Where Insurance and Contracts Collide in Construction

Christopher G. Hill | Construction Law Musings | May 23, 2017

As has been said a “few” times here at Construction Law Musings, the courts of the Commonwealth of Virginia strictly interpret the actual terms of a construction contract. A recent case in the Circuit Court for the City of Richmond provides yet another example of this fact.

In Fixture Specialists Inc. v. MGT Construction Mgmt. Inc., the Court looked at whether a waiver clause in the prime contract between the owner, Cedar Street Genesis, and the general contractor, MGT Construction Management, Inc. (“MGT”) can be extended to protect a plumbing subcontractor and acknowledged third party beneficiary of the all risk insurance policy carried by the owner. In this case, MGT withheld approximately $130,000.00, an amount over and above any insurance coverage, from Fixture Specialists to cover damages incurred due to a water leak alleged to have been caused by Fixture Specialist’s negligent performance of its scope of work.

Fixture Specialists argued that the following clause protected it and precluded MGT from withholding any funds:

The Owner and Contractor waive all rights against (1) each other and the Subcontractors, Sub-subcontractors, agents and employees each of the other, and (2) the Architect and separate contractors, if any, and their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other peril to the extent covered by insurance obtained pursuant to this Paragraph 12.3 or any other property insurance applicable to the Work, except such rights as they may have to the proceeds of such insurance held by the Owner as trustee. The foregoing waiver afforded the Architect, his agents and employees shall not extend to the liability imposed by Subparagraph 4.18.3. The Owner or the Contractor, as appropriate, shall require of the Architect, separate contractors, Subcontractors and Sub-subcontractors by appropriate agreements, written where legally required for validity, similar waivers each in favor of all other parties enumerated in this Subparagraph 12.3 .6.

Fixture Specialists filed a motion for partial summary judgment and argued two points, both of which were rejected. The first was that this waiver clause applies to FSI to preclude any damage claim by MGT against FSI. The second was that even if the Waiver Clause did not apply, MGT’s exclusive remedy for the water damage was to turn to the all risk policy even in the event that the damage exceeded the limits of the policy because it was a third party beneficiary to the prime contract.

The Court rejected the first argument stating:

It is clear to the court that the Waiver Clause precludes Cedar Street Genesis and MGT, the only parties to the contract, from bringing suit against each other and each other’s subcontractors and sub-subcontractors. It does not apply to claims that MGT may have against its own subcontractors, including FSI.

The Court then went on to state that the second argument failed because 1. MGT had no contractual obligation to provide insurance for FSI and 2. MGT required FSI to carry its own insurance, therefore a plain reading of the contract precludes FSI’s second argument.

In short, the Court looked at the construction contracts between the owner and MGT and the subcontract between MGT and FSI and read them as written to deny FSI’s motion for summary judgment and allow the trial to go forward.

A Slippery Slope: How Counsel and Experts Can Work Together to Detect Slip and Fall Claims Fraud

Jonathan H. Colman and Angela DiDomenica | CLM Magazine | April 2017

Questionable slip and fall claims aren’t going away anytime soon. According to the National Safety Council, slip and fall incidents are the third leading cause of injury to customers and employees each year, costing American businesses a whopping $70 billion annually in workers compensation and insurance claims.

In analyzing a slip and fall claim, either pre-litigation or at the onset of litigation, an investigation and discovery plan is crucial. Depending upon the nature of the claim and potential injury exposure, counsel representing companies and insurers are tasked with the responsibility of directing investigations (to protect attorney-client privilege whenever possible) as well as discovery. In advance of the retention of an expert, it is important that fact specific requests for admissions and contention interrogatories are used to force the claimant to narrow the facts of the loss as much as possible. Detailed deposition questioning— including, most importantly, eliciting testimony about all of the movements of the claimant prior to, during, and following the alleged incident—will help not only counsel at trial, but also the designated expert.

Red-flag indicators specifically relating to questionable slip and fall claims include the following:

1. An unusually long distance between the location of the fall and the claimant’s residence.

2. Attorney involvement may include linkage with medical clinics and prior slip and fall claims, attorney representation on the date of the loss or soon thereafter, and the first notice of loss being made by the attorney.

3. Inspection of the scene shows no defect in the surface that could have caused the slip and fall.

4. The reported body movements are contrary to the laws of physics based upon the reported facts.

5. Minor slip and fall procedures with highly questionable and exaggerated medical costs.

Retention of the appropriate investigators and experts is important to obtain detailed statements from the claimant, conduct interviews of property/business owners as well as employees, and canvas for witnesses and surveillance, medical history, background checks, and even sub rosa. Investigators also will request maintenance records (sweep sheets), interview potential maintenance witnesses, obtain necessary safety manuals, and arrange for a determination of whether the location of the incident complies with appropriate building codes, standards, and guidelines.

Analyzing an alleged slip and fall event entails ascertaining, if possible, which adjusts the speed of the truck while in cruise control and attempts to maintain a set following distance when detecting a lead vehicle in front of it. However, one must understand the multiple parameters of a particular vendor’s collision mitigation system technology, specifically including radar detection of—and reaction to— moving vehicles, stopped vehicles, and stationary objects.

On the contrary, lane departure warning systems and event recorders are passive safety systems. Lane departure warning systems use camera technologies to identify lane markings and provide an audible, visual, or seat vibration alert to warn drivers of lane deviations when the appropriate turn signal has not been activated. Naturally, this technology application presents difficulties when the cameras are misaligned or the roadway markings are obfuscated, for example, by construction or by precipitation on the window.

Event recorders capture video and other data, and have basic features that may include:

• A one-way, road-facing camera that captures what is going on outside the truck.

• A two-way camera, with one lens road-facing to capture external events and another lens facing into the cab to capture the driver.

• A quad-view or 360-degree view, using multiple cameras to see all around the truck.

• Recorders that capture the speed, lateral movement, accelerations, and decelerations (measured by g-force change), as well as other mechanical aspects of the vehicle.

Event recorders typically operate in one of two modes: continuously recording or on demand. The latter is triggered by a certain set of events, such as a hard brake, overspeed, or high definition shock (variably measured by each vendor as a g-force change). Some implications of the technology’s application are very clear. The CEO of one major carrier recently testified before Congress that the use of collision mitigation systems reduced rear-end collisions by 69 percent in one year.

The value of other technologies is not always so obvious. For example, we are aware of carriers that have implemented roll stability control technology only to see instances of tractor-trailers rolling over increase, apparently because drivers endeavored to over-rely on the technology. A technology application’s value, after all, rests largely upon the manner in which we humans interact with it. Accordingly, drivers will need to clearly understand how their safety technology functions in their vehicles.

SHAPING EVENTS

Technology choices cannot be made without careful consideration of the purpose to which the technology will be put. With respect to event recorders, attention must be paid to the size and type of fleet, as well as the nature of the workforce.

For instance, a relatively small workforce that has little turnover and whose drivers navigate familiar routes may take no offense to an inward-facing camera of an event recorder. In contrast, a larger carrier with a more diverse workforce of over-the-road drivers and a high turnover rate may choose not to impose an inward-facing camera on its drivers. Certainly, inward-facing cameras pose a potential privacy invasion for over-the road truckers who sleep in their cabs, but drivers may perceive a privacy invasion even while they’re awake. We are aware of more than one carrier that implemented a pilot program of two-way cameras only to find that turnover increased so dramatically as to make the pilot program untenable.

Event recorders have the potential to capture an enormous quantity of data. A carrier that implements event recorders is well-advised to decide in advance how the data will be used as well as the costs and benefits of using the recorded data as a coaching tool. Certainly, in this regard, the overhead investment to use the data as a coaching tool is substantial. However, the carrier must also consider the uses to which the data will be put in the event no coaching is provided. Those who have been in the industry any meaningful length of time will anticipate the plaintiffs’ bar seeking to use the failure to coach as a sword in future litigation.

With respect to the defense of any particular case, some implications of the technology are fairly straightforward. We can well expect, for instance, that event recorders— to the extent they act as impartial observers of the circumstances surrounding a collision—will provide enormous clarity to cases of clear liability and, just as clearly, prevent protracted litigation over disputed factual issues when viewed by plaintiff’s counsel. We anticipate that claims with reasonably clear event recorder data will close more quickly either through a swifter settlement or a withdrawn claim once plaintiff’s counsel sees the video.

From a legal perspective, carriers will need to make some policy decisions, too. These include determining the video or data retention policy; when and to whom video and data will be released (including instances when the subject driver is not involved in the occurrence itself); and when to seek protective orders for video and data produced, including a prohibition on social sharing. The savviest carriers already are headed down these paths, with no clear answers likely to emerge in the immediate future.

As the continued application and improvement of transportation technologies is inevitable, those in the transportation industry must remain vigilant to understand the current technologies, anticipate future technology, and carefully consider how these technologies will apply to their organizations. The only constant we can fairly anticipate is change.

Building Damage Caused by Copper Theft Is Not Excluded

Christina Phillips | Property Insurance Coverage Law Blog | May 20, 2017

Theft of copper wiring or piping is a loss that impacts many in urban areas, but whether there is coverage for the loss is usually dependent upon the specific language of the insurance policy. This issue was recently addressed by the Tennessee Court of Appeals in Dillon v. Tennessee Farmers Mutual Insurance Company.1

The insured had purchased a home previously damaged by fire. The insured was not going to occupy the premises during renovations and purchased personal fire and extended coverage insurance policy from Tennessee Farmers. The policy specifically covered “Vandalism or Malicious Mischief” as one of the nine enumerated covered perils. The terms “Vandalism” and “Malicious Mischief” were undefined, but the provision did specifically state it did not apply to loss “by theft, burglary or larceny. But it does apply to damage to the covered building which is caused by burglars.”

During renovations, the insured discovered that the home had been broken into and the intruders cut through the sheet rock and pulled out the wiring of all levels of the home. A claim was submitted to Tennessee Farmers who concluded there was coverage under the vandalism provision and tendered a small check to the insured—although how Tennessee Farmers classified certain damage as “vandalism” was unknown. Following suit, the trial court held that the insured was only entitled to the amounts already paid for “vandalism” because the loss was caused by theft.

On appeal, the appellate court looked closely at the language of the Vandalism or Malicious Mischief provision. Giving the provision “reasonable meaning” in light of all provisions, the appeals court concluded that the cost of the copper wire itself was not recoverable, but the damage to the building caused by the burglars was.
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1 Dillon v. Tennessee Farmers Mut. Ins. Co., No. E2016-01080, 2017 WL 1536484 (Tenn. App. April 27, 2017).

Eleventh Circuit Deems Voluntary Dismissal of a Coverage Action Sufficient to Award Attorneys’ Fees to a Policyholder as the Prevailing Party

Aaron Weiss | PropertyCasualtyFocus | May 19, 2017

In a recent unpublished opinion, the Eleventh Circuit issued a decision that should serve as a warning to insurers to be sure to resolve all issues before dismissing a coverage action, particularly when involved in the settlement of an underlying suit.

A Tale of Two Cases

In W&J Group Enterprises, Inc. v. Houston Specialty Ins. Co., No. 16-15625 (11th Cir. Apr. 6, 2017), the insurance carrier filed a declaratory action against its policyholder in the Middle District of Florida, wherein the carrier sought a declaration that it was not obligated to cover the claim at issue and for rescission of the policy based on alleged misrepresentations. The declaratory action was filed while an underlying tort action remained pending in state court. The underlying tort action involved allegations of dram shop liability — the policyholder allegedly served alcohol to a patron around breakfast time and that patron was involved in car accident.

Thereafter, the underlying tort case was settled for $653,000. The carrier paid $650,000 toward the settlement and the policyholder paid $3,000. While the Eleventh Circuit opinion does not get into these details, the filings in the district court docket seem to suggest there may have been some confusion about whether a dismissal of the declaratory action (and agreement that each party would bear its own fees) was included in that deal. In any event, it appears that the insurance carrier went ahead and contributed $650,000 toward the tort case settlement despite not having a formal release and agreement on the fees issues for the declaratory case.

After this, the insurance carrier went ahead and dismissed the declaratory case by filing a notice of voluntary dismissal, pursuant to Fed. R. Civ. P. 41(a)(1)(A)(i). Technically, this method of dismissal was inconsistent with Rule 41, as the defendant policyholder had filed an answer. Rather than contest the form, the defendant policyholder moved for its prevailing party fees, pursuant to Fla. Stat. § 627.428. The fees amounted to approximately $90,000.

The district court judge focused primarily on the fact that the $3,000 contribution by the defendant policyholder rendered the insurance carrier’s decision to fund $650,000 of the $653,000 settlement out of the strict “confession of judgment” framework. On that basis, the district court found that the defendant policyholder was not entitled to prevailing policyholder fees under Fla. Stat. § 627.428.

The Eleventh Circuit Writes a Different Ending

On appeal, the defendant policyholder challenged the district court’s determination. The Eleventh Circuit began by noting the trend of Florida intermediate authority explaining that the settlement of a third-party claim and voluntary dismissal of a related declaratory-judgment action constitute a confession of judgment sufficient to trigger an award of attorneys’ fees. See Mercury Ins. Co. of Fla. v. Cooper, 919 So. 2d 491 (Fla. 3rd DCA 2005); Unterlack v. Westport Ins. Co., 901 So. 2d 387 (Fla. 4th DCA 2005); O’Malley v. Nationwide Mut. Fire Ins. Co., 890 So. 2d. 1163 (Fla. 4th DCA 2004).

The Eleventh Circuit held:

By entering into the settlement agreement—thereby agreeing to pay $650,000—[the insurer] ‘declined to defend its position’ in the declaratory-judgment action. … That the Insureds also contributed $3000 toward the settlement award—in and of itself—does not alter materially the nature of [the insurer’s] decision to abandon its position in the declaratory-judgment action. Based on that determination, the Eleventh Circuit held that trial court improperly declined to award attorney fees to the policyholder.

 

The Moral of the Story

The lesson here is twofold. The first point should be self-evident to insurers in Florida: if at all possible, make sure to include a provision for the resolution of attorney fees claims in a coverage dispute when making an indemnity settlement of a third-party claim. And this will almost always be possible. Second: insurers in Florida would be wise to be very cautious and conservative in evaluating whether the courts will consider a policyholder a prevailing party in a coverage dispute.

Insurer’s Refusal to Provide Explanation for Claim Denial Until Litigation Supports Bad Faith Award

Christina Phillips | Property Insurance Coverage Law Blog | May 14, 2017

The Court of Appeals of Tennessee recently affirmed an award which included bad faith damages against Farmers Mutual of Tennessee where the insurer repeatedly failed to explain to the insured what the basis for the denial of the claim was until the insurer answered certain requests during litigation.

In Burge v. Farmers Mutual of Tennessee,1 the insureds had applied for insurance coverage on their mobile home and identified one mortgage holder. Following a fire, the insurer denied their claim and the insureds sought information from Farmers as to the basis for the denial. Farmers provided no reason or explanation to the insureds—in fact the insureds were forced to file suit and then figure out the basis of the denial from information provided in the insurer’s discovery responses.

Farmers filed a response to the insured’s summary judgment motion, stating as its basis for denying the claim that the insured property was encumbered by two mortgages when the application was submitted, so there had been a material misrepresentation. The trial court found there was one lien holder—who was listed on the insurance application—and consequently there was no misrepresentation by the insured.

The trial court awarded prejudgment interest and imposed a statutory bad faith penalty of 15%, noting the insurer’s delays, its failure to pursue its claimed defense in an efficient manner, and the “harsh and rude treatment” the insured received from the insurance company adjuster and representatives when they sought information.

The appellate court affirmed the trial court’s award of bad faith damages, noting that the insurer had no substantial legal grounds for failing to pay the claim. The appellate court stated that a simple inquiry would have disclosed that only one mortgage encumbered the property. Specifically, the appellate court indicated that had the insurer explained its position to the insured during the months after the fire, additional documentation could have been provided and any confusion about the mortgage could have been clarified. The appellate court agreed with the trial court’s conclusion that the insurer’s refusal to pay the loss was not in good faith and the penalty awarded matched the attorney’s fees incurred by the insured.
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1 Burge v. Farmers Mut. of Tennessee, No. M2016-01604, 2017 WL 1372864 (Tenn. App. Apr. 13, 2017).