Draft your Lawsuit to Trigger Insurance Coverage

As most people reading this blog post are aware, construction lawsuits can trigger seemingly countless insurance coverage issues. For example, were the alleged damages caused by an “occurrence” as defined in the contractor’s insurance policy? If so, did the damages begin and/or end during different years, thereby triggering multiple insurance policies? In addition, did the damages stem from more than one “occurrence,” thereby potentially leading to an increase in applicable policy limits?

Furthermore, the “exclusions” found in a contractor’s insurance policy can be critical. For example, most standard Commercial General Liability (CGL) policies exclude coverage for damages stemming from the insured’s errors or mistakes of a professional nature (e.g., damages which would likely be covered by an Errors & Omissions or other malpractice-type insurance policy). In addition, CGL policies typically exclude coverage for damage to “your work” or “your product.” 

When you are drafting a complaint, it is important to draft it in a fashion which triggers an insurer's duty to defend, if at all possible; some contractors are judgment proof so, in the absence of insurance, your client might not otherwise have any recourse from a practical standpoint. Insurance can be a game-changer. 

Of course, all claims must be asserted in good faith and there will be times when you cannot draft allegations sufficient to trigger insurance coverage. However, in many instances, a complaint can be pleaded properly and in good faith to trigger an insurer's broad duty to defend and corresponding duty to indemnify. For example, if you represent an owner suing a general contractor, you can avoid issues regarding the "your work" and "your product" exclusions by including allegations that the defendant's negligence caused damage to the work and/or product of another contractor(s) or caused damage to the owner's property. Sometimes, you must be creative; however, being creative can require you to take a close look at your allegations because they must be asserted in good faith and without violating your ethical obligations. In addition, you can trigger multiple insurance policies by alleging a continuing loss over several years. If you believe in good faith a loss started three or four years ago, plead it. Don't limit yourself. 

Furthermore, be careful with the manner in which you describe the defendant-contractor's actions. For example, coverage might be denied if you allege that the damages resulted from the contractor's decision to use a certain process or particular type of design or material, because the contractor's decision could be interpreted as an intentional act. If so, coverage might be denied due to the lack of an "occurrence" which is typically defined as an "accident," and might also be denied due to an "intentional acts" exclusion, which, as the name suggests, excludes coverage for damages stemming from an insured's deliberate actions. 

While each dispute is different, most if not all complaints should be drafted with an eye towards insurance coverage. It is much easier to draft a broad complaint and trigger coverage than it is to sue a contractor, find out its insurer denied coverage, and then try to amend your complaint to trigger the insurance policy. Do it right the first time.

ABA Fundamentals of Construction Law Program

ABA Fundamentals of Construction Law Program coming November 8 -- Reduced Rate expires 10/24

Here’s your chance to experience an outstanding program that comes only every few years. Limited seating is available for this program in 6 cities: Chicago, Kansas City, Los Angeles, Las Vegas, New York City or Tampa. Excellent CLE, outstanding instructors, and your own volume of the brand new edition of Fundamentals of Construction Law.

This is a can’t miss for new construction lawyers and we hope to see you there! Register now for the great low price of $250 (before it jumps to $280).

Download the brochure.

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For Section 1367(b) Supplemental Jurisdiction, “Plaintiff” means “Original Plaintiff,” Not “Third-Party Plaintiff.”

The case of Allstate Interiors & Exteriors, Inc. v. Stonestreet Const., LLC, 2013 WL 5290028 (1st Cir. Sept. 20, 2013) involved the renovation and construction project of a hotel in Providence, Rhode Island (the “Project”).  Parallel proceedings were filed:

• State Court: Mechanic’s lien proceedings brought against the Owner
• Federal Court (diversity jurisdiction): Subcontractor vs. General Contractor

o   Counterclaim (Rule 13): General Contractor vs. Subcontractor

o   Third Party Claim (Rule 14) General Contractor vs. Owner (supplemental jurisdiction)

The General Contractor and Owner were non-diverse – both Rhode Island entities.  There was no dispute amongst the parties that supplemental jurisdiction initially applied to General Contractor’s claim against the Owner because the claims “‘“derive from a common nucleus of operative fact” or “are such that [they] . . . would ordinarily be expected to [be] tr[ied] . . . in one judicial proceeding.”’” Allstate, at *4 (quoting Penobscot Indian Nation v. Key Bank of Me., 112 F.3d 538, 564 (1st Cir. 1997).

The state court mechanic’s lien actions were settled while the federal action was pending.  Notably, the Subcontractor remained a party to the federal court action and the General Contractor did not release its counterclaim against the Subcontractor in the settlement. 

Owner moved to dismiss for lack of supplemental subject matter jurisdiction. To support its argument, Owner relied on 28 U.S.C. Section 1367(b) which “strips federal jurisdiction ‘over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure . . . when exercising supplemental jurisdiction over such claims would be inconsistent with the . . . requirements of [diversity jurisdiction].’” (Emphasis added.)  The Owner’s reading of Section 1367(b) construed the term “plaintiff” to mean any party that commences an action against another, including a “third party plaintiff.”  The Court rejected the Owner’s broad reading and affirmed the trial court’s denial of the motion finding valid supplemental jurisdiction.  The Court stated:

[W]e now hold that “plaintiff” in section 1367(b) refers to the original plaintiff in the action, and not to a defendant that is also a third-party plaintiff.  In so holding we join several other circuits that have come to the same conclusion. See State Nat’l Ins. Co. v. Yates, 391 F.3d 577, 580 (5th Cir. 2004); Grimes v. Mazda N. Am Operations, 355 F.3d 566, 572 (6th Cir. 2004); Viacom Int’l v. Kearney, 212 F.3d 721, 726-27 (2d Cir. 2000); United Capitol Ins. Co. v. Alpha Hous. & Health Care, Inc., 54 F.3d 156, 160-61 (3d Cir. 1995).  This holding is consistent with Congress’s intent that section 1367(b) should ‘prevent original plaintiffs – but not defendants or third parties – from circumventing the requirements of diversity.” Grimes, 355 F.3d at 572; see also United Capitol Ins. Co., 155 F.3d at 493 (“Because defendants are involuntarily brought into court, their joinders and impleaders were not deemed [by Congress] as suspect as those of the plaintiff, who is master of his complaint.”)

Allstate, at *4. 

Fifth Circuit: Mississippi's Stop-Notice Statute Is Unconstitutional

Today we have a guest post from Forum Member Dorsey R. Carson, Jr. of Burr & Forman in Jackson, Mississippi, relating to a very important case from the Fifth Circuit holding Mississippi's Stop-Notice statute unconstitutional.  

Dorsey R. Carson, Jr.

In Noatex Corp v. King Construction of Houston, LLC, Case No. 12-60385 (5^th Cir. Oct. 10, 2013), the Fifth Circuit Court of Appeals issued its long-awaited ruling on the constitutionality of Mississippi's Stop-Notice statute, Miss. Code Ann. Section 85-7-181. The Stop-Notice statute allowed unpaid subcontractors or materialmen to bind money in the hands of the project owner, thereby preventing those funds from being disbursed to the non-paying prime contractor.  The Stop-Notice statute was a primary protection for construction subcontractors and suppliers in Mississippi.

The Fifth Circuit upheld the decision of the District Court of the Northern District of Mississippi, and ruled that the statute as written did not contain sufficient procedural safeguards, and thus violated the Constitution's guarantee of due process for the taking of property. Specifically, the Fifth Circuit held that the Stop-Notice statute, which required that a contractor's money be held by the owner once the owner received a written notice from an unpaid subcontractor, was an unconstitutional taking without due process because it (1) did not provide for any notice or hearing prior to the binding of the funds, (2) did not require a posting of any bond by the subcontractor, (3) did not require any showing of exigent circumstances, and (4) did not require the subcontractor to submit an affidavit or other writing setting forth the factual background of the dispute and swearing to its authenticity. Accordingly, the Fifth Circuit held that the Stop-Notice statute was unconstitutional and no longer valid.

The immediate effect of this ruling will be to strip subcontractors and materialmen of any legal recourse against owners in the event that they are not paid by the prime contractor. While subcontractors and materialmen would still retain rights against the prime contractor for breach of contract and unjust enrichment, there are no real protections where there is an absconding or bankrupt general contractor.

The Fifth Circuit's decision in Noatex could be the impetus needed for Mississippi to pass a mechanics lien law that extends at least to first tier subcontractors or materialmen, as most of Mississippi's construction industry have sought for years. Currently, Mississippi is the only U.S. state that does not have such a law that applies to the development owner's real property (as distinguished from project funds). Additionally, some members of the Mississippi legislature have already drafted legislation to comply with the Fifth Circuit's due process requirements, although it is currently unknown what additional burdens any new statute, if passed, will place on subcontractors and materialmen. 

Second Circuit Clarifies Standard for Vacating an Arbitration Award Under the Corruption Ground of FAA Section 10(a)(2).

In Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL IrrevocableTrust, 2013 WL 4609100, -- F.3d – (2d Cir. 8/30/2013), the Court affirmed the District Court’s denial of an action to vacate an arbitration award. 

The dispute concerned the ownership of a life insurance policy.  Claimant alleged that the respondents had materially breached their obligation to pay the insurance premiums and therefore claimant became the sole owner of the policy.  The parties agreed to submit their dispute to a panel of three rabbis (“the Panel”) to arbitrate the contract dispute.  Each party selected an arbitrator and they both selected the third, neutral arbitrator.  After seven or eight sessions (for more than 30 hours total) and one fact witness, the Panel issued an award in favor of the claimant. 

Respondents moved to enjoin the enforcement of the arbitration award and for vacatur of the same.  The District Court confirmed the arbitration award and denied respondents action for vacatur. 

On appeal, the Second Circuit framed the issue as follows:

Whether there was ‘abundantly clear’ evidence of corruption to vacate the arbitration award under the FAA, where (1) no records of the arbitration proceeding were kept; (2) all parties agreed that the arbitrators could reach their decision by any legal, factual or other basis; (3) an affidavit submitted to the district court alleged that the neutral arbitrator was overhead promising one of the parties a favorable ruling; (4) the affiant testified that he was threatened for making his testimony; and (5) the arbitration panel issued its ruling with only two of the three arbitrators present.

Kolel, at *4.

The Second Circuit confirmed that its standard for vacating an award under the “corruption” ground of section 10(a)(2) was the same standard as under section 10(a) for “corruption, fraud, or undue influence” – “[e]vidence of corruption must be abundantly clear in order to vacate an award.” Kolel, at *3 (emphasis added).  The evidence must be “direct and not speculative.” Kolel, at *3, 5. Denial is appropriate where “a reasonable person would not “have to” conclude that [an arbitrator] was partial to a [party], or biased against [parties challenging the award].”Kolel, at *6.

Although the Court referenced the appellate record had a substantial amount of “he-said, she-said” conflicting accounts, the Court found “only one affidavit that is from an individual without an obvious stake in the outcome of the arbitration and with firsthand knowledge of the pertinent facts or evidence.” Kolel, at *5.  That witness stated that he overhead the neutral arbitrator tell a non-party to inform the claimant that the Panel would be issuing a favorable decision to claimant.  The Court found that the appellants failed to prove with clear and convincing evidence “corruption.” Kolel, at *6.  Even accepting the assertions in the affidavit as true, the appellants “failed to suggest – let alone prove – what, if anything, [the neutral arbitrator] stood to gain or what special connection he had with [claimant] that would have given plausible reason to corrupt his decision.” Kolel, at *6.

In addition, the Second Circuit found that vacatur was not required given that the award was made after only one witness testified.  “The Panel’s decision to hear only one witness does not make the arbitration fundamentally unfair.” Kolel, at *7.  The Court explained that particularly where the issue is one of contractual interpretation, a question of law, reference to external evidence is not necessarily required. Kolel, at *7.  The Court reaffirmed its recent holding, in LJL 33rd St. Assoc., LLC v. Pitcairn Props., Inc. 2013 WL 3927615, -- F.3d --, at *8, that “[a]rbitrators have substantial discretion to admit or exclude evidence.” 

Throughout its reasoning, the Court made reference to (i) the absence of a detailed record of the proceeding and (ii) unreliable, contested facts.  When entering into the arbitration agreement and at the preliminary conference, parties should carefully evaluate whether they should incur the additional costs to better preserve a record (e.g. stenographer) of the arbitration to permit effective review by a court should that become necessary.  Also, when challenging an award, submit properly authenticated and reliable (e.g. not hearsay) affidavits to support the claims of vacatur.  At least the Kolel court appeared turned-off by the bickering on tangential issues between the parties.

Federal Arbitration Act Requires the Arbitration of Massachusetts Consumer Protection Claims

Massachusetts has a powerful consumer protection statute commonly known as Chapter 93A.  General Law Chapter 93A affords a private right of action on behalf of consumers (§ 9) and businesses (§ 11) for unfair or deceptive acts and practices.  Where a violation is shown, a party may recover reasonable attorney’s fees and potentially treble damages (upon proof of a willful violation).  Chapter 93A is routinely pled in business contract and tort actions in Massachusetts. 

In 1982, the Massachusetts Supreme Judicial Court (“SJC”) “held that, even where a consumer executed a valid contract agreeing to arbitrate all disputes, a plaintiff may not be compelled to arbitrate a claim alleging unfair or deceptive trade practice in violation of G.L. c. 93A, § 9.” Hannon v. Original Gunite Aquatech Pools, Inc., 385 Mass. 813, 826-827, 434 N.E.2d 611 (1982).  Thus, absent agreement at the time the dispute has ripened, a party could keep Chapter 93A claims (and perhaps the entire dispute if the facts are intertwined with each other) out of arbitration despite an otherwise enforceable agreement to arbitrate.

On August 12, 2013, the SJC held that even Chapter 93A claims “must be referred to arbitration where the contract involves interstate commerce and the agreement to arbitrate is enforceable under the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. (2006) (FAA).”  McInnesv. LPL Financial, LLC, 466 Mass. 256, -- N.E.2d – (2013).  The Court acknowledged that the Hannon decision “made no reference to the FAA” and, although not expressly stating it, found Hannon was wrongly reasoned for matters that implicate interstate commerce by disregarding the FAA which would have superseded any state prohibition of arbitration under the supremacy clause.  In so ruling, the Court reversed and remanded two separate lower court rulings denying a motion to compel arbitration because of the existence of the consumer protection claims.

Join Division 1's LinkedIn Subgroup

Division 1 created a subgroup on LinkedIn.  The subgroup is part of the Forum on the Construction Industry's LinkedIn Group.  Visit the Division 1 LinkedIn Subgroup Page to join.

The Fall Meeting at the Omni Shoreham Hotel: What did you miss?

Hopefully, you did not miss the Fall 2013 Meeting of the Forum on the Construction Industry, but if you did, here's some idea of what you would have seen, heard, and learned. The plenary sessions and workshops focused on P3s (public-private partnerships, to the uninitiated), which is becoming the emerging way for delivering infrastructure projects for many states, cities, and schools in rapid fashion with less impact on the government's budget.  

As part of the seminar, Division 1 and Division 9 (Specialty Contractors and Subcontractors) held a joint breakfast on the Friday morning of the meeting. Division 1 members Roger Jones and Tony Lehman participated in a discussion moderated by Division 1's Scott Griffith to discuss the unique issues posed by multiparty arbitrations.  

Breakfast panel discussion including Tony Lehman and Roger Jones from Division 1

When people were not listening to the high quality presentations taking place in the meeting rooms, they often sought out their fellow Forum members to enjoy a drink, a meal, or a joke. Here are a few photos taken in Washington, DC, during the meetings.

Georgia Law Graduates and Forum Members (from left) Tony Lehman, Eddie James,
Reggie Jones, and Dorsey Carson

The nighttime courtyard at the Omni Shoreham Hotel 

Rather than hold a formal sit-down dinner, Division 1 opted for cocktails and a view with Division 2. The cocktails and the view were courtesy of the W Hotel's P.O.V. Lounge, which overlooks the Department of Treasury Building and some little residence located at 1600 Pennsylvania Avenue. President Obama chose not to make an appearance to ask Division 1 for ways to avoid the government shutdown, choosing instead to make a phone call to the President of Iran. 

The Department of the Treasury, across the street from the POV Lounge, where Division 1
 joined Division 2 for cocktails and fun

The White House, from the POV Lounge

Division 1 Chair Lu Prats, with photo-bomber and Steering Committee Member Scott Griffith

Lu Prats holding court (and a cocktail) at POV Lounge, perhaps planning a run for President Obama's house?