Court Says Claims for Unreasonable Delay or Denial of Insurance Benefits Can Be Filed Beyond One Year

Jonathan Bukowski | Property Insurance Coverage Law Blog | June 12, 2018

As discussed in a previous post, Colorado allows policyholders—even repair vendors such as contractors or roofers where there has been an assignment of insurance benefits—to bring a cause of action for bad faith where an insurance company unreasonably delays or denies the payment of covered insurance benefits.1

This law allows the potential recovery of two times the covered insurance benefits that have not been paid, or that were paid after an unreasonable delay. The statute provides a powerful deterrent against the wrongful delay or denial of insurance benefits to policyholders. While the statute provides strong protection for policyholders, the legislature did not assign a timeframe for which a policyholder or repair vendor must bring a claim for the unreasonable delay or denial of insurance benefits leading to much uncertainty.

The Colorado Supreme Court issued two important decisions this week surrounding Colorado’s statutory bad faith law. My colleague, Ashley Harris, previously wrote about the Colorado Supreme Court’s decision in American Family Mutual Insurance Company v. Barriga, holding that an award for unreasonable delay or denial of insurance benefits cannot be reduced by payments delayed, but later paid by an insurance carrier. This post will discuss Rooftop Restoration, Inc. v. American Family Mutual Insurance Company, and the Colorado Supreme Court’s decision to strike down arguments made by insurance carriers that any claim for unreasonable denial or delay of payment of benefits must be brought within one year.

In late August 2013, the insureds timely filed a claim for hail damages to their property with American Family. American Family inspected the property several days later, determining that the damage to the insureds property did not exceed the $1000.00 deductible of their policy. The insureds assigned their insurance claim to Rooftop Restoration, who provided American Family an estimate for damages of approximately $70,000.00 in May 2014. Following a reinspection, American Family increased its estimate to $4,000.00 and issued payment less the policy’s deductible on May 28, 2014. Rooftop Restoration subsequently sued for breach of contract and unreasonable delay and denial of insurance benefits in September 2015. American Family moved to dismiss Rooftop Restoration’s bad faith claim for unreasonable delay and denial of benefits as untimely, arguing that a claim for the unreasonable delay or denial of insurance benefits is penal in nature and therefore must be brought within one year. Due to the lack of a controlling decision on the issue, the lower court requested that the Colorado Supreme Court provide direction.

After considering the legislative intent in creating the statute, the Colorado Supreme Court ultimately ruled that the one-year statute of limitations applicable to penal actions did not apply to Colorado’s unreasonable delay and denial statute because the legislature did not intend the statute to operate as a penalty. The Colorado Supreme Court decision is helpful to policyholders where even the property adjustment of an insurance claim can take well over one year to complete.

While the Court’s decision brings some clarity to the time requirements for filing a claim for the unreasonable delay or denial of insurance benefits, the Colorado Supreme Court did not specifically identify the limitation period applicable to a cause of action under for the unreasonable delay or denial of insurance benefits. Therefore, it remains important to pay attention to the claims process and identify unreasonable conduct by the insurance carrier. If you have been affected by one of the many recent Colorado hailstorms and feel that your insurance company has unreasonably delayed or denied the payment insurance benefits, consider contacting a Colorado licensed attorney experienced in protecting first-party policyholder claims.
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1 Colorado Revised Statute § 10-3-1115 and § 10-3-1116.

Deconstructing Construction Claims – Issues to Consider When Handling Construction Defect Subrogation

William L. Doerler and Victoria Phillips | CLM | May 3, 2018

Construction defect claims often are complicated by a variety of issues, including those related to the statute of repose and contractual bars to recovery. In order to maximize the subrogation potential for these claims, you should deconstruct any potential subrogation barriers and, upon identifying a potential target, avoid procedural barriers that impact the pursuit of subrogation claims.

Initial Investigation

When you receive a construction-related claim, you should immediately identify potential subrogation targets, such as the architect, general contractor, subcontractors, the developer, and material suppliers. As part of the identification process, first attempt to procure copies of all of associated contracts, subcontracts, and purchase orders. These documents are important because they often contain contractual barriers to recovery, including indemnification clauses, waivers of subrogation, insurance clauses, caps on liability, and contractual statutes of limitations.

In addition to securing copies of the applicable construction documents, you should also try to secure information that will help you identify when the accident occurred during the construction cycle. This information can impact the potential subrogation recovery because subrogation waivers and insurance clauses often refer to dates such as the substantial completion date or final payment date, gearing the applicability of these clauses to those dates.

Statutes of Limitations and Repose

In addition to gathering the documents identified above, you should consider whether claims against potential targets are barred by the applicable statutes of limitations or repose. If either bars the claim, then the claim has no true subrogation potential. Although the defendant can waive a statute of limitations defense by not asserting it in a timely fashion, the defendant cannot, generally, waive a statute of repose defense because this statute creates substantive, rather than procedural, barriers to pursuing a claim. If a statute of repose applies, then no cause of action arises after the repose date and, thus, after the repose date—say, 10 years after the date of substantial completion—there is no cause of action to pursue.

When considering the impact of any statute of limitations or repose, you should also review the applicable contract terms to ensure that the contract does not have a contractual statute of limitations clause or an accrual clause. Courts generally enforce these clauses as long as they are reasonable. Thus, if applicable, a contractual statute of limitations or accrual clause may bar your claim. For example, the American Institute of Architects (AIA) contract form A201-1997 has an accrual clause, §13.7.1, stating that claims accrue on a certain date, such as the date of substantial completion. If applicable, the clause bars any discovery rule that may otherwise apply and, effectively, turns the otherwise applicable statute of limitations into a statute of repose.

Of note is that some states, in addition to having a construction defect-related statute of repose, also have a statute of repose related to products liability claims. As such, to the extent that your potential target is a company that provided a product incorporated into the construction project, you may need to analyze the impact of both the construction defect statute of repose and the products liability statute.

Waiver of Subrogation

The most common contractual barrier to pursuing subrogation targets involved in construction losses is a waiver of subrogation clause. If you find such a clause in your construction contracts, then you should analyze the scope of the waiver clause to determine whether it applies.

To analyze the scope of the clause, determine whether the property damage at issue is covered by the clause. This analysis generally focuses on the meaning of the term “work” in the contract, as waiver of subrogation clauses typically apply to the proceeds of insurance applicable to the work. Thus, if the damage at issue relates to personal property or to parts of a building that were not the subject of the contract, then you may be able to pursue subrogation for damage to this non-work property.

However, the success of your subrogation claim may depend on whether the applicable jurisdiction follows the source-of-coverage approach to defining the scope of a waiver clause (based on whether the insurance policy that covered the work also covered the non-work property) or the nature of the damage approach. Although courts often refer to the source of the coverage approach as the “majority” approach, the U.S. District Court, Northern District of Mississippi, recently applied the nature of the damage approach in Liberty Mut. Fire Ins. Co. v. Fowlkes Plumbing. Thus, when analyzing the scope of a waiver of subrogation clause, your analysis should include an analysis of how the applicable jurisdiction interprets such clauses.

With respect to the AIA contract forms, the most recent version of the AIA General Conditions, A201-2017, includes a waiver of subrogation clause, §11.3.1, that references the term “project,” rather than the term “work.” Under this version of the waiver clause, owners and contractors waive all rights against each other and their subcontractors “for damages caused by fire or other causes of loss, to the extent those losses are covered by property insurance…applicable to the project, except such rights as they have to proceeds of such insurance.” The term “project” is defined in §1.1.4 as “the total construction of which the work performed…may be the whole or a part….” Arguably, this change clarifies that the waiver of subrogation clause refers only to the construction work itself. However, it remains to be seen how courts will interpret this change in the wording of the AIA waiver of subrogation clause.

Right to Repair Acts

As part of the process of identifying subrogation targets, claims professionals should be aware of the fact that many states have Right to Repair Acts. These acts generally require that the homeowner, and possibly the insurer, give notice of construction defect claims to the contractor or builder. Thus, to the extent that you identify a subrogation target, you should review the applicable Act to determine whether, as a subrogating insurer, your claims notice needs to comply with the terms of the applicable Act.

The issues discussed here offer only a partial review of some of the issues that subrogation claims professionals need to consider when handling a construction defect claim. The issues identified, however, should highlight the importance of analyzing the subrogation potential for construction-related claims during the early part of the claims investigation. When the issues you identify are complicated or warrant additional analysis, it is equally important to involve subrogation counsel early.

The Standard Fire Policy 60-Day Vacancy/Unoccupancy Condition

Edward Eshoo | Property Insurance Coverage Law Blog | June 5, 2018

Last November in my blogpost, Does the Standard Fire Policy Vacancy/Unoccupancy Condition Apply to a Fire Loss Occurring within Sixty Days of the Inception of Coverage, I discussed how courts have measured vacancy/unoccupancy when a loss occurs within sixty days of the inception of coverage; but, the insured property had been vacant or unoccupied for more than sixty days prior to the effective date of coverage.

In Ervin v. Travelers Personal Insurance Company,1 which was my case, a federal district court in Illinois recently weighed in on the issue as it related to Illinois’ statutorily-mandated standard fire insurance policy (“the Standard Fire Policy”).2 There, a fire damaged a two-unit residential rental dwelling thirty-two days after the policy went into effect. Travelers, which insured the dwelling at the time of the fire, denied the claim based on an exclusion in its policy for loss caused by any intentional and wrongful act committed in the course of vandalism and malicious mischief, if the dwelling has been vacant for more than thirty consecutive days immediately before the loss (“the vandalism exclusion”).

In contrast, Lines 28-35 of the Standard Fire Policy restrict coverage for a fire loss “while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days.”3 Travelers posited that its vandalism exclusion applied because the dwelling had been vacant for more than two years before the vandalism fire, a position based on measuring the vacancy period from the inception of the vacancy as opposed to the inception of coverage.

Following Travelers’ denial, the insured filed suit. Travelers raised its vandalism exclusion as an affirmative defense. The insured then moved for judgment on that defense, arguing that the exclusion violated the Standard Fire Policy’s 60-day vacancy condition. In response, Travelers asserted that if the Standard Fire Policy applies, then all it means is the vacancy period in its vandalism exclusion is amended from 30 days to 60 days. Because the dwelling had been vacant for more than 60 consecutive days immediately before the fire, Travelers contended that its vandalism exclusion nonetheless applied.

The district court rejected Travelers’ argument. The district court reasoned that even if it is amended to 60 days, the vacancy period in the Travelers vandalism exclusion still afforded the insured less fire coverage than provided in the Standard Fire Policy vacancy condition, as vacancy or unoccupancy is measured prospectively from the date of inception of coverage and not retrospectively from the date of inception of the vacancy or unoccupancy. The district court entered judgment against Travelers on its vandalism exclusion, finding it inconsistent and in conflict with the Standard Fire Policy vacancy condition which affords coverage for a fire loss occurring within sixty days of the inception of coverage.
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1 Ervin v. Travelers Personal Ins. Co., No. 17-5492, 2018 WL 1635849 (N.D. Ill. April 5, 2018).
2 Under the powers vested by sections 397 and 401 of the Illinois Insurance Code, the Director of Insurance has promulgated certain regulations which provide for a Standard Fire Policy. 215 ILCS 5/397 and 5/401(a); 50 Ill. Adm. Code § 2301 et. seq. Under the regulations, all fire insurance policies must “conform to such form of the Standard [Fire] Policy or, if another form is used, shall for the purpose of concurrence of contract be deemed to be the Standard [Fire] Policy.” 50 Ill. Adm. Code § 2301.30. In essence, the Standard Fire Policy guarantees a minimum level of coverage that supersedes any attempt to limit or to restrict coverage to less than the statutory minimum. Stated differently, fire insurance policies may not provide coverage less than that set forth in the Standard Fire Policy.
3 The Illinois Standard Fire Policy 165-line form is identical to the Standard Fire Policy 165-line form prescribed by the New York legislature in 1943. See Corday’s Dep’t Store, Inc. v. New York Fire and Mar. Underwriters, Inc., 442 F.2d 100, 104 (7th Cir. 1971).

Colorado Supreme Court Clarifies Unreasonable Delay or Denial Statute

Ashley Harris | Property Insurance Coverage Law Blog | June 1, 2018

The Colorado Supreme Court issued two opinions favorable to Colorado policyholders earlier this week:

  1. American Family Mutual Insurance Company v. Barriga; and
  2. Rooftop Restoration, Inc. v. American Family Mutual Insurance Company.

Both cases address the unreasonable delay or denial of insurance benefits statute in Colorado. This post addresses the Barriga opinion, and the Rooftop Restoration, Inc. will be discussed in the coming days.

In Barriga,1 the Colorado Supreme Court considered whether an award of damages under section 10-3-1116(1), C.R.S. (2017), must be reduced by an insurance benefit unreasonably delayed but ultimately recovered by an insured outside of a lawsuit.

As background, in 2009 a fire damaged an apartment building owned by Mr. and Mrs. Barriga. After the fire, the policyholders and American Family Mutual Insurance Company (“American Family”) coordinated for a contractor to begin repairs at the apartment building, and American Family made various payments to and on behalf of the Barrigas, totaling $209,816.43. After substantial repair work had been completed, the contractor submitted a revised estimate of the cost of repairs based on additional necessary repairs and asbestos remediation.

In response to the revised estimate, American Family invoked appraisal, which resulted in an award of $322,141.79. American Family paid the award, less the prior payment of $209,816.43.

Mr. and Mrs. Barriga then sued American Family for breach of contract, common law bad-faith breach of insurance contract, and unreasonable delay and denial of insurance benefits under section 10-3-1116(1). The jury found for the Barrigas on all claims, awarding damages of $9,270 for breach of contract and $136,930.80 for benefits unreasonably delayed or denied.

Section 10-3-1116(1) provides that a plaintiff “whose claim for payment of benefits has been unreasonably delayed or denied may…[recover] two times the covered benefit” (emphasis added).

The trial court determined that the verdict on the statutory claim comprised two parts: (1) $9,270 in benefits unreasonably denied; and (2) $127,660.80 in benefits unreasonably delayed.

The trial court first doubled the total statutory verdict ($136,930.80 x 2 = $273,861.60), then reduced that amount by $127,660.80—the amount of benefits unreasonably delayed but eventually paid outside litigation—resulting in a total award of $146,200.80.

The Colorado Supreme Court found that “an award under section 10-3-1116(1) must not be reduced by an amount unreasonably delayed but eventually paid by an insurer because the plain text of the statute provides no basis for such a reduction.”

The Colorado Supreme Court further found that “the general rule against double recovery for a single harm does not prohibit a litigant from recovering under claims for both a violation of section 10-3-1116(1) and breach of contract.”

This opinion clarifies the intent of this statute, which places pressure on insurance carriers to pay what’s rightfully owed to the policyholder promptly to avoid the application of double damages after unreasonably denying and/or delaying claims.

A full copy of the Colorado Supreme Court opinion can be found here.
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1 Am. Family Mut. Ins. Co. v. Barriga, No. 15SC934, 2018 CO 42 (Colo. May 29, 2018).

Choosing a Damages Methodology for Certain Construction Claims

Daniel B. Swaja | International Law Office | May 21, 2018

In any construction dispute resolution process, not only does a claimant have to prove liability of the other party, but the claimant must also prove damages to prevail on its claim. The proof of damages element to prevailing on a claim is often overlooked and its importance can be underestimated. Many times a claimant will focus its case on the facts supporting entitlement, but fail to take the time to meet all requirements establishing a particular damages claim. While a jury may be more forgiving of such an approach, a court on a bench trial or an experienced construction arbitrator may not be so forgiving.

A common example of a construction claim requiring specific elements of proof occurs when a party seeks recovery of extended, or unabsorbed, home office overhead costs for a delay claim. Delays are common in the construction industry and will impact home office overhead costs. Extended home office overhead costs can include management salaries, administrative staff salaries, rent, supplies, home office equipment, and insurance, among others. Construction delay claims are regarded as being among the most difficult types of claims in the industry and often times require the engagement of an expert. This can be due in large part to the difficulty in analyzing the home office overhead costs associated with a specific project in conjunction with the percentage of the total amount of these costs for the company. Typically, home office overhead costs are not directly allocable to a specific construction project. As a result, it is important for a contractor to select a recognized methodology for calculating allocable home office overhead costs and ensure all elements tied to such damages methodology are satisfied.

A common methodology for determining the extended home office overhead attributable to a specific project delay is the Eichleay Formula. The Eichleay Formula’s foundation is in the government contracting arena and more specifically in the Armed Services Board of Contract Appeals case, Eichleay Corporation, ASBCA No. 5183, 60-2 BCA 2688. The methodology can be summarized as requiring the following steps to prove an extended home office overheard claim:

  1. (Total billings for the contract/Total billing for the Company during the original contract period) X Company Total Overhead During Contract Period = Home Office Overhead Allocable to the Contract.
  2. (Overhead Allocable to the Contract)/(Days of Contract Performance) = Daily Home Office Overhead Rate
  3. (Daily Contract Overhead Rate) X (Days of Compensable Delay) = Recoverable Home Office Overhead

In doing this calculation, there are certain other legal thresholds that may be required in order to prove the claim. For example, in Ohio, these elements include (1) proof that the contractor was on standby; and (2) the contractor must prove that it was unable to take on other work while on standby. The Court of Appeals of Ohio recently addressed whether these elements must be met on a claim for extended home office overhead costs, using a slight variation of the Eichleay Formula, in Wood Electric, Inc. v. Ohio Facilities Construction Commission, 90 N.E.3d 371 (10th Dist. 2017).

In Wood Electric, Inc., an electrical contractor on a multi-prime school construction project run by a construction manager brought suit against the Ohio Facilities Construction Commission (“Owner”). Among other issues in dispute were the damages suffered by the electrical contractor as a result of delays in the construction allegedly caused by the Owner and other contractors. The electrical contractor sought a claim for extended home office overhead and, instead of using the Eichleay Formula, it used a variant called the HOOP formula. The HOOP formula is a methodology adopted by the Ohio Department of Transportation, and essentially involved the use of elements two and three of the EichleayFormula. Thus, it was a similar, but not identical methodology. The electrical subcontractor prevailed on this claim in the Court of Claims, but the Owner appealed arguing that the trial court’s decision was contrary to Ohio Supreme Court precedent requiring a prima facie showing of two elements for a home office overhead claim: (1) the contractor was on standby; and (2) the contractor was unable to take on work while on standby. Id. at 379-380 (citing Complete Gen. Constr. Co. v. Ohio Dept. of Transp., 760 N.E.2d 264 (Oh. 2002). Specifically, the Owner argued that the electrical contractor was not entitled to recovery on this claim because it failed to establish these two additional elements.

In evaluating this argument, the Court of Appeals stated that the electrical contractor never sought to use the Eichleay Formula, but instead expressly relied on the ODOT adopted HOOP formula. The Court noted that the parties’ contract neither forbade the HOOP formula nor mandated the use of the EichleayFormula. Further, and importantly, the Court noted that Complete Gen. Constr. Co. expressly stated that “we do not find that the Eichleay Formula is the exclusive manner of determining unabsorbed home office overhead.” Id. at 381 (citing the similar case J&H Reinforcing & Structural Erectors, Inc. v. Ohio School Facilities Comm., 2013 WL 4779008 (Ohio 2013). Because the Court concluded that the two elements of prima facie proof do not necessarily apply to other formulas for calculations of home office and adhered to the recent J&H ruling, the Court of Appeals concluded that the trial court did not err in failing to require proof of the Complete Gen. Constr. Co. elements. Based on this ruling, and there are other factors that may come into play, it appears contractors – at least in Ohio – seeking extended home office overhead claims may want to consider using a formula other than Eichleay to potentially lessen their burden in proving such a claim.