A Fire Destroying More Than Half of the Project is not a Cardinal Change Where the Parties Entered Into a Separate Agreement to Cover the Fire Remediation Work

Kristopher Berr | Constructlaw | November 29, 2018

IES Commercial, Inc. v. Manhattan Torcon, A Joint Venture, 2018 U.S. Dist. LEXIS 164973 (D. Md. Sept. 26, 2018)

In 2009, the Army Corps of Engineers hired Manhattan Torcon Joint Venture (“MT”) as general contractor to build a biological research facility at Fort Detrick, Maryland.  MT subcontracted with IES Commercial, Inc. (“IES”) to perform the electrical system work.

In August 2013, after IES had completed over 90% of its work, a fire destroyed or damaged more than half of the facility, including significant portions of IES’s work. MT ordered IES to perform significant fire remediation work in addition to the remainder of its base contract work. In November 2013, IES and MT entered into a subcontract amendment referred to as the “Fire Rider,” which included an agreed rate schedule for the fire remediation work, along with a procedure by which IES would perform work at MT’s direction, submit daily work tickets and monthly invoices, and be paid within ten days after MT received payment from its insurer.

The parties performed under the Fire Rider for over four years.  During this time, IES complained that MT was mismanaging the work by, among other things, failing to develop a schedule accounting for fire remediation work in addition to base contract work, and by requiring IES to work out of sequence. In September 2017, MT informed IES it would not be paid for the remainder of its work because MT’s insurer had ceased payments. In December 2017, IES sued MT in federal court in Maryland, asserting breach of contract and cardinal change claims. It also sued MT’s sureties under the Miller Act. MT and its sureties moved to dismiss all counts. The Court denied the motion with respect to the breach of contract and Miller Act claims but granted the motion on the cardinal change claim.

In granting the motion, the Court first reasoned that IES had misconstrued the nature of a cardinal change claim. Under the cardinal change theory, a contractor is entitled to recover damages when work ordered by the government is materially different from the work initially bargained for. In its complaint, however, IES did not allege that MT ordered work materially different from IES’s original scope. Instead, it alleged that the fire itself constituted a cardinal change. Thus, IES failed to allege a valid cardinal change claim.

Second, even assuming that the changed work ordered by MT – rather than the fire itself – was a cardinal change, the Court held that claim still failed because IES failed to allege damages resulting from that work. Instead, IES alleged damages consisting primarily of labor inefficiency costs, allegedly caused by MT’s mismanagement of the project. However, IES did not allege that MT’s mismanagement after the fire was, itself, a cardinal change. Thus, IES failed to allege increased costs resulting from a cardinal change.

Finally, the Court held that the cardinal change claim was barred by the existence of the Fire Rider. According to the Court, a cardinal change occurs when the government demands a contractual alteration that requires the contractor to perform duties materially different from those originally bargained for. Here, however, the parties bargained for and entered into the Fire Rider to account specifically for fire remediation work. Thus, the Court held that the cardinal change claim failed as a matter of law because IES was not ordered to complete fire remediation work materially different from its contractual scope of work. Instead, it agreed to perform the work pursuant to a new agreement.

Calif. Landslides Prompt ‘Efficient Proximate Cause’ Rehash

Jennifer Hoffman | Zelle LLP | May 4, 2018

Mother Nature recently reminded California, as she often does, of how cruel she can be. In December 2017, the state experienced its largest wildfire in history.[1] The wildfire, known as the Thomas Fire, burned more than 281,000 acres in Southern California and destroyed more than 1,000 structures.[2] A month later, California experienced its heaviest rainfall in nearly a year.[3] Experts posit that the heavy rains, coupled with the absence of vegetation from the fires, triggered catastrophic mudflows that killed 21 people and caused significant property damage to homes and infrastructure.[4]

Insured property owners who experienced damage from the wildfire are likely covered. However, insured property owners who experienced damage as a result of the mudflows will have to wait to see how insurers respond to their claims. This is because most first party insurance policies insure against loss or damage from fire, but typically exclude earth movements such as mudflows or landslides. But if experts are correct, and the charred land did allow the mudslides to form, then the question becomes which event — fire, rain or mudflow — is to blame for the damage? To answer the question, a California court will likely apply an efficient proximate cause analysis.

California courts have long adhered to an “efficient proximate cause” analysis when determining the availability of insurance coverage in situations where more than one event has contributed to damage. Under this rule, when a loss is caused by a combination of a covered risk and a specifically excluded risk, the loss is covered only if the covered risk was the “efficient proximate cause” of the loss.[5] But what does this phrase mean? Well, at least in California, efficient proximate cause means the “most important” or “predominant” cause.[6] In other words, it does not matter if an excluded peril, such as mudflow, also contributed to the loss as long as the covered peril, such as fire, was the predominant cause of the loss.

In the aftermath of the mudflows, California’s response was twofold. First, California Insurance Commissioner Dave Jones issued a notice to insurance carriers advising them that mudflow exclusions are unenforceable if the “efficient proximate cause” of the mudslide was the wildfire. Second, the California Senate introduced a bill, SB 917, seeking to add a section to the Insurance Code regarding the efficient proximate cause doctrine and coverage for landslides.

The Jan. 29, 2018, notice from the California insurance commissioner stated, in part, that:

The California Department of Insurance (Department) is aware that homeowners’ and certain commercial property insurance policies frequently exclude losses caused by mudflow, debris flow, mudslide, landslide, or other similar events. However, under the “efficient proximate cause” doctrine established by the Insurance Code and articulated by California courts, these exclusions are not be [sic] enforceable if the facts establish that the wildfire (a covered peril) was the efficient proximate cause of the subsequent flooding, mudflow, debris flow, mudslide, landslide, or other similar events.[7]

Not surprisingly, the commissioner’s notice does little to clarify whether insurance policies respond to the mudflow damage, since it does not make any determinative finding of fact that the wildfire was the “predominate” cause of the mudflows. This remains a determination for the factfinder. However, the notice does draw a parallel to the facts of Howell v. State Farm Fire & Casualty Co.[8]

In Howell, the insured submitted an insurance claim after heavy rains triggered a landslide that damaged its property. The insurer denied the claim based on the policy’s earth movement and water damage exclusions. At trial, the insured presented expert testimony that the landslide occurred as a result of a fire that destroyed vegetation on the slope where the landslide started. The California Court of Appeals held that where a covered peril, fire, was the efficient proximate cause of the mudslide, the policy’s earth movement exclusion was unenforceable, regardless of other contributing causes.

Similarly, the insurance commissioner indicated in his January 2018 notice there is a “substantial basis” to indicate that the Thomas Fire was the efficient proximate cause of the mudslide events that occurred in Southern California. Accordingly, he recommended that insurers undertake a diligent investigation and carefully consider the facts underlying the cause of the mudslide before denying claims.

The commissioner’s notice also pointed out that the efficient proximate cause rule is already incorporated into the California code. Specifically, Article 2 entitled “Causes of Loss,” Sections 530 and 532, state as follows:

530. An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.

532. If a peril is specially excepted in a contract of insurance and there is a loss which would not have occurred but for such peril, such loss is thereby excepted even though the immediate cause of the loss was a peril which was not excepted.

These sections codify existing case law that holds the efficient proximate cause analysis to be “the preferred method for resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.”[9]

The second action taken in California in response to the mudslides was the introduction of SB 917 in the California Senate. That bill, which was passed on April 25, 2018, makes the following change to the Insurance Code, Article 2, Section 530:

530.5 If a loss or damage results from a combination of perils, one of which is a landslide, coverage shall be provided if an insured peril is the efficient proximate cause of the loss or damage.

The addition of Section 530.5 to the Insurance Code by this act does not constitute a change in, but is declaratory of, existing law.[9]

Under the newly amended wording, if an insured sustains damage from an excluded peril such as landslide or mudflow, as well as a covered peril such as wildfire. and the wildfire is the efficient proximate cause of the loss, then there is coverage for the damage. Thus, even though excluded mudflow was the immediate cause of the damage, the fire could still trigger coverage under the policy.

There is much debate among insurers and attorneys as to how the change to the California Insurance Code will affect and influence claims and insurance coverage litigation. But the amendment purports to merely reiterate what is already codified and expressed in caselaw and does not seek to change the current law. Other than trying to placate to their constituents, it is unclear what impact the change will have. And, since the amendment is specific to landslides, does this mean that the state legislature will attempt to revise the Insurance Code each time a natural disaster causes damage?

SB 917 was just passed on April 25, 2018. It is, therefore, too early to tell what the impact, if any, the amendment will have on claims. Nevertheless, insurers need to be prepared to address efficient proximate cause. In this regard, insurers’ best defense is likely to focus on the temporal and geographical factors since the California mudslides occurred weeks after the Thomas Fire and at varying distances from the insured properties at issue. With respect to those matters that end up in litigation, insurers should be prepared for inconsistent verdicts rendered by courts and juries applying the efficient proximate cause test.

[1] https://www.cbsnews.com/news/thomas-fire-now-largest-in-california-history-fire-officials-say/.

[2] http://www.fire.ca.gov/current_incidents/incidentdetails/Index/1922.

[3] https://www.dailynews.com/2018/01/10/rain-is-done-how-much-did-we-get/.

[4] https://www.washingtonpost.com/news/capital-weather-gang/wp/2018/01/10/how-the-harrowing-thomas-fire-planted-the-seed-for-californias-deadly-mudslides/.

[5] See Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 770 P.2d 704 (1989).

[6] Id.

[7] http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release012-18.cfm.

[8] 218 Cal. App. 3d 1446 (1990).

[9] Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 753 (2005).

[10] http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB917

New Report Gives Insight into Increased Fire Claim Figures

Nicole Vinson | Property Insurance Coverage Law Blog | March 22, 2017

One of the most terrifying and devastating perils insured against is fire. A wildfire outbreak is one news alert that can have a massive impact on our property and lives. A new research study has exposed some of the data on the insurance claim side of this catastrophe.

For many years, the amount of claim dollars that carriers were spending on wildfire losses accounted for only 1.8 percent of total dollars.

Research coming from a CoreLogic study shows that the danger and the quantity of these claims is on the rise- with Colorado, California, and Texas having the most risk. However, the report cautions that 38 states should be on high alert for wildfire damage.

What is causing the increase in wildfire devastation? Sadly, the Department of Interior linked as many as 90% of the wildfires to a human starting the fire in some fashion. Now, this calculation includes intentionally set fires that are considered arson, but also includes unattended campfires, debris burns, and improperly discarded cigarettes. Other causes of wildfire include lightning strikes and even lava flow.

What was interesting from the report was that the link has been made that another familiar phenomenon, wind, is the culprit. Wind-blown embers can allow for significant fire spread impacting surrounding buildings and residences. Homes in close proximity are more likely to burn in clusters, especially if there is only 15 feet between the residences with combustible forces. This data was supplied by the Institute for Business & Home Safety.

The hot-off-the-presses data from January 1, 2017, to February 3, 2017, reported 2,459 wildfires, an increase compared to the 723 wildfires counted in the same period in 2016. With the increase in the number of fires already counted this year, the area impacted is almost three times the land mass from last year.

But 2015 and 2016 also had incredibly devastating fires, and a wildfire that originated in Alberta, Canada, impacted homeowners as far south as Iowa.

Harvard School of Engineering and Applied Science has forecast that by the year 2050, the number of the wildfires in the West could rise by 50%.

As policyholder advocates, our concern is that the data collected and included in the research may not have contemplated some covered damages that policyholders did not fully collect. Insured property owners in the path of the fires filed claims with their carriers. Fire and wildfire losses should not be a heavily contested peril but even when coverage and causation is clear, that does not always mean every claim is paid in full. Issues with wildfire claims can include inadequate scopes, failure of the insurance company to indemnify for all the covered losses—including dwelling extensions and ordinance and law issues—and rejection of loss of rents or additional living expenses claims.

The insurance claim dollars and number of claims also doesn’t account for the damages that are not paid—or not claimed because the policyholder assumed because the fire did not catch their home on fire, there was no damage. However, many times homes and properties in the vicinity may have been damaged by smoke or heat. The damages may be more subtle on the property but can be submitted as direct, physical loss caused by the wildfire. Some insurance companies try to also dodge paying these claims arguing the lack of damage, or below the deductible damages. It is worth having a second opinion on these smoke claims because damage evaluations by an expert may show intense impact on building components and carcinogens may have seeped into your home and the damage needs to be properly remediated.

United Policyholders has some great resources for wildfire survivors. United Policyholders is an incredible non-profit organization that helps insureds across the country in a major way. The resource materials and amicus briefs by United Policyholders can make an enormous difference for those experiencing property loss.