Does an Attorney Have a Duty to Disclose to Opposing Counsel a Material Error in a Contract?

Does an attorney have a duty to disclose to opposing counsel a material error in contract language or a material change made by the attorney in the contract language? This was the issue decided by the State Bar of California Standing Committee on Professional Responsibility and Conduct in Formal Opinion no. 2013-189.

In the case considered by the Committee, a purchase contract subject to a covenant not to compete was negotiated between attorneys. Buyer’s attorney inadvertently changed the consideration due for the covenant from $1,000,000 to $1, rendering the covenant ineffective in favor of the Seller. The issue was whether the Seller’s attorney had a duty to notify opposing counsel of the material error.

In determining if an attorney has a duty to alert opposing counsel of material errors, the Committee noted that attorneys are “held to a high standard, and may be subject to general obligations of professionalism.” The California Supreme Court has held that attorneys have an “obligation not only to protect [their] client’s interests but also to respect the legitimate interests of fellow members of the bar….” (Kirsch v. Duryea (1978) 21 Cal.3d 303, 309.) Furthermore, the Committee has previously held that attorneys should treat opposing counsel with candor and fairness. However, any duty of professionalism to opposing counsel is secondary to the duties owed by attorneys to their own clients, and there exists no general duty to protect interests of nonclients, as this would damage the attorney-client relationship. (Fox v. Pollack (1986) 181 Cal.App.3d 954, 961.)

In further analyzing an attorney’s duty of professionalism to opposing counsel, the Committee noted that attorneys do not have any obligation to correct the mistakes of opposing counsel. There is no liability for conscious nondisclosure absent a duty of disclosure. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 342, 346.) The Committee previously held that there is no duty to correct erroneous assumptions of opposing counsel. (See ABA Formal Opn. No. 94-387.)

However, it is unlawful for an attorney to commit any act of moral turpitude or dishonesty and such acts could be cause for disbarment or suspension. (Bus. & Prof. Code § 6106.) Likewise, it is inappropriate for an attorney to engage in deceit or active concealment, or make a false statement of a material fact to a nonclient. (Bus. & Prof. Code § 6128(a).) In analyzing these rules, the conclusion is reached that an attorney may have an obligation to inform opposing counsel of a material error if and to the extent that failure to do so would constitute fraud, a material misstatement, or engaging in misleading or deceitful conduct.

In the case considered by the Committee, it was found that the Seller’s attorney had no duty to notify opposing counsel of the material error in contract terms. Seller’s Attorney engaged in no conduct or activity that induced the error, nor had there been any agreement on the purchase price of the covenant. Because the Seller’s Attorney had not engaged in deceit, active concealment, or fraud, it was found that the attorney had no duty to disclose the error. However, if Seller’s attorney took any action to actively conceal the mistake, a duty to disclose would then exist.

It is important for attorneys to understand their duties not only to clients, but nonclients and opposing counsel as well. Despite an attorney’s duty of professionalism and candor to opposing counsel, where an attorney has engaged in no conduct to induce a material error by opposing counsel, the attorney has no obligation to alert the opposing counsel of the error. However, where an attorney has deceitfully made a material change to contract language or actively concealed a mistake, the failure of the attorney to alert opposing counsel of the change would be a violation of his ethical obligations.

This blog was posted on the Jampol Zimet LLP’s Insurance Defense Blog on July 23. Click here to read the original post. 

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In almost every case that crosses our desks these days, plaintiffs make an offer of settlement and set a time limit for acceptance, striking fear in the heart of my clients who then ask: will a court find that we acted in bad faith by refusing to settle within the time limit? The seminal case on this issue is Southern General Ins. Co. v. Holt, 262 Ga. 267, 416 S.E.2d 274 (1992). In Holt, the plaintiff’s attorney made a time-limited settlement offer for policy limits of $15,000. The plaintiff’s attorney advised the insurer the plaintiff’s medical bills totaled more than $10,000 and the lost wages exceeded $5,000. The letter included a doctor’s report indicating the plaintiff had a herniated disc, and included medical bills totaling over $6,000. The plaintiff’s attorney later sent proof of additional expenses of over $4,000. In a last letter to the insurer, the plaintiff’s attorney extended the offer to settle within policy limits for five additional days and included in the letter a certified copy of the plaintiff’s complete medical records. The insurer neither sought more time to evaluate the claim nor responded to the offer before it expired. The insurer offered to settle the case within limits only after the plaintiff’s attorney had withdrawn the offer. A jury returned a verdict in favor of the plaintiff for $82,000. The insured assigned to the plaintiff her claim against the insurer for negligent or bad faith refusal to settle within the policy limits. The plaintiff in this suit sought the excess of $67,000, plus interest.

In the affirming the judgment for the amount of excess, the Georgia Supreme Court first noted the insurer may be liable to its insured for failing to settle a claim “where the insurer is guilty of negligence, fraud, or bad faith.” 262 Ga. at 268. While reiterating the equal consideration rule, the Court further stated “[a]n insurance company does not act in bad faith solely because it fails to accept a settlement offer within the deadline set by the injured person’s attorney.” Id. at 269. The Court, however, rejected the insurer’s argument “that an insurance company has no duty to its insured to respond to a deadline to settle a claim within policy limits when the company has knowledge of clear liability and special damages exceeding the policy limits.” Id. (emphasis in the original). The Court found the insurer did more than simply fail to settle within the time frame set by the plaintiff’s attorney. The insurer had information, including medical bills and documented lost wages, which showed special damages alone, exceeded the limits of the insured’s policy. The insurer’s claims representative acknowledged he had the information, but he testified he needed medical documents to support it. The Court noted, however, that neither the claims representative nor the claims manager requested an extension of time to evaluate the plaintiff’s claim. Thus, there was some evidence for the jury to conclude the insurer did not give equal consideration to the interest of its insured.

The issues raised in Holt have percolated through Georgia courts for the past twenty years. Most recently, the Georgia Court of Appeals ruled that Plaintiff’s policy limit demand, without an agreement to assure satisfaction of hospital liens, constituted an excess demand. See Southern General Ins. Co. v. Wellstar Health Systems, Inc., 315 Ga. App. 26, 34 (2012). The Court noted that “had Southern General verified the validity of the liens, made payment directly to Wellstar, and then paid the remainder of its policy limits to Plaintiff, Southern General would have created a safe harbor from liability under Holt and its progeny.” Unfortunately, Southern General had not done so.

As those of us in the insurance defense business know, Holt demands have been abused by some in the plaintiffs' bar who attempt to extract large settlements by setting short time frames for responses to their demands. The General Assembly took note and last term considered HB 1175 which proposed giving insurers a minimum of 60 days to respond to offers of settlement before being subjected to a bad faith claim. Additionally, the Bill mandated that such offers include full and complete copies of the claimant’s relevant medical records. After various groups, including the plaintiffs' bar, made their “contributions” to the Bill, it became too unwieldy to come up for a full chamber vote.

The issue of Holt demands has resurfaced before the General Assembly in 2013 – with both sides of the bar coming together in an attempt to create a standardized practice for communicating settlement offers which provides the defense with all pertinent information as well as the time with which to provide a considered response. While they have fallen a bit shy of the goal, there is at last some light at the end of the tunnel.

A secret group (really) of plaintiffs’ and insurance defense lawyers appointed by the Speaker of the House recently negotiated House Bill 336, which would give insurers at least 30 days to respond to a settlement offer submitted prior to the filing of a lawsuit, before a bad faith claim could be brought. HB 336 would also require that all settlement demands include (1) the specific time period in which the demand must be accepted; (2) the amount of the demand; (3) the identification of all parties the claimant would release; (4) the type of release; and (5) the specific claims to be released. Significantly, HB 336’s application will be limited in its application to claims of personal injury or death arising out of the use of a motor vehicle. Finally, while HB 336 does not require plaintiffs to produce all of their related medical records with their initial demand, it does allow insurers to seek clarification regarding the facts of the case, liens, standing to release the claims, medical records and bills, without these requests constituting a counter-offer.

Those in the know anticipate that HB 336 will move through the House Judiciary Committee unscathed due to its “bipartisan” support. At least HB 336 is a step in the right direction.

This blog was originally posted on the Georgia Insurance Defense Lawyer Blog on February 26. Click here to read the original post. 

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On December 13, 2012, the Court of Appeals for the First District filed its opinion in Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP et al. (No. A134542.)  The decision is bad news for architects and other design professionals since it holds they can be held liable in negligence to third party purchasers under both the common law and Senate Bill 800. 

Skidmore, Owings & Merrill LLP (SOM) and HKS Architects (HKS) provided architectural and engineering services for the Beacon Residential Condominiums, a 595 unit development in San Francisco.  Alleged construction defects caused problems with water infiltration, inadequate fire separations, structural cracks, and other life safety hazards.  SOM and HKS demurred to claims for negligence and statutory negligence.  The trial court granted the demurrer, reasoning that design professionals owe no duty of care to condominium associations or residents if the owner retains final decision-making power over the design.  Plaintiffs appealed.

The court of appeals reversed, finding that design professionals do, under some circumstances, owe a duty of care to third party purchasers and residents even when they do not have control.  The Court viewed the issue as “not whether a design professional owes a duty of care to purchasers but the scope of that duty.”  It applied the six policy factors from Biakanja to assess the scope of that duty: 1) extent to which the transaction was intended to affect the plaintiff, 2) foreseeability of harm to the plaintiff, 3) degree of certainty that the plaintiff suffered injury, 4) closeness of connection between defendant’s conduct and the injury suffered, 5) the moral blame attached to defendant’s conduct, and 6) the policy of preventing future harm.

The contract between HKS and the developer contained a clause intended to limit HKS’s liability.  Ironically, the court used this clause as evidence that HKS and the other defendant were “more than well aware that future homeowners would necessarily be affected by the work that they performed.”  The court noted other facts that grounded their analysis.  The defects posed a serious risk of harm to people or property.  The plaintiffs were purchasers/owners and not merely investors.  Due to the numerous cross-complaints filed among the approximately 40 defendants named in the action, it was unlikely that the design professionals would bear liability out of proportion to their fault.  SOM and HKS were allegedly paid over $5,000,000 for their work on the project, a factor speaking to proportional liability as well. 

The court further reasoned that the Legislature sets public policy and that the legislative intent of Senate Bill 800 (enacted in 2000 as the Right to Repair Act), was clear that design professionals are liable to third parties for negligence.  This reasoning served to show that the sixth factor of Biakanja was met, for a common law analysis.  However, the court noted further that “To the extent that a Biakanja/Bily policy analysis is not otherwise dispositive of the scope of duty owed by a design professional to a homeowner/buyer, Senate Bill No. 800 is.”  This sentence implies that even if a design professional is not liable under the common law, they are liable under the statute.  As the court noted, this decision will have an impact on the cost of housing.  It also will likely have an impact on the cost of professional liability insurance for design professionals who work on residential developments.  It will be interesting to see whether SOM and HKS appeal to the Supreme Court of California.

This was originally posted on January 3 on Jampol Zimet blog. Check out the original post here
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Too Hot for the Job?

Posted on January 4, 2013 03:44 by Mark A. Fahleson

Last week, the Iowa Supreme Court answered the following question:

"Can a male employer terminate a female employee because the employer's wife, due to no fault of the employee, is concerned about the nature of the relationship between the employer and employee?

According to the opinion, the plaintiff was employed as a dental assistant in the defendant's dental practice.  The employer dentist complained to the dental assistant that her clothing was too tight and distracting, yet acknowledged discussing plaintiff's sex life with her on occasions.   In late 2009 the employer dentist took his children to Colorado skiing while his wife, who was also an employee of the dental practice, remained home.  After the dentists wife discovered that her husband had been texting the dental assistant while on vacation, she confronted her husband and as a couple then met with the senior pastor at their church.  Collectively, they decided that it was necessary for the dental assistant's employment to be terminated because their relationship had become a detriment to all involved.  The dental assistant subsequently brought suit, not alleging sexual harassment, but that she was terminated because of her gender and would not have been fired had she was male.

On appeal, the Iowa Supreme Court, citing federal court precedent, affirmed summary judgment in favor of the employer dentist.  

Is it relevant that the employer dentist only employed female dental assistants?

If the dentist would have been liable if he had sexual harassed her, can he avoid liability for firing her out of feat that he was going to harass her?

Is the plaintiff's physical appearance relevant, i.e., what if she wasn't objectively attractive, does that give rise to a genuine issue of material fact regarding the employer dentist's motivation for firing the dental assistant? Read more about the case here

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In a major decision concerning privilege waiver, the Illinois Supreme Court, in Center Partners, LTD v. Growth Head GP, LLC, ruled that the subject matter waiver doctrine does not apply to privileged communications disclosed in an extrajudicial context.  The Court’s decision, which can be accessed here, answered a question of first impression in Illinois and will serve as influential authority when other states consider the scope of subject matter waiver.

Question at Issue
The precise question before the Court was whether, as a matter of law, the subject matter waiver doctrine applies to the disclosure of privileged information made outside of a litigation or judicial setting (an extrajudicial setting).

Illinois Supreme Court
Where a privileged communication is voluntarily disclosed, the subject matter waiver doctrine extends this waiver to all other communications pertaining to the same subject matter.  The purpose of the doctrine is to prevent a party from selectively disclosing favorable information while simultaneously withholding unfavorable information under the cloak of privilege. The question in Center Partners was whether the subject matter doctrine, and its underlying purpose, should apply in non-litigation contexts.

Facts of Case
The Center Partners case involved a complicated business transaction.  In short, three companies negotiated the purchase of Rodamco North America, N.V., including the General Partner of one of Rodamco’s holdings.  During the purchase negotiations, the purchasing entities and their lawyers exchanged privileged information concerning the legal implications of the transaction, rights and obligations of the parties to the transaction, and legal concerns and conclusions about the structure of a new partnership agreement.  A couple of years after the transaction was complete, a group of minority limited partners sued for breach of contractual and fiduciary duties, and sought all communications actually disclosed between the purchasing entities and all privileged, non-disclosed communications concerning the same subject matter.

Court’s Ruling
In an issue of first impression in Illinois, the Court ruled that the subject matter waiver doctrine does not apply where privileged communications are disclosed in an extrajudicial setting. The Court based its decision in large part on the doctrine’s underlying purpose.  The purpose is to prevent a party from using an evidentiary privilege offensively (sword) to disclose favorable information and later defensively (shield) to withhold unfavorable information pertaining to the same subject matter.

The Court reasoned that, outside the litigation context, parties generally do not decide to disclose privileged information for sword and shield purposes.  In many non-litigation settings, such as business transactions, parties disclose privileged information before litigation is initiated or even contemplated.  And expanding the subject matter waiver doctrine to non-litigation contexts would produce a perverse result: parties may “leave attorneys out of commercial negotiations for fear that their inclusion would later force wholesale disclosure of confidential information.” Consequently, the Court found that the purpose of the subject matter waiver doctrine is simply not served by expanding it to non-litigation contexts.

The Court placed one limitation on its ruling.  It stated that, if a disclosure is made during a business negotiation to gain a later tactical advantage in anticipated litigation, then the subject matter waiver doctrine would still apply if such a disclosure is later used by the disclosing party at any point during the litigation to gain a tactical advantage.

PoP Analysis
Most states have not addressed the issue whether the subject matter waiver doctrine applies in extrajudicial contexts, and this area of evidentiary privileges needs more development.  The Illinois Supreme Court’s decision in Center Partners is based on sound reasoning and will likely serve as persuasive authority when the issue arises in other states.  And while the decision was made in the non-litigation context of business transactions, it will likely serve as persuasive authority for disclosures made in other non-litigation contexts such as disclosures made during settlement negotiations, government investigations, regulatory compliance filings, or for public relations/media purposes.  For a more detailed analysis of these issues, see an earlier PoP post recommending an IADC article by Andrew Kopon and M.C. Sungaila.

The original post by Todd Presnell was published on December 3 and can be found here
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Extra! Extra!

On June 28, 2012 the Supreme Court of Nevada changed the calculation of medical damages in personal injury suits.  Tri-County Equipment & Leasing v. Klinke involved a woman/employee who was injured, by a third-party, while within the course and scope of her employment.  The employee received workers’ compensation benefits and then sued the third-party for negligence. At trial the employee admitted evidence that her medical providers billed her a certain amount.  The defense then sought to admit evidence that the medical providers had accepted, as payment in full, a lesser amount from workers’ compensation.  The district court refused to admit the amount paid and the issue was appealed.
The Supreme Court reversed.  “Applying Nevada law, we conclude that evidence of the actual amount of workers’ compensation benefits paid should have been admitted and that a clarifying jury instruction provided by statute should have been given.”

In resolving this case, the court ruled narrowly.  It seems to say evidence of the amount billed AND the amount paid is admissible based under NRS 616C.215(10).  Meaning the employee could tell the jury how much the providers billed, but the defense can state how much the providers accepted as payment in full.  “Applying Nevada law, we conclude that evidence of the actual amount of workers’ compensation benefits paid should have been admitted and that a clarifying jury instruction provided by statute should have been given. “  Once this evidence is admitted, the jury decides the reasonable value of the services.

The court did not address any other context like Medicaid or other governmental programs with similar discounts.  “Because the amount of workers’ compensation payments actually paid necessarily incorporates the written down medical expenses, it is not necessary to resolve whether the collateral source rule applies to medical provider discounts in other contexts.”

So why is this on a discovery blawg?  Footnote six.

[I]t is apparent that there are numerous reasons for medical provider discounts, including discounts that result when an injured party’s insurance company has secured medical provider discounts as part of the health insurance plan.  At least in those circumstances, such benefits may reside within the scope of the collateral source rule, although that is a legal issue we leave for a case that requires its determination. Whether the collateral source rule applies to other types of medical expense discounts would require evidence of the reason for the discount and its relationship to the third-party payment.

I read this as a hint that, if the court is to rule on how this issue applies beyond the confines of NRS 616C.215(10), it will expect the defense (presumably) to present, or at least make an offer of proof, consisting of “evidence of the reason for the discount and its relationship to the third-party payment.”

*This blog was originally posted in Michael's blog Compelling Discovery
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For all of its diminutive stature, Rhode Island has proven over the years that it can punch outside of its weight class when it comes to generating large environmental liability disputes and the insurance coverage controversies that invariably attend them.

Rhode Island also has the unique distinction of being one of the few states (perhaps the only one) that still recognizes “manifestation” as the appropriate trigger of coverage in long-tail disputes such as those involving pollution liabilities.  Further, Rhode Island’s view of “manifestation” is not just the date of discovery.  Rather, as the Rhode Island Supreme Court explained in CPC Int., Inc. v. Northbrook Excess & Surplus Ins. Co., 668 A.2d 647 (R.I. 1995) coverage should arise in the policy year in which property damage was discovered, became manifest or, in the exercise of reasonable diligence, could have been discovered.

Traditionally, “manifestation” was viewed as a coverage theory that assigned the insured’s entire claim to a single policy year, that being the year in which the loss was actually discovered.  In Rhode Island, it seems that courts are not only broadening the idea of “discoverability” but are implicitly treating “manifestation” as potentially involving different years of coverage that correspond to the different events identified in CPC, that is to say when the pollution was actually discovered or became manifest (ie. discovery) and the earlier year when it could have been discovered in the exercise of reasonable diligence.  

Although no Rhode Island court has explicitly declared that “manifestation” may trigger multiple policies, several recent cases have acknowledged the right of an insurer in one year to sue another for contribution, thus implicitly suggesting that multiple policy years may be required to respond to a single “occurrence.”      

Last year, for instance, a federal district court in Rhode Island ruled that a liability insurer that had insured an industrial polluter in 1969-70 was entitled to recover from an earlier insurer nearly all of the defense costs that it had been ordered to pay to its insured following a lengthy and contentious coverage law suit. Judge Smith ruled in Century Ind. Co. v. Liberty Mut. Ins. Co., No. 09-285 (DRI, September 6, 2011) that even though Liberty Mutual had bought back its 1971-79 policies early on for a settlement of $250,000, it must reimburse Century Indemnity for nearly $6 million in defense costs that it had been forced to pay since the tiny amount paid had all but guaranteed that the insured would be forced to litigate its claims against the other insurers to the better end.  The court declared that, “To reward Liberty Mutual for its settlement with Emhart would do nothing to serve Rhode Island’s public policy of encouraging settlements and that ‘far from being a litigation killer, Liberty Mutual’s settlement essentially ensured that this litigation would not die.’”  Having found that Liberty Mutual owed contribution to Century Indemnity, Judge Smith concluded that defense costs should be apportioned on a “time on the risk” basis, comparing Century Indemnity’s 11 months of coverage to the eight years insured by Liberty Mutual.  As a result, the Court ruled Liberty Mutual was obliged to reimburse Century Indemnity for 86.87% of the defense costs that it had paid to Emhart for a total payment of $5.27 million less the $250,000 settlement that Liberty Mutual had already paid.  The case subsequently settled.

Now the First Circuit has issued a new opinion sustaining a liability insurer’s equitable contribution claim against another insurer for claims arising out of the same Centredale Manor Superfund site as engendered the dispute between Century Indemnity and Liberty Mutual. In Travelers Property & Cas. Co. v. Providence Washington Ins. Co., No. 11-2193 (1st Cir. July 11, 2012), Travelers sought contribution from Providence Washington for costs that it had incurred in defending a mutual insured against claims that it had contributed to pollution at the site.  New England Container (NEC) had conducted various business operations at the site between 1952 and 1969, including the incineration of the chemical contents of drums and other containers.  

After being named as a PRP by the U.S. EPA, New England Container tendered its defense to Travelers, which had issued CGL policies to it between 1969 and 1982, and Providence Washington, which insured it after 1982.  Travelers, which had agreed to defend under a reservation of rights, sued Providence Washington for contribution.  However, a federal district court in Rhode Island ruled in 2011 that Providence Washington had rightly refused to defend as the property damage in question had all occurred before its 1982-85 coverage.  The court observed that by 1982, NEC was no longer doing business at the site and had no on-going connection to it.  Remarking that it had found no Rhode Island court decision holding that the coverage trigger "was satisfied when the policy period did not correspond at all to the period during which the insured conducted its allegedly harmful activities," the district judge underscored that, here, "there is not even a small speck of an overlap between the policy period and the period of the insured's allegedly damaging activities."  Travelers appealed.

In reversing the lower court’s finding of no coverage, the First Circuit emphasized Rhode Island’s liberal view of the scope of the duty to defend as well as the principle that coverage is triggered by when property damage is reasonably discoverable and not merely by reference to the date of the insured’s involvement at a site.  In this case, the First Circuit ruled the government’s claims against New England Container left open the possibility that pollution could have been discovered in the exercise of reasonable diligence within one of the prongs of the CPC “manifestation” rule. The court ruled that “discoverable in the exercise of reasonable diligence” does not require a temporal overlap between the policy period and the insured’s active business operations during which the allegedly damaging polluting activity took place.”  As the underlying facts alleged that pollution had migrated over a period of decades leading up to its discovery in 1999, the court found that the absence of specific allegations with respect to when property damage became detectable did not preclude the potential of a manifestation trigger during the Providence Washington coverage period.  

Fairly read, these allegations give rise to the potential that NE Container's polluting activities may have spanned two decades and that the pollution migrated from NE Container's property and eventually caused damage to surrounding land and waterways, which damage was discovered in 1999. While the complaint does not include specific allegations showing when property damage became detectable, the potential magnitude of NE Container's alleged polluting activities supports a reasonable inference that property damage was discoverable in the exercise of reasonable diligence some time before its actual discovery, including during the policy period

The First Circuit acknowledged that an insured might face a heavier burden in establishing a claim for indemnity in such a case as this but declared that there was, nonetheless, a duty to defend:

It may be difficult to unearth evidence and prove for indemnity purposes that property damage occurred in accord with the reasonable diligence coverage trigger during a time frame when the insured has long ceased its business operations that coincided with the pollution activity. Still, there is a vast array of factual circumstances in the progressive environmental damage context, and we must take our cue from the Rhode Island court's demarcation of an "occurrence" coverage trigger for delayed manifestation scenarios. Cf. Emhart Indus., 559 F.3d at 69 (concluding that the state court's silence on the duty to defend issue does not sufficiently support [the insurer-appellant's] claim that the Rhode Island Supreme court would not apply the pleadings test in the CERCLA context).

Finally, the First Circuit rejected Providence Washington’s suggestion that this construction of the manifestation trigger transformed it into a continuous injury trigger.  The court observed that under a continuous injury trigger, injury is presumed to have occurred in all years from the date of initial exposure through manifestation, whereas under Rhode Island’s pleadings test, a duty to defend only arises where allegations in the charging document “show the potential that property damage occurred during the policy period.”  More candidly, the First Circuit also commented that “it is not necessarily certain that the Rhode Island Supreme Court has put to rest the continuous trigger test in the environmental context,” pointing to dicta in Textron in which the Supreme Court had stated that “because we conclude that liability under the policy may be established by one of the recognized CPC tests, we need not address the continuous trigger-of-coverage standard."

There is some irony in this holding, as Providence Washington’s Rhode Island counsel—Adler Pollock & Sheehan--is also the law firm that prevailed on behalf of policyholders in cases such as Textron. In the wake of this latest ruling, one must wonder what distinction remains between “manifestation” and “continuous injury” triggers in the context of environmental claims.

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On June 25, 2012, the California Supreme Court set forth new rules regarding the discoverability of witness statements in Coito v. Superior Court of Stanislaus County, No. S181712 (Cal. 2012).  The issue before the court was what work product protection, if any, should be accorded two items: (1) recordings of witness interviews conducted by investigators employed by defendant’s counsel, and (2) information concerning the identity of witnesses from whom the defendant’s counsel obtained statements.        

The California Supreme Court concluded that witness statements procured by an attorney are entitled, as a matter of law, to at least qualified work product protection.  Regarding the level of work product protection, the court held that the witness statements may be entitled to absolute protection if the attorney resisting discovery of the statements makes a preliminary showing that disclosure would reveal his or her impressions, conclusions, opinions, or legal research or theories.  The opposing party can overcome this privilege only by demonstrating that denying discovery will unfairly prejudice her in preparing her claim or will result in an injustice. 

As to the identity of witnesses from whom defendant’s counsel obtained statements, the court held that such information is not automatically entitled to absolute or qualified work product protection.  To invoke the privilege, the party resisting discovery must persuade the trial court that disclosure would reveal the attorney’s tactics, impressions, or evaluation of the case.  If defendant could do so, such information should be afforded absolute protection.  If, on the other hand, the defendant persuades the trial court that disclosure would result in opposing counsel taking undue advantage of the attorney’s industry or efforts, the information should be afforded qualified protection. 


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In its 2011 legislative session, the Alabama Legislature made significant changes affecting the construction industry, specifically relating to the Prompt Payment Act and the Statute of Repose.  This article provides practitioners with an update on those amendments.

A.      Prompt Payment Act

Since 1995, Alabama law has provided a Prompt Payment Act, Ala. Code § 8-29-1 et seq., to assist contractors and subcontractors with recovering prompt payment for their services on construction jobs.  The 2011 amendments modified the maximum retainage provisions included in the Act.  These amendments went into effect on September 1, 2011, and apply to contracts entered into on or after that date. 

The maximum retainage allowed to be withheld by the owner is 10% of the estimated amount of work properly done and the value of materials stored onsite or suitably stored and insured offsite.  Ala. Code § 8-29-3(i).  After 50% project completion has been accomplished, no further retainage may be withheld.  Id.

In practical terms, therefore, an owner is limited to retaining 5% of the total contract sum as security for proper completion of the job (10% of earned payments for the first half of the job). 

Contractors and subcontractors are limited by the same caps.  Any retainage withheld in excess of the allowable amount will accrue interest at the rate of 1% per month (12% per annum).

The owner is required to release and pay retainage to the contractor for work completed on any construction contract no later than sixty (60) days after completion of the contractor's work as defined in its contract or "substantial completion" of the project, whichever occurs first.  Ala. Code § 8-29-3(l)(1).  "Substantial completion" means "the stage in the progress of the project when the project or designated portion thereof is sufficiently complete in accordance with the contract documents with all necessary certificates of occupancy having been issued so that the owner may occupy or use the project for its intended purpose."  Ala. Code § 8-29-3(l)(2).

The contractor is required to release and pay retainage to its subcontractors for work completed in accordance with the payment terms agreed to in the parties' contract, but if payment terms are not agreed to, then within seven (7) days of receipt of payment from the owner.  Ala. Code § 8-29-3(l)(1); Ala. Code § 8-29-3(b).  Owners, contractors, and subcontractors may condition payment on the receipt of a full release of any lien of the contractor, subcontractor, or sub-subcontractor for the amount of work being paid.  Ala. Code § 8-29-3(n).

The Prompt Payment Act does not apply to:  (1) residential home builders; (2) improvements to real property intended for residential purposes which consist of 16 or fewer residential units; (3) contracts, subcontracts, or sub-subcontracts in the amount of $10,000.00 or less; or (4) contracts with state or local governments (although these contracts do have the benefit of payment bonds under Alabama's Little Miller Act, Ala. Code § 39-1-1 et seq.).  Ala. Code § 8-29-7. 

In addition, the Prompt Payment Act is not applicable in civil actions to enforce mechanics' or materialmen's liens under Ala. Code § 35-11-210 et seq.  Ala. Code § 8-29-8.  Finally, the retainage caps and 60-day rule do not apply to construction projects for or by an electric utility regulated by the Public Service Commission.  Ala. Code § 8-29-3(m).

B.      Statute of Repose.

The 2011 legislative session also saw amendments to the Statute of Repose that significantly limit the potential liability of architects, engineers, and general contractors for damages relating to their work on construction projects.  Ala. Code § 6-5-220 et seq.

The amendments provide that no lawsuit may be filed against any architect, engineer, or licensed general contractor for any cause of action (whether in contract, tort, or otherwise) which arises more than seven (7) years after substantial completion of the construction project.  Ala. Code § 6-5-221(a).  (Formerly, lawsuits could be filed up to thirteen (13) years after substantial completion of a project.) 

Under the statute, a cause of action "arises" at the time of injury or, where the injury is latent in nature, at the time the injury should reasonably be discovered.  Ala. Code § 6-5-220(e).  In general, a lawsuit must be brought within two (2) years after the cause of action arises, Ala. Code § 6-5-221(a), but a latent defect may not cause any actual injury or be discovered for many years after the project has been completed. 

Before the current legislation, a latent defect could create a situation where potential liability could go on almost indefinitely.  Under the amended Statute of Repose, however, if the cause of action does not arise within seven (7) years of substantial completion of the project, then the injured party is forever barred from filing a lawsuit against the architect, engineer, and general contractor on the project. 

The amendments are not retroactive, so the new time limits will only apply to projects that are substantially completed on or after September 1, 2011.

Jaime W. Betbeze
Hand Arendall LLC
Mobile, AL

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The California Supreme Court has blocked an expansion of product liability law in a major decision that provides guidance for other courts facing similar questions and follows a growing trend in this area. In Barbara O’Neil, et al., v. Crane Co., et al. (#S177401; January 12, 2012) the court held that a manufacturer has no obligation to prevent harm from other manufacturers’ defective products used with its product or equipment. Even if a manufacturer could “foresee” the use of another’s defective product with its own, that manufacturer cannot be held liable in strict liability or negligence for damages caused by the other manufacturer’s defective product. 

Events Leading to the O'Neil Opinion
The case involved equipment installed in a U.S. Navy ship’s steam propulsion system. Twenty years later, Patrick O’Neil, a sailor assigned to work on/near the equipment, was exposed to asbestos dust from work performed on gaskets and packing embedded in the equipment and asbestos insulation covering the equipment. Forty years later, he developed a lethal cancer (mesothelioma) from these and other asbestos exposures. The plaintiffs sued the manufacturers of the equipment. However, there was no evidence the asbestos gaskets, packing or insulation from which he was exposed were manufactured, sold or distributed by the defendant equipment manufacturers. Over the 20 years since the initial installation, the original gaskets and packing had been replaced. The Navy, in most instances, specified asbestos replacement gaskets, packing and insulation. 

At trial, the defendant manufacturers moved for nonsuit saying they were not liable because plaintiffs did not introduce any evidence that their equipment was defective and it did not cause Mr. O’Neil’s cancer. Defendants argued that if gaskets, packing and insulation in and on their equipment were a cause of Mr. O’Neil’s cancer, the defendant equipment manufacturers were not responsible because the asbestos-containing replacement products were designed, manufactured or sold by others.

The plaintiffs countered it was “foreseeable” Mr. O’Neil would be exposed to gaskets, packing and insulation in and on the defendant manufacturers’ equipment. They argued that the equipment was originally sold with asbestos gaskets and packing; that the defendant manufacturers knew users would cover the equipment in asbestos insulation; and, that the defendant manufacturers knew that asbestos replacement gaskets and packing would be used with their equipment. The trial court did not agree with plaintiffs and granted the motions for nonsuit finding there was no evidence the equipment was defective because of the asbestos content and determined that defendants’ equipment did not contribute to the cause of the mesothelioma.

However, the California Court of Appeal reversed. It held the defendant manufacturers are liable “for dangerous products with which [their] product will necessarily be used.” (All emphases added.) The court of appeal made no distinction as to which entity was responsible for design, manufacture or distribution of the defective asbestos products from which Mr. O’Neil was exposed. The court of appeal reasoned that because the defendants’ equipment originally included defective asbestos gaskets and packing and knew that they would need to be replaced with asbestos gaskets and packing made by others, they owed a duty to warn. Moreover, the equipment itself was deemed to be defective, not only because of a failure to warn, but also because their equipment “required” asbestos packing, gaskets and insulation.

Supreme Court's Ruling and Policy Holdings
The California Supreme Court reversed the court of appeal. It found no facts in the record that supported the assertion that defendant manufacturers required asbestos replacement gaskets, packing or insulation. There was no evidence the defendant manufacturers’ equipment depended on asbestos materials to operate. The court stated: “Mere compatibility for use with such components [asbestos containing parts] is not enough to render them defective.”  The court concluded that defendants were not liable because their products were not “a legal cause” of the plaintiffs’ injury in strict liability or negligence. Moreover, defendants “had no duty to warn of risks arising from other manufacturers’ products.” (emphasis in original).

The supreme court found the court of appeal’s decision to be an unwarranted expansion of California product liability law: “(W)e have never held that these responsibilities [under California law] extend to preventing injuries by other products that might foreseeably be used in conjunction with a defendant’s product” (emphasis in original). Whether to apply strict product liability doctrine “in a new setting is largely determined by the policies underlying the doctrine...”. “’[T]he strict liability doctrine derives from judicially perceived public policy considerations and therefore should not be expanded beyond the purview of these policies.’” The court revisited its 1963 decision in Greenman v. Yuba Power Products, Inc.(1963) 59 Cal.2d 57, 63, quoting: “’The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market…’” A year later the California Supreme Court extended the strict liability doctrine to retailers as “’an integral part of the overall producing and marketing enterprise.’” Vandermark v. Ford Motor Co. (1964) 61 Cal 2d 256, 262.

Stream of Commerce
The “marketing enterprise” or “stream of commerce” policy consideration is one of two themes at the backbone of the supreme court’s decision in O’Neil. Where product manufacturers “generally ha[ve] no 'continuing business relationship' with each other," they cannot bear responsibility for other manufacturers’ products. They “cannot be expected to exert pressure on other manufacturers to make their products safe and will not be able to share the costs of ensuring product safety with these manufacturers.” The court said it is “also unfair” to require a manufacturer to “shoulder a burden of liability” for another manufacturer’s product where it “derives no economic benefit from the sale of the product that injured the plaintiff.” A contrary rule would require manufacturers “to investigate the potential risks of all products and replacement parts that might be foreseeably used with their own products and warn about the risks.” This would “impose on manufacturers the responsibility and costs of becoming experts in the manufacturers’ product.” This, it said, is “an excessive and unrealistic burden.” Such a rule could also act “perversely” by “inundating users with excessive warnings” and, quoting New Jersey jurisprudence, “[t]o warn of all potential dangers is to warn of nothing.”

Defendant's Act or Control
An even more fundamental policy lies at the heart of this opinion: Liability is not imposed for an injury unless it was caused “by an act or instrumentality under defendant’s control.” The original asbestos gaskets and packing that defendant manufacturers sold with the equipment were gone when Mr. O’Neil was exposed to asbestos from replacement gaskets and packing manufactured by others. 

The O’Neil opinion (together with two other cases also on appeal and resolved by the O’Neil opinion) stands for the proposition that there is no legal causation for the original product manufacturer where the defective aftermarket replacement part is the source of the harm, even though:
(1) The equipment manufacturer designs the equipment for use with the defective aftermarket product (e.g., asbestos in replacement gaskets and packing);
(2) The manufacturer specifies the use of replacement parts with the same defect;
(3) The manufacturer also supplies replacement parts with the defect in question;
(4) The manufacturer knows that the purchaser of their equipment or product requires that the original equipment contain the defective component and use of the defective replacement part.

Liability Is Not Foreclosed
Likely due to the variety of economic entanglements product manufacturers may have with aftermarket manufacturers’ products, the supreme court conceived of circumstances where liability for another manufacturer’s parts could arise. The court stated in the O’Neil opinion’s opening paragraph that a manufacturer may be held liable for harm caused by another manufacturer’s product where (1) the defendant manufacturer’s own product, although not defective, “contributed substantially” to the harm, or (2) the defendant manufacturer’s (non-defective) product “participated substantially in creating a harmful combined use of the products.” The O’Neil court discusses two appellate cases where the manufacturer’s product would not have been put “into the stream of commerce” but for the manufacturer’s economically beneficial participation in the product that eventually gave rise to the harm. 

Additionally, in a footnote (Fn. 6) the court outlined a hypothetical where a “stronger argument for liability might be made.” If the product/equipment “required the use of a defective product in order to operate” (emphasis in original), the original manufacturer’s product would incorporate the defect and every replacement part would too. The defective replacement parts, though manufactured by others, “would not break the chain of causation.” However, the court warned that in these circumstances, “the policy rationales against imposing liability on a manufacturer for a defective part it did not produce or supply would remain.”


The California Supreme Court appears to have drawn clear rules for precluding liability where an original manufacturer’s product has left its possession or control, but an aftermarket replacement part has ensnared the original equipment manufacturer in litigation. Where the manufacturer does not control or derive direct economic benefit from the defective aftermarket product, it will not be liable. However, the opinion does not build an impregnable wall. The court specifies that an original manufacturer will be liable for another manufacturer’s parts, where the original product contributes substantially or participates in a combined product causing harm. Even under those scenarios, however, imposing liability must not run afoul of the policy rationales supporting the O’Neil opinion. 

Christopher W. Wood
Lisa L. Oberg
McKenna Long & Aldridge
San Francisco, CA
(415) 267-4000



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