Fourth District Reverses Lower Court Ruling in Construction Defect Litigation

Gregory D. Hagen, Edward P. Garson, John R. Clifford and Ian A. Stewart | Wilson Elser | February 18, 2015

On January 22, 2015, the Fourth District Court of Appeals issued for publication its decision in McMillin Companies LLC v. American Safety Indemnity Company, 4th Dist. Div. 1, D063586.

The case is significant in addressing a fact pattern that is recurring with greater frequency given recent changes in the indemnity rights of developers and general contractors as against subcontractors. Developers are more aggressively pursuing their rights under additional insured (AI) endorsements issued to subcontractors, seeking full coverage in lieu of triggering any self-insured or direct insured monies.

In this case, the general contractor, McMillin, settled the underlying construction defect action using AI monies and then pursued a dozen or more AI carriers for unreimbursed defense costs. Of course, given that each AI carrier had an independent obligation to defend the entire action, there should have been complete coverage for all defense costs. Nevertheless, McMillin pursued its action against the AI carriers and recouped more money in that coverage action than its out-of-pocket total. It asserted, however, that some of the amounts obtained in the coverage action should be attributed to Brandt fees (an insured can recover attorney fees “reasonably incurred to compel payment of the policy benefits”) that were incurred in pursuing the recalcitrant carriers. American Safety Indemnity Company (ASIC), which had issued two commercial general liability policies to the framing subcontractor, argued, on the other hand, that McMillin had failed to meet its burden of establishing that allocation and therefore had no damages.

In a separate motion in limine, McMillin asserted that ASIC owed a duty to defend McMillin, and argued that this point was established under two cases – Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co., Inc.) (1993) 6 Cal.4th 28, 24 Cal.Rptr.2d 467; 861 P.2d 1153 and Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 17 Cal.Rptr.2d 210; 846 P.2d 792 – because the Court had earlier denied ASIC’s motion for summary judgment. The two cases hold that where factual issues preclude summary judgment in the insurer’s favor, the duty to defend is then established, absent additional evidence bearing on the issue.

The trial court found for McMillin on the duty to defend, but also found that McMillin had no damages and thus entered judgment in ASIC’s favor.

The Court of Appeals reversed on both points. First, on the duty to defend, the Court of Appeals found that the mere denial of an insurer’s motion for summary judgment was not sufficient to automatically establish coverage. In this case, the court that originally considered the motion merely found that ASIC failed to meet its “initial burden of production” rather than finding that there was a “disputed issue of fact.” Thus, when a motion for summary judgment filed on a carrier’s behalf is denied, the phrasing of the order is important.

As to the offset issue, the Court of Appeals refused to apply a string of California cases (including Emerald Bay, Bramalea, Ringler, Prichard, and J. Lamb) in which the receipt of fully offsetting settlements from other carriers resulted in no damages and thus dismissal of the insured’s case. Instead, the Court found that offsets may be used to diminish damages but do not necessarily preclude a claim against a carrier that did not participate in the insured’s defense.

This latter portion of the opinion leaves the door open for an insured in a multi-carrier insurance coverage case to allocate settlement monies away from defense costs and essentially “pocket” settlements – attributing them to Brandt fees – while continuing its efforts against non-settling carriers.  Also left unsettled by the Court of Appeals are difficult evidentiary issues involving the proof necessary to establish the allocation of settlement proceeds.

via Fourth District reverses lower court ruling in construction defect litigation – Lexology.

Calculating Actual Cash Value, Part 5: New Jersey and New York

Shane Smith | Property Insurance Coverage Law Blog | February 22, 2015

Since many attorneys in our firm are litigating numerous Superstorm Sandy claims on behalf of policyholders in New Jersey and New York, this week’s post on calculating actual cash value will focus on these two states.

To determine actual cash value, New Jersey courts follows the Broad Evidence Rule.1 In New York, if the policy language is silent on the definition of “actual cash value,” the broad evidence rule is the default rule.2 The Broad Evidence Rule allows the trier of fact to consider every fact and circumstance which would logically tend to the formation of a correct estimate of the loss.3 This includes all relevant evidence of the value of the damaged property such as age of the property, the profit likely to accrue on the property, and the property’s tax value.

In New York, overhead and profit likely may be depreciated. In Mazzocki v.State Farm Fire & Cas. Corp.,4 the replacement cost estimate did not include contractor’s profit and overhead, and affected the actual cash value amount received. The issue before the court was “whether replacement cost include[d] a general contractor’s profit and overhead even if not actually incurred.” The insurer argued that profit and overhead was a contingent expense (contingent upon the property actually being repaired or replaced) and therefore should not be included. The court ruled that the insurer had to include profit and overhead in replacement costs and in actual cash value, whenever a general contractor would be needed.5 The court rejected State Farm’s argument that since such an expense may not be incurred, it is contingent and should not be included. “[W]e conclude that a replacement cost estimate is equally hypothetical or contingent as to all materials, labor and contractor services.”6 Therefore, the matter was remitted back to the trial court for further proceedings to determine whether the loss had been reasonably likely to require a general contractor. If so, actual cash value should have included the amount.

1 Lancellotti v.Maryland Cas. Co., 617 A. 2d 296, 298‐99 (N.J. Super. Ct. 1992); Messing v. Reliance Ins. Co., 187 A. 2d 49, 51 (N.J. Super. Ct. 1962).

2 SR Int’l Bus. Ins. Co. v. World Trade Center Props., LLC, 445 F. Supp. 2d 320, 342‐45 (S.D.N.Y. 2006), citing McAnarney v. Newark Fire Ins. Co., 159 N.E. 902 (N.Y. 1928).

3 Mazzocki v. State Farm Fire & Cas. Corp., 766 N.Y.S.2d 719 (N.Y. App. Div. 2003).

4 Id. at 722.

5 Id.

6 Id.

via Calculating Actual Cash Value, Part 5: New Jersey and New York : Property Insurance Coverage Law Blog.

No Diagnosis, No “Damages”: Wisconsin’s Construction Statute of Repose in Asbestos Cases

Gregory N. Heinen | Wisconsin Appellate Law | February 2, 2015

How to apply Wisconsin’s construction statute of repose, Wis. Stat. § 893.89, in asbestos cases has recently been a hot topic dividing trial courts. The statute bars a broad category of claims if they are brought more than 10 years after the date of substantial completion of an improvement to real property. Many corporate defendants argue that their involvement in past real property improvements entitles them to the protection of the statute and bars asbestos plaintiffs’ claims. One of the key debates involves the meaning of the exception from the statute’s protection for claims for “[d]amages that were sustained before April 29, 1994.” § 893.89(4)(d). Plaintiffs, some of whom first worked with asbestos-containing products more than 50 years ago, often contend that this exception applies to their claims, making the statutory bar inapplicable.

Last week, in Peter v. Sprinkmann Sons Corp., 2014AP923, the Wisconsin Court of Appeals, District I, held the exception inapplicable to claims made by the estate of the deceased, Mr. Peter. The crux of the issue was the meaning of the phrase “damages that were sustained.” Did “damages” refer to legal damages, as in a legal cause of action that accrues when a cancer diagnosis is made (here, in 2012), as the defendant urged? Or did “damages” mean physical damage, as the plaintiff estate contended, submitting expert testimony that physical damage occurs upon asbestos exposure, which here may have been as far back as 1959. The court agreed with the defendant, for four reasons.

First, the court held that “damages” has a specific meaning: a legally cognizable claim or right to recover for injuries. The decedent had no such claim until his mesothelioma diagnosis in 2012, nearly two decades after April 29, 1994. Second, the court determined that the legislature had used both the word “damages” and the word “injury” in the same sentence in § 893.89(2) (“damages for any injury”), so to give those terms an identical meaning would render a piece of the statute “absurd.” Accordingly, “damages” in this statute had to mean something other than “injury.”

Third, the court approvingly cited an opinion by Judge Griesbach of the Eastern District of Wisconsin, holding that the use of the plural word “damages” in the statute showed that “damages” means legal damages, not physical “damage.” Lastly, the court thought that its interpretation was supported by the purpose of § 893.89: to provide long-term liability protection for those involved in real property improvements by extinguishing all rights of recovery after the 10-year repose period expired. While the court acknowledged the harshness of this result for asbestos plaintiffs who may face a 40-year latency period before their diagnosis, it put the responsibility for constructing any asbestos-related exception in the statute squarely on the legislature.

There is little doubt that Peter will encourage defendants involved in past real property improvements to cite the statute of repose as a defense in asbestos litigation. If the opinion is published, as the panel recommended, it will have statewide precedential effect, Wis. Stat. § 752.41(2), and may well govern the outcome of three other cases of which we are aware, now pending in the Court of Appeals on this same issue, as well as in trial courts throughout the state. We will not be surprised, therefore, to see the plaintiff estate petition for review by the Wisconsin Supreme Court.

via No Diagnosis, No “Damages”: Wisconsin’s Construction Statute of Repose in Asbestos Cases | Wisconsin Appellate Law.

If You Post It, Your Opponent Can Probably Discover It

Dick Bennett | Cozen O’Connor’s Property Insurance Law Observer | January 26, 2015

In March we ran a post on how important videos, photographs, and statements on social media sites can be when investigating a property loss.  A picture is literally worth a thousand words.  Earlier this month, a Florida court explained that such material is also discoverable – even in situations where the policyholder employs privacy settings that prevent the general public from having access to his or her account – because the user’s privacy interest in such a site is “minimal, if any.”  Nucci v. Target Corp., – So.3d –, 2015 WL 71726, 2015 Fla. App. LEXIS 153 (Fla.Dist.Ct.App., Jan. 7, 2015) involved a slip-and-fall, but it applies with equal force to discovery in a first-party matter.

Maria Nucci filed a personal injury action against Target, alleging that she fell on “a foreign substance” on the floor of one of the defendant’s stores.  Her complaint contended that she sustained permanent injuries, aggravated pre-existing ones, and also experienced lost earnings and emotional pain and suffering.  Prior to her deposition, Target’s attorneys reviewed her Facebook profile and found that it contained 1,285 photographs.  She was questioned about some of them at the deposition itself, and she promptly took three dozen of the pictures down.

Target moved to compel.  After a hearing, the trial court ordered production of “copies or screenshots of all photographs associated with” any social networking account that Ms. Nucci was currently registered with from two years prior to the date of loss until the present.  The plaintiff then sought certiorari review from Florida’s intermediate level appellate court.

Earlier this month, a unanimous panel denied the petition.  As Judge Robert M. Gross’ opinion explained, one reason was that “certiorari review is available in only a narrow class of cases and [Ms. Nucci’s] case does not meet the stringent requirements” for that remedy.  The judges also denied the petition, however, because the Facebook pictures were “highly relevant” and, most significantly, because it held that Ms. Nucci had “but a limited privacy interest, if any, in pictures posted on her social networking sites.”

With respect to relevance, Judge Gross explained the court’s rationale as follows:

In a personal injury case where the plaintiff is seeking intangible damages, the fact-finder is required to examine the quality of the plaintiff’s life before and after the accident to determine the extent of the loss.  From testimony alone, it is often difficult for the fact-finder to grasp what a plaintiff’s life was like prior to an accident. It would take a great novelist, a Tolstoy, a Dickens, or a Hemingway, to use words to summarize the totality of a prior life.  If a photograph is worth a thousand words, there is no better portrayal of what an individual’s life was like than those photographs the individual has chosen to share through social media before the occurrence of an accident causing injury. Such photographs are the equivalent of a “day in the life” slide show produced by the plaintiff before the existence of any motive to manipulate reality. The photographs sought here are thus powerfully relevant to the damage issues in the lawsuit.

With respect to privacy, the panel held that “the relevance of the photographs overwhelms Nucci’s minimal privacy interest in them.”  As Judge Gross noted, before the right to privacy attaches, “there must exist a legitimate expectation of privacy.”  Ms. Nucci argued that she had just such an expectation because her Facebook page had been on a privacy setting that prevented the general public from accessing her account.  The court was unconvinced, however, explaining that the very nature of a social networking site such as Facebook effectively rules out such an expectation.  According to the opinion:

We agree with those cases concluding that, generally, the photographs posted on a social networking site are neither privileged nor protected by any right of privacy, regardless of any privacy settings that the user may have established.

*  *  *

Because information that an individual shares through social networking web-sites like Facebook may be copied and disseminated by another, the expectation that such information is private, in the traditional sense of the word, is not a reasonable one.

via If You Post It, Your Opponent Can Probably Discover It | Cozen O’Connor’s Property Insurance Law Observer.

Oregon Appellate Case Limits Duty to Defend in Construction Contracts

Daniel J. Nichols | Gordon & Rees LLP | February 2, 2015

In Sunset Presbyterian Church v. Anderson Constr. Co., 268 Or. App. 309 (Dec. 31, 2014), the Oregon Court of Appeals curtailed the damages available from a breach of a duty to defend obligation in an Oregon construction contract. The court affirmed a trial court’s denial of all defense costs sought because there was no attempt to distinguish between costs covered by the duty and those not covered. Prior to the decision, Oregon law appeared to require a party to defend against all claims (both covered and uncovered), similar to an insurance agreement.

Oregon’s Anti-Indemnity Statute for construction contracts (ORS 30.140) voids “any provision in a construction agreement that requires a person … to indemnify another against liability for … damage to property caused in whole or in part by the negligence of the indemnitee.” In other words, a general contractor cannot force a subcontractor to indemnify the general for the general’s own negligence (or vice versa).

The court rejected the argument that the limitation on “indemnity” obligation in construction agreements does not apply, on its face, to “defense” obligations, holding that ORS 30.140 limits defense obligations in the same manner as indemnity obligations. The court also ruled that a duty to defend does not follow the standard “defend-one-defend-all rule,” whereby a duty to defend against any claim in a complaint requires defense of all claims in the complaint. This rule, developed in insurance law, had previously been applied to duties to defend among non-insurance parties (including parties to construction agreements). However, the court held that the rule was inappropriate in construction agreements with a duty to defend. Rather, a duty to defend in a construction agreement cannot require a party to pay for defending against claims caused by the other’s own negligence.

In the end, the petition for defense costs was rejected in its entirety because the petitioner did not distinguish between the costs of defending claims caused by the indemnitor’s own negligence and other claims.

via Oregon appellate case limits duty to defend in construction contracts – Lexology.