Tag Archives: breach of contract

Contracting Diseases: Mishaps in contract drafting, limitation of liability edition

1 Aug

One of the problems I regularly encounter with new clients is that they have come to me too late to do the most good. This frequently happens in the area of drafting contracts relating to their business or project. Many people say they want a “simple” contract, or they think they know what they’re signing, or that they trust the other party to the deal, so they don’t need to overthink what they’re doing. A recent decision by a Federal Court in Indiana demonstrates how costly this kind of “penny-wise” thinking can be.

SAMS Hotel Group, LLC set out to build a new hotel. Unfortunately, the architecture firm the company retained to provide the design work for the project apparently did not employ or even consult with a registered professional structural engineer for the project. The county building officials later found structural design defects, which resulted in the condemnation of the structure and its ultimate demolition before the hotel ever opened its doors to the public.

SAMS sued its architect, Environs, Inc. The trial court held that Environs breached the applicable standard of care by failing to involve a structural engineer and for failing to timely inspect the project during construction. SAMS proved damages in the amount of $4.2 million.

Now the story turns truly tragic for the developer. Environs incorporated a clause in its contract with SAMS that sought to limit its liability:

The Owner [SAMS] agrees that to the fullest extent permitted by law, Environs/Architects/Planners, Inc. total liability to [SAMS] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.

SAMS, as the “Owner” under the applicable contract, paid Environs a lump sum fee of $70,000. The court enforced this limitation of liability provision and held that SAMS could recover only $70,000 of its $4.2 million loss, even though the source of Environs’ liability arose out of negligence rather than a breach of the parties’ contract. The United States Court of Appeals for the Seventh Circuit affirmed the trial court’s ruling. It noted, under Indiana law, that sophisticated parties aren’t entitled to protection from even the apparently unfair terms of the contracts they sign:

[T]he general rule of freedom of contract includes the freedom to make a bad bargain.

Parties are free to enter into any kind of contract they like, but just know that if you assume you are sophisticated enough not to need a lawyer’s assistance with your contract, the court just might agree with you and hold you to what you signed.

The complete order of the Federal District Court for the Southern District of Indiana can be read here.

The complete opinion of the Seventh Circuit Court of Appeals can be read here.

Matt Drewes contributed this article. Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s eight-member Community Association Representation Group and the firm’s Creditors’ Remedies Group, and practices in the areas of business and real estate litigation and transactions, employment law, construction litigation, community association law, debtor/creditor law, and insurance. He has been included in the annual list of Minnesota’s Rising Stars for several years, and has been quoted in print publications such as the Minneapolis StarTribune, Minnesota Lawyer, Habitat Magazine, and on various websites including Yahoo!Finance.com, Bankrate.com, MSN.com, HOALeader.com, and elsewhere on issues involving construction litigation, community associations, and real property issues. He can be reached at mdrewes@tn-law.com or by phone at 952.835.7000.

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Do Non-matching Shingles Mean A Property Damage Insurance Carrier Must Pay for Full-roof Replacement?

5 Mar

For years, this question has clouded insurance claims determinations (adjustments) and the appraisals and other claims-resolution procedures available to the parties.  We may now have the Minnesota Court of Appeals’ answer in the form of QBE Insurance Corporation v. Twin Homes of French Ridge Homeowners Association, — N.W.2d —, 2010 WL 607409, *1 (Minn. Ct. App. Feb. 23, 2010).

The case involved a hail storm causing damage to some, but not all, of the shingles on the roofs of a 16-building townhome association.  The Association’s insurance policy stated the method of determining how much coverage applied in the event of a loss:

[W]e will pay no more than the least of the following:

a.  The cost to repair or replace the property at the same site, regardless if repaired or replaced at the same site or another, without deduction for depreciation:

(1) With comparable material;

(2) With property of the same height, floor area and style; and

(3) With property intended for the same purpose;

b. The amount actually and necessarily expended in repairing or replacing the property at the same site; or,

c. The limit of insurance.

QBE Ins. Corp. v. Twin Homes of French Ridge Association, 2010 WL 607409 at *2.  After the loss, the insured and the insurance company could not agree on the amount of the loss, so the community association demanded an appraisal pursuant to the policy.  Each party selected its appraiser and the two appraisers attempted to resolve the dispute.  When they could not they presented their opinions to the umpire so the three-member panel could review the issues and reach its decision.  From that point, as the Court of Appeals itself stated:

The appraisal panel determined that the loss could not be remedied by repair or replacement because the shingles used on the buildings were no longer manufactured and/or the non-damaged shingles were too worn to be suitable to connect to new shingles, so they rejected the first valuation method and applied the second.  Consistent with the policy’s second valuation method, they determined the amount that would need to be expended to repair the roofs by using comparable shingles. . . .  Consistent with the plain language of the insurance contract allowing the panel to value the loss at the amount actually and necessarily expended to repair or replace the shingles, the panel’s decision is a proper determination of the value of loss to respondent.

QBE Ins. Corp. v. Twin Homes of French Ridge Association, 2010 WL 607409 at *4 (emphasis added).  The Court of Appeals clearly acknowledged it was proper for the appraisal panel to conclude that shingles which are no longer manufactured may have to be replaced entirely.  In fact, this basis or the potential that even matching replacement shingles may not suitably connect to the existing shingles appears to warrant a full roof replacement.  It is unclear whether other factors may have motivated the panel’s decision as well, but it appears the Court did not necessarily rely on those other considerations.

Does this case require insurance companies to pay for full roof replacement each time there is demonstrable damage to only a few shingles?  Insurance companies will argue that it does not.  The battles over this issue are not likely to end, but for the time being, insured parties appear to have another weapon in their arsenal.  It remains to be seen whether the insurance company will ask the Minnesota Supreme Court to review (and possibly reverse) the Court of Appeals’ decision.

Entry by Matt Drewes.  Matt is a shareholder at Thomsen & Nybeck, P.A. and head of the firm’s Community Association Representation Group and Co-chairs the firm’s Construction Litigation Group.  He practices primarily in the areas of real estate litigation, townhome and condominium law, construction litigation, debtor/creditor law, insurance litigation and employment law.  Matt can be reached at mdrewes@tn-law.com.

American Family to Pay More than $2,000,000 due to Finding of Bad Faith

18 Aug

On Friday, August 14, 2009 a three-judge panel of the United States Court of Appeals for the Eighth Circuit upheld a decision by a Federal judge of the North Dakota Federal District Court not to overturn a jury’s verdict finding that American Family Mutual Insurance Company committed bad faith adjustment practices and should pay punitive damages.  The case involved a farmer, Thomas Moore, and his wife, who purchased a structure to use as rental property and insured it for $50,000.  The property burned down and American Family accused the Moores of arson, which apparently the jury concluded was so unfounded as to constitute bad faith on the part of American Family.  You can read the case here:  http://www.ca8.uscourts.gov/opndir/09/08/083238P.pdf.

 

The jury concluded that the Moores should have received their original insurance claim of $48,414.97, as well as $1,150,000 for, among other things: economic losses that Moores suffered from loss of income on their rental property; the potential expenses they might incur as a result of being deemed uninsurable as a result of American Family’s reporting its unfounded conclusion to various agencies; and the related emotional trauma caused by the accusation that they were arsonists.  The jury also added $1,150,000 in punitive damages, which are warranted under North Dakota law where an insurer “guilty by clear and convincing evidence of oppression, fraud, or actual malice.”  The panel of Eighth Circuit judges held that the punitive damage award was not excessive and was supported by the evidence.

 

This case should be compelling reason for insurers to exercise appropriate discretion before accusing insureds of wrongdoing and/or denying an insurance claim.  Importantly, it should also encourage people who feel their insurance claims have wrongfully been denied to pursue their rights.  Minnesota does have its own version of North Dakota’s bad faith adjustment practices statues and provides a policy holder with the right to seek additional damages and attorneys’ fees if the insurance company acts in bad faith or is knowingly unreasonable.  These rights are affected where the insured proceeds with an arbitration or appraisal proceeding, so it is important to get proper advice before pursuing that option under an insurance policy.  Contact an attorney right away if you believe you are not being offered the insurance benefits you paid for.  Thomsen & Nybeck has insurance coverage litigation attorneys who can help.

 

Entry by Matt Drewes.  Matt is a shareholder at Thomsen & Nybeck, P.A. and head of the firm’s Community Association Representation Group and Co-chairs the firm’s Construction Defect Litigation Group.  He practices primarily in the areas of real estate litigation, townhome and condominium law, construction litigation, debtor/creditor law, insurance litigation and employment law.

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