Another Florida Insurer Adds Binding Arbitration Endorsement Amid Losses

William Rabb | Insurance Journal

Heritage Property & Casualty Insurance Co. reported more losses for the first quarter of 2022 and a spike in its combined ratio. But company officials said Friday they are taking aggressive steps, including rate increases, policy changes and tightened underwriting requirements, to improve the Florida-domiciled company’s financial profile.

The Friday earnings call for the publicly traded Heritage came the same day that the carrier filed notice with the Florida Office of Insurance Regulation that it would cut the eligibility age of metal, slate and tile roofs from 25 to 15 years for new homeowner policies, beginning June 1. A number of Florida insurers, including Heritage, have aleady reduced the age of covered shingle roofs to 10 years, but this may be one of the first filings to tighten requirements on metal and tile, which are generally expected to last for decades.

The conference call also came two weeks after Tampa-based Heritage filed for an endorsement requiring binding arbitration for claims disputes, beginning July 1 for new and renewing homeowners policies.

“Given the turbulent state of the market, rampant with fraud and abuse, we are proposing changes that will control exploitation,” reads a memo accompanying the April 26 filing with OIR.

The filing came two months after OIR surprised many in the industry when it approved an endorsement from American Heritage Insurance Co., offering arbitration in exchange for a premium discount for policyholders. But Heritage, facing weather losses and spiraling litigation expenses, appears to be taking it a step further, with no mention of a trade-off.

“If you and we fail to agree on whether there is coverage for the loss, either party may, in writing, demand arbitration,” the Heritage endorsement reads. “An arbitration award shall be binding upon the parties as the issue of coverage and all damages and benefits due and owing under the policy.”

Garateix

Both parties must pay for their respective arbitrators and experts. If the chosen arbitrators cannot reach agreement, the matter will go to a chief arbitrator, paid for by Heritage, the endorsement notes. The insured and the insurer will pay their own attorney fees and policyholders will not be able to recover the legal costs from the insurer, as is currently allowed by statute for some claimants who prevail in litigation.

Heritage homeowner policies, like most insurers’ policies, already call for non-binding mediation and an appraisal panel to help settle disputes before litigation. But the arbitration clause is new, according to the OIR filing. The regulatory agency has not indicated if or when the endorsement will be approved.

Insurance groups have embraced the idea of more arbitration as a way to avoid costly litigation, and more carriers are expected to file similar endorsements in coming months. The special session of the Florida Legislature, which meets May 23-27, also is slated to consider ways to expand the use of arbitration.

Policyholder attorneys and consumer advocates have expressed concern, arguing that arbitration does not follow the rules of court and can take away homeowners’ right of appeal and due process.

The Heritage earnings call did not mention the new arbitration endorsement. But company officials did name other steps the company is taking to stem losses.

“We will continue to seek rate changes commensurate with our cost of doing business,” Heritage CEO Ernie Garateix said. “We are committed to proactively and appropriately raising rates to offset higher loss costs and taking actions to improve our profitability throughout the year.”

“We will consider all options,” Chief Financial Officer Kirk Lusk said.

The company’s first quarter 2022 financial results show a $31 million loss, a big increase over this time last year, but less red ink than the $49 million loss in the fourth quarter of 2021. The combined ratio also shot up, to 129.5% for Q1 2022. That’s significantly worse than the 107.7% reported in Q1 2021 and the profitable 93.2% reported for the last quarter of last year.

Financial analysts on the call wondered about Heritage’s unusually large amount of catastrophe losses this year. The company reported net accident year weather losses of $64 million – double the prior year’s Q1 results. The weather losses included $45 million in catastrophe losses, despite no hurricanes so far this spring.

Lusk said the losses were due to six significant weather events, most of them in Florida, in January. Heritage also writes in six Southeastern states as well as other states.

Heritage’s Q1 2022 financial report also shows that it has continued to pull back from the trouble-plagued Florida market, shedding almost 18% of its policies in the state and about 15% of its totaled insured value there.

Across its book of business in all states, Heritage also has seen an average premium increase of 21%, company leaders said.

The financial results, posted a few days before the earnings call, did not soothe Wall Street. Two investment research firms, Zachs Investment Research and StockNews.com, last week downgraded the Heritage stock from a “buy” rating to a “hold.” The stock price closed Friday at $3.72 per share, down sharply from a week before, when the preliminary financial results were posted.

Since the end of March, the stock price has lost half its value, according to Yahoo!Finance and other stock trackers.

Heritage continues to enjoy an “A, exceptional” financial stability rating from the Demotech rating firm.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

A General Introduction to Public-Private Partnerships in USA

Armando Rivera Jacobo and Dolly Mirchandani | White & Case

All questions

Overview

It has been said that the development of the modern form of PPP can be traced back to the power purchase agreements developed in the United States during the 1980s, which provided for a two-component compensation system: a capacity availability payment and an actual usage payment.2

There is no uniform statutory definition of PPP at the federal level in the US. The scope of transactions that each state may use to procure from, or partner with, the private sector for the delivery or operation of infrastructure varies from state to state. In some cases, infrastructure-related procurement laws have not permitted the typical forms of contracts used in PPPs in the international context, requiring, for example, the separation of the procurement of the design of a project from the procurement of the construction of the same. Most notably, this has been the case in the state of New York. However, policies towards design-build procurement have changed in recent years and, at the end of 2019, the legislature in the state of New York passed authorising legislation enabling various state agencies (including the Department of Transportation, the Department of Environmental Protection, the School Construction Authority and the New York City Housing Authority) for a period of three years to enter into design-build contracts.3

Some states have enacted PPP-specific enabling legislation; others rely on legislation relating to their general procurement authority and common law. In some cases, the PPP-enabling legislation is limited to specific categories of projects, such as transportation. In others, it allows the procurement by way of a request for proposal of all types of infrastructure projects.

Currently, a majority of states and Puerto Rico have enacted PPP-specific legislation that permits PPP transportation and social projects. In some cases, the PPP-enabling legislation authorises specific projects on an ad hoc basis. Other states, such as New York, have enacted pilot programmes authorising the procurement of a limited number of projects using the PPP model.

The types of public infrastructure that can be procured through the PPP model also vary from state to state. The transportation sector has historically accounted for the greatest use of PPPs in the US, most commonly for the development of roads and related infrastructure, but also for light rail and airport projects. PPPs have also been successfully used for water, wastewater and desalination projects in the US. In recent years, PPPs have increasingly been utilised for social infrastructure projects, particularly courthouses, prisons, university housing and schools.

The market for PPP transportation projects began to develop in the 1990s with the SR-91, Dulles Greenway and Camino Colombia projects. When these projects ran into financial difficulty, the market for this kind of PPP project froze for several years. It was only in the mid to late 2000s that the transportation PPP market in the US began gaining new momentum. However, many PPP projects at the municipal level had been implemented for long before that, mainly in the water and wastewater sectors. Correctional services companies have also built prisons and offered their services to all levels of government for several years.

Two pathfinder projects to develop consolidated rent-a-car (ConRAC) facilities at the LAX and Newark International Airports successfully reached financial close in recent years. The success of these transactions has encouraged other airport authorities to look at opportunities for this new asset class.

In the past decade, the use of pre-development agreements has also become a trend across multiple types of authorities and projects. Prominent examples of PPP projects that have used pre-development agreements include the Texas SH 130 (segments 5 and 6), the Denver International Airport Great Hall (which has since been terminated after a dispute between the owner and developer) and the National Western Campus (stages 1 and 2). Projects currently being pursued under a pre-development agreement model include Los Angeles County Metro’s Sepulveda Corridor, the Lake Oswego Waste Water Treatment Plant and portions of Maryland’s I-495/I-270 Capital Beltway. Unlike the traditional PPP model, pre-development agreements are used at an early stage of development, when the full scope of the project is not completely defined, environmental studies may still be ongoing and the financial viability of the project may not be clear. A pre-development agreement mitigates the financial and execution risk for the private party and the authority, limiting the scope of the initial work and investment prior to determining that the project is viable. At the same time the parties benefit from their open collaboration defining the project scope and selecting the features that will make the project provide the best value for money to the authority and an attractive return on investment to the private party. The authority has the right to terminate the pre-development agreement and related work on the project, with limited termination payments liability, and the private party has the option to enter into a definitive PPP agreement before it is offered to other potential developers. This arrangement typically results in a reduction in the length of the procurement period and costs.

The year in review

The biggest recent development in the US market is the enactment of the Infrastructure Investment and Jobs Act and its US$1.2 trillion public funding commitment, aimed at closing the infrastructure funding gap and delivering state-of-the-art infrastructure across the US. However, many of the details on how these funds will be deployed and the role of the private sector remain to be developed.

In recent years, we have seen a substantial increase in the number of broadband and social infrastructure assets being developed through PPPs. Multiple courthouses, prison projects and student housing have achieved commercial or financial close in recent years, and there are many other social infrastructure projects currently in procurement, including civic centres, schools and sports and leisure facilities. A number of states, including New Jersey and Arkansas, have recently introduced PPP legislation facilitating the application of PPPs beyond transportation and authorising a range of government agencies to procure such projects.

Although, overall, transportation continues to account for the biggest portion of the PPP market in the US by value, only a handful of PPP transportation transactions achieved financial close during 2021, with a number of procurements stalled or on hold due to the continuing effects of the covid-19 pandemic on the economy generally and the transportation sector in particular. These include the redevelopment project at Philadelphia’s 30th Street Station.

The US also saw a number of university energy PPP projects reach financial close in 2021, including projects procured by Georgetown University and Fresno State University. There is a growing trend in the US for universities to enter into comprehensive long-term arrangements with a private partner who will take on responsibility for the operation and maintenance of the university’s utility system as well as the management and funding of future renewal and capital improvement needs. In some cases, these projects have involved a large upfront payment for the procuring university, also making them attractive revenue-generating opportunities for public universities. The private partner typically makes its return through a utility fee structure, similar to the rate-setting methodologies employed by regulated utilities in the US.

Other major PPP transactions that achieved financial close during 2021 include the Texas Fargo-Moorehead Area Diversion and the New York State Thruway projects.

The past year also saw a couple of setbacks in the US PPP market, including the cancellation of highly anticipated projects such as phases three through eight of the Denver National Western Center and Georgia’s SR 400 availability payment DBFOM project (which the state is now trying to procure under a new revenue risk structure). Increasing development costs, beyond the affordability expectation, and uncertainty of availability of sufficient appropriations, user fees or other sources of funding, have presented a significant challenge for projects to achieve successful commercial and financial close. Although in the long term the negative economic effects of the covid-19 pandemic will be overcome, the immediate reduction in tax and user revenue created or exacerbated immediate challenges to the granting authority’s assumptions of its expected financial commitments. In addition to these challenges, the covid-19 pandemic increased parties’ focus on the definition of force majeure and relief events, not only to ensure the inclusion of pandemics, but also the actions that authorities may adopt in response to them. The numerous decentralised jurisdictions in the US, and entities within each such jurisdiction that constitute the universe of grantors, and the different powers that they hold, make it impossible to provide an overall view of how the covid-19 pandemic, or the possibility of similar future pandemics, have changed the terms of PPP agreements. The range of responses in the market goes from simply adjusting or tightening the definition of force majeure events, adding more detailed descriptions of events related to widely spread disease and responses thereto, to implementing covid-19 and covid-19 response-specific relief events, forms of relief and conditions to granting such relief.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

No Coverage for Claim Deemed Made After Policy Expired When Insured First Received Actual Notice of Lawsuit

Elizabeth Jewell | Wiley Rein

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that a claim was deemed first made when the insured received actual, rather than constructive notice of the claim. Philadelphia Indem. Ins. Co. v. Lewis Produce Mkt No. 2, 2022 WL 1045640 (N.D. Ill. Apr. 7, 2022).

The insured, a supermarket, was insured under two successive professional liability policies (the “2020 Policy” and the “2021 Policy”). A lawsuit alleging violations of the Illinois Biometric Information Privacy Act (BIPA) was filed against an uninsured affiliate of the supermarket on the last day of the 2020 Policy, but the insured did not receive notice of that lawsuit until one week later, by which time the 2021 Policy had incepted.  The insured notified its professional liability carrier of the lawsuit and the complaint was later amended to add the insured as a defendant.

The insurer filed a declaratory judgment action, seeking an order it had no duty to defend or indemnify the insured under the policies because under the 2020 Policy, the lawsuit was not a claim deemed first made during the policy period because the insured received notice of the lawsuit after the 2020 Policy expired. The parties agreed that the 2021 Policy, unlike the 2020 Policy, did not provide coverage for BIPA violations.

The court granted a motion for judgment on the pleadings in favor of the insurer. The court highlighted the 2020 Policy’s terms, which provided “a claim shall be considered made when an Insured first receives notice of the Claim.” The court held that while the lawsuit was filed within the 2020 Policy’s policy period, under the relevant policy language, the Claim was deemed made when the insured first received notice of the lawsuit, and it was undisputed that the insured did not receive actual notice of the Claim until after the expiration of the 2020 Policy. As such, the lawsuit was not a Claim made during the relevant policy period. The court also rejected the insured’s argument that it had constructive notice of the lawsuit during the policy period because the lawsuit was a matter of public record, and that constructive notice should be sufficient to deem the claim first made during the 2020 Policy, noting that such an interpretation would contravene the plain and unambiguous language of the 2020 Policy and would render the language deeming a claim first made when the insured “first receives notice” superfluous.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Waive Your Claim Goodbye: Louisiana Court Holds That AIA Subrogation Waiver Did Not Violate Anti-Indemnification Statute and Applied to Subcontractors

Gus Sara | The Subrogation Strategist

In 2700 Bohn Motor, LLC v. F.H. Myers Constr. Corp., No. 2021-CA-0671, 2022 La. App. LEXIS 651 (Bohn Motor), the Court of Appeals of Louisiana for the Fourth Circuit (Court of Appeals) considered whether a subrogation waiver in an AIA construction contract was enforceable and, if so, whether the waiver also protected subcontractors that were not signatories to the contract. The lower court granted the defendants’ motion for summary judgment based on the subrogation waiver in the construction contract. The plaintiffs appealed the decision, arguing that the subrogation waiver violated Louisiana’s anti-indemnification statute. The plaintiffs also argued that even if enforceable, the subrogation waiver did not apply to the defendant subcontractors since they were not parties to the contract. The Court of Appeals ultimately held that the subrogation waiver did not violate the anti-indemnification statute because the waiver did not shift liability, which the statute was intended to prevent. In addition, the Court of Appeals found that the contract sufficiently satisfied the required elements for the defendant subcontractors to qualify as third-party beneficiaries of the contract.

In 2017, plaintiff 2700 Bohn Motor Company, LLC (Bohn) retained defendant F.H. Myers Construction Corporation (F.H. Myers) as the general contractor to renovate its dealership in New Orleans. Bohn and F.H. Myers entered into an AIA construction contract for the renovation project. The contract included a mutual subrogation waiver, which stated the parties “waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other… for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work.” F.H. Meyers subcontracted with Orleans Sheet Metal Works and Roofing, Inc. (OSM) and B & J Enterprise of Metairie, Inc. (B & J) on the project. The contract obligated Bohn to secure the property insurance policy for the project.

In November 2019, a fire occurred at the property during the renovation project. As a result of the damage, Bohn’s insurers issued payment to Bohn to make the necessary repairs. Bohn also incurred a deductible. Bohn and its’ insurers filed a lawsuit against F.H. Myers, OSM and B & J, alleging that the defendants’ negligence caused the fire. The defendants filed a joint motion for summary judgment on grounds that the subrogation waiver barred the plaintiffs’ claims. The lower court granted the defendants’ motion and dismissed the case entirely, including Bohn’s claim for its deductible. The plaintiffs filed an appeal with the Court of Appeals.

The Court of Appeals acknowledged that, in Louisiana, a subrogee has no greater rights than those of the subrogor and is subject to all limitations applicable to the original claim of the subrogor. The court also cited several Court of Appeals decisions where the AIA subrogation waiver was deemed enforceable. As per the language of the waiver, the court found that Bohn clearly waived its subrogation rights against the defendants and thus had no rights to which its’ insurers could be subrogated.

The court then considered whether the AIA subrogation waiver violated Louisiana’s anti-indemnification clause. Louisiana statute La. R.S. 9:2780.1 prohibits, among other things, any provision, clause, covenant, or agreement contained in, collateral to, or affecting a construction contract which purports to indemnify, defend, or hold harmless, or has the effect of indemnifying, defending, or holding harmless the indemnitee from or against any liability for loss or damage resulting from the indemnitee’s negligence. The Court of Appeals agreed with the lower court that the anti-indemnification statute did not nullify the subrogation waiver because indemnity agreements and subrogation waivers have separate and distinct legal meanings in a contract. The court explained that unlike indemnification clauses, which can shift liability from the responsible party to another, a waiver of subrogation is simply an allocation of risk. As such, the court held the waiver of subrogation did not violate the anti-indemnification statute.

The Court of Appeals also found that defendants OSM and B & J qualified as third-party beneficiaries under Louisiana law because of the direct language of the subrogation waiver. Louisiana statute La. C.C. art. 1978 permits contracting parties to stipulate a benefit for a third person, commonly referred to as a “stipulation pour autrui.” Louisiana jurisprudence established three factors for determining whether contracting parties provided a benefit for a third party: 1) the stipulation for a third party is clear; 2) there is certainty as to the benefit provided; and 3) the benefit is not a mere incident of the contract between the signatories. Here, the court found that the plain language of the subrogation waiver specifically waived subrogation rights of the owner and the general contractor against each other and their subcontractors and sub-subcontractors on the project. Since the court found that the stipulation is manifestly clear, the benefit is certain and the benefit is not incidental, the court affirmed the lower court’s decision finding that OSM and B & J were third-party beneficiaries of the contract.

Lastly, the court also dismissed Bohn’s claim for its’ deductible. The court found that the contract explicitly obligated Bohn, as the owner, to secure the property insurance policy and stated that if “the property insurance requires deductibles, the Owner shall pay costs not covered because of such deductibles.” Thus, the court held that Bohn should bear the cost of the deductible regardless of fault.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Is Your Contract “Mission Essential?” Recovering Costs for Performing During a Force Majeure Event Under Federal Regulations

Joneis M. Phan and Sarah K. Bloom | ConsensusDocs

Federal contractors have faced unprecedented challenges performing during the COVID-19 pandemic. Additional costs have included delays and inefficiencies, site closures, quarantines, unavailability of supplies and materials, and full shutdowns of subcontractor operations. For contractors performing under fixed price contracts, the cost impact of COVID-19 was likely severe.

The Federal Acquisition Regulation (“FAR”) recognizes “epidemics” as a force majeure event that may excuse non-performance. Many federal contracts include some version of the Default clause, which prevents the government from terminating a contractor for default due to impacts of force majeure events that are beyond a contractor’s control, such as an epidemic. See, e.g., FAR 52.249-10. See also Pernix Serka Joint Venture v. Dep’t of State, CBCA No. 5683 (Apr. 20. 2020)The Default clause, however, operates as a shield from liability, not a sword authorizing recovery. Contractors are now left wondering whether any avenue exists to recover additional costs incurred after performing in the face of the COVID-19 pandemic.

In response to a likely influx of claims and requests for equitable adjustment due to COVID-19 impacts, the federal government largely took the position that contractors were entitled to extensions of time, but not to additional costs. This article explores the avenues that may be available for contractors to recover costs for performing during a force majeure event that would otherwise be non-compensable. 

Examine Your Contracts For Explicit Remedies Related To “Mission Essential” Services

While the FAR does not address “mission essential services,” clauses required by the various agency FAR supplements may explicitly address performance during emergencies or crisis situations.

Contractors furnishing services to the Department of Defense (DoD) may have an explicit remedy. DFARS 252.237-7023, “Continuation of Essential Contractor Services,” was promulgated in response to the 2009 H1N1 influenza pandemic. The clause governs the performance of essential contractor services that support “mission-essential functions” and authorizes contractors to recover costs associated with continuing performance in a pandemic or emergency environment. Mission essential functions are those activities that must be performed under all circumstances to achieve DoD component missions or responsibilities, as determined by the appropriate functional commander or civilian equivalent. Failure to perform or sustain these functions would significantly affect DoD’s ability to provide vital services or exercise authority, direction, and control. See 48 C.F.R. § 252.237-7023.

Contracting Officers must include the Continuation of Essential Contractor Services clause in all solicitations and contracts that are in support of mission-essential functions. See 48 C.F.R.

§ 252.237.7603. In other words, this clause notifies prospective contractors that they will be expected to continue performing during disasters and events which might otherwise justify suspending work. DoD promulgated the clause specifically to ensure continuity of contractor services during the H1N1 pandemic and, therefore, a worldwide pandemic is anticipated by the clause. The clause requires contractors to develop and maintain a Mission-Essential Services Plan, which the government can require the contractor to execute in appropriate circumstances.

Thus, some DoD contracts contain an explicit remedy granting clause authorizing monetary relief for additional costs incurred in performing during an emergency event. Even contractors whose contracts do not contain DFARS 252.237-7023 may, however, be able to support claims for monetary relief.

The Christian Doctrine May Incorporate Remedies By Operation Of Law

As discussed above, the designation of a contract (or a portion thereof) as “mission essential” is generally effectuated by the Contracting Officer’s inclusion of DFARS 252.237-7023 in the solicitation or contract at issue. During the COVID-19 pandemic, however, the DoD’s expectation that contractors continue performing appeared to extend beyond contracts that were explicitly designated as “mission essential.”  

On March 5, 2020, DoD issued a memo to all Services reminding them to incorporate DFARS 252.237-7023 into their contracts for mission essential services. In its memo, DoD recognized that “Today’s changing environment has increased the need for continuity of operations . . . . Threats to continuity of operations include natural disasters, severe/inclement weather, pandemic, and a variety of other crisis situations.”

Less than a month later, on March 20, 2020, the DoD identified the Defense Industrial Base (“DIB”) as part of the “Essential Critical Infrastructure Workforce.” The memorandum asserted that the mission essential workforce included “individuals who support the essential products and services required to meet national security commitments to the Federal Government and the U.S. Military [including] aerospace; mechanical and software engineers; manufacturing/production workers; IT support; security staff; security personnel; intelligence support, aircraft and weapon systems mechanics and maintainers; suppliers of medical supplies and pharmaceuticals, and critical transportation.” (Emphasis added). The “mission essential” designation purportedly applied to “personnel working for companies, and their subcontractors, who perform under contract to the Department of Defense providing materials and services to the Department of Defense and government-owned/ contractor-operated and government-owned/government-operated facilities.” Upon issuing that designation, the DoD stated that contractors performing such services had a “special responsibility to maintain [their] normal work schedule[s]” in the face of the pandemic.

DoD’s broad definition of “mission essential” services may have swept in contractors and contracts that did not contain the mission essential DFARS clause. Nevertheless, an argument may exist that DFARS 252.237-7023 applies to such contracts by operation of law under the Christian doctrine.

Contracting Officers are required to include the Continuation of Essential Services clause (48 C.F.R. § 252.237-7023) in all solicitations and contracts that are in support of mission-essential functions. See 48 C.F.R. § 237.7603. Thus, the government’s conversion and treatment of previously non-essential contracts as now “essential,” may have triggered an obligation to incorporate DFARS 252.237-7023 into the contract as a mandatory clause.

Under the Christian Doctrine, mandatory clauses are read into government contracts by operation of law even when they are omitted from the contract. See G.L. Christian & Assocs. v. United States, 312 F.2d 418 (Ct. Cl.), cert. denied, 375 U.S. 954 (1963); see also Appeal of Transcontinental Cleaning Co., NASA BCA No. 1075-9, 78-1 BCA ¶ 13081(Where agency regulation mandated incorporation of Price Adjustment Clause, Christian doctrine applied and the contractor was entitled to reimbursement for increased costs); K-Con v. Secretary of Army, 908 F.3d 719 (Fed. Cir. 2019) (Christian doctrine applied to incorporate mandatory bond requirements into a contract; the contractor was responsible for costs of obtaining a bond).

No Court has analyzed whether the Continuation of Essential Services Clause is the type of clause that “express[es] a significant or deeply ingrained strand of public procurement policy” to which the Christian doctrine is applied. See Gen. Eng’g & Mach. Works v. O’Keefe, 991 F.2d 775, 779 (Fed. Cir. 1993) (Christian doctrine not applicable to all mandatory clauses). Several recent events, however –  such as the 2009 H1N1 epidemic, the Ebola epidemic, and several lapses in federal agency appropriations – have brought the issue of mission-essential contractor services to the forefront.

Moreover, the Christian doctrine has been applied to clauses that appear far less significant. See id. (noting that the Christian doctrine has been applied to clauses requiring exhaustion of administrative remedies, implementing Buy American Act, and outlining pre-award negotiating procedures). Neither the Armed Services Board of Contract Appeals nor the Court of Federal Claims has addressed the clause in this context. Nevertheless, an argument could exist that the government’s designation of construction contracts as essential, combined with the regulatory and statutory mechanisms for establishing continuity of essential services in the event of a government shutdown, are significant enough to justify the application of the Christian doctrine.

Relief May Be Available Under A Constructive Change Theory

Even if the Government is reluctant to recognize DFARS 252.237-7023 as part of a Contract under the Christian doctrine, relief may be available under a theory of constructive change.  As set forth above, Contracting Officers are required to include the Continuation of Essential Services clause in all solicitations and contracts that support mission-essential functions. See 48 C.F.R. § 237.7603. Treating a contract as one for mission-essential functions when the contract does not contain that clause may be viewed as a constructive change to the Contract.

By re-designating a Contract as “mission essential,” the government required continued performance in the face of a crisis that may otherwise have excused non-performance. This change to the Contract’s allocation of risk may justify the recovery of additional costs. Moreover, the costs of developing and implementing an Essential Contractor Services Plan, as required by the clause, may be allowable under the FAR.  See DCAA Selected Areas of Costs Guidebook: FAR 31.205 Cost Principles, Chapter 13, Continuation of Essential Contractor Services (indicating that plan preparation, maintenance, and execution costs are allowable under FAR Part 31).

Contractors who were treated as “mission essential” despite the government’s failure to include DFARS 252.237-7023, or a similar clause, should consider opening a discussion with the government about the impacts of that treatment and should explore the government’s appetite for recognizing a change to the contract.

Moving Forward: Drafting Or Revisiting Your Mission Essential Services Plan

DFARS 252.237-7023 requires contractors to prepare a Mission Essential Services Plan, which explains how the contractor will continue performing during a crisis event. Even if a contract does not contain the mission essential clause, the government has demanded continued performance during a pandemic. Contractors preparing to bid on new solicitations should, therefore, devote some attention to preparing a Mission Essential Services Plan. Where the solicitation does contain the DFARS clause, contractors should devote substantial attention to their plan.

An effective Mission Essential Contractor Services Plan must provide clear and concise details for the agency to reasonably evaluate and accept the plan. In fact, agencies have downgraded proposals that fail to address the issues listed above in sufficient detail, and such decisions have been upheld in bid protests before the Government Accountability Office. See InnovaSystems Int’l, LLC, B- 417215, B- 417215.2, B- 417215.3, 2019 CPD ¶ 159 (April 3, 2019). Thus, going forward, agencies may devote more attention to the content of proposed Mission Essential Services Plans in evaluating proposals for future contracts. 

Prospective contractors should carefully review solicitations for all requirements related to the Mission Essential Services Plan, and address any specific concerns identified by the agency in detail. At a minimum, such plans must address: (1) challenges associated with maintaining essential contractor services during an extended event, such as a pandemic that occurs in repeated waves; (2) the time lapse associated with the initiation of the acquisition of essential personnel and resources and their actual availability on site; (3) the components, processes, and requirements for the identification, training, and preparedness of personnel who can work from home; (4) any established alert and notification procedures for mobilizing identified “essential contractor service” personnel; and (5) the approach for communicating expectations to contractor employees regarding their roles and responsibilities during a crisis. DFARS 252.237-7024(b).

The plan should also address essential services that cannot be fully provided despite best efforts, costs for preparing the plan, and the costs for keeping the plan in place. Finally, the plan must consider and identify the procedures to maintain the continuity of services “for up to 30 days or until normal operations can be resumed.” DFARS 252.237-7023(b)(1). 

Conclusion

Contractors seeking to understand how a force majeure event may impact their construction project should seek the advice of counsel. If you have questions on any matters related to drafting or enforcing an existing Mission Essential Services Plan, project delay, project suspension, or contractual rights to suspend or terminate, please contact Watt, Tieder, Hoffar & Fitzgerald LLP for assistance.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.