You Are Indemnified…. Until You Are Not

William F. Bresee | Leech Tishman Fuscaldo & Lampl LLC | February 11, 2019

In the ordinary course of a construction project (or any commercial transactional arrangement, for that matter), something can go wrong. People can get injured; property can be damaged. For that reason, one of the significant risk allocation tools available to business people is indemnification. The concept is elegantly simple – you are an owner and engage me to provide you equipment or services. If there is a deficiency in my deliverable or service and, as a result of that deficiency (which could be negligent performance, a warranty breach, or similar), a third party is harmed by injury or economic loss and sues you, I step in and protect you against the impact of the claim made against you. The simplicity of the arrangement does not, however, mean that you do not have to read the language of indemnification provisions and of contract documents through the product or service supply chain. The ruling in Oliver Communications Group, Inc. v. Schneider Electric Buildings Americas, Inc., Case No, 07-17-00396-CV, Court of Appeals, Seventh District of Texas (November 2018) is instructive.

Schneider Electric Buildings Americas, Inc. (“Schneider”) contracted with the Delaware River Port Authority for installation of security cameras on the Benjamin Franklin Bridge; Schneider then subcontracted portions of the work to Oliver Communications Group, Inc. (“Oliver.”) A provision of the Bridge Contract allegedly obligated Schneider to indemnify Port Authority against certain claims. In the Subcontract, Oliver also agreed to indemnify Schneider against certain claims. An employee of Oliver, Patrick Burness, slipped and fell on steps at the job site. Burness sued the Port Authority, among others. The Port Authority demanded indemnification from Schneider, and, in turn, Schneider demanded indemnification from Oliver. Oliver refused, while Schneider did not. Burness settled his lawsuit, Schneider paid the settlement, and Schneider sued Oliver for indemnification upon the subcontract with Schneider. Both litigants filed motions for summary judgment. The trial court granted that of Schneider, denied Oliver’s, and awarded Schneider over $1.2 million against Oliver. Oliver appealed on the basis of the existence of an obligation to indemnify Schneider and the enforceability of the indemnity agreement, as well as whether it was obliged to also pay pre-judgment interest on attorney’s fees. Noting that Texas law strictly construes indemnity agreements against the indemnitor, the Texas Court of Appeals reversed the trial court and denied judgment for Schneider.

The subcontract entered into by Schneider and Oliver has Oliver agreeing “to indemnify, save and hold harmless the Contractor, Contractor’s agents and employees, and all parties indemnified by Contractor in Contractor’s Contract from and against all claims, damages, losses and expenses…. to the extent caused in whole or in part by any negligent act or omission of Subcontractor, … or anyone for whose acts Subcontractor may be liable” and further provides that “Subcontractor expressly so agrees, whether or not said liability, claim, demand, loss or expense arises in part from the negligence of Contractor or any party indemnified by Contractor in Contractor’s Contract.” The subcontract was to be interpreted and enforced according to Texas law (even though the work was done in Pennsylvania). It makes clear that Oliver was obliged to indemnify Schneider and anyone Schneider was obligated to indemnify. The appellate court easily found that “Contractor’s Contract” was the contract between the Port Authority and Schneider. It then found, however, that Schneider was not obligated to indemnify the Port Authority against the claim of Burness.

The contract between the Port Authority and Schneider was comprised of a Request for Proposal and a Purchase Order from the Port Authority. The Purchase Order was unsigned; contained only elementary terms, and contained no indemnity provision; although referring to a “Solicitation” and “Supplier’s Bid or Proposal” and “documents attached to this Purchase Order or incorporated by reference,” nothing was attached to or expressly incorporated into the Purchase Order. Only the Request for Proposal contained an indemnity provision; that requiring Schneider to indemnify the Port Authority against claims “arising out of or resulting from: (a) performance or non-performance of the Work; (b) breach of any of the Design/Builder’s obligations under the Contract Documents, or (c) acts or omissions of the Design/Builder, its contractors, consultants, suppliers, or anyone directly or indirectly employed by any of them or anyone for whose acts they may be responsible, regardless of whether or not such claim, demand, cause of action, damage, liability, loss, or expense is caused in part by a party indemnified hereunder.” However, although alluding to a “Solicitation,” none was attached or defined by the Purchase Order. Finding that Schneider failed to establish the necessary linkage between the “Solicitation” and the Request for Proposal through its summary judgment evidence, the appellate court found that there was no evidence that Schneider contractually agreed to indemnify the Port Authority and that Oliver’s obligation to indemnify Schneider was never triggered.

The appellate court found that Schneider’s summary judgment evidence failed for a more telling reason pertaining to the scope of Oliver’s duty. Oliver’s indemnity arose “…to the extent caused in whole or in part by any negligent act or omission of Subcontractor [Oliver], [Oliver’s] employees, agents, suppliers, subcontractors or anyone for whose acts subcontractor may be liable and [Oliver] expressly so agrees, whether or not said liability . . . arises in part from the negligence of Contractor [Schneider] or any party indemnified by [Schneider] in Contractor’s Contract.” The court noted that this language required (i) causation “in whole or in part” by Oliver or one of those under it for whose acts Oliver accepted liability, and (ii) a negligent act or omission by Oliver or someone in that group. Finding that the language excluded the sole negligence of Schneider or another indemnified party, the also court found the language required multiple causes, one of which had to a negligent act or omission by a party within the Oliver group. Finding that the record was without evidence of negligence of Oliver or those under it (including Burness), the court found that Schneider’s summary judgment motion would have nonetheless failed on that point.

Whether the obligation to indemnify is in place through the contractual chain, and whether the specific requirements of an indemnity provision are to be triggered are key to being comforted that the intended allocation of risks between and among contracting parties is in place and enforceable. The review should be accomplished upon contracting as well as at the time a claim for indemnity arises.

Consequences of a Well-Pled Complaint

Deborah Trotter | Property Insurance Coverage Law Blog | February 1, 2019

The New York Supreme Court, Appellate Division, First Department “unanimously reversed, on the law, with costs, the motion denied and the claims reinstated,” the New York County Supreme Court trial judge’s order dated April 2, 2018, to the extent appealed from, which granted dismissal of Plaintiff D.K. Property, Inc.’s (“D.K.”) consequential damages (other than attorney’s fees) pled in its amended complaint.1 The dispute involves an “all-risk” commercial property policy issued by Defendant National Union Fire Ins. Co. of Pittsburgh, PA (“National Union”) and its denial of D.K.’s October 2014 claim for policy proceeds and benefits arising from damage to one of its buildings insured under the policy.

D.K. alleged in its complaint filed in February 2017 that National Union refused to pay or deny its claim, even after repeated inspections and documentation presented to support its claims, which it alleged amounted to a breach of contract and breach of the covenant of good faith and fair dealing. After being served the complaint, National Union filed a partial motion to dismiss D.K.’s demand for consequential damages for attorneys’ fees, costs, and expenses or disbursements alleging the complaint failed to contain allegations sufficient to support those claims. The trial court granted National Union’s partial motion to dismiss, without prejudice, to allow D.K. an opportunity to amend its complaint.

Plaintiff filed an amended complaint on July 14, 2017, containing greater detail in the allegations regarding National Union’s inadequate and unfair claim handling, unreasonable denial and requests, as well as the foreseeable attorneys’ fees, costs and expenses that National Union’s breach and conduct would reasonably require D.K. to incur to protect its rights. National Union again filed a partial motion to dismiss D.K.’s consequential damages demands alleged in its amended complaint.

Persuaded by a heightened pleading standard of specificity for consequential damages argued by National Union, the trial court dismissed the consequential damages demanded in D.K.’s count one of the amended complaint for breach of contract and count two for breach of the covenant of good faith and fair dealing, except for attorneys’ fees.2 See my colleague Jason Cieri’s post on April 11, 2018, concerning the trial court’s ruling.

D.K. appealed the trial judge’s ruling and argued that at the pleading stage, a claim for consequential damages, which do not flow directly from the breach does not require a detailed, factual description or explanation for why those damages are recoverable. The appellate court agreed with D.K. finding, “the motion court erred in dismissing the consequential damages claim, because plaintiff fulfilled the pleading requirement by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.3

The appellate court reasoned:

It is well settled law that on a motion to dismiss pursuant to pursuant to CPLR 3211(a)(7), the pleading is afforded a liberal construction, facts as alleged in the complaint are accepted as true, plaintiffs are afforded the benefit of every possible favorable inference, and the motion court must only determine whether the facts as alleged fit within any cognizable legal theory (see e.g. Leon v Martinez, 84 NY2d 83, 87–88 [1994]).

The complaint alleges that rather than pay the claim, defendant has made unreasonable and increasingly burdensome information demands throughout the three year period since the property damage occurred. Plaintiff contends that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contends defendant’s investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged are engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property.

Despite substantial documentation of the cause and extent of the damage to plaintiff’s building, not only by plaintiff’s engineer, but also an engineer that defendant hired, who inspected the building several times, defendant has persisted in demanding further, unnecessary monitoring, data collection, inspections, and reinspections. Although it has yet to pay the loss or deny the claim, defendant nonetheless sought to intervene as plaintiff’s subrogor under the policy when plaintiff sued the owner of the adjoining property. By doing so, defendant forced plaintiff to incur significant, unnecessary legal fees. A plaintiff may sue for consequential damages resulting from an insurer’s failure to provide coverage if such damages (“risks”) were foreseen or should have been foreseen when the contract was made (Bi-Economy Mkt, Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192 [2008]). Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, forseeable should not be decided on a motion to dismiss and must await a fully developed record (see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]; see also Bi-Economy at 192). In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.4

The appellate court found D.K.’s amended complaint met the pleading requirements with respect to consequential damages, in both the first cause of action for breach of contract and in the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract.5 And contrary to National Union’s claim, the appellate court found “[t]here is no heightened pleading standard requiring plaintiff to explain or describe how and why the “specific” categories of consequential damages alleged were reasonable and foreseeable at the time of the contract. (Panasia Estates Inc. v. Hudson Ins. Co., 68 AD3d 530, 530 [1st Dept 2009], aff’d 10 NY3d 200 [2008], citing Bi-Economy 10 NY3d at 192).”

In closing, the appellate court offered its guidance on issues raised, though not currently before it:

  • “An insured’s obligation to ‘take all reasonable steps to protect the covered property from further damage by a covered cause of loss’ supports plaintiff’s allegation that some or all the alleged damages were foreseeable (Benjamin Shapiro Realty Co. v. Agricultural Ins. Co., 287 AD2d 389, 389-390 [1st Dept 2011]”; and
  • In addressing National Union’s motion to dismiss plaintiff’s second count for breach of the covenant of good faith and fair dealing as duplicative of count one breach of contract, “[a]s noted by the Court of Appeals in Bi-Economy, a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative (id. At 191).”

The New York Court of Appeals has removed the spike strip thrust in the road in front of New York policyholder plaintiffs and provided them with an excellent road map for properly pleading consequential damages in New York—a great victory for policyholders, indeed!
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1 D.K. Property, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Index 650733/17 (New York Supreme Court, Appellate Division, 1st Dept. Jan. 17, 2019).
2 D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, 59 Misc.3d 714, 74 N.Y.S.3d 469, 2018 N.Y. Slip Op. 28097 (Supreme Court, New York County April 03, 2018).
3 Id. (emphasis added).
4 Id. (emphasis added).
5 Id.

Court Addresses Damages Under Homeowners Insurance Policy

David R. Cook, Jr. | Autry, Hall & Cook, LLP | December 29, 2018

During a storm, a tree landed on a homeowners house causing damage to the home’s foundation.  Homeowners filed a claim on their homeowners insurance policy to recover the resulting damages.  After homeowners and insurance company could not come to an agreement on value of the loss, homeowners filed a lawsuit.  

Homeowners presented the testimony of a contractor as an expert witness regarding the damage and the resulting loss of value.  Contractor testified that the home value was reduced in half as a direct result of the damage to the home’s foundation.  Insurance company sought to exclude the contractor’s testimony, arguing he was not qualified as an expert and did not apply appropriate methodology to reach his opinions.  

The trial court agreed with the insurance company and excluded the testimony of the contractor.  Homeowners appealed to the Georgia Court of Appeals. The Court of Appeals agreed that contractor did not use appropriate methodology to present expert opinion as to diminution in value.  However, the trial court erred in excluding contractor’s testimony as a lay witness.  The court explained that under O.C.G.A. § 24-7-701(b), lay witness testimony is permitted concerning value.  In other words, one need not be an expert to give an opinion on the value or demonization in value.

Under O.C.G.A. § 24-7-701(a), lay witness testimony is permitted if it is rationally based on the perception of the witness; helpful to the determination of a fact in issue; and not based on scientific, technical, or other specialized knowledge requiring expert testimony.  With respect to lay testimony of value, the court agreed that the witness need not be an expert or dealer to form a reasonable opinion.  

The court concluded that contractor’s lay option was admissible based on a number of factors.  These included, for example, the contractor was licensed, he had experience in home building and remodeling, he had constructed and repaired many homes, he was familiar with the cost of construction and the valuation of homes based on his professional experience, he reviewed the specific damage in this case, he witnessed the structural damage in damage to the slab foundation, he witnessed the impact of such damage to the structural integrity of the house, he was familiar with the impact of structural damage to the value of a home, and other important factors.

In short, the court agreed with the insurance company that the contractor could not testify as an expert on the value of the home.  However, based on his experience and observations, he was well suited to testify as a lay witness.  As a result, trial court should have allowed the contractor to present evidence about the diminution in value of the home. 

Is Evidence of a Liability Insurer’s Investigative Findings Admissible in a Third-Party Property Damage Claim?

Kevin Pollack | Property Insurance Coverage Law Blog | June 12, 2017

Assume a homeowner suffers damage as a result of a construction professional’s negligence. After the homeowner notifies the construction professional of the damage, the construction professional puts his liability carrier on notice and advises the homeowner that the liability insurer will investigate the damage and work with the homeowner to resolve the claim.

Further assume that the liability insurer’s investigation determines that the construction professional’s negligence caused the homeowner’s damage, and that the construction professional does not dispute the investigation’s findings. Last, assume that although the construction professional and his insurer have acknowledged liability, they disagree with the homeowner over the scope of damage.

If:

(1) the homeowner is forced to file suit against the construction professional to obtain the funds necessary to repair the home;
(2) cannot sue the insurer because state law precludes it; and
(3) the construction professional changes its position and denies liability in the litigation,

can the homeowner introduce evidence of the liability insurer’s investigation and pre-litigation settlement offers (property damage estimates) to support his case?

First, because the insurer’s investigation was conducted on the construction professional’s behalf as an authorized representative, there is an argument that the insurer’s investigative actions were performed as its insured’s agent. It is a well-known principle of agency law that communications, admissions, and information gathered by an agent/representative (in this case, the insurer) are imputed to the principal (Construction professional ). (( See, e.g., Cal. Civ. Code § 2332 [“[a]s against a principal, both principal and agent are deemed to have notice of whatever either has notice of”]; O’Riordan v. Federal Kemper Life Assurance (2005) 36 Cal. 4th 281, 288[“The fact that the knowledge acquired by the agent was not actually communicated to the principal. … does not prevent operation of the rule.”].

Further, under California Evidence Code § 1222, admissions by a party’s agent are imputed to the party. The Evidence Code provides that evidence of a statement offered against a party is admissible if the statement was made by a person authorized by the party to make a statement. Thus, there is an argument that the insurer’s investigative findings are binding on the construction professional.

Because the construction professional agreed with its insurer’s investigative findings, under California Evidence Code § 1221, there is an argument that it’s adoption of its insurer’s investigative findings is binding against it as an adoptive admission (a third person’s out-of-court statement is admissible against a party as a party admission if, with knowledge of the contents of the statement, the party—by words or conduct—manifested his or her adoption or belief in its truth.)

But what about the fact that evidence of a defendant’s liability insurance is typically excluded under California Evidence Code § 1155 (and other similar statutes in other jurisdictions) based on the public policy of wanting to prevent a prejudicial reaction by the jury (where the jury is more likely to find against the defendant because of the presence of insurance)?

Such evidence can be admissible if it is relevant for an entirely different purpose, and if it is more probative than prejudicial. (Blake v. E. Thompson Petroleum Repair Co., Inc. (1985) 170 Cal.App.3d 823, 831 (where the topic of insurance coverage is coupled with other relevant evidence, evidence of insurance may be admitted along with such other evidence) (“It has always been the rule that the existence of insurance may properly be referred to in a case if the evidence is otherwise admissible.”)(emphasis added). See also Menefee v. Williams (1968) 259 Cal.App.2d 56, 62, 66 (when insurance coverage is mentioned in a statement made by a Defendant, which statement contains an admission of fault, probative value of the evidence outweighs prejudicial effect of the statement and the statement is admissible)).

What about the pre-litigation settlement communications? Are those admissible? Although “settlement communications” are excluded from evidence if they are used to create an inference of liability under California Evidence Code § 1152, settlement communications can be admissible if they contain admissions or statements against interest. (Truestone, Inc. v. Simi West Industrial Park II (1984) 163 Cal.App.3d 715, 725 (party’s statement that he is willing to settle claim may be an admission against interest); Coronet Const. Co. v. Palmer (2d Dist. 1961) 194 Cal. App. 2d 603, 614–15 (abrogated on other grounds by Weiner v. Fleischman, 54 Cal. 3d 476 (1991)(admissions against interest made during settlement efforts are admissible). See also In re Marriage of Schoettgen (1986) 183 Cal.App.3d 1, 7-8 (evidence of offers made when there was “no controversy to negotiate” were deemed admissible).

In the context described above, the evidence of settlement discussions would seem particularly relevant because, before litigation commenced, both the construction professional and its insurer had communicated to the homeowner that the construction professional was liable for the damages sustained. To the extent there was a pre-litigation disagreement at all, it was over damages, not liability.

The evidence referenced above (including the admissions) would appear to fall outside the scope of Evidence Code §§ 1155 and 1152 because the homeowner would not be offering it into evidence to establish liability through a negative inference based on the presence of liability insurance. The pre-litigation admissions would seem to rebut the new contention made in the litigation that the construction professional is free of liability, and the evidence would also show that although the construction professional knew it was responsible for the damages, it did not want to fully compensate plaintiff for those damages.

Are Insurers Required to Pay Overhead and Profit for Payments Made on Actual Cash Value Basis?

Kevin Pollack | Property Insurance Coverage Law Blog | May 1, 2017

A recent class action lawsuit filed in Pennsylvania1 raised an issue that policyholder advocates and public adjusters see all over the country – insurers that try to exclude overhead and profit from property damage claim payments made on an actual cash value basis.

The named plaintiffs had replacement cost insurance policies with the following language:

Actual cash value- means the reasonable replacement cost at time of loss less depreciation for both economic and functional obsolescence.

5. How We Settle Covered Loss.

( 1) Settlement for covered loss or damage to the dwelling or separate structures will be settled at replacement cost, without deduction for depreciation, for an amount that is reasonably necessary, for the lesser of repair or replacement of the damaged property
….
When the cost to repair or replace damaged property is more than $2,500, we will pay no more than the actual cash value of the loss until actual repair or replacement is completed.

e. General contractor fees and charges will only be included in the estimated reasonable replacement costs if it is reasonably likely that the services of a general contractor will be required to manage, supervise and coordinate the
repairs. However, actual cash value settlements will not include estimated general contractor fees or charges for general contractor’s services unless and until you actually incur and pay such fees and charges, unless the law of your state requires that such fees and charges be paid with the actual cash value settlement.

(Emphasis added).

The case involved a situation where the plaintiffs had not yet completed the construction repairs at the time they received their ACV payments. Therefore, the insurer argued that it was not responsible to include overhead and profit in the payments because they were made on an actual cash value basis and that its policy explicitly excluded overhead and profit payments for general contractors when payments are made on ACV basis.

The policyholders disagreed, and argued that the general contractor overhead and profit exclusion was ambiguous because of its use of the term “replacement cost” as a component of “actual cash value” and that the provision was contrary to Pennsylvania law and unenforceable.

The court agreed with the policyholders and ruled in their favor. The court’s ruling specified that:

Insurance companies are required in Pennsylvania to include general contractor overhead and profit in actual cash value payments for losses where repairs would be reasonably likely to require a general contractor…. [This reflects] the majority approach across jurisdictions. (see Mills v. Foremost Ins. Co, 5 I I F.3d 1300, 1306 (II th Cir. 2008) (“A majority of courts considering the question under similarly drafted insurance policies has determined that an actual cash value payment includes a general contractor’s overhead and profit charges in circumstances where the policyholder would be reasonably likely to need a general contractor in repairing or replacing the damaged property in issue”); Goffv. State Farm Florida Ins. Co., 999 So. 2d 684, 689 (Fla. Dist. Ct. App. 2008) (“Actual cash value includes overhead and profit where the insured is reasonably likely to need a general contractor for repairs.”); Salesin v. State Farm Fire & Cas. Co., 229 Mich. App. 346, 368-69, 581 N. W .2d 781, 791-92 (1998) (“it is also true Sales in has paid a premium for a full replacement cost policy. There is no logical reason. nor any reason based upon the insurance policy itself or the record below, for deducting estimated contractor’s overhead and profit”); Tritschler v. Allstate Ins. Co., 213 Ariz. 505, 514, 144 P.3d 519, 528 (Ct. App. 2006), as corrected (Dec. 19, 2006) (“Several other jurisdictions have since followed the reasoning in Gilderman and Salesin and ruled that an insurer may not automatically deduct a contractor’s overhead and profit from an actual cash value payment.”); Mazzocki v. State Farm Fire & Cas. Corp., 766 N. Y.S.2d 719, 721 (App. Div. 3d Dep’t 2003) (“we find that the term “replacement cost”-as opposed to “actual replacement cost”-in defendant’s policies can reasonably be interpreted to include profit and overhead whenever it is reasonably likely that a general contractor will be needed to repair or replace the damage”).

The court also took issue with the insurer’s policy language seeking to exclude overhead and profit from actual cash value payments “unless the law of your state requires [otherwise].” The court stated this provision was troublesome because it requires “a lay purchaser of a homeowner insurance policy [to obtain] legal assistance to understand what he or she is paying for.”
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1 Konrad Kurach v. Truck Insurance Exchange, No. 150700339, and Mark Wintersteen v. Truck Insurance Exchange, No. 150703543, both before the Court of Common Pleas of Philadelphia County, Pennsylvania.