For nearly 11 years, I served as a secret weapon in the defense of the nation’s largest homebuilders against numerous construction defect claims involving thousands of building units. Most of my colleagues and clients were often surprised when I mentioned that one of the top builders in the country was a non-profit: Habitat for Humanity. Collectively, we have often wondered what might happen if a public-benefit housing provider ended up in litigation. It appears we may see what happens soon enough.

Hurricane Katrina was devastating to a large number of inhabitants of Louisiana, Mississippi and adjacent areas. Fortunately, there have been some truly wonderful people who have stepped in with support. One of those entities is the Make It Right Foundation that was started by Brad Pitt. According to their website, the organization has built 87 homes in New Orleans, out of 150 it has committed to building.

These homes are not like most homes. Although the homes sell for a target price of $150,000.00, all are high-performing, LEED Platinum-certified, designed by award-winning architecture firms and utilize concepts inspired by William McDonough’s Cradle to Cradle design principles. Not to mention that a big part of the intent behind this project is to leave the future homeowners with buildings that will be much more resilient when (not if) the next big hurricane rolls through town.

Ultra-affordable, cutting edge architectural designs, extremely high performance, using the latest sustainable materials and practices, built in a short time frame using a lot of volunteer labor — talk about high risk!

Once again, Murphy’s theorem proves true

Approximately 30 of the homes built by Pitt’s foundation utilized a novel sustainably sourced material manufactured by Timber Treatment Technologies. The product, TimberSIL, is made from the rapidly renewable Southern yellow pine which has been treated with sodium silicate and heat, which essentially encases the wood fibers in glass. This is much more environmentally friendly than standard pressure-treatments that are applied to wood for protection when exposed to the elements. (The chemical that was at the center of the case made famous by Erin Brokovich is used to chemically treat telephone poles.)

Unfortunately, the new treatment hasn’t proven as effective as the manufacturer and others had hoped:

Actor Brad Pitt’s Make It Right Foundation, which has built 100 energy-efficient new homes in the Hurricane Katrina-ravaged Lower 9th Ward, is considering legal action against the manufacturer of an innovative glass-infused wood that was used in some of the homes’ outdoor steps and front porches. The wood has begun rotting, despite being guaranteed for 40 years, a Make It Right spokeswoman said…
But now, decks and steps that were built as recently as three years ago are showing signs of rot, with the wood taking on a dark gray tinge. “It was unable to withstand moisture, which obviously is a big problem in New Orleans,” [Make It Right spokeswoman Taylor] Royle said.

Make It Right Foundation will make things right

The foundation will remove and replace the TimberSIL product everywhere it was installed, at an estimated cost of $150,000.00 over a period of six months. That includes locations where no deterioration or other resultant damage was found. According to Brad Pitt himself:

“Make It Right is ambitious and tries new things all the time in order to make our homes better,” he said. “Where we find innovative products that didn’t perform, we move quickly to correct these things for our homeowners.”

Aside: I really want to highlight this point. Make It Right Foundation is spending its limited resources to fix construction defects, even if those defects did not result in damage. Builders – if you’re tired of increasing insurance premiums from construction defect claims, maybe it is time to consider a much more rational and cost-effective approach: just fix the damn problem before you get sued. But I digress…

According to The New Orleans Advocate, spokeswoman Royle stated that the organization is currently exploring the possibility of legal action against the manufacturer of the TimberSIL product:

“We are evaluating our rights under the law and under the product warranty,” she said. “We hope to have a candid discussion with the company and have asked them to put their insurance carrier on notice. We prefer to resolve this short of litigation, but we are prepared to pursue all legal remedies if necessary.”

Not an isolated occurrence

The New Orleans Advocate also mentioned this nugget:

Earlier this year, renovations at a 19th-century inn in western Massachusetts stalled after contractors who had used TimberSIL to build deck rails said they realized the product would not hold a coat of paint or withstand the region’s climate. Replacing the material was expected to add $100,000 to the project’s originally contracted price tag of $760,000, according to local news reports.

Lessons Learned

There are several takeaways in this story:

  • For-profit builders (and their over-compensated legal counsel…) could stand to learn a lot from non-profit builders when it comes to customer service.
  • With new materials and techniques come risk: design and construction professionals need to anticipate that risk and be prepared to respond accordingly.
  • There is nothing sustainable about throwing out a bunch of building materials that are poorly made, inappropriate for their environment or improperly installed (see the LEED Platinum case study nobody wants you to read).

Sources:


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Image of Make It Right Foundation home under construction courtesy Mark Gstohl

I met Peter Lattey at West Coast Casualty’s Construction Defect Seminar in 2012. Over lunch a few months later, he told me the story of his involvement representing the respondent in Sequoia Insurance Company vs International Recording Corporation. As Peter’s story shows, there are no typical days for professionals working in architecture, engineering and construction forensics.

Two weeks after I was engaged on this case, our client was charged with arson and arrested. He spent the weekend in jail. After he was released on bail, we went to work.

About 12 months earlier, at 8:00 AM on a peaceful Sunday morning, a natural gas explosion blew the roof off our client’s recording studio. There were pieces of plywood and debris scattered a half a block away. Luckily no one was hurt.

It took the Burbank Fire department several hours to quell the blaze. By the time the fire was out, half the building had been gutted and the rest was a shambles. 20 years of building a recording studio business was gone. He lost his business and all the memorabilia from the various groups and films that were recorded there.

That’s Our Story, and We’re Sticking To It…

Of course the owner immediately called his insurance company. They sent out their fire expert who did his investigation before the fire department started theirs. He quickly concluded that our client had set the fire by opening a gas line in the mechanical room and then running out of the building to await the inevitable explosion.

The investigators also claimed to have found evidence of accelerants, (things like gasoline, for example), at a number of locations in the building. Based on this, the insurance company refused to pay his claim for $1.4M. I was brought in, along with several other experts to investigate the fire/explosion and to determine where the explosion really started and what caused it.

From the outset, the insurance claims manager appears to have decided that this was a case of arson. They investigated by looking for evidence that supported this belief. Facts and evidence to the contrary were simply ignored.

We took a different approach. Our approach was to look at all the facts to understand how the explosion actually occurred. We accepted all evidence we found and then let the facts speak for themselves. If our client had in fact set the explosion, we wanted to know that as soon as possible.

Complications & Missing Evidence

This was a complicated case due to the complex nature of the building and the fact that we were starting our investigation almost a year after the explosion. Much of the original evidence had been removed or destroyed. The insurance investigators had pawed over the building, tossed trash into a big heap and removed critical gas lines and other evidence.

It was impossible to tell how the building had looked before the explosion or right after it. And of course the building had been exposed to the weather for 12 months. It was a horrible mess.

What appeared to be a simple concrete block warehouse from the outside had a very complicated interior. The building was divided into three recording studios. There were offices, restrooms, two mezzanines, a mechanical room, huge racks of recording equipment, double walls, triple walls, false ceilings and sealed attics. We needed a model so we could understand the building and how the fire occurred.

Low Tech, But High Fidelity

We needed a model of the building, and we needed it to be accurate and produced quickly. We chose to build a physical model instead of a 3D computer model. This was distinctly low tech but proved to be exactly the right decision.

The foamboard model cost a quarter of the computer model. After we had assembled the information on the building, it only took a week to build. But far more important was the usefulness and functionality of the physical model.

An electronic model requires a computer and skill to view it on screen. It is also inherently untrustworthy. Computer models are faked or tweaked every day. A physical model is inherently more trustworthy, can be viewed directly without any technology and is understood by everyone.

The Side With The Best Evidence Often Wins

The physical model was submitted as an exhibit and remained on the courtroom table during the trial. It could not be ignored. It was repeatedly referred to by all attorneys.

Points were made by lifting off the “roof” and looking inside to see exactly how things were configured. While the real physical building could not be brought into the courtroom, the model on the table substituted perfectly for the real building.

At one point the defense introduced a superb computer generated model to support their theory of how the explosion had occurred. Their expert had spent hundreds of hours generating this. I pointed out several features on the model that the computer model was missing. These features demonstrated that their computer model was invalid. As a result, the court rejected their explosion model.

Reconstructing The Disaster

We made our model from construction drawings of the original construction, aerial photos, descriptions provided by the owner, photos taken during construction and from physical measurements of the ruined building. The drawings were incomplete, the aerial photos were of poor quality, the owner’s memory was not perfect and much of the building was in ruins.

The model wasn’t fancy, but everyone who looked at it could understand exactly how the building was configured before the fire. It was accurate enough that it was never challenged by the insurance attorneys.

While we were building the model we visited the wrecked building several times with the owner and a fire expert to see what we could observe. This was like an archeological dig. We used our eyes and our experience to see what was there. We found several key things.

  • The mechanical room where the insurance company investigators said the explosion originated, had no evidence of a fire or an explosion.
  • There was a mechanical time clock for the exterior lights located at the opposite side of the building from the mechanical room. The clock was badly burnt and stopped at a few minutes after 8:00 AM, the same time as the explosion.
  • The insurance investigator said that the explosion had occurred on one side of an access door and spread through it. But the door was blown off its hinges in the opposite direction and the wrong side of the door was charred.
  • The reinforced block wall beside the time clock was cracked and displaced outward 1.5 inches. Photos taken before the explosion showed this wall as undamaged. It would take a serious force to crack this wall.
  • According to the insurance investigator, the fire spread from the mechanical room into the Foley studio and then burned out the ceiling of this studio. We doubted this. Buried under a pile of ceiling structure and trash placed by the insurance company’s investigators, was a large section of undamaged carpet. This invalidated their theory.
  • From an aerial photo, I could see that the mechanical room had several roof vents that would have allowed natural gas to vent out. This made the beautiful and expensive explosion propagation video of the insurance expert irrelevant.

Trial Pro Tip: Make Sure You Have All The Experts You Need

The insurance company had 12 different experts including several PHD’s and experts in gas diffusion and explosions. However, they didn’t have an architect who understood basic building codes that define how buildings are built. As a result, their investigation missed many critical points.

Amongst other things they didn’t realize that there was a one hour fire wall between the mechanical room and the rest of the building. This is standard on all commercial buildings but their experts didn’t know that or simply ignored it.

Conclusion

The final outcome of the case was an award of $14M for building damage, loss of income, attorney’s fees and interest, all arson charges were dropped, and the claims manager at the insurance company was looking for a new job.

Sweet.

There are two morals to this little story. First, you should investigate a fire or any other situation with an open mind and let the facts tell you what happened rather than trying to force the facts to fit a preconceived conclusion. Second, if the case involves a building, get a good technical architect on your team.


About the Author

Peter Lattey is a licensed architect with over 35 years of experience on most building types. His experience encompasses both the architectural and construction management areas of construction. He has played in a key role in the construction of major institutional, commercial, residential and recreational buildings. He has practiced in the USA, Canada, Australia, Papua New Guinea and Germany. He has provided expert witness testimony on numerous cases. He has been involved in the investigation of seismic, product defect, construction defect, construction delay, scaffolding collapse, water intrusion and fire cases. He worked in the both the original construction of the World Trade center and the investigation after 9/11.

In his spare time he is a sailor and an internationally exhibited wood sculptor.

peterlattey.com

If you aren’t doing anything on Wenesday, 10 April 2013, and you’ll be in the San Diego area, I invite you to join me for lunch. I have been invited to present at the next Lunch+LEED seminar, hosted by my friends at the San Diego Green Building Council.

You may recall that last September I gave a talk at the Retail Design & Construction Conference in Atlanta, GA. This week I will be giving a talk called, Quality Assurance vs. Quality Control – How to deliver projects that are truly sustainable. The presentation has been awarded continuing education credits by both the AIA and the GBCI.

Event Details

When: 10 Apr 2013, 11:30 AM – 12:59 PM
Location: Design Institute of San Diego (DISD), 8555 Commerce Ave, Bldg 4, Rm 402, San Diego, CA 92121 (map here)
Cost: $10 for SDGBC members, $15 for non-members (includes light lunch)
To register: Visit the SDGBC page for this event

A Bigger, Bolder AEC Quality .com

In preparation for the event, I have significantly updated the associated website AEC Quality .com. If you have a moment to check it out, please let me know what you think.

Also, be sure to get your free copy of the eBook, Quality Assurance vs. Quality Control, once it is available.

Thanks again for your continued support and I hope to see you on Wednesday.

Last week, I posted an article entitled VE-ADR 2012: Where are we going with Construction Defect Litigation, summarizing some of my initial thoughts after attending LiMa Solutions’ seminar in Key West. This article is the first in a series discussing some of the key take-aways from the event for stakeholders. Since there wouldn’t be construction defect litigation without plaintiff attorneys filing suit, I figured I would start there. Please note that the opinions and observations here are mine alone, unless otherwise noted, and those of others may not accurately reflect those of their employers, etc., etc. – consider yourself fully disclaimed.

About the picture: This photo shows some resultant damage at wood trim on the exterior of the Westin Hotel, where the seminar was held – somehow fitting and yet also ironic.

On July 26th and 27th, 2012, LiMa Solutions invited about 50 or so of the top professionals in the construction defect litigation industry to Key West. Over the course of those two days in a series of six panels, we discussed some of the emerging trends for effectively resolving construction defect claims.

I took about 25 pages of notes and then sorted some of the various observations into categories. While there were a wide variety of opinions expressed, some clear trends emerged, with some strong consensus by both plaintiff and defense representatives. Below are six key take-aways for successful construction defect plaintiff attorneys to consider.

1. Have an Open Mind

Are your cases resolving as quickly as you and/or your clients would like them to? Of course not. Which means that if you, like most of your colleagues have contingency fee agreements, it also means you aren’t getting paid as quickly as you might like either.

They say that insanity is doing the same thing over and over, expecting different results. In other words, you’d be crazy not to try something different. I’m not advocating that you completely re-vamp everything you are doing. Instead, I recommend approaching change scientifically. That means conducting little experiments where you can isolate one specific variable. For example, maybe you suspect that your notice of claim might have more impact if you deposit representative photos from your expert’s investigation. The next time you have two cases ready to file that are somewhat similar, include the photos with one of them. Carefully observe and document what the response is from defense on both cases. Track the progress of both cases and see if there are any differences in the outcome.

When experiments prove successful, you can then integrate the new strategy into your work moving forward, with confidence.

Another important aspect of having an open mind has to do with how you approach each case. Ed Martinet likes to refer to the parties in a construction dispute as stakeholders instead of litigants. This is what Larry Kent (a successful and highly regarded plaintiff attorney himself) said during his opening address to seminar attendees:

Let’s set aside the inherent conflict. Everyone makes a lot of money unless you’re the one paying for it. We owe it to our clients to resolve cases as quickly as possible. We can do a better, faster and cheaper job. It will make your life better and better for the client.

2. Your Client Matters

One theme that was consistent across many of the panel discussions in Key West was the “human” factor in construction defect litigation. As Dave Stern (West Coast Casualty) said, “this is the largest ‘people business’ outside of retail.” I know that sometimes it probably feels like the defense attorneys and insurance adjusters have no regard whatsoever for your clients. But at the end of the day, we are all human and deep down, we can all empathize with what it must be like to purchase a new home, only to discover that it was not built to the required standards. The fact that a house is often a person’s most significant investment is not lost on those who are responsible for defending the claims that you are advancing. (A lot of your adversaries are also homeowners, some of whom may have even experienced defective construction in their own homes.)

One of the major complaints that participants in VE-ADR 2012 had of plaintiff counsel is the faceless nature of many construction defect claims. Signing up homeowners en masse may be more cost effective, and may have merit, but it takes the focus away from the individual. Nobody wants to be an “et al.” Representatives from the insurance carriers, and defense counsel alike repeatedly emphasized that having the opportunity to work one-on-one with an individual homeowner yields to more effective resolution of construction defect claims.

Typical plaintiffs in residential construction defect claims were categorized as follows:

  • Individual homeowner of a single family home (typically more involved and more aware of specific issues at their residence)
  • Multiple single-family homeowners (often unaware of specific issues, sometimes not even aware of their involvement, usually viewed as “opportunistic” by defense)
  • Homeowner association (HOA board members have certain obligations and as a result, typically have different motivations than individual owners)
  • High-profile, high net-worth owners (may be represented by personal counsel without significant CD experience)

Defense representatives all agreed that early evaluation of the case is the most important factor for successful and expedient resolution of construction defect claims. The first thing that they recommend evaluating: Who is the plaintiff? Many times when responding to claims, the defect list is identical from one case to the next – only the homeowner names have changed.

That may not lead to the response that you are hoping for.

3. Use the Right Expert

How much work does your expert do on behalf of defense? None? It is kind of hard to view that expert as anything other than an “advocate.” That’s your job – to be an advocate on behalf of your client. Your expert needs to be impartial and base their opinion on their experience and the evidence available.

Perception is everything in this world. So no matter how accurate the opinions of your expert may be, how they are perceived by opposing counsel and the carrier’s representatives (not to mention the mediator, judge, and/or jury) will ultimately impact the outcome of the case.

Make sure that your expert is mindful of the importance of demonstrating resultant damage. Perhaps you have legal standing for making claims related to all sorts of technical violations. But you know that without resultant damage, it will be hard for the insurance coverage to kick in.

Make sure that there is sufficient communication between you and your expert. Ask for early evaluation of the case by your expert. Make sure your expert isn’t artificially inflating costs because they think it will help you achieve a better settlement. And since communication is two-way, make sure you are listening to your expert. If there isn’t a whole lot wrong with a house (or tract), and a lower settlement is likely, the more work you put into that case, the less money you make – if you have a contingency fee agreement.

Your expert needs to understand that the bigger the number, the more evidence is required to convince others. As the Honorable Susan Johnson of Nevada stated, “Whenever the plaintiff has a large number compared to the defense offer, I need people to explain the numbers, whether big or small.” Or as Florida mediator, Rodney Romano put it, “Large numbers and tiny offers have never bothered me. To me, it is a window to the soul for the person speaking… Sometimes [they] have to put on a show for the client.” Put another way, it is going to be very hard for the defense to take your demand seriously when your expert calls for complete removal and replacement of the roof, stucco, windows and plumbing fixtures, yet only has a few pictures of slipped roof tiles and hairline stucco cracks. Especially when there hasn’t been any destructive testing.

Actively encourage and facilitate meetings between your expert and those of the defense. Playing “hide the ball” with information and evidence might make for good TV drama, but it won’t help you resolve the case any faster. The sooner that the opposing experts understand the technical aspects of what your expert has uncovered, the sooner they can help their client make an informed decision about resolution. Just make sure that the expert you hire is open to such exchanges and doesn’t make it harder for you to do your job.

4. Consider a Neutral Approach

At the conference in Key West, the central concept was finding better ways of resolving construction defect claims. A big part of this, especially in light of the economy, is controlling costs.

One of the biggest costs in construction defect litigation is related to discovery – and ultimately that means the cost of experts. Just as I previously mentioned that your choice in expert should include those that work on behalf of plaintiff and defense, you might want to consider the neutral option.

Many of the Right To Repair laws in various states (SB800, Chapter 40, for example) create a “pre-litigation” process. If during this pre-litigation process, you were to share the investigative cost with defense by utilizing neutral experts, you could expedite resolution and dramatically reduce the cost for all stakeholders. The neutral expert’s opinion would (and should) be protected under mediation rules, but if in the event the case moves into litigation, the evidence collected could be used by all parties.

Ed Martinet and Bob Freedman presented a special panel on the neutral approach. It should be noted, that a neutral evaluation is generally accepted and promoted by the courts, but it hasn’t been applied much in construction defect litigation due to the inherent complexity. The key to this approach is to gain early buy-in and engagement by stakeholders (plaintiff and defense parties). Once everyone is entrenched in their perspectives (plaintiffs calling for complete reconstruction, defense offering the spare change in their pockets), it is more difficult to get to resolution and narrow the gap.

If the plaintiff and defense are reasonable and rational, such a process could easily reduce settlement costs by 40% across the board, and reduce the cost of going to trial by 300%, according to Martinet.

For a neutral evaluation process to be successful, it has to be customized for the specific case. Martinet and Freedman also emphasized that use of neutral experts doesn’t preclude involvement by counsel’s own experts. In fact, outside experts can “shadow” the findings by the neutral team and therefore provide valuable insight to counsel.

5. Understand Coverage

Insurance coverage issues aren’t necessarily your responsibility when you represent the claimant. But if you don’t accurately understand what coverage exists, what policies are still in play, SIRs and AIs, you are at a disadvantage.

Nevada plaintiff attorney Mark Bourassa takes it a step farther. He recommends that plaintiff counsel bring in attorneys with a background in insurance coverage. Their insight and understanding can provide exceptional clarity to your more challenging cases. This will allow you to negotiate from a stronger position.

Wendy Wilcox, an attorney specializing in the representation of subcontractors puts this into perspective: “You may want $100,000 from my guy, but if he doesn’t have it and the carrier doesn’t have coverage, $100,000 times 0 still equals $0.”

6. Be Creative With Your Presentation and Your Fees

How you present your case, and how you handle your fees have a significant impact on the final outcome. Let’s discuss presentation first.

Jim Kurkhill is a true renaissance man. He has worked as an engineer at Kodak, helped a defense contractor on some lasers, practiced construction law for nearly two decades, and now runs a consulting firm specializing in trial exhibit presentations. During a panel at VE-ADR, Kurkhill showed some tips for presenting better. The most important concept: Construction defect cases involve lots of complex data that needs be simplified in order for you to be more persuasive.

Here are some tips that I have for presenting better:

  • Ditch PowerPoint. Especially the built-in templates. Pictures and graphics that are relevant are much more compelling than a slide loaded with bullets and 12 pt text. (For more on this check out Garr Reynolds’ Presentation Zen)
  • Tell a good story, based on the facts. It is easy to get bogged down by details. Every case has a story that is compelling – let that be your guide.
  • Outsource! Hiring a good presentation designer/consultant will yield a measurable return on investment.

How you handle your fees is between you and your client. But you might want to consider some other alternatives. One of the difficulties with SB800, in particular, is that there are no provisions for plaintiff attorney fees. Therefore, if the builder elects to make repairs, in lieu of a cash settlement, a contingency fee agreement means no money for you. If your fee agreement were to include an alternate flat-fee or hourly fee option in the event of repairs, it means you and your client have additional flexibility.

Additionally, some plaintiff attorneys participating in the seminar in Key West mentioned that they have been successful in accelerating case resolution by offering to reduce their contingency fee percentage. For additional alternative fee arrangements worth considering, see the Association of Corporate Counsel’s Value Challenge.

Conclusion

These are just some of the trends that I picked up on during VE-ADR 2012 in Key West. Many of us that work in construction defect litigation, have been doing so for a long time. Some of you may have devoted the bulk of your career to CD work. As with any industry, things change. And construction defect litigation is an industry in flux.

How you adapt to the changing environment will determine not only your own success, but the successful outcome of the cases you handle.

The 19th annual West Coast Casualty’s Construction Defect Seminar (WCCCDS), held at the Disneyland Grand Hotel has come to a close.

Preliminary estimates of attendance indicate that this year’s attendance may have been down slightly from last year, though the final numbers won’t be available until later this week. Overall, it was clear that a good time was had by all – especially for all the suits stumbling around Downtown Disney late Thursday evening…

The Good, The Bad, and The Ugly

In the “good” category, there were definitely some standout moments during this year’s conference. Whereas last year, only one company seemed to be taking a proactive approach to preventing construction defect litigation, this year there were several firms that were promoting quality assurance and quality control (QA/QC) services. Although many of us depend on revenue generated through the construction defect litigation process, it has always been my perspective that the goal is to improve quality in the built environment. Since WCCCDS caters primarily to residential construction defect litigation, much focus pertains to how large-scale speculative home builders address defective construction. I heard first-hand about how some insurance carriers are offering discounts on premiums for contractors implementing third party verification of quality. Unfortunately, the profit margins for performing third party QA/QC are incredibly low, and as a result, most large builders’ quality verification programs are (to me) less than ideal.

Something else that was clear at this year’s event was the impact that technology has on the construction defect industry. In order to improve efficiency and reduce the total cost of claims related to construction defects, forward-thinking firms presented evidence of technological innovations. My friend Rob Mathewson debuted his cloud-based construction photo documentation platform to the defect industry and provided plenty of hands-on demonstrations of how this software would benefit those of us that depend on photos for evidence in disputes. Jim Hays and I skipped lunch to discuss his construction inspection software that his firm developed at great expense for documenting both course-of-construction and post-construction investigations. On Thursday afternoon, I had a chance to talk about the incredible series of webinars that Pete Fowler’s firm has been offering to the community. And last, but certainly not least, the full LiMa Solutions team was on hand to showcase their innovative approach to resolving construction defect claims.

Regarding the “bad” – I do not want to single out any one particular firm or individual. It was clear in the exhibit hall that there were less vendors than in past years. Due to a downturn in construction defect litigation, there are a number of firms that have endured reductions in staff, or have merged with other firms, or have gone out of business altogether. In other situations, some firms have split, leaving some rather negative emotions. As I walked around and spoke with various professionals, I noticed some less-than-content demeanors. In almost every case, these professionals are involved with firms that have failed to adapt to the changing marketplace. This, in part, inspired me to write about pivots in business strategy at my personal blog.

The primary “ugly” truth that was abundantly clear during the 2012 WCCCDS is that the world of construction defect litigation is changing. Economist, investment advisor, and analyst Gary London clearly demonstrated that the number of construction defect lawsuits filed is trending downwards. To add further insult to injury, because new construction (particularly in the residential sector) has almost come to a halt, the future is quite grim for construction defect litigation. It is unlikely, perhaps even impossible, that construction defect litigation will somehow cease altogether. However, the total amount of work available for construction defect professionals (especially expert witness firms) is shrinking fast.

Image courtesy HBC4511

“Why do We Need to Know Certain Things and How Decisions are Made . . . Construction Defect Claims and Insurance: A Primer on Insurance from a Claims Professional’s Point of View”

Phyllis Modlin, Todd Schweitzer, Teresa Wolcott and Lee Wright

Prior to the panel beginning, representatives from Disney performed a choreographed safety demonstration, accompanied by Herbie Hancock’s Watermelon Man.

Disclaimer: The panel was careful to point out that this discussion should not be taken as a representation of the opinions of various insurance carriers, etc.

Survey: Approximately 1/3 of respondents indicated this was their first year attending WCCCDS, and another 1/3 indicated they have attended 2-5 years. Another survey indicated that 2/3 of attendees are attorneys.

The claims professional’s role begins with a complaint, arbitration petition or notice of claim identifying the insured party. The claims professional must conduct an investigation to establish the insured’s scope of work, contracts, dates of involvement and expert reports. An insurance policy contains two elements: insuring agreement and exclusions.

What is a suit? The Insuring Agreement requires defense of a suit. There can be statutory definitions, but not every claim is in fact a “suit.” It is really up to the carrier to determine whether or not the claim will be defended. There are times when a large case includes arbitration requirements for some contracts, but not all. In the end, it depends on whether or not the carrier wants to proceed with arbitration.

From the carrier perspective, Schweitzer said, “Know your audience,” when it comes to issuing coverage letters. He recommends that the coverage letter be concise and that it accurately communicates what the company’s coverage position is. Discussion between the claims adjuster and the insured is essential.

Deductible vs. SIR

Deductible: “Carrier has an immediate defense obligation and bills the insured for dedcutible once it is paid. Self-Insured Retention: “A stated amount that must be paid by the Named Insured.” When the Named Insured cannot satisfy the SIR, who can satisfy it? RTFP (short for “read the f___ing policy”) This can become a complicated issue.

Additional Insured Tenders

AI endorsements are not being included in policies these days, but the legacy of policies from the early ’00s means that these still come up. The key to AI endorsements is to make sure the communication from counsel is thorough. AI endorsements also vary from state to state. There is conflicting law regarding coverage during operations.

Defending the Named Insured

Sometimes the insurer has the right to select defense counsel. One of the most import things that carriers are looking for from defense counsel is meaningful and accurate reporting, as well as setting appropriate reserves. At the beginning of the case, the carrier needs to know the defense strategy and be presented with some understanding regarding whether the case can be defended. The worst mistake that the defense counsel can make is to force the adjuster to request additional funds. Attorneys need to accurately analyze the risk exposure and continually update the carrier. The carrier “wants to partner with the defense,” Wright said. “I want your opinion – that’s why we hired you.” Successful defense attorneys are truly partners with the carrier. In many situations, the relationship between builders, carriers, owners, etc., is bigger than any individual case. The carrier wants to get the insured out of the case as quickly as possible, for as little money as possible.

Setting reserves is subject to the carrier’s internal policies, but is generally very early on in the case. The defense counsel needs to “use some guts,” according to Modlin regarding the value of the case and what is going to be required to settle the case. Perhaps worth noting, not setting appropriate reserves inhibits the ability of counsel to get paid.

Use of Experts

Wright said, “we need to have a better business relationship with our experts.” Sometimes cutting into another building isn’t going to improve the outcome of the case. Discovery is very expensive, so the expert should help the carrier to develop an appropriate strategy. Carriers do not enjoy spending $300,000 on discovery, only to settle the case for $50,000. Although sometimes that is effective, Wright indicated that those cases are the exceptions to the rule. It is important to understand that many carriers view money spent on discovery as separate from money spent on indemnity.

Defending the Additional Insured Issues

  • Choice of counsel
  • Reporting requirements
  • Allocation methods
  • “Recalcitrant carriers”

Mediation

Survey: Has the mediation process improved since this time last year? 83% of respondents say NO! Should more CD cases be taken to arbitration or trial? 55% say yes.

When it comes to mediation, the issue of cost of defending versus the cost of settling involves significant risk. Trying a case is incredibly costly for a carrier, so counsel needs to provide clear direction. Wolcott: “It is going to take everyone in this room [to improve the mediation process].” Coverage issues need to be put “on the table” early on so that they can resolved. The goal: resolve cases by second, third, or fourth, rather than the eighth or ninth. According to Schweitzer, there are usually only a few key issues that drive each case, and that is where the focus should be. To improve the mediation process, it will require more “hard work” prior to mediation. Cases need to be evaluated realistically.

Considerations for “going all the way” (to arbitration or trial):

  • Make a decision regarding strategy early on
  • A “win” in a construction defect case doesn’t necessarily mean $0 paid on behalf of the insured. The defense cost of repair is a key indicator for evaluating “success.”

“Arbitration is like communism. Great idea, but doesn’t work in practice.” – Lee Wright

Image courtesy gluemoon

According to ENR, when Peter Arkley and Michael Cusack left Aon, they took more than their personal belongings with them to California-base Alliant. Court documents show that within 72 hours of leaving Aon, around 50 employees followed. A number of clients followed as well. Cases are pending in three states.

Even in an industry wracked by recesson, smaller margins and fewer good clients, insurers battle for talent that brings in business from top construction-insurance and surety-brokerage accounts. In good times or bad, individual brokers or producers cultivate close relations with contractors and wield considerable market power even when employed by large brand-name brokerage firms. And if a company wants to build up fast a construction insurance unit there’s no faster way than to buy a company or bring over the rainmakers from an established competitor.

At the center of the current legal storm are two former Aon executives: Cusack, a managing director and longtime construction insurance expert, and Arkley, who since 2006 served as president and chief executive of Aon Construction Services Group and, prior to that, as a managing principal of Aon Risk Services Inc. Both had been with Aon 18 years.

The Consumer Electronics Show in Las Vegas is not where one typically expects to see new building products unveiled. We’ve seen internet-enabled refrigerators, and the kids are all raving about the new internet-enabled TVs. But internet-enabled windows? Below is a video:

We didn’t expect to see the window getting a makeover any time soon, but here we stand. Shown off at the CES trade show in Las Vegas, this transparent touchscreen could let you get your Internet kicks while you see what the weather’s doing outside.

The see-through screen could be installed in your kitchen and used to access recipes, or placed in your bedroom wall so you can check Twitter before drawing your curtains. Perhaps the weirdest application of the tech we saw was an on-screen switch that ‘drew the blinds’ — turning the display black to simulate shutting out light.

I’m guessing Samsung hasn’t done much due diligence in researching the legal liabilities associated with producing windows that are installed in buildings. But this does make me wonder what window testing might look like in the future.

Judy Greenwald wrote an insightful article at Business Insurance entitled, Contractors professional liability demand rises. In most circles, especially among architects, engineers and attorneys, contractors are not typically viewed as professionals. So why are these “non-professionals” purchasing “professional liability insurance?”

As construction delivery methods such as design-build and integrated project delivery (IPD) continue to gain acceptance in the A/E/C industry, contractors are taking on liability for roles that historically required professional licensure. As Greenwald notes:

Observers say there has been a blurring of the once-sharp lines between contractors and architects and designers. Increasingly, contractors are being drawn into the design process, which exposes them to possible liability.

Adding to this risk is the increasing reliance, especially in non-residential construction, for building information modeling (BIM), which replaces traditional 2-dimensional paper-based drawings with computer-based 3-dimensional designs. After the architect and/or engineers have reached a specific point in completing the building model, the file is then “handed off” to the contractor or construction manager for the execution phase. This responsibility for maintaining the BIM files can thus theoretically create a potential liability for contractors for design changes.

Filling The Coverage Void

According to the article:

Contractors professional liability insurance “fills a tremendous void that is becoming increasingly more apparent to contractors and construction management firms in their insurance programs,” said Richard Hartman, vp, architects and engineers professional liability for Arch Insurance Group Inc. in New York.

Contractors’ biggest exposure is for claims filed against them for project delays and cost overruns. But traditional general liability insurance offers coverage only for bodily injury and property damage, and does not cover financial or economic losses, he said.

“The contractors themselves are starting to realize the changes in these project delivery methods is exposing them more and more” to professional liability risks, said Mr. Slivka.

Furthermore, owners are beginning “more and more to require the coverage,” said Michael Davis, Philadelphia-based product management director for construction professional and pollution lines for Zurich North America.

Greenwald reports that as more and more contractors seek professional liability coverage, a snowball effect has come into play. Contractors and construction managers are by nature very competitive anyways, so obtaining these new policies is becoming another differentiator in the market.

Professional Liability Coverage for Residential Construction?

According to the article, residential professional liability coverage for contractors is not so easy to come by:

Meanwhile, any contractor whose work is more than 25% residential is going to find obtaining coverage “pretty challenging,” said Matt Gough, senior vp and partner with Washington-based broker Ames & Gough. “It is not an area that a lot of insurers have healthy appetites for,” because of losses and the large number of dormant residential projects.

While the insurance industry is clearly reluctant to offer additional coverage to home builders, I suspect that this stance will soften over time.

The Impact of the “Green Building” Movement

What the article does not address, is why IPD and BIM are becoming more popular in the A/E/C industry. While there are clear advantages to these methods in certain situations, one of the primary drivers for adoption of both IPD and BIM is within the “green building” movement.

In order to construct buildings that use less energy, water and non-renewable resources, newer methods and materials must be implemented. These higher performing buildings have much lower tolerances, and rely upon much greater sophistication in both design and construction phases. BIM, by nature, creates an opportunity for advanced modeling of building performance characteristics. IPD fosters a much greater opportunity for collaboration between the owner, design team and the construction manager. Thus, sustainable construction requires more professionalism from the contractors and construction managers that participate on these projects.

From Blue Collar to White Collar

Perhaps the time has come for contractors and construction managers to gain wider recognition as true professionals. Within the A/E/C industry, contractors are often looked down upon by the so-called professional engineers and architects.

In the modern world, the business behind the built environment is influenced heavily by the insurance carriers. As is the case in many of the construction defect cases I have investigated, without coverage, there is little opportunity for curing defects. Therefore, recognition by the insurance industry of the increasingly professional role of contractors and construction managers is significant.

Image courtesy seattlemunicipalarchives

On Monday, I wrote a post entitled, “When we build, let us think that we build forever”. In that post I introduced the QAO, or Quality Assurance Observation, methodology. The first project to be certified by OAC Management Incorporated under this methodology, was The Ritz-Carlton Residences in Vail, CO. Here is what the insurance carrier, Old Republic Construction Programming Group, had to say about the project:

Richard Livermore, executive vice president for Old Republic said, “Eleven projects and five years later this is the first quality program that we have ever endorsed and been a part of designating a project Quality Assurance Observation Certified — which points to how rigorous the standards are. We believe this will revolutionize the approach that is typically taken in a construction project. In the years to come we believe you’ll see the Quality Assurance Observation Certification gain the same type of respect as a LEED Certification.

To earn certification, a project team must first be trained by OAC Management on procedures required throughout the Quality Assurance Observation period. Once trained, the project team must then demonstrate the skills in completing the protocols defined in the program requirements.

Once the project is complete, OAC personnel then meets with the project team to close-out the certification process.


Image courtesy OAC Management Incorporated.