Monthly Archives: May 2018

Farmers Insurance Recognizes 25% Contractor Overhead and Profit!

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Chip Merlin | Property Insurance Coverage Law Blog | May 22, 2018

Overhead and Profit can generate a lot of debate when insurance company adjusters are looking to meet their adjustment severity goals and lower claims payments. But have you ever wondered how those same insurers instruct their sales people to calculate overhead and profit when they are calculating the premiums that they charge their customers for the same coverage?

It would be reasonable to think that insurance companies would calculate the same overhead and profit, if not less, at the time of underwriting costs of construction. After all, insurance to value provides for new construction replacement costs, which are lower than repair construction values. But veteran readers of this blog know where this is going……

Analyze the above scan taken from a document instructing Farmers policyholders how to determine the cost to insure their homes. Can you divide ……by …… ? What does that equal? Bingo!! Twenty-Five Percent Overhead and Profit!!

Insurance company appraiser Jonathon Held, who promotes a much lower profit and overhead figure when he presents his knowledge of pricing to umpires, must be falling off his chair as he reads this. He is not alone. I expect that Farmers Insurance claims managers are wondering how many regulators will ask this question and how many bad faith lawsuits might arise from their customers’ reliance on this document. How will Farmers respond to customers who ask why its sales agents calculated twenty-five percent for overhead and profit when calculating their premiums when its adjusters calculate a substantially lower percentage when adjusting their claims. Farmers’ home office counsel are probably wondering if some smart class action attorneys may sue them for an extra five percent of all the claims payments that provided only twenty percent—at best—for overhead and profit.

The truth is that everybody in the insurance and restoration industry knows that general contractors generally need at least a thirty-eight to forty-two percent profit margin to break even. Restoration contractor associations teach this at their seminars. Even Belfor and ServoPro, dominant insurance industry stalwarts, estimate margins much higher than twenty percent when bidding jobs, even though their Xactimate estimates show something completely different.

Which begs the question…

Is Xactimate really exact? I can hear your laughter whether you want to admit it or not.

California Supreme Court Provides Clarity to California’s Prompt Payment Exception

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Timothy L. Pierce and Heather L. Frisch | K&L Gates | May 23, 2018

The California Supreme Court issued an opinion on May 14, 2018 in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. that resolves a split in authority regarding whether Civil Code Section 8814 excuses prompt payment of retention by an owner or prime contractor if a good faith dispute of any kind exists between the parties or only when there is a dispute over the work for which the retention is due. The Court held that a contractor is only entitled to withhold retention when there is a dispute arising out of the work on which the retention is based.

In United Riggers, the prime contractor, Coast Iron & Steel Co. (Coast Iron), entered into a contract with the owner, Universal Studios, and in turn subcontracted a portion of the work to United Riggers & Erectors (United Riggers). United Riggers submitted its final bill that included additional costs for increased expenses due to Coast Iron’s alleged mismanagement and outstanding change order requests. Coast Iron accepted the work completed by United Riggers, but disputed the additional costs. Coast Iron then used this dispute as justification to withhold the entire final payment, including the retention payment for the accepted work.

United Riggers filed suit against Coast Iron for, among other things, its failure to make prompt payment of the retention monies it had received from Universal according to California Civil Code Section 8814. Notably, by the time the bench trial took place, Coast Iron had paid the outstanding retention to United Riggers. This action did not moot the statutory claim because violation of the prompt payment statute can result in a monetary penalty and payment of attorney’s fees under Civil Code Section 8818.

Coast Iron argued that the Court should adopt the broad view of the statute held in Martin Brothers Construction, Inc. v. Thompson Pacific Construction (2009) that held any bona fide dispute between the parties can justify the withholding of retention. In particular, Coast Iron pointed out the lack of any express limit on the nature of the dispute contained in the Section 8814 exception. On the other hand, United Riggers argued for the narrow interpretation of Section 8814 held in East West Bank v. Rio School District (2015) which restricts justification for withholding retention payments to disputes related to the security purpose of retention. East West Bank highlighted the underlying purpose of the prompt payment statutes was “to ensure timely payment of the retention as soon as its narrow justifications have been served.”

The Court considered the legislative history of Section 8814 and held that its narrow interpretation of the prompt payment statute aligns with the statute’s underlying purpose to ensure timely payment of undisputed amounts to contractors while still allowing the retention to fulfill its security purpose. Retention may be withheld when: (1) the subcontractor’s construction-related performance is the subject of a good faith dispute, (2) the liens or other demands from third parties expose the direct contractor to double payment, or (3) when payment would result in the subcontractor receiving more than the minimum amount both sides agree is due. Under United Riggers, withholding retention is not justified because of a dispute whether additional amounts beyond the retention might be owed such as pending requests for change orders.

Foiling the Expert Battle in First-Party Property Cases

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Eric K. Bowers and Victoria L. Vish | Zelle LLP | May 11, 2018

Every litigator knows the term “battle of the experts.” This is commonly heard in first-party property cases. Usually the term suggests uncertainty, i.e. that the jury will hear both sides’ experts and simply pick one. But winning the war in these cases often means avoiding the expert battle altogether, by challenging — and excluding — the other party’s expert testimony. It cannot be overstated: winning or losing a property case often turns on the credibility and, in the first instance, admissibility, of expert testimony. This is because without expert testimony, many property insurance cases cannot be proven.

Designate your experts with sufficient specificity for discrete subject areas and avoid generalized, broad disclosures. Make sure your expert has reviewed your draft disclosures and is comfortable with the subjects on which he or she is being designated before making your expert disclosures, so the individual can appropriately qualify as an expert on that matter. Show the expert the designation again before they are deposed to address any questions the expert may have about the designation.

The Basics of Expert Testimony

Following the United States Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceutical, Inc., federal trial court judges are charged with the duty of acting as initial “gatekeepers” and determining whether challenged expert witness testimony is relevant and reliable before it may be presented to the factfinder.[1]

The trial court must first determine whether the proffered expert testimony is relevant, that is, whether it has any tendency to make a fact more or less probable than it would be without the evidence; and whether the fact is of consequence in determining the action.[2] To be relevant, the proposed testimony must be “sufficiently tied to the facts of the case that it will aid the jury in resolving a factual dispute.”[3] If the trial judge determines that the proffered testimony is relevant and reliable, he or she must then determine whether to exclude the evidence because its probative value is outweighed by the “danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, or needless presentation of cumulative evidence.”[4]

Like federal trial courts under the Daubert test, Texas trial courts are also endowed with the responsibility of acting as the evidentiary gatekeeper and have broad discretion to determine the admissibility of evidence.[5] Under Texas law, the testimony of a qualified expert may be precluded if it is unreliable. The unsupported opinion of even the most qualified expert is of no assistance to the jury.[6] Testimony that is not grounded in accepted methods and procedures constitutes nothing more than “subjective belief or unsupported speculation.”[7] The requirement has its roots in Texas Rule of Evidence 702, which provides:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.

While the Texas rule is virtually identical to Federal Rule of Evidence Rule 702, it omits parts (b)-(d) of Federal Rule of Evidence 702 (the subparts incorporating Daubert and Kumho Tire Co. Ltd. v. Carmichael, 526 U.S. 137, (1999)). This is inconsequential, however, because the Texas Supreme Court and Court of Criminal Appeals have both articulated standards concerning the admissibility of expert testimony that are consistent with the federal rule’s text.[8] In short, Rule 702 focuses on assessing the reliability of expert testimony.[9]

In Texas, for expert testimony to be admissible: (1) the expert must be qualified; and (2) the testimony must be relevant and be based on a reliable foundation.[10] Thus, an expert’s opinions must be both relevant and reliable.[11] Unreliable evidence is of no assistance to the trier of fact and is therefore inadmissible under Rule 702.[12] To further guide trial courts in assessing reliability, the Texas Supreme Court has crafted two tests: the Robinson factor analysis and the “analytical gap” test.[13] Further, and particularly important to many first-party cases, the Texas Supreme Court has determined that expert testimony is unreliable if it fails to rule out other plausible causes.[14] The Robinson factors for gauging the reliability of an expert’s methodology include:

1) the extent to which the theory has been or can be tested;

2) the extent to which the technique relies upon the subjective interpretation of the expert;

3) whether the theory has been subjected to peer review and/or publication;

4) the technique’s potential rate of error;

5) whether the underlying theory or technique has been generally accepted as valid by the relevant scientific community; and

6) the non-judicial uses which have been made of the theory or technique.[15]

Robinson teaches that, in addition to demonstrating that an expert witness is qualified to testify under Texas Rule of Evidence 702, the proponent of the evidence must demonstrate the expert’s testimony is relevant to the issues and based on a reliable foundation.[16]

Complementing the Robinson standard, a trial court properly excludes expert testimony as unreliable under the “analytical gap” test if: (1) the foundational data underlying the opinion is unreliable; (2) the methodology used by the expert to interpret the underlying data is flawed; (3) notwithstanding the validity of the underlying data and methodology, there is an analytical gap in the expert evidence; or (4) the expert fails to rule out other plausible causes.[17] In applying this reliability standard, however, the court does not decide whether the expert’s conclusions are correct; rather, the court determines whether the analysis used to reach those conclusions is reliable.[18] The Texas Supreme Court noted in Merrell Dow Pharmaceuticals Inc. v. Havner:

If the foundational data underlying opinion testimony are unreliable, an expert will not be permitted to base an opinion on that data because any opinion drawn from that data is likewise unreliable. Further, an expert’s testimony is unreliable even when the underlying data are sound if the expert draws conclusions from that data based on flawed methodology. A flaw in the expert’s reasoning from the data may render reliance on a study unreasonable and render the inferences drawn therefrom dubious. Under that circumstance, the expert’s … testimony is unreliable and, legally, no evidence.[19]

Moreover, an “analytical gap” renders an opinion unreliable, such as the failure to rule out other possible causes of a particular injury or condition.[20] For instance, in a case where an insurance carrier denied its insureds’ claim for foundation damage, the court relied on Gammill and found that the expert left an “analytical gap” between his observations and his conclusions on causation. Because the expert failed to rule out other causes of the damage and merely made assumptions attempting to rule out settlement and tree influence, his causation conclusion was simply “unreliable.”[21]

Types of Expert Opinions in First-Party Property Cases

Causation Causation opinions based on possibility, speculation and surmise are not evidence.[22] Texas courts have consistently held that an expert’s testimony on causation can be unreliable if the expert fails to rule out other plausible causes.[23]

In State Farm Lloyds v. Hamilton, for example, the carrier argued that the conclusions of the insured’s expert were ipse dixit (i.e., dogmatic and unsupported opinions).[24] The court explained, however, that the expert had sufficiently connected his observations and data concerning the leak, soil samples and the foundation movement.[25] State Farm also argued that the insured’s expert failed to rule out historical facts such as placement of footings and installation of a shelf and drain reasonably explaining why the insured’s entire foundation tilted.[26] The court nevertheless held that the expert’s opinion was not unreliable, because all other possible causes were eliminated before concluding that a plumbing leak was the cause of the foundation damage. Moreover, the court held the testimony was not conclusory because the opinions were based on facts and analyses that were made available to the jury.[27]

Try to elicit testimony from an opposing causation expert acknowledging other potential causes of the damage observed. Then probe for an admission that the expert did not reliably rule out the other potential cause(s).

Scope of Damage and Valuation

Expert opinions with respect to the scope of damage in first-party cases, especially those involving weather events, can often incorporate the expert’s opinion on causation. In first-party property cases, insureds may suffer damage by multiple causes of loss. Some of the damage may be concurrent; that is, caused at the same time by two or more contributing factors. Others may not be concurrently caused. This is particularly important when some of the causes are covered and others are not.

A typical policy definition of “replacement cost” is “the amount it would take to replace property with property of the same kind and quality, determined at the time of loss.” “Actual cash value” is commonly defined as “the replacement cost, at the time of loss, of the property damaged or destroyed, less depreciation.” Under a replacement cost value, or RCV, policy, the insured typically must repair or replace the damaged property to recover the full replacement cost; otherwise, the insured may recover only the actual cash value.

Many policies require the insured either to repair or replace, or notify the carrier of its intent to repair or replace, within a certain time period to be able to recover the holdback/depreciation. Failure to comply with this notice requirement bars any later claim for replacement cost coverage.[28]

Often when the insured has not made repairs or, in some cases, has not elected RCV coverage under an applicable notice period, a damage expert’s valuation of the loss on a replacementcost basis may not be admissible. If an expert merely equates actual cash value with replacement cost value or otherwise fails to deduct depreciation to calculate actual cash value, the testimony is not helpful to the jury and is not probative of actual cash value. Under these circumstances, expert opinion testimony as to replacement cost value amount is inadmissible, because it does not relate to any issue before the jury and should be excluded under Rule 402, which deals with the admissibility of only relevant evidence. Moreover, a jury hearing testimony on the amount of replacement cost, without accounting for depreciation, might be misled into believing that actual cash value need not account for depreciation. The jury might therefore erroneously equate actual cash value with replacement cost value. Rule 403 considerations such as confusing the issues or misleading the jury should be cited to challenge such testimony in this situation.

Expert testimony should be challenged on all potential grounds, if possible, so no potentially valid argument is left unasserted.

Conclusion

Expert witnesses are often crucial to coverage/causation and damages issues in first-party property insurance cases. The shrewd litigator will not dismiss these issues merely as a “battle of the experts,” but instead will see them as opportunities make their case and undermine the opposition’s case. By using the evidentiary rules and case law to challenge the other side’s expert opinions, you just might win the war without ever having to engage in a “battle of the experts.”

 

[1] 4 McDonald & Carlson Tex. Civ. Prac. § 21:59 (2d. ed.) (citing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993)).

[2] Tex. R. Evid. 401.

[3] E.I. du Pont de Nemours & Co., Inc. v. Robinson, 923 S.W.2d 549, 556 (Tex. 1995) (citing Daubert, 509 U.S. at 589-93).

[4] Tex. R. Civ. Evid. 403.

[5] See Robinson, 923 S.W.2d at 556; City of Sugarland v. Home and Hearth Sugarland, L.P., 215 S.W.3d 503, 510 (Tex. App.—Eastland 2007); Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 719 (Tex. 1998).

[6] Cooper Tire & Rubber Co. v. Mendez, 204 S.W.3d 797, 801 (Tex. 2006).

[7] Gharda USA, Inc. v. Control Solutions, Inc., 464 S.W.3d 338, 348 (Tex. 2015).

[8] Testimony by Expert Witnesses, 2A Tex. Prac., Handbook on Texas Evidence R. 702.

[9] The Committee Note to Rule 702 explains the rule was amended in response to Daubert, 509 U.S. 579. Under Daubert, expert testimony is admissible only if the proponent demonstrates that: (1) the expert is qualified; (2) the evidence is relevant to the suit; and (3) the evidence is reliable. See Watkins v. Telsmith, Inc., 121 F.3d 984, 988–89 (5th Cir. 1997).

[10] Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 499 (Tex. 2001).

[11] Id; Gammill, 972 S.W.2d at 726.

[12] Robinson, 923 S.W.2d at 557.

[13] Gammill, 972 S.W.2d at 727; Robinson, 923 S.W.2d at 556.

[14] Merrell Dow Pharmaceuticals, Inc. v. Havner, 953 S.W.2d 706, 720 (Tex. 1997); Robinson, 923 S.W.2d at 559.

[15] Robinson, 923 S.W.2d at 557.

[16] State Farm Lloyds v. Mireles, 63 S.W.3d 491, 493–94 (Tex. App.—San Antonio 2001, no pet.) (citing Robinson, 923 S.W.2d at 556).

[17] See Kimberly S. Keller, Bridging the Analytical Gap: The Gammill Alternative to Overcoming Robinson & Havner Challenges to Expert Testimony, 33 St. Mary’s L.J. 277, 302–20 (2002).

[18] Havner, 953 S.W.2d at 728; Southland Lloyds Ins. Co. v. Cantu, 399 S.W.3d 558, 563 (Tex. App.—San Antonio 2011, pet. denied).

[19] 953 S.W.2d 706, 714 (Tex. 1997), cert. denied, 523 U.S. 1119.

[20] Mireles, 63 S.W.3d at 494 (citing Gammill, 972 S.W.2d at 727); Weiss v. Mechanical Associated Servs., Inc., 989 S.W.2d 120, 126 (Tex. App.—San Antonio 1999, pet. denied).

[21] Mireles, 63 S.W.3d at 499–500.

[22] Havner, 953 S.W.2d at 711–12.

[23] See, e.g., Allstate Tex. Lloyds v. Mason, 123 S.W.3d 690, 698 (Tex. App.—Fort Worth 2003, no pet.).

[24] 265 S.W.3d 725 (Tex. App.—Dallas 2008, pet. dism’d).

[25] Id. at 731.

[26] Id.

[27] Id. at 733-34. See also Gulley v. State Farm Lloyds, 461 S.W.3d 563, 575 & 577 (Tex. App.—San Antonio 2014, pet. denied).

[28] See, e.g., Devonshire Real Estate & Asset Mgmt., L.P. v. American Ins. Co., 2014 WL 4796967 *5 n.5 (N.D. Tex. Sept. 26, 2014) (unpub.) (noting that while the insured cannot claim RCV without first repairing or replacing, it could invoke the two-step process of electing ACV and then later submitting an additional claim for any repair costs that it incurred in excess of the ACV already paid).

After Turnover Do a Developer’s Actions (or Inaction) Affect an Association’s Construction Defect Claims? YES

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Daniel Miske | Husch Blackwell | May 23, 2018

Yes, developers can be lazy, greedy good for nothing con-artists. Developers can also adversely affect the rights of an association by simply doing nothing.  Specifically, a developer (owner of the property and declarant of the association) with knowledge of construction defects can prevent the association and/or unit owners, after turnover, from potentially suing the contractor and/or engineer for construction defects.

Facts. In a 2017 case we learned that in the late 1990s a high rise apartment was built in New Jersey.  In 2004 it was converted into a condominium by 100 Old Palisade, Inc.  As part of the conversion, an engineer inspected the property and issued a report to the developer/declarant noting concrete spalling and cracking.  In 2006, the period of declarant control ended.  The association then hired its own engineer who issued a report in 2007 detailing various construction defects, upon which a series of lawsuits were filed beginning in 2009.

Decision. The court reasoned that an owner (even a declarant) with knowledge can’t sell a unit and thereby have a cause of action “spring to life.”   In other words, the time can’t be extended by some sale of the units or turnover of the association.  So by doing nothing, the prior owner of the property (the developer/declarant) who knew or should have known of the defects, thereby starting the clock on the statute of limitations, ended the ability of the association to sue on some causes of action because the time had passed.

Lesson.  When an association takes over control, it is imperative that the association immediately hire an engineer and thoroughly inspect the property for any defects.  If any exist, the association should retain a qualified and experienced attorney to advise the association as to its options, including what causes of action might exist against the developer, former board members, contractors, architects and/or engineers.

In a Matter of First Impression, the Supreme Court Reverses Trial Court: No “Evident Miscalculation” in Arbitration Award

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Katherine Kohm, Esq. | The Dispute Resolver | May 24, 2018

The Supreme Court of Mississippi in D. W. Caldwell, Inc. v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT, — So.3d.– (Miss. May 10, 2018) reversed and remanded a trial court’s modification of an arbitration award for “evident miscalculation.”  The Supreme Court held that “evident miscalculation of figures was not apparent from face of arbitration award, and thus, modification of the award was not warranted.” The Supreme Court remanded for the trial court to confirm the award.

The underlying dispute concerned a roofing subcontract for a dormitory at Auburn University.  After the subcontractor started work, it discovered structural issues that needed to be addressed before roofing could begin.  The general contractor and the subcontractor agreed that the subcontractor would perform the structural repairs and then complete the roofing.  However, subcontractor was not paid in full for both the repair change order and the original roofing scope.  A dispute arose and the parties arbitrated.  The arbitrator issued a reasoned award in favor of the subcontractor. The general contractor requested clarification of this award, which the arbitrator denied, and then proceeded to Mississippi trial court on a motion to “alter, amend, or vacate the award.” The subcontractor, for its party, moved to confirm the award.

In Mississippi, like many other states, the grounds justifying an amendment or correction to an arbitration award are quite limited including only: “(a) an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy.”  Miss. Code. Ann. § 11-15-135.

The trial court “believing that an evident miscalculation was present as it related to the retainage amounts” denied the subocontractor’s motion to confirm the award and instead allowed the general contractor to introduce new evidence and witness testimony as to the miscalculation.  The trial court held that there was a “facially evident miscalculation” as “the arbitrator had duplicated the labor costs for shingle installation in its award–once under the original subcontract and once under the oral agreement to repair the structural damage [and] amended the award, reducing the total by $104,507.”

The subcontractor appealed the trial court decision and the Mississippi Supreme Court reversed holding that “arbitrator’s award contained no evidentmiscalculations which would merit modification.” The Court first focused on the extreme narrowness of arbitration review, but also acknowledged that “what amounts to an evident miscalculation” had not previously been decided by this Court.  After reviewing cases from other jurisdictions it decided on this definition: an “evident (plain, obvious, or clearly understood) miscalculation must be apparent from nothing more than the four corners of the award and the contents of the arbitration record.” Indeed the moving party must be able to show “[w]ithout looking outside the undisputed facts or relying upon testimony from a witness in the trial court” that “a different, but correct, calculation could be made.”  In the instant case, the Court examined “the thirteen-page award for any facially evidentmiscalculations or computational errors. In doing so, [it found] that no such errors [were] present. Looking next to the attorney-written arguments, oral arguments, and agreed-upon record evidence, [it] likewise failed to find such errors.”  In sum, the court “fail[ed] to find that the arbitrator erroneously duplicated costs of labor and relied on such a duplication in making his award. Nor [did the Court] ascertain that the arbitrator erred by excluding the retainage totals.”

In reaching this holding, the Mississippi Supreme Court also held that the trial court had abused its discretion by hearing and crediting witness testimony during the award modification hearing.  The trial court took additional testimony regarding the cost of the structural repairs in order to determine whether and to what extent there was an evident miscalculation of figures in the award. The Supreme Court emphasized that “arbitration is meant to supplant litigation, not supplement it” and that the trial court’s error “transformed . . . the very narrow and limited purpose of its review [impermissibly]  imbu[ing] it with the responsibility of the factfinder.” Note that trial court’s abuse of discretion was not the linchpin of its evident miscalculation decision.