Improving Recovery on Delay and Impact Claims Using American Society of Civil Engineers’ Standard

Jason Ebe | Snell & Willmer

2020 is now behind us, and we have reason for a positive outlook for 2021. However, delays and impacts due to COVID-19 and other factors in 2020 will likely continue into 2021, and claims and disputes over relief will likely increase in 2021. A persuasive claim analysis and presentation and demonstration that if the parties cannot negotiate or mediate a reasonable resolution, and the claim must be arbitrated or litigated, you have a high likelihood of success may help maximize your ability to present and recover on your claim for relief. On the other hand, you may need to be able to successfully defend against such a claim.

The American Society of Civil Engineers has issued its draft Standard for Identifying, Quantifying, and Proving Loss of Productivity for second public comment in anticipation of publication in 2021. This standard was developed by a consensus standards development process, which has been accredited by the American National Standards Institute (ANSI). Accreditation by ANSI, a voluntary accreditation body representing public and private sector standards development organizations in the United States and abroad, signifies that the standards development process used by ASCE has met the ANSI requirements for openness, balance, consensus, and due process. The provisions of the standard are written in permissive language and, as such, offer the consultant/expert a series of options or instructions, but do not prescribe a specific course of action. Significant judgment is left to the consultant/expert. The authors note “The appropriate applications of these Principles are dependent upon and should be tailored to the available project management resources, date, and circumstances of a specific project.” Thus, the standard does not promote a one size fits all approach. Rather, larger and more sophisticated projects may require more sophisticated processes and techniques, whereas smaller, shorter duration projects may be better suited for simpler processes that may be less precise, but more cost efficient for the amounts in dispute.

The standard includes best practice guidance on collecting and storing productivity data and tips for identifying, reporting and mitigating productivity loss. With respect to damage calculation methods, the standard addresses the common methods of measured mile, modified total cost and total cost. Interestingly, the draft for second public comment proposes a strikethrough of the traditional preferred damage quantification method of actual discrete costs, so we’ll have to wait and see how that is addressed in the final publication. Regardless, many courts and arbitrators continue to recognize that damages based upon actual discrete costs tend to be the most persuasive. The standard also includes in an appendix a hypothetical project with examples of application of different loss of productivity quantification methods to an impacted project. Also included is a bibliography of relevant publications on measured mile; total costs and modified total cost; changes, rework, change orders and cumulative impact; specialized studies related to weather and seasonal factors; learning curve, overtime, project characteristics and management factors; congestion, trade stacking, crew size and delayed delivery; acceleration, delay and disruption; and shift work, poor management and estimating guides. The bibliography alone is a useful research tool for performing due diligence and analyzing the testimony of your consultant/expert or the opposing consultant/expert.

Based on the foregoing, this standard may provide a useful tool for you and your consultant/expert in analyzing and presenting a persuasive claim for recovery of relief for delay and impacts due to COVID-19 and other factors. Conversely, if you are in the position of having to defend against such a claim, this standard may similarly benefit you and your consultant/expert in analyzing and defending a claim that has not been prepared using appropriate practices.

Be a Good Neighbor: Techniques to Mitigate the Risk of Claims From Adjacent Landowners

Joshua Levy, Josh Neudorfer and Madeleine Bailey | Construction Executive

In May 2020, a real estate developer performing excavation work in New York was sued by a neighboring property owner for property damage. A court overturned an injunction preventing the developer from continuing excavation work after reviewing a preconstruction assessment that showed the damage to the neighboring property was preexisting—not caused by the excavation (see Feldman v. 3588 Nostrand Ave. LLC as an example)

A preconstruction assessment is one of the most important tools in the arsenal of a developer protecting itself from neighbors bringing claims for property damage. Part two of this series will review the benefits of risk mitigation tools recommended for developers such as postconstruction assessments and monitoring during construction.

PRECONSTRUCTION ASSESSMENT OVERVIEW

A preconstruction assessment is a review of a property adjacent to a site where demolition and/or construction activities are to take place. The goal of the assessment is to establish baseline conditions by conducting an inspection of buildings and infrastructure, including identification of existing damage to improvements, so that causation of any alleged damages can be more easily determined.

The types of construction activities that would warrant a preconstruction assessment include foundation work in close proximity of adjacent structures; overhead work such as scaffolding and overhead crane access; demolition work generally, and particularly where blasting work or explosives are used; delivery routes where heavy hauling will occur; and construction work above existing utilities or transportation lines (i.e. subway tunnels).

The following items should be included in a preconstruction assessment:

  • Location of the proposed structure and adjacent structures;
  • Evaluation of potential concerns and sensitive buildings and/or infrastructure;
  • Location and conditions of existing structures or monuments;
  • Existing roads and parking lots to be retained;
  • All utility lines, gas lines, phone lines or cable lines near the proposed construction area;
  • Any existing objects to be demolished, and any existing trees or vegetation to be retained;
  • Observed deficiencies and anomalies;
  • Identification of conditions such as background noise, lighting, vibrations, water conditions and ambient air quality sufficiently in advance of project commencement; and
  • Still photos, videos and survey documentation of existing conditions in addition to a written summary of findings.

Preconstruction Assessment Technology


The preconstruction assessment can be conducted using photo, video, survey tools including laser scanning, vibration monitoring equipment and a variety of other tools depending on the nature of the work being conducted. For example, decibel meters should be used when noisy work is anticipated, and passive and active collectors should be used when air quality will be affected. The preconstruction assessment should also evaluate subsurface conditions that are important to wave transmission such as localized geotechnical information and regional soil conditions and lithology. The preconstruction assessment can also be used to identify signs of structural issues on adjacent properties that should be monitored throughout the construction to monitor potential changes. The preconstruction assessment can ultimately be compared to a follow-up post-construction assessment to determine whether damage occurred during construction.

Who Should Conduct a Preconstruction Assessment?

A third-party engineering group should conduct the assessment to minimize conflicts of interest. The conducting party and the adjacent property owner may want to retain their own third-party investigators to provide separate condition assessments. This is acceptable, however, both parties should meet to review the condition assessments and confirm and agree as to the existing conditions on the neighboring property.

ESTABLISHING A REGULATORY BASELINE

In addition to establishing a baseline for structural site conditions, developers should consider involving relevant regulators in the project before project commencement, for example, by inviting the regulator to the jobsite prior to commencement. This way, the regulator is aware of baseline site conditions and is familiar with the site and the project scope. Early involvement of relevant regulators sets a productive tone for the relationship, and can be a cost-saving measure as it prevents delay-inducing surprises that can result from involving a regulator later in the project or after issues arise.

MONITORING DURING DEMOLITION/CONSTRUCTION

Monitoring during demolition and construction can allow developers to identify concerns quickly, allowing for rapid work modifications and proactive management of contractor behavior to limit more severe issues that might develop during field activities. Often, early discovery of a developing issue can lead to proper identification of the root source of the issue, potentially a source wholly unrelated to the work on site. Developers should consider use of monitoring tools that alert project managers of site conditions in real time.

The background assessment provides a key element to addressing potential concerns identified during the on-going monitoring process, as it allows for a comparison to baseline conditions. Monitoring detail will be addressed in part three of this series.

This is the second article in a three-part series. Part one reviewed how to avoid a lawsuit on a project in close proximity to other buildings.

Be a Good Neighbor: Protect Against Claims by an Adjacent Landowner During Construction

Joshua Levy and Madeleine Bailey | Construction Executive

There’s nothing like working in an office while pilings are being pounded into the ground next door, leading to crashing sounds of pile driving and the attendant afternoon headaches. Fortunately, that’s often the extent of a neighboring project’s real inconvenience. In other cases, however, construction in close quarters can mark the beginning of costly and emotional disputes, which can escalate to costly legal battles during and after construction.

NUISANCE AND STRUCTURAL DAMAGE CLAIMS

Construction claims are often based on the concept of “nuisance,” or on structural damage to adjacent property. Nuisance claims are typically based on noise and dust from construction sites, while structural damage claims are based on direct physical damage caused by neighboring demolition, vibrations, excavation and dewatering. These types of claims can result in monetary damages for neighbor plaintiffs, loss of permits for contractors and reputational damage to the developer.

In one recent case in New York City, the developer faces up to $10 million in damages in a lawsuit with a neighboring property owner. The developer was conducting excavation, dewatering and installation of steel sheet piles, which the plaintiff alleges caused its five-story building to settle and shift, rendering doors inoperable and causing extensive cracking and separation of floors and ceilings from walls and supports. The plaintiff filed its complaint on Jan. 24, 2019, and the lawsuit is ongoing, exemplifying that construction claims such as these can be time consuming and costly (Complaint, 642 East 14th St. v. 644 E. 14th Realty [N.Y. Sup. Ct. January 24, 2019]).

Non-monetary costs associated with adjacent property damage claims can also be steep. In one infamous Philadelphia case, a construction crew destroyed a shared foundation wall while working underground, causing the ceiling of the neighboring rowhouse to cave in, and the stairs to separate from the wall. The city ordered demolition of the neighboring house, revoked the contractor’s permits and ordered a district attorney investigation of the incident.



Nuisance claims can be similarly costly. In a Texas nuisance case, plaintiff homeowners sued a developer constructing a project near their homes, alleging that vibrations, lights and noise caused “loss of use and enjoyment” of their properties. The court upheld an award of more than $200,000 to the neighbors even though the developer held proper city permits. The court specifically relied on the facts that the contractor worked “around the clock” for approximately four months, including weekends and holidays, using bright lights placed directly behind the plaintiffs’ homes to illuminate the worksite at night. Some of this around-the-clock work included excavation work performed within 20 feet of one of the plaintiff’s homes. The court held that these actions were “abnormal and out of place.” ( C.C. Carlton Indus. v. Blanchard, 311 S.W.3d 654 [Tex. App.—Austin, 2010, no pet.])

RISK-MITIGATING MEASURES

High-risk projects in urban or high-density areas also put developers at risk of being sued by neighbors falsely claiming that preexisting damage was caused by the developer’s construction. Preconstruction surveys can save developers from opportunistic neighbors by debunking claims that they caused such damages.

One New York court reversed a previous injunction which prevented a developer from construction based on evidence shown in a preconstruction survey. In this case, the plaintiff alleged property damage resulting from excavation work. The court specifically relied on an independent engineering report showing that the damages alleged by the plaintiff were actually preexisting as shown by the preconstruction survey. (Feldman v. 3588 Nostrand Ave. LLC, 2020 NY Slip Op 31274 [U], ¶ 18 [Sup. Ct.])

Minimizing potential nuisance claims is a bit simpler. Developers can mitigate this risk by maintaining appropriate work hours and good worksite housekeeping practices. Also, developers should conduct a thorough review of the jurisdiction’s noise and vibration ordinances to ensure compliance. Proactive developers may consider visiting neighbors in advance to review the days and times when more obtrusive activities will take place.

Finally, while nuisance and structural damage claims can result in costly damage awards, the potential costs to goodwill between neighboring property owners should not be overlooked. Recognizing the disruption a project will cause and implementing disturbance mitigation measures can help owners and contractors avoid neighbor disputes.

This is the first article in a three-part series. Parts two and three will review preventative measures that can mitigate the relational fallout from construction incidents, and minimize the chances a construction project is tied up in costly and time consuming litigation.

Court’s Opinion Provides Guidance on Protecting a Claims Handling Manual as a Trade Secret

Karl A. Schulz | Property Insurance Law Observer

In Chavez v. Std. Ins. Co., 2020 U.S. Dist. LEXIS 203610 (N.D. Tex. Oct. 30, 2020), Judge David C. Godbey considered a variation on a common scenario that arises in first party cases.  Typically, the insured/plaintiff wants an insurer’s claims handling manual to use against the insurer in proving claims under Texas Insurance Code Chapter 541 and the DTPA.  However, as Judge Godbey explained, such manuals are not automatically discoverable.  Also, insurers can significantly increase the chances that a court will protect such manuals from unrestricted discovery and use in litigation by providing certain affidavit evidence.

The plaintiff in Chavez was receiving long-term disability benefits from Standard Insurance Company (“Standard”).  Standard terminated Chavez’s benefits after a medical examination.  Litigation ensued.  Chavez requested Standard’s claims handling manual in discovery.  To avoid a discovery dispute, Standard produced the manual pursuant to an agreed protective order.  Chavez subsequently sought to undo Standard’s designation of the manual as confidential trade secret under the protective order.       

Judge Godbey observed that courts have routinely held that an insurer’s claims handling manuals are trade secrets.  He also considered the affidavit evidence provided by Standard in support of its request to keep the manual a confidential trade secret.  The affidavit provides a roadmap to other insurers attempting to protect such manuals from unprotected discovery, indicating that the affiant should emphasize:

  • Why the insurer promulgated the claims handling manual;
  • The expense incurred by the insurer in creating the manual;
  • The insurer’s treatment of the manual as confidential, proprietary, and a trade secret that is not willingly or voluntarily provided to individuals not affiliated with the insurer;
  • The insurer’s substantial efforts to ensure that the manual is not available to the public, the insurer’s competitors, or the insurer’s customers;
  • The insurer’s use of the manuals as a resource for employees; and
  • How dissemination of the manual would be detrimental to the insurer’s ability to maintain its unique position in the marketplace, given the ease with which a competitor could duplicate the manual.

Judge Godbey analyzed Standard’s affidavit with approval (the operative paragraph was only three-quarters of a page long, so affidavit does not need to be lengthy as long as it hits the key points) and kept the claims handling manual under seal.  Also, Judge Godbey criticized Chavez for trying to circumvent an agreed protective order two years after it was entered.  This indicates that insurers can further protect claims handling manuals if the insured/plaintiff does not promptly seek such manuals in discovery and does not promptly challenge their designation as confidential trade secret.

Chavez also argued that Standard waived the protections for the claims handling manual by paraphrasing a portion of the manual.  Judge Godbey rejected this “gotcha” argument as unfair.  He commented that, if a single reference in a motion could destroy the confidentiality of a sealed document, parties would be forced to file virtually every document under seal, which would limit the public’s ability to access the court system. 

Who Has Priority Over My Recovery? – An Overview Of The Made Whole Doctrine

Jessica Skarin | Butler Weihmuller Katz Craig

After paying out a claim, insurers often pursue a subrogation recovery from a responsible third party. In evaluating the potential for recovery, subrogation specialists consider many issues including proof of liability, applicable contract provisions, statutory limitations, and the cost of pursing a recovery. Well informed insurers also work with their subrogation specialist to ask the question: Who is entitled to the recovery if we collect? In other words, who has priority over the funds recovered? Answering this question requires an understanding of the Made Whole Doctrine. The purpose of this article is to discuss the basic concepts surrounding the Made Whole Doctrine and identify some areas where application of the doctrine may be different across jurisdictions.

The Made Whole Doctrine Balances Equities and Sometimes Limits an Insurer’s Subrogation Rights

The Made Whole Doctrine (sometimes referred to as the Made Whole Rule), is a common law doctrine that states a subrogee/insurer is not entitled to recover from an at-fault party unless and until the subrogor/insured has been, or can be, “made whole.” The doctrine is an equitable defense that an insured can utilize to bar or limit an insurer’s subrogation rights so that the insured has priority over any recovery from the at-fault party. As a common law doctrine, it is equitable in nature and was created to prevent insurers from exercising subrogation rights when the result would be inequitable. The thought being that if one of the two parties must be left with uncompensated damage, it should be the insurer and not the insured. Thus, the doctrine applies in situations where there is a limited pool of funds from which the insured and the insurer are both seeking to recover, with the goal being to balance the competing equities. Although the made whole doctrine is generally defined the same throughout the United States, its application widely varies depending on jurisdiction.

The Balancing of Equities May Depend on the Context of the Loss

Some states, including Alabama, Florida, North Carolina, and Texas, have issued opinions applying the made whole doctrine to claims involving property damage. Other jurisdictions, including Kentucky and Mississippi have generally only applied the doctrine in the context of health insurance or medical benefits implying that the doctrine may not apply in all contexts. Some states have expressly rejected the doctrine in specific contexts, while a handful of jurisdictions do not yet have any major opinions regarding the doctrine. To properly evaluate whether the made whole doctrine applies to a specific case, a subrogation specialist must look not only to see whether the jurisdiction has adopted the made whole doctrine, but must also look to what contexts the doctrine has historically been applied. The balancing of equities, and thus the application of the equitable doctrine, may be different in the context of a property loss than it would be in a situation involving personal injury.

See Shumpert v. Time Ins. Co., 329 S.C. 605, 616, 496 S.E.2d 653, 658 (S.C. App. 1998).

“Made Whole” Does Not Always Mean Made Happy

When the made whole doctrine does apply, the question to ask is “has the insured been made whole?” If the answer is no, the insured may be entitled to recover from the at-fault party first, because the made whole doctrine gives the insured priority over any recovery until it has been “made whole.” But, being “made whole” generally means being compensated for legally recoverable tort damage. See Tampa Port Auth. v. M/V Duchess, 65 F. Supp. 2d 1299 (M.D. Fla. 1997). Items of damage for which the insured wishes to be paid, but would not be recoverable from the at-fault party in a lawsuit are not to be considered when determining whether the insured has been “made whole.” For example, an insured who has been paid the actual cash value for its damaged property is likely to be deemed “made whole,” even though the insured may seek the full cost to replace from the at-fault party. This is because an at-fault party in tort is only responsible for the difference in fair market value and would not be required to pay for depreciation. See Global Int’l Marine, Inc. v. US United Ocean Servs., LLC, 2011 WL 2550624, *17 (E.D. La. 2011).

Additionally, the majority of courts have considered the amount of costs and attorneys’ fees incurred by the insured in pursuing a recovery when deciding whether the insured has been “made whole.” See e.g., Ortiz v. Great Southern Fire & Cas. Inc. Co., 597 S.W. 2d 342, 343 (Tex. 1980); St. Paul Fire & Marine Ins. Co. v. W.P. Rose Supply Co., 198 S.E. 2d 482 (N.C. App. 1973). On the other hand, a handful of courts have declined to do so explaining that the American legal system generally requires a litigant to bear his/her own cost of prosecution and that this concept should be no different when applying the made whole doctrine. See CNA Ins. Co. v. Johnson Galleries, 639 So. 2d 1355, 1359 (Ala. 1994). Whether costs and fees are considered may depend on whether the insured chose to participate in the recovery efforts. If one party (either the insured or the insurer) bore all costs then a court is more likely to look to a net recovery figure when applying the doctrine. If both parties pursued recovery (together or independently), there is unlikely to be an inequity in requiring each party to bear its own expenses.

The Terms of the Policy May Override the Common Law Made Whole Doctrine

When asserting a subrogation claim, an insurer may be exercising its equitable rights in common law or exercising contractual subrogation rights provided to the insurer pursuant to a provision in the policy itself. Some jurisdictions hold that if an insurer is exercising contractual subrogation rights, the common law made whole doctrine does not apply. See Nat. Union Fire Ins. Co. of Pittsburg, P.A. v. Riggs Nat’l Bank of Washington, D.C., 646 A.2d 966, 971 (D.C. 1994). But, most jurisdictions continue to apply the made whole doctrine regardless of how the insurer’s right to subrogation arises. See Allstate Ins. v. Hugh Cole Builder, Inc., 772 So. 2d 1145, 1146-47 (Ala. 2000); Florida Farm Bureau Ins. Co. v. Martin, 377 So. 2d 827 (Fla. 1st DCA 1979).

In order to avoid uncertain application of the made whole doctrine, many insurers have chosen to include a subrogation section in the insurance policy that expressly sets forth how a recovery will be split between the insurer and insured. The majority of jurisdictions allow these provisions to override the common law doctrine, so as to favor the language of the contractual agreement between the parties.

See Wine v. Globe Am. Cas. Co., 917 S.W.2d 558 (Ky. 1996). But see, Hare v. State of Miss., 733 So. 2d 277 (Miss. 1999) (holding that parties cannot avoid application of the common law made whole doctrine via a contract provision). In jurisdictions that also allow for modifications of the common law doctrine, those modifications can also be made after a loss via a joint prosecution agreement or other similar document. Regardless of the type of contract or agreement utilized, the document must expressly provide for something contrary to the common law principles so that it is clear that the parties both intended to modify the common law. If the agreement can be read in such a way as to be consistent with the common law made whole doctrine, then it is not sufficient to avoid the normal application of the doctrine. See Wolfe v. Alfa Mutual Ins. Co., 880 So. 2d 1163 (Ala. Civ. App. 2003).

When Priority Is Not Clear, Preparation Is Important

There are significant jurisdictional variations and multiple factors at play in evaluating the question of “Who Has Priority? When the answer is not clear, the best practice is to try and address any made whole doctrine concerns during the first party claim, if possible. Protracted litigation can be avoided by dealing with made whole issues early. For example, an insurer can include a waiver of made whole doctrine claims in any release or settlement agreement with the insured. For compromised claims or policy limit situations, an insurer can take extra steps to designate how much is being paid for each type of loss under the policy so that it is clear what damages were compensated and what might remain. This detail is helpful when determining whether the insured has been fully compensated for legally recoverable tort damages. Understanding the made whole doctrine and take steps to address concerns early can help the insurer keep its subrogation recovery. At the very least, a better understanding of the doctrine will help an insurer know when subrogation efforts are worthwhile and when a recovery may need to be shared with the insured.