1/3/2012

Construction Defect Claims Revisited

Fireman’s Fund’s Lawrence Beemer previously provided three myths with regard to handling construction defect claims. In this online exclusive, he addresses three additional myths of which claims managers and directors should be aware.

By Lawrence C. Beemer

Editor’s Note: In the January print issue of Claims Management, Fireman’s Fund’s Lawrence Beemer provided three myths with regard to handling construction defect claims. In this online exclusive, Beemer addresses three additional myths of which claims managers and directors should be aware.

Myth #4: There is little an adjuster can do in the area of litigation management to affect the outcome of a construction defect file.                    

This concept generally comes from cases being handled in the western states where most cases are handled under a case management order (CMO). Many lawyers believe that there is nothing they can do to affect the outcome of cases that have a CMO in place. The problem with this assumption is that many defense lawyers do not read the CMO anymore and do not know what discovery may actually be available to them. Many counsel, especially those representing smaller subcontractors, have fallen into the trap of rote handling of construction defect cases. Many adjusters also have fallen into this trap.

The reality is that many CMOs now allow for some minimal discovery. This discovery, no matter how minimal, should be used to the greatest extent possible. Moreover, prior to the CMO being in place, counsel has the ability to conduct minimal discovery. If nothing else, in representing a small subcontractor in a case a set of interrogatories served concurrently with an answer to the suit sends a message to the plaintiff’s or developer’s counsel that your counsel will be difficult with which to deal. This simple act of written discovery will indicate that this subcontractor needs to be settled with early to keep from complicating the case and making more work for the plaintiff’s or developer’s counsel.   

Of course the best litigation management is to not let a case go into active litigation at all. Most construction defect cases generally come to the carrier as an administrative proceeding, such as an arbitration proceeding or per a notice of repair statute or in a suit. Depending on whom their insured is, a good adjuster may be able to obtain a time extension to respond, using this time to negotiate a cost of defense settlement. If an answer is required and the adjuster is negotiating the case, then the use of defense counsel on a task basis to simply answer the complaint or notice of repair can provide the adjuster time to settle the case at minimal cost to the company.

However, if the case goes into full-blown litigation, it is imperative for the adjuster to obtain a budget and timeline for when the work will be completed. In my mind, the adjuster holding counsel to the estimated fee agreement is much less important than making sure the defense counsel strictly adheres to the timelines for completing the needed discovery in the case. This assures the carrier that the minimal needed facts will be obtained before a mediation in the case takes place.

Making sure that discovery is done in a timely way is one facet of litigation management. Another facet is making sure that the carrier is getting the proper quality of work. Adjusters need to question their counsel in detail about the nature and extent of the depositions attended. An attorney can write a report by getting information from other counsel while not being actively engaged in the deposition.

An attorney recently sent me a cell phone photo of five young attorneys who were asleep at a deposition of the plaintiff’s main expert. Interestingly enough, this attorney had a very small subcontractor in the case but asked to be lead counsel and take the deposition of the expert, as no one else really knew how to do this since they had no experience in doing so. This underscores the need for adjusters to really quiz their counsel on the facts of the case.

Another facet to litigation management is the use of legal audits. Including various levels of claims people in these audits is a tremendous way to train adjusters on how litigation works from an attorney’s perspective and what counsel may be missing in their work product that an adjuster cannot see in their file correspondence.

Finally, claims directors overseeing construction defect cases have to look at the bigger picture when it comes to litigation management. Since many carriers have multiple cases with the same insureds, it becomes imperative for the carrier and their counsel to remain consistent in their position regarding the degree of involvement of subcontractors in a case.

Put simply, if a carrier in one case is paying $100 a home and in the next case pays $200 a home, the floor has just doubled. If there is factual evidence why this should occur, then there is justification for this position. If, however, another adjuster wants to settle a case early by throwing more money at it, this becomes a dangerous precedent. It hinders the litigation because plaintiff’s or developer’s counsel will not settle a case at the lower number knowing the carrier has settled already at a higher amount.

In the big picture of construction defect claims, litigation management can still be a powerful tool for carriers in managing their costs as well as continuing to keep their indemnity costs in check. Construction defect lawyers and adjusters must get out of the mindset that “it is only construction defect” and realize that they can have an effect on the resolution of a case through active litigation management.

Myth #5: Alternative fee agreements (AFA) save money for the carrier in construction defect cases.

It is clear that AFAs are here to stay. AFAs provide budgeting certainty for the carriers and provide a constant cash flow for law firms. If priced correctly, these agreements can be beneficial for both the carrier, self-insured, and the law firm.

In the construction defect arena, AFAs can be expensive if the construction defect cases are melded into an AFA program with multiple different types of cases. Each of these types of cases (products, general liability, auto, professional liability, etc.) has specific niche issues that change the cost and profitability for the carrier and law firm. As a result combining all of these types of cases can make it extremely difficult to obtain pricing that is favorable for both the carrier and law firm. In other words, while the pricing may work overall when broken down into niche areas such as construction defect, a carrier can find themselves facing significant increases in their expenses.

Here’s an example: An average subcontractor case can be handled on an hourly basis for $8,000. However, under a combined AFA, a carrier pays the law firm $10,000. At the end of the day this may be a good deal for the carrier when considering total paid for all files. However, in the construction defect area the expenses for legal just jumped $2,000 a file.

This is why AFAs should be constructed specifically to the niche areas of claims. In construction defect, creating an AFA that breaks down construction defect claims by subcontractor tiers, developer/general contractor, and product manufacturer will help to control the overall construction defect expenses for a carrier.

Finally, carriers also have to be cognizant about cases in which they share counsel fees with another carrier. While this may seem advantageous compared to an AFA, in reality it may not be on a case-by-case basis. For example, take a situation in which shared counsel bills $30,000 to defend a case, which equates to $15,000 per carrier. The portfolio flat fee is $10,000. The carrier just spent $5,000 more than needed had they just used portfolio counsel.

Myth #6: Defense counsel and adjusters do a good job of risk transfer.

While there are some defense attorneys and adjusters who handle and have perfected risk transfer, the reality is that most adjusters and attorneys do not handle this area very well. Many times the construction defect adjusters have had no formal training in this area and simply miss the risk transfer opportunities. We find the same thing with many lawyers who handle construction defect cases.

Much of the problem comes from adjusters and counsel not understanding all of the coverage areas that are available to them for risk transfer. Moreover, depending on the state, we find that adjusters and counsel are not nearly as well versed on indemnification as they should be. Certainly additional insured (AI) endorsements make up a large majority of the potential for risk transfer. Many adjusters simply leave the tendering of the AIs to the attorney, but this is really an adjuster’s job.

Early tendering is crucial to obtaining recovery of all or some of the defense fees a carrier is expending in a case. Counsel should assist the adjuster with follow-up tenders to parties who do not answer the tender. Where adjusters and counsel miss opportunities usually manifests itself in not understanding the coverage associated with the AI that they are tendering. Moreover, responses to tenders from carriers will cite exclusionary endorsements that have been misinterpreted by the answering carrier. Counsel and the adjuster must understand the flaws in these coverage positions and continue to pursue coverage from the other carrier.

Proper understanding of triggers of coverage based on venue is extremely important in obtaining risk transfer and a time on risk calculation favorable to the tendering carrier. This area is extremely complicated and deserves annual training for both adjusters and counsel handling construction defect cases.


Lawrence C. Beemer is the national claim director for construction defect, latent injury, and entertainment claims at the Fireman’s Fund Insurance Company. He is a member of the AIA subcommittee on Construction, a member of the Southern California Construction Defect Claims Managers Association, and on the Advisory Board for the CLM since 2007. He may be reached at lawrence.beemer@ffic.com, www.firemansfund.com.

 



Lawrence C. Beemer is the national claim director for Fireman’s Fund Insurance Company. He is a member of the AIA subcommittee on construction, a member of the Southern California Construction Defect Claims Managers Association, and on the Advisory Board for the CLM since 2007. He may be reached at lawrence.beemer@ffic.com, www.firemansfund.com.

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