Colorado Notice Standard Update For Residential and Commercial Property Damage

Timothy Burchard | Property Insurance Coverage Law Blog | August 24, 2018

Many of us in Central Colorado remember the hail storm that wreaked havoc on the Denver metro area in May 2017. What happens when hailstorm damage to your property does not manifest itself for a period of months, or even a year later? Should a claim be denied for being reported once discovered? Unfortunately, the standard surrounding late notice continues to be unclear in the Colorado courts today.

Earlier this year my colleague, Jonathan Bukowski, discussed the 2017 Colorado Federal Court decision rendered by Judge Arguello,1 where the trial court applied the Traditional Notice Ruleto the issue of late notice, providing that “failure to notify the insurer within a reasonable time constitutes a breach of that contract requiring a justifiable excuse or extenuating circumstances explaining the delay.” In relying upon the Traditional Notice Rule, Judge Arguello concluded that the policyholder’s lack of familiarity or sophistication in insurance matters was not a justifiable excuse for its delayed notice to the insurance carrier. In short, ignorance of contractual requirements, does not excuse the duty to notify your insurance carrier of a potential covered claim.

More recently, Colorado Federal District Court Judge Martinez, issued an opinion in Sunflower Condominium Association v. Owners Insurance Company,2 in which he applied the Notice-Prejudice Rule, instead of the Traditional Notice Rule. Importantly, unlike the more stringent Traditional Notice Rule which requires proof of a justifiable excuse for delay in notifying a carrier of covered damages, the Notice-Prejudice Rule offers policyholder’s the opportunity requires the court to:

  1. Determine whether an insured provided their notice timely, through evaluation of whether the timing of the notice and the reasonableness of any delay;
  2. If such notice is determined untimely was the delay unreasonable, determine whether the insurance carrier was prejudiced by such untimely notice.

Located in Aurora, Colorado, the Sunflower property is a multi-family complex of condominiums which sustained damages resulting from a hail and wind storm that occurred on September 29, 2014. Sunflower first submitted its claim for storm caused damages over fourteen months later in December 2015. When Sunflower and Owners could not agree upon the amount of loss, Sunflower filed suit for breach of contract and the unreasonable delay and denial of covered benefits.

During litigation, the court considered several facts demonstrating Sunflower may have been aware of the damages much earlier and could have provided notice sooner – a Sunflower board member had filed a claim for damages to her car one month after the hail storm, the board had received a work proposal for the property that indicated hail damage in April 2015, and a contractor informed a Sunflower board member of the hail damage during a phone call that summer.

Agreeing that Sunflower had multiple opportunities to deliver notice to Owners sooner, Judge Martinez ultimately determined that the timing of Sunflower’s notice was untimely and unreasonable. Judge Martinez then turned to the second step of the Notice-Prejudice Rule – did the untimely notice prejudice the insurance carrier’s investigation of the claim. Judge Martinez ultimately determined that Owners investigation had been prejudiced by Sunflower’s unreasonable delay in providing notice of the claimed damages, as multiple hail storms had occurred between the claim and the September 2014 hail storm.

While this decision led to the unfortunate demise of Sunflower’s claim, Judge Martinez’ pivot towards the Notice-Prejudice Rule may provide Colorado policyholders a step towards the majority approach applied throughout the country. This approach provides a more level playing field between policyholders and insurance carriers, and hopefully it is a step towards a new standard in Colorado. However, the Sunflower case provides an important reminder to always provide notice to the insurance carrier at the first sign of damage to your property to avoid any late notice arguments down the road. While you may have strong and supportable reasons for delaying notice to an insurance carrier of covered damages, the court can always see things differently.
1 Cherry Grove East II Condo. Assoc. v. Philadelphia Indem. Ins. Co., No.1:16-cv-02687 (Colo. D. Dec. 27, 2017).
2 Sunflower Condo. Assoc., Inc. v. Owners Ins. Co., No. 1:16-cv-2946-WJM-NYW (Colo. D. May 14, 2018).

The Challenges in Mediating Multi-Defendant Cases

Richard P. Byrne, Esq. | National Arbitration & Mediation | July 2018

One of the challenges a Mediator faces is multi-defendant litigation where the defendants are consumed with the issues among and between each other and are drawn more to in-fighting than in addressing the claims of the plaintiff.

This can materialize not only through the traditional debates over liability and exposure as presented in cross-claims and third-party practice, but via questions of contractual indemnity, insurance coverage and the scope/priority of that coverage – issues which, in and of themselves, can present layers of intense complexity.

There are a number of ways a Mediator can confront this situation and endeavor to posture the matter to allow for effective negotiations and, hopefully, a global resolution.

The first – and optimal – scenario is to develop an allocation structure whereby the defendants agree to percentage contributions and, upon doing so, set aside the claims among one another, focusing solely on their common interests vis-à-vis the plaintiff. Of course, this is much easier said than done. To begin, the Mediator needs to identify the points on which the defendants (or sub-sets of the defendants) have common interest. The corresponding effort is to aggregate those issues on which the defendants differ among themselves and to assess which “camps” each may belong.

Once the issues among the defendants are adequately identified, a hierarchy needs to be developed, placing each defendant on a spectrum for purposes of participation at the Mediation. Ideally, an acknowledgment should then be secured from the defendants, if at all possible, that the line-up is not arbitrary or irrational and that, in an admitted fashion of “rough justice”, the hierarchy could form a foundation for continued discussions.

Next, those discussions should move into the realm of allocated percentages of participation, so that a means of funding can be constructed. (One of the interesting exercises for a Mediator in this regard is to have the defendants privately provide their proposed allocations to see where consensus may lie.) Of course, each and every defendant will inevitably say “it ultimately depends on a percentage of what…”, but that is a signal to the Mediator that the dialogue can proceed to the collective interest of the defendants – that is, contesting the claims of the plaintiff and disputing their value. Also, it is helpful to seek understanding on what the defendants agree would represent a reasonable settlement range. And, hopefully, by this point, the defendants are beginning to eye the prospect of resolution.

It is often not possible, however, to get defendants to agree on percentage allocations. In that instance, although less desirable from a process standpoint, the Mediator can solicit individual offers which are then pooled and presented to the plaintiff as a global offer. The difficulty with this approach is that once the defendants learn of each other’s offers, they then may take stock of where they stand relative to one another, calculate the percentages to the whole, and digress to their original positions – with the in-fighting resumed.

An alternative to that scenario is to have the defendants bid blindly with the Mediator gathering up individual contributions confidentially and then packaging them together for a global offer to the plaintiff. While the defendants learn of the global counter-demand to the packaged offer, they are not privy to each other’s individual contributions. Unless and until, that is, a settlement is announced and the individual offers are revealed. Once this occurs, though, one or more of the defendants may be displeased when they see how their contributions stand relative to the other defendants and the overall settlement figure. This needs to be ameliorated, on an anticipatory basis, by the Mediator reminding each defendant in caucus during the negotiations that they should be making offers based on an independent assessment of their potential liability and exposure – untied to what that party believes a co-defendant may or should be contributing.

If the “blind” negotiation process is not successful, a sub-option is for the Mediator to endeavor to privately secure a “rock bottom” figure from the plaintiff and then provide a recommended figure to each defendant – individually and confidentially – with the group of defendants thereafter being advised, collectively, that if they all provide a “Yes” to their recommended contribution, the case is settled, but that if any one returns with a “No” the negotiations will come to an end. It is important here that both the plaintiff’s “rock bottom” number and the amounts sought of each defendant be kept confidential unless a settlement is achieved in order to insure that no party’s position is compromised. This option is admittedly a “Hail Mary” pass to be used in a last ditch effort to settle the matter, although it is conceivable that if there is only one or two hold-outs, further cajoling by the Mediator may prove warranted.

A separate option if the defendants cannot agree to a percentage allocation or to individual negotiations (in the open or blindly) is for the Mediator to again seek to secure that “best and final” figure from the plaintiff, but this time with the understanding that the Mediator will simultaneously seek the defendants’ agreement to arbitrate their differences and pay that sum within a defined time period. In other words, the goal is to try to reach a figure with the plaintiff that all defendants agree is not unreasonable with the understanding that the defendants will then arbitrate their differences and secure a determination of who is responsible to pay what share of that figure within a set time frame, e.g., 90 or 120 days. Perhaps not surprisingly, some defendants (and/or their insurers) are hesitant to agree to this process; however, any hesitation needs to be balanced against the continuing cost and increased exposure of on-going litigation in which the defendants are pointing fingers at one another and effectively assisting the plaintiff make their case. In contrast, an Arbitration, which can be designed to capture the entirety of the defendants’ disputes (including any attendant insurance coverage issues) will provide speed and finality at a reduced cost with a capped exposure.

The bottom line is that a Mediator faced with the challenges of a multi-defendant action needs to find the most effective mechanism to defuse the inter-defendant claims in order to promote productive negotiations with the plaintiff and secure a comprehensive resolution for all concerned.

Anatomy of a Construction Dispute- An Alternative

Christopher G. Hill | Construction Law Musings | July 18, 2018

Over the past three weeks, I’ve discussed three “stages” of a construction dispute from the claim, to how to increase the pressure for payment, to the litigation. While these three steps are all too often necessary tools in your construction collection arsenal, they are expensive and time consuming. No well run construction business can or should budget for litigation. The better practice would be to engage a construction attorney early in the process and avoid the dispute altogether if possible. Unfortunately, even the best of planning can lead to the need to hire a construction lawyer for the less pleasant task of assisting you in getting paid.

This post is about an alternative to the scorched earth of stage 3 of the process that can and should be at least considered either before or after the complaint or demand for arbitration has been filed. I am of course speaking about voluntary mediation. Why did I emphasize “voluntary?” Because to me mandatory mediation (as required in many construction contracts) is a bit like forced volunteerism, it is something that the parties will go through to “check a box” but will not have their hearts in it. Remember, by the time the mandatory mediation clause kicks in, the parties are likely at an impasse in their construction dispute and are ready to fight. Being forced to mediate, especially from the party seeking payment, can (and in my experience often does) make the parties just go through the motions at best and be hostile to the process at worst. Neither of these attitudes are conducive to resolving a dispute.

All of that said, and as anyone that has followed Construction Law Musings for any period of time knows, I am a HUGE fan of voluntary mediation. I am such a fan that I went through the additional time and effort to become a certified mediator here in Virginia. As opposed to mandatory mediation, when the parties decide that, as business people, they will sit down with a third party and try to come to a resolution that is at least one that they can live with, the process usually leads to the end of the dispute. Even in those instances where the process does not lead to an immediate resolution, mediation has its benefits.

I have personally gone into a mediation thinking that either my client (when I’m wearing my construction attorney hat) or the parties (when acting as a mediator) have no chance of settling their differences short of walking out and continuing to court and, with the help of a qualified mediator, have left with a resolution that seemed impossible. The parties managed to get past the anger and the “my way or the highway” battle cries of the arbitration and litigation worlds and find a way to walk out of the mediation at least equally displeased with the outcome. The two sides also walked out having removed the risk of a poor result in litigation and the certainty of a much higher attorney fee bill.

In short, before charging to the end of what I call “Stage 3- The Last Straw,” I always recommend that mediation be considered as an alternative to the long, expensive and risky litigation or arbitration process.

I recommend that you look to my ADR page here at Musings for more of my (and others’) thoughts on mediation and its benefits.

Connecticut Supreme Court Again Asked to Determine the Meaning of Collapse

Tred R. Eyerly | Insurance Law Hawaii | July 25, 2018

Faced with a series of policies, earlier ones which did not define collapse, newer policies which did, the court determined there was a possibility of coverage under the older policies which did not define collapse. Vera v. Liberty Mut. Fire Ins. Co., 2018 U.S. Dist. LEXIS 100548 (D. Conn. June 15, 2018).

Connecticut courts have faced a rash of collapse cases as a result of cement provided to build house foundations by J.J. Mottes Concrete Co. Many basement foundations built with the concrete have shown cracking and other signs of premature deterioration.

Here, plaintiffs noticed cracking in their basement. Their expert, William Neal, found “spider web cracking” and several vertical external cracks. But the house did not show any signs of falling down. The expert believed the cement was the cause of the cracks. Mr. Neal recommended replacing the basement walls.

Plaintiffs submitted a claim to Liberty. Liberty sent an inspector to the home. After the inspection, the claim was denied because the cracking was due to faulty, inadequate or defective materials along with settling.

The policy covered collapse as follows:

8. Collapse. We insure for direct physical loss to covered property involving collapse of a building or any part of a building caused only be one or more of the following . . .

b. Hidden decay

The policy had exclusions for faulty, inadequate or defective design, workmanship, construction, etc.

In a prior case, the Connecticut Supreme Court defined collapse as the  “substantial impairment of structural integrity” of a building or any part of a building. Beach v. Middlesex Mut. Assur. Co.,, 532 A. 2d 1297, 1300 (Conn 1987). Since Beach, no Connecticut appellate court had explained what “substantial impairment of structural integrity” meant. It was not clear how “substantial” an impairment needed to be to constitute “collapse.”

Therefore, the court certified the following question to the Connecticut Supreme Court:

What constitutes a “substantial impairment of structural integrity” for purposes of applying the “collapse” provisions of this homeowners’ insurance policy?

The same question was previously certified to the Connecticut Supreme Court by Judge Underhill, another Federal District Court Judge from the District of Connecticut [post here].

Is Being Named As An “Additional Insured” On An Insurance Endorsement Sufficient To Provide

Henry L. Goldberg and Michael J. Hogan | Moritt Hock & Hamroff | August 22, 2018

The New York Court of Appeals (New York’s highest court) recently held that being named as an additional insured on a Certificate of Insurance might not, by itself, provide any coverage for additional insureds.

The Dormitory Authority of the State of New York (“DASNY”) contracted with general contractor Samson Construction Company (“Samson”) for construction of a new forensic laboratory for New York City. DASNY also contracted with a joint venture between Gilbane Building Company and TDX Construction Corporation (hereinafter, “Gilbane JV”) for Gilbane JV to be the construction manager on the project. DASNY’s contract with Samson provided that Samson would obtain general liability insurance for the job, with an endorsement naming as additional insureds as follows: “DASNY, the State of New York, the Construction Manager, Gilbane JV, and other entities specified on the Sample Certificate of Insurance provided by DASNY.” The Sample Certificate of Insurance listed as Additional Insureds under General Liability with respect to this project: … Gilbane/TDX Construction Joint Venture.” Samson obtained general liability insurance coverage from Liberty Insurance Underwriters (“Liberty”).

DASNY sued Samson and Perkins Eastman, Architects, P.C. (Perkins) (the project architect), alleging that Samson damaged the excavation support system in August of 2003 by negligently removing a section of steel plating which caused the foundation of the neighboring building to settle several inches. Perkins then commenced an action against Gilbane JV. Gilbane JV provided notice to Liberty, seeking defense and indemnity under the Liberty policy. Liberty denied coverage. Gilbane JV commenced a lawsuit, alleging that it qualified for coverage under the Liberty policy as “an additional insured.” The lower court denied Liberty’s motion for summary judgment, holding that Gilbane JV was an additional insured under the policy. The Appellate Division subsequently reversed the decision, granting Liberty’s motion for summary judgment, and the matter was appealed to the Court of Appeals.

The critical portion of the Liberty policy was the “Additional Insured-By Written Contract” provision, which read:

“WHO IS AN INSURED (Section II) is amended to include as an insured any person or organization with whom you have agreed to add as an additional insured by written contract but only with respect to liability arising out of your operations or premises owned by or rented to you.”

Gilbane JV had no written contract with Samson naming Gilbane JV an additional insured, but argued that no such contract is necessary as that requirement would conflict with the plain meaning of the Liberty endorsement, as well as “well-settled rules of policy interpretation” and the parties’ reasonable expectations. The Court of Appeals concluded that Gilbane JV’s argument was meritless; the endorsement is facially clear and does not provide for coverage unless Gilbane JV is an organization “with whom” Samson has a written contract.

The Court of Appeals found that the endorsement would have the meaning Gilbane JV desired if the word “with” had been omitted. Omitting “with”, the phrase would read: “… any person or organization whom you have agreed by written contract to add …” and Gilbane JV’s position would have had merit. But, the Court of Appeals pointed out Samson and Liberty included the “with” in the contract between them, and it must be given its ordinary meaning. The “with”, in the Court’s opinion, can only mean that the written contract must be “with” the additional insured. The Court of Appeals found the endorsement’s meaning to be plain and unambiguous.

Gilbane JV attempted to offer extrinsic materials, including the sample certificate of insurance, in support of its argument that it reasonably expected to be covered by the policy, and relied heavily on the contract between DASNY and Gilbane JV, which required Samson (as the prime contractor) to name Gilbane JV as an additional insured on all liability policies obtained by Samson. This approach was rejected by the Court of Appeals, holding that “[e]xtrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide.” The Court of Appeals concluded that Gilbane JV might have a claim against Samson for failing to obtain additional insured status for Gilbane JV, but that breach would not permit the Court to rewrite Samson’s contract with Liberty.

MH&H Commentary

Clearly, based upon the foregoing Court of Appeals decision, being named as an additional insured on an Insurance Certificate does not convey coverage to the named insureds in all instances. In order to guarantee coverage, the “additional insurance” provision or endorsement itself must be obtained and reviewed. If such provision or endorsement contains the controversial “with” (as the Liberty provision did) there must be a written contract between the additional insured and the contract holder (insured) of the General Liability Policy for coverage to exist.