Construction Defect Claims Revisited

Lawrence C. Beemer – January 3, 2012

Myth #4: There is little an adjuster can do in the area of litigation management to affect the outcome of a construction defect file.                    

This concept generally comes from cases being handled in the western states where most cases are handled under a case management order (CMO). Many lawyers believe that there is nothing they can do to affect the outcome of cases that have a CMO in place. The problem with this assumption is that many defense lawyers do not read the CMO anymore and do not know what discovery may actually be available to them. Many counsel, especially those representing smaller subcontractors, have fallen into the trap of rote handling of construction defect cases. Many adjusters also have fallen into this trap.

The reality is that many CMOs now allow for some minimal discovery. This discovery, no matter how minimal, should be used to the greatest extent possible. Moreover, prior to the CMO being in place, counsel has the ability to conduct minimal discovery. If nothing else, in representing a small subcontractor in a case a set of interrogatories served concurrently with an answer to the suit sends a message to the plaintiff’s or developer’s counsel that your counsel will be difficult with which to deal. This simple act of written discovery will indicate that this subcontractor needs to be settled with early to keep from complicating the case and making more work for the plaintiff’s or developer’s counsel.

Of course the best litigation management is to not let a case go into active litigation at all. Most construction defect cases generally come to the carrier as an administrative proceeding, such as an arbitration proceeding or per a notice of repair statute or in a suit. Depending on whom their insured is, a good adjuster may be able to obtain a time extension to respond, using this time to negotiate a cost of defense settlement. If an answer is required and the adjuster is negotiating the case, then the use of defense counsel on a task basis to simply answer the complaint or notice of repair can provide the adjuster time to settle the case at minimal cost to the company.

However, if the case goes into full-blown litigation, it is imperative for the adjuster to obtain a budget and timeline for when the work will be completed. In my mind, the adjuster holding counsel to the estimated fee agreement is much less important than making sure the defense counsel strictly adheres to the timelines for completing the needed discovery in the case. This assures the carrier that the minimal needed facts will be obtained before a mediation in the case takes place.

Making sure that discovery is done in a timely way is one facet of litigation management. Another facet is making sure that the carrier is getting the proper quality of work. Adjusters need to question their counsel in detail about the nature and extent of the depositions attended. An attorney can write a report by getting information from other counsel while not being actively engaged in the deposition.

An attorney recently sent me a cell phone photo of five young attorneys who were asleep at a deposition of the plaintiff’s main expert. Interestingly enough, this attorney had a very small subcontractor in the case but asked to be lead counsel and take the deposition of the expert, as no one else really knew how to do this since they had no experience in doing so. This underscores the need for adjusters to really quiz their counsel on the facts of the case.

Another facet to litigation management is the use of legal audits. Including various levels of claims people in these audits is a tremendous way to train adjusters on how litigation works from an attorney’s perspective and what counsel may be missing in their work product that an adjuster cannot see in their file correspondence.

Finally, claims directors overseeing construction defect cases have to look at the bigger picture when it comes to litigation management. Since many carriers have multiple cases with the same insureds, it becomes imperative for the carrier and their counsel to remain consistent in their position regarding the degree of involvement of subcontractors in a case.

Put simply, if a carrier in one case is paying $100 a home and in the next case pays $200 a home, the floor has just doubled. If there is factual evidence why this should occur, then there is justification for this position. If, however, another adjuster wants to settle a case early by throwing more money at it, this becomes a dangerous precedent. It hinders the litigation because plaintiff’s or developer’s counsel will not settle a case at the lower number knowing the carrier has settled already at a higher amount.

In the big picture of construction defect claims, litigation management can still be a powerful tool for carriers in managing their costs as well as continuing to keep their indemnity costs in check. Construction defect lawyers and adjusters must get out of the mindset that “it is only construction defect” and realize that they can have an effect on the resolution of a case through active litigation management.

Myth #5: Alternative fee agreements (AFA) save money for the carrier in construction defect cases.

It is clear that AFAs are here to stay. AFAs provide budgeting certainty for the carriers and provide a constant cash flow for law firms. If priced correctly, these agreements can be beneficial for both the carrier, self-insured, and the law firm.

In the construction defect arena, AFAs can be expensive if the construction defect cases are melded into an AFA program with multiple different types of cases. Each of these types of cases (products, general liability, auto, professional liability, etc.) has specific niche issues that change the cost and profitability for the carrier and law firm. As a result combining all of these types of cases can make it extremely difficult to obtain pricing that is favorable for both the carrier and law firm. In other words, while the pricing may work overall when broken down into niche areas such as construction defect, a carrier can find themselves facing significant increases in their expenses.

Here’s an example: An average subcontractor case can be handled on an hourly basis for $8,000. However, under a combined AFA, a carrier pays the law firm $10,000. At the end of the day this may be a good deal for the carrier when considering total paid for all files. However, in the construction defect area the expenses for legal just jumped $2,000 a file.

This is why AFAs should be constructed specifically to the niche areas of claims. In construction defect, creating an AFA that breaks down construction defect claims by subcontractor tiers, developer/general contractor, and product manufacturer will help to control the overall construction defect expenses for a carrier.

Finally, carriers also have to be cognizant about cases in which they share counsel fees with another carrier. While this may seem advantageous compared to an AFA, in reality it may not be on a case-by-case basis. For example, take a situation in which shared counsel bills $30,000 to defend a case, which equates to $15,000 per carrier. The portfolio flat fee is $10,000. The carrier just spent $5,000 more than needed had they just used portfolio counsel.

Myth #6: Defense counsel and adjusters do a good job of risk transfer.

While there are some defense attorneys and adjusters who handle and have perfected risk transfer, the reality is that most adjusters and attorneys do not handle this area very well. Many times the construction defect adjusters have had no formal training in this area and simply miss the risk transfer opportunities. We find the same thing with many lawyers who handle construction defect cases.

Much of the problem comes from adjusters and counsel not understanding all of the coverage areas that are available to them for risk transfer. Moreover, depending on the state, we find that adjusters and counsel are not nearly as well versed on indemnification as they should be. Certainly additional insured (AI) endorsements make up a large majority of the potential for risk transfer. Many adjusters simply leave the tendering of the AIs to the attorney, but this is really an adjuster’s job.

Early tendering is crucial to obtaining recovery of all or some of the defense fees a carrier is expending in a case. Counsel should assist the adjuster with follow-up tenders to parties who do not answer the tender. Where adjusters and counsel miss opportunities usually manifests itself in not understanding the coverage associated with the AI that they are tendering. Moreover, responses to tenders from carriers will cite exclusionary endorsements that have been misinterpreted by the answering carrier. Counsel and the adjuster must understand the flaws in these coverage positions and continue to pursue coverage from the other carrier.

Proper understanding of triggers of coverage based on venue is extremely important in obtaining risk transfer and a time on risk calculation favorable to the tendering carrier. This area is extremely complicated and deserves annual training for both adjusters and counsel handling construction defect cases.

Tornado Commission Recommends More Shelters, Tougher Building Codes

Robin DeMonia -- The Birmingham News By Robin DeMonia — The Birmingham News 

CENTER POINT, Alabama — Weather disasters in the state might be less deadly if storm shelters were required in new mobile home parks and apartment complexes, if tougher building codes were established for homes, and if Alabamians were offered a sales tax holiday on emergency supplies.

These were among 20 recommendations the Tornado Recovery Action Council made to Gov. Robert Bentley after studying the state’s deadly twister outbreak last April. The group’s report was presented to Bentley this morning in Center Point, where he’d come to tour new storm damage that occurred on Monday.

The council planned to deliver its findings to Bentley on Monday, but the event was canceled because of storms that swept through the state before daybreak.

Bentley created the group in August, hoping its 19 members would find ways Alabama could be better prepared to respond to future threats and disasters. The council’s co-chairmen are Protective Life CEO Johnny Johns and Birmingham News publisher Pam Siddall.

The report calls for more geographically precise weather warnings, more academic research on tornadoes, minimum standards for local emergency management directors, and new forms of assistance for businesses affected by disasters.

Three recommendations involve storm shelters: The state needs to build more public shelters and better publicize the locations; offer incentives to encourage safe rooms in private homes and businesses; and work toward requiring shelters in new mobile home parks and apartment complexes. “Simply put, more shelters will save more lives,” the report said.

In addition, Alabama needs to implement and enforce statewide building standards that will help homes better withstand severe weather, if not a direct hit by a powerful tornado. Relatively inexpensive requirements for roof tie-downs and better-anchored foundations could reduce property damage and prevent deaths in weaker winds, the report said. Most states already enforce statewide building standards, it said.

To encourage individuals to be better prepared for disasters, the report recommends a continuing campaign about the importance of assembling emergency kits and taking other steps before a disaster strikes. In a related idea, the tornado council suggested a yearly sales tax holiday for goods such weather radios, first-aid supplies and generators. Louisiana and Virginia already have a sales tax holiday for hurricane supplies, the report said.

Proposals to improve warnings include: a statewide severe-weather alert system to deliver more geographically precise warnings to individuals and businesses through phones and smartphone technology. The Tornado Recovery Action Council also concluded the state should pursue funding for more research at Alabama universities “to better understand the conditions that produce, strengthen and direct tornadoes.”

To improve disaster response, the state needs to set minimum standards for local emergency management directors. Currently, local EMA directors don’t have to have any particular credentials or training, and establishing some kind of criteria is “a difficult but necessary decision,” the report said.

Other response-related recommendations focus on the need for more attention to communication plans and training exercises to make sure they work; for unannounced mass casualty drills to practice assessing and transporting patients; and for more coordination of volunteers after disasters occur.

The final recommendations address ways to help Alabamians recover after disasters. They focus mostly making low-interest loans, tax breaks, grants and other assistance available to help people whose homes or businesses are damaged. One idea drawn from an Iowa program would have the state give zero-interest loans to small businesses affected by disasters with a promise to forgive the debt if the business reopens within 12 months.

Here is a full list of TRAC’s recommendations:

— Add more public storm shelters and better publicize the locations.

— Offer incentives to include safe rooms in new construction and to add them to existing homes and businesses.

— Work to require shelters in new apartment complexes and mobile home parks, and offer incentives to add them at existing locations.

— Establish statewide standards for new, rebuilt or extensively remodeled homes to ensure relatively inexpensive design techniques that will reduce property damage in severe weather.

— Create a utility work group in which electric, natural gas, telecommunication, water and other utilities can share best practices and better prepare for disasters.

— Offer incentives for certain businesses that buy generators or rewire to accommodate portable generators that can be used after a disaster.

— Launch an ongoing awareness campaign to educate people about ways they can prepare for disasters and resources that are available when disasters strike.

— Establish an annual sales tax holiday for items that relate to severe weather preparedness.

— Implement a statewide weather-alert system that will provide more geographically precise warning information, allow people to enroll their phone numbers and use smartphone technology.

— Push for technology that will allow more localized warning information to be delivered from weather radios.

— Pursue funding for academic research in Alabama about how tornadoes are generated and fueled.

— Set minimum standards and training for county Emergency Management Agency directors.

— Require emergency response agencies to have updated communication plans and include communication elements in all training exercises.

— Conduct unannounced, multiregional mass casualty drills for triage and transportation of patients.

— Go forward with plans to rebrand the governor’s Office of Faith-Based and Community Initiatives as Serve Alabama, and more clearly state its mission of coordinating volunteer services.

— Elevate a Voluntary Organizations Active in Disaster leader to a high-level position in the state EMA structure and increase the number of VOAD chapters across the state, with the goal of one in each county.

— Establish a nonprofit organization to seek federal and private funds for a statewide program that offers low-interest loans and other aid to build homes and build or expand businesses after disasters.

— Maximize the use of Alabama Housing Finance Authority funds to provide low-interest mortgages and low-income, multifamily housing in disaster areas.

— Provide loans, grants and tax credits to encourage businesses to rebuild or expand after disasters.

— Encourage local governments to have standing contracts for debris removal and disposal in place before disasters strike.

More than Your Bargained For? Avoid Paying Twice for Construction Costs

January 20, 2012 by Lisa Magill

One of the most daunting aspects of construction projects is understanding the different legal documents presented (or that should be presented) by contractors, subcontractors, laborers, and suppliers.  Although construction contracting is not something most board members are familiar with, the State of Florida requires them to follow very detailed procedures when making payments to the contractors hired to do work on the condominium property.  If payments aren’t made correctly you may face liens on the property that interfere with sales and which may be foreclosed by the contractor.

The first step to take when commencing a construction project is to record a Notice of Commencement. Florida Statutes require you to record a Notice of Commencement in the public records identifying the legal title of the property being improved, and the names and addresses of the owner (or association as the agent of the owners), contractor, lender, bond surety (if any), and any other individuals who should receive copies of documents associated with the Florida Construction Lien Law.  It is also critical to make sure that if your contractor or subcontractors are posting payment bonds (which may exempt your property from liens), those bonds must be recorded in the County Records along with the Notice of Commencement. A copy of the Notice of Commencement and Bond should also be given to the appropriate building department and inspecting authority.

As your construction progresses, you will receive documents called Notice to Owner. Sometimes these documents are called Notice to Owner/Preliminary Notice and are usually served upon you via Certified Mail. If you included your fax number in the Notice of Commencement, the Notice to Owner may also be faxed to you. They may also hand-deliver it to you and, in some instances, it may just be posted on your job site. It is very important that you keep track of everybody who has served a Notice to Owner on you. The Notice to Owner is not a cloud on title; rather, it is a document from those entities, hired by your contractor, that you must ensure get paid to avoid liens on your property.

Every time you pay your contractor for the construction on the project, which may vary depending upon your specific contract, it is vital that you ensure that all subcontractors and suppliers that have served you with a Notice to Owner have been paid in full. Before you make payments to your contractors, you should call everybody who served a Notice to Owner on you and find out how much they are owed. When you make your next payment to your contractor, it is critical that you make sure that you get a Release from everybody who served a Notice to Owner in the amounts which you learned are due. If you do not get a Release in that amount, you can be sure the company is not being paid, and they will look to you later for payment or lien your job. Sometimes, you may even want to consider writing joint checks, which are checks made payable jointly to your contractor and the company who served the Notice to Owner. These checks, even though they are joint in nature, will still count as payment towards your contractor and still be credited against the contract price. The bottom line is to ensure that everyone who serves a Notice to Owner is current with their payments every time you pay your contractor, and issue a Release of Lien to reflect this. The Florida Construction Lien Law also gives you the right to require a list of money owed to subcontractors from your contractor every time you make a payment. This Affidavit should be given to you by your contractor, but the law does not allow you to legally rely on whatever the contractor tells you. Rather, you have an affirmative duty to make sure everyone who serves a Notice to Owner is paid in full.

When the final payment under your contract becomes due, you should not make final payment until the contractor gives you an Affidavit stating that all lienors under the direct contract who have timely served a Notice to Owner have been paid in full or, alternatively, identify the names of the lienors who have not been paid in full and the amount due or to become due to each of them. Once again, although this Affidavit is helpful, you have no legal right to rely on it for any entity who served a Notice to Owner. Do not, under any circumstances, make your final payment to your contractor until you receive final Releases of Lien from every entity who served a Notice to Owner. If there is a problem getting these releases, you must make sure that everyone serving a Notice to Owner gets paid before you issue that last check to the contractor.


Learning from Others’ Lessons, that they Learned the Hard Way

Ryan F. Carpenter – January 23 2012

No one likes admitting that they have a problem. That holds true even with regard to construction-related problems. However, as Mr. and Mrs. Hochberg found out the hard way, if an owner is able to see the symptoms of a construction defect but does not promptly investigate the cause, determine the entities responsible and file a lawsuit to hold the responsible entities accountable, the owner risks losing his or her claim. Hochberg v. Thomas Carter Painting, Inc., 63 So. 3d 861 (Fla. 3d DCA 2011).

While the Florida Legislature tried to protect owners from losing their claims for construction defects that are not easily seen or obvious (are “latent”) by specifically addressing latent defects in Section 95.11(3)(c), Florida Statutes, the protection provided by the language is limited. Generally, owners have four years in which to file a lawsuit based on a construction defect claim. The latent defect language in Section 95.11(3)(c) delays the start of the four years until a latent defect is either discovered or should have been discovered.

When the Hochbergs moved into their new home they could smell mold and found damp carpeting in their master bedroom. The Hochbergs hired a mold remediation company and an engineer to investigate the problems, but based on the results of that investigation, only filed an action against the general contractor. Eventually, the Hochbergs were able to identify the specific subcontractor that performed the defective work which allowed water to enter their home and they filed a lawsuit against it as well.

By that time, though, the Court found that too much time had passed since the Hochbergs were on notice of the problem and they could no longer pursue the subcontractor. The Court held that “Florida law is clear that ‘where there is an obvious manifestation of a defect, notice will be inferred at the time of manifestation regardless of whether the [owner] has knowledge of the exact nature of the defect.’” (emphasis added). Based on the Court’s holding, if an owner fails to promptly investigate symptoms of a construction defect (as examples, smells, wet carpet, cracks in walls), the owner not only runs the risk of a small problem becoming bigger and more expensive to fix, but also runs the risk of losing his or her right to hold the responsible entities accountable. The Hochbergs learned that lesson the hard way. Other owners can avoid losing their claims by learning from the Hochbergs’ experience, admitting that they have a problem, promptly investigating it and timely filing lawsuits against the responsible entities.

Construction Renovation Contracts 101: Six Key Considerations for Proactive Boards and Managers

Martha L. PerkinsAuthor page »

One of the most challenging responsibilities for association board members and the association manager is renovation contracts.  It is a fact of life that community associations must periodically perform small and large construction renovations—everything from lobby updates to balcony repairs and garage resurfacing, from window and roof replacements to new HVAC system installations.  Before signing a construction renovation contract, boards and managers should understand the potential risks and be prepared to minimize them.  Here is a checklist that will help you safeguard the association’s funds:

  1. Due Diligence in Selection of Architect and/or Engineer

An architect or engineer who is experienced in association renovations plays a crucial role in the success of a renovation project.  A competent design professional will assist the board in developing the design concepts, preparing a thorough set of project plans and specifications, selecting good contractors, and overseeing construction.   A proactive board or manager should either have prior successful experience with the design professional or conduct due diligence on the design firm.

  1. Experienced Construction Attorney

Associations should retain the services of a knowledgeable and experienced attorney to help guide the association through the project, in particular reviewing and negotiating the contracts.  This is particularly important for major renovation projects.  Often attorneys representing associations know a lot about condominium governance but little about the complexities of construction law.  It is critical to retain counsel who is knowledgeable about both condominium law and construction law.

The most important reason to retain an attorney to assist the association with a renovation project is for the attorney to write and negotiate the contracts.  This includes the contracts with both the design professional and the contractor.  For a $2,000 lobby touch-up, the association probably does not need to consult an attorney.  For a renovation contract over $100,000, it makes good sense to consult an attorney.  In the gray areas between those numbers, the board will need to make a reasoned judgment call.

  1. Crucial Bid Process

The bid process is an important step in a successful renovation project.  A good design professional should assist the board in preparing a list of contractors asked to bid on the project.  The board and the manager should ensure that the bid list only has experienced, competent, and professional bidders on the list.  The association should question the design professional closely about his experience working with each bidder and check references.

Associations frequently ask when it is necessary to obtain three or more bids. Obtaining multiple bids is nearly always a good idea because they tend to drive the contract price down.  Comparing bids is a good idea because, if a bid is much higher or lower than the others, that contractor may misunderstand the scope of work or has anticipated different problems on the project.  Or the contractor may just be taking a lower margin.

It is a mistake to think that the lowest bid is always the best bargain for the association. Sometimes contractors bid low in order to be awarded the contract and then they plan to “change-order” the contract to death to increase their margins.  Such contractors usually have poor reputations, and due diligence will often uncover such undesirable entities.

  1. Understand and Negotiate the Construction Contract Terms

It cannot be emphasized enough:  the written contracts between the association and its architect and engineer and between the association and the contractor define the legal agreements and understandings between the parties.  Contracts terms should be reviewed, understood, and negotiated so that the association — and its funds — are appropriately protected.   Each project is unique and requires unique contracts; one-size contract forms do not fit all projects.

Contractors often present owners with standard form contracts for major association renovation contracts, which the association might accept without even a minimal review.  These form contracts are often drafted for general use in the construction industry and favor the architect or contractor rather than the owner.  Sometimes the forms presented do not apply properly to the specific project and a contractor who tries to customize it for the particular project may inadvertently create inconsistencies with the fine print.  The upshot for the association is that it is not properly protected.  Your contractor is not your lawyer; your own layer can draft the supplementary terms and conditions in order to protect the association interests.

A contract between the association and the contractor should address, among other things, the following issues:  names of the parties to the contract; scope of work; start and completion dates, contract amount, and payment terms; retainage; handling of change orders; submission of payment documents; schedule; warranties; insurance and bonds; indemnification; dispute resolution; attorneys’ fees; and termination.  These contract provisions, properly drafted, are critical for helping to protect the association from improper and unanticipated risks.

The long and the short of renovation contracts is that an association must review, understand and negotiate the terms and conditions of such contracts to ensure that the association is reasonably and properly protected.

  1. Performance and Payment Bonds:  What Are They?

The world of performance and payment bonds seems to the uninitiated to be shrouded in mystery.  Both documents provide certain protections to the association.

  • A performance bond guarantees to an owner that the project will be completed, even if the contractor defaults.  A contractor might, for instance, go bankrupt, walk away from the project for some reason, or perform so poorly that the association terminates the contract.
  • A payment bond guarantees that certain subcontractors and suppliers on a project will be paid.  The general contractor receives payment from the owner and then pays its subcontractors and suppliers.  But what if the general contractor fails to pay them?   They will file liens against the owner.  The payment bond guarantees that those subcontractors and suppliers will be paid for work performed or materials supplied on the project.

Your agreement with the contractor may call for these bonds.  Typically, the contractor obtains the bonds from his surety company through his bonding agent and the owner pays the premium.  The bonds are usually in the amount of 100% of the contract price.  So, if the renovation contract is for $500,000, the bonds will be issued in the amount of $500,000.  The cost of the bonds is between 1-3% of the contract price.

When should an association require performance and payment bonds for a renovation contract?  There are no hard-and-fast rules on this question.  The answer depends largely on the cost and complexity of the renovation project; the higher the cost of and the more complex the project, the stronger the argument to require bonds from the contractor.  The board must weigh the benefits versus the costs of the bonds.  For contracts under $100,000, a board usually does not require bonds.  For contracts over $500,000, the board should seriously consider requiring bonds.  For contracts between those amounts, the board must make a judgment call.

  1. Association’s Project Representative as Communicator

A clear line of communication between the owner, design professional, and contractor is essential to the smooth progress of a project.  Because the association is run by a board members, few of whom are experts in construction projects, it usual for the board to designate an “owner’s representative.”  The owner’s representative needs to (1) understand the project and the specifications; (2) have the authority to make project decisions on behalf of the association; (3) document and organize a project file—whether hard copies and/or electronic.  In the event of a dispute between the association and the contractor, a well-documented and -organized file can clarify many disputes, with little cost or time expended.  Often, the project representative will be someone from the association’s management company, if it has the on-staff expertise to do the job well.  If not, the association should consider hiring a professional to represent the association’s interests throughout the construction process.

A major renovation project at an association doesn’t happen often.  While it is exciting for owners, it is also fraught with potential risks and ensuing legal disputes.  Take the time to do it right so that the project goes more smoothly to completion, without major disappointments and exhausting construction disputes.

%d bloggers like this: