The Blame Game

Teresa m. Beck | The CLM Magazine | March 2018

How Good Are You at Predicting Construction Verdicts?

One of the most important things that claims professionals, risk managers, and defense counsel do is evaluate the verdict potential of cases that are headed for trial.  As a trial date approaches, invariably, the infamous roundtable meeting is scheduled where key members of the claims and defense team convene with their most experienced personnel to discuss key issues in the case.  We take out our cyrstal balls and make our best estimates about the odds of winning a case, the likely outcome at trial, and other vairables like the risk of runaway verdicts and the idiosyncrasies of the judge or jury pool.

This is an area where there is little science.  Members of the litigation team from the defense attorney to the claims professionals, claim managers and risk managers put their heads together and forecast the outcome as best as they can based on their years of experience and often with help from jury verdict reports.  We can never have too much information about what the judge or jury has determined after trials of cases similar to the ones we are litigating.

With that in mind, below are summaries of four cases from around the country with as much detail as could be obtained from jury verdict and news reports concerning liability and damages.  As each case is reviewed, consider the probable outcomes.  Should the case end in a plaintiff or defense verdict?  If you expect a plaintiff verdict, how much do you predict the verdict was?  Was there any comparative fault?  Deanne Murphy, construction defect senior resolution specialist with Gallagher Bassett, will also share her assessment of the outcome of each case before the actual verdict is revealed.

VERDICT #1

Our first case comes from one of the hotbeds of construction litigation: California.  This construction defect case involved a 246-unit, two-tower high-rise condominium project located in Long Beach, Calif.  The plaintiff was the homeowners’ association, whose members owned interests in the project.  The major damage claim revolved around the large window walls of the high-rise buildings, with additional claims involving plumbing, HVAC, electrical, automatic fire sprinkler, and miscellaneous architectural issues. An asphalt-based peel-and-stick flashing was used on the window walls to protect them from water intrusion.  The flashing, however, allegedly turned into liquefied “gunk” over time and seeped onto the metal cladding of the window walls.  Plaintiff claimed that the liquified funk needed to be removed and the metal cladding needed to be repainted or replaced at a cost of several million dollars.  Plaintiff requested over $10 million at trial.  Teh developer argued that the cost of repair for the window wall, assuming liability, was $5 million, the defense cost of repair.

DEANNE MURPHY SAYS: I have some experience in defending these types of product issues, so I predict that the developer’s cost of repair should prevail.  given the defense cost of repair is $5 million, the verdict will be at least that much.

ACTUAL VERDICT: In this California construction defect case, the jury awarded a total of $5 million for the window wall claims.  The developer entities were held 15 percent responsible, the builder was held 60 percent responsible, and the glazing subcontractor was held 25 percent responsible.  The product manufacturer of the flashing material was found to have no responsibility.  Other window defects were awarded at $72,852 with the builder entity  responsible for 65 percent and the glazing subcontractor 35 percent responsible.  finally, other miscellaneous defect claims were awarded for $468,123, with the developer entities responsible for five percent and the builder entities responsible for 95 percent.

VERDICT #2

The next verdict comes from Arizona.  The facts involve a 58-year-old welder who was injured while working at a construction site managed by the defendant general contractor (GC) when he fell through an unguarded, unprotected hole in a floor where a staircase was to be installed.  Plaintiff filed suit, alleging the GC failed to appropriately discover and correct dangerous conditions at the worksite and failed to hire safe subcontractors.  Plaintiff also alleged that an employee of the defendant subcontractor, who was contracted to install the steel staircases, removed teh safety railings from the stairwell while plaintiff was working int eh area prior to the fall.  The defendant GC denied liability, arguing plaintiff was an experienced worker who worked at the site for several months, and plaintiff was inattentive and walked through danger tape.

In terms of damages, plaintiff reportedly suffered a skull fracture, brain bleeds, multiple fractures of toes and bones in the feet, and blood in his right eye, which impaired his vision.  Plaintiff also alleged that as a result of his injuries, he was permanently unable to perform his occupational duties.  Plaintiff claimed severe and permanent injuries and a total economic loss exceeding $3 million and made a claim for punitive damages.  Defendants argued plaintiff’s complaints had resolved within days after his fall and that any ongoing complaints were related to a preexisting condition.  The jury verdict report did not indicate the amount of medical specials (they may have been withdrawn to prevent the jury from anchoring to low medical expenses).  Defendants made a final offer of $280,000 before trial.

DEANNE MURPHY SAYS: I predict that there will be no punitive damages since nothing in the facts suggests they would be justified.  Under these facts, $280,000 seems like a low offer.  I think it’ll be a $1 million verdict, unless the jury didn’t like the plaintiffs for some reason.  Plaintiff should be at least 50 percent at fault for ignoring the danger tape.

ACTUAL VERDICT:  The outcome in this Arizona construction injury case was a defense verdict, following two hours of deliberation by the jury.

VERDICT #3

Our third case comes from Texas and involved a commercial building owner who owned a multi-story building in Houston, Texas, which was severely damaged in a hurricane.  The building was insured by a well-known insurer that allegedly failed to conduct an adequate investigation following a claim for damages to the property.  The investigation was allegedly “outcome-oriented.”  The insurer paid out $2.4 million in damages, but refused to pay more and declined to take a position on coverage.  It is unclear from the jury verdict report how much total insurance coverage was available under the policy.

The property owner filed suit against the insurer and others in the Texas District Court of Harris County, arguing that the insurer breached its contract with the property owner and violated the Texas Insurance Code by failing to properly investigate and by underpaying the claim.  The property owner sought payment of all covered damages, attorneys’ fees, costs of court, interest, and additional damages under the Texas Insurance Code.  A week-long trial trial was conducted.  Admittedly, there are many facts missing here and that is always a drawback when assessing jury verdict reports.

DEANNE MURPHY SAYS:  I question why this case was tried by a jury, Commercial insurance policies generally have arbitration agreements, and it is often considered best to not publically try these types of disputes.  That aside, the insurer does need to give an explanation for what is covered and what is not covered under the policy.  Any failure to provide such an explanation is problematic and could be bad faith.  It is hard top predict the amount of the verdict without knowing the policy limits, but this kind of case can go sideways.  I would estimate a judgment of at least $600,000.

ACTUAL VERDICT:  The outcome in this Texas bad-faith case was a $1.4 million judgment for the plaintiff.

VERDICT #4

Our last case was provided to us by Jury Verdict Reporter, a CLM-Member company, and comes from Colorado (special thanks to Sally K. Gilbert, editor and publisher of the Jury Verdict Reporter, which is based in Colorado).  Plaintiff was a homeowners’ association located in Arapahoe County.  The project at issue consisted of two levels of a subterranean garage, a ground level of retail spaces, and three additional floors containing 90 residential condominium units.  Plaintiff sued the general contractor and the developer.  The plaintiff alleged that the defendants improperly constructed certain portions of the project, including the balconies, stucco, windows, concrete flatwork, asphalt, roof and subterranean garage, causing $6 million in damages for the cost of repairs.  Plaintiff’s final demand before trial was $6 million, according to plaintiff’s attorneys.  The defense made no offer before trial.

DEANNE MURPHY SAYS: The lack of any offer before trial is concerning.  It is unusual in a case like this for there to be no claims that create exposure sufficient enough to produce at least some settlement value.  Just on these facts, it appears that the defense may not have had a solid cost of repair.  Without a reasonable defense cost of repair, I predict the jury will give the plaintiff its $6 million in alleged damages.

ACTUAL VERDICT:  In this Colorado case, the jury determined the plaintiff’s total amount of damages was $5.8 million.  Plaintiff’s motions for pre-judgment interest, post-judgment interest, and costs were pending at the time of the verdict report.

What are the morals of these stories?  As is often the case, the outcomes were mixed.  In one example, a California jury seemed to carefully assess the damages and was not swayed by the damage arguments made by the plaintiff.  The Arizona verdict reminds us that defense verdicts are still possible, and sometimes there is an argument to be made for trying the right cases.  The Texas bad-faith case is a cautionary tale that coverage investigations can be tricky and that it is important to communicate that the insurer is seeking to find coverage rather than looking for reasons to deny it.  Finally, the Colorado case suggests that making an offer before trial could prevent expensive litigation.

Of course, in all of these cases, there are factors that we don’t know about that may be significant.  Either way, the outcomes are always informative as we consider the cases to line up for trial.

New York Insurance Law: Under Construction

Seth Schafler and Om V. Alladi | Proskauer | March 30, 2018

Imagine you hired a general contractor to renovate the master bathroom of your home. The general contractor hired a subcontractor to do the plumbing work, but the subcontractor botched the job, resulting in a massive leak causing extensive damage to other areas of your home and valuable personal property. You demand full compensation for the loss, but unfortunately the contractors you hired had no assets besides their comprehensive general liability insurance policies.

Will those insurance policies cover this loss? 

Until now, New York courts may well have answered this question in the negative, because they did not consider a subcontractor’s defective workmanship to qualify as an “occurrence” under CGL policies. But that view may be changing.

Recently, a number of cases in courts around the country have taken a fresh look at coverage in this scenario and reached the opposite conclusion. In 2016, the New Jersey Supreme Court changed its previous position and decided that under current CGL policies, damages caused by a subcontractor are a covered “occurrence” and therefore insurable.

More recently, in February 2018, the United States Court of Appeals for the Tenth Circuit, applying New York law, predicted that if the question were presented today, New York would find a potential for coverage even though prior intermediate appellate decisions in New York went the other way.

The issue in the Tenth Circuit case was whether a general contractor could recover for property damage caused by their subcontractor’s faulty installation of a component in a coal-fired power plant. The contractor settled claims brought by the owner for $225 million, and sued its CGL carrier for coverage. The insurers argued that subcontractor-caused damage was not an “occurrence” under New York law, but the contractor argued that position was outdated.

Although the insurers convinced a district court judge to dismiss the case based on prior New York authority, the Tenth Circuit reversed, predicting that the New York Court of Appeals would find coverage if the question were presented today. The Tenth Circuit reached this conclusion based on a comprehensive study of changes in the CGL policy, which showed that the policy form had been modified specifically to recognize coverage for damages caused by a subcontractor’s defective construction work, and that it would be contrary to the intent of the policy to deny coverage due to the absence of an “occurrence.”

It is too soon to tell whether the Tenth Circuit’s prediction will prove correct. But its decision follows a trend of court decisions over the past several years which have found coverage in these circumstances. In addition, recent decisions of New York’s highest court have focused on the precise policy wording and insisted that effect be given to every provision in an insurance contract, in line with the Tenth Circuit’s reasoning.

This is not the last we will hear from the courts on this evolving issue. Stay tuned for further developments. In the meantime, however, New York policyholders should not assume that there is no coverage for property damage caused by a subcontractor under a CGL policy and should take appropriate action to preserve coverage such as giving timely notice of occurrences or claims and assessing their litigation options.

Some Decisions Policyholders Can Be Thankful for this Year

Bryan J. Coffey | Pillsbury Winthrop Shaw Pittman LLP | November 27, 2017

It’s that time of the year when Americans gather together, enjoy a feast, and fall asleep in front of the TV. But before the tryptophan kicks in, we also like to give thanks for the good things that have happened in the past year. Corporate policyholders can share in the tradition, as this year has produced a number of court decisions that favored insureds and protected their coverage expectations. Here are a few of the cases we are most thankful for:

This case out of the South Carolina Supreme Court gave generously to policyholders in a number of ways this year (giving us the opportunity to post in this blog again and again and again). The case involved defective construction claims against a developer. The developer’s insurer, Harleysville, provided a defense under a vague reservation of rights letter. After the underlying plaintiffs were awarded verdicts against the developer, Harleysville sued to avoid covering the judgments. The court ruled against Harleysville on four issues:

  1. Harleysville’s vague, general reservation of rights letter did not effectively reserve its rights to contest coverage under the terms and exclusions in the policy;
  2. Where the underlying verdicts did not apportion the damages between covered and uncovered losses, the insurer bore the burden of proving amounts allocable to uncovered losses. Where the insurer failed to meet that burden, it had to cover the entire verdict;
  3. Punitive damages awarded in the verdicts were found to be covered under Harleysville’s policy; and
  4. The owners’ association, which was asserting the dissolved developer’s coverage rights in the case, had standing to challenge the insurer’s reservation of rights letter.

Harleysville is a case that just keeps on giving.

The duty to provide a defense, or reimburse defense costs, is one of the most important features of liability insurance. You could say it’s the stuffing, where indemnity is the turkey. The Delaware Superior Court emphasized that obligation in Verizon to the tune of $48 million in defense costs that the insurer had refused to pay. This decision was important because it rejected the insurer’s attempt to define the vague term “securities claim” narrowly to avoid its obligation to pay defense costs. More broadly, the court upheld the pro-policyholder interpretative doctrine of contra proferentem, rejecting the insurer’s argument that the doctrine should not apply where the insured is a large, sophisticated corporation. Applying the doctrine, the court held that unless it can be shown that the insured had a hand in drafting the policy language, ambiguous terms should be interpreted against the insurer. A more detailed analysis of the decision by this firm can be found here.

All State Interior Demolition Inc. v. Scottsdale Insurance Company and McMillin Management Services v. Financial Pacific Insurance Company

Thanksgiving dinner is always better with more guests. Additional Insured endorsements in policies extend the invitation to more parties that may require a seat at the table of insurance protection. This is especially important in the construction context, where developers and general contractors rely on numerous subcontractors’ insurance policies to protect them from liability arising from those subcontractors’ work. These two decisions rejected insurers’ attempts to narrow the application of additional insured endorsements.

In All State Interior, previously highlighted here, a New York County trial court interpreted an endorsement broadly, granting additional insured status to companies that didn’t technically contract with the subcontractor, and who weren’t named in the endorsement. The court, in essence, incorporated the terms of the contract between All State and the subcontractor into the endorsement to trigger additional insured coverage for the project owner, site lessor, and construction manager as All State’s “partners, directors, officers, employees, agents and representatives.”

In McMillin, the insurer’s policy granted additional insured status to McMillin, the general contractor of a project, for “liability arising out of [the subcontractor’s] ongoing operations,” and excluded additional insured status for the insured’s completed operations. The insurer denied defense coverage on the basis that the subcontractor had finished working on the project. The California Court of Appeal disagreed, stating that the endorsement’s phrase “arising out of” is broader than “during,” and so the liability did not have to arise while the insured was still working on the project.

When it’s time for dessert, allocating the available pie to make sure everyone gets what they deserve can be tricky. This year, Missouri joined the ranks of “all sums” states that maximize coverage for policyholders with long-tail claims stretching over several years. The “all sums” method of allocation allows an insured to allocate all of its damages from long-tail losses to a single year of coverage. This ruling by the Missouri Court of Appeals was based on the plain language of the policies, which promise to indemnify the insured for all sums the insured is legally obligated to pay for occurrences during the policy period. The court also ruled that all triggered primary policies across a period of years need not be exhausted before excess policies in the period selected by the policyholder can be triggered. The court ruled that only the primary policy in one year needs to be exhausted before that year’s excess policies are triggered. For a more thorough analysis of this case, click here.

Rather than brave the stampedes of Black Friday, one can get good deals on holiday gifts on Cyber Monday. But to protect against cyber thieves, make sure your insurance coverage will protect you. In this case, the U.S. District Court for the Southern District of New York interpreted the computer fraud provision of a crime policy to do just that. Policyholder Medidata was the victim of fraud when someone tricked its employees into wiring money overseas, using spoofed emails that looked like they came from the company’s president. Medidata’s insurer denied its claim, stating that the computer fraud clause of the crime coverage required actual hacking into and manipulation of Medidata’s computer system. But the court sided with Medidata, ruling that the spoofing of emails violated the integrity of the insured’s computer system enough to trigger coverage, and actual entry by hackers was not required by the policy language or by precedent.