The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

It is one thing to assert construction claims; it is another thing to prove your case with admissible evidence. Therefore, those who intend to litigate construction claims must keep Steven Covey's advice in mind: Begin with the end in mind. This mindfulness must begin prior to the commencement of the project. Systems must be put in place to manage, sort, and preserve potential evidence. If you wait until a lawsuit is filed to get your ducks in order, it may be too late. At that point, the more appropriate aphorism has something to do with cats, not ducks, because organizing admissible evidence at that juncture is like herding cats. With enough time and money, you may get most of what you want organized and ready for trial, but something is bound to get away from you-or taken away from you by the court.

The reality of being precluded from using evidence at the trial of a construction defect case was aptly demonstrated in a recent decision of the New Jersey Supreme Court in the Tri-Form Construction case (August 2010). To read the entire opinion click here. This case is a useful primer on a number of levels. First, it deals with the issue of spoliation, meaning, the destruction of evidence. What happens when evidence is destroyed in the remediation process so that the defendant no longer has the evidence to defend itself in court? The New Jersey Supreme Court also does a good job summarizing the competing interests and corresponding difficulties of parties involved in construction litigation.

How Courts Perceive Construction Claims

Commercial construction projects often present unique challenges to the courts, in part because when an argument erupts over a claimed construction defect, it is inevitably complicated by the conflicting interests of the parties. The project owner wants the building to be free of defects, while other parties to the project, including the general contractor, its subcontractors and suppliers, the construction manager, if any, the architect and other design professionals, each may dispute the existence of, the extent of, and the responsibility for, any claimed defects. Moreover, each of them may seek to shift the blame for any conceded defect to others and each will likely assert that it has the right to investigate the claim and to attempt to cure any defects that are identified.

Further compounding those competing interests, time itself may create overriding considerations for the building's owner. Particularly if the claimed defect threatens the building's integrity or the owner's ability to conduct its business, the owner will view the time within which to remedy a defect in a building's construction as being constrained. The building's owner, fearing that existing, identified defects, if not cured promptly, will worsen or adversely affect other parts of the structure, may have limited patience with a contractor who does not resolve a problem quickly. The owner may lose confidence in the contractor's ability to remedy a defect if that contractor's response is slow or if proposed resolutions are inadequate. In either situation, the building owner may hasten to seek solutions from experts, consultants, or contractors in an effort to prevent a relatively minor problem from turning into a major failure of one of the building's systems.

Nor is the building's owner the only party whose interests complicate the dispute. A contractor who is being blamed for a problem may conclude that there is no defect to be cured and, if the complaints persist, may come to regard the owner as unreasonable or as seeking perfection when the work was performed in an adequate, acceptable, and workmanlike manner. Alternatively, the contractor may recognize that there is a defect and try to resolve it, or it may decide that the problem was caused by a supplier, laborer, or another contractor outside of its control, or has resulted from faulty plans or specifications.

Other parties to a large construction project will also have their own unique perspectives on the owner's claim that there is a problem to be addressed. General contractors, construction managers, architects, and engineers each have a role to play in the project and interests to protect in the event that a claimed defect is identified. Questions about whether the defect arose because of faulty plans and specifications, improper design, poor workmanship, defective materials, insufficiently skilled subcontractors, or inadequate supervision may divide the participants and confound the ability to reach a workable solution.

As complicated as the relationships inherently are, they are compounded when they play out in the shadow of threatened or actual litigation. The reality of how project owners, contractors, and related professionals behave, each with distinct and often inconsistent goals and motivations, frequently leads one or more of them to act in ways that impact on the eventual conduct of that litigation.

The building owner who only wants to solve a problem and prevent it from getting worse may undertake testing and repairs without waiting for a resolution by the contractor whose work the owner believes is the cause. The contractor called back to the building for a repair may make suggestions or corrections without undertaking a thorough investigation or fully documenting the alleged defect or identifying other potential causes. Even if the parties act with the purest motives, evidence of the extent or the cause of any claimed defect may be compromised or destroyed as testing and investigations are undertaken and as repair, retrofitting, or replacement of affected building systems or components is completed.

It is preferable, of course, to have an orderly procedure for identifying a defect, alerting the allegedly culpable party, conducting an investigation and testing that is observed and documented by representatives for all potentially responsible parties, identifying a cause, and achieving a solution. In the real world of construction projects, however, the parties do not always behave that way and may proceed to develop a solution without preserving all of the evidence that is needed to determine liability or prove damages.

Owner's Catch 22: Remediation vs. Spoliation

Catch 22 has come to be known as a situation in which a desired outcome is impossible to achieve because of a set of illogical rules or conditions. As will be shown, the owner in the Tri-Com Construction case was in a Catch 22 situation. The curtain wall system in the owner's large new commercial building leaked, and the subcontractor that installed it eventually stopped responding to the owner's request for help. What is an owner to do? On the one hand, he must take action to protect his building and the health and safety of those who work there. On the other hand, if litigation is contemplated, remediation could destroy evidence that may be necessary to prosecute or defend the claims.

In this case, after the owner fixed the problems with the window system, the company sued its construction manager, its consultant Tri-Form Construction, and the installation subcontractor, Academy Glass. The defendants filed motions to exclude all evidence regarding the curtain wall system on the grounds of spoliation of evidence. The New Jersey Supreme Court summarized the proceedings as follows:

On March 21 and 22, 2006, the trial court separately granted defendants' motions to exclude evidence relating to the window system installation. In reaching that conclusion, the court found that plaintiff had never given notice to defendants about the proposed remediation prior to the commencement of the work; had failed to respond to defendants' initial requests to conduct an inspection; had first notified defendants of the remediation work on January 24, 2003, when there was insufficient time to permit them to perform an independent investigation; and had completed the repairs when there was no real emergency.

The trial court concluded that plaintiff had engaged in spoliation of the evidence and that there was clear prejudice to defendants because their expert had not been given an opportunity to fully investigate the leaks and their cause. The court also concluded that the expert's photographs and his records about his visual observations were not sufficient^[ to permit defendants to secure an expert opinion contrary to that offered on plaintiff's behalf.

Shortly thereafter, the trial court granted summary judgment to one defendant and partial summary judgment to another on the grounds plaintiff owner could not no longer prove its claims following the order excluding evidence. The plaintiff owner appealed and the appellate division reversed the order of dismissal, holding that the preclusion of evidence was unreasonably harsh under the circumstances. The defendants then appealed to the New Jersey Supreme Court, and that court held:

 

In this dispute, plaintiff has already lost claims as a result of the spoliation and its claim relating to the strip-window system has been limited significantly. There remains, however, one further step in our analysis, because defendants are not similarly situated. As to defendant Academy Glass, we agree with the Appellate Division that there is a sufficient basis on which to permit plaintiff to proceed, limiting its claims to the conditions that were observable prior to remediation and its experts to a review of only those conditions.

However, we reach a different result as to defendants Tri-Form and Karabinchak. In spite of the fact that the wealth of evidence ordinarily generated during construction projects lends itself to leveling the playing field, in this case the opportunity to inspect the leaking windows before remediation was critical. Because plaintiff deprived defendants Tri-Form and Karabinchak of that opportunity, and because we therefore perceive them to have no independent source of evidence or testimony sufficient to permit them to mount a defense, the claims as to those defendants cannot proceed at all. As to defendants Tri-Form and Karabinchak, the only fair remedy for plaintiff's spoliation is to impose the sanction of dismissal.

The Tri-Form Construction case shows the rationale of courts trying to fashion a just remedy when evidence has been destroyed. Each state will have different factors to consider. In New Jersey, the courts consider the following factors:

In summary, courts confronted with spoliation in the context of commercial construction litigation should recognize that a variety of factors bear on the appropriate remedy. In particular, courts should consider all of the following: the identity of the spoliator; the manner in which the spoliation occurred, including the reason for and timing of its occurrence; the prejudice to the non-spoliating party, including whether the non-spoliating party bears any responsibility for the loss of the spoliated evidence; and the alternate sources of information that are, or are likely to be, available to the non-spoliator from its own records and personnel, from contemporaneous documentation or recordings made by or on behalf of the spoliator, and from others as a result of the usual and customary business practices in the construction industry. Courts should then balance all of those considerations in crafting the appropriate remedy with an appreciation for the ways in which the construction industry itself provides them with unique tools with which to "level the playing field" and achieve an appropriate remedy for spoliation.

Suggestions

Owners are faced with this kind of Catch 22 situation ail of the time. Here are a few suggestions to prepare for the next time it happens:

1. Draft contract language that addresses this issue. State the address where notices can be sent to advise the other side of defective conditions. Include reasonable time frames within which  inspections and repairs are to be performed.
2. Before taking corrective measures, advise the other side in writing of the date, time and place of the remediation efforts, giving the other side ample time and warning about the remediation efforts that are to take place, and invite them to be there to observe, take pictures, take notes, etc.
3. Make sure to establish an unassailable record of your efforts to get the contractors to (1) take corrective action, (2) the contractors refusal to do so, and (3) that the contractors had actual notice of the time and place of your remediation efforts.
4. During the remediation process take pictures and video of the work; handle with care any portion of the work that is removed; take special efforts to preserve the materials; keep a log of the chain of custody in case someone alleges that the materials have been tampered with.

As was mentioned at the beginning of this article, the success of the prosecution or defense of construction claims begins before the project begins: contract language, systems and controls to preserve evidence, diligence in ensuring the other side is on notice of plans for remediation, and so much more, all have a role in being prepared for potential litigation. The Tri Form Construction case is a perfect example of the uncertainty of litigation, that evidence matters, that courts have tremendous power and influence over what the jury will ultimately hear and see during trial

 

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On June 28, 2010, the California Court of Appeal published Pennsylvania General Insurance Company vs. American Safety Indemnity Company (2010), Cal. App. 4^th, a case involving the following recurring coverage issue in construction defect litigation that vexes primary and excess insurers alike: what, if any, obligation does an insurer owe to its policyholder where: (1) the commencement date of the damages is not certain, (2) the damages caused by the defective workmanship are continuous, and (3) the damages span the successive annual policies of one or more carriers? The short answer is it depends on the language of the insurance policy. But the Pennsylvania General case tells us more than that; it is a primer on the basic coverage issues arising from continuous damage claims.

While no new ground will be plowed for seasoned insurance coverage lawyers, it is hoped that some seeds of understanding will be planted for construction lawyers and other construction industry professionals. One aspect of the case is most interesting because the policy language at issue was a direct effort by the insurer to draft language that would avoid coverage in these kinds of continuous damage cases and thereby circumvent the holding in the seminal California Supreme Court case, Montrose Chemical Company v. Admiral Insurance Company.

 

1.Summary of Underlying Construction Defect Case

 

Whitacre Construction was insured under a commercial general liability policy issued by Pennsylvania General Insurance Company for the period October 1998 through December 2001. During this time, Whitacre entered into a subcontract to perform framing and rough carpentry work on a project. At the conclusion of Pennsylvania General's policy period, and after Whitacre's work on the project was completed, American Safety Indemnity Company issued a CGL policy to Whitacre for the period December 2001 through December 2002.

In the underlying construction defect litigation, various parties alleged that Whitacre’s work was improperly done and had created various problems with the project. Whitacre tendered its defense to both Pennsylvania General and American Safety Indemnity. Pennsylvania General accepted Whitacre’s tender of the defense under a reservation of rights and ultimately paid the defense and settlement costs for Whitacre. American Safety declined Whitacre’s tender, asserting there was no possibility of coverage under its policy since the work was completed prior to the inception date of its policy, and did not participate in defending or indemnifying its insured.

After the settlement of the construction defect case against Whitacre, Pennsylvania General filed suit against American Safety seeking equitable contribution from American Safety for a portion of the defense and indemnity costs paid by Pennsylvania General. The trial court, ruling on cross-motions for summary judgment, concluded American Safety had no responsibility to pay any portion of the defense or indemnity costs because there was no potential coverage under American Safety's policy for the claims asserted against Whitacre and entered summary judgment for American Safety. Pennsylvania General filed an appeal.

2. General Coverage Issues

A. First Party Claims vs. Third Party Claims

How coverage is triggered in an insurance policy depends on whether the policy is a first party property insurance policy, such as a homeowners policy, or a third party liability policy, such as the CGL policy at issue in the Pennsylvania General case. A first party homeowners policy provides coverage for a homeowner in case of a fire, theft, or some other covered peril like earthquake, water, or wind. A third party liability policy, on the other hand, provides coverage for the liability of the insured to a third party, such as a building owner who sues for defective workmanship.

Just as the risks being insured are different in first party and third party policies, so too is the coverage analysis for each policy."[T]he right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks." Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal. 3d 395,407.

Another difference in first party homeowner policies and third party CGL policies centers on the notice of loss requirements. Standard homeowner policies have time limitations within which damages must be discovered, notice to the insurer must be given, and a lawsuit must be filed. CGL policies do not have time limitations on coverage based on the date of discovery of the loss. Instead, CGL policies cover damages caused by an “occurrence” which is typically defined as an accident or continuous exposure to conditions that result in bodily injury or property damage during the policy period. Likewise, there is no limitation period for filing suit in a CGL policy. It is the damaged party who makes the claim against the insured and, if coverage is established, the insurer is required to indemnify the insured up to the limits of the CGL policy.

As has been noted, for CGL policies the focus is on whether there has been an “occurrence” during the policy period. But what if, as was alleged in the Pennsylvania General case, the inception date of the occurrence can not be determined and the damages are continuous, spanning more than one policy and implicating the policies of more than one carrier? That question was answered fifteen years ago in Montrose Chemical Corp. v. Admiral Ins. Co.(1995) 10 Cal.4th 645, 655-58.

B. The Montrose Case

 

Montrose Chemical Company manufactured the pesticide known as DTD from 1947 until 1982.

In 1983 it became embroiled in the infamous Stringfellow cases where the State of California and the U.S. government sued Montrose for the clean up cost at several disposal sites where the company had dumped its chemicals.The governments alleged there was progressively deteriorating property damage caused by chemicals being released into, or migrating through, soil, groundwater, and surface water. Montrose tendered the claims to its insurance carriers (warning: the following is a gratuitous editorial comment), seeking the defense and indemnity for which it had paid handsome premiums for many years.

Between 1960 and 1986, seven different insurers, ending with Admiral Insurance, issued CGL policies to Montrose. Admiral’s four CGL policies covered the periods from 1982 to 1986, and contained the standard language requiring Admiral to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... bodily injury, or ... property damage to which this insurance applies, caused by an occurrence...." "Occurrence" is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

Montrose filed a declaratory relief action against the various carriers to establish the rights and duties of the parties under the policies of insurance. Admiral moved for summary judgment on the issue of its duty to defend, arguing that there was no potential for coverage under its policies given the effective dates of its policies and the fact that the dumping of the waste predated its policies. The trial court granted the motion for summary judgment, finding there was no potential for coverage, and thus Admiral had no duty to defend the lawsuits.

Montrose appealed the ruling and the Court of Appeal reversed the order granting summary judgment. Admiral’s petition to the California Supreme Court was granted, but the decision of the Court of Appeal was affirmed, with the Supreme Court explaining:

[W]e conclude that the standard CGL policy language, such as was incorporated into Admiral's policies in issue in this case, provides coverage for bodily injury and property damage that occurs during the policy period. In the case of successive policies,bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods. Stated in the insurance industry's parlance, we conclude the "continuous injury" trigger of coverage should be adopted for third party liability insurance cases involving continuous or progressively deteriorating losses. In this case, because the potential of coverage arose under Admiral's policies, so too did its duty to defend Montrose in the underlying lawsuits.

The “continuous injury trigger” rule in Montrose has been applied to construction defect claims over the years. In the Pennsylvania General case, it was alleged that the insured’s framing and rough carpentry work caused damages that continued beyond Pennsylvania General’s policy period, and into the policy period of American Safety. Interestingly, the Court noted that when American Safety denied the claim, it was relying upon its policy language that “was designed to 'circumvent the continuous injury trigger of the coverage rule laid down' in [Montrose]."

 

3. Interpretation of American General’s Insurance Policy

 

The Court analyzed the American General policy based upon three important principles of insurance law: (1) “[w]hen construing an insurance policy, [a court ] must resolve ambiguities in coverage clauses most broadly in favor of coverage”; (2) “[a] policy provision is ambiguous when it is capable of two of more constructions, both of which are reasonable”; and (3) when the language of the policy is not clear it should be construed in a manner the “satisfies the hypothetical insured's objectively reasonable expectations.”

 

The Court summarized the relevant policy provisions as follows:

ASIC's CGL policy provided it would indemnify Whitacre for any amount Whitacre became obligated to pay as " 'property damage' to which this insurance applies," and specified that "[t]his insurance applies to . . . 'property damage' only if: [¶] (1) The . . . 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and [¶] (2) The . . . 'property damage' occurs during the policy period." (CGL, Section I, Coverage A, ¶ 1(a) & (b).) ASIC's CGL policy provided a "per occurrence" {Slip Opn. Page 11} limit of $1 million, and provided a "Products/Completed Operations" aggregate limit of $1 million

ASIC's CGL policy also contained two 1999 endorsements that modified the standard policy provisions. The standard definition of "occurrence" contained in the 1997 version of the CGL policy was replaced by ASIC's 1999 endorsement that refined the definition of "occurrence" by adding the following italicized language: " 'Occurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. 'Property damage' . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance." (Italics added.)

At the same time, ASIC added another 1999 endorsement, entitled "PRE-EXISTING INJURY OR DAMAGE EXCLUSION," which stated: "This insurance does not apply to: [¶] 1. Any 'occurrence', incident or 'suit' . . . [¶] [(a)] which first occurred prior to the inception date of this policy . . .; or [¶] [(b)] which is, or is alleged to be, in the process of occurring as of the inception date of this policy . . . even if the 'occurrence' continues during this policy period.

The Court of Appeal summarized the trial court’s reasoning in granting American Safety’s motion for summary judgment as follows:

ASIC's policy excluded coverage for the claims asserted against Whitacre in the construction defect litigation because Whitacre's work was completed before the inception of ASIC's policy. The trial court reasoned that under ASIC's CGL policy: "The terms 'occurrence' and 'property damage' are distinctly defined and are not synonymous. In evaluating the trigger of coverage in the policies, there are two separate triggers, 'occurrence' and 'property damage' which are not the same, in light of the fact that 'property damage'' is caused by an 'occurrence.' [Citations.] An occurrence is a causal event. [Citation.] [¶] . . . [ASIC's] policy requires that . . . the occurrence [both] . . . 'happen during the term of the insurance' . . . and cause property damage during the policy period. It also excludes a prior 'occurrence' . . . .In the context of the underlying action, the Court finds that the 'occurrence' (the act causing the injury/damage), here the defective framing work performed by Whitacre, could arise no later than the time Whitacre's framing work on the project was completed. The undisputed evidence establishes that Whitacre's work was completed by June of 2001. . . . Therefore, the evidence establishes that the 'occurrence' commenced during [Pennsylvania General's] policy period, which was prior to the inception of [ASIC's] policy.

The Court did not agree with the analysis of the trial court. In analyzing the policy, the Court stated the proper construction of “occurrence,” as defined by the policy, requires a focus on “when the damages caused by the negligent causal acts of the insured first commenced, and is not on when the insured completed its work.” Since summary judgments are appropriate only if there are no triable issues of fact, the Court noted “the facts were disputed on when those damages first commenced and the trial court's entry of summary judgment in favor of ASIC was based solely on its conclusion that there was no potential for coverage because Whitacre's causal acts happened before the inception of ASIC's policy. We conclude, however, the policy was reasonably susceptible to the interpretation that the trigger of coverage was not when the insured completed its work, but was instead based on when the damages caused by the negligent causal acts of the insured first commenced.”

The Court reversed the judgment and awarded Pennsylvania General its costs on appeal. Presumably, the case will be remanded to the trial court for a trial on the disputed fact of when the damages caused by Whitacre’s negligent construction first commenced. Even if the trier of fact concludes the damages commenced prior to American Safety’s policy period, under Montrose, the findings will not be complete, and American General will not be off the hook, unless there is also a finding that there is no continuous or progressively deteriorating losses that fall within its policy periods.

Alternatively, the parties may elect to resolve the dispute through mediation rather than risking an unacceptable outcome by a judge or a jury. That’s an option I can support.

Editor's Note: This article originally appeared in Mealy's Litigation Report: Consruction Defect Insurance, Vol.7, #7, August 2010.

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The right to arbitrate a dispute can be waived. One way to waive arbitration rights is to sit on them, figuratively speaking, of course. By sit on them, I mean delay enforcement of the right or take steps that leads the other side to believe you do not intend to arbitrate the dispute. In a recent unpublished opinion (meaning, the case can't be cited in legal pleadings or used in oral argument as persuasive authority), the California Court of Appeal addressed the waiver issue. The case is important to the The Critical Path because the facts present a common set of circumstances that can result in a waiver. Therefore, even though the opinion is unpublished, it is instructive, and it is helpful in that it refers to most of the published California opinions on the subject. Click here to read the opinion.

Here's What Happened

Thompson Building Materials was a defendant in a construction defect case. The homeowners alleged the stone pavers provided by Thompson cracked and deteriorated due to latent defects, and that debris from the defective material damaged the pool filter and pump system. Thompson filed an answer to the complaint and participated in court-ordered proceedings, discovery, and a mediation. A week before the discovery cut-off and a month before trial, Thompson filed a motion to compel arbitration, claiming that it had recently discovered an arbitration provision on the back of the invoices for the sale of the building materials.Apparently, when the invoices were copied, only the front side was copied, leaving the backside boilerplate, including the arbitration provision, uncopied.

In support of the motion to compel arbitration, Thompson's counsel informed the trial court that

although he had-known of these invoices and had been-litigating these invoices for probably 20 years, his associate (to whom he had delegated the responsibility of responding to plaintiffs discovery) had not, and-she simply didn't know any better in terms of knowing there should have been a back side on [the invoice]. 

 Plaintiff homeowners opposed the motion to compel, arguing Thompson waived the arbitration provision by participating in the litigation for over a year and that plaintiffs were prejudiced by the fact that Thompson was attempting to compel arbitration of a case that was only a month away from trial. Plaintiffs also argued that they were prejudiced because Thompson obtained information in discovery that it would not have been able to obtain in arbitration.

 The trial court granted the motion to compel arbitration, and the homeowners filed a petition for writ of mandate. The Court of Appeal held the trial court's order was not supported by substantial evidence and granted the homeowners' petition. The court concluded Thompson had waived its arbitration rights:

 

Although there is no uniform test for determining whether a party‘s conduct amounts to a waiver of the right to arbitrate, the courts have formulated a list of factors that are relevant in making that determination. These include ‗―(1) whether the party‘s actions are inconsistent with the right to arbitrate; (2) whether ‗the litigation machinery has been substantially invoked‘ and the parties ‗were well into preparation of a lawsuit‘ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‗whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place‘; and (6) whether the delay ‗affected, misled, or prejudiced‘ the opposing party.(St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196, quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992.)

Thompson‘s conduct in this case satisfies virtually all of these factors and compels a finding of waiver. Thompson did not raise arbitration as an affirmative defense in its answer. (SeeGuess?, Inc. v. Superior Court, supra, 79 Cal.App.4th at pp. 557-558.) Thompson participated in the litigation for nearly a year. In opposition to Thompson‘s motion, plaintiffs‘ counsel submitted a declaration in which he listed 54 items plaintiffs considered to be ―significant litigation activities by the parties. Nearly half of these items are discovery propounded by Thompson. The parties designated expert witnesses; Thompson‘s expert inspected plaintiffs‘ property in June 2009 and March 2010. The parties also participated in a case management conference in September 2009 and court ordered mediation in February 2010. Suffice it to say, ―the litigation machinery has been substantially invoked and the parties ―were well into preparation of a lawsuit before Thompson notified plaintiffs that it would seek to compel arbitration.  

 

Lessons to be Learned

Usually, the decision to include an arbitration provision in a contract is the result of a deliberative decision making process. Therefore, when a claim arises, it would be wise to take steps to preserve that right, or at least, consider your options. You may want to create a checklist that could include one or more of the following points:                                                                                                                                                

• make sure there is  a written contract
• assume the contract has a dispute or claims clause and check to see if there is an arbitration provision
• decide if the arbitration provision should be enforced or waived, if it is believed that litigation would be more advantageous under the circumstances of the claim
• decide if there are mechanics lien rights, statute of limitations issues, or other equitable remedies that must be preserved by filing a lawsuit, then seek a stay of the action, and proceed with the parts of the claim that are subject to arbitration.                                                                                                                                                      

You might also want to be sure that both sides of documents are copied before providing them to your attorney or to the other side. You would be surprised how many times issues seem to disappear simply because both sides of documents are inadvertently not copied.

 

 

 

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In response to an onslaught of construction defect cases, California enacted statutory procedures to encourage settlement of claims before a lawsuit is even filed. But those procedures usually involve attorneys and experts, and they cost money, so are insurance companies obligated to pay the defense costs even though a lawsuit has not officially been filed? In a case of first impression, a California Court of Appeal has answered that question in the affirmative.

 In Clarendon America Insurance Company v StarNet Insurance Co. (2010) Cal App 4^th, Centex Homes was the developer of a residential development in Simi Valley, California known as Westwood Ranch. In July 2006, the Westwood Ranch Homeowners Association served a notice of commencement of legal proceedings pursuant to California Civil Code section 1375 on Centex that set forth a list of alleged construction defects at Westwood Ranch. This step was taken in compliance with the Calderon Act which requires that developers and homeowners associations engage in a prelitigation effort to settle construction defect claims. If the claims can nor be settled, the homeowners association is then authorized to file a lawsuit.

StarNet Insurance had issued two successive CGL policies to one of Centex’s subcontractors on the project, and Clarendon America Insurance had issued a CGL policy to another subcontractor. Centex was a named additional insured on the policies issued by both carriers.

In December 2007, Centex filed a complaint against Clarendon seeking payment of defense fees and costs incurred in defending against the construction defect claims in the prelitigation proceeding known in California as the Calderon Process. Clarendon filed a cross-complaint against the other insurers, including StarNet, seeking a declaration they were obligated to provide Centex a defense and/or coverage. In the first amended cross-complaint, Clarendon sought indemnity, declaratory relief, and contribution from the additional insurers. Clarendon reached settlements with all of the other CGL insurers except StarNet.

StarNet moved for summary judgment asserting the prelitigation process did not constitute a "suit" within the meaning of the defense agreement in the StarNet CGL policies. The trial court denied the motion, holding the prelitigation procedure “ is a civil proceeding in which damages are alleged and therefore falls within the StarNet CGL policies' definition of ‘suit’…Additionally, the definition of 'suit' also includes alternative dispute resolution procedures to which the insured submits with the insurer's consent…Thus, even if the Calderon process is not considered to be a 'civil proceeding' if that phrase is narrowly interpreted to mean 'court action[,'] but rather is considered an 'alternative dispute resolution proceeding[',] there is a question of fact as to whether or not Star[N]et has a duty to defend once the Calderon process has begun."

After analyzing the language of StarNet’s policy according to the standard rules of insurance policy interpretation, the Court of Appeal made this important observation:

The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.

In affirming the trial court’s ruling, the Court stated, “The function and significance of the Calderon Process in construction or design defect litigation, and the StarNet CGL policies' definition of "suit" to include civil proceeding, lead to the reasonable inference the parties' intended StarNet would have a duty to defend the insured in the Calderon Process. Extending the duty to defend to the Calderon Process is therefore consistent with a hypothetical insured's reasonable expectations.”

This is good news for contractors, developers and, of course, homeowner associations. Hopefully CGL carriers will be more forthcoming in participating in prelitigation procedures such as the Calderon Process in California. This holding should lead to more prelitigation resolutions of construction defect cases and facilitate the public policy reasons for the enacting such laws.

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