Monthly Archives: December 2018

Allocation of Risk in Construction Contracts – 2018 Update

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Ellis Baker, Luke Robottom and Anthony P. Laver | White & Case | December 14, 2018

Risk in construction contracts

‘Risk’, in a project delivery context, can be defined as ‘an uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of one or more of the project’s objectives’.1 Risk exists as a consequence of uncertainty, and, in any project, the exposure to risk produced by uncertainty must be managed.2 

Construction projects are often complex, highly technical and of high value, and can have construction periods that may span a number of years. Common risks prevalent in construction projects include weather, unexpected job conditions, personnel problems, errors in cost estimating and scheduling, delays, financial difficulties, strikes, faulty materials, faulty workmanship, operational problems, inadequate plans and specifications, and natural disasters.3 Projects will also have additional specific risks, dependent on the nature of the project and its surrounding circumstances.

Although the volume and nature of contractual documentation for a construction project will vary as a consequence of the nature of the project, its scale and the procurement methodology adopted,4 a construction contract may be simply described as a contract between a contractor and an employer whereby one person (the contractor) agrees to construct a building or a facility for another person (the employer) for agreed remuneration by an agreed time.5 A construction contract will include a compact of rights and obligations6 between the parties by which the parties pre-allocate responsibilities between themselves in respect of certain risks that may transpire during the contract’s execution. In doing so, the parties define the impact of such risks on the three key elements of the construction: the product or facility that is to be constructed by the contractor, the time at which the product or facility must be completed by the contractor and the amount the employer is obliged to pay the contractor. The collective allocation of such risks in a construction contract represents its ‘risk allocation’.

 

Pursuit of a ‘fair and equitable’ allocation of risk

Typically, in preparing the contract document bid package, the employer will be in a position to decide on its intended risk allocation. While there may be, in such circumstances, a temptation to allocate major risks to the contractor, this must be tempered by an understanding of the adverse consequences of unilaterally assigning risk where doing so may preclude the submission of bids or result in such an increase in cost that the project is no longer financially viable.7 Improper risk allocation may also result in prolongation of construction completion times, wastage of resources and increased likelihood of disputes. As Shapiro states, ‘proper risk identification and equitable distribution of risk is the essential ingredient to increasing the effective, timely and efficient design and construction of projects. If the parties to the construction process can stop thinking in an adversarial manner and work in a cooperative effort towards obtaining an equitable sharing of risks based upon realistic expectations, the incidence of construction disputes will be significantly reduced.’8

While it is possible for parties to negotiate the terms of a construction contract individually, the possibility of unwanted variance and scope for abuse of bargaining power on both sides has led to a number of standard form contracts being developed by various entities, and it is now common in major projects for one of these standard forms to be used as the basis for the final construction contract.9 One of the pervasive features of standard form contracts is an attempt to produce a ‘fair and balanced’ allocation of risk.10 The rationale for pursuing this is that doing so will provide the best chance of successful project delivery. Echoing Shapiro, Lane notes that, ‘[a] contract which balances the risks fairly between a contractor and an employer will generally, in the absence of bad faith, lead to a reasonable price, qualitative performance and the minimisation of disputes.’11

Abrahamson suggests that to achieve a fair and equitable allocation of the risks inherent in construction projects, a risk should be allocated to a party if:

  • the risk is within the party’s control;
  • the party can transfer the risk, for example, through insurance, and it is most economically beneficial to deal with the risk in this fashion;
  • the preponderant economic benefit of controlling the risk lies with the party in question;
  • to place the risk upon the party in question is in the interests of efficiency, including planning, incentive and innovation; and/or
  • the risk eventuates, the loss falls on that party in the first instance and if it is not practicable, or there is no reason under the above principles, to cause expense and uncertainty by attempting to transfer the loss to another.12

Commenting on this, Bunni notes that, while the principle of control of a risk is a powerful method in the determination of risk allocation, it is not comprehensive and other principles must be utilised to address adequately the allocation of risk in a construction contract.13 For example, ‘acts of God’ or ‘force majeure’ cannot be controlled by either party, and, instead, the consequences of such risks must be assessed and managed. Consequently, Bunni proposes that the following four principles are used for allocating risks in construction contracts:

  • Which party can best control the risk and/or its associated consequences?
  • Which party can best foresee the risk?
  • Which party can best bear that risk?
  • Which party ultimately most benefits or suffers when the risk eventuates?

The question of what is a ‘fair’ risk allocation is, ultimately, a subjective one; in deciding how it wishes to procure a project and the way it seeks to allocate risks, an employer will need to weigh up the theoretical efficiency of the risk allocation with political and market dynamics and the needs of the particular project.

Property Damage Is Not Necessarily Physical In Calif.

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Catherine L. Doyle and Jan A. Larson | Jenner & Block LLP | December 10, 2018

In a recent decision, Thee Sombrero Inc. v. Scottsdale Insurance Company, a California appellate court ruled against insurers seeking to limit coverage for loss of use damages related to an ownership interest in tangible property. The appellate court held that the “loss of use” need not be a loss of all possible uses of the property and recognized that the loss of a particular use was sufficient to constitute the required property damage. In addition, the appellate court authorized the use of economic loss calculations as an appropriate measure of this covered property damage. In so holding, the appellate court challenged the reasoning of other opinions in a sister state and elsewhere in California, and its detailed analyses of the more insurer-friendly holdings may provide persuasive support for policyholders facing similar issues throughout the country. We suggest that policyholders facing similar situations familiarize themselves with this opinion when advocating for coverage for loss of a particular use of tangible property, resulting in economic losses.

A unanimous panel of the Court of Appeals for the Fourth District of California recently issued an opinion construing a commercial general liability policy’s coverage for property damage as extending to economic losses stemming from a loss of use of that property for a particular purpose. In Thee Sombrero Inc. v. Scottsdale Insurance Company, a judgment creditor of the policyholder brought suit against the policyholder’s liability insurer to recover the loss of value that resulted from the revocation of a municipal permit to operate a nightclub. The insurer sought to circumvent coverage by contending that the loss of a permit was merely the loss of an intangible right, and that the plaintiff had only suffered economic damages. The insurer argued the plaintiff’s claims therefore fell outside of the scope of the liability policy’s coverage for property damages. In ruling in favor of coverage, the appellate court undertook a rigorous analysis that refuted the insurer’s arguments and distinguished contrary authority that had taken a more insurer-friendly position.

Thee Sombrero Inc. owned commercial property in Colton, California. Sombrero also possessed a conditional use permit, or CUP, issued by the city, which authorized the operation of a nightclub on the premises. In 2007, Sombrero leased the property to lessees who ran a nightclub under the CUP. Among other conditions, the CUP required city approval of the property’s floorplan and mandated that the approved floorplan could not be modified without further city approval. The city inspected the property in connection with the lease and approved the floorplan, which included a single entrance to the nightclub, equipped with a metal detector.

Crime Enforcement Services was hired to provide security services for the nightclub. Unknown to Sombrero at the time, CES converted a storage area on the property into a “VIP entrance” without a metal detector. On June 4, 2007, a fatal shooting occurred inside the nightclub. Sombrero subsequently learned about the “VIP entrance,” and the owner of CES admitted that the gun used in the shooting had entered the club via this unauthorized second entrance.

As a result of the shooting at the nightclub, the city revoked the CUP. Sombrero negotiated with the city and secured a modified CUP, allowing for use of the property as a banquet hall instead of a nightclub. However, this restricted use as a banquet hall was less lucrative than the prior use as a nightclub.

In 2009, Sombrero sued CES for breach of contract and negligence, alleging that CES did not frisk the shooter and that CES’s failure to screen the shooter led to the shooting, which in turn caused the revocation of the original CUP. The loss of the CUP “lower[ed] the resale and rental value of the [p]roperty” and caused “lost income,” since renting the property as a nightclub had been more profitable than renting it as a banquet hall. Sombrero sought damages against CES for “the reduction in fair market value of the [p]roperty” and “lost income.” The president of Sombrero attested that the difference in value of the property under the original CUP versus the modified CUP was $923,078. In 2012, the court entered a default judgment against CES for the $923,078 of lost value.

CES had a general liability policy issued by Scottsdale Insurance Company, which covered CES’s liability for “property damage” caused by an occurrence. The policy defined “property damage” as either “[p]hysical injury to tangible property, including all resulting loss of use of that property,” or “[l]oss of use of tangible property that is not physically injured.” As a judgment creditor of CES, Sombrero initiated a direct action against Scottsdale in 2015 seeking coverage for the loss of use, expressed as the $923,078 in economic losses, caused by CES.

Scottsdale moved for summary judgment, arguing that the revocation of the original CUP was not a loss of use of tangible property. Rather, according to Scottsdale, the loss of the original CUP was merely the loss of an intangible right to use the property in a particular way. Scottsdale further asserted that property damage, as contemplated by the policy, did not include economic loss. Sombrero responded that it lost the use of tangible property because of the revocation of the original CUP and argued that the economic loss resulting from the loss of use of tangible property did constitute property damage covered by the policy. The trial court agreed with Scottsdale and granted the motion for summary judgment in 2016. In its order, the trial court held, “[l]ost value is economic loss, but economic loss is not lost use of tangible property.”

Sombrero appealed, reiterating its argument that the loss of use of the property resulting from the revocation of the original CUP constituted “loss of use of tangible property that is not physically injured.” The appellate court noted that the interpretation of an insurance policy is a question of law subject to de novo review under settled rules of contract interpretation. Among those well-settled rules of interpreting insurance contracts, the appellate court construes ambiguous language to protect the objectively reasonable expectations of the policyholder.

At the outset of its analysis, the appellate court declared that it “defies common sense to argue” that Sombrero’s loss of its ability to use its property as a nightclub is not, by definition, a loss of use of tangible property. The appellate court then dispatched conflicting authority, including a Washington appellate court decision also involving Scottsdale with “strikingly similar” facts. In Scottsdale Insurance Co. v. Int’l Protective Agency, the dispute centered on the loss of a restaurant’s liquor permit caused by the negligence of Scottsdale’s policyholder, a security company that permitted a minor to enter the restaurant. The opinion in IPA did not persuade the appellate court in Thee Sombrero to abandon its “common-sense position.” In the view of the appellate court, the coverage analysis properly focused on the loss of use of property that results from the loss of an entitlement and not the loss of the intangible entitlement itself. Although a permit or license is not tangible property itself, its loss means the owner of the property can no longer use that property in a particular way. Furthermore, the reasonable expectations of the policyholder would construe “loss of use” to include the loss of any significant use of the property, not merely the total loss of all possible uses. Finally, the appellate court parted ways, in dictum, with the IPA court’s assertion that a right to occupy premises is not a tangible property interest. To the contrary, at least under California law, a lease is considered a conveyance of an estate in real property. Moreover, regardless of the technical legal contours, a policyholder would understand “tangible property” in an insurance policy to include leased real property. In any event, the appellate court determined that Sombrero, as the owner of the property at issue, plainly owned an interest in tangible property.

Having disposed of Scottsdale’s argument that Sombrero had only lost an intangible right to use its property in a particular way, the appellate court went on to address other points of disagreement with the trial court’s ruling. The trial court had granted summary judgment for Scottsdale under the rationale that a “mere economic loss” is not property damage. Generally speaking, strictly economic losses — such as lost profits, loss of an investment, loss of goodwill or loss of an anticipated benefit of a bargain — will not constitute tangible property damage as contemplated by a commercial general liability policy. However, where the intangible economic losses provide a measure of damages to tangible property that is covered by the policy, the policy will provide coverage for those damages. In other words, loss of economic value is an appropriate method of measurement to calculate property damage in the commercial general liability policy context. The diminution of property value is not merely economic loss but damages sustained because of property damage. Therefore, the appellate court articulated that the correct principle is not that economic losses can never constitute property damage; rather, only losses that are exclusively economic and that lack any accompanying physical damage or loss of use of tangible property are not property damage. Under this principle, Sombrero suffered a loss of use of tangible property under the policy. Further, the loss of value was a proper measure of those damages. Sombrero’s use of the diminution of value calculation to measure its damages did not provide an escape hatch for Scottsdale to avoid coverage.

The appellate court also dispensed with other precedent offered by Scottsdale. Referring back to the policy language, “[l]oss of use of tangible property that is not physically injured,” the appellate court distinguished a California Supreme Court case that sided with an insurer on claims based on the loss of an easement, which was not itself tangible property, and resulting in loss in value but no physical damage to the injured party’s property. The appellate court also distinguished a 2007 decision from the Second District appellate court involving a case brought by a lessee against its landlord for the landlord’s failure to maintain the property in the condition in which the landlord had contracted to maintain it, as this amounted to a breach of contract claim over leasehold interests and not the loss of use of tangible property.[4] Although the appellate court in Thee Sombrero again expressed doubt, in dictum, over the expressed proposition in the Golden Eagle opinion that leasehold interests are not tangible property, it relied upon Sombrero’s status as property owner to hold that its claim for diminution of value or its ownership interest constituted a claim for loss of tangible property.

Since the appellate court ruled in favor of Sombrero on grounds that the loss of the original CUP was anchored to the covered loss of use of tangible property and was properly measured by the loss of value economic damages, the court declined to address alternative arguments raised by Sombrero. Questions of whether the loss of the original CUP itself constituted a loss of use of tangible property and whether the construction of the unauthorized VIP entrance constituted physical damage to tangible property (arguably not an “occurrence,” defined as an “accident” by the policy) were thus reserved for another day.

The appellate court’s opinion in Thee Sombrero underscores the benefit to policyholders of express policy language that encompasses the loss of use of tangible property that has not sustained physical damage. We recommend policyholders review their commercial general liability policy provisions, including the definitions, and consider the appellate court’s analysis in Thee Sombrero when evaluating whether their policy may extend to claimed loss of use damages, even where property is not physically damaged. Policyholders may find persuasive support in the methodical examination of the practical, “common sense” connection between the loss of a right to use tangible property and the covered loss of use of such property. The opinion also provides an analytical foundation for the applicability of economic losses as the correct measure of the property damages. The strongest support may be for property owners above lessees in Thee Sombrero, although the appellate court articulated certain reservations that suggest it may be persuaded by future arguments regarding similar loss of use claims made by lessees, as well.

Class Actions Under California’s Right to Repair Act. Nope. Well . . . Nope.

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Garret Murai | California Construction Law Blog | December 17, 2018

It’s the holidays. A time when family and friends, and even neighbors, gather together.

And nothing brings neighbors closer together than class action residential construction defect litigation.

In Kohler Co. v. Superior Court, Case No. B288935 (November 14, 2018), the Second District Court of Appeal addressed whether neighbors can bring class action lawsuits under the Right to Repair Act. For those who are regular readers of the California Construction Law Blog you’re familiar with the Right to Repair Act codified at Civil Code sections 895 et seq.

For those of you who aren’t here’s a short history. In 1998, in Aas v. Superior Court (1998) 64 Cal.4th 916, the California Supreme Court held that economic damages arising from construction defects, say a defective roof (as opposed to damage to your holiday gifts as a result of water damage resulting from the defective roof), are not recoverable if the basis for liability is negligence (e.g., faulty workmanship) or strict liability (e.g., defective materials).

To limit the application of the Aas case to newly constructed residential housing, including single family homes and condominiums (but not condominium conversions), the California legislature enacted SB 800 also known as the Right to Repair Act. The Right to Repair Act permits homeowners of newly constructed residential housing to sue for economic damages alone if new residential construction does not meet certain enumerated construction standards set forth under the Right to Repair Act and the homeowner satisfies the pre-litigation procedures of the Act.

One aspect the Right to Repair Act does not clearly address, however, is if homeowners can join together and bring a class action lawsuit under the statute.

Kohler Co. v. Superior Court

In Kohler, two homeowners, Joanna Park-Kim and Maria Cecilia Ramos, filed a lawsuit against Kohler Co. on behalf of themselves and others similarly situated  throughout California. The plaintiffs alleged that “Rite-Temp Pressure Balancing Valves” and “Mixer Caps” manufactured by Kohler, which are used to regulate water flow and temperature in household plumbing, were “corroding, failing, and/or will inevitably fail” and violated the construction standards of the Right to Repair Act.  Kohler sold approximately 630,000 of these valves and mixer caps in California during the relevant period.

While the case was pending, Kohler filed a motion claiming that the Plaintiffs could not bring a class action lawsuit under the Right to Repair Act. The trial court denied Kohler’s motion but certified its ruling for appellate review finding that the issue presented a controlling question of law upon which there were substantial grounds for differences of opinion.

The Appellate Court Decision

On appeal, the Second District Court of Appeal focused on Section 931 of the Right to Repair Act, which provides that, when construction defect claims combine causes of action or damages that are not covered under the Right to Repair Act (i.e., construction defects that are not among enumerated construction standards of the Act) with other claims involving construction defects that are covered by the Act, that those defects that are covered by the Act are to be administered according to the Act (i.e., the pre-litigation procedures of the Act). Specifically, Section 931 provides:

If a claim combines causes of action or damages not covered by this part, including, without limitation, personal injuries, class actions, other statutory remedies, or fraud-based claims, the claimed unmet standards shall be administered according to this part, although evidence of the property in its unrepaired condition may be introduced to support the respective elements of any such cause of action. As to any fraud-based claim, if the fact that the property has been repaired under this chapter is deemed admissible, the trier of fact shall be informed that the repair was not voluntarily accepted by the homeowner. As to any class action claims that address solely the incorporation of a defective component into a residence, the named and unnamed class members need not comply with this chapter.

Describing Section 931 as “somewhat obtuse,” the court noted that while the inclusion of the term “class actions” in the first sentence implies that class actions cannot be brought under the Right to Repair Act, the last sentence of the section that “any class action claims that address solely the incorporation of a defective competent into a residence” suggests that certain class actions might be able to be brought under the Act.

Looking to the legislative history of the Right to Repair Act, the Court of Appeals held that class actions may not be brought under the Right to the Repair Act, “with one very narrow exception.”

The Court of Appeal referred to a Senate bill analysis of SB 800 discussing the pre-litigation procedures of the Right to Repair Act, which stated: “The bill establishes a mandatory process prior to the filing of a construction defect action. The major component of this process is the builder’s absolute right to attempt a repair prior to a homeowner filing an action in court. Builders, insurers and other business groups are hopeful that this right to repair will reduce litigation.” The Court concluded that “it makes sense” that “the Legislature intended to exclude class actions for virtually any claim under the Act, because class actions make prelitigation resolution impossible.” Moreover, held the Court:

Even if the named plaintiffs bringing a class action comply with the prelitigation process, thus giving the builder of their homes an opportunity to attempt to repair whatever defect is claimed as to their homes, the builders of other homes are given no such opportunity with respect to the unnamed class members, thus thwarting one of the most significant aspects of the Act.

However, held the Court of Appeal, Section 931 does carve out one narrow, or, as the Court stated, one “very narrow” exception to the Right Repair Act.  And that is claims that solely involve the incorporation of a defective component into a home.

And, here, because the plaintiffs’ claims against Kohler alleged that the defective valves and mixers violated several of the enumerated construction standards set forth under the Right to Repair Act causing damage to other components in their homes, the Court of Appeal held that their claims did not solely involve incorporation of a defective component in their homes, and further, involved an allegedly defective manufactured product that is excluded under Section 896 of the Right to Repair Act, which excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.”

“In short,” held the Court of Appeal, the Right to Repair Act “does not permit class action claims except when those claims address solely the incorporation into the home of a defective component other than a product that is completely manufactured offsite.”

So there you go. Something for everyone this holiday season. Kind of.

Conclusion

Kohler Co. clarifies that, with one very narrow exception, class action lawsuits cannot be brought under the Right to Repair Act. Furthermore, while the Court did not directly address what constitutes a “defective component other than a product that is completely manufactured offsite,” it would seem that this is indeed, as the Court of Appeal stated, a very narrow exception that would exclude class action claims involving most  manufactured products except products built in whole or in part at a project. Maybe I’ve had too much eggnog, but I can’t even imagine what those types of products might be.

Are In-Laws “Relatives” for Coverage Purposes?

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Kesha Hodge | Property Insurance Coverage Law Blog | December 17, 2018

The holiday season is often a time to gather with family and friends. Sometimes, people consider their in-laws and even their ex-in-laws to be family and relatives worthy to be visited during the holidays, particularly if there are children involved. But does this analysis carry over for insurance coverage?

The Arizona Court of Appeals recently weighed in on this question.1 Following a fire at her mother-in-law’s home, an injured daughter-in-law sought coverage under her mother-in-law’s “House & Home Policy.” At the time of the fire, the policyholder’s daughter-in-law and her husband were living with the policyholder. The policy contained the following definition:

Insured person(s)—means you and, if a resident of your household:

a) any relative; and
b) any person under the age of 21 in your care.

The fire had destroyed personal property and inflicted serious physical injuries to the daughter-in-law, her husband, and her son (the policyholder’s son and grandson). Claims were submitted to the mother-in-law’s insurance carrier. Regarding liability coverage, the policy excluded coverage for “bodily injury to an insured person . . . whenever any benefit of this coverage would accrue directly or indirectly to an insured person” and coverage for “bodily injury to any insured person or regular resident of the insured premises.”

The injured daughter-in-law argued those exclusions should not apply because she was not a “relative” of her mother-in-law. She maintained that the term “relative” was not defined in the policy, it was ambiguous, and should be construed narrowly in her favor to mean “someone must be related by ‘blood’ or ‘common descent.’ ” The Court of Appeals disagreed and found her construction of the term inconsistent with Arizona precedent.

The court concluded that:

“[U]sually, ‘relative’ is defined as persons connected by blood (consanguinity) or marriage (affinity).”. . . . We see no reason to deviate from our prior interpretation of the term “relative.”2

In other words, unless defined otherwise in the policy, Arizona courts will interpret the term “relative” to mean one connected by blood or marriage. The court found that the daughter-in-law was a “relative” to her mother-in-law for purposes of applying the exclusion.

What about former in-laws? In an earlier case, the Court of Appeals considered whether an ex-son-in-law was a “relative” under his former-mother-in-law’s homeowners insurance policy.3 In that instance, even after the divorce, the ex-son-in-law lived with the policyholder’s daughter after the divorce, received mail at his former mother-in-law’s address, visited his children living with his ex-wife at that address, and was “commonly thought of” as a relative.

The policy, in that case, provided:

4. “insured” means you and, if residents of your household,

(a) your relatives;

The term “relative” was not defined in this policy. The appellate court explained:

Courts have defined the term “relative” in a number of ways, depending upon the circumstances and context in which the term is used. Usually, “relative” is defined as persons connected by blood (consanguinity) or marriage (affinity). In this case, the policyholder’s daughter had been divorced for many years before the incident giving rise to the claim of coverage. The divorce decree forever terminates the bonds of matrimony unless the parties remarry. Because the ex-son-in-law was not related to the policyholder by blood or marriage at the time material herein, the only conclusion the trial court could reach was that he was not an insured.

* * *

His relationships with his children and ex-wife after the divorce were not relevant to the issue of his legal relationship to his former mother-in-law. In insurance cases, one not a relative by blood or marriage is not covered as a relative.4

In other words, in the case of connection by marriage, if the marital bonds are terminated at the time of the loss, the person is not a “relative”

So, although one may consider their in-laws (including their ex-in-laws) to be family, they may not be a “relative” for purposes of insurance coverage in Arizona.
___________________________________
1 Allstate Vehicle and Prop. Ins. Co. v. Maile, No. 1 CA-CV 17-0723, 2018 WL 5116546 (Ariz. App. Oct. 18, 2018).
2 Maile, 2018 WL 5116546 at * 2 (citations omitted; emphasis added).
3 Groves v. State Farm Life & Cas. Co., 171 Ariz. 191, 829 P.2d 1237 (Ariz. App. 1992).
4 Groves, 171 Ariz. at 192, 829 P.2d at 1238 (emphasis added).

Insurance Lobbyist Describes His Personal Story of Insurance Company Bad Faith

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Chip Merlin | Property Insurance Coverage Law Blog | December 14, 2018

Insurance lobbyist Scott Johnson is a bulldog advocate for the insurance industry. He usually is trying to make policyholders, their attorneys or anybody other than the insurance claims executives and adjusters look bad to support the insurance industry’s legislative efforts. I fell out of my chair when he described his own personal claim and why the insurance industry needs strong oversight and civil penalties to keep it in line.

Here is his November 11, 2018 blog post:

I may have been in the insurance industry for 40 years, but…when it comes to Florida’s mediation statute, I’ve been a lay person. I had no idea how useful and easy (and free) state sponsored mediation could be. That’s until December 2010 when, late one holiday evening, our cozy fireplace popped a small flaming ember onto the rug immediately in front of the hearth.

In the seconds it took to find the TV remote and pause our movie, locate the appropriate fireside tool and flick the menacing cinder back from whence it came, a silver-dollar sized hole was seared into our high-end, deep pile carpet.

Anticipating our annual Christmas party my wife and I covered the scorch with a small foot stool. Later, I would patch it, hide it or, maybe, just ignore it.

My wife did not agree. Despite its small size, she was not content with a black spot in the middle of our main living space.

And so this instructive story begins.

I called my insurance agent and soon my insurance company dispatched a local claim representative accompanied by a local carpet expert to examine the damage. The carrier’s expert said…”It’s for sure this carpet can’t be patched. It’ll never match. You’ll have to replace the whole thing.”

My wife was giddy.

Small samples of the carpet cut from the back of our coat closet were sent to a laboratory in Indiana which confirmed the price per square foot. Unfortunately the insurer was only going to pay for the carpet in the room where the damage occurred and not in the two adjoining rooms.

I received a check for $2,200 ($3,200 minus a deductible of $1,000). It was a precise and accurate computation based on the value of the carpet and the square footage in the room where the damage occurred.

That did not satisfy my wife, an interior decorator who was no longer giddy.

So we got two estimates on our own that included carpet replacement in the two adjoining rooms. Both estimates exceeded $7,000. The lowest was $7200. I told the adjuster I needed $7,200 otherwise I would have two different colored carpets and an angry wife. I explained it’s an open concept with a great room and two adjoining rooms that flow into it, all of which can be seen from the front door. I said, the value of the home will suffer if the carpet doesn’t match.

At this point I should say that I had been very careful not to let the company know who I was. I didn’t want preferential treatment. I just wanted what I had paid for and what the contract said I was entitled to.

The adjuster said, “Sir, we have a line-of-sight rule”. I said, “Show me where it says that in the policy.” He said. “Sir, we don’t cover cosmetic damage”. I said, “Show me where it says that in the policy.”

Finally, I referenced Florida’s “Pair and Sets” statute with language that’s been used to require replacement of undamaged carpet in adjoining rooms. (See NOTE #1 below)

Also helpful was that, along with all the other policyholders of this carrier, I received an unrelated notice that when/if my policy renews it would be amended to limit coverage for “cosmetic damages” to $10,000.

I called the adjuster. Obviously cosmetic damages were covered, I explained, “why would you ever apply a limit to something if it isn’t even covered?” He was getting irritated.

Finally, totally frustrated, he told me that if I wanted any more money, I would have to seek state sponsored mediation, which I immediately did with just a phone call to the toll-free number provided in the envelope that transmitted the $2,200 claim check, which I never cashed. (See Note #2 below)

It’s been eight years since this happened but, my recollection is that the day before mediation the carrier’s attorney called and offered a higher settlement. “In grey area’s such as this” she said, “we see no need for the expense and hassle of mediation if we can reach an acceptable payment number with you.”

Ultimately, they agreed to give me $6,000 minus the $1,000 deductible for a total of $5000. If I had hired a public adjuster, it would’ve cost me up to 20% of $6200 ($7,200 minus $1000 deductible) a maximum yield of only $4800 minus the PA’s 20%. So I saved $200 by making one phone call.

While this case might be too small for most attorneys, it would have been better to hire one rather than a public adjuster as attorney fees are usually paid by the insurer.

Here’s the ironic conclusion.

I was lazy, and though I intended to, I didn’t replace the carpet. We just covered it with a small area rug and pledged to fix it someday. Someday never came, but…one day a carpet repair man came to the house and I showed him the scorch in the living room and explained how an expert from the insurance company said it couldn’t be repaired.

He exclaimed, “I can fix it and no one will ever know it’s there! I do it all the time.”

“How much?” I asked incredulously. “I wouldn’t charge anything for a job that easy”, he said. Then, he went to the closet, cut a small piece of carpet from the back corner, patched it over the scorch and within ten minutes… Voila’ …it was repaired.

Eight years later, I still have the same carpet and neither me nor my wife, “eagle-eye”, can even find the patch job.

I did not send the $5,000 back to the insurance company. (see Note #3 below).

Scott Johnson gets the same treatment that many policyholders receive every day from some insurance companies. Trained adjusters know they have to pay for cosmetic damage and they know the insurance laws regarding matching. Johnson just exposed the intentional scams so many policyholders face every day by the same insurance industry he is paid to represent. He was a potential victim trying to be duped by an insurance adjuster that knew better. Fortunately, Scott Johnson’s tenacity, self-education and experience helped him overcome this wrongful claims practice my clients and Merlin Law Group attorneys face every day.

Johnson should be congratulated for exposing another example of insurance company wrongdoing which can be shown to legislators and insurance commissioners.