Michigan Court of Appeals: Construction Lien Can’t Exceed Contract Value

Scott R. Murphy | Barnes & Thornburg | September 27, 2019

The Michigan Court of Appeals held that an arbitrator’s decision to award a contractor consequential damages on a construction lien claim warranted reversal even under the extremely narrow standard of review for arbitration awards. In reaching its decision, the court made the definitive ruling that a contractor may not assert a construction lien for consequential damages beyond the monetary value of the parties’ contract.

In TSP Services, Inc. v. National-Standard, LLC, the contractor’s scope of work included asbestos abatement, demolition of steel structures and disposal of scrap steel as well as other site restoration work for an abandoned industrial facility. The parties’ contract required payment in installments with an aggregate contract price of $414,950, due upon completion of the asbestos abatement. Notably, the contract did not mention the sale of scrap steel or TSP’s potential profits therefrom as compensation under the contract. This fact was significant in the eyes of the appeals court because the arbitration proceeding focused on the profits from the sale of scrap steel as a major component of the contractor’s scope of work.

Because the project experienced significant delays in permitting, the contractor was unable to begin the steel reclamation work. During the delay, the market price for steel declined dramatically and as a result, the value of the contract was diminished significantly. In response to the declining steel prices, the contractor requested an equitable adjustment to the parties’ contract. At the time the contractor requested the equitable adjustment, only 9 percent of the available steel had been removed from the project site. When the parties could not reach an agreement to adjust the contract price, the owner terminated the contractor for cause.

However, the arbitrator ultimately concluded that the owner improperly terminated the parties’ contract and committed the first material breach of the parties’ contract. The arbitrator awarded the contractor a construction lien for $782,496.05 and broke that amount out as follows:

  • $141,083 on the unpaid invoices under the contract
  • $46,557.39 for interest and unpaid invoices
  • $391,809 for lost profits on steel inventory
  • $33,793 for interest on those profits
  • $169,226 in attorneys’ fees

The arbitrator determined that the contractor’s construction lien was valid, and was enforceable against the entire award, including the award for consequential damages for lost profits on steel inventory. Notably, the arbitrator awarded the contractor the full value of all the steel even though the contractor never actually removed the steel from the project site.

Despite the extremely narrow standard of review for arbitration awards under Michigan law, the Michigan Court of Appeals reversed the arbitrator’s award of consequential damages in connection with the lien claim because the value of the lien was nearly double the value of the parties’ contract. In reaching this decision, the appeals court emphasized that under the Michigan Construction Lien Act, the amount of any construction lien cannot exceed the remaining unpaid balance under the contract. See MCL 570.1103(4).

Because the arbitrator approved a construction lien well in excess of the contract value, the award violated the Construction Lien Act. Specifically, the arbitrator approved a lien for $782,469, which is $641,386 greater than the unpaid balance under the contract. According to the appeals court, the arbitrator’s award constituted a clear legal error that would reduce the value of the lien by over $500,000.

In reversing the arbitration award, the appeals court relied upon the Michigan Supreme Court’s decision in Detroit Auto Inter-Insurance Exch v Gavin, which held that judicial interference with an arbitration award is appropriate where the arbitration award contains a clear error of law that if corrected would substantially change the award. The Michigan Court of Appeals granted interlocutory relief because further proceedings on the lien claim would have only further complicated the issues and lead to multifarious litigation.

In summary, the decision in TSP Services, Inc v National-Standard makes it clear that consequential damages are not available under the Michigan Construction Lien Act when they exceed the balance of the parties’ contract.

Introducing John Link – Construction Expert Witness

Advise & Consult, Inc. | August 2, 2018

John Link Headshot 002
John Link

We are excited to announce the addition of John Link to our expert witness family here at Advise & Consult, Inc. He covers the Michigan area and has expertise in construction, remodeling and restoration services. John is also very experienced as a business consultant, public speaker and educator, and system and program development.

John has been a licensed builder, remodeler, and restoration contractor for over 30 years. His former businesses performed work thorough out the US with over 200 employees. His company was one of the only ISO certified restoration companies in the United States, which allowed direct contracts with large corporations. He also developed an industry 1st in the contents restoration services by standardizing the contents remediation process for several insurance providers and third party administrators. Throughout his career he has consulted with numerous companies to implement scalable growth and sales strategies. He has served as an expert witness for over 25 years. He has produced many CE classes, speaks publically, and provides industry training.  

Since the start of his business career, one of John’s main focuses has been how to effectively run and scale a business. With this focus, John has put together a comprehensive business administrative package. It provides start to finish protocol with over 300 critical documents covering the 4 main areas of business: personnel, project management, accounting, and file management. It also contains marketing sales strategies including educational classes that are industry specific. The package has been designed and implement to be highly adaptable to various businesses. This kind of organization and detailed business focus is what help his company become one of the only ISO Certified restoration companies in America.

If you are in Michigan and in need of his services – call 231.598.6166 or email johnlink@adviseandconsult.net

Property Damage to Insured’s Own Work is Not Covered

Tred R. Eyerly | Insurance Law Hawaii | April 22, 2019

    The Michigan Court of Appeals found there was no coverage for a lawsuit filed against the insureds for faulty workmanship. Skanska United States Bldg. v M.A.P. Mech. Contrs., 2019 Mich App. LEXIS 529 (Mich. Ct. App. March 19, 2019).

    Contractor Skanska United States Building was the construction manager on a renovation project for the medical center. The heating and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors (MAP). MAP had a CGL policy from Amerisure Insurance Company. Skanska and the medical center were named as additional insureds on the policy. 

    After installation of the steam boiler and related piping, it was discovered that the heating system did not function property. Skanska discovered that MAP had installed some of the expansion joints backward, causing damage to concrete, steel, and heating system. The medical center sent a demand to MAP. Skanska performed the repairs and replaced the damaged property. Skanska then submitted a claim to Amerisure, which was denied.

    Skanska filed suit against MAP and Amerisure. The trial court denied Amerisure’s motion for summary judgment. The court found that the parties injured by MAP’s negligence did not anticipate, foresee or expect backward expansion joints or property damage to the entire length of the underground steam lines. Michigan courts had consistently focused on the particular property damaged to determine whether an “occurrence” had happened. The unforeseen incident meant an “occurrence” may have happened, which triggered Amerisure’s duty of coverage. 

    The court of appeals found that the trial court had erred. It was well established that an “occurrence’ could not include damages for the insured’s own faulty workmanship. Consequently, there was no “occurrence” here. Amerisure presented evidence to demonstrate that all of the repair and replacement work was within the scope of Skanska’s original project. Once Amerisure presented this evidence, the burden shifted to Skanska to present evidence that the repair and replacement work included tasks or property beyond the scope of the original project. 

    Amerisure was entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there were no genuine issues of material fact that the only damage was to Skanska’s own work product, or that of its subcontractor. 

Statutory Interest Series: Michigan

Beaujeaux de Lapouyade | Property Insurance Coverage Law Blog | May 16, 2019

Prompt-pay laws are important to a policyholder’s rights to recover insurance benefits following a wrongful denial or delay in payment of a property damage claim. Prompt-pay laws vary from state to state. The implementation of statutory prompt-pay laws is critical to a policyholder’s recovery following a devastating loss.

A policyholder’s entitlement to prejudgment interest on wrongfully delayed or denied claim payments is a necessary tool to encourage insurance carriers to properly investigate claims and issue payments in a timely manner.

The State of Michigan enforces statutory interest penalties for a carrier’s failure to issue payments promptly. The Michigan State Legislature enacted prompt-pay laws to protect consumers from delayed payment of owed policy benefits.

Michigan’s Prejudgment Interest Statute1 allows interest on any money judgment recovered in a civil action and calculated from the date of filing the complaint at 6% per year.

In addition, claims not paid timely will constitute an unfair trade practice unless the claim is “reasonably in dispute.” The statute provides as follows:

Mich. Comp. Laws §500.2006. Payment of benefits on timely basis; payment of interest in alternative; failure to pay claims or interest as unfair trade practice.

(1) A person must pay on a timely basis to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . or, in the alternative, a person must pay to its insured, a person directly entitled to benefits under its insured’s insurance contract . . . 12% interest, as provided in subsection (4), on claims not paid on a timely basis. Failure to pay claims on a timely basis or to pay interest on claims as provided in subsection (4) is an unfair trade practice unless the claim is reasonably in dispute.

The last sentence of subsection (1) tells us that we should also consider the language of subsection (4), which provides:

(4) If benefits are not paid on a timely basis, the benefits paid bear simple interest from a date 60 days after satisfactory proof of loss was received by the insurer at the rate of 12% per annum, if the claimant is the insured or a person directly entitled to benefits under the insured’s insurance contract. . . . The interest must be paid in addition to and at the time of payment of the loss. If payment is offered by the insurer but is rejected by the claimant, and the claimant does not subsequently recover an amount in excess of the amount offered, interest is not due. Interest paid as provided in this section must be offset by an award of interest that is payable by the insurer as provided in the award.

Policyholder’s should be mindful of subsection (4) above, which notes that interest is not payable on payments offered by the carrier and rejected by the policyholder if the policyholder subsequently fails to recover an amount more than the offered amount.

In Denham v. Bedford,2 the Michigan Supreme Court confirmed that Michigan’s Prejudgment Interest Statute is a “remedial statute entitled to liberal interpretation.” In Denham, the court determined that carriers owe interest to the policyholder on the entire judgment regardless of whether the interest owed allows the total payment to exceed policy limits. A noteworthy portion of the opinion provides:

Payment of prejudgment interest not only compensates the prevailing party but also liability for prejudgment interest may act as an incentive to the insurer to promptly settle a meritorious claim. Without such an incentive, the insurer may refuse to settle a meritorious claim in hopes of forcing plaintiff to settle for less than the claim’s true value. The insurer risks nothing. Even if protracted litigation results, the insurer will only be liable for its policy limits all the while reaping a tidy sum from its investment of the policy limits.

Delay tactics are a real burden many policyholders face when dealing with property damage claims. It is important to be aware of the various tools available to assist policyholders in efficiently obtaining full payment of owed policy benefits.
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1 M.C.L.A §600.6013.
2 Denham v. Bedford, 287 N.W.2d 168, 528 (Mich. 1980).



Interesting Public Adjuster Contract Required By Michigan Director of Insurance

Chip Merlin | Property Insurance Coverage Law Blog | April 29, 2019

The Michigan Director of Insurance recently issued the following bulletin:

MICHIGAN INSURANCE BULLETINS AND RELATED MATERIALS
BULLETINS
Bulletin 2019-07-INS
April 17, 2019

FROM: Anita G. Fox
Director Of Insurance
DATE: April 17, 2019

RE: RESIDENTIAL PUBLIC ADJUSTER CONTRACT

This bulletin supersedes Bulletin 2018-22-INS, dated November 20, 2018.

The Director has approved a new residential public adjuster contract. The effective date of the new contract is May 15, 2019. All licensed public adjusters must begin using the new contract on that date; and must file the new contract with DIFS no later than June 30, 2019.

Here is a copy of the new Michigan Residential Public Adjuster Contract.

Anita Fox is a former accomplished insurance defense counsel and was recently appointed Michigan’s Director of Insurance. Despite her name and background, her appointment does not necessarily mean that an insurance company fox is guarding the insurance henhouse. Time will tell and many experienced insurance defense counsel certainly know how insurance companies can make policies and procedures which are not in the public interest.

The mandated insurance contract has two parts which I found interesting. It requires the parties to indicate which coverages the public adjuster is adjusting and charging a fee. This is important. Some public adjusters wrongly do no adjustment work on the contents or living expenses and instead make their own policyholder customers do all the work, and then charge for it. This contract makes it clear what the public adjuster is required to do, and I applaud this requirement.

The second item is the recognition that the public adjuster is still required to be paid for work even if litigation, arbitration or mediation is necessary. I applaud this as well because the issue comes up every now and then and after the public adjuster does work and disputes arise regarding the amount owed or coverage owed. This contract mandate expressly raises the issue so there is no misunderstanding.