The Hall & Evans Rocky Mountain Litigation Reporter is a periodic online newsletter directed to a select group of individuals and organizations. In this edition, we summarize two recent decisions from courts in Colorado barring wrongful death lawsuits arising from rafting accidents on the basis of liability waiver forms signed by the decedent, as well as a new ordinance enacted by the City of Lakewood addressing construction defect litigation.
Topics in This Issue
Cases
Notice-Prejudice Rule Does Not Apply to Claims-Made Policies
Interrelated Contracts Doctrine Can Apply to Entity Which Did Not Exist When the Contract Was Formed, and Commercial Entity Which is a Third-Party Beneficiary of Contract Which Interrelates to Contract for Building a Home Is Subject to Economic Loss Rule and May Not Sue in Tort
No Claim for Bad Faith Breach of Insurance Contract Before Insured Submits Request for Benefits
Federal Court Clarifies Legal Assistance
Legislative and Administrative Developments
Colorado Medicaid False Claims Act
Colorado Division of Insurance Issues Regulation Regarding Appraisals
Department of Labor Recognizes Marriage According to “Place of Celebration”
Workers’ Compensation
Ripeness for Adjudication Measured by Legal Standards, Not by State of the Evidence
Cases
Notice-Prejudice Rule Does Not Apply to Claims-Made Policies
There are two types of general liability insurance policies: those that provide coverage for an injury or event that occurs during the policy period (“occurrence policies”) and those that provide coverage for claims made during the policy period (“claims-made policies”). Both types of policies require the insured to give the insurer notice of a claim or occurrence as soon as practicable after the event occurs or a claim is made. A claims-made policy also requires the insured to give notice of the claim by a date certain (a certain period after the policy expires). In Friedland v. Travelers Indemnity Co., 105 P.3d 639 (Colo. 2005), the Colorado Supreme Court held that an insurer cannot deny coverage under an occurrence policy due to late notice from the insured unless the insurer can prove that it was prejudiced by the late notice. Friedland did not involve a claims-made policy.
The recent case of Craft v. Philadelphia Ins. Co. does involve a claims-made policy. Dean Craft was the president and principal shareholder of a cement company called CCCI. In July 2007, Craft agreed to sell 10% of his shares in CCCI to Suburban Acquisition Company. Craft warranted that CCCI had water rights at a pond near its Arvada factory. In fact, CCCI did not own the water rights. In July 2010, Suburban sued Craft in Broomfield County District Court for misrepresentation. When he was sued, Craft did not know that CCCI had purchased directors’ and officers’ liability insurance from Philadelphia Indemnity Insurance Company. As an express condition precedent to coverage, the policy required the insured to provide written notice to Philadelphia “not later than 60 days” after the policy period expired. The relevant policy period was November 1, 2009 to November 1, 2010.
Craft did not learn of the insurance policy until March 2012 – more than a year after the policy period in which the suit was filed had expired. Craft immediately notified Philadelphia of the lawsuit against him, but Philadelphia did not respond. In June 2012, shortly before trial, Craft agreed to settle with Suburban. Months later, Philadelphia responded to Craft’s repeated inquiries for coverage by indicating only that certain policy exclusions applied to Craft’s claim.
Craft sued Philadelphia in state court for breach of contract, breach of good faith and fair dealing, and unreasonable delay and denial of payment of insurance benefits in violation of C.R.S. §10-3-1116. Philadelphia removed the case to federal district court and moved to dismiss the suit on the ground that Craft failed to provide notice of the underlying claim against him within 60 days of the expiration of the policy period. The federal district court granted Philadelphia’s motion to dismiss, rejecting Craft’s argument that the notice-prejudice rule of Friedland v. Travelers Indemnity Co.applied to the policy in this case. The court reasoned that Friedland addressed an “occurrence policy,” and that its holding does not apply to “claims-made liability policies.” Craft appealed to the United States Court of Appeals for the Tenth Circuit, and the Tenth Circuit certified two questions of law to the Colorado Supreme Court. The essence of those questions was whether the notice-prejudice rule of Friedland v. Travelers applied to the date-certain notice provision of a claims-made policy. Although the Tenth Circuit was reluctant to apply the notice-prejudice rule to a claims-made policy, it concluded that the Colorado Supreme Court should have the first opportunity to address this issue.
The Colorado Supreme Court observed that the date-certain notice provision in a claims-made policy served to effectuate the agreed upon temporal limits of coverage. To excuse notice given after the expiration of the reporting period would rewrite a fundamental term of the insurance contract. For this reason, the Colorado Supreme Court concluded that the notice-prejudice rule does not apply to the date-certain notice provision in a claims-made policy, and answered the certified question in the negative. Although excusing late notice and applying a prejudice requirement makes sense in the context of a prompt notice requirement in an occurrence policy, extending such concepts to a date-certain notice requirement in a claims-made policy would defeat the fundamental concept by which the coverage is provided. In short, to excuse late notice in violation of a date-certain provision in a claims-made policy would alter a basic term of the insurance contract.
Full text of opinion . . . Craft v. Philadelphia Indemnity Ins. Co., 2015 Colo. LEXIS 139 (Colo. 2015). For further information regarding this decision, contact John E. Bolmer II, member of Hall & Evans, LLC, at 303-628-3366 or by email to bolmerj@hallevans.com.
Interrelated Contracts Doctrine Can Apply to Entity Which Did Not Exist When the Contract Was Formed, and Commercial Entity Which is a Third-Party Beneficiary of Contract Which Interrelates to Contract for Building a Home Is Subject to Economic Loss Rule and May Not Sue in Tort
Developer Sun Mountain Enterprises, LLC (“Sun Mountain”) hired soils engineers to perform soils analysis for the construction of a home. Sun Mountain secured financing for the home through a construction loan from Alpine Bank. Before the home reached the market, the loan came due. To avoid foreclosure, Alpine Bank and Sun Mountain entered into a deed-in-lieu of foreclosure whereby Alpine Bank received the deed to the home in exchange for a release of the loan (plus payments). Alpine Bank then placed title to the home in a newly-created entity, Mid Valley Real Estate Solutions (“Mid Valley”).
Before Mid Valley could sell the home, large cracks appeared in the walls due to problems in the soils beneath the home. Mid Valley sued the soils engineers for purely economic losses under negligence theories. The soils engineers moved for summary judgment under the economic loss rule, arguing that Mid Valley was a third-party beneficiary of the contract between Sun Mountain and the soils engineers by reason of the construction loan and deed-in-lieu of foreclosure contract which interrelated with the contract under which the home was built. The trial court denied the motion for summary judgment, and Mid Valley petitioned for interlocutory review. The Court of Appeals granted review and affirmed the trial court.
The Colorado Supreme Court then granted certiorari to resolve two issues: (1) whether an entity that did not exist when the contract was formed can still be subject to the economic loss rule through the interrelated contract doctrine; and (2) whether a commercial entity which is a third-party beneficiary of a contract that interrelates to the contract under which the home was built is among the class of plaintiffs entitled to the protection of the independent tort duty to act without negligence owed by construction professionals to subsequent homeowners when constructing residential homes.
To resolve these issues, the Court first reviewed the basic principles of the economic loss rule in Colorado. Absent an independent tort duty, a plaintiff is generally barred from suing in tort if (1) the plaintiff seeks redress for breach of a contractual duty that caused only economic losses, (2) the plaintiff is a party to a contract or a third-party beneficiary of a contract, and (3) that contract defines the duty of care that the defendant allegedly violated or is interrelated with another contract that does define the duty of care. The Court explained that if the defendant owes a duty of care to the plaintiff independent of the duty contained in the interrelated contracts, the plaintiff may sue in tort for violation of that independent duty. In Cosmopolitan Homes v. Weller, 663 P.2d 1041 (Colo. 1983), the Court held that the independent duty owed by home builders to use reasonable care in the construction of a home extends to subsequent purchasers of the home. And in A.C. Excavating v. Yacht Club, 114 P.3d 862 (Colo. 2005), the Court recognized that this duty to act without negligence in the construction of a home is also owed sub-contractors as well.
The Court then concluded that (1) the economic loss rule can apply to an entity that did not exist when the contract containing the duty was formed if that entity is a third-party beneficiary of the contract (or an interrelated contract); and (2) the independent duty recognized in Cosmopolitan Homes does not apply in this situation because, as a third-party beneficiary of a commercially negotiated contract that interrelates to the contract under which the home was built, Mid Valley cannot properly be considered a “subsequent purchaser.” The Colorado Supreme Court then reversed the Court of Appeals on the economic loss rule but remanded the case to the trial court for further proceedings on certain factual issues.
Full text of opinion . . . SK Peightal Engineers v. Mid Valley Real Estate Solutions, 2015 CO 7 (Colo. 2015).
No Claim for Bad Faith Breach of Insurance Contract Before Insured Submits Request for Benefits
No Claim for Bad Faith Breach of Insurance Contract Before Insured Submits Request for BenefitsIn the United States District Court for the District of Colorado, Case No. 14-CV-02594, Magistrate Judge Michael E. Hegarty dismissed claims for bad faith breach of insurance contract against a national property and casualty insurer. Plaintiff Melvin Bernstein’s wife was killed during the filming of a pilot episode for a reality TV show. The decedent was covered by an accidental death benefit insurance policy issued to the production company. The full benefits were paid to Mr. Bernstein once the claim was submitted, but Mr. Bernstein asserted an unreasonable delay in payment due to the fact that he was not notified of the existence of the policy for several months. Mr. Bernstein invoked Colorado’s insurance bad faith statute, C.R.S. §§10-3-1115 and 10-3-1116, which provides for damages of two times the covered benefit plus attorney fees in the event a claim for benefits is unreasonably delayed or denied. In granting the motion to dismiss, Judge Hegarty agreed with defendant that the claim was not covered under the plain language of the statute, given that Mr. Bernstein alleged a delay only during the time before he submitted his request for benefits. Judge Hegarty also rejected Mr. Bernstein’s common law bad faith claim, finding no indication that the common law tort for bad faith breach of insurance contract applied to pre-claim conduct.
The defendant was represented by Kevin O’Brien, member, and Gillian Dale, special counsel, of Hall & Evans. For further questions concerning this case, contact Kevin O’Brien at 303-628-3353 or by email to obrienk@hallevans.com or Gillian Dale at 303-628-3328 or by email todaleg@hallevans.com.
Federal Court Clarifies Legal Assistance
On January 12, 2015, Magistrate Judge Kristen Mix of the United States District Court for the District of Colorado issued a decision clarifying a rule promulgated by the federal court which disallows most forms of limited-scope representation. According to Judge Mix, this rule not only forbids ghost writing a client’s pleadings but also prohibits assisting the client in drafting filings or communicating with opposing counsel. Judge Mix found it implicitly clear that an attorney’s assistance in drafting documents for a pro se litigant is prohibited. Judge Mix also said that the federal court’s rejection of Rule 1.2(c) of the Colorado Rules of Professional Conduct means that an attorney is not allowed to speak with opposing counsel on behalf of a pro se litigant.
Under the opinion issued by Judge Mix, an attorney may speak with the plaintiff and give advice; attend or observe hearings as a member of the public; and assist the plaintiff with clerical tasks such as locating forms and sample documents. However, an attorney is prohibited from drafting documents for submission to the court or opposing counsel; providing “drafting assistance” to the plaintiff in connection with the case; or communicating directly with opposing counsel about the case on the plaintiff’s behalf.
Full text of opinion … Chung v. El Paso School District, Civil Action No. 14-cv-1520-KLM (D. Colo. 2015)
Legislative and Administrative Developments
Colorado Medicaid False Claims Act
To protect the State Treasury against the submission of false claims for reimbursement of expenses under the Medicaid program, the General Assembly enacted the Colorado Medicaid False Claims Act. C.R.S. §25.5-4-303.5. Under this Act, a person submitting a false claim for payment is liable to the State of Colorado for a civil penalty of not less than $5,500 and not more than $11,000, plus three times the amount of damages that the State sustains because of the false claim. C.R.S. §25.5-4-305.
The Attorney General of the State of Colorado is primarily responsible for enforcement of the Medicaid False Claims Act. C.R.S. §25.5-4-306(1). However, a private person (called a “relator”) may bring a civil action for violation of the Act on behalf of both the relator and the State of Colorado. C.R.S. §25.5-4-306(2). If a private person brings such an action, the State may intervene and assume control of the action. C.R.S. 25.5-4-306(2)(d). If the State assumes control of the action, the private person shall receive “at least fifteen percent but not more than twenty-five percent of the proceeds of the action or settlement of the claim.” C.R.S. 25.5-4-306(4). In addition, the relator shall also receive an award for his costs, expenses, and reasonable attorney fees. C.R.S. §25.5-4-306(4)(a)(III).
If the State does not proceed with the action, and if the relator is successful in his lawsuit, the relator shall receive an amount “that the court decides is reasonable for collecting the civil penalty and damages.” C.R.S. §25.5-4-306(b). This amount “shall be not less than twenty-five percent and not more than thirty percent of the proceeds of the action” (i.e., the penalty), plus costs, expenses, and attorney fees. C.R.S. §25.5-4-306(b).
Recognizing that a medical provider’s request for reimbursement under Medicaid can be quite large, and that a successful relator can recover treble damages plus attorney fees, the potential award under the False Claims Act could be substantial. The General Assembly was persuaded that this potential for substantial recovery could motive private persons to seek out false claims and thereby assist the government in eliminating fraud under the Medicaid program. Interest in the pursuit of false claims across the United States has grown substantially as individual states have enacted similar statutes.
For further information regarding Colorado False Claims Act, contact Robert Ferm, member of Hall & Evans, LLC, at 303-628-3380 or by email to fermr@hallevans.com.
Colorado Division of Insurance Issues Regulation Regarding Appraisals
To address industry concerns, the Colorado Division of Insurance recently revised Bulletin no. B-5.26, titled “Requirements Related to Disputed Claims Subject to Appraisal.” The original Bulletin was addressed only to insurers and required appraisers and umpires to conduct appraisals in a “fair, competent and impartial manner” by forbidding ex parte communications.
The industry raised concerns with the language of the Bulletin, specifically whether the Bulletin was drafted too broadly and might affect normal claims communications. The Division responded by clarifying that the prohibition on ex parte communications applies only after an appraisal is triggered. The Division also expanded the scope of the Bulletin, making it apply not only to insurers but also to policyholders, their representatives and public adjusters.
The Division modified the Bulletin shortly after the Colorado Legislature adopted C.R.S. §10-2-417 which attempts to eliminate significant conflicts of interest by public adjusters. Alarmingly, prior to this statute it was common practice in Colorado for a public adjuster to represent a policyholder on a claim, and then subsequently perform the repairs which were the subject of the claim. Pursuant to the statute, public adjusters are now prohibited from having any financial interest in a claim, beyond their payment as a public adjuster.
For further information regarding this matter, contact Lisa Mickley, member of Hall & Evans, LLC, at 303-628-3325 or by email to mickleyl@hallevans.com.
Department of Labor Recognizes Marriage According to “Place of Celebration”
On February 25, 2015, the United States Department of Labor announced that it will issue a Final Rule revising regulations promulgated pursuant to the Family and Medical Leave Act (FMLA) concerning the term “spouse.” The new regulations will refer to “marriage as defined or recognized under state law . . . in the State in which the marriage was entered into.” 29 C.F.R §825.102. Under the new regulations, DOL will employ a “place of celebration” test to define the term “spouse,” rather than the former state of residence. The goal of this change is to ensure that FMLA rights are consistently applied to all legally married employees, regardless of the state in which they reside. The new regulations should take effect on March 27, 2015.
Workers’ Compensation
Ripeness for Adjudication Measured by Legal Standards, Not by State of the Evidence
An appellate panel of the Industrial Claim Appeals Office recently issued an opinion explaining that the jurisdictional requirement of “ripe for adjudication” is determined by reference to the legal status of the issue raised, not by the state of the evidence concerning that issue.
On March 3, 1997, the claimant suffered an admitted workers’ compensation injury. The respondents filed a Final Admission of Liability on March 5, 2003, admitting to continuing medical treatment for the claimant’s injury. On April 27, 2011, the respondents filed an Application for Hearing to terminate the ongoing medical treatment. The respondents also endorsed two additional issues: apportionment and authorized treating physician (“ATP”). At hearing, an administrative law judge awarded the claimant attorneys’ fees on the grounds that neither the apportionment issue nor the ATP issue was ripe. The decision was reversed on appeal to the Industrial Claim Appeals Office and remanded, then appealed again by both parties.
In the second appeal, the claimant argued that the issues were not ripe for adjudication, because, at the time the respondents filed the Application for Hearing, they possessed no evidentiary support for the issues. The claimant argued that because of this, the issues were not “real, immediate, and fit for adjudication” and were therefore unripe. On the other hand, the respondents argued that, while they may have lacked evidentiary support for their position when they filed their Application for Hearing, there was no legal impediment to submitting the issues when they filed the motion.
The appellate panel characterized the parties’ arguments as a debate between whether an issue must be factually viable or legally viable to be ripe for adjudication. The panel determined that an issue must only be legally viable at the time of filing to be ripe, and that whether a party could present a viable evidentiary case was irrelevant to a ripeness determination. The panel reasoned that the claimant’s argument confused the standard of “merit” with that of “ripe for adjudication.” Additionally, the panel noted that, unlike other civil and regulatory systems, the “statutory and regulatory scheme governing workers’ compensation claims often requires a very speedy request for a hearing in order to prevent an issue from being resolved by default.” If the parties were forced to obtain sufficient evidentiary support before endorsing an issue, the parties “would be forced to choose between their right to a hearing or waiving that right to avoid an expensive assessment of fees should they guess wrong about the possible strength of their claim.”
The issues the respondents endorsed were legally viable, even though the respondents lacked evidentiary support for the issues when they filed their Application for Hearing. Therefore, the panel remanded the claim to the administrative law judge with instructions to vacate the award of attorneys’ fees against the respondents. Jane McMeekin v. Memorial Gardens and Reliance National Indemnity, W.C. No. 4-384-910 (September 30, 2014)