Court Denies Recovery of Public Adjuster Fees in Breach of Contract Action

Ashley Harris | Property Insurance Coverage Law Blog | December 16, 2018

In Kingshill Hospitality, Inc. v. American Economy Insurance Company,1 the policyholder’s hotel was damaged by a fire. Three days later the policyholder hired a public adjuster to assist in submitting its insurance claim. A dispute arose regarding the amount of loss and the policyholder filed suit for breach of contract.

As part of the damages claimed, the policyholder sought recovery of the public adjuster fee as consequential damages. The insurance carrier moved the court to strike the claim for consequential damages, which the court granted.

The policyholder argued that “it had to retain the services of an insurance claims professional (Public Adjuster) to pursue its claim.” The court disagreed, reasoning that consequential damages are “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act,” and here, the policyholder hired the public adjuster only three days after the fire occurred and before the insurance carrier made a coverage determination. The court concluded:

Because these costs were incurred in May – before the alleged breach occurred when American Economy partially denied coverage on June 1 – Kingshill’s public adjuster expenses cannot be categorized as consequential damages.

While not relevant under the facts of this case, the court noted:

If an insured believes that its insurer is not attempting to settle a claim in good faith and hires a public adjuster to refute the damage estimate or coverage determination proferred by an insurer, such expenses could be considered consequential damages. And under those facts, the consequential damages would be extracontractual damages that could only be recovered in a bad faith action, pursuant to QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541 (Fla. 2012).

It should be noted that courts in Florida have found that consequential damages can be recovered in a breach of contract action.2 Here, however, where the public adjuster was hired before a dispute arose regarding the loss or coverage, the public adjuster fees were not recoverable.
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1 Kingshill Hospitality, Inc. v. American Economy Ins. Co., No: 5:18-cv-520, 2018 WL 6427681 (M.D. Fla. Dec. 5, 2018).
2 See e.g.Trident Hospitality Florida, Inc. v. American Economy Ins. Co., No.: 6:08-cv-289, 2008 WL 11334515 *2 (M.D. Fla. May 30, 2008) (“Plaintiff is entitled to consequential damages if it can prove that damages ‘were within contemplation of the parties when the contract was formed.’” Citing Martin v. Monarch Life Ins. Co., No. 94-1182, 1995 WL 127157, at *1 (M.D. Fla. Mar. 21, 1995)).

Bad Faith May Arise Out Of Wrongful Misrepresentation in Application Denial

Chip Merlin | Property Insurance Coverage Law Blog | November 28, 2018

Suspicion runs rampant with some insurance companies when it comes to alleged arson. Even if they cannot prove the policyholder had anything to do with a fire, some adjusters cannot help to look for other ways to deny an insurance claim. In Hayes vs. Metropolitan Property and Casualty Insurance Company,1 an insurer was held liable for bad faith denial of an insurance claim even though the policyholder did not win the breach of contract action because the policyholder failed to file his lawsuit within the one-year statute of limitations.

Since it is a misrepresentation in the application case, let’s start with the application facts:

Hayes’s home at 480 South 6 Street, Springfield, Nebraska, was insured…under a homeowner’s insurance policy. Hayes used the detached garage of the residence as part of a home base for his plumbing business, and in addition to living there himself with his children, he also rented out the second and third levels of the residence to a tenant and her two children.

When Hayes insured the residence in 2007, Met argues that he indicated on his application that the premises were not used to conduct business, and were not used as rental property. However, the application, a five-page document, was not a model of clarity on either of these two points. It was apparent that the form was not filled out by hand because pre-printed “x’s” were used in the checked boxes. Hayes testified that he did not recall personally completing the application in 2007; that he worked with an independent insurance agent when it was filled out, and it was also likely filled out with information from his sister, because his signature “stamp” was used in the signature line instead of his actual handwritten signature, and she had his authorization to use the stamp.

With regard to tenants, the form asked whether “the residence [was] held exclusively for rental?” and a pre- printed “x” was marked next to the letter “N” in answer to that question. The form also asked for number of “families” and the number “1” was printed in that box. With regard to the business, the form asked whether “[a]ny farming or other business [was] conducted on premises?” and again, a box indicating “no” was marked with a preprinted x. Hayes testified at trial that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. He also testified that he definitely did not “run” the plumbing business out of the premises, although customers would on occasion contact him there about doing a plumbing job. Further, Hayes had a separate commercial business insurance policy to cover the plumbing business in the detached garage, (although the address for this business was inadvertently and incorrectly listed on the insurance form as 680 South 6 Street, Springfield, Nebraska, rather than 480), and Hayes testified that he believed the commercial policy adequately covered his business. Hayes did not make a claim with regard to the shop or business as a result of the fire.

(Emphasis added).

Of course, there was no problem with Metropolitan accepting the premiums for six years until a fire happened in January 2013. The insurance company kept rejecting the policyholder’s proofs of loss, made numerous requests for documents and information and took numerous examinations so that by the time the insurance company got around to deny the claim for a misrepresentation in the application, approximately 18 months had passed.

The problem for the policyholder was that he did not file his lawsuit until after the denial and long after the 12-month suit limitation under the policy. The problem for Metropolitan was that the judge who dismissed the contract action because it was late-filed also found that Metropolitan had no reasonable basis to deny the claim and found bad faith on the part of Metropolitan.

The Circuit Court of Appeals noted:

While Met is correct that there must have been a contract at some point in time in order for there to be a bad faith claim, Met cannot insulate itself from a bad faith claim by creating the fiction that a contract never existed by voiding or rescinding it “ab initio.” The cases Met cites do not stand for the proposition that an insurer can do what it did here–discover there is liability after eighteen months of “investigating” and rescind based upon misrepresentation evidence that was within its knowledge five days after the fire….

There are a number of lessons from this case. Insurance companies must investigate claims promptly. Second, when insurance companies deny claims, they must have a reasonable basis to do so, and a reasonable basis cannot be based on an ambiguous application with ambiguous answers which do not indicate an intent to deceive the insurance company.

Insurance Joke For The Day

What’s the difference between an actuary and an accountant?

An actuary looks at his shoes when he talks to you. An accountant looks at your shoes.
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1 Hayes v. Metropolitan Prop. & Cas. Ins. Co., No. 17-3005, 2018 WL 5852740 (8th Cir. (Neb.) Nov. 9, 2018).

Timely Paying Appraisal Award Exempted Insurer from Breach of Contract and Bad Faith Claim

Marle Laur | Property Insurance Coverage Law Blog | November 3, 2018

In the case Biasatti v. GuideOne National Ins. Co., No. 07-17-00044-CV (Tex. Ct.App. Aug. 16, 2018), Steven Biasatti and Paul Gross, d/b/a TopDog Properties, brought suit against its insurance company, GuideOne National Insurance Company for breach of contract.

TopDog Properties (“TopDog”) was insured through a commercial insurance policy issued by GuideOne National Insurance Company (“GuideOne”). The property suffered a loss as a result of wind and hail damage, and TopDog put GuideOne on notice of the loss. The insurer inspected the property and determined that the damage totaled $1,896.88. GuideOne did not issue payment to the insured since the damage was less than the $5,000.00 deductible. When GuideOne did not change its coverage determination after a second inspection, TopDog requested appraisal of the claim. GuideOne responded that under the policy, only the insurer could invoke appraisal, and it declined to do so. The insured filed suit.

Months after TopDog filed suit, GuideOne invoked appraisal. The insured resisted, and the trial court refused to compel the appraisal. On appeal, the trial court was directed to grant GuideOne’s motion to compel appraisal.

The appraisers and umpire set the amount of loss at $168,808.00. GuideOne sent TopDog a check for $146,927.30, which reflected the amount awarded less the deductible and depreciation.

TopDog then filed a motion for partial summary judgment against the insurer for breach of contract and failure to timely pay the insured’s claim. The insurer argued, in its own motion for summary judgment, that since it had promptly paid the appraisal award, the insured’s claims against GuideOne could no longer stand. The trial court ruled in favor of GuideOne’s motion. TopDog appealed.

The appellate court affirmed the trial court’s ruling, holding that since GuideOne invoked the appraisal clause following the benefits dispute, as permitted by the policy, then timely tendered the appraisal award, TopDog received the benefits it was entitled to under the policy and did not demonstrate that any policy benefits were withheld.

Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.

General Contractor’s Unjustified Threats to Assess Delay Damages Against Subcontractor are a Material Breach of Contract

Luke Nicholas Eaton | Pepper Hamilton LLP | October 11, 2018

Randy Kinder Excavating, Inc. v. JA Manning Constr. Co. 2018 U.S. App. LEXIS 21878 (8th Cir. Aug. 7, 2018)

This dispute arose from a contract to build a pumping station in Arkansas (the “Project”).  In June of 2010, the U.S. Army Corps of Engineers (“COE”) awarded a contract to Randy Kinder Excavating, Inc. (“Kinder”) to serve as the general contractor on the Project.  Kinder entered into a subcontract with J.A. Manning Construction Co. (“Manning”) to engineer, furnish and install a mechanically stabilized earth (“MSE”) wall at the Project.

The Project experienced significant delays which affected the Manning’s initial start date.  By the time Manning could begin constructing the MSE wall, only six days remained until the original completion date of the entire Project.  Unknown to Manning, however, Kinder was telling the COE that weather and other issues were delaying the Project and Kinder represented to the COE that its projected completion date for MSE wall was in the summer of 2012.  At the same time, Kinder was telling Manning that the MSE wall needed to be completed by November of 2011 and repeatedly threatened to assess delay damages against Manning if this did not occur.  In addition, during the construction of the MSE wall, Kinder and/or the COE demanded that Manning install the wall panels 0.75 inches apart with absolutely no variance, despite industry standard allowing a 0.25 inch variance.  On March 7, 2012, Kinder terminated Manning, at which point Manning had constructed 27.5 feet of the 40-foot MSE wall.  The MSE wall was later completed by a replacement contractor, although the wall as-accepted by the COE contained a number of defects that Kinder and the COE told Manning were unacceptable. 

In October of 2012, Kinder filed suit against Manning, alleging breach of contract and tortious interference.  Manning counterclaimed, allegedly that Kinder had wrongfully terminated the subcontract.  The district court conducted a bench trial, after which it decided the matter in favor of Manning.  Specifically, the district court concluded that: (1) Kinder committed the first material breach of contract by threatening to assess delay-related damages without any justification; (2) Kinder materially breached the contract by wrongfully terminating Manning; and (3) any of the alleged deficiencies in Manning’s work were not material breaches and Manning had substantially performed its obligations.  The district court awarded Manning $215,578.24, which represented Manning’s cost for unpaid labor and materials incurred prior to the date of termination.  Kinder appealed.

Kinder’s primary argument on appeal was that the district court erred in concluding that Kinder committed the first material breach, and instead Kinder argued that the first breach occurred when Manning failed to pay its suppliers for the MSE wall.

The subcontract between Kinder and Manning contained a choice-of-law provision requiring the application of Missouri law.  In Missouri, under the “first to breach” rule, “a party to a contract cannot claim its benefit where he is the first to violate it, [however] only a material breach may excuse the other party’s performance.”   Therefore, in order for Kinder to prevail, it needed to show that Manning committed the first material breach.

To determine whether Manning’s alleged failure in performance was material, the Court analyzed the five factors set out in the Restatement (Second) of Contracts §241.  After reviewing these factors, the Court determined that even assuming that Manning’s failure to pay its suppliers occurred prior to Kinder’s threats, the district court correctly determined that Kinder’s unjustified threats to impose delay-related damages were the first material breach.  Specifically, the Court noted that the evidence suggested that Kinder’s incessant threats were actually the driving force behind Manning’s failure to pay suppliers and that Manning would have paid its supplier’s invoices as soon as it received assurances that it would be paid by Kinder.

Kinder also argued that the district court incorrectly determined that Kinder’s threats were a breach of the contract.  Kinder maintained that such threats were justified because Manning was failing to comply with Kinder’s scheduling demands.  The Court rejected this argument, noting that Kinder’s argument “completely fails to acknowledge  that Manning, through no fault of its own, was prevented from beginning work until more than one year after it was originally supposed to.  It therefore would have been impossible for Manning to perform according to the timelines contained in the early schedules.”  The Court also found that Manning was, in fact, performing in accordance with the timeline contained in the schedule that Kinder sent to the COE, which stated that Manning should be finished with the MSE wall in the summer of 2012.

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