CONSTRUCTION DEFECT CLAIMS: A MEDIATOR'S PERSPECTIVE

By: Richard P. Byrne Esq.

Construction defect 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 – 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 article will address 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 their insurers find their resources impaired and their options curtailed by litigation – with no way to reverse course.

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: (i) owner; (ii) developer; (iii) general contractor/construction manager; (iv) subcontractors; (v) and design professionals. Within the category of subcontractors, the parties can then be broken down further by trades. For example: (i) demolition contractors; (ii) framers; (iii) roofers; (iv) façade contractors; (v) window installers; (vi) drywall contractors; (vii) painters; (viii) plumbers; and (ix) electricians. The same can be done with the design professionals: (i) architects; (ii) engineers (civil, structural, soils); and (iii) 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 being to create and implement the most effective means of communication with the parties whose work is at issue.

OWNER/DEVELOPER

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 lay person unit owners, represented by a law firm which 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 – impacting the value of their property. From a Mediator's perspective, he or she needs to be mindful of this reality and manage the emotional component of the claims 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.

GENERAL CONTRACTOR

The general contractor, though, is generally going to be the prime practical target for the plaintiffs since they are 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 has to come to understand that despite any expectations to the contrary, they are not going to be able to off-load all of the risk and exposure downstream and that they, in the end, may be facing 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 parties' contract documents and insurance information.

In this regard, on a practical level, one of the early goals of the Mediation process is to identify where the coverage lies. Developing a coverage chart is critical – outlining where the coverage stands horizontally and vertically – and who is claimed to be an additional insured on whose policies.

SUBCONTRACTORS

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 for the Mediator to 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?

DESIGN VS. CONSTRUCTION

It is also important to determine if issues are being raised relative to alleged flaws in design. The overriding question is whether damages flowed 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. It is obviously not a straightforward question and can be the subject of great debate. Here, though, there is often a sub-plot 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 towards settlement.

EXPERTS

The debate of construction vs. design also leads us 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 which 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 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 can additionally have an impact on the coverage issues, e.g., 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, not surprisingly, the experts play a key role at Mediation. They need 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.

INSURANCE COVERAGE

Overlaying all of this is the question of insurance coverage. To begin, we have 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 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 contribute toward settlement due 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, which 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; 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 contractors' policy. They can also take the form of excess insurers bringing suit against primary insurers which are seeking to employ a non-cumulation endorsement or a pre-existing 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. From a Mediator's perspective, he or she needs to focus on the issues to which the insurers will be most sensitive: (i) first and foremost, the cost – particularly with those insurers that may be defending one or more parties in the underlying litigation; (ii) the reality that a trial in the underlying matter will not resolve issues attendant to coverage; (iii) the potential ramifications of an uninsured verdict against an insured; and (iv) the risk of unfavorable judicial interpretations and bad precedent relative to the insurers' policy language.

THE ALTERNATIVE OF MEDIATION

When all of these issues are considered together, Mediation becomes increasingly attractive. 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 coordinate and address the issues in an effective fashion, which often entails a series of preliminary telephone calls, meetings, small-scale 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. Indeed, limited expert testing may also assist in addressing questions of liability, damages and coverage. That limited discovery, though, in and of itself, will also provide a taste of the tremendous amount of time and expense which will be incurred if the case is not settled and is allowed to proceed into full-blown discovery.

The bottom line is that while the Mediation of construction defect 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, short of years of expensive and ultimately unsatisfying litigation.

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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. In 2018, for the fourth year in a row, he was voted one of the Top 3 Mediators in the country by National Law Journal Reader Rankings Survey and for the second year in a row, he was named a National Law Journal 2017 Alternative Dispute Resolution Champion, as part of a select group of only 37 nationwide. Further, for the fourth straight year, he was voted a Top Ten Mediator in New York State by the 2017 New York Law Journal Reader Rankings Survey.

Click here to view Richard Byrne's resume.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.

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