Monthly Archives: July 2020

Being an Expert Witness with “Nothing” to Witness

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Advise & Consult, Inc.

Fire ravaged neighborhood.

Typically, when we are hired as a construction expert witness, we are given some preliminary documents and plan on a site visit.  We are then able to “witness” many of the damaged properties (if the damage has not already been repaired) and start gathering data on what caused the damage, who the responsible parties are, and what are the estimated costs to repair the damage – in a simplified example – to find a resolution for all parties involved and move on.

There are other instances, however, where we are hired as a construction expert witness and expected to find a resolution with “nothing” to witness.  It seems increasingly more often, large wildfires, hurricanes, tornadoes, and other natural disasters are ravaging many areas, resulting in massive damage to life and property, leaving little to nothing behind over hundreds of thousands of acres.  People have suffered catastrophic losses of most if not all personal possessions including property documentation.  These clients are emotionally worn out and completely overwhelmed with starting over and finding a place of stability for their family with so many questions left unanswered.  The experience is harrowing and painful to revisit and being asked to provide documentation or answer questions about this loss causes frustration and pours salt on yet to be healed open wounds.

Law firm administration do their best to gather as much info as possible for the expert witnesses to create their report. The problem is they know what information is needed to fully support their claim for damages but do not know exactly what is needed to satisfy the insurance company and this can add months to the process – only adding to the frustration and anxiety of firm staff and property owners.  Here lies the bottleneck and the client’s frustration – being asked to relive the pain trying to gather information that is not needed.  Multiply this by the potential hundreds of clients that you have signed to represent, and this can be very frustrating and nerve wracking for staff trying to deal with hyper emotional clients and finding that they are not moving through the process in the most efficient way – causing everyone involved only an increase in stress and anxiety.

When you have a qualified expert witness firm that knows the exact information that is needed for an accurate rebuild estimate report, it streamlines the entire process from beginning to end for the clients, the law firm and/or insurance company.  This information can be gathered through a short 30-60-minute phone interview and paired with public, online sites that can provide most, if not all, of the necessary information in a good picture of the loss.  When other documentation is available from the client, those documents can be dragged and dropped by the clients straight to the expert witness.  This can all be done with a 3-5 business day turn around.  This process is efficient, accurate, and less painful, making it a win for the client, a win for the law firm and/or insurance company, and a win for the expert witness.  If your expert witness firm cannot provide this type of resolution, why are they your expert witness firm?

Fraudulently Filing Lien Backfires on Contractor

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J. David Pugh and Amandeep S. Kahlon | Buildsmart

Liens represent one of the primary mechanisms by which contractors, subcontractors, and other downstream parties secure payment rights under a construction contract. When utilized properly, filing a lien may induce an owner to release funds that are undisputedly owed to the lienor. However, when a party’s lien filing is delinquent or defective, and the party refuses to discharge or withdraw the defective filing, that party may be liable to the owner of the liened property. Potential lienors must avoid any knowing misrepresentations when filing liens, as the decision may come back to haunt them. The Florida Second District Court of Appeal’s recent opinion in Witters Contracting Co. v. West describes some of the pitfalls that may befall a contractor who is found to have abused the lien filing process.

In that case, a couple entered into a cost-plus agreement with a contractor, Witters Contracting Company, to build a new home. Nine months into the build, the relationship soured, and Witters sent a demand for $30,000 to the new homeowners. Witters coupled the demand with a threat to file a lien for $100,000. Witters followed up this demand with a letter from its lawyer asking the homeowners to pay $59,706 and enclosing supporting documentation. Six days later, Witters filed a lien stating an unpaid balance of $75,000.

The homeowners filed a complaint against Witters alleging fraud and slander of title. Witters counterclaimed for breach of contract and quantum meruit. The homeowners then moved for summary judgment on their claims and Witters’ counterclaims. The trial court granted the summary judgment motion finding:

[T]he liens filed by Defendants were compiled with such gross negligence as to the amounts claimed therein to constitute willful exaggerations. The willful exaggerations were material and substantive in nature and the liens are deemed fraudulent by the Court. …The Defendants’ filing and recording of the fraudulent liens constitutes a slander of title upon Plaintiffs’ real property.

After a trial on damages, the trial court awarded the homeowners over $180,000, which included punitive damages, attorneys’ fees, and costs. The contractor appealed.

On appeal, the Second District Court of Appeal affirmed the trial court’s summary judgment ruling and damages judgment. However, the court did reverse the trial court’s finding that the owner of Witters was personally liable for the judgment.

Takeaways from Witters Contracting

The proliferation of lien forms and software/applications to simplify completing those forms has made the process of filing liens more accessible throughout the construction industry. However, increased accessibility may come at a cost if companies do not fully appreciate the legal implications of filing liens.

Filling out a form with incorrect information or filing a lien after your rights have expired may subject you to substantial liability if, like Witters Contracting, you are found to have fraudulently filed and/or slandered the title of an owner through the defective filing. Whatever leverage you hope to create by filing a lien may not offset the consequences of a defective filing.

Additionally, for upstream parties facing improper liens, the decision in Witters Contracting should provide some insight on how to navigate a dispute with a subcontractor or supplier who refuses to discharge a defective lien. If the lien is holding up a transaction or otherwise threatening the use of your property or the owner’s property (if you are a contractor), you may have an action for fraud or slander of title that ‘has some teeth.’ Consider all your options before bonding the lien off or succumbing to the demands of the lienor.

Clarifying the Standard for Severance Damages for Condemned Property in Utah

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Mark Morris and Tyson Prisbrey | Snell & Wilmer

In UDOT v. Target Corp. et al., 2020 UT 10, the Utah Supreme Court recently clarified the standard by which a property owner is entitled to severance damages in connection with condemnation under Utah Code Ann. § 78B-6-511(1)(b).

The case arose from a UDOT highway construction project in which it condemned a small portion of Target’s property to reconstruct an interchange. Though only a sliver of the new interchange was actually built on the taken property, the new raised interchange interfered with the property’s visibility from the highway and it took away a convenient right-out exit from Target’s property that provided easy access to the north-bound onramp. At trial, the jury awarded Target $2.3 million in severance damages.

Under the severance damages statute, the owner of a partially condemned property is entitled to severance damages caused “by reason of its severance from the portion sought to be condemned and the construction of the improvement in the manner proposed by the [condemning authority].” Courts applying this standard were required to interpret the meaning of “improvement” and what it means for an improvement to be constructed “in the manner proposed” by the condemning authority. This resulted in confusing case law. For example, courts had previously tied their analysis to the construction of “structures” or “projects,” rather than improvements. They also had sent mixed signals about the effect of the original property line on the availability of severance damages, with some cases suggesting that a property owner may be limited to severance damages stemming only from actions taken on the original property, with other cases indicating that severance damages are available if they flow from actions taken outside of the original property line so long as the severance is deemed “essential to the projects as a whole.”

Beginning with the interpretation of improvement, the Utah Supreme Court found an improvement encompasses a broad range of beneficial alterations to land such that any aspect of an improvement is included in the damages analysis “so long as they materially advance the purpose of the condemning authority.” The Court also rejected the “essential to the project as a whole” test because it is contrary to the plain language of the statute. In doing so, the Court found that land owners are entitled to severance damages “by a proposed improvement to the condition of land that (1) is to be completed at or near the time of the taking and (2) serves the same purpose for which the severed property was taken – i.e., damages caused by the construction of the improvement in the manner proposed.”

In sum, the Utah Supreme Court clarified how property owners will be compensated for their partially-condemned land beyond the actual value of the condemned land. By rejecting the “essential to the project as a whole” test, claimants will only have to show that the damages were caused by the construction of the improvement—which includes any alteration to the land that materially advances the purpose of the condemning authority—completed at or near the time of the taking. Thus, property owners should be aware that this clarified standard will likely increase the damages available to them in connection with condemnation of their property.

Separation of Insured Clause Strikes Again to Deny Coverage

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Stanley A. Martin | Commonsense Construction Law

A very recent blog discussed the effect of a separation of insured clause, on the scope of general liability coverage for an additional insured, when a personal injury claim is pursued by an injured worker. A federal court judge has just reached the same conclusion in another case.

Here, a residential project was being built by a developer and its related construction company. The construction company engaged a framing subcontractor. An employee of the framing sub was injured on the job, and he eventually sued the developer and contractor, who had a general liability policy with Nautilus Insurance Company.

Notice was sent to Nautilus, and it denied coverage. The developer/contractor filed a lawsuit for declaratory judgment, seeking a court order requiring Nautilus to defend and provide coverage.

A federal court judge has ruled in favor of Nautilus and against the developer/contractor, holding that the separation of insured clause acted to exclude coverage for the injured worker claim. In its decision, the court quoted a portion of the endorsement and separation of insured clause:

The Policy includes Endorsement L205 (the “L205 Endorsement”). D. 25 at 84. The L205 Endorsement states in capital letters that it “CHANGES THE POLICY” and further reiterates that the endorsement “modifies the insurance policy” by replacing the employer’s liability exclusion in the general terms with the following terms of the exclusion:

e. Injury to Employees, Contractors, Volunteers and Other Workers

“Bodily Injury” to:

(1) “Employees”, “leased workers”, “temporary workers”, “volunteer workers”, statutory “employees” casual workers, seasonal workers, contractors, subcontractors, or independent contractor of any insured; or

(2) Any insured’s contractors’, subcontractors’ or independent contractors’ “employees”, “leased workers”, “temporary workers”, “volunteer workers”, statutory “employees”, casual workers, seasonal workers, contractors, subcontractors or independent contractors arising out of and in the course of:

(a) Employment by any insured; or

(b) Directly or indirectly performing duties related to the conduct of any insured business; . . . .

Note here that the phrase “Employment by any insured” in section (e)(2)(a) is not being construed by the court in the sense of an employer/employee relationship. Rather, the court is construing that phrase in the context of engagement by the insured even if indirectly. This is a critical element of the court’s analysis, which results in the endorsement sweeping away an entire category of coverage, and parties who would assume they had coverage, that would ordinarily be expected.

The federal court case is Nagog Real Estate Consulting Corp. v. Nautilus Ins. Co., 2020 U.S. Dist. LEXIS 126737 (D. Mass., June 20, 2020).

Exceptions to the Enforceability of Limitation of Liability Clauses

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Patrick Tighe | Snell & Wilmer

A common feature of some contracts, including construction and design contracts, is a limitation of liability clause that limits or “caps” the amount of potential damages a party faces in the event of a breach. Although Arizona courts will generally enforce limitation of liability clauses, there are at least four potential ways to attack their enforceability under Arizona law.

1. Bad Faith.

In Airfreight Express, Ltd. v. Evergreen Air Center, Inc., the Arizona Court of Appeals adopted the “sensible rule” that “[a]s a matter of public policy, a party should not benefit from a bargain it performed in bad faith.” Examples of bad faith include “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms and interference with or failure to cooperate in the other party’s performance.”

Airfreight provides a good example of the type of showing required for establishing bad faith. There, the plaintiff, AFX, had a contract with a company to repair AFX’s aircraft so that it could perform an air cargo service contract with a thirdparty, Air France. In support of its bad faith allegation, AFX had evidence showing that: (1) the repair company intentionally delayed repairing AFX’s aircraft and (2) the repair company encouraged Air France to contract with the repair company’s sister company to provide air cargo service instead of using AFX’s delayed and unrepaired aircraft. On appeal, the Arizona Court of Appeals found that AFX presented sufficient facts to preclude summary judgment on whether the defendant repair company performed the contract in bad faith.

2. Fraud and Other Intentional Torts.

Another avenue to attack a limitation of liability clause is if a party seeking to invoke the limitation clause acted fraudulently or engaged in other intentional torts. The Airfreight court quoted Corbin on Contracts for the proposition that a contractual limitation of liability is “not effective, however, if that party acts fraudulently” and it noted that the Restatement (Second) of Contracts prohibits contracts from exempting parties from “intentional . . . tort liability.” Fraud is one type of intentional tort, but this general statement about “intentional tort liability” may encompass other intentional torts, such as a breach of a fiduciary duty and the intentional interference with contract or business expectancy.

3. Recklessness.

A party’s reckless tort behavior may also render a limitation of liability clause unenforceable. The Airfreight court noted that § 195 of the Restatement (Second) of Contracts prohibited contracts exempting parties from “reckless tort liability.” And “[i]n the absence of contrary Arizona authority, [Arizona courts] follow the Restatement of the Law.” As defined by the Arizona Supreme court, a party acts recklessly even if the party did not realize the high degree of risk involved, but a reasonable person would have. S. Pac. Transp. Co. v. Lueck (adopting and quoting the definition of recklessness in the Restatement (Second) of Torts § 500, cmt. 5).

4. An Activity that Affects the Public Interest.

Finally, an Arizona court may not enforce a limitation of liability clause if the activity at issue concerns a public interest. Section 195(2)(b) of the Restatement (Second) of Contracts provides that a contracting term exempting a party for negligence is unenforceable if “the term exempts one charged with a duty of public service from liability to one to whom that duty is owed for compensation for breach of that duty.” This “public interest” exception appears to be broader than the prior three exceptions. That is, whereas an Arizona court will not enforce a limitation of liability provision if the party seeking to limit harm caused intentionally, recklessly or in bad faith, this exception entails a court not enforcing a limitation of liability clause to exempt even negligent harm if the activity at issue concerns a “public service.”

In determining whether the type of service is a “public” service, courts generally consider whether the activity is one suitable for public regulation. A Minnesota court has stated that: “Types of services thought to be subject to public regulation have included common carriers, public utilities, hospitals and doctors, innkeepers, public warehousemen and services involving extra-hazardous activities.” In Schlobohm v. Spa Petite, Inc. An Arizona court has discussed this public interest exception in at least one published decision, but the court found that the activity at issue – car racing – did not affect the public interest because car racing is a non-essential, recreational activity for amusement. See Valley Nat. Bank v. Nat’l Ass’n for Stock Car Auto Racing, Inc.

In sum, a limitation of liability clause is not ironclad and an Arizona court may not enforce such a clause upon a showing of the exempting party’s bad faith, intentional tort activity, recklessness or engagement in an activity affecting the public interest.