QUICK NOTE: MITIGATION OF DAMAGES IN CONTRACT CASES

imagesIn an earlier article, I discussed an owner’s measure of damages when a contractor breaches the construction contract.  This article discussed a case where the contractor elected to walk off a residential renovation job due to a payment dispute when he demanded more money and the owners did not bite.  This case also discussed the commonly asserted defense known as mitigation of damages, i.e., the other party failed to properly mitigate their own damages.  

 

In the breach of contract setting, mitigation of damages refers to those damages the other side could have reasonably avoided had he undertaken certain (reasonable) measures.  This is known as the doctrine of avoidable consequences

 

In contract cases, there is really no “duty to mitigate” because the claimant “is not compelled to undertake any ameliorative efforts”; rather, he is merely prevented from recovering damages he “could have reasonably avoided.” The word “reasonably” is important. The doctrine of avoidable consequences does not allow a trial court to reduce damages “based on what ‘could have been avoided’ through Herculean efforts.  It applies only where a claimant fails to undertake measures to avoid damages that are available to him without undue effort or expense.

Forbes v. Prime General Contractors, Inc., 43 Fla.L.Weekly D2094a (Fla. 2d DCA 2018) (internal citations omitted).

 

Stated differently, (1) what reasonable efforts could the other party have undertaken to avoid damage or further damage and (2) if the other party employed such efforts, what is the quantum of those avoidable damages.  Typically, you want these addressed by an expert witness so that there is evidence of reasonable efforts the other side could have undertaken and had these efforts been undertaken their damages would be reduced to “X” or it would have prevented them from incurring “Y” in damages. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONTRACTOR WALKS OFF JOB. WHAT ARE THE OWNER’S DAMAGES?

shutterstock_1059607865What are your damages as the result of a breach of the construction contract?  This is an important question, right?  It is probably the most important part of your case.  If you didn’t have damages, you wouldn’t be in a dispute. So, I repeat, what are your damages as the result of a breach of the construction contract? The below case explains dealing with a contractor that elected to walk off the job mid-construction.

 

In Forbes v. Prime General Contractors, Inc., 43 Fla.L.Weekly D20194a (Fla. 2d DCA 2018), owners hired a contractor to perform a residential renovation job for $276,000.  The owners were to pay the contractor in five draw payments (common for residential jobs) where the third draw payment was due upon the contractor’s completion of the dry-in (as defined in the contract).  After the contractor received the first two draw payments totaling $138,000 plus an additional $6,000 for updated architectural plans, the contractor claimed the job doubled in price and demanded that the owners pay the contractor the third draw payment immediately (before it was due) plus an additional $31,450.  The contractor refused to continue unless the owners agreed to its terms, and then walked off the job when the owners would not agree to these terms (nor should the owners agree to those terms).  At the time the contractor walked off the job, the owners’ home was not habitable due to the construction.

 

The owners sued the contractor for breach of the construction contract and had two damages methodologies they could employ:

 

 

(1) they could deem the contract a total breach, treat the contract as void, suspend their own performance under the contract, and look to be placed in the position they would have been in prior to entering the contract (i.e., had they not hired the contractor); or

(2) they could seek the damages that would place them in the position had the contractor completed the contract.  This damages methodology is more common and would result in the owners seeking the difference between the total amount to complete the contract and the amount owed under the original contract.  For example, if the owners were all in at $376,000 to complete the contract, the contractor would be liable for $100,000, since the owners were always planning on the original contract amount of $276,000. 

 

In this case, however, the owners chose the less common first damages methodology.  The reason being is that the owners could not find another contractor that was reasonably willing to complete the contract.  Also, because the home was uninhabitable, the owners were forced to buy another house versus indefinitely renting.  This resulted in the owners losing the uninhabitable house to foreclosure and their $45,000 equity in the house.  Accordingly, the owners, seeking to be put in the position had they never hired the contractor, sought to recover, among other damages (i) the first two draw payments totaling $138,000 plus the additional $6,000 for updated architectural drawings, (ii) $5,600 in rent, and (iii) $45,000 in lost equity.  These were permissible recoverable damages under the first damages methodology: 

 

They [owners] sought to be put in the position they would have occupied had they never contracted with Prime [contractor]. It was clear at trial that the Forbeses [owners] regarded the breach as total; indeed, they were explicit that they were entitled to suspend their own performance under the contract. And the damages they asked the court to award — return of payments made under the contract and the equity in their home at the time of contracting — were of a type that regarded the contract as void and attempted to restore the Forbeses to their precontractual situation.

 Forbes, supra.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

ASSIGNMENT OF BENEFITS PROVISION IN HOMEOWNER’S POLICY IS ENFORCEABLE

shutterstock_1005703702When it comes to property insurance claims, particularly those under a homeowner’s insurance policy, an insured will oftentimes assign its benefits under the policy to a restoration contractor.  The request for the assignment may likely be prompted by the contractor that does not want to perform the work without the assignment of benefits.  The assignment of benefits (also known by the acronym “AOB”) allows the third-party contractor (as the assignee of the insured) to sue the insurer directly for benefits under the policy associated with the restoration work.  

 

Recently, the Fourth District Court of Appeal found enforceable a provision in a homeowner’s insurance policy that stated, “[n]o assignment of claim benefits, regardless of whether made before a loss or after a loss, shall be valid without the written consent of all ‘insureds,’ all additional insureds, and all mortgagee(s) named in this policy.”   Restoration 1 of Port St. Lucie v. Ark Royal Ins. Co., 43 Fla.L.Weekly D2056a (Fla. 4th DCA 2018).  This meant that for the assignment of benefits to be valid, all insureds and the insured’s mortgagee had to sign off on the assignment.

 

In this case, the restoration contractor got the assignment of benefits signed by the wife-insured, but the assignment was not signed by the husband-insured or the mortgagee.  Based on this, the insurer denied payment to the restoration contractor.  The restoration contractor sued the insured based on the assignment and the Fourth District affirmed the trial court in dismissing the complaint holding that the language of the assignment of benefits provision in the policy is enforceable (meaning the contractor needed the written consent of all insureds and the mortgagee in order to effectuate a valid assignment). 

 

Regardless of your feelings about assignment of benefits, the language in the homeowner’s policy must be reviewed to ensure compliance with any assignment of benefits language in the policy. 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LIABILITY INSURER PRECLUDED FROM INTERVENING IN INSURED’S LAWSUIT

shutterstock_368505233There are cases where I honestly do no fully understand the insurer’s position because it cannot have its cake and eat it too.  The recent opinion in Houston Specialty Insurance Company v. Vaughn, 43 Fla. L. Weekly D1828a (Fla. 2d DCA 2018) is one of those cases because on one hand it tried hard to disclaim coverage and on the other hand tried to intervene in the underlying suit where it was not a named party.

 

This case dealt with a personal injury dispute where a laborer for a pressure washing company fell off of a roof and became a paraplegic.  The injured person sued the pressure washing company and its representatives.  The company and representatives tendered the case to its general liability insurer and the insurer–although it provided a defense under a reservation of rights—filed a separate action for declaratory relief based on an exclusion in the general liability policy that excluded coverage for the pressure washing company’s employees (because the general liability policy is not a workers compensation policy).   This is known as the employer’s liability exclusion that excludes coverage for bodily injury to an employee.  The insurer’s declaratory relief action sought a declaration that there was no coverage because the injured laborer was an employee of the pressure washing company.  The pressure washing company claimed he was an independent contractor, in which the policy did provide limited coverage pursuant to an endorsement.

 

The insurer also moved to intervene in the underlying action for the purpose of getting special interrogatories on the verdict form relative to the injured plaintiff’s employment status.  The pressure washing company objected because they did NOT want to inflate the damages by having the jury learn that insurance was involved, thereby prejudicing it, particularly if it was determined that there was no insurance coverage.  You cannot blame the insured in this instance, particularly because the injured plaintiff was probably all for having the insurer intervene so that the jury learned about the insured’s insurance. 

 

While the trial court granted the motion to intervene, after a number of events occurred (not discussed here), the trial court ultimately dismissed the intervention. The insurer appealed.

 

The appellate court affirmed the denial / dismissal of the insurer’s intervention in the underlying action.  The bottom line is that the insurer was not sued in the underlying action. It could not be sued by the injured plaintiff based on Florida’s non-joinder statute (Florida Statute 627.4136) that would prevent the injured plaintiff from suing the liability insurer directly until it gets a judgment against the insured.  Thus, the insurer had no direct and immediate interest in the dispute. Any judgment entered in the case would not be against the insurer—it would be entered against its insured.  Further, if the insured obtained a judgment and then sued the insurer, the insurer would not be deprived of appropriate legal defenses. 

 

As the appellate court explained, the insurer’s argument, if accepted, would be to eviscerate Florida’s non-joinder statute:

 

If the possibility of owing up to the policy limits based upon entry of an adverse judgment [against an insured] was itself a sufficient basis to allow intervention, insurers would be permitted the unhindered and unfettered opportunity to intervene in innumerable tort cases. That is exactly what Houston [insurer] wants; it seeks to interject itself directly into Mr. Vaughn’s [injured plaintiff’s] tort lawsuit. We cannot countenance such a result in light of the legislature’s intent [in Florida’s non-joinder statute] to prevent the introduction of such prejudicial information from being introduced to the jury.  After all, courts must continually be concerned that insurance coverage not be introduced to the jury because of its potential to adversely impact the issues of liability and damages. 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.