Wood v. Milionis Constr.

• Court: Court of Appeals of Washington
• Parties: JEFFREY WOOD and ANNA WOOD, husband and wife, Respondents, v. MILIONIS CONSTRUCTION, INC., a Washington corporation; STEPHEN MILIONIS, an individual, Respondents, CINCINNATI SPECIALTY UNDERWRITERS INSURANCE COMPANY, an insurance corporation, Appellant.
• Docket Number: No. 36286-8-III,36286-8-III
• Decision Date: 28 April 2020

JEFFREY WOOD and ANNA WOOD,husband and wife, Respondents, v. MILIONIS CONSTRUCTION, INC., a Washington corporation;

STEPHEN MILIONIS, an individual, Respondents,

CINCINNATI SPECIALTY UNDERWRITERS INSURANCE COMPANY,

an insurance corporation, Appellant.

No. 36286-8-III

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION THREE

April 28, 2020

UNPUBLISHED OPINION

LAWRENCE-BERREY, J. — Cincinnati Specialty Underwriters Insurance Company (Cincinnati) appeals the trial court's finding that a covenant agreement entered into between its insured and the claimants was reasonable. The basis for the trial court's determination was its belief that the insured, itself, had valued the claimants' contract damages at $1.2 million, which was near the $1.7 million settlement amount. The record does not support this. Instead, the insured valued the claimants' contract damages at less than $350,000, which includes $200,000 for what the claimants asserted they previously paid for repairs. Because of the significant discrepancy between $350,000 and $1.2 million, substantial evidence does not support the trial court's finding of reasonableness. We therefore reverse and remand for a second reasonableness hearing.

FACTS

In July 2015, Jeffrey and Anna Wood hired Milionis Construction, Inc. (MCI) as their general contractor to build a new home in Newman Lake, Washington. As the general contractor, MCI had the responsibility to oversee, manage, supervise, and administer the building of the custom, single-family residence. The parties originally agreed to $1,356,000 as the contract price to complete the house.

MCI and its subcontractors started work in the summer of 2015. On November 1, 2016, work ceased, at which time the Woods claimed to have paid MCI more than $550,000.

Substandard work performed by various subcontractors left the house with multiple defects. Brian Hanson, the engineer who provided structural design plans for the house, provided the Woods with a list of defects and deviations caused by the subcontractors' work.

PROCEDURE

The Woods sued MCI and its president, Steve Milionis on November 18, 2016. They asserted claims for breach of contract, unjust enrichment, promissory estoppel,breach of contractual duties of good faith and fair dealing, negligence, negligent misrepresentation, and violation of the Consumer Protection Act, chapter 19.86 RCW. The Woods also asserted a claim against MCI's bond.¹ MCI counterclaimed, seeking damages still owed under the contract.

Cincinnati had issued MCI a commercial liability insurance policy in the amount of $1 million. The broad claims asserted by the Woods invoked Cincinnati's duty to defend its insured. Cincinnati retained attorney Shane McFetridge to defend MCI.² Cincinnati also reserved its right to deny or limit coverage.

On December 12, 2016, the trial court entered an agreed stay of proceedings in accordance with the parties' contract for building the house. The contract required the dispute to be mediated and, if mediation failed, the dispute had to be arbitrated.

Unsuccessful Mediations

The parties mediated in May 2017 and again in September 2017, but both mediations were unsuccessful. They then scheduled the third and final mediation for October 19, 2017.

MCI experts' October 17, 2017 opinion of value

On October 17, just before the October mediation, McFetridge sent a letter to Cincinnati, requesting settlement authority:

[Woods' expert] Edward Smith's total cost estimate for repairing the alleged Defect Nos. 1 through 43 is $761,234. The cost estimate . . . does not have adequate information to properly assess its reasonableness, as dollars [sic] amounts were provided with no specific line item detail. By contrast, [MCI's expert] Nick Barnes' current attached cost estimate includes a complete breakdown . . . and supporting subcontractor bids. . . .

. . . Barnes . . . full pricing of all of the alleged Defect Nos. 1 through 43 totals $540,341.76. Please recall that we do not agree that all of the 43 alleged defects are legitimate. For example, Defect Nos. 36 and 37 pertain to exterior deck work that has not yet even been started. Moreover, the mediator-appointed general contractor, Paul Shelton, obtained a variance from the County with respect to the exterior grade elevation work that would be otherwise required for Defect No. 40.

Please recall from the report previously provided by our architect expert, Scott Buckles, for purposes of mediation, he agreed that repairs should be performed with respect to Defect Nos. 1 through 14, 17, 18 and 19, 21, 23 through 27, 35 and 41 through 43. Adding up those items for which Mr. Buckles agrees that some responsibility lies with Milionis Construction for the alleged defects, using Nick Barnes' current estimate cost of repair, the total for all agreed repair items is $224,772.59. However, please also recall that Mr. Buckles only allocated approximately 65% liability to Milionis for these alleged defects, with the [remaining] balanceof liability being allocated to the Woods', the architect and structural engineer. Thus, 65% allocation to Milionis for the agreed estimated cost of repair items totals $146,102.18. Please recall from my prior report, that I estimate the exposure for attorney's fees and costs to be approximately $180,000. These two amounts total $326,102.18. Therefore, I continue to recommend . . . settlement authority of up to $350,000 to resolve this case.

Clerk's Papers (CP) at 414-15 (underlining added). Thus, excluding attorney fees and costs, MCI's experts believed the Woods' breach of contract claims totaled $146,102.18.

Contingent settlement agreement

The parties chose a general contractor, Paul Shelton, to assist in the third mediation. Rather than acting as a passive go-between, Shelton actively worked with the parties.

McFetridge wrote a postmediation letter to Cincinnati, describing the mediation and how the parties achieved a conditional settlement:

The following is a recap of yesterday's mediation. We had a very long day, but were able to get an agreement signed. The deal is subject to Cincinnati's agreement to fund the settlement amount of $399,514.58.This amount reflects the mediator appointed general contractor's recommended "Claim Amount" of $374,514.58, plus $25,000, which reflects a portion of the costs for repair already paid by the Woods to their general contractor . . . .

As previously discussed, the principle issues we had to overcome to reach a settlement were getting the Woods to come off of their inflated cost estimate numbers provided by [their expert] . . . . The mediator appointed general contractor, Paul Shelton's, cost estimate for Defect Nos. 1 through 43 totaled $562,327.12. . . . [W]e were able to convince the Woods that thecost estimate provided by [their expert] was unreasonably inflated. Thus, the agreed settlement reflects the estimate amounts provided by Mr. Barnes and Mr. Shelton, with Mr. Barnes agreeing to perform the repairs.

Mr. Shelton arrived at his final "Claim Amount" by backing out the previous draws that had been paid by the lender to Milionis from the adjusted contract price . . . and by backing out the amounts owed to Milionis for Draw 8 and the unpaid change orders. As you know, I arrived at essentially the same place in terms of a recommended settlement amount by backing out the cost amounts in Nick Barnes' cost estimate for construction of the back deck and exterior grading work and then factoring in exposure for attorney fees and costs. Ultimately, the difference between Paul Shelton's "Claim Amount" [of $374,514.58] and my recommended settlement number [of $350,000] is only $25,514.58.

. . . .

In sum, I think we negotiated the best deal we possibly could given all of the issues in the case. . . . Therefore, I recommend that Cincinnati agree to fund the Settlement Amount . . . .

CP 419-20 (underlining and emphasis added).

The following day, Brook Cunningham, the corporate attorney for MCI, sent a letter to Cincinnati. In it, he demanded Cincinnati to fund the settlement amount and also accused Cincinnati of repeatedly placing its interest above that of its insured. Cunningham's letter concluded:

If Cincinnati fails to fund [the] settlement amount, this insured will have no choice but to offer to stipulate to a judgment in favor of the plaintiffs in this matter in exchange for a release from individual liability and assign the bad faith insurance claim against Cincinnati to the plaintiffs.

CP at 299.

On October 25, Cincinnati responded to Cunningham and explained its reasons for not funding the full settlement amount. Cincinnati explained that its general commercial insurance policy with MCI did not cover the Woods' claims, but instead covered only "property damage" caused by an "occurrence." CP at 300. Cincinnati elaborated:³

Washington law is . . . eminently clear that "[a] general liability policy is not intended to encompass the risk of an insured's failure to adequately perform work," and that "[p]ure workmanship defects are not considered accidents or occurrences, since commercial general liability policies are not meant to be performance bonds or product liability insurance." [Big Constr., Inc. v. Gemini Ins. Co., 2012 WL 1858723 at *7 (W.D. Wash. 2012]. Thus, "[t]here is no coverage for repairing or replacing an insured's defective work [and for] faulty workmanship[. T]o give rise to property damage there must be property damage separate from the defective product itself." Id.

Moreover, even though an insurer has an obligation to conduct good faith settlement negotiations, that duty does not require the insurer to disregard its coverage defenses or pay sums for damages that are not covered. Berkshire Hathaway Homestate Inc. Co. v. SQI, Inc., 132 F. Supp. 3d 1275, 1290 (W.D. Wash. 2015) . . . .

CP at 300, 303.

Cincinnati explained an additional reason that precluded coverage. As a condition to coverage, the policy required MCI to obtain written contracts from each subcontractor...