In the underlying dispute, a townhome development association’s board of directors (the Association) filed suit on behalf of the townhome owners against M/I Homes (the developer) for breach of contract and breach of the implied warranty of habitability. The Association alleged defects, including leaky roofs and damage to “other property” (such as damage to the interior of units caused by the leaky roofs).
M/I Homes sought defense from its CGL insurer Acuity and pursuant to the terms of its policy. Acuity, however, took the position that it did not need to defend M/I Homes for two primary reasons. First, Acuity stated that the underlying complaint failed to properly allege “property damage” caused by an “occurrence” because the alleged damage consisted only of damage to the townhomes, not damage to “other property.” Second, Acuity stated that the damage was a “natural and ordinary consequence” of the defective work, rather than an “accident,” and therefore did not qualify as an “occurrence” under the policy, which defined “occurrence” as an “accident.” M/I Homes countered that the Association’s broad allegation of damage to “other property” constituted “an allegation of property damage beyond the repair and replacement costs of the faulty construction work.” Thus, according to M/I Homes, “property damage” caused by an “occurrence” had been pled sufficiently and triggered defense obligations under the policy.
The trial court ruled in favor of Acuity, specifically citing the occurrence/accident argument as persuasive. On appeal, the parties agreed that under Illinois law, “property damage” caused by an “occurrence” required that the underlying complaint allege property damage to something beyond the townhome construction project itself. The appellate court questioned this shared understanding, noting that it arose not out of the language of the insurance policy, but from appellate case law interpreting CGL policies. The appellate court ultimately reversed the trial court decision, favoring an interpretation of the policy and complaint where the Association’s broad allegation of damage to “other property” was sufficient to find Acuity had a duty to defend.
On cert, the Supreme Court of Illinois focused its analysis on the plain terms of the CGL policy and the allegations in the underlying complaint. Under this line of inquiry, “if the facts alleged fall potentially within the policy’s coverage, the insurer is obligated to defend its insured.” After looking at the policy terms at issue, the court determined that coverage depends upon whether there has been an allegation of “property damage” that is caused by an “occurrence” within the meaning of the CGL policy language. Two aspects of the court’s decision merit specific consideration.
First, the court rejected a previous case that held foreseeable results of negligent conduct did not constitute “accidents” and, therefore, did not meet the definition of “occurrences” for purposes of the policy’s insuring agreement. The court strictly reviewed the policy language at issue, noting that an “occurrence” is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” While the policy did not define the term “accident” and the Illinois Supreme Court had itself never defined “accident” in this context, the court determined that an “accident” in this context can encompass “the unintended and unexpected harm caused by negligent conduct.” With this, the court determined that, because there were no allegations that the defects in question were intentional, the underlying Association complaint had pled an “occurrence.”
Second, the court held that the parties’ “agreement” on appeal—that under Illinois law an “occurrence” causing “property damage” requires damage to something beyond the constructed property—was erroneous. The court held: “To the extent that prior appellate court cases relied upon considerations outside the scope of the insuring agreement’s express language, that analysis, which is not tied to the language of the policy, should no longer be relied upon.” The court further held that to the extent CGL policies sought to restrict coverage for negligent work, the insurers would need to do so through policy exclusions and not through judicial restrictions of the broadly drafted insuring agreement. Consequently, the court did not inquire into whether the underlying complaint pled damage to “other property,” but instead remanded the case for the purpose of determining if any potential exclusions in the policy applied.
Authors’ Comments
The Illinois Supreme Court looked to straighten out a legal framework that “[l]ay in chaos” according to some commentators. Accordingly, the court decided, “rather than merely begin with the parties’ premise, the best approach to bringing clarity to these issues is to return to first principles and apply a disciplined legal framework from which we can arrive at the correct legal analysis and the correct result.” The court’s decision to return to first principles and set aside prior precedent regarding the interpretation of “property damage” caused by an “occurrence” brings Illinois law in line with the national trend, which increasingly rejects judicially created limitations on coverage based on the assumed purpose of commercial liability coverage.
Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, reh’g denied (Jan. 22, 2024).
Federal District Court Refuses to Exclude Expert Testimony
Courts commonly criticize the reliability of the total cost or modified total cost methods of damage calculation, but it is relatively rare that an expert’s testimony is excluded from consideration. An ongoing suit between AECOM Technical Services, Inc. (ATS) and Flatiron AECOM, LLC (Flatiron) demonstrates this continued conundrum in construction litigation. As the ATS/Flatiron dispute approached trial, ATS brought a motion to exclude Flatiron’s damages expert on the grounds that the expert utilized the total cost method. Ruling in favor of Flatiron, the District Court for the District of Colorado, applying Colorado law, permitted the opinion testimony that relied on the total cost method so long as the party proffering its use acknowledged other causal factors affecting the damage total beyond the initial bid amount.
The dispute between ATS and Flatiron emerged from a large-scale highway project funded by the Colorado Department of Transportation. ATS was the designer for the project and Flatiron was the general contractor. After suffering massive cost overruns on the project, Flatiron brought suit against ATS and claimed that ATS’s design was defective; Flatiron sought a total of $263 million in damages. Flatiron hired an expert to opine on the total damages it allegedly suffered. ATS sought to exclude certain testimony from Flatiron’s damages expert, asserting that the expert’s use of the total cost method was disallowed under Colorado law.
The total cost method measures damages arising from a construction project by subtracting the contractor’s bid amount from the actual total cost the contractor expended on the project. This method is regularly criticized as ignoring potential causal factors by assuming the bid price was reasonable and the contractor was not responsible for any of the cost overruns. The theory underlying the criticism is that performance by contractors on complex construction projects is rarely error free and it is unlikely that a contractor at any tier could complete a project without any mistakes.
Flatiron responded to ATS’s motion by arguing that its expert did not use the total cost method and asserted that its expert did not attribute $120 million in cost overruns to ATS. Flatiron argued that Colorado has not fully rejected the total cost method, but rather rejected damage computation methods that failed to differentiate between costs attributable to the defendant and those caused by other factors; Flatiron stated that its expert did not opine in this offending manner. Flatiron states that the assessment utilized by its expert was more akin to the modified total cost method. Under this approach, the damage amount produced by the total cost method is used as a starting point and is then lessened by other costs that were not caused by the defendant. Flatiron contended that in claims stemming from large, complex projects, the modified total cost method is sometimes utilized because it may become impossible to measure actual damages with precision or present such damage calculations to the jury in a comprehensible manner.
Siding with Flatiron, the court began by stating its disapproval of what it characterized as a dispositive motion in the guise of a motion in limine. It stated that in most cases, the court typically will not exclude testimony when such testimony is necessary to prove an essential element of a claim. In this scenario, the court held that the reliability of an expert’s damage calculations is properly weighed by the jury after cross-examination. Exclusion, on the other hand, would essentially operate as a dispositive motion because Flatiron would be unable to offer opinion evidence on its damages.
The court also agreed with Flatiron’s argument that while Colorado traditionally disfavored the total cost method, the state had not outright rejected it. The court ultimately did not reach this issue, however, because the expert report in question provided some basis for distinguishing between costs attributable to the defendant and those caused by other factors, thereby satisfying the more exacting requirements of the modified total cost method. As the court noted, Colorado, like most other jurisdictions, only requires proof of damages with reasonable certainty. Under the circumstances, the modified total cost method was viable, and the court left the ultimate task of determining whether Flatiron had met that standard to the jury.
Authors’ Comments: Although the total cost method and the modified total cost method may not be the most precise measures of damages, the court’s reference to the need to prove damages with reasonable accuracy is the general standard typically used for measurement. The decision is also a good illustration of judicial disfavor of dispositive motions masquerading as motions in limine by characterizing certain testimony as “irrelevant” based on substantive rules of law.
AECOM Technical Services v. Flatiron AECOM, LLC, Case No. 19-CV-2811, 2024 WL 22640 (D. Col. Jan. 2, 2024).
Mechanic’s Lien Survives Property Transfer Under Nebraska Law
Mechanic’s liens are effective tools to ensure that contractors and suppliers are paid for the services and materials they provide on a project. In Nore Electric Inc. v. S & H Holdings, L.L.C., the Supreme Court of Nebraska reinforced the essential protections provided under the Nebraska Construction Lien Act (the Act) and held that an owner’s transfer of the subject property to a third party does not extinguish a contractor or materialman’s right to attach a lien to the property after the transfer.
The facts of the case concerned the construction of a fast-food restaurant on property owned by S&H Holdings, L.L.C. (S&H). S&H hired Integrated Construction Management Services, Inc. (ICMS) to serve as the general contractor and ICMS hired various subcontractors, including plaintiff Nore Electric, Inc., to supply services and materials to the project (Nore Electric and the other subcontractors hereinafter referred to as Subcontractors). On January 18, 2019, S&H executed a warranty deed conveying the subject property with the fast-food restaurant improvement to Realty Income Properties 19, LLC (RIP). Ultimately, ICMS did not pay its Subcontractors in full and the Subcontractors recorded construction liens against the subject property on dates ranging from March 22 through April 18, 2019. S&H and RIP refused to satisfy the liens, and one of the Subcontractors brought a suit against them.
Under the Act, “[a] person who furnishes services or materials pursuant to a real estate improvement contract has a construction lien . . . to secure the payment of his or her contract price.” A “real estate improvement contract” is defined as “an agreement to perform services, including labor, or to furnish materials for the purpose of producing a change in the physical condition of land or of a structure.” Relatedly, the Act defines “contracting owner” as “a person who owns real estate and who, personally or through an agent, enters into a contract, express or implied, for the improvement of the real estate[.]”
S&H and RIP argued that liens can only attach to the “contracting owner’s real estate.” S&H and RIP claimed that the Subcontractors’ liens did not attach to the subject property because S&H was the contracting owner and the liens were not recorded until after S&H’s ownership interest in the subject property had been transferred.
The court determined that under the Act, the term “contracting owner” is a “descriptor used as a modifying term that identifies the real estate being improved or directly benefited.” Under this interpretation, the “contracting owner’s real estate” is fixed at the time the contract to improve real estate is entered into and liens arise upon the contractor’s performance or services and provision of materials. Recording liens, on the other hand, allows for the attachment of the lien on the contracting owner’s real estate and a lien may be recorded under the Act at any time “not later than [120] days after his or her final furnishing of services or materials.” Upon this interpretation, the court held that the Subcontractors’ liens were valid and had attached to the subject property upon their recording.
Additionally, the court recognized that the Act allows for owners to file a notice of commencement describing the specific portion of real estate subject to improvement so as to limit the total property area subject to a lien under the Act. S&H filed a notice of commencement with an expiration date of June 11, 2019, and had not terminated the notice of commencement prior to transferring its interest in the property to RIP, which gave RIP constructive notice that the property may be encumbered. The court also recognized that RIP had actual notice that S&H had entered into an improvement contract with ICMS.
Based on these facts, the court held that at the time S&H transferred the property, S&H’s interest was encumbered by the future interest of any the Subcontractors who recorded a lien within 120 days of their final furnishing of services and material to the property. This exact interest, according to the court, was what RIP acquired from S&H at the time of the transfer.
Authors’ Comments
Mechanic’s lien statutes differ significantly by jurisdiction and, like here, are not always clear with respect to their application to later acquirers of the property covered by the lien. This case is a good illustration of the deference courts often pay in their interpretation decisions to the policy behind lien statutes—protecting contractors. However, it is interesting to speculate how the case might have been decided had the court been dealing with an innocent purchaser without knowledge of the lien. In such a case, the competing policy considerations would have been closer and may have compelled a different result.
Nore Electric Inc. v. S & H Holdings, L.L.C., 316 Neb. 197 (2024).