Time Lag Does Not End Insurer’s Duty to Defend, Court Rules

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Andrew G. Simpson | Claims Journal

A federal court in New York has reiterated that a time lag between the date a trip-and-fall accident occurred and when the conduct alleged to have caused it took place does not itself relieve an insurer of its duty to defend its insured in an injury suit related to the accident.

ACE American Insurance Co. has been ordered to defend Consolidated Edison (ConED) in an injury lawsuit that blames one of ConEd’s sidewalk contractors for work it did months before the injury happened.

After Altagracia Ramirez tripped and fell on a sidewalk in the Bronx on April 20, 2015, she sued the owner and manager of the adjacent property. They, in turn, sued ConEd, which they believed was responsible for work on the sidewalk.

ConEd claimed that one of its contractors, Petmar Builders, was responsible for the construction work, and since ConEd was covered as an additional insured on the ACE contractor’s policy, ConEd asked the ACE to defend it.

ACE declined to provide a defense, largely because its insured contractor’s work did not happen “on/about” the date of the accident. Because Petmar’s work at the site was completed 10 months before the accident “and the job was signed off,” in ACE’s view, there was no coverage.

ConEd countered that there was coverage for defense because even though the contractor insured by ACE completed its work prior to the date of the alleged incident, this did not eliminate the possibility that the insured caused or created the defective condition that in turn allegedly caused Ramirez to fall.

The federal court for the Southern District of New York sided with ConEd and ordered that ACE defend ConEd.

The court said ACE was wrong in arguing that Petmar must have done its work on or about the time of the accident to trigger defense coverage for two reasons: the facts presented to ACE suggested a reasonable possibility that its named insured, Petmar, was a proximate cause of the accident, and the 10-month lapse of time between the contractor’s work and the accident does not cut off the chain of proximate cause as a matter of law.

There were indications in documents that ConEd was supposed to complete a permanent repair of the construction site after Petmar did a temporary repair. But the court said that was not at issue at this stage.

ACE had actual knowledge of facts indicating that Petmar had worked at the site of the accident, that Petmar had prepared a temporary patch, and that ConEd had not completed a permanent patch before the date of Ramirez’s accident.

“These facts were sufficient to indicate that Petmar had engaged in conduct—opening and temporarily patching the sidewalk—that gives rise to a risk that corresponds to the harm that ultimately took place—Ramirez tripping and falling on the sidewalk where the work was done,” the court said.

The information known to ACE at the time of its decision to decline coverage indicated a “reasonable possibility” that Petmar’s conduct proximately caused Ramirez’s injuries. As a result, ACE had a duty to defend ConEd in the underlying action, the court concluded.

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.

Contractor Wins in Arbitration Only to Lose Before the Superior Court on Section 7031 Claim

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Garret Murai | California Construction Law Blog

If you’re a regularly reader of the California Construction Law Blog you’re aware of Business and Professions Code section 7031 which courts have variously described as “harsh[ ],” “draconian” and “unjust,” but, importantly, nevertheless valid. We haven’t seen many cases applying Section 7031 in an arbitration setting, however, until now.

In Vascos Excavation Group LLC v. Gold, 87 Cal.App.5th 842 (2022), a contractor who prevailed on a payment claim in arbitration, had its victory snatched from its fingertips by the Superior Court which found that the arbitrator had exceeded her authority because the contractor was subject to Section 7031.

The Vascos Case

in 2019, Vascos Excavation Group LLC entered into a construction contract with Robert Gold to perform excavation, grading and concrete work at his property in Pacific Palisades, California. A payment dispute arose and Vascos recorded and later filed suit to foreclose on a mechanics lien. In response, Gold filed a petition to compel arbitration pursuant to an arbitration provision contained in the construction contract. Vascos filed a notice of non-opposition to the petition and the court entered an order compelling the parties to arbitration.

The arbitration provision provided for arbitration before the American Arbitration Association pursuant to the AAA’s Construction Arbitration Rules. A four-day hearing was later held. After both parties rested, Gold argued that Vascos was barred from seeking compensation as an unlicensed contractor under Section 7031. The arbitrator re-opened the hearing  for limited purpose of giving Vascos an opportunity to prove it held a valid contractor’s license.

Vascos filed a certified copy of its contractor’s license from the Contractors State License board showing that one John Matthew Welch was the responsible managing employee (RME) for the company. Vascos also filed a declaration by Victor Montes, the project manager onto project, which attached two videos showing Welch at the construction site on June 29 and August 10, 2020.

After the arbitration was officially closed, the arbitrator issued an award finding that Vascos was entitled to recover $111,440.29 from Gold. In the award, the arbitrator found: “The evidence of Mr. Welch’s participation was his attendance at the job site on at least one occasion, and that he worked remotely from his home in his capacity as RME. Working remotely would allow Mr. Welch to make administrative decisions. For this reason, the challenge to his RME status is over ruled.”

Gold later filed a petition to vacate the arbitration award on the ground that the arbitrator had exceed her authority. Gold’s argument was that the arbitrator’s authority was premised on the arbitration provision contained in the parties’ construction contract, but that because Welch was a sham RME, that Vascos was an unlicensed contractor, and the arbitration provision was therefore contained in an void construction contract. Vascos opposed the petition and asked that the trial court confirm the arbitration award.

The trial court, finding that Vascos had failed to meets its burden of proving that Welch was a bond fide RME, vacated the arbitration award.

Vascos appealed.

The Appeal

At this point you may be asking yourself “what the heck happened?” Didn’t the arbitrator find that Vascos had satisfied its burden of proving that it was a licensed contractor? Why is the superior court second guessing the arbitrator? And aren’t arbitration decisions generally not reviewable for errors of fact or law? Well, read on.

On appeal, the 2nd District Court of Appeal explained that “generally, an arbitration is final” and that “the scope of judicial review of arbitration awards is extremely narrow because of the strong public policy in favor of arbitration and according finality to arbitration awards.” However, explained the Court of Appeal, the “power of the arbitrator to determine the rights of the parties is dependent upon the existence of a valid contract under which such rights might arise” and “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.”

“Whether a contract is entirely illegal, and therefore unenforceable, is an issue ‘for judicial determination upon the evidence presented to the trial court,” explained the Court of Appeal, “and any preliminary determination of the legality by the arbitrator . . . should not be held to be binding upon the trial court.” In short, each reviewing court conducts its own de novo review, although the Courts of Appeal will look at the evidence presented to trial court, not the arbitrator.

On appeal, Vascos argued that by producing a certified copy of its contractor’s license from the CSLB that it had satisfied its burden of proof and that the burden then shifted to Gold to prove that Welch was a sham RME. Not so held the Court of Appeal. While production of a certified copy of a contractor’s license is “necessary” to prove valid licensure, it is “insufficient if the point is controverted,” and where a claim is made that an RME is a sham, “[t]he contractor has the burden of proof on the issue of whether it has a bona fide RME.”

And here, held the Court of Appeal, Vascos did not meet its burden. In fact, what the Court of Appeal said the Vascos failed to do, is embarrassingly simple:

  • An RME, explained the Court of Appeal, must be a “permanent” employee working no less than “32 hours per week, or 80 percent of the total hours per week that the company’s business was in operation.”
  • The videos, explained the Court of Appeal, while it showed Welch at the project site, did not show that Welch was a permanent employee or that he was working no loess than 32 hours per week or 80% of the total weekly working hours of Vascos.
  • “The burden on Vascos was not high,” explained the Court of Appeal, and it  likely could have met that burden with a “five sentence declaration . . . yet [Vascos] failed to meet it.”
  • Moreover, explained the Court of Appeal, there are sound public policy reasons for placing the burden on the contractor who has access to payroll records, timesheets and other employees who can testify to the activities of the RME.

Vascos’ final argument on appeal was an “I gotcha,” and I think may say more about the case, than anything. When Gold filed his petition to vacate the arbitration award, he asked for an order “permitting limited discovery to determine the existence of documents proving full-time employment of John Matthew Welch from June to November 2019, including: (a) payroll records with cancelled checks; (b) worker’s compensation employee reports; and (c) payroll tax returns” and for an evidentiary hearing with live witness testimony.

Vascos objected to permitting discovery and holding an evidentiary hearing, arguing that “Gold’s request for what would effectively be a new court trial on the issue of licensure is unsupported and unsupportable”, that the trial court’s authority was at most to conduct “a de novo review of the available evidence to the trial court at the time of review”, and that Gold was seeking an inappropriate “fishing expedition” that “is clearly not supported by law.”

Having lost before the trial court, Vascos argued on appeal that trial court “erred in not setting an evidentiary hearing”, and the Court of Appeal was not sympathetic. “Vascos,” held the Court of Appeal, “forfeited on appeal any argument that the trial court should have conducted an evidentiary hearing because it did not ask for one in the trial court. To the contrary, Vascos successfully opposed such a hearing.” Ouch.

Conclusion

There are a number of lessons to be learned here. First, an arbitrator’s award, while generally immune from attack, can be challenged if proper licensure is in dispute, the argument being that the arbitrator has no authority to hear the case if the contract with the arbitration provision is void to begin with. Second, when proper licensure is in dispute, the trial court conducts a de novo review, meaning that you better bring your guns even if you already won before the arbitrator. And, finally, while the burden of proving proper licensure is on the contractor, satisfying that burden is not difficult, although its may involve more than simply producing a certified copy of your contractor’s license.

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 Recent Oregon Court of Appeals Decision Bears on Insurance Coverage for Repair of Construction Defects

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Laurie Hager | Snell & Wilmer

In a February 15, 2023 decision in Twigg v. Admiral Insurance Company, the Oregon Court of Appeals held that an insurance company was not required to indemnify its insured based on a claim for breach of a repair agreement that settled underlying construction defect claims.

As background, the Twiggs hired a contractor, Rainier Pacific, to construct a new home. The Twiggs then filed their first arbitration against Rainier Pacific alleging, among other things, that a portion of the work was defective. The first arbitration was resolved through a settlement agreement which the parties referred to as the “Repair Agreement.” Under the Repair Agreement, Rainier Pacific was required to repair certain alleged construction defects.

The Twiggs then filed a second arbitration alleging that Rainier Pacific had breached the Repair Agreement by failing to perform the repairs required under the Repair Agreement. The arbitrator awarded $604,594.80 to the Twiggs for the total cost to perform the repairs that Rainier Pacific had failed to adequately complete under the Repair Agreement.

Rainier Pacific had a commercial general liability insurance policy from Admiral Insurance Company, under which Admiral agreed to cover Rainier Pacific’s liability arising from property damage caused by an occurrence. An occurrence is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” After Admiral denied indemnity coverage, the Twiggs sought to collect on their arbitration award by asserting a claim against Admiral for breach of the general liability insurance policy.

The trial court dismissed the Twiggs’ coverage claim against Admiral, and the Twiggs appealed. The Court of Appeals (“the Court”) affirmed the trial court’s dismissal ruling on appeal.

In its decision, the Court notes that the Twiggs’ written arbitration claim was informal and did not set forth numbered allegations or labeled claims, but was generally framed as a breach of the Repair Agreement. With respect to the arbitrator’s ruling, the Court found that the

“arbitrator concluded that [certain] repairs had been completed, but that the installation was ‘defective’ and contrary to the manufacturer’s specifications. … The arbitrator concluded that Rainier Pacific, ‘through its consistent failure to diligently prosecute the work, and through its defective efforts to repair the garage slab, materially and substantially breached the [Repair] Agreement.’ The arbitrator finally concluded that the Twiggs’ ‘relief is based upon common-law principles of breach of contract.’”

The Court concluded that the claim asserted by the Twiggs in the second arbitration did not allege property damage based on an “occurrence.” Rather, the Court held that the claim was for breach of Rainier Pacific’s contractual obligations under the Repair Agreement, which is not a claim covered under the insurance policy. The Court relied heavily on the fact that the Twiggs’ arbitration claim was presented, defended, and ruled on by the arbitrator as a single claim for breach of contract.

All that being said, the Court acknowledged that “[t]here is no doubt that a repair contractor’s negligent work that accidentally caused damage to physical property could give rise to an occurrence under the policy.”

The Court’s decision allows for different outcomes under distinguishable facts. For example, the Court’s decision suggests that it might have ruled differently had the arbitration claim clearly alleged a distinct claim for negligence that caused resulting property damage. Additionally, if the performance under the Repair Agreement had led to new resulting property damage that was not already required to be repaired under the Repair Agreement, that might have also led the Court to a different conclusion. Additionally, it appears that the Admiral policy did not cover the underlying defects that led to the first arbitration that was resolved through the Repair Agreement and, therefore, the Twiggs could not argue that the underlying defects from the first arbitration constituted resulting property damage that Admiral was required to cover under the policy.

A contractor that enters into separate contract to repair originally defective work should be aware of the Admiral coverage case ruling, as it may affect the contractor’s ability to receive indemnity coverage for related property damage.

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.

Insurer Has No Obligation to Cover Arbitration Award in Construction Defect Case

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Tred R. Eyerly | Insurance Law Hawaii

    The court determined there was no coverage for an adverse arbitration decision suffered by the insured in a construction defect case. Am. Fire and Cas. Co. v. Unforgettable Coatings, Inc., 2023 U.S. Dist. LEXIS 64846 (D. Nev. April 13, 2023). 

    Unforgettable contracted with Muirfield Village Homeowner’s Association for painting and related services. Following completion of the project, Muirfield alleged that Unforgettable’s work was defective and filed suit. The parties agreed to arbitration. The arbitrator found that Unforgettable breached the contract and its implied warranty. Damages were awarded to Muirfield. 

    American Fire and Casualty Company (AFCC) was Unforgettable’s insurer and defended Unforgettable at the arbitration. AFCC sued for a declaration that it had no obligation to indemnify Unforgettable for the damages awarded. Unforgettable and Murifiled counterclaimed, alleging that AFCC breached the policy by not covering the award, as well as a variety of extracontractual claims related to the investigation process. AFCC moved for judgment on the pleadings. The motion was granted with leave to amend.

    After the counterclaims were amended, AFCC again moved for judgment on the pleadings. The court first found that Unforgettable had assigned all of its rights under the policy to Muirfield. Therefore, Unforgettable had no standing and its counterclaims were dismissed. 

    In the second amended counterclaims, Muirfield provided no allegations that persuaded the court to reconsider its initial analysis. “Occurrence” did not apply to faulty workmanship. Muirfield argued that the word “accident” within the definition of “occurrence” was ambiguous. The court rejected the argument. Regardless of what “accident” meant precisely, the court had already excluded the relevant conduct from the definition. The damage was the poor workmanship itself. 

    The argument for breach of the implied covenant of good faith and fair dealing also failed. The denial of coverage was proper and there was nothing to trigger coverage.

    Muirfield’s request for leave to amend was also rejected. Muirfield already had two opportinities to cure its pleading and failed to do so. 

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.

California Court of Appeal Holds a Tenant Owes No Duty to Protect a Social Guest From a Defective Sidewalk Leading to a Condominium Unit

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Garrett A. Smee and Lawrence S. Zucker II | Haight Brown & Bonesteel

On May 5, 2023, the California First District Court of Appeal, Division One, issued an opinion in Moses v. Roger-McKeever (A164405), holding that a condominium tenant owes no duty to a social guest using a walkway that leads to the unit.

Eleanor Moses fell on a walkway outside a condo rented by Pascale Roger-McKeever. Moses would not have used the walkway but for Roger-McKeever’s invite to a small gathering for members of a political activist group. Upon entering the condo for the event that night, Moses brought to Roger-McKeever’s attention the poor lighting in the entryway. Roger-McKeever apologized, and stated that her landlord had delayed repairing the porch light. The accident supposedly happened on a short walkway that had three steps leading away from a street sidewalk. Supposedly, Moses tripped on the second step while leaving the social gathering because of the poor lighting.

Moses first argued that Roger-McKeever owed a duty of care because Roger-McKeever “impliedly adopted” the sidewalk by inviting Moses to the gathering, knowing that Moses would need to use the sidewalk to come and go from the event. Moses also argued that Roger-McKeever, at the very least, had a duty to warn. The Court rejected both arguments, affirming the trial court’s decision to grant summary judgment: “A defendant cannot be held liable for the defective or dangerous condition of property which it does not own, possess, or control.” (Citing Isaacs v. Huntington Memorial Hospital (1985) 38 Cal. 3d 112, 134.) The Court also summarized prior cases to determine that “where the lease does not confer upon him or her a right to control that portion of the land that caused the plaintiff’s injury, there must be a showing that the tenant took some affirmative action to assume responsibility for the safe condition of that portion of the land.” (Citing Contreras v. Anderson (1997) 59 Cal. App. 4th 188, 200.) The Court also analogized to commercial settings, where businesses owe a duty to patrons to protect from danger even away from the business premises. The Court determined that businesses do in fact owe a duty in such settings because they have a “special relationship” with the patrons who they invite to their business premises. By contrast, Roger-McKeever simply invited Moses to a “small gathering” as an informal social host, and not for commercial profit. Moses and Roger-McKeever had no “special relationship.”

The Court reasoned: “Imposing a duty of care in this case simply because Roger-McKeever invited Moses to her condominium, would essentially create a rule making all tenants responsible for hazardous conditions in surrounding public spaces, even when such spaces are not under their control.”

The take away here is (1) courts impose a clear distinction between social host liability and the liability of commercial enterprises, and (2) a tenant has no duty to protect from danger away from her rented space, even if the tenant occasionally performs “minimal, neighborly maintenance of property owned by another.”

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.