The Centers for Medicare and Medicaid Services (CMS) recently made several announcements regarding Medicare, Medicaid, and SCHIP Extension Act (MMSEA) Section 111 reporting for Non-Group Health Plans (NGHPs).

SECTION 111 NGHP TOWN HALL TELECONFERENCE SCHEDULED

CMS announced it would be hosting a Section 111 NGHP Policy and Technical Support Town Hall Teleconference from 1:00 p.m. to 2:00 p.m. EDT on July 28, 2015. CMS-hosted Section 111 NGHP Town Hall Teleconferences begin with announcements from CMS representatives followed by an open question and answer session. The call-in number for the teleconference is 1.800.603.1774, and the passcode is “Section 111.” CMS recommends that individuals interested in attending begin calling in 20 minutes before the start of the call due to the large number of participants.

UPDATED VERSION OF MMSEA SECTION 111 USER GUIDE RELEASED

CMS also announced the release of an updated version of the MMSEA Section 111 NGHP User Guide. The updated user guide is version 4.7. Version 4.7 incorporates the following changes from prior Section 111 NGHP Alerts:

-The web address or URL for accessing the Section 111 Coordination of Benefits Secure Website (COBSW) and submitting Section 111 reporting information has been changed to https://www.cob.cms.hhs.gov/Section111//

- CMS had previously provided a workaround that allowed Responsible Reporting Entities (RREs) to submit Recovery Agent or Third-Party Administrator (TPA) information on Tax Identification Number (TIN) Reference Files. CMS has eliminated this workaround and provided a permanent fix. The permanent fix allows Recovery Agent or TPA name and contact information to be submitted on TIN Reference Files in dedicated fields designated as “Recovery Agent” fields (fields 16–22). Submission of Recovery Agent information is optional. If Recovery Agent information is submitted in the Recovery Agent fields, copies of all correspondence regarding recovery claims will be sent to both the RRE and the designated Recovery Agent. These fields should only be used for agents who handle recovery claims. These fields should not be used for Section 111 reporting agents, unless the same agent handles Section 111 reporting and recovery claims. If Recovery Agent information is submitted in fields 6–11 of the TIN Reference File, only the Recovery Agent will receive correspondence regarding recovery claims.

-To prevent false positives when querying with partial Social Security Numbers (SSNs), all four of the additional matching criteria (first initial of the first name, first six letters of the last name, date of birth and gender) will need to match a Medicare beneficiary’s information. When querying with full SSNs or Medicare Health Insurance Claim Numbers (HICNs), only three of the four additional matching criteria need to match. CMS encourages RREs to submit full SSNs or HICNs whenever possible to ensure an accurate match is identified.

-The naming convention used for the Claim Response, TIN Response and Query Response Files was changed in order to ensure file names are always unique. Specifically, the values of the time node were changed.

For additional information regarding any of these changes, a full copy of the MMSEA Section 111 NGHP User Guide is available at http://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Non-Group-Health-Plans/NGHP-User-Guide/NGHP-User-Guide.html

REMINDER REGARDING MANDATORY TRANSITION TO ICD-10 CODES

Finally, on July 18, 2015, CMS issued a Section 111 NGHP Alert reminding Section 111 RREs and their reporting agents of the mandatory transition from ICD-9 to ICD-10 codes for all claims with a CMS Date of Incident on or after October 1, 2015. Additional information regarding the transition to ICD-10 codes is available in the MMSEA Section 111 NGHP User Guide, Chapter IV, Technical Information, Section 6.2.5.


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On Monday July 20, 2015, the Seventh Circuit Court of Appeals weighed in on the hotly-contested issue of standing in data breach class action litigation. In so doing, the Court reversed the district court’s dismissal of a consumer class lawsuit against luxury department store Neiman Marcus, holding that the plaintiffs had successfully alleged the concrete, particularized injuries necessary to support Article III standing.

This lawsuit arose in January of 2014, when Neiman Marcus publicly disclosed that it had suffered a major cyberattack, in which hackers collected the credit card information of approximately 350,000 customers. Soon after this disclosure was made, a number of consumers filed a class action lawsuit in the United States District Court for the Northern District of Illinois, alleging that Neiman Marcus put them at risk for risk for identity theft and fraud by waiting nearly a month to disclose the data breach. In September 2014, the district court dismissed the case, ruling that both the individual plaintiffs and the class lacked standing under Article III of the Constitution.

On appeal, the Seventh Circuit analyzed the injuries the Neiman Marcus consumers claimed to have suffered in order to determine whether they constituted the type of “concrete and particularized injury” required to establish standing.  In this instance, plaintiffs alleged lost time and money spent in protecting against fraudulent charges and future identity theft, as well as two “imminent injuries:” an increased risk of future fraudulent charges and greater susceptibility to identity theft.  The Seventh Circuit ultimately determined that these allegations sufficiently established standing, as they showed a “substantial risk of harm” from the Neiman Marcus data breach. Importantly, the Court explained that the Neiman Marcus customers did not have to wait until hackers actually committed identity theft or credit-card fraud to obtain class standing, as there was an "objectively reasonable likelihood" that such an injury would occur. The full opinion is available here

This ruling is consistent with decisions from several other courts across the country. See, e.g., In re Sony Gaming Networks and Customer Data Security Breach Litigation, 996 F.Supp.2d 942 (S.D. Cal. 2014); Moyer v. Michaels Stores, Inc., No. 14 C 561, 2014 U.S. Dist. LEXIS 96588, 2014 WL 3511500 (N.D. Ill. July 14, 2014); In re Adobe Systems Inc. Privacy Litigation, No 13-cv-05226-LHK, 2014 U.S. Dist. LEXIS 124126, 2014 WL 4379916 (N.D. Cal. Sept. 4, 2014); Michael Corona, et al. v. Sony Pictures Entertainment, Inc., No. 2:14-cv-09600-RGK-E (C.D. Cal. June 15, 2015).  Earlier this year, in a comprehensive article on standing in data breach cases (available here), our firm questioned whether opinions of this nature were indicative of a trend or anomalies.  The Seventh Circuit’s ruling this week and the Central District of California’s ruling in Corona last month suggest it is in fact a trend. If the trend continues, consumers nationwide may find it easier to survive a motion to dismiss based on a lack of standing.    

Ryan Brown is a partner and Christina Vander Werf is an associate with Gordon & Rees Scully Mansukhani. 



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In most states, the legal requirements a Plaintiff must meet to bring a medical malpractice claim are similar if not identical to what is required in order to bring a claim against a nursing home or assisted living facility.  One distinction between these types of cases, however, has been in the numerous claims and legal theories of recovery that Plaintiffs have historically brought against long term care providers in the same complaint.  Some states have enacted legislation in order to end the distinction between traditional “medical malpractice” claims and Adult Protection Act claims, Negligence Per Se claims, and so-called “custodial care” or ordinary negligence claims against nursing facilities.  For instance, the Tennessee Civil Justice Act of 2011 deleted the term “medical malpractice” from the Tennessee code books altogether.  It was replaced, instead, with a broader cause of action called a “health care liability action.”  Some notable provisions of the Act are as follows:         

- There is no longer any formal claim called “medical malpractice”;

- “Health care liability action” is a defined term in the statute and includes any civil action regardless of the theory of liability on which the action is based alleging that a health care provider caused an injury related to the provision of, or failure to provide “health care services.”

- “Health care provider” is a defined term and includes physicians and nurses but now also specifically includes LPNs, advance practice nurses, physician assistants, nursing technicians, pharmacy technicians, orderlies, and CNAs.

- “Health care services” is a defined term and includes care provided not only by physicians and nurses but now also specifically includes care provided by LPNs, pharmacists, orderlies, CNAs, advance practice nurses, physicians assistants, nursing technicians and also includes staffing, custodial or basic care, positioning, hydration and similar patient services.   

- Long term care facilities and their employees, such as LPNs, CNAs, and orderlies are “health care providers” whose care and services are subject to the statute’s requirements.  

- Many claims which traditionally fell under ordinary negligence (i.e. care provided in a nursing home by CNAs) are now defined as health care liability claims.  

- A Plaintiff must bring such an action in accordance with the provisions of this Act.  

Regarding the change in the law, one Tennessee opinion, Parker v. Portland Nursing & Nursing Rehab, 2012 Tenn. App. LEXIS 606, FN. 4 (Tenn. Ct. App. Aug. 30, 2012), is instructive because the case was decided after passage of the Civil Justice Act but plaintiff’s claims accrued prior to enactment.  The plaintiff initially sued the defendant nursing homes for ordinary negligence before amending her complaint to add a medical malpractice claim.  The Court allowed the amendment and applied the prior law (distinguishing between ordinary negligence (custodial care) and medical malpractice) while acknowledging the change in the law for claims that accrued after the relevant date of the Act.  The Court noted: “. . .[C]laims for ordinary negligence and medical malpractice are separate and distinct causes of action. . .”  Importantly, however, the Court added: “Both parties note that the passage of the Tennessee Civil Justice Act of 2011 ended this distinction and created a new cause of action of a "health care liability" claim.” (See 2011 Tenn. Pub. Acts ch. 510). Id. at FN 4 (emphasis added).  Clearly, the “Civil Justice Act” replaced “medical malpractice” and expanded the definition of a “health care liability claim” to include the type of claims commonly alleged against nursing homes and long term care providers.

For those interested in further discussion of this topic and learning other ways in which nursing home/ALF litigation is different from medical malpractice litigation, DRI’s Nursing Home/ALF seminar is right around the corner – September 10-11, 2015 at The Venetian/Palazzo Resort Hotel in Las Vegas, Nevada. Among the many areas discussed, there will be presentation regarding the business side of defending nursing home cases, how plaintiffs’ themes have developed and evolved, and tips and techniques for defending these types of cases from inception through trial.  This is the preeminent seminar for attorneys in private practice, in-house counsel, claims specialists, and other professionals involved in the defense of claims against long-term care facilities, assisted living facilities, and other aging services providers across the country.  Additional information on the seminar can be found here

 

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On June 10, 2015, the New York City Council passed the Fair Chance Act (“the Act”), which makes it unlawful for employers to inquire about an applicant’s criminal background during the initial stages of the application process. The law joins other “ban the box” legislation across the nation in an attempt to ban the checkbox indicating criminal history on employment application forms. Mayor Bill de Blasio is expected to sign the bill any day, and the law will go into effect 120 days later.

The Act makes it a discriminatory practice for employers or employment agencies to inquire into an individual’s arrest or conviction record or perform a criminal background check before an employer has extended a conditional offer of employment. The Act also restricts an employer’s ability to issue any solicitation, advertisement, or publication that in any way expresses any form of limitation in employment based on a person’s arrest or criminal conviction history. Applicants are not required to respond to illegal inquiries and cannot be disqualified for not responding.

Importantly, the law does not prohibit employers from inquiring about criminal history or running background checks; it just delays the background check until an applicant can demonstrate his or her qualifications. Employers may still inform prospective employees that employment is contingent on their responses to a criminal history inquiry or criminal background check.

If the employer decides to take adverse action based on the inquiry or criminal background check, the employer must first take a number of steps:

1. The employer must provide a written copy of the inquiry or background check to the applicant, in a manner that will be established by the NYC Commission on Human Rights (the “Commission”).

2. The employer must perform a multi-factor analysis under Article 23-A of the New York State Corrections Law and then has to provide that analysis to the applicant in writing in a manner to be determined by the Commission, which shall include the “supporting documents that formed the basis for the adverse action” as well as the employer’s reasons for taking the adverse action.

3. After giving the applicant the inquiry and analysis in writing, the employer must allow the applicant a reasonable time to respond, which the Act states should be at least three business days. Furthermore, during that time, the position must remain open for the applicant.

The above provisions do not always apply. The law excludes certain positions that require criminal background checks by federal, state or local laws where a conviction prohibits employment, as well as police officers, peace officers, and law enforcement agencies (as those terms are defined by law). The Act also does not apply to certain positions that involve law enforcement, are susceptible to bribery or other corruption, or entail the provision of services to or safeguarding of individuals vulnerable to abuse, though if any employers in this category take adverse action based on criminal history, they must comply with item 2 above. The positions that qualify for this exemption will be enumerated by the commissioner of citywide administrative services, published as a commissioner’s calendar item, and listed on the website of the department of citywide administrative services.

The Act modifies the New York City Human Rights Law, Section 8-101 et seq. of the Administrative Code of the City of New York; thus, it does not apply to employers with less than four employees. However, for those it does cover, the damages available are among the broadest of all employment discrimination protection statutes and include the potential for back pay, front pay, unlimited compensatory damages, and unlimited punitive damages.

New York City employers are advised to take steps now to prepare for when the Act goes into effect. These steps may include, but are not limited to:

-reevaluating and revising employment application forms.

-updating handbook provisions and other policies and procedures as needed.

-examination of the Article 23-A factors, to fully understand the written analysis that must be performed in the event a candidate is rejected due to their criminal history. Employers may want to create a template for the analysis, to increase the likelihood that no factor will be overlooked in the analysis.

-providing training to all employees involved in recruiting, hiring and interviewing, to ensure they understand the parameters of the law and how, if at all, they must adjust their prior practice.

 

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As a shareholder at a small firm, I understand the unique concerns of small businesses. My goal each day is to find balance between tending to current client needs, supervising young attorneys, and making sure the firm’s administrative engines are running on all cylinders. My biggest priority, however, is maintaining a steady flow of new business and a stable of happy people to do the work. That’s where DRI comes in.

Small firms have limited resources, both in terms of (wo)manpower and finances, to devote to building a referral network and professional development. We need to make sure that every dollar and hour spent counts because there is not room for “fluff” in a small firm budget. Simply being a member in a national organization with more than 21,000 participants will not give you much bang for your buck. Here are 5 easy tips that can help your small firm maximize its DRI membership: 

1. Sponsor In-House Counsel’s Membership. DRI offers membership to in-house counsel for only $285/year. In-house counsel who join DRI’s Corporate Counsel Committee (which is free) can also attend any DRI seminar free of charge, and will receive substantial discounts for attending the annual meeting. There are currently more than 900 members in DRI’s Corporate Counsel Committee and introducing your in-house lawyers to this DRI network would be a great way to show that you are all about their specific needs. By sponsoring a DRI membership, you not only cover their CLE needs for the entire year through the free educational programming available to in-house members, you also lay the groundwork to connect with them in person at DRI seminars. That’s a win-win.

2. Invest In Your Young Lawyers. All firms feel the impact when an associate leaves to pursue other opportunities, but small firms feel that loss tenfold. The best way to retain talented young lawyers is to invest in their development and let them know that you care. The membership for a young lawyer (admitted 5 years or less) is only $165/year. Included with that membership is a certificate to attend any DRI seminar for free. One of our associates joined DRI during his first year at our firm, attended the Young Lawyers’ Seminar with the free certificate, and made connections that turned into a leadership role almost immediately. He has not even been in practice for three years, but he has already been published in The Whisper and serves as the Young Lawyer Vice Liaison for the Insurance Law Committee. That kind of involvement in a national organization is not only great for him, it’s good for us.  

3. Join a Substantive Law Committee. Small firms don’t have the same access to multiple practice groups as large firms. Our firm’s practice focuses on insurance coverage and bad faith litigation; if a case involves an IP question, it is not as though we can walk to another floor and get the answer. One of the benefits of DRI is that they have 29 active Substantive Law Committees – which means that you have access to newsletters, compendiums, and leading practitioners in each of those 29 areas. Have a question about Trucking Law? Pick up the phone and call the Committee Chair. Want to know about current trends in Data Management and Security? Download the most recent newsletters. Need to find an expert in a unique area? Search the DRI expert database and expert profiler. These types of broad resources are even more valuable to small firms with specialized practice areas.  

4. Double-Dip Your Seminar Trips. For small firms, any time a lawyer is out on business travel, the impact is felt on the home front. The firm is down billable hours, fewer hands are around to handle last-minute projects, and travel is much more expensive than staying in the office to watch a webinar. But the truth is that relationships aren’t often formed through webinars. If you want to build a meaningful referral network, you need to get out and shake some hands! Attending DRI seminars is an incredible way to meet inspiring lawyers from across the country. There is not a single DRI seminar that our firm can’t turn into a “double dip trip.” If we are traveling to New York for the Insurance Coverage Symposium, we plan our flights so that we can visit clients in New Jersey and Boston while we’re on the east coast. If an associate is attending the Young Lawyers Seminar in Nashville, it’s easy to have her stop by a client’s office in Atlanta on the way. The convenient locations of the DRI seminars make it possible for small firms to get the most bang for their travel buck. 

5. Seek Out Publication and Speaking Opportunities. Small firms are always looking for ways to set themselves apart from the competition. One of the best ways to increase your firm’s visibility is to become well-known as being knowledgeable in your substantive practice area by publishing or speaking. These opportunities abound at DRI. From blog posts, to articles, and compendiums; from webcasts, to panel presentations, and break-out sessions. DRI is always looking for current topics to share and welcomes participation from its members. Did you recently obtain summary judgment on an issue of first impression? Have you researched an emerging area of law? Share it with the DRI community! Most Substantive Law Committees have a publications chair or a social media chair you can contact to figure out what opportunities exist and how you can get your name out there.  

 


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Premises Liability, Mode of Operation

Posted on June 25, 2015 04:39 by Philip Howe

*The Massachusetts Supreme Judicial Court has on June 23, 2015  ruled that the “mode of operations” approach to premises liability applies to slip and fall incidents including slipping on a wet spot on the dance floor in a bar.

Mode of Operations

The Massachusetts Supreme Judicial Court had previously applied the “mode of operations” standard of negligence in a slip and fall at a self-service supermarket, Sheehan v. Roche Brothers. Supermarkets, Inc. 448 Mass. 780, 788 (2007). Traditionally, a plaintiff asserting premises liability has been required to show that the owner of the premises had actual or constructive notice of an unsafe condition that gave rise to an injury for which compensation is sought.

Under the mode of operations approach the plaintiff satisfies the notice requirement by showing that the injury was attributable to a reasonably foreseeable unsafe condition related to the premises owner’s chosen mode of operation. Opinion, page 2.

Under the traditional approach, the plaintiff was required to prove how long the substance creating the hazardous condition has been on the floor. This imposed an unfair burden on plaintiffs to “adduce evidence more readily available to defendants.”  Opinion,  page 14.

Slip and Fall

The plaintiff in this case had broken her leg after slipping and falling on a wet dance floor at a nightclub owned by the defendant. Patrons were permitted to consume their alcoholic beverages on the dance floor while they danced. The dim lighting was accented by strobe lights. The staff included security guards, barbacks and a manager responsible for ensuring the dance floor was free of debris. Opinion pages 3-4. The plaintiff and her friends danced for several hours. She then stepped on a wet surface, slipped and fell. Opinion page 4.

The Trial Court granted summary judgment to the defendant. 

Broadening the Mode of Operations Approach

In Sheehan, supra, the plaintiff had fallen on a grape in a grocery store. The grapes were packaged in individual bags that were easily opened by hand and were susceptible to spillage by customers. Opinion, page 6. In Sheehan, supra¬, the Court noted that the evolution of grocery stores from clerk-assisted to self-service operations created a new risk for customers. They generally may not be as careful and vigilant as a store owner because customers are not focused on the store owner’s concern of keeping items off the floor to avoid potential risks of harm. Opinion page 7.

The Court ruled that it would be unjust to saddle the plaintiff with the burden of isolating the precise failure that caused an injury, particularly where the injury results from a foreseeable risk of harm stemming from an owner’s mode of operation. Wollerman v. Grand Union Stores, Inc. 47 N.J. 426, 430 (1966). The Court wrote further that, irrespective of the particular mode of operations involved, the plaintiff “bears the burden of establishing that the defendant failed to exercise reasonable care in protecting its patrons from the unsafe conditions facilitated by its mode of operations.” Opinion page 9.

The Court wrote that in the case of a nightclub permitting patrons to dance with their drinks, such reasonable care might include sufficient staff to monitor and clean up spilled liquid at sufficient intervals. Or they might use beverage containers that are less likely to spill, instead of plastic cups. Opinion pages 9, 13. The Court ruled that it was reasonably foreseeable that permitting patrons to dance with beverages in plastic cups would result in liquid on the dance floor. The spill creates an unsafe condition that a patron such as the plaintiff “is ill-suited to discern.” The owner is in a far better position to identify and investigate the source of the condition once it has occurred. Opinion page 13.

The plaintiff must prove either that the owner caused the unsafe condition or had notice of it. “Under the mode of operations approach, foreseeability of condition satisfies the notice requirement.” Opinion page 12. “The nightclub manager testified in his deposition that, “spills on the dance floor are part of the business.” Opinion page 15.  Considering the evidence in the light most favorable to the Plaintiff, the reasonable inference is that a spilled beverage produced the wet surface on which plaintiff slipped. Opinion pages 15-16.

The Court reversed the summary judgment in favor of the defendant and remanded the case to the trial court.

SARKISIAN V. CONCEPT RESTAURANTS, INC., ___N.E. 3d ___, 2015 WL 3833877 (Mass. 2015).


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This year’s DRI Fidelity and Surety Roundtable featured some excellent presentations.  One that really caught my attention was Ronald Freidberg’s presentation on “pay-if-paid” clauses and recent case law affecting their enforcement in Ohio.  Contingent payment clauses can be used to the surety’s advantage in defending payment bond claims.  The practical implications of such clauses ensure that the surety will rarely be relying upon these provisions without an active principal.  Practically speaking, if the owner or upstream contractor is withholding money from the principal and the principal is using that withholding of money as a defense to a downstream contractor, they are usually going to be actively involved in the litigation related to the project and the defense of the claim.   It is rare that a principal will simply walk away from money owed on the project after the work has been performed or the material has been delivered.  Still, the surety must be knowledgeable of these defenses.  There is no doubt that these clauses can be used to the surety’s advantage in defending payment bond claims. 

Several questions arise every time a surety comes across a contingent payment clause.  How are these clauses enforced and what are the practical differences between pay-if-paid clauses and pay-when-paid clauses?  While there may be headings that designate a certain contractual clause as a “contingent payment provision,” it is rare that the construction contract will be drafted with actual heading titled: “pay-if-paid” or “pay-when-paid.”  What happens when there is not an active principal?  Can the surety, as a secondary obligor, rely upon this defense just like the other defenses of the principal?

Application of a Pay-If-Paid Clause versus a Pay-When-Paid Clause

Both pay-if-paid and pay-when-paid clauses are “contingent payment clauses.”  While their labels are only separated by one word and they are both risk-shifting provisions, their applications can be wildly different.

Generally speaking, a pay-if-paid clause makes payment from the owner or the upstream contractor a condition precedent to payment from the principal to the downstream contractor.  A pay-when-paid clause, on the other hand, only deals with the timing of the obligation to pay the downstream contractor. At some point under these pay-when-paid clauses, when it becomes clear that the owner or upstream contractor is simply refusing to pay and is not simply withholding payment, the principal will become liable for the amounts owed to the downstream contractor.  This is generally a fact intensive inquiry and can be affected by such circumstances as the length of delay in payment, the reason for non-payment, and the downstream contractor’s performance on the project.

Interpreting a Contingent Payment Clause as Pay-If-Paid or Pay-When-Paid

Whether either clause will be upheld is a very jurisdictionally specific question.  Some jurisdictions favor the right to contract and will enforce these clauses as long as the parties clearly establish that they are shifting the risk of nonpayment to the downstream contractor in the construction contract. Others will practically interpret all clauses as pay-when-paid clauses.  Still others frown on these clauses altogether.    

My home state of Texas is a right to contract state.  Therefore, these provisions will be enforced as long as the parties’ intent to shift this risk to the downstream contactor is clear in the construction contract.  There is no magic language differentiating a pay-if-paid clause from a pay-when-paid clause. However, most Texas case law interpreting a contingent payment clause as a pay-if-paid clause states that the owner’s or up-stream contractor’s payment is a “condition precedent” to the principal’s liability to the downstream contractor.  If this contingency to liability is not clear, the clause very well may be interpreted as a pay-when-paid clause and will only affect the timing of the principal’s liability.  If the contingent payment provision is interpreted as a pay-if-paid, then the clause is subject to the “Texas Contingent Payment Statute,” which provides four scenarios which serve as exceptions to the application of these clauses: (1) the owner’s or upstream contractor’s refusal to pay is caused by the principal’s failure to meet its obligations; (2) the contingent payment clause is contained in a sham contract; (3) the downstream contractor provides timely notice objecting to the enforcement of the contingency payment clause; or (4) the enforcement of the clause would be unconscionable.  The application of any of these exceptions will depend heavily on the facts and circumstances of the claim. 

The Surety’s Ability to rely upon a Contingent Payment Clause

Logically, the surety is entitled to rely upon this defense when it is available to its principal.  It is black letter law that the surety, as a secondary obligor, may rely upon all defenses of its principal to any claim under the bond.  However, I have had claimants argue that it is void as to the surety based upon public policy.  Most statutes requiring a statutory payment bond include language that prohibits the parties from contractually waiving claims under the bond as a matter of public policy.  While most sureties will argue that (1) this is not the intent of such prohibitions and (2) a contingent payment clause is only a defense and it is not a waiver of a claim, the wary surety practitioner should know that such arguments are out there.  The language in the Texas Contingent Payment Statute also suggests that the surety may rely upon these contingent payment provisions.  In discussing the above referenced exceptions, the statute states that “a contingent payor or its surety may not enforce a contingent payment clause to the extent . . . .”   The inclusion of the surety in this language, at the very least, suggests that the surety has the right to enforce these clauses whenever these exceptions do not apply.

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*The Massachusetts Court of Appeals has on June 17, 2015 ruled that the burden is on the insurer to prove the applicability of an exclusion. Because the facts alleged in the Complaint in the underlying action do not establish that the business pursuits exclusion in a homeowner’s policy applies to all potential liability as a matter of law, the insurer had a duty to defend.

The insured was licensed electrician. The Complaint alleged that the insured acted as a general contractor, contracted with others and oversaw the work of renovations to a house owned by his parents.  In the underlying action for personal injuries by the plumber suffered on the project, the plumber recovered a judgment t for $226,218.49.

Two Policies

There were two homeowners policies in force issued by two different insurers. Vermont Mutual assumed the defense of the parents but refused to defend their son, the electrician. Preferred Mutual defended the son but under a reservation of rights.

Preferred filed its separate declaratory relief action against Vermont and the insureds. It sought a judgment declaring that its policy did not provide coverage and that Vermont was obligated to defend and indemnify the son. Preferred also asserted a claim for half of Preferred’s defense costs incurred on behalf of the son.

Exclusion and Coverage

The Vermont policy excluded coverage for bodily injury “arising out of or in connection with a business engaged in by an insured.” The Vermont policy also provided that it was “excess over other valid and collectible insurance…”

The Preferred policy covered the son “only with respect to the conduct of a business of which you are the sole owner.”  The Preferred policy also provided that it is the primary policy and that the insurer’s share is “based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.”

Duty to Defend

The Court ruled that the duty to defend arises when the allegations in the Complaint in the underlying action are reasonably susceptible of an interpretation that states or roughly sketches a claim that would be covered by the policy terms. The duty to defend is based on the facts alleged in the complaint and on the facts known or readily knowable by the insurer that may aid in its interpretation of the allegations in the complaint. Billings v. Commerce Ins. Co., 458 Mass. 194, 200-201 (2010).

The Court rejected Vermont Mutual’s position that the above business pursuits exclusion applied arguing that the Complaint referred to the son’s occupation and his role in supervising the project. The Court rejected this position and found that the son’s parents owned the building and the project was the renovation of their “mutual home.”

Two Prong Test

The Court went on to rule that, while the Massachusetts Courts had not yet faced this issue, there was in most jurisdictions a two prong test for determining when the business exclusion applied, that is, when an activity arises out of or in connection with the insured’s business. Massachusetts adopted that test. Opinion, page 8. 

The first prong is “continuity”, the activity in question must be one in which “the insured regularly engages as a means of livelihood”. The second prong is the “profit motive”, the purpose of the activity must be “to obtain monetary gain.” Opinion, page 8. 5 New Appleman on Insurance Law Library Edition, Section 53.06[2] [d] [i] (2014); 9A Couch on Insurance Section 128.13 (3d ed. 2006); 3 Windt, Insurance Claims & Disputes, Section 11:15 (6th ed. 2013); Springer v.Erie Ins. Exchange, 439 Md. 142, 162 – 164 (2014).

The Court found that there was no indication in the Complaint that the son’s alleged supervisory or disposal activity on the project were ones “in which he regularly engaged in connection with his means of livelihood.” The Court further found that the Complaint did not indicate whether the son’s participation in the renovation project “was motivated by profit.” The Complaint left it entirely possible that the son contributed his labor out of a desire to help his parents and improve the residence in which they all lived. Opinion, page 9.

Burden on the Insurer

The Court ruled, “It is the insurer who bears the burden of proving the applicability of an exclusion.” In order for an exclusion to negate an insurer’s duty to defend ab initio, the facts alleged in the Complaint must establish that the exclusion applies to all potential liability as a matter of law. Opinion, Page 9. Because the facts alleged in the Complaint do not establish that the business pursuits exclusion applies to all potential liability as a matter of law, Vermont Mutual had a duty to defend and should not have disclaimed coverage outright. Opinion, page 10.

Preferred also had a duty to defend. The claims asserted in the Complaint are also potentially within the scope of Preferred’s  coverage.  The Complaint alleged that the son was an electrician who had been in charge of the renovations project. These allegations do not negate the possibility that he was engaged to work on the renovations as an electrician and that his supervisory activities and/or his removal and disposal work were ancillary to his electrical work and performed in the conduct of his business. Herbert A. Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 394-395 (2003).

But, the Court further ruled that Vermont could not demonstrate that the Preferred policy afforded coverage to the son. The Preferred policy covered the son only with respect to the “conduct of a business of which [he was] the sole owner.” Opinion, page 15. That business was identified as the son being an electrician. The record revealed no facts from which it might reasonably be inferred that the son was conducting his business as an electrician at any time relevant to the occurrence of the accident at issue. Opinion, page 16.

The Court concluded that both Vermont and Preferred had duties to defend the son. But, while Vermont had a duty to indemnify the son, Preferred did not. Furthermore, Preferred was entitled to equitable contribution and Vermont shall reimburse Preferred 50% of its costs in defending the son. Opinion, pages 16-17.

Preferred Mutual Insurance Company v. Vermont Mutual Insurance Company, ___N.E. 3d ____, 2014 WL 99009470 (MA Ct. App. June 17, 2015).

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In a negligent misrepresentation claim, the Vermont Supreme Court strictly construed plaintiffs’ need to prove direct reliance on the alleged misrepresentation. Lacking such proof, the claim failed. To assert a viable consumer protection claim, plaintiffs must prove not merely that defendant made a statement, but that defendant was directly involved in the transaction at issue.  Because it was not, the claim failed.

The case is Glassford v. Dufresne & Associates, P.C., 2015 VT 77 (June 12, 2015).  Plaintiffs-homeowners alleged negligent misrepresentation and violation of the Vermont Consumer Protection Act. Superior Judge Toor granted summary judgment for defendant, and the Vermont Supreme Court affirmed.  

The case involved defendant’s certification to the Agency of Natural Resources that the septic system in plaintiffs’ new home had been installed, and that it operated, as permitted.  Vermont law (10 V.S.A. § 1973) requires such a certification.  The builder of the home hired defendant to make the certification.  Defendant filed the certification with the Agency shortly before plaintiffs purchased the home from the builder.  Within a few weeks of their closing on the house, plaintiffs’ septic system failed.  Plaintiffs contended that the soil placed over the system was improperly graded.  Defendant contended that the house was too large; that plaintiffs operated a daycare center that added to the wastewater entering the system; and that plaintiffs’ horses were allowed to walk over the system.  Plaintiffs alleged that defendant:  1) failed to properly inspect the system, and 2) misrepresented the proper construction of the system in the certification to the Agency.

The superior court granted judgment for defendant on the negligent misrepresentation claim because plaintiffs never saw the certification until the lawsuit commenced, and so couldn’t have relied on it in making their decision to purchase the home.  The court granted judgment for defendant on the consumer protection claim because the parties did not contract with each other for a sale of goods or services.

On appeal, with respect to the negligent representation claim plaintiffs argued that they effectively relied on the certification because, even though they did not see it before they closed on the home, defendant had a “duty” to furnish it to them.  Furthermore, they argued, because their closing attorney received a copy of the certification just before the closing, they relied on it through their agent.

As had the superior court, the Vermont Supreme Court analyzed the negligent misrepresentation issue under the Restatement (Second) of Torts § 552.  The Court determined that plaintiffs – homebuyers purchasing a newly-constructed septic system – were among the class of people for whom the certification requirement in 10 V.S.A. § 1972 was intended.  Thus, defendants could be liable to plaintiffs.  However, plaintiffs’ claim failed because they demonstrated no direct reliance on the certification (i.e., the alleged misrepresentation), as § 552 requires.  The Court surveyed case law from around the country and determined that in negligent misrepresentation claims plaintiffs must demonstrate that they directly relied on the alleged misrepresentation.  Because plaintiffs here did not ever see the certification before they closed, they could not have relied, and did not rely, on what it said.  The fact that their closing attorney saw the certification did not satisfy their burden to show direct reliance on it. The attorney’s knowledge of the certification could not substitute for actual reliance by plaintiffs on its contents. Accordingly, the Court affirmed the superior court’s judgment for defendant on the negligent misrepresentation claim.

On the consumer protection claim, the superior court ruled for defendant because the parties were not in privity. On appeal, the Supreme Court held that privity is not required on a consumer protection claim, but that the defendant must still be directly involved in the transaction that gives rise to the alleged liability.  Here, defendant’s filing of the septic certification with the Agency was an act unrelated to the sale of the home to plaintiffs.  The filing was unrelated to the issue of who bought or owned the home.  There was no interaction between plaintiffs and defendant.  Accordingly, defendant could not be liable under the consumer protection act and the Court affirmed judgment for the defendant on this claim.

It should be noted that one justice vigorously dissented.  

A copy of the decision is attached hereto and is available at http://info.libraries.vermont.gov/supct/current/op2014-194.html


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DRI: It’s Personal!

Posted on June 12, 2015 02:45 by Tanya Lawson

I saw a post recently on the DRI Diversity blog that impacted me at my core.  It is the sort of post that some organizations would have shied away from because it raised serious issues on a diversity topic that is still very controversial for some.  Instead, in subsequent days I saw other posts from DRI members lauding the author of the article for his courage to raise these important issues.  This is one of the primary reasons that I gravitated toward and have been a longstanding member of DRI over any other legal organization.  DRI’s commitment to diversity is real!  DRI and its members have been at the forefront of these issues and I have found DRI to be an oasis in what can sometimes seem like a legal desert.

As an African American woman who has been practicing over 20 years, there are some circles in which I have not always felt welcome or appreciated.  I have had to work hard to try to fit in and get ahead in a profession that I love but which can sometimes be very challenging for African Americans, especially in a large firm environment.  I can remember it like it was yesterday -- the first time I attended a DRI Diversity for Success Conference in Chicago almost a decade ago.  It was at a reception which was filled with people of all ages and backgrounds but who all seemed to be excited about making diversity a priority for the organization.  People were warm and welcoming and I began an odyssey with DRI that would take me to the highest levels within the organization and ultimately the profession.

Ever since that first day, I looked forward to attending the Diversity for Success Conference each year.  I would re-connect and solidify relationships with old friends and would get the sustenance I needed to go back to Florida to continue my drive to achieve success in the profession.  Indeed, the diversity conferences became a fixture in our African American Forum budget at my prior firm and attorneys would vie for a spot on the team selected to attend.  Each time I have attended the conference since that first day, I have experienced an intense feeling of belonging and have felt revived and rejuvenated.  Not only have my experiences with DRI had a curative quality, I gained deep insights as well as good friendships as a result of my participation in DRI sponsored events.

I was for some time the only African American female partner in my former AmLaw 200 firm, and then later only 1 or 2 African American female partners.  DRI’s diversity committee offered sometimes the only opportunity I had to interact with and bounce ideas and experiences off a variety of other African American male and female partners in large law firms.  As co-chair of diversity at my prior firm, I also leaned heavily on DRI’s leadership for ideas to assist me to bring new insights to the diversity and inclusion dialog.  Douglas Burrell, DRI’s current Membership Chair, has been a source of constant encouragement and inspiration.  Pam Carter, who heads up the DRI’s Diversity Committee, was also a tremendously positive influence.

From my perspective, DRI should be a staple in any lawyer’s portfolio of membership organizations.  For me it has been intensely personal and I have thoroughly enjoyed my association with DRI!

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