Benefits of Virtual ADR in Insurance Disputes: Ten Reasons To Consider Resolving Disputes Virtually

Steven R. Gilford, Esq. | JAMS ADR Blog

There has been a lot of talk lately, and a lot of presentations, about the pros and cons of virtual alternative dispute resolution (ADR)—video arbitrations and mediations. I recently participated in one such program, but it had a slightly different twist since it was focused on insurance litigation and the insurance industry.

While many of the pros and cons of virtual ADR are generally applicable to a wide range of matters, some have special importance in the context of insurance disputes. In part, this is because insurance companies are in the business of handling insurance claims and litigation. Unlike many businesses, where litigation may be a rarity, disputed claims are commonplace in the insurance industry. As a result, the cost and efficiency of handling claims and disputes are critical and can make virtual ADR extremely attractive.

Time and scheduling. Two of the common obstacles to traditional in-person ADR —both mediation and arbitration—are time and scheduling. In large commercial mediations, the parties, including the policyholder, the insurers, the relevant lawyers and experts, and the mediator are commonly spread across the country, and often around the world. A mediation in such a case requires travel to get to the mediation, a full day or two in the proceedings and frequently another day to get home, especially where the mediation runs late into the night in an effort to achieve a settlement. The time and expense of travel and downtime can be avoided by having a virtual proceeding, as can the need to reserve an entire day when it is not necessary for a session. The case handler, the lawyers and others involved can use the time to manage other claims and matters, significantly increasing productivity.

Flexibility. While the savings from the elimination of travel and downtime are fairly obvious, it may be useful to illustrate the flexibility of virtual proceedings with an example. Consider a large environmental or mass tort coverage case. A first step in a mediation is commonly a presentation by defense counsel and coverage counsel concerning the underlying case and the relevant insurance. In some cases, this is followed by a discussion of information needs. Policyholders are often frustrated when they have traveled and set aside a day but are told after the initial presentations that an insurer needs to consult with the home office to get authority. In a virtual setting, this initial session can be limited to a discussion of the case and the exchange of information necessary to move forward with negotiations.

Access to authority. As much as mediators typically insist on the attendance of persons with authority to settle, insurance mediations often run into issues of authority. In some cases, the insurer did not expect to enter into active negotiations at an initial session. In others, an adjuster came with authority, but needs more to settle a case. In either situation, a virtual mediation permits a more senior company representative of either party to participate in some or all the process. This can be a major advantage and can help to avoid the frustration of an inability to move forward associated with the absence of a more senior representative. Senior managers who lack the time or inclination to take several days to attend a mediation are often willing to participate virtually. A similar dynamic occurs in virtual arbitrations where senior decision-makers may want to watch a key witness or argument without having to travel and be present for an entire, proceeding.

Access to coverage counsel in mediating an underlying case. The flexibility provided by virtual ADR can be particularly beneficial where there is a substantial case, perhaps a class action or mass tort case, and insurance is an important component of the parties’ ability to settle. Parties are often reluctant to incur the time and expense of having coverage counsel attend a mediation of the underlying case, but then reach an impasse because the coverage issues and availability of insurance are critical to their ability to settle. Virtual mediation allows the participation of coverage counsel and underlying counsel, together or individually as needed. The ability to bring the right parties together at the right times, without necessarily having them all in the same physical location, is a major benefit of virtual ADR.

Access to multiple players. A unique element of many insurance disputes is the number of players involved. This may occur where there are towers of insurance with multiple insurers, multiple years of relevant coverage or multiple insurance programs potentially in play. In each of these scenarios, finding a time and place where lawyers and company representatives for all the players can participate may be very challenging, particularly where some of the insurers are based in London or other non-U.S. markets. Virtual ADR makes it much easier to schedule a mediation or arbitration session, including during hours outside the traditional workday since participants may be willing to participate from home or office early in the morning or in the evening.

Access to experts. It is often useful to have an expert attend a mediation. It may be an expert on underlying liability, a coverage issue, lost policies or allocation. Direct discussions between the parties and the experts can help the parties to understand and test their adversary’s positions and, in some cases, the credibility of the experts or their positions. Experts can be available virtually, reducing the time and expense of attendance.

Less idle time. Another advantage of virtual ADR in multi-insurer disputes is the ability to break up the discussions into smaller chunks. All of us have experienced the frustration of sitting idly while the mediator moves from room to room, trying to get a sense of each party’s respective position. A virtual proceeding can be broken into separate sessions, with the mediator meeting with each party individually. This approach has proven very effective in multi-party cases.

Training. Many insurers have strict requirements about use of multiple attorneys at a hearing. This is especially relevant where travel is involved. Virtual proceedings allow the additional attendance of a less senior attorneys or client representatives at a substantially lower cost. Whether that cost is borne by a client or its law firm, it provides an important training opportunity in virtual proceedings.

Expanding the pool of available mediators. Because disputes can occur anywhere, parties have traditionally tried to agree on a locale for the mediation and to find a mediator in that location in order to capitalize on local knowledge and to avoid the time and expense of travel. In some cases, the parties agree on an out-of-town mediator because the mediator is mutually acceptable and viewed as exceptionally talented and able to understand complex issues in a particular case. In the virtual world, location is much less important, thus widening the pool of acceptable, available mediators.

Avoiding the abrupt race to get home. Mediations often pick up pace as the day wears on. In many cases, however, that momentum is disrupted by one of the participants having to abruptly stop to race for a plane or a train. While that time pressure can sometimes be productive, it can also be extremely frustrating to parties that feel they are on the cusp of getting a matter resolved and are committed to staying as long as it takes. This situation can often be avoided in a virtual mediation where the parties are appearing from home or their offices.

There are certainly challenges with virtual proceedings. Parties need to be comfortable with the technology and have the proper equipment. They need to be comfortable interacting with and reading each other onscreen as opposed to in person. There may be challenges of logistics and personal style. But many experienced mediators are finding that virtual mediations have significant benefits and that their success rate is similar to that of in-person mediations. These benefits have special significance for insurance disputes and suggest that virtual ADR, whether fully virtual or a hybrid, will be an important tool for claims handlers and coverage advocates for the foreseeable future.

Arguing Cardinal Change is Different than Proving Cardinal Change

David Adelstein | Florida Construction Legal Updates

The cardinal change doctrine has become a popular doctrine for a contractor to argue under but remains an extremely difficult doctrine to support and prove.  Arguing cardinal change is one thing.  Proving cardinal change is entirely different.   As shown below, this is a doctrine with its origins under federal government contract law with arguments extending outside of the federal government contract arena.  For this reason, the cases referenced below are not federal government contract law cases, but are cases where the cardinal change doctrine has been argued (even though these cases cite to federal government contract law cases).

A party argues cardinal change to demonstrate that the other party (generally, the owner) materially breached the contract based on the cardinal change.  In reality, a party argues cardinal change because they have cost overruns they are looking to recover and this doctrine may give them an argument to do so.  But it is important to recognize the distinction between raising it as an argument and the expectation that this (difficult doctrine to prove) will carry the day.

The cardinal change doctrine is a doctrine that originated under federal governments contracts law–the doctrine developed based on drastic unilateral modifications of the contract from the federal government that were not contemplated by the contract’s changes clause.  IES Commercial, Inc. v. Manhattan Torcon A Joint Venture, 2018 WL 4616029, *5 (D. Maryland, 2018).  See also U.S. v. Peter R. Brown Construction, Inc., 674 Fed.Appx. 901, 909 (11th Cir. 2017) (explaining cardinal change doctrine has applied when a contractor is directed by the government to perform a scope “that fundamentally alters the contractual undertaking” such that it is “not comprehended by the normal Changes clause.”) (citation omitted).

The cardinal change doctrine applies “when the government effects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.”  Durr Mechanical Construction, Inc. v. PSEG Fossil, LLC, 2021 WL 303030, *2 (D.New Jersey 2021) (quotation and citations omitted).   These are changes that “fundamentally alter the nature of a contract” and constitute a “drastic modification beyond the scope of the contract that altered the nature of the thing to be constructed.”  Latex Construction Company v. Nexus Gas Transmission, LLC, 2020 WL 7386358, *8 (S.D.Texas 2020) (internal quotations and citations omitted). See also Amex Construction, Inc. v. Clark County, 2020 WL 3488736, *6 (D.Nevada 2020) (“A cardinal change must drastically alter the work agreed to such an extent that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained.”) (internal quotation and citation omitted).

Noteworthy, out of sequence work, delays, and even increased costs do not amount to a cardinal change.  Ames Construction, supra.

Just because the cardinal change doctrine applies to federal government contract law does not mean it universally applies to state law.  For instance, in Durr Mechanical, the court refused to apply the cardinal change doctrine because it had not been adopted by New Jersey law. Durr Mechanical, supra, at *5 (“I find no compelling reason to recognize a cardinal change doctrine claim under New Jersey law, and decline to do so.”).   On the other hand, in Latex Construction Company, the court found that while the plaintiff faces significant hurdles in proving a cardinal change, the doctrine applied to private construction contracts.   Latex Construction Company, supra, at *8.

When arguing cardinal change, outside of the federal government contract arena, please remember that there may be an argument that the doctrine does not apply to the state law claims.  And, even if there is an argument that the cardinal change doctrine does apply, keep in mind that the origin of the doctrine and its historical context will apply.  The change should apply to a drastic change/modification (unilateral modification) that fundamentally alters the contract because it is so materially different than what was bargained for–this is difficult to prove!

Design Immunity Does Not Shield Public Entity From Claim That it Failed to Warn of a Dangerous Condition

Garret Murai | California Construction Law Blog

Readers of this blog are familiar with the concept of the design immunity defense.

Codified at Government Code section 830.6, it provides in pertinent that a public entity is not liable for an injury caused by a plan or design of a public improvement where the plan or design has been “approved in advance . . . by the legislative body of the public entity or by some other body or employee exercising discretionary authority to give such approval or where such plan or design is prepared in conformity with standards previously so approved” if the trial or appellate court finds that there “is any substantial evidence upon the basis of which (a) a reasonable public employee could have adopted the plan or design or the standards therefor or (b) a reasonable legislative body or other body or employee could have approved the plan or design or the standards therefor.”

In the next case, Tansavatdi v. City of Rancho Palos Verdes, Case No. B293670 (January 29, 2021), the 2nd District Court of Appeal examined whether the design immunity defense also serves as a defense to a claim that a public entity has a duty to warn of a dangerous condition on public property.

The Tansavatdi Case

In March 2016, Betty Tansavatdi’s son was killed by a semi-trailer while waiting at a stoplight on his bicycle at the corner of Hawthorne Boulevard and Dupre Drive in Rancho Palos Verdes, California. Tansavatdi’s son had intended to go straight through the intersection on Hawthorne Boulevard while the semi-trailer had intended to turn right onto Vallon Drive.

The stretch of Hawthorne Boulevard leading to Dupre Drive did not have a bicycle lane although other stretches of Hawthorne Boulevard had bicycle lanes.

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In March 2017, Tansavatdi’s mother filed suit against the City of Rancho Palo Verdes alleging a single cause of action for dangerous conditions on public property. Tansavatdi alleged that the City had created a dangerous condition and failed to warn of a dangerous condition.

The City later filed a motion for summary judgment arguing that it was shielded from liability under the design immunity defense of Government Code section 830.6. The City also claimed that the design immunity defense shielded it from liability from Tansavatdi’s claim that the City failed to warn her son of a dangerous condition through the placement of signs or other warnings.

In support of its motion, the City submitted the declaration of Nicole Jules the former Deputy Director of Public Works and Supervising Civil Engineer for the City. Jules had testified that there had never been a bicycle lane at the stretch of Hawthorne Boulevard leading to Dupre Drive, although other sections of Hawthorne Boulevard had bicycle lanes, because the City wanted to retain on-street parking for the benefit of an adjacent park. In her declaration, Jules stated that the stretch of Hawthorne Boulevard leading to Dupre Drive met or exceeded all applicable government standards and was reasonably approved.

The City also submitted the declaration of Rock Miller a traffic engineering expert. Miller stated that plans for the stretch of Hawthorne Boulevard leading to Dupre Drive were reasonable and in full compliance with applicable guidelines. He also stated that available collision data at the intersection showed that the accident was the only serious accident from 2006 to 2017 and had an “extremely good” collision record.

In opposition, Tansavatdi submitted the declaration of Edward Ruzak a traffic engineering expert who stated that the intersection constituted a dangerous condition due to the absence of a bicycle lane that would direct riders to the left of the right-turn lane. He also stated that Hawthorne Boulevard was heavily used by bicyclists, that the risk of serious collisions was significant, including a steep downgrade in the stretch where the accident occurred, and he faulted the City for failing to provide “warnings or positive guidance regarding the proper and safe use of [the road]” in the absence of a bicycle lane.

The trial court granted the City’s motion for summary judgment concluding that the City had shown entitlement to design immunity as a matter of law. The trial court did not address Transavatdi’s claim that, irrespective of whether the City established design immunity, the City was liable for failing to warn of a dangerous condition. 

Transavatdi appealed.

The Appeal

On appeal, the 2nd District Court of Appeal explained that while a public entity may be liable for injuries caused by a dangerous condition on its property, Government Code section 830.6 provides that a public entity may avoid liability by raising the defense of design immunity, which requires the public entity to show: (1) a causal relationship between a plan or design and the accident; (2) discretionary approval of the plan or design prior to construction; and (3) substantial evidence supporting the reasonableness of the plan or design.

The Court of Appeal further explained that the first two elements – causation and discretionary approval – involve factual questions to be resolved by a jury unless the facts are undisputed. However, the third element explained the Court – the existence of substantial evidence supporting the reasonableness of the plan or design – is a legal matter for the court to decide.

The Court of Appeal found that the City had carried its burden as to each of the three elements. As to causation, the Court held that the plans for Hawthorne Boulevard, while it included markings for “BIKE LANE & ARROW” along portions of Hawthorne Boulevard, it included no such markings for the area where the accident occurred, and that Transavatdi had failed to show that the lack of such markings where the accident occurred was an inadvertent omission.

As to discretionary approval, the Court of Appeals held that the City had carried its burden. A private engineering firm had prepared the plans and submitted them for approval to the City and the City did in fact approve the plans submitted.

Finally, as to substantial evidence supporting the reasonableness of the plan or design, the Court of Appeal explained that “[g]enerally, a civil engineer’s opinion regarding reasonableness is substantial evidence to satisfy this element,” and that here, Jules and Miller, both traffic engineers, opined that the plans were reasonable and in full compliance with applicable guidelines.

However, the Court of Appeal held that it was error for the Court not to consider Transavatdi’s argument that, irrespective of whether the City established design immunity, the City was liable for failing to warn of a dangerous condition. Citing Cameron v. State of California (1972) 7 Cal.3d 318, 327, the Court of Appeal explained that the California Supreme Court has held “that a public entity may be held liable for failure to warn of a concealed dangerous condition even if that dangerous condition was covered by design immunity”:

Thus, under Cameron, the city’s entitlement to design immunity for its failure to include a bicycle lane at the site of Jonathan’s accident does not, as a matter of law, necessarily preclude its liability under a theory of failure to warn. Because it appears the trial court did not consider appellant’s failure to warn theory, we deem it advisable to allow the trial court to consider the failure to warn theory in the first instance.

Conclusion

So there you have it. Design immunity does not in and of itself shield a public entity from a claim that the public entity failed to warn of a concealed dangerous condition, even if that dangerous condition was covered by design immunity.

Eastern District of Pennsylvania Confirms Carrier Owes No Duty to Defend Against Claims for Faulty Workmanship

Anthony L. Miscioscia and Marianne Bradley | White and Williams

On March 17, 2021, the Eastern District of Pennsylvania issued its decision in Estate Chimney & Fireplace v. IFG Companies & Burlington Insurance Company, 2021 U.S. Dist. LEXIS 50360 (E.D. Pa. March 17, 2021), finding that an insurance carrier had no duty to defend its insured where the allegations in the underlying litigation involved claims of faulty workmanship.

Estates Chimney & Fireplace, LLC (Estates Chimney) had performed inspections and replaced chase covers for a number of chimneys in a condominium complex. Chase covers are pieces of metal, which are placed over chimneys in order to keep out environmental elements. Several condominium owners sued Estates Chimney, alleging that Estates Chimney had improperly installed, then improperly replaced, their chimney caps, which caused their chimneys to cease working properly. As a result, the underlying plaintiffs allegedly incurred costs to repair or replace the chimney caps and chimneys.

Estates Chimney sought coverage from its carrier, who denied coverage based upon its determination that the claims in the underlying lawsuits arose out of faulty workmanship, which did not result in damage to the property of a third party. Estates Chimney filed a declaratory judgment action, seeking a declaration that it was entitled to coverage under the policy. Both parties moved for summary judgment, and the Eastern District ruled in favor of the carrier.

In reaching its decision, the court declined to consider the insured’s expert’s opinion, explaining that – under Pennsylvania law – courts “must decide coverage issues based on the four corners of the complaint against the insured, not the opinion of an expert, even if that expert opined that Estates Chimney did quality work that complied with all laws and regulations. This is a coverage dispute, the outcome of which cannot be decided by extrinsic evidence that addresses the merits of the underlying claims.” Id. at *17.

Having determined that its consideration was limited solely to the four corners of the underlying complaints, the court concluded that all of the underlying plaintiffs’ claims were for faulty workmanship, which do not present the degree of fortuity required for there to be a covered “occurrence,” defined in part as an “accident.” Id. at *17 (citing Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006).

The court further rejected the insured’s argument that – because some of the underlying plaintiffs may have sought consequential damages – the allegations in the underlying complaint constituted an “occurrence.” Id. Rather, the court explained that “the holding in Kvaerner has been extended to the foreseeable results of the insured’s faulty workmanship.” Id. Thus, because it was foreseeable that faulty workmanship when capping chimneys could lead to damage to the chimney itself, rendering the fireplace unusable, “there is no insurance coverage.” Id. at *16.

Finally, the court declined to find a covered “occurrence” based upon the insured’s argument that the underlying lawsuits involve “specific allegations of negligence.” Relying upon well-established Pennsylvania law, the Eastern District explained that it is the factual allegations, not the legal terminology used in the complaint, which determines whether a duty to defend arises. Id. at *18 (citing Nationwide Mutual Insurance Company v. CPB International, Inc., 562 F.3d 591, 598-99 (3d Cir. 2009)). Thus, faulty workmanship – even when cast as a negligence claim – does not constitute a fortuitous event. Id. (citing Westfield Insurance Company v. Bellevue Holding Company, 856 F. Supp. 2d 683, 694 (E.D. Pa. 2012).

Construction Contractors Beware: Think Twice Before Paying Prevailing Wage Assessments!

Jeffrey Risch | SmithAmundsen

Big Labor continues to use local, state and federal prevailing wage laws to target contractors they have a “beef” with.  Since most prevailing wage audits are triggered by a complaint (including 3rd party complaints), trade unions and certain union-friendly organizations can easily turn in a contractor with the general assertion that the contractor is not complying with applicable prevailing wage law. While contractors and merit shop trade associations could do likewise, they typically don’t for obvious business reasons.  Having concentrated my practice on assisting contractors with prevailing wage disputes throughout the U.S., this trend not only continues but is ramping up in recent months.  While contractors who intentionally cheat the system and ignore their legal obligations should get what they rightly deserve, many contractors are facing audit assessments that are simply  off or incorrect.  Paying a disputed assessment in the hope of not upsetting the government agency or believing that cooperation will bring you favor is arguably one of the worst things a contractor can do these days; failing to properly document your disputes with any assessment that you believe has been issued in error could be the 2nd worst thing. 

In short, I am now seeing more and more audit findings that are just flat out wrong, in whole or in relevant part.  Additionally, it is often the case that even if the ultimate assessment is correct, the discrepancy is based on a clerical mistake, an unintentional accounting or reporting error or a case of disputed worker classification.  However, many general contractors and public bodies, especially local units of government, are being told that they must reject the bid of a contractor who has any past or pending prevailing wage complaint against it, even when the contractor is the low bidder. By rejecting bids or terminating contracts with non-debarred contractors who are simply fighting the good fight with prevailing wage issues, these general contractors and public bodies are depriving contractors of fair due process, stifling competitive bidding and ignoring their obligations to the taxpayer.

In these times, contractors need to be extra cautious and careful in any and all communications with any government agency investigating prevailing wage compliance. To be clear, every complaint must be taken seriously by the contractor to ensure that the record ultimately reflects that the contractor is not only complying with its legal obligations, but also free to bid and perform public construction projects without interference. 

With the above in mind, there are 5 basic rules for anyone performing public construction work to follow with an eye on growing prevailing wage enforcement:

  1. Know your legal obligations under any and every local, state or federal prevailing wage ordinance/law that applies to your business (note: what’s permissible under Federal Davis-Bacon may be unlawful under local/state prevailing wage law);
  2. Ensure your business is complying with all applicable prevailing wage obligations for every worker, every day, every week, every job — not simply paying the correct rates but also keeping and maintaining detailed and accurate time and payroll records;
  3. Never allow a prevailing wage audit or investigation  to be closed or remain in limbo without some document that confirms your full compliance with your legal obligations (you will have to do this yourself);
  4. Never sign any settlement agreement concerning prevailing wage issues without first reviewing it with competent legal counsel to help ensure that no admission of liability or guilt is made and to expressly state that you are free and clear to bid and perform future public construction work; and
  5. Educate your local units of government on who you are and highlight your good name and business reputation — get to know the public officials, get involved and form relationships.