Cost Sharing Agreements

By:  Lisa Cappelluti, Gene Witkin, and Keith Bremer with a special acknowledgment to Sara Igdari for her collaboration on this article.

I.          Introduction

            Cost sharing agreements are, more than ever, a topic of discussion and focus in the overall strategy for cases involving construction litigation.  New economic pressures, evolving insurance products and recent legal decisions have played a role in creating the necessity for cost sharing agreements, as well as adding complications for their use and enforcement.  Typical uses for cost sharing agreements include: shared experts, use of evidence and documents, and the implementation of fee sharing arrangements under additional insured obligations and/or contractual fee obligations.  Wrap insurance carriers have also begun using cost sharing agreements to address firm retention for similarly grouped parties within the wrap and their counsel-such as general contractor representation and subcontractor representation.

            Understanding the advantages and pitfalls of different types of costs sharing agreements is thus vital to both insurers and insureds involved in the defense of construction defect litigation.

II.        Concepts and Challenges for Cost Sharing Agreements Used in Construction Cases

            Each of the types of cost sharing agreements has benefits and various purposes, with the primary objective being cost savings.  These include:

            The cost sharing agreement for joint retention of experts is a great resource to assist with sharing of information and resources for retention of expert witnesses amongst multiple parties on issues that are common to the entire group.  Specifically, in many cases the use of forensic experts to analyze financial issues such as construction delays, lost profit as well as property valuation are typically areas facing all parties on one side of a case in any given litigation.  The services of such experts can be extraordinarily helpful to deal with high costs and coordination for the review and analysis of large quantities of information.  Retention of one set of experts to analyze these issues is greatly beneficial to minimize duplication of efforts as well as to avoid inconsistent testimony at trial which might undermine co-defendants or co-plaintiffs.  Additionally, testimony by multiple experts on the exact same issues may be limited by a judge on the basis of redundancy and also may have a negative effect on a jury if multiple experts take the stand with similar views on identical issues.  It is critical to the success of these agreements that all parties share the same goals and objectives.

            Use of a joint retention agreement for medical and/or scientific experts is useful to address issues involving toxic tort or other medical claims which may arise in the context of construction litigation.  While all parties will frequently have different liability experts in construction cases relating to the means and methods of work performed as well as the standard of care for that work, it is typical for the defendants to want to share the cost and knowledge of the individual scientific and medical experts on these issues as would the plaintiffs.  It is also unlikely that any court would allow multiple independent medical examinations of a given plaintiff for 10-15 different parties and clearly undesirable to have, for example, 14 or 15 medical doctors testify as to the allergy claims of one specific plaintiff in trial.

            The challenges of these agreements include ensuring that all information obtained is protected by the typical privileges that would apply absent such agreement, and that the cost sharing arrangement is practical and manageable for all parties.  It is is difficult to enforce these agreements during the course of a case.  If a written agreement is in place amongst the parties, a motion to enforce cost sharing agreements can be made during the course of litigation or trial and, depending upon the judge, will likely be ruled upon relatively quickly to ensure cooperation amongst the parties and fair apportionment of fees to parties due to recalcitrant payments by other parties in the case.   However, even then, there are practical difficulties involved given conflicting objectives between insurers or between insureds of the same insurance company.  (See Section V, below.)

            Another concern for joint retention of experts is an agreement in advance that settlement or dismissal of any of the parties to the agreement will automatically result in reallocation of the fees to the remaining parties so that the agreement does not become void in the event that one of the parties is dismissed from the case.  Additionally, the agreement between the parties needs to clarify that any party settling out of a case or being dismissed from a case cannot turn over the information it obtained through the joint retention agreement to any other party in the case which is not a party to that agreement.  It is also a good idea for practical purposes to ensure that the expert witness being retained bill each party separately if at all possible or, alternatively,  that a lead counsel is appointed to administer the billing for the expert so that prompt attention is paid to any delays or problems before testimony is needed or reports must be produced.  This poses particular problems in the case of wrap insurance.  (See Section IV, below.)

            Parties to a joint retention agreement should be aware of issues of confidentiality, privileges, and attorney work product when communicating with one another.  California recognizes the common interest doctrine.  Under the common interest doctrine, an attorney can disclose work product to an attorney representing a separate client without waiving the attorney work product privilege if (1) the disclosure relates to a common interest of the attorneys’ respective clients; (2) the disclosing attorney has a reasonable expectation that the other attorney will preserve confidentiality; and (3) the disclosure is reasonably necessary for the accomplishment of the purpose for which the disclosing attorney was consulted.  Oxy Resources California LLC v. The Superior Court, 115 Cal. App.4th 874, 891, 9 Cal.Rptr.3d 621, 636 (2004).  The common interest doctrine only protects work product relating to the defendants’ common interests as long as elements two and three are satisfied.  Attorneys to joint agreements should be aware that disclosure of work product relating to adverse interests results in a waiver of the attorney work product privilege.  Meza v. H. Muehlstein & Co., 176 Cal. App. 4th 969, 982, 98 Cal.Rptr.3d 422, 432 (2009).  Other states use different standards including joint defense privilege or common interest privilege, both of which are distinct from the common interest doctrine.  Oxy Resources California LLC v. The Superior Court, 115 Cal. App.4th 874, 888-889, 9 Cal.Rptr.3d 621, 633-635 (2004).

In Meza v. H. Muehlstein & Co., defendants entered into a Joint Defense Cost Sharing Agreement which provided that the defendants would create a common defense fund to share joint defense costs for their common defense.  176 Cal. App.4th 969, 98 Cal.Rptr.3d 422 (2009).  The common defense fees and costs included fees for depositions of percipient and expert witnesses, costs of deposition transcripts, expert preparation, site inspection costs for experts, and medical examination.  Defendants moved to disqualify plaintiffs’ law firm for hiring an attorney who had previously represented another defendant and was part of the Joint Defense Cost Sharing Agreement.  The Court upheld the trial court’s ruling disqualifying the plaintiffs’ firm because under the common interest doctrine defense attorneys were protected to disclose attorney work product to one another regarding their respective clients’ common interests.

Cost sharing agreements have also become widely used in construction litigation cases to administer the allocations and payments for additional insured carriers which are jointly defending the interests of one of the parties in the case.  Such agreements can be challenging from an accounting standpoint, and many law firms have chosen to utilize the services of a cost administrator to handle the accounting and billing in such cases.  However, this raises some of the trickiest issues affecting cost sharing agreements which involve verification to those in the cost sharing agreement that all parties that should be participating are participating either through providing a chart of insurance information showing the acceptance or declination of all additional insured tenders.  Additionally, many insurance carriers are also focused on the recovery of fees under the contractual indemnity obligation and collection of fees as owed under such provision as confirmed in the holding of Crawford v. Weather Shield Mfg., Inc., 44 Cal.4th 541, 79 Cal.Rptr.3d 721 (2008).   (See Section III, below.)

III.       Legal Issues to Consider for Use of Cost Sharing Agreements

            The use of cost sharing agreements is, as explained, quite varied in the legal practice especially as applied in construction cases.  Some agreements are created through use of an actual written agreement as exemplified by the sample agreement for retention of experts and is fully executed by all parties.  The typical terms of such agreement are clear and consideration is provided through the payment by the parties.  Other agreements, such as those for additional insured obligations are typically not formalized in a fully executed agreement by all carriers, clients, and counsel but utilized under general understanding of billing and use of agreed upon principles for cost sharing.

            There are no California statutes on point regarding joint retention agreements or cost sharing agreements currently.  However, there are statutes regarding the indemnification of parties which are discussed in detail in the Crawford case.

            A joint defense agreement is an agreement to share information and/or resources between codefendants sharing a common interest.  The Courts have applied contract theories to cost sharing agreements and joint defense agreements.  All elements of a valid contract must be present: offer, acceptance, and consideration.  California courts have held that joint defense agreements are not void as against public policy and are enforceable.  Oxy Resources California LLC v. The Superior Court, 115 Cal. App.4th 874, 9 Cal.Rptr.3d 621 (2004); City of Oxnardv. Twin City Fire Insurance Company, 37 Cal.App.4th 1072, 44 Cal. Rptr. 2d 177 (1995).  The courts uniformly void joint defense agreements that bargain to manipulate or suppress testimony or nonprivileged documents because they are against public policy. Williamson v. Superior Court 21 Cal.3d 829, 148 Cal.Rptr. 39 (1978); Smith v. Superior Court 41 Cal.App.4th 1014, 49 Cal. Rptr.2d 20 (1996).

            The discussion of cost sharing agreements also brings up various issues about apportionment and fairness.  California courts have expressly declined to formulate definitive rules for apportioning defense costs among insurers and have required that costs be apportioned according to the equitable considerations in the particular case.  CNA Cas. v. Seaboard Sur. Co. 176 Cal.App.3d 598, 222 Cal.Rptr. 276 (1986).   California courts agree that equitable considerations affecting apportioning defense costs among insurers include such considerations as the particular policies of insurance, the policy periods, the natures of the claim made, and the relation of the insured to the insurers. Signals Companies, Inc. v. Harbor Ins. Co. 27 Cal.3d 359, 165 Cal.Rptr. 799 (1980).  California courts have generally espoused the proposition that there is no specific formula to be used for cost sharing agreements and that equitable consideration will always be utilized by a court in determining allocation between insurers.  See, Centennial Ins. Co. v. United States Fire Ins. Co., 88 Cal.App.4th 105, 105 Cal.Rptr.2d 559 (2001).  There are specific cases that have addressed the apportionment of fees and costs such as those espoused in Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366 (1997), as between insurer and insured.  However, there will likely be further appeals to address the explicit application of the sharing of fees and costs under contractual indemnity enforcement of a fee obligation similar to that in the Crawford case.

IV.       Cost Sharing Agreements for Wrap Insurance Policies

            Traditional litigation strategies and cost sharing agreements rely upon contractual and additional insurance relationships between the owner, general contractor and subcontractors.  This model typically results in the lack of control over costs between the various parties as each party weighs and determines its own fate through investigation, discovery and experts.

            The general goal of a single OCIP policy is to centralize the risks and costs arising out of the construction project.  The objective is to be able to respond to covered liability claims (such as property damage and bodily injury claims) in a unified fashion, avoiding the necessity to allocate blame among construction participants.  By avoiding the "blame game" and accomplishing a unified defense to handling a lawsuit, the OCIP provides the framework for achieving the reduction of overall costs to all participants and insurers, thus making a traditional cost sharing agreement unnecessary.

            However, when the need arises due to inherent conflict or coverage problems to fracture the OCIP participants, the participants should take every reasonable means possible to coordinate  and share any costs associated with investigation, discovery and experts.  This is most important when dealing with depleting OCIP policies.  Additionally, if possible and at the early stages of case evaluation, participants should bring the claimant into the cost sharing discussion to avoid unnecessary costs of claims.  A good example of this is relocation, mediated scope of repair, and/or life care, all of which typically the parties can agree upon.

V.        Specific Issues Arising from Cost Sharing Agreements

              Three areas of dispute are common in the context of current cost sharing agreements: (1) reporting and administration of a cost sharing arrangement, including dissemination of information, (2) method of allocation, and (3) costs for pursuing recalcitrant participants.

            (1)        There are different views as to how and when to have sharing agreements administered by third party cost administrators.  However, in practice this effort as a whole seems to be efficient since it can be difficult for a specific law firm to handle the accounting of multiple carriers for the legal services, the expert services and other vendor bills associated with such agreements.  Additionally, computer-based mathematical allocations, together with impartiality, are helpful to streamlining the otherwise complicated approval and payment process.  One key for cost sharing agreements is to ensure that reports are regularly provided to the additional insured (AI) carriers or parties in the agreement as well as budgets and any other standard information provided to a client in a case.  A concern is always present when reporting to carriers which are defending subcontractor parties and also providing a defense to the developer or general contractor under an additional insured obligation that communication provided to that carrier through its representative may waive attorney-client privilege or allow the disclosure of information protected by the attorney-client privilege or as work product.  In this regard, it is always prudent to make sure that key communications are protected and counsel are careful about disclosure of sensitive case information.

            (2)        Methods of allocation also remain an area of contention in many cases.  Following the Crawford decision, subcontractor counsel were quick to voice their concern that the case raised more questions than it answered.  Included among these questions are (a) whether a developer or general contractor (collectively, the developer) is entitled to any payment without disclosure of its bills, (b) whether Crawford payments deplete policy aggregate, and if so, (c) whether an insurer could choose to make a Crawford payment rather than an additional insured payment to the detriment of the named insured, and (d) whether a subcontractor whose insurer accepts an additional insured tender is still exposed for a Crawford demand.  On the other side of the argument, developer counsel were quick to respond that the contractual duty to defend cannot now be delayed pending waiver of work product in unredacted invoices or resolution of ultimate issues of allocation, much less on potential conflicts between subcontractors and their insurers.  Of course, the arguments on both sides beg the question of how defense are to be allocated among those agreeing to participate where there are both contractual defense obligations and additional insured defense obligations.

            Even among AI carriers alone, disputes continue between proponents of equal share allocation, time on risk, and other methods of allocation.  See, Centennial Ins. Co. v. United States Fire Ins. Co., supra.  Similar debates continue between the developer and subcontractors as to the nature of the defense obligation triggered by an indemnity agreement.  See, e.g., UDC-Universal Development v. CH2M Hill, 181 Cal.App.4th 10, 103 Cal.Rptr.3rd 684 (2010).  In a somewhat ironic twist, some subcontractor insurers have begun arguing a case that developers had previously argued against them -- Presley Homes, Inc. v. American States Ins. Co., 90 Cal.App.4th 66, 108 Cal.Rptr.2d 715 (2001)(duty to defend an additional insured requires an immediate and entire defense per Buss).  The argument goes that because AI insurers must provide a complete defense, the claim for Crawford fees should not belong to the developer, which has no standing per Bramalea California, Inc. v. Reliable Interiors, Inc., 119 Cal.App.4th 468, 14 Cal.Rptr.3rd 302 (2004).  Again, the developers are quick to reject that argument, countering that in actuality a complete defense is rarely provided, let alone an immediate and complete defense.  The debate goes on.

            (3)        Finally, the question is often raised as to whose burden it is to chase recalcitrant insurers or subcontractors.  Some insurers are often their own “worst enemies” on this issue, taking inconsistent positions between cases.  For example where a single insurer has all or most of the accepting coverage for a case, it may pay developer counsel or developer coverage counsel without objection to aggressively pursue Crawford and/or other AI participation.  Yet in the next case, where that insurer is only funding, say, 10% of the defense, bills for efforts to secure Crawford participation are now reduced or rejected.  Interestingly, and to the frustration of many claims managers, this is more often an issue of contention where the developer has direct insurance – in other words, more often a by-product of intra-carrier dispute than of dispute between insurer and insured.  What remains to be seen is whether these disputes will diminish in light of the recent decision in Interstate Fire and Cas. Ins. Co. v. Cleveland Wrecking Co., 182 Cal.App.4th 23, 105 Cal.Rptr.3d 606 (2010) (insurer’s subrogation rights arising out of insured’s status as indemnitee may survive the granting of a good faith motion in favor of indemnitor).

VI.       Conclusion

Jacobsen Construction Company, Inc. v. FS Jackson Hole Development Company, LLC (LASC Case #BC312011)

Jacobsen Construction Company, Inc. v. FS Jackson Hole Development Company, LLC. (LASC Case #BC312011).  Matter proceeds to judicial reference before retired Judge Olson. Jacobsen Construction Company, Inc. (“Jacobsen”) files suit against FS Jackson Hole Development Company, LLC (“FSJH”) for non-payment relating to the Four Seasons resort in Jackson Hole Wyoming.  FSJH cross-complains for construction and design deficiencies.  Jacobsen subsequently cross-complains against numerous subcontractor parties, including our client, Bartile Roofs, Inc. (“Bartile”).  Bartile installed the roof at the hotel which has approximately 150,000 square feet of roof surface and almost a mile (5,200 lineal feet) of roof edge.FSJH produces a cost of repair which includes approximately $6 million for an entire re-roof.  After about four years in litigation, FSJH settles the construction defect claims for $3,070,000 and the design deficiency claims for $1,900,000.  Of this amount, Jacobsen paid $1,265,000 to settle the roofing construction defect claims.  The only parties remaining are Jacobsen and Bartile.  Jacobsen’s pre-trial demand to Bartile is $2 million (consisting of the $1.265 million it paid to settle the roofing construction claims and approximately $700K in attorneys’ fees allocated to Bartile).  We proceed to trial before retired Judge Olson.A key issue in the case is which contract(s) are applicable.  The Master Subcontract Agreement (“MSA”) between Jacobsen and Bartile contains a Type I indemnification provision.  (Quite frankly, it is the strongest indemnification provision that I have ever seen).  Judge Olson ultimately found that the MSA was not executed by either party.  However, the Subcontract Work Order (SWO) incorporates by reference the MSA.  There are two different SWOs, and the difference is huge.  The SWO that Jacobsen argues is the applicable agreement is signed and dated by both parties on 11/1/02 and specifically incorporates by reference the MSA by date and MSA number.  The SWO which we contend is the correct one, does not reference any MSA by specific date, but does identify a MSA number in a small box on the first page of the document.  Additionally, it should be pointed out that we are missing the last two pages (including the signature page) to our SWO.  In the end, Judge Olson found that our SWO was the applicable SWO and that the incorporation by reference language was not specific enough to incorporate the MSA.  (Note:  Judge Olson found that Jacobsen must have forged their version of the SWO).  As such, Judge Olson found that there was no express indemnity provision in existence between Jacobsen and Bartile.

That left only equitable indemnity and Judge Olson did determine that Jacobsen is entitled to equitable indemnity from Bartile based on comparative fault.  There were a total of 22 roofing defect allegations asserted in the underlying action.  One of the primary allegations was that the roof edge was improperly constructed which required a complete roof edge repair (which repairs were actually performed).  Judge Olson found for Bartile on each and every issue.  In summary, Judge Olson found that Bartile was not negligent in the performance of its contract, and therefore, Bartile has no liability to Jacobsen on their claim for indemnity.

So What Is Patent Defect, Anyway?

SO WHAT IS A PATENT DEFECT, ANYWAY?

    The California Court of Appeal has just made this question more difficult to answer in its opinion in Creekside Townhome Owners Association, Inc. v. C. Scott Whitten, (2009) Superior Court Case Number 04AS02481.

    In Creekside, the Homeowner's Association of a townhome development sued a roofer, an inspector and a roofing supplier based on the re-roofing of eleven (11) buildings involving sixty-one (61) units.  The Defendants argued that Creekside failed to file suit prior to the expiration of the four (4) year patent defect statute of limitations (C.C.P. section 337.1).  Defendants brought a Motion for Summary Judgment based on the statute of limitations, arguing that an interrogatory response which referenced a letter sent by one homeowner to the Association's board of directors concerning a water intrusion problem inside one (1) of the unit's bedroom, and reporting several broken roof tiles, evidenced a patent defect condition.  The interrogatory admitted that the letter was discussed in open session at a board meeting.  The Complaint was filed more than four (4) years from the date of the meeting.

    Based on this evidence, the trial court granted Defendants' Motion for Summary Judgment, relying largely on the prior Court of Appeal decision in Landale-Cameron Court, Inc. v. Ahonen, (2007) 155 Cal. App. 4th 1401, wherein another Court of Appeal granted a Motion for Summary Judgment on a similar basis.

    The Court of Appeal reversed the trial court, finding that one (1) reported leak by one (1) of sixty-one (61) homeowners is insufficient to result in a finding that the roof defects were patent and not latent as a matter of law. 

    In finding against the Defendants, the Court considered a declaration filed by an expert for Creekside which stated that there were multiple roof defects which could not have been readily apparent to a lay person.  The Court also noted what it described as a "sharp distinction" between the facts of the instant case, and those in Landale. 

    Specifically, in Landale, the townhome development had eight (8) units, there were roof leaks reported in three (3) of them (including the unit owned by the President of the Association), and roof repairs were attempted.  Basically, the Court of Appeal found the evidence of leaks was more likely to put a Homeowner's Association on notice of the existence of possible construction defects than in the instant case (1 unit leak out of 61 units).

    Finally, the Court stated that finding for Defendants would "force property owner associations across the state to conduct extensive investigations for possible construction defects based on any report of a small problem.  This could prove very expensive for the associations, and would often be futile.  We decline to impose such a burden".

CASE ANALYSIS

    The definition of a patent defect pursuant to C.C.P. section 337.1 is whether the average consumer, during the course of a reasonable inspection, would discover the defect.  Geertz v. Ausonio, (1992) 4 Cal. App. 4th 1363.  While the test is usually a question of fact, it may be determined as a matter of law, such as in Landale.  Other examples include Tomko Woll Group Architects v. Superior Court, (1996) 46 Cal. App. 4th 1326 (cracked concrete causing a person to trip and fall is a patent defect) and Preston v. Goldman, (1986) 42 Cal. 3d 108 (backyard pond built with a one foot wall causing toddler to fall in is a patent defect).

    It is my opinion that the Court in Creekside did not follow the logic in Landale, Tomko and Preston.  In Tomko and Preston, the Court found a patent defect even though there was no formal "inspection".  The alleged defects were visible, and that was enough.  But most interesting is the manner in which the Court of Appeal picked the facts of Landale which supported its opinion, and ignored the rest.
   
    In Landale, virtually all of the complaints at the project concerned leaking roofs.  There was evidence similar to that in the instant case of isolated reports of stairway and deck issues, but the overwhelming number of complaints concerned the roofs.  Yet the court in Landale granted Defendant's Motion for Summary Judgment as to all sources of water intrusion at the complex which concerned Ahonen, who installed the waterproofing, the decks and the roofs.  The Court of Appeal in Landale found that the significant issues pertaining to the roofs put the Association on notice of all potential sources of water intrusion.

    At the oral argument in the Court of Appeal in Landale, this issue was hotly debated amongst counsel and the justices.  I know this because I was there.  Bremer Whyte Brown & O'Meara represented Ahonen and successfully argued that the trial court was justified in granting Summary Judgment as to all waterproofing issues even though the complaints were mainly specific to the roofs.

    I believe that the Court of Appeal in the instant case is confusing actual notice of a defect with whether there is sufficient evidence to warrant an inspection, and whether that inspection would reveal the defect.  Water leaking into a unit is not normal.  Something must have been amiss or the water intrusion would not have happened.  The Association ignored the problem, but then investigated later and, according to the Association's expert, they found "multiple construction defects".

    The burden on the Association to investigate the source of a unit leak would have been minimal.  Yet the Court of Appeal bought the Association's argument that the investigation could involve an "extensive investigation" based on the report of a small problem.

    This case will make obtaining Summary Judgment based on the existence of a patent defect more difficult since the Court of Appeal has blessed the acceptance of declarations from  experts on the issue of whether a defect is patent or latent (thus creating an issue of material fact sufficient to defeat a Motion for Summary Judgment), and creating a blurred line between sufficient inquiry notice (as in Landale) and not enough notice (Creekside).

    I welcome your comments.
Very truly yours,
BREMER WHYTE BROWN & O'MEARA LLP

John V. O'Meara

John O'Meara
jomeara@bremerandwhyte.com
JVO/