A Fire Destroying More Than Half of the Project is not a Cardinal Change Where the Parties Entered Into a Separate Agreement to Cover the Fire Remediation Work

Kristopher Berr | Constructlaw | November 29, 2018

IES Commercial, Inc. v. Manhattan Torcon, A Joint Venture, 2018 U.S. Dist. LEXIS 164973 (D. Md. Sept. 26, 2018)

In 2009, the Army Corps of Engineers hired Manhattan Torcon Joint Venture (“MT”) as general contractor to build a biological research facility at Fort Detrick, Maryland.  MT subcontracted with IES Commercial, Inc. (“IES”) to perform the electrical system work.

In August 2013, after IES had completed over 90% of its work, a fire destroyed or damaged more than half of the facility, including significant portions of IES’s work. MT ordered IES to perform significant fire remediation work in addition to the remainder of its base contract work. In November 2013, IES and MT entered into a subcontract amendment referred to as the “Fire Rider,” which included an agreed rate schedule for the fire remediation work, along with a procedure by which IES would perform work at MT’s direction, submit daily work tickets and monthly invoices, and be paid within ten days after MT received payment from its insurer.

The parties performed under the Fire Rider for over four years.  During this time, IES complained that MT was mismanaging the work by, among other things, failing to develop a schedule accounting for fire remediation work in addition to base contract work, and by requiring IES to work out of sequence. In September 2017, MT informed IES it would not be paid for the remainder of its work because MT’s insurer had ceased payments. In December 2017, IES sued MT in federal court in Maryland, asserting breach of contract and cardinal change claims. It also sued MT’s sureties under the Miller Act. MT and its sureties moved to dismiss all counts. The Court denied the motion with respect to the breach of contract and Miller Act claims but granted the motion on the cardinal change claim.

In granting the motion, the Court first reasoned that IES had misconstrued the nature of a cardinal change claim. Under the cardinal change theory, a contractor is entitled to recover damages when work ordered by the government is materially different from the work initially bargained for. In its complaint, however, IES did not allege that MT ordered work materially different from IES’s original scope. Instead, it alleged that the fire itself constituted a cardinal change. Thus, IES failed to allege a valid cardinal change claim.

Second, even assuming that the changed work ordered by MT – rather than the fire itself – was a cardinal change, the Court held that claim still failed because IES failed to allege damages resulting from that work. Instead, IES alleged damages consisting primarily of labor inefficiency costs, allegedly caused by MT’s mismanagement of the project. However, IES did not allege that MT’s mismanagement after the fire was, itself, a cardinal change. Thus, IES failed to allege increased costs resulting from a cardinal change.

Finally, the Court held that the cardinal change claim was barred by the existence of the Fire Rider. According to the Court, a cardinal change occurs when the government demands a contractual alteration that requires the contractor to perform duties materially different from those originally bargained for. Here, however, the parties bargained for and entered into the Fire Rider to account specifically for fire remediation work. Thus, the Court held that the cardinal change claim failed as a matter of law because IES was not ordered to complete fire remediation work materially different from its contractual scope of work. Instead, it agreed to perform the work pursuant to a new agreement.

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.

Better Early Than Late

J. Ryan Fowler | Property Insurance Coverage Law Blog | October 3, 2018

I often get asked: “Can I still file a lawsuit against my insurance company for my claim from. . . .” Like all good lawyers my answer is maybe. The reality is that the deadlines to file a lawsuit against an insurance company are controlled by the state law that applies to your claim and the facts of your individual case.

In Texas claims for breach of the duty of good faith and fair dealing and violations of the Texas Insurance Code must be brought within two years after the cause of action accrues. The normal period of bringing a breach of contract claim, four years, is commonly reduced to within two years and a day of the date of accrual by most insurance policies. Simply stated most lawsuits against an insurance company must be filed within two years of when the causes of action accrues. Sounds easy but “when does the causes of action accrue”, you ask?

Recently the United States District Court, Southern District of Texas, Laredo Division revisited this question in Rodriquez v. State Farm Lloyds.1 The insured had a pipe burst of January 6, 2015, and filed the lawsuit against State Farm Lloyds on July 13, 2017. We can all see that more than two years passed between the date of the loss and the filing of the lawsuit, but when did the causes of action accrue?

The court discussed the general rule that a cause of action accrues when facts come into existence that authorize a party to seek a judicial remedy. The court then discussed that in an insurance case both for breach of contract and insurance code violations, a cause of action accrues when the insurer denies the claim.

Next, the court examined the record for when the insurer denied the claim. The competing two possible dates are below:

  1. January 21, 2015 – State Farm sent a letter to insured informing that evaluation over and damage less than deductible.
  2. October 2015 – State Farm administratively closed the claim for the first time.

The insured argued that after the denial letter in January the insurer continued to communicate with the insured and was still investing the claim until the insurer issued a “final denial” in 2016. The court determined that nothing indicated that the insurer ever changed or withdrew its initial claim determination and that reinvestigation itself is insufficient to show a prior decision’s withdrawal or change. Therefore, the court held that the limitations period was never reset, and the lawsuit was time-barred and must be dismissed.

It is always important to consult a lawyer to review the facts of your case to determine when the applicable statutes of limitations has started to run and ultimately when a lawsuit must be filed to preserve your rights.
____________________________
1 Rodriguez v. State Farm Lloyds, 2018 WL 3966270, No. 5:17-CV-161 (S.D. Tex. Aug. 17, 2018).

Ten Things Attorneys and Insurance Professionals Should Know About Using Drones in Insurance Claims

Justin Fine, Esq. | Pessin Katz Law | August 29, 2018

The commercial application of drones is increasing. Drones are being used to fight forest fires, for commercial agriculture, and to deliver medical supplies to remote areas.

Insurance companies are also increasingly using drones, which can be useful for capturing evidence during the claims process. However, there are plenty of pitfalls in using drones, including the admissibility of evidence during litigation. Further, the legal landscape for drones is changing all the time. The States and the Federal Aviation Administration (“FAA”) are rapidly issuing new laws and regulations.

In the likely event that you come across the use of a drone in an insurance claim, here are ten things to consider in order to anticipate and respond to potential issues.

  1. Drones are helpful for investigating accidents, mapping debris fields, and preserving evidence at the scene of a loss because of their ability to capture images from a birds-eye-view that are not readily visible from the ground.
  2. Drones can carry more than just cameras. They also carry sensors to measure distance, heat, radiation, sound, and light.
  3. Drones can be easily deployed in the field. Modern drones are compact enough that they can fit into a camera bag.
  4. Both personal and commercial drone use are regulated by the FAA.
  5. Evidence obtained from drones used in violation of FAA rules and regulations may not be admissible in court.
  6. Several states, including Maryland, Texas, Delaware, California, and Florida, have specific laws about the use and admissibility of evidence obtained by drones.
  7. When evaluating the admissibility of evidence, consider that there are greater restrictions on the commercial use of drones, including the regulations set out in 14 C.F.R. § 107 et seq.
  8. Even the incidental use of a drone for a commercial purpose, such as inspecting the roof of a business, can be subject to the commercial drone-use regulations.
  9. Some restrictions to keep in mind when considering the admissibility of evidence obtained from a drone is that drones cannot fly over people (including sporting events), must fly below 400 feet, cannot fly in restricted airspace, and must remain within the sight of the pilot.
  10. Additionally, commercial drone pilots must be licensed, although personal drone pilots generally do not have to be.

Utah’s Highest Court Holds That Plaintiffs Must Properly Commence an Action to Rely on the Relation-Back Doctrine to Overcome the Statute of Repose

Shannon M. Warren | The Subrogation Stategist | August 7, 2018

Earlier this summer, in Gables & Villas at River Oaks Homeowners Ass’n v. Castlewood Builders LLC, 2018 UT 28, the Supreme Court of Utah addressed the question of whether the plaintiff’s construction defects claims against the general contractor for a construction project were timely-filed, or barred by the statute of repose. In Utah, the statute of repose requires that an action be “commenced within six years of the date of completion.” The plaintiff alleged that its 2014 amended complaint naming the general contractor as a defendant was timely-commenced because, before the date on which Utah’s statute of repose ran, a defendant filed a motion to amend its third-party complaint to name the general contractor as a defendant, and the defendant subsequently assigned its claims to the plaintiff. The plaintiff argued that the filing of its 2014 amended complaint related back[1] to the date of its original complaint. The Supreme Court disagreed, holding that an action is “commenced” by filing a complaint and that a motion for leave to amend does not count as “commencing” an action.

In Gables & Villas, the plaintiff, Gables & Villas at River Oaks Homeowners Association (the Association), a homeowner’s association, filed suit against the developers of the project. Shortly after the plaintiff filed suit, the developers filed a third-party action against multiple sub-contractors. At this juncture, the Association and sub-contractors were not aware of the general contractor’s involvement with the construction at issue.

At a later date, the parties identified Castlewood Builders LLC (Castlewood) as the general contractor involved with the original construction project. On May 2, 2012, the developers filed a motion for leave to amend their third-party complaint to bring Castlewood into the action. After the court granted the developers’ motion, the developers assigned their claims to the Association. The Association then filed an amended complaint and Castlewood accepted service. However, the court struck the amended complaint because the Association, the filing party, had not obtained leave to amend the complaint. The court found that the leave it granted to the developers did not permit the Association to file an amended complaint, even if the developers assigned their claims to the Association.

Over six months after the general contractor accepted service of the Association’s amended complaint, the Association filed a motion for leave to amend. Its motion was finally granted approximately eight months later. Within two months, on May 13, 2014, the association filed its amended complaint.

In response, Castlewood filed a motion for summary judgment, alleging that the statute of repose precluded the Association from bringing claims against it related to six buildings that were completed in 2006 and 2007. There was no dispute that the amended complaint was filed more than six years after the final building was completed. However, the Association argued that its amended complaint was timely because it related back to the date of its original complaint.

The district court denied Castlewood’s motion, finding that the general contractor and developers were so closely related that the general contractor was on notice of the claims against it when the developers filed its motion to amend the complaint within the statute of repose period. Because the general contractor had notice of the motion to amend before the statute of repose period expired, the district court found that the relation-back doctrine was satisfied.

In response to Castlewood’s interlocutory appeal, the Association argued that its action against Castlewood “commenced” when the developers filed their motion for leave to amend. To decide when an action commences within the meaning of the statute of repose, the court looked to Utah R. Civ. P. 3(a) for guidance. Rule 3(a) states that a civil action is commenced by filing a complaint or by service of the summons and a copy of the complaint. It makes no mention of motions to amend, which the court considered fatal to the Association’s position.

Ultimately, the court found that the letter of the law was clear in what is meant by commencing an action and ­­was unwilling to accept policy arguments that were inconsistent with the plain meaning of Rule 3(a). Thus, the court held that the Association “commenced” its action when it filed its amended complaint, which was after the statute of repose period had expired. In support of its holding, the Supreme Court rejected the Association’s position that an injustice would result if motions to amend did not “commence” an action subject to the statute of repose because the moving party has no control over when a motion to amend is granted, and accordingly cannot control when the amended pleading is filed. However, as the court pointed out, while a party cannot control when a motion to amend is granted, it does have the option of filing a separate lawsuit to prevent its claims from being time-barred.

The procedural errors and delays in the Gables & Villas case ultimately led to the Association’s claims against Castlewood being time-barred by the statute of repose. This case is a reminder that subrogation practitioners should be diligent in meeting statutory and procedural requirements, and that failure to do so may lead to a dismissal of the subrogating insurer’s claims. Additionally, it is good practice to conduct prompt, thorough investigations to identify all potentially liable parties, rather than waiting until litigation is underway and there is a greater risk of statutory time limitations being an issue.


[1] The relation-back doctrine allows amended pleadings to relate back to the time an original pleading is filed in certain circumstances, including when the party to be brought in by amendment received notice of the action and knew that an action would be brought against it once properly identified by the party asserting such claims. See Utah R. Civ. P. 15(c).