The Letter of the Law: December 2012

IN THIS ISSUE:

CONSTRUCTION: Court of Appeals Weighs in on Contribution Actions Between Insurance Carriers in Construction Defect Actions

EMPLOYMENT: Employer Obligations Under Disability Laws

LAND USE: Unused Easements and the Sanctity of Property Rights

Court of Appeals Weighs in on Contribution Actions Between Insurance Carriers in Construction Defect Actions

By: Paul T. McBride

A recent insurance law decision by the California Court of Appeals, St. Paul Mercury Insurance v. Mountain West Farm Bureau Mutual Insurance, (2012) 210 Cal.App.4th 645, clarifies the role and obligations of insurance carriers for subcontractors involved in construction defect litigation. This decision potentially sounds a very ominous note for both subcontractors and their carriers as it makes clear the peril inherent in refusing the general contractor's demand for a defense at the outset of a case.

Jacobsen Construction was the general contractor on a condominium project in Jackson Hole, Wyoming. Teton Builders was the rough framing subcontractor. Jacobsen was insured by St. Paul Mercury ("Mercury.") Teton was insured by Mountain West. Mountain West issued an additional insured endorsement to Jacobsen, agreeing to defend Jacobsen from any claims arising from Teton's work.

Jacobsen completed 90% of the project and then was fired by the developer. Jacobsen sued the developer for breach of contract. The developer cross-complained against Jacobsen for construction defects at the project. The developer's expert filed a report citing numerous construction defects, many of which involved the framing. Jacobsen cross-complained against Teton and other subcontractors in the construction defect action. Jacobsen tendered its defense to Mountain West as an additional insured on Teton's policy. Mountain West refused to accept the additional insured tender. However, it did retain defense counsel to defend Teton and did participate in settlement negotiations in the case.

The construction defect case eventually settled for $3,070,000. Of this total amount, Jacobsen (through Mercury) contributed $2,265,000. Teton contributed only $100,000. The settlement agreement released all claims by and between Jacobsen and Teton, but reserved all claims by Jacobsen's insurer, Mercury, against Teton's insurer, Mountain West. Mercury spent $1,780,000 defending Jacobsen in the action.

Mercury filed an equitable contribution action against Mountain West, contending that both it and Mountain West were jointly obligated to defend Jacobsen, and that Mercury paid more than its fair share of both defense costs and indemnity costs for Jacobsen. Accordingly, it demanded that Mountain West reimburse Mercury for a portion of defense and indemnity costs Mercury incurred in the case.

At a bench trial, the Court found:

1) That Mountain West had a duty to participate in the defense of Jacobsen and failed to do so.

2) That Mountain West's fair share of the $1,780,000 spent by Mercury in defending Jacobsen was 43%, or $731,000.

3) That Mountain West fair share of the $3,070,000 total paid to settle the case was also 43%, or $1,320,000.

The trial court's assessment of 43% as Mountain West's fair share of both defense and indemnity was based on evidence produced at trial by Jacobsen's expert showing that a large percentage of the construction defect claims in the case related to the framing.

On appeal, the court sustained the trial court's finding, reasoning as follows:

1) Mountain West claimed that, by retaining defense counsel to defend Teton in the case, it defended the framing allegations and discharged its defense obligation to Jacobsen. The Court rejected this argument, stating that the additional insured endorsement issued by Mountain West to Jacobsen required Mountain West to directly participate in the defense of Jacobsen, which means paying a fair share of Jacobsen's attorney and expert fees.

2) Mountain West claimed it was unfair to saddle it with 43% of Jacobsen's defense costs when it was one of 18 subcontractors who were named as cross-defendants. The court rejected this argument because equitable contribution requires a co-insurer to pay its fair share, not its pro rata share. Given how much of the claim was based on alleged framing defects, it was fair for the trial judge to allocate 43% of the settlement and of defense costs to the framer's insurance company.

3) The court held that, by failing in its duty to defend Jacobsen, Mountain West was precluded from challenging the reasonableness of either the settlement amount paid by Jacobsen's insurance carrier, or the amount of defense costs incurred and paid by Jacobsen's insurance carrier.

The lessons to be drawn from this case by subcontractors and insurance carriers are:

1) If you are an insurance carrier who has issued an AI endorsement, you refuse a tender of defense from the general contractor at your own peril;

2) If you are a subcontractor who has been issued a Crawford tender of defense from the general contractor, put pressure on your insurance carrier to honor its AI endorsement if it issued one, since developer will use this case, in combination with Crawford, to come after you for your "fair share" of its defense costs at the end of the case;

3) If you are an insurance carrier who has issued an AI to the general contractor, simply hiring a defense counsel for your subcontractor insured will not discharge your defense obligations to the general contractor, even though your defense counsel is defending the allegations relating to your insured's work. You must also pay your fair share of the developer's attorney's fees;

4) If you are a subcontractor who has retained your own defense counsel to defend the case, it is unclear whether doing so will allow you to satisfy your Crawford defense obligation to the general contractor. The general contractor will use this case to argue that you must also pay your share of its defense costs. You will argue back that you are not an insurance carrier and that this case only interprets the obligations of insurance carriers;

5) The fair share of the general contractor's defense costs to be borne by any particular subcontractor will be determined by evaluating the plaintiffs' defect report and cost of repair estimate and determining how much of the claims and costs relate to a particular subcontractor's work. The framer may be required to pay the most; and

6) Finally, if you are an insurance carrier who has refused an AI tender, be mindful that a settlement of the case which reserves AI issues not only leaves you open to a suit for defense costs, it can also leave you open to a suit for reimbursement of indemnity costs.

Employer Obligations Under Disability Laws

By: Nami E. Chun

The laws governing employers' obligations with respect to disabled employees are complex, and employers should tread carefully when faced with a disability-related request by an employee. The following covers some basic employer obligations under both federal and state laws with regards to disabled employees.

The Americans with Disabilities Act ("ADA") applies to all employers with 15 or more employees. However, the California Fair Employment and Housing Act ("FEHA,") which provides broader protection than the ADA, applies to employers with 5 or more employees. Both the ADA and FEHA were enacted to protect employment opportunities for individuals with disabilities. They prohibit discrimination on the basis of disability by employers. They also require employers to make reasonable accommodations to enable disabled individuals to perform their job.

Covered Employees

The ADA defines a disability as (1) a physical or mental impairment that substantially limits one or more major life activities, (2) a record of such an impairment, or (3) being regarded as having such an impairment.

Under California's FEHA, it need only be shown that a condition "limits" (not "substantially limits") a major life activity. The following are examples of impairments that consistently meet the definition of "disability": deafness, blindness, intellectual disability (mental retardation,) partially or completely missing limbs, mobility impairments requiring use of a wheelchair, autism, cancer, cerebral palsy, diabetes, epilepsy, HIV/AIDS, hepatitis, multiple sclerosis, muscular dystrophy, major depression, bipolar disorder, post-traumatic stress disorder, obsessive-compulsive disorder and schizophrenia.

The individual must also be "qualified" for the position, i.e., possess the requisite skill, experience, and other qualification standards, and be capable of performing the "essential functions" of the position with or without a reasonable accommodation. If the employee or applicant lacks the requisite skill or other job-related requirements, the employer need not make a reasonable accommodation.

Discrimination Prohibited

Employers must not discriminate against a qualified individual on the basis of a disability in regards to the job application procedures, hiring, advancement, discharge of employees, compensation, job training, and other terms, conditions and privileges of employment.

Acts constituting discrimination include, but are not limited to, the following:

  • improper job standards or qualifications
  • failing to accommodate disability
  • improper preemployment medical exams
  • improper preemployment inquiries

Duty to Provide Reasonable Accommodation

Employers must provide "reasonable accommodations" to enable an employee with a known disability to perform a position's essential functions. Examples of reasonable accommodations include:

  • making facilities readily accessible to disabled individuals
  • job restructuring
  • part-time or modified work schedules
  • transfers or reassignments
  • modified equipment or devices
  • medical leaves of absences

Undue Hardship Exception

The employer's duty, however, does not extend to accommodations that "would impose an undue hardship on the operation of the business." Undue hardship is an action requiring significant difficulty or expense when considered in light of the following factors: the nature and cost of the accommodation needed; the overall financial resources of the employer; the overall size of the business; and the type of business operations.

Duty to Engage in Interactive Process

The employee generally has the initial duty to notify the employer of the disability and request a reasonable accommodation. The request for an accommodation need not mention the ADA or use the phrase "reasonable accommodation." Although it is generally the employee's duty to request an accommodation, if the employer learns from any other source that the employee has a potential disability, the employer is under a duty to initiate discussions concerning the need for an accommodation.

Once an accommodation has been requested or the employer becomes aware of its necessity, the employer must initiate an informal, interactive process to determine the nature of the accommodation necessary to enable the individual to perform the position's essential functions. The interactive process requires communication and good faith exploration of possible accommodations between the employer and employee. The duty to accommodate is a continuing duty that is not exhausted by one effort. The obligation continues where the employee asks for a different accommodation, or where the initial accommodation is failing and further accommodation is needed.

Remedies

Discriminating against, failing to provide reasonable accommodations, or refusing to engage in the interactive process with disabled employees can subject the employer to liability for loss of wages, emotional distress damages, punitive damages, and the plaintiff's attorneys' fees and costs.

Unused Easements and the Sanctity of Property Rights

By: Lance A. Adair

Can an unused private easement be extinguished to accommodate a desirable plan of development? Not according to the California Court of Appeal in a recent published decision. In Cottonwood Duplexes, LLC v. Barlow, (2012) WL 5492890, the court held that a developer's need for land burdened by a previously-granted roadway and utility easement did not trump the easement holder's property rights, even though the easement holder arguably had no need for the easement.

In the Cottonwood case, a developer-actually, a foreclosing lender stepping into a developer's shoes-sought to proceed with plans for a 16-lot subdivision, the success of which partially hinged upon the extinguishment of a previously-granted 60-foot roadway and utility easement. The easement had been granted by a previous owner in the chain of title. Having failed in its efforts to re-purchase the easement, the developer, Cottonwood, boldly went to court seeking to obtain from the court what the easement holder would not relinquish.

The case went to trial, where the developer put on evidence that (1) the previously-granted easement area was critical to the developer's plans for development of its property; (2) the easement holder was not using the entirety of the easement, and did not need the utility easement at all; and (3) the easement holder had full access to his property by means of existing public roads. The trial court agreed and granted the requested judgment, finding that the easement holder's requirements for the reasonable use of the easement did not require the full size and scope of the original easement. In its judgment, the court reduced both the width and length of the easement, and altogether eliminated its use for purposes of utilities.

Viewing the case as an assault on property rights, the Court of Appeal reversed. As the court pointed out in its decision, parroting the argument in the defendant's appellate brief, "no recognized rule of law authorized [the trial court] to terminate [the defendant's] property rights by reducing the size of his easement, no matter what the evidence showed." The court further noted that, under California law, an easement obtained by grant deed is not lost by mere non-use, without more. In fact, some prior California court decisions have required a showing of three elements to justify the extinguishment of an unused easement: (1) non-use; (2) an intention to abandon the easement; and (3) damage to the owner of the servient estate from the continued existence of the easement. The better-reasoned cases, however, require only a showing that the easement owner has stopped using the easement (or perhaps never used it at all) with the intention of abandoning the right to any future use.

In the Cottonwood case, according to the appellate court, there was no evidence that the defendant easement holder had intended to abandon any part of the easement (which perhaps explains why he refused the developer's rather generous offer of compensation.) According to the court, the developer's case was simply premised on an argument that "the owner of the servient tenement can . . . compel the extinguishment of [an] easement against the will of the dominant owner."

The lesson for property owners? Think twice before granting an easement that could impact your successor's future development plans, or your own. Once created, an easement granted for a specific purpose may be very difficult to extinguish.

It should be noted, however, that the law of easements is somewhat complex. Not mentioned in the Cottonwood case, for example, is California case law holding that, where the original easement was created only in general terms, and thereafter used only on a limited basis, the future use of the easement may at least be limited to its past use. On that subject, it would be advisable to consult a qualified real property attorney.

Kring & Chung Welcomes New Family Law Partner

David L. Miller has joined Kring & Chung as a Partner to manage the Family Law Department at the firm's headquarters in Irvine, CA. Mr. Miller operated his own successful family law firm for nearly 16 years before joining the firm. His practice was focused on representing federal, state and local peace officers who face the all-to-common occupational hazard of divorce that comes with such a demanding and stressful profession.

Mr. Miller's clients have included, but are not limited to, employees and relatives of municipal police departments (PD's), the Federal Bureau of Investigation (FBI), the Department of Homeland Security (DHS), the Immigration and Customs Enforcement (ICE), the California Highway Patrol (CHP), the Los Angeles Police Department (LAPD), the Los Angeles Sheriff's Department (LASD), the Orange County Sheriffs' Department (OCSD), and the State of California Department of Corrections and Rehabilitation (CDCR).

Mr. Miller has practiced in the Superior Court and for the counties of Orange, Los Angeles, San Bernardino, Riverside, San Diego, and Kern. Mr. Miller has developed a solid reputation for being able to negotiate when it benefits his clients and to aggressively advocate for his clients in a trial setting if negotiations are unsuccessful.