CONSTRUCTION CLAIMS: A MEDIATOR'S PERSPECTIVE BY RICHARD P. BYRNE, ESQ.
Posted on Jun 08, 2020 |Publications
As published by the American Bar Association (ABA)
Construction claims often evolve into one of the most complex, expensive, unwieldy, and exasperating types of litigation. Numerous parties, extensive documentation, never-ending depositions, and competing experts—often with underlying insurance coverage disputes and parallel declaratory judgment actions—have the potential to cumulatively present all the negatives of the litigation process in one setting. This chapter addresses the alternative route of mediation as a means to cast a net over the situation and provide a forum to address the issues in a controlled fashion—before the parties and/or their insurers find their resources impaired and their options curtailed, with no way to reverse course. The chapter is organized into three basic subsets of construction litigation: (1) construction defect claims; (2) delay/extras claims; and (3) construction worker personalinjury claims. While each is unique unto itself, there is much in the way of thematic overlap from a mediator's perspective, as will be seen in the discussion that follows.
II. Mediating Construction Defect Claims
A. AGGREGATING THE PARTIES AND THEIR ISSUES
To begin, the parties and their issues need to be aggregated as a means to organize the litigants and identify those with commonality. The mediator should begin with a basic breakdown of the parties' roles on the project: owner, developer, general contractor/construction manager, subcontractors, and design professionals. Within the category of subcontractors, the parties can then be broken down further by trades. For example: demolition contractors, framers, roofers, façade contractors, window installers, drywall contractors, painters, plumbers, and electricians. The same can be done with the design professionals: architects, engineers (civil, structural, soils), and landscape designers.
These parties should then be grouped based upon the issues with which they are involved—with those issues, in turn, prioritized. As a result, if one of the leading issues concerns water infiltration via the façade, the mediator should be looking to group the general contractor, framers, window installers, and façade contractors. The point of the exercise is to create and implement the most effective means of communication with the parties whose work is at issue.
In looking at the parties' respective relationships to the claims through the lens of a mediator, we begin with the owner. The owner is often a homeowners association or condominium board that has recently taken control from the developer and, in doing so, had an engineering firm come in, perform an inspection, and prepare a transition report, which has identified a host of alleged defects/deficiencies in the construction. The drivers in the case, therefore, may be a board of layperson unit owners, represented by a law firm that specializes in construction defect litigation, who believe that they have been victimized by the developer and are concerned that their units may have significant flaws—affecting the value of their property. The mediator needs to be mindful of the emotional components of the claims and endeavor to manage them from the start.
The developer, while facing the direct wrath of the unit owners, is going to endeavor to point downstream to everyone else, but may be facing independent claims relative to the representations made to the then prospective purchasers. And there may be an affiliation between the developer and the general contractor with consequent efforts under way by the unit owners to pierce the corporate veil. That may ultimately prove to be a pressure point at the mediation, which the mediator can employ to encourage full participation at all levels.
2. General Contractor
The general contractor, though, is generally the prime practical target for the plaintiffs since it is the party ultimately responsible for the construction and the alleged defects. The general contractor also provides the point from which the plaintiffs' claims are pressed down to the subcontractors as well as their insurers. From a mediator's perspective, the general contractor must come to understand that despite any expectations to the contrary, it will not be able to off-load all its risk and exposure downstream and that it faces bearing a significant percentage of the ultimate settlement. Out of the gate, this should be employed as an incentive for the general contractor to take the lead on gathering up all of the lower-tier parties' contract documents and insurance information.
In this regard, one of the early goals of the mediation process is to identify where the insurance coverage lies. It is critical to develop a coverage chart that outlines where the coverage stands horizontally and vertically and who is claimed to be an additional insured on whose policies.
While the general contractor might have strived for contractual consistency and uniformity in approach at the first level of subcontracting, it can all fall apart at the next level of sub-subcontractors, with poor contract documents and missing or vaguely defined obligations relative to contractual indemnification and additional insured status. As a result, it is very important that the mediator understand and appreciate the contractual relationships—beginning with the general contractor and flowing downstream to those with hands-on responsibility.
There are a host of issues in this vein relative to the subcontractors, which leads us back to the aggregation of the parties and their issues. Whose work is in question? Which subcontractors have a second tier of sub-subcontractors? What do their respective contracts and insurance documentation provide? Are any of the subcontractors now defunct and/or uninsured? Will there be finger-pointing back at the general contractor based on the oversight of the project and the coordination of the trades?
B. DESIGN VERSUS CONSTRUCTION
It is also important to determine if issues are being raised relative to alleged flaws in design. The overriding question is whether damages purportedly flow from deficiencies in the original design or whether the defects claimed stem from the manner in which the work was performed and a failure to follow the design. This is obviously not a straightforward question and can be the subject of great debate. Here, though, there is often a subplot of the design professionals being insured via cost-inclusive policies—meaning that every dollar spent on defense is one less dollar available for indemnity. From a mediator's perspective, this dynamic can cut both ways and the prospect of a design professional's coverage being dissipated by defense costs, leaving the design professional under/uninsured, can be employed as leverage for an earlier contribution toward settlement.
The debate of construction versus design also leads to the topic of experts who, of course, play a central role in construction defect litigation and efforts to mediate the parties' differences. As noted earlier, it is generally an expert that first framed the claims by preparing a transition report that identified a wide range of defects in the construction. Those claims, in turn, need to be addressed by experts retained to defend the design and the construction and/or point fingers at others who, in response, have to do the same. The inherent costs are obvious and the experts' opinions drive the litigation not only as to liability, but as to damages and potentially insurance coverage as well. For example, what are the repair protocols being advanced and how are those proposed “fixes” being countered by the experts on the other side? In the meantime, the experts also play a role in testing—particularly invasive testing— and all the negotiations that go into the development and implementation of testing protocols. The experts' views, as noted, can additionally have an impact on the coverage issues, for example, the timing of the “occurrence(s)” and whether and to what extent third-party damage has, in fact, taken place for purposes of implicating the contractors' policies.
As a result, and not surprisingly, the experts play a key role at mediation. Theyneed to present the claims and defenses and be able to respond to inquiries posed so that the attorneys are simply not arguing over their respective interpretations of the experts' opinions and filtering those opinions when advantageous to their case.
D. INSURANCE COVERAGE
Overlaying all of this is the question of insurance coverage. To begin, there is the well-known legal precept that the duty to defend is broader than the duty to indemnify, meaning that if the allegations of the complaint are adequate to trigger coverage, even theoretically, an insurer is obligated to defend. This becomes critical in the context of construction defect litigation because the greatest fear for the primary insurers of the lesser players is that they will get hooked on the defense and never be able to step away. They may admittedly have limited coverage from an indemnity perspective but, in the end, could pay more in defense costs than their limit of liability. From a mediator's perspective, this is important because the primary insurers may ultimately consider releasing their coverage defenses and contributing toward settlement due to the harsh economic reality of doing otherwise.
Compounding matters further, these insurers may have the obligation to defend more than one party and/or under more than one policy. As a result, when it comes time for mediation, there is great debate and discussion over the insurers' respective defenses and limitations to coverage as a means of prioritizing the various insurers' levels of participation. Issues can relate to the broad topic of coverage for faulty workmanship (depending on the state's law that may control) to inter-insurer arguments over which policies on the horizontal timeline are implicated, and on to specific exclusions that may limit the scope of coverage—many of which are now customized or “manuscripted” through a particular insurer.
Setting aside the traditional coverage issues between particular contractors and their insurers, there are additional battlegrounds with upper-tier contractors seeking coverage under the lower-tier contractors' policies by way of claims for additional insured status and contractual indemnification coverage. Tenders are conveyed and possibly accepted, but often rejected or deferred—all of which sets the stage for coverage litigation.
These parallel declaratory judgment actions can take the form of insurer versus the insured—where the insurer is seeking to limit the scope of its coverage or the number of policies exposed. Or they can take the form of claims by purported additional insureds seeking confirmation that they have coverage under a lower tier contractor's policy. They can also take the form of excess insurers bringing suit against primary insurers that are seeking to employ a noncumulation endorsement or a preexisting damages exclusion to limit their coverage horizontally.
Obviously, these parallel actions need to be drawn into the mediation process as well if resolution is to be achieved. The mediator needs to focus on the issues to which the insurers will be most sensitive: (1) first and foremost, the cost—particularly with those insurers that may be defending one or more parties in the underlying litigation; (2) the reality that a trial in the underlying matter will not resolve issues attendant to coverage; (3) the potential ramifications of an uninsured verdict against an insured; and (4) the risk of unfavorable judicial interpretations and bad precedent relative to the insurers' policy language.
III. Delay/Extra Claims
A. ORGANIZATION OF INFORMATION AND DOCUMENTATION
The mediation of a delay/extras claim first requires the mediator to have a strong working knowledge of the parties' contractual rights and obligations. The contract documents, in this setting, provide the roadmap as to which claims for additional time and cost are permitted and in what manner they are allowed to be advanced. Sophisticated contractors study the roadmap well before they first come on-site and, therefore, know exactly when, where, and how to document their claims. The mediator should obtain all of this information and documentation prior to the first mediation session—not only the contracts themselves, but requests for change orders, related approvals/denials, applications for payment, back charges, and so on. This documentation becomes the touchstone for the mediation because it often belies any “handshake deals” or “understandings” that may have been reached in the field. Nonetheless, project correspondence and e-mails do need to be viewed with a critical eye since they can be positional and self-serving, written in anticipation of future litigation and negotiations.
The most effective way to mediate a delay/extras claim is to break it down piece by piece, for example, change order by change order, and to conduct mini-mediations as to each claim. It is admittedly tedious and exhausting but must be done with one overriding rule—that once agreement is reached on an item, the parties cannot go back and reopen the topic. It must stay on the side of the ledger on which it has been placed and remain there. That is not to say that a particular item cannot be “passed” or later grouped with similarly situated claims but, once negotiated, it needs to be placed in the lockbox and considered done.
In this vein, it is critical to have the decision makers present. These individual issues cannot be “resolved” on a “recommendation” basis where management on either side can then later cherry-pick or reject the arrangements reached on an item-by-item basis. Incremental decisions need to be reached to allow for the development of momentum, measurable progress, and a sense that resolution can be achieved if the parties remain on task.
B. DELAY DAMAGE EXPERTS
As in the case of construction defect litigation, experts also play a driving force in delay claims and, therefore, should be employed in an integral fashion in efforts to mediate the disputes. Often, these experts develop elaborate analyses, particularly when a critical path method (a project management tool that defines critical and noncritical tasks in relation to each other) was utilized on a project. The experts endeavor to demonstrate how a particular contractor's activities/lack of action or unforeseen site conditions disrupted the planned flow of work, affected other trades (who may then have made claims for their own delays/extras), and caused time and/or monetary damage. Complicating matters further, the expert may also be compelled to avoid the impact of a “no damages for delay” provision in the contract documents by contending that the delay was not within the contemplation of the parties or fell within another judicially recognized exception to the enforcement of the provision, elevating the positioning to yet another level.
As always, though, expert opinions and conclusions are only as solid as the data upon which they are based. Here, again, it is important for the mediator to have all the relevant support information and documentation at hand. Defending experts will often not only simply dispute that their client was the cause of any alleged disruption to the project schedule, but will point to the role of others on-site (and/or weather and/or lack of materials in the marketplace and/or labor unrest) as concurrent or intervening causes. Thus, the mediator needs to be in a position to test the foundation of each side's claims and defenses in order to identify weak spots in the experts' analyses and lead the dialogue toward compromise and settlement.
IV. Injured Construction Worker Claims
A. INTRODUCTION OF LAYPEOPLE
Construction is a dangerous business and, unfortunately, injuries to construction workers are not uncommon events, with the extent of injuries ranging from the minor to the catastrophic, including death. The mediation of a personal injury claim in the context of a construction setting adds numerous variables for a mediator that are not present in the more contract-based claims and defenses inherent in construction defect litigation and claims for delay/extras.
Most obviously, the mediator is now dealing with an individual (and, often, his or her family) who has suffered a personal injury that, depending on its severity, may have limited or precluded the worker's ability to make a living. There may also be a consequent impact on the plaintiff's mental/emotional state and his or her interfamily relations, above and beyond the pain and suffering, that lies at the heart of the claim. The mediator needs to be sensitive to these various issues, while underscoring that a monetary settlement—albeit imperfect—is the only option available. The laypeople should be encouraged to appreciate that litigation involves tremendous risk and that while there may be a lack of complete satisfaction in a monetary compromise reached through mediation, the injured worker still has a say in the outcome—control that will be lost if the matter is allowed to proceed down the path to trial.
One of the practical issues that a mediator confronts in this arena is the availability and impact of workers' compensation insurance. Negotiations at mediation must be attractive enough to adequately replace any indemnity and medical expenses the injured worker is currently receiving. At the same time, any existing lien for workers' compensation payments received to date also needs to be factored into the equation. Here, the responsibility falls in the first instance to the plaintiff's counsel, who needs to bring current and documented lien figures to the mediation. It is also incumbent upon the plaintiff's attorney to have shared those figures with his or her adversary well in advance of the mediation session because the existence and quantification of such a lien can affect a defendant's assessment of their potential exposure. In this vein, any preliminary dialogue the plaintiff's counsel can have with the workers' compensation insurer toward a compromise of the lien is also helpful because it assists in forecasting their client's net recovery depending on the amount of the settlement achieved. It is counterproductive for a defendant to first learn of a significant workers' compensation lien at the mediation table, as this often makes it difficult to get the parties to meaningful negotiations and, minimally, an adjournment may be necessary.
Another practical factor that can complicate the mediation is the existence of funding loans—advances taken by a plaintiff against any ultimate settlement or judgment— that carry high interest rates. While defendants generally take the stance that the satisfaction of such loans is not their responsibility, their existence cannot be ignored. Unless a settlement can accommodate a pay-off of the loan, the interest will continue to mount, reaching a point where the case must be tried, because the plaintiff has no exposure to the lender if the case is lost. Here, it also behooves the plaintiff's counsel to engage in negotiations with the lender before the mediation session in order to ascertain where a discounted pay-off figure might lie. The plaintiff's attorney should likewise have ready access to the funding company during the course of the mediation as negotiations are transpiring. Again, counsel's goal is to be prepared to advise their client at mediation where the net recovery will stand and, thereby, reach closure.
B. RISK TRANSFER
The battle among insurers for risk transfer in multi-defendant injured construction worker cases can take on even more immediacy than in construction defect claims because the issues are generally more focused and the short-term rewards can be greater. Even prior to suit, the insurers for prospective defendants who have notice of an accident begin to press tenders founded upon contractual indemnity and additional insured status. The objective is to transfer the risk off one policy and onto the coverage for another defendant(s) and have that insurer(s) commit to provide a defense and, ideally, indemnification before the underlying action gets underway.
On a practical level, though, those risk transfer issues are often not fully resolved by the time the matter reaches mediation—with tenders, as noted earlier, rejected or deferred. As a result, risk transfer must necessarily become part of the mix for the negotiations at mediation. It can be incredibly frustrating, however, for a plaintiff to spend a day at mediation where the mediator is consumed with issues among and between the defendants, with risk transfer debates predominating, and nothing is brought forth to the plaintiff by day's end beyond what may be perceived as a meager opening offer. The mediator is then forced to conduct mediations within a mediation, potentially leaving a number of the parties and, particularly, the plaintiff, unsatisfied because there may simply be too many moving parts for the mediator to oversee simultaneously.
The better practice is to first hold what can be more positively described as an “informational meeting” as opposed to an “initial mediation session” (in order to manage the attendees' expectations), followed by one or more pre-mediation sessions among the defendants and their insurers aimed at establishing a framework by which offers can be funded without having to revisit and renegotiate the issues among the defendants each time a new demand is received from the plaintiff and an increased offer is to be communicated.
To that end, a hierarchy needs to be developed, placing each defendant on a spectrum for purposes of participation at the mediation. Ideally, an acknowledgment should then be secured, if at all possible, from the defendants that the line-up is not arbitrary or irrational and that in an admitted fashion of “rough justice,” the hierarchy could form a foundation for continued discussions. Those discussions should then move next into the realm of allocated percentages of participation, so that a means of funding can be constructed. Of course, each and every defendant will inevitably say “It all depends on a percentage of what . . . ,” but that is a signal to the mediator that the dialogue can now proceed to the collective interest of the defendants—that is, contesting the claims of the plaintiff and disputing their value. As part of doing so, it is also helpful to seek consensus on what the defendants agree would represent a realistic settlement range.
This point cannot be reached, however, without keeping matters from overheating on Day 1 where the defendants' independent issues can lead to infighting, discouragement, and, perhaps, a rejection of the process altogether. Thus, the more effective approach is to stage matters where at each step, issue by issue, the parties see incremental progress and compromise, allowing them to envision (and then ultimately achieve) a global resolution.
C. VOLATILITY AND VARIABLES
One of the hallmarks of any personal injury claim is the volatility of potential verdicts, premised upon recognized variables. These variables can include, among others: (1) the plaintiff's age and number of dependents; (2) the claimed lost wages and future work life/capacity; (3) the plaintiff's ongoing projected medical costs; (4) the plaintiff's ethnicity; (5) the state venue (e.g., whether a particular state has workers' protection statutes); (6) the local venue (whether a county is generally viewed as pro-plaintiff or pro-defendant); (7) the reputation and experience of the attorneys in the case; (8) the availability of insurance or other assets to satisfy a judgment; and (9) the respective credibility of the witnesses.
Each of these variables can break in favor of one side or the other. The task of the mediator is to create a ledger and, when appropriate within the context of private discussions, underscore to each side separately which items fall on which side of the ledger for that party. The unspoken theme, of course, is that no claims or defenses are perfect and that while the ledger may weigh somewhat for one side or the other in a particular action, the only way to avoid the volatility that flows from such variables via a verdict is to compromise and resolve the matter.
V. The Mediation Alternative
Mediation is an attractive option in the context of construction claims. Indeed, it is the only forum where all of the parties' respective interests can be addressed in one setting. Now, that is not to say that the road is easy—even the mechanics of the mediation itself can be daunting. Great advance work needs to be employed in order to effectively coordinate and address the issues, often entailing a series of preliminary telephone calls, meetings, small-scale pre-mediation sessions, and the like as a means by which foundational goals can be identified and, hopefully, achieved. Part of that foundation building may also involve the need for limited discovery. Here, the exchange of contracts, insurance policies, expert reports, and project files may be necessary and productive. That limited discovery, though, in and of itself, will also provide a taste of the tremendous amount of time and expense that will be incurred if the case is not settled and is allowed to proceed into full-blown litigation.
The bottom line is that while the mediation of construction claims is a significant undertaking, it provides the most effective route for parties to gather, air, and resolve the wide range of disparate interests presented, circumventing years of expensive and ultimately unsatisfying litigation.
Excerpted from the book “Resolving Insurance Claim Disputes before Trial” (Chapter 8). ©2018 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Richard P. Byrne, Esq., is a member of NAM's (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate cases throughout the United States. He has successfully mediated issues in a wide variety of specialty areas, including commercial matters, employment discrimination claims, employment contract disputes, construction litigation, complex personal injury and property damage claims, together with insurance, reinsurance and risk transfer matters. Mr. Byrne has earned the distinction of being voted a Top 3 Mediator in the United States for the sixth straight year in the 2020 National Law Journal Best of Survey. Further, he was ranked a Top 10 Mediator by the 2019 New York Law Journal Best of Survey for the past five years. He was also voted a Top 3 Mediator by the 2018 Corporate Counsel Best of Survey and for the third straight year, was named a National Law Journal Alternative Dispute Resolution Champion, as part of a select group of only 46 Neutrals nationwide. He has been awarded an A-V rating by Martindale-Hubbell, the highest rating available, based on its peer review process.
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