April, 2010

CSM Celebrates First Anniversary

Cantrell, Strenski & Mehringer, LLP proudly celebrated its first anniversary last month.  The law firm opened its doors on March 2, 2009 on the 24th floor of Market Tower in Indianapolis, Indiana and has worked in this past year on continuing to provide high quality representation to its clients in a smaller law firm environment.  All members of the firm have large law firm experience which has prepared them to offer the highest quality of representation in all types of insurance coverage, bad faith and other types of complex litigation.  The past year has shown that our smaller law firm allows us to provide the same high quality representation without the conflicts, rate pressure and high overhead inherent in large law firms.  We look forward to continuing to serve the insurance industry for many years to come.

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Transfer Granted on Construction Defect Case

On January 14, 2010, the Indiana Supreme Court held oral argument on whether to accept transfer of Sheehan Construction Company Inc. et al. v. Continental Casualty, Indiana Insurance Company, and MJ Insurance. (See vacated Court of Appeals opinion at  www.in.gov/judiciary/opinions/pdf/06230902msm.pdf  ).  Later that afternoon, the Indiana Supreme Court vacated the Indiana Court of Appeals’ opinion that was handed down on June 23, 2009. The Indiana Supreme Court’s decision to accept the Petition for Transfer could signal a change in the law for insurance coverage for general contractors in construction defect claims or the Court could clarify what constitutes an accident or “occurrence” in the context of construction claims.

In Sheehan , a class of homeowners alleged that their homes were negligently constructed by the subcontractors of general contractor Sheehan Construction. The class of homeowners and Sheehan settled for approximately $2.8 Million ($800,000 for attorney fees and $2 Million for the cost of repairing the homes). The settlement provided that the Class would not pursue the claims against Sheehan. Instead, Sheehan assigned its rights against the insurers and non-settling subcontractors to the Class. Continental filed a declaratory judgment action to seek a determination that it was not obligated to indemnify Sheehan. The Class answered with a counterclaim and a third-party complaint against Indiana Insurance, who insured one of the subcontractors. Sheehan also sued its insurance broker, MJ Insurance, for negligent failure to procure insurance.

In the trial court, all of the parties moved for summary judgment and the trial court granted the broker and the insurers’ motions. Sheehan and the Class filed an appeal and Indiana filed a cross-appeal.

In a split decision, the Indiana Court of Appeals agreed with the trial court that the insurers did not owe coverage for the claimed construction defects, which included water leaks around windows, water stains below windows and on ceilings, discolored carpet, warped floors, roofing materials blowing off during storms, mold below windows, on floors, in crawlspaces, and on the siding; and decay of window frames and OSB sheathing. Sheehan and the Class alleged that the problems were caused by the subcontractors’ faulty workmanship from inadequate flashing and caulking around windows, a lack of house wrap over the sheathing and window casements, improperly installed roof shingles, improperly sealed openings in roofs for chimneys and vents, improperly installed bricks and cement board siding and improper ventilation of crawlspaces.

The trial court and the majority in the Court of Appeals held that there was no coverage because there was no covered “property damage” nor was there an accident or “occurrence.” The majority opinion found that damage to a construction project due to faulty workmanship or defective materials was not “property damage” for purposes of CGL coverage citing to previous Court of Appeals and Supreme Court decisions including, Amerisure, Inc. v. Wurster Construction Co. Inc., 818 N.E.2d 998 (Ind. Ct. App. 2004), clarified on rehearing, 822 N.E.2d 1115 (Ind. Ct. App. 2005) and R.N. Thompson and Associates Inc. v. Monroe Guaranty Insurance Company, 686 N.E.2d 160 (Ind. Ct. App. 1997) (trans. denied ), 698 N.E.2d 1191 (Ind. 1998). The majority, following the reasoning in those cases, found that claims limited to remedying faulty workmanship or materials do not involve “property damage” but instead the cost of repairing faulty workmanship is an economic loss not covered by CGL policies. Relying upon R.N. Thompson, the majority found that damage caused by water penetration resulting from faulty workmanship was inseparable from the faulty workmanship itself and, therefore, was not “property damage.” The majority opinion did not address whether the faulty workmanship constituted an accident or “occurrence” under the CGL policies.

However, Judge Brown dissented concluding that there was a question of fact regarding whether the Class and Sheehan’s claims were for “property damage” caused by an “occurrence.” Judge Brown observed that the subcontractors’ failure to properly seal the houses caused damage not only to the windows and the roof, but also to floors, carpet and ceilings and allowed mold to accumulate throughout the homes. Judge Brown would have reversed and remanded to the trial court for further proceedings. In her view, the damages alleged might constitute “property damage” under the policies. Judge Brown distinguished Amerisure and R.N. Thompson on the grounds that the Class and Sheehan’s claims alleged damage to property other than just the defectively installed materials. Judge Brown looked at cases from other jurisdictions that rejected the insurers’ contentions that there could never be “property damage” in cases of faulty construction relying upon those cases that have found that faulty workmanship and materials could cause continuous exposure to moisture, which could cause unforeseen and unintended damage to the home. Additionally, Judge Brown would have held that the “property damage” alleged in the case was caused by an “occurrence” (defined as an accident including continuous or repeated exposure to substantially the same general harmful conditions).

At the oral argument, the Class and Sheehan argued that the claims constituted “property damage” and the damage was caused by an “occurrence.” Additionally, their counsel argued that the Indiana Supreme Court decision in Indiana Insurance Company v. DeZutti, 408 N.E.2d 1275 (Ind. 1980) (a leading case on this issue) is distinguishable because there had been changes in 1986 in the standard ISO form CGL policy that specifically broadened coverage for a general contractor by covering work performed by a subcontractor.

We will need to wait for the Indiana Supreme Court’s decision to find out if the Court will signal a change in the law to provide coverage for construction defect claims.
In the meantime, insurers should carefully review the facts and claims in construction defect litigation to determine whether claims against a general contractor assert damages to other property.   
 

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Health Care Provider Liable to Patient for Losing Medical Records

In Howard Regional Health System v. Gordon,  __ NE2d __ (Ind. Ct. App. 2010 WL 1524870) see, www.in.gov/judiciary/opinions/pdf/04161006msm.pdf , the Indiana Court of Appeals recently held that there is a private cause of action against a hospital as a third-party for the loss of patient medical records. This decision exposes health care providers to liability when a provider’s “spoliation” of evidence results in the plaintiff’s inability to adequately pursue a claim of medical negligence.

As the court in Gordon noted, Jacob Gordon suffers from serious medical disorders that could have been caused by substandard obstetric care at the time of his birth. Jacob’s mother brought a medical malpractice action and requested medical records from Howard Community Hospital, where Jacob was born. A year and a half after Gordon’s request for the medical records, the Hospital responded with an affidavit stating that some of the records were missing. Gordon retained a neonatal doctor to review the records that were provided and to determine whether the care the obstetrician provided conformed to the standard of care. The doctor could not provide an opinion because of the missing records. Gordon filed a claim and pursued a motion for summary judgment against the Hospital for spoliation of evidence. The trial court granted the motion and the Hospital appealed.

As an initial matter, the Hospital argued that the trial court lacked subject matter jurisdiction to hear Gordon’s spoliation claim because the Indiana Medical Malpractice Act required a proposed complaint be presented to a medical review panel and the panel give its opinion before an action against a health care provider may be commenced in court. The Gordon court rejected the Hospital’s argument and held that Gordon’s claim was based upon the tort of spoliation of evidence and was unrelated to the “promotion of a patient’s health or the provider’s exercise of professional expertise, skill or judgment.” The court further reasoned that the resolution of Gordon’s spoliation claim does not involve any medical provider’s “exercise of professional expertise, skill, or judgment.” Rather, the spoliation claim will be resolved by determining whether the Hospital had a duty to retain the records and whether it breached that duty. Because the spoliation claim was outside the Indiana Medical Malpractice Act, Gordon held that the trial court had jurisdiction to hear it.

The court then addressed the availability of a private right of action for loss of medical records. The court held the trial court properly found that the Hospital had a “duty imposed by statute” to maintain its medical records and that it breached that duty. Pursuant to Ind. Code § 16-39-7-1, a hospital is required to maintain its health records for seven years. If it violates that section, it “commits an offense for which a board may impose disciplinary sanctions against the provider under the law that governs the provider’s licensure, registration, or certification.” Id. The court in Gordon held that a violation of Ind. Code § 16-39-7-1 is negligence per se, and therefore, a private action is available to Gordon. The court reasoned that Gordon is within the class of persons the record retention statute is intended to protect and was subjected to the type of harm expected to occur as a result of its violation. Finding that it is apparent for a variety of reasons why a patient might want or need to have access to his or her medical records, the court stated that it is “reasonably foreseeable that a patient could be harmed by a provider’s failure to maintain the patient’s records.”

The Gordon court also examined the availability of a “third-party” spoliation claim which refers to spoliation of evidence by a non-party to the lawsuit. In holding that there is indeed a third-party claim available, the court noted that fairness and integrity of outcome, as well as the deterrence of evidence destruction, require an additional tort remedy when evidence is destroyed or impaired by persons who are not parties to litigation, and thus not subject to existing remedies and sanctions. It would “strain credulity” to suggest that a hospital might be unaware of the potential importance of its medical records to its patients, especially those patients whose medical care had a poor outcome.

Finally, the court in Gordon addressed the issue of damages and whether summary judgment was appropriate given that Gordon did not prove, with reasonable specificity, that the loss of the records caused harm and resulting damages. The court recognized that spoliation of evidence is a tort claim based upon a breach of duty to preserve evidence, and a plaintiff’s inability to bring a cause of action is typically the “damage” resulting from the breach of duty. The damage that flows from such a breach is the resulting inability to prove a cause of action. Gordon’s spoliation claim seeks compensation, not for bodily injury, but rather for the loss of the probable expectancy of recovery in the underlying lawsuit. Although the court acknowledged the inherent difficulty in proving the highly speculative outcome of a hypothetical lawsuit, Gordon declined to hold that such difficulty would preclude a third-party spoliation claim under any circumstances. Such a result would leave an unscrupulous health care provider or insurer with no disincentive to destroy evidence that could later subject it to civil liability.

This case highlights the importance of strict protocols and diligent enforcement of records retention policies. As the use of electronically-stored medical care records becomes mainstream, the possibility for loss of electronically stored records becomes more of a reality. Health care providers are encouraged to discuss records retention safeguards with any EMR provider that might be considered. It should also be noted that any entity, even non-health care providers, that has a legal duty to retain records could be subject to liability pursuant to the rulings in the Gordon case. If you wish to discuss how this case may impact your hospital, long term care nursing facility or medical practice policies, please do not hesitate to contact Stephanie Holtzlander. 

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