A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter's precision carrying the day most of the time, sometimes a litigator's creativity can trump it. Well, it's happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it's the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it's unpublished.
I occasionally give a presentation called "That's not what I meant!" which is subtitled "Usually the drafter's precision carries the day, but sometimes the litigator's creativity trumps it." Our legal system generates seemingly endless material for this presentation and last week the Eighth Circuit gave us more in Union Electric v. AEGIS Energy Syndicate. The policy had a mandatory arbitration provision, but an endorsement specified that Missouri law governed and a Missouri statute prohibits mandatory arbitration of insurance disputes, so while the carrier wanted to compel arbitration, Judge Jean Hamilton refused and the Eighth Circuit affirmed her decision. So, the drafters may have intended that any disputes would be arbitrated, but if so, they should have done some more homework.
There are a couple of lessons here. First, read the entire policy, including the endorsements. The endorsements are like change orders to construction contracts and until you've read them, you don't know what the policy provides for. Second, just because a policy (or any other contract, for that matter) says something doesn't mean it has to be. Many common contractual clauses are rendered unenforceable by either caselaw or statutes. Third, because insurance policies are governed by state laws, and in light of the differing interpretations and statutory schemes amongst the states, there can be wide variations of the procedural and substantive effect of policies depending on what state's law governs. So, do your homework.
The Second Circuit's recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court's grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured's defense, after concluding that the district court erred when it ruled that a swimming pool contractor's liability for cracked concrete could not be covered by its insurance. The district court relied on the "your work" exclusion, but in doing so, it read the "subcontractor exception" out of the policy. The Second Circuit put it back in.
An insured's duty to cooperate with its insurer in the investigation and potential payment of claims is essential to the insurance relationship and is often a condition precedent to coverage. As the Supreme Court for the State of Washington recently affirmed, however, an insurer's ability to deny coverage based on lack of cooperation is limited. Staples v. Allstate Ins. Co., No. 86413-6 (Wash. Jan. 24. 2013). To do so, the insurer must demonstrate a substantial and material breach by the insured of the cooperation clause that results in actual prejudice to the insurer. In other words, where the insured has substantially complied with the cooperation clause or there has been no prejudice to the insurer, a denial of coverage for breach of cooperation will not stand.
On December 7, 2012, the U.S. Court of Appeals for the Federal Circuit issued its first decision determining that government contractors need to challenge any obvious errors, improprieties, or ambiguities on the face of a solicitation amendment before award (extending its previous rule that such challenges to the initial solicitation generally must be challenged before award). In COMINT Systems Corp. & Eyeit.com, Inc., JV v. United States, the Federal Circuit found that Comint missed an opportunity to challenge an obvious - or patent - error in an amendment to the solicitation. By signing the amendment and waiting until after award to protest the allegedly problematic amendment, the government contractor waived any right to challenge the terms of the amendment to the solicitation.
To learn more about this, click here to read the client alert that was written by Daniel Herzfeld.
Illinois and California appellate courts recently issued two policy-holder favorable decisions. In both cases, the trial court had granted summary judgment in favor of the insurance company and denying coverage, and in both cases the trial court decisions were reversed.
It is the rule in many jurisdictions that an insurer which assumes defense of its insured without issuing a reservation of rights can be estopped from later denying coverage based on rights or defenses in the insurance contract. This general rule was rejected by the Supreme Court of Wisconsin in Maxwell v. Hartford Union High School District, 814 N.W.2d 484 (Wis. 2012). The court in Maxwell held that an insurer which defends without reserving the right to deny coverage has not waived its ability to rely on coverage clauses in the policy allowing for such a denial.
In Maxwell, the policyholder - a school district facing a wrongful termination suit from an ex-employee - tendered a claim to its liability insurer which defended the school district in the ensuing litigation without issuing a reservation of rights letter. It was not until a judgment in excess of $100,000 was awarded against the school district that the insurer denied coverage based on language in the policy excluding liability for damages due under the employment agreement and for lost benefits or lost wages. That the policy indeed excluded coverage for the damages at issue was not in dispute. The issue presented to the court was whether, because the insurer failed to issue a reservation of rights, it had waived or could be estopped from asserting its defense of no coverage. In rendering its decision, the court held that waiver or estopped could not supply coverage to an insured that was not provided in the policy itself. Ruling otherwise, the court stated, would force an insured to pay for a loss for which it had not received a premium.
The First Circuit has endorsed key principles that favor policyholders in insurance coverage disputes -- principles that can frequently be used to help insureds in construction cases. So, this new case is worth a look. In Oxford Aviation, Inc. v. Global Aero., Inc., 2012 U.S. App. LEXIS 10101 (1st Cir. 2012), the U.S. Court of Appeals for the First Circuit vacated the district court's decision which found that a carrier had no duty to defend claims involving alleged faulty workmanship. Relying on Maine law, the court held strong to the concept that even the remotest possibility of coverage triggers an insurer's duty to defend.
Under the Texas code, the workers' compensation exclusive remedy bar applies up and down: barring injured employees of subcontractors from bringing common law tort suits against a general contractor which provided workers compensation insurance, and also in reverse, barring injured employees of the general contractor from bringing suit against a subcontractor, even when the employees are covered under separate workers' comp policies. So says the Texas Court of Appeals in Garza v. Zachry Construction Corp., 2012 WL 1864350 (Tex. Ct. App. May 23, 2012).
A federal court in Louisiana denied a subcontractor's coverage action against Ace Insurance because the subcontractor did not enroll in the Contractor Controlled Insurance Program. The case is Williams v. Traylor-Massman-Weeks, LLC, et al., EDLA No. 10-2309 and you can look at the pdf of the opinion here: Williams v. Traylor-Massman-Weeks.pdf
The Corps of Engineers entered into a contract with Shaw, which had a Contractor Controlled Insurance Program (known as a "CCIP" which is a type of "wrap up" because its "wraps up" various types of insurance into one place. Shaw entered into a contract with Eustis and at the time, Shaw planned to sponsor a CCIP, but had not created it yet. So, Shaw's subcontract directed Eustis to enroll -- presumably when the CCIP was created.
The trouble was, Eustis didn't enroll. And wouldn't you know it, of all the projects where they forgot to enroll in the CCIP, that was the one where they had a lawsuit? Eustis came up with several creative theories for coverage, but couldn't escape its fundamental problem: It simply didn't enroll in the CCIP.
Aside from the obvious lesson here -- if you are a potential enrollee on a wrap up, make sure you have actually enrolled -- there are other less obvious lessons. If you sponsor a CCIP, do two things: (a) try to make sure your subs get their paper work in; and (b) structure your contracts so that if they don't, the risk to you is minimized.
On March 30, 2012, New Jersey's Appellate Division issued a ruling in the case of New Jersey v Perini Corp. which explains how New Jersey's 10 year statute of repose applies to projects using phased construction.
New Jersey's statute of repose essentially provides that no action may be brought to recover damages for any deficiency in the "design, planning, surveying, supervision or construction" of a project "more than 10 years after the performance or furnishing of such services and construction." Earlier cases have already established that the statute of repose runs from the date that one's services for the project are substantially complete. So, the statute of repose will prohibit a claim against an early trade subcontractor once 10 years has elapsed after that subcontractor completed its work on the project even though the entire project may not yet be substantially complete for more than 10 years. However, the general contractor will remain on the hook until 10 years has elapsed from the date of substantial completion for the entire project.
The Perini case required the court to apply these concepts to phased construction. The state sued the general contractor, designer and pipe supplier for problems that developed with the underground hot water piping at a new state prison. The suit was filed on April 28, 2008. By contract, the prison was constructed in three separate phases - each with its own contractual substantial completion date. By April 27, 1998, 10 years before the state filed suit, the state had issued substantial completion certificates for the entirety of the first two phases of the project and for all but two buildings included in the third phase - a garage and a housing unit located outside the main perimeter. However, no certificate of substantial completion was issued specifically for the hot water system.
The court held that "multiple phases of a construction project that are clearly identified and documented can trigger separate periods of repose, even for the general contractor and other contractors that continue to work on the entire project." However, the court rejected the notion that there can be "separate trigger dates of repose for components of a project, whether multi-phase or not, that are not clearly identified in the documentary record as distinguishable improvements." In this case, the court found that the hot water system was not a clearly distinguishable component of the construction and was not substantially complete by April 27, 1998. As such, the state's claim was not untimely under the statute of repose.
Can anyone claim that they read their homeowner's insurance policy before they had a claim to submit? That's what I thought. I don't know whether Larry Ward read his before he had a claim, but he's read it now, and so have several judges and numerous lawyers. Based on a recent decision from the U.S. Court of Appeals for the Fourth Circuit, the judges and clerks of the Virginia Supreme Court will be reading it too.
Ward submitted a claim to his property insurance carrier when he discovered that his new home was suffering damage from Chinese Drywall. The carrier denied his claim and filed a declaratory judgment action in federal court for the Eastern District of Virginia (the "Rocket Docket" for those not familiar with it). The district court granted summary judgment in favor of the carrier and Ward appealed. The Fourth Circuit did not affirm or reverse. Instead, the court concluded that the case involved unsettled questions of Virginia law, and certified the question to the Virginia Supreme Court.
"Does an insurance broker, after procuring an insurance policy for a developer on a construction project, owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company's subsequent insolvency?"
In this issue of first impression in California, the Fourth District Court of Appeals said "no."Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc. --- Cal.Rptr.3d ----, 2012 WL 621346 (Cal.App.4 Dist.).
A quick background: developer (Bosa) engaged insurance broker (Aon) to obtain insurance for a project in downtown San Diego. Through Aon, BOSA created an OCIP from Legion. Under the OCIP, Legion provided liability insurance to every contractor and subcontractor on the project.Bosa later subcontracted with Pacific Rim (PacRim), who became an enrolled party on the OCIP.After the project was complete, Legion became insolvent.And apparently subcontractor PacRim was the last to find out.
New York State's Appellate Division, First Department, in VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., recently adopted strict federal standards with respect to a party's obligations to preserve documents prior to litigation. These standards were derived from the landmark Zubulake and Pension Committee opinions of Judge Shira Scheindlin of the United States District Court for the Southern District of New York. This is the first time that a New York appellate court has applied these standards to sanction a litigant for failing to suspend automatic data destruction practices once it "reasonably anticipated" litigation. The decision provides important clarity in the timing and scope of the preservation obligation. It also raises the bar for companies subject to the jurisdiction of New York state courts, many of whom had previously viewed the obligation to preserve as being triggered only by the commencement of litigation.
On January 17, 2012, the Supreme Court of the State of New York, Appellate Division, First Department, declined to follow and expressly overruled the insurance rule adopted in DiGuglielmo v. Travelers Prop. Cas., 6 A.D.3d 344 (N.Y. App. Div. 1st Dep't 2004). The DiGuglielmo rule stated that "[a]n insurer is not required to disclaim on timelines grounds before conducting a prompt, reasonable investigation into other possible grounds for disclaimer." Id. at 346.
In George Campbell Painting v. National Union Fire. Ins. Co., 2012 NY Slip Op 00254 (N.Y. App. Div. 1st Dep't 2004), relying on the language of Insurance Law § 3420(d) (requiring a liability insurer to give the insured or the injured person written notice of disclaimer of a personal injury claim "as soon as is reasonably possible"), the court decided that the DiGuglielmo rule was contrary to the plain language of the statute, inconsistent with the Court of Appeals precedent interpreting the statute, and adverse to the statute's intended purpose.
Overall, the court saw no reason in allowing insurance companies with knowledge of grounds to reject a claim to delay notifying the insured that the claim will be denied: "[J]ust as we would not permit the insured to delay giving the insurer notice of claim while investigating other possible sources of coverage, we should not permit the insurer to delay issuing a disclaimer on a known ground while investigating other possible grounds for avoiding liability."
The new rule in New York, therefore, is that an insurer with knowledge of a valid ground for a disclaimer cannot delay issuing the disclaimer by further investigating other possible grounds for disclaiming.