ALJDEC decisions subject to certification as final

2011A-5755-ROC · Registrar of Contractors · 2012-03-29

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: March 16, 2012, at 8:00 a.m. APPEARANCES: Complainants Clarence and Juanita Harden appeared on their own behalf; Respondent Monster Medical, L.L.C. dba Flood Impact Xperts appeared through T.W. Owen, its member. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure The Arizona Registrar of Contractors (“the Registrar”) issued License No. KB-1.270557-D for dual building contracting to Monster Medical, L.L.C., doing business as (“dba”) Flood Impact Xperts (“Respondent”). The Registrar received a complaint from Clarence and Juanita Harden (“Complainants”) against Respondent regarding its restoration of their residence at 5671 South McKinney Avenue in Globe, Arizona, after the residence was damaged by fire. Complainants stated that they had paid Respondent $59,111.24, and that after Respondent received their money, it failed to perform any work. Therefore, Complainants requested that the Registrar require Respondent to refund their money. The Registrar issued a Citation and Complaint against Respondent, charging violations of A.R.S. § 32-1154(A)(1) and (2). Respondent filed a timely written answer to the Citation and Complaint, denying any statutory violations and affirmatively alleging that although the Gila County Building Department (“Gila County”) inspector would not issue a permit unless the house was demolished and rebuilt, Complainants’ insurer, State Farm, would only authorize payment for repairs to the most severely damaged part of Complainants’ residence. The Registrar referred the matter to the Office of Administrative Hearings, an independent agency, for an evidentiary hearing. On March 16, 2011, a hearing was held. Complainants submitted two exhibits and presented the testimony of three witnesses: (1) Mr. Harden; (2) Mrs. Harden; and (3) Michael F. Guerrero, their friend. Respondent submitted nine exhibits and presented the testimony of Respondent’s three members: (1) T.W. Owen; (2) Ross Frazier; and (3) Joseph Decker. Hearing Evidence Complainants are both severely disabled senior citizens who have limited means. At approximately 2:00 p.m. on June 2, 2011, Complainants’ residence was severely damaged by an arson-caused fire. Because Complainants’ residence was uninhabitable after the fire, they went to a motel. That evening, Respondent’s salesman presented Complainants with Respondent’s Work Order Agreement, under which Respondent would perform emergency services and repairs to Complainants’ residence and negotiate with State Farm on their behalf. On June 2, 2011, at 7:30 p.m., Mr. Harden signed the Work Order Agreement. Mr. Owen testified that he knew that Complainants could not afford to pay to replace or repair their residence and were totally dependent on the insurance proceeds. However, the Work Order Agreement provided that if Complainants’ insurance company failed to honor the agreement, Complainants would be liable for Respondent’s construction costs. On or about June 6, 2011, Respondent secured Complainants’ residence by surrounding it with a fence and started removing Complainants’ personal belongings to attempt to salvage them. Respondent placed Complainants’ salvaged personal belongings in storage. Mr. Owen testified that State Farm approved the fence and storage. Mr. Harden testified that State Farm told him that he would be responsible for the cost of the fence. Respondent took photographs of the damage to Complainants’ residence and sent the photographs to Gila County Building Inspector Joe Mendoza for an opinion on the necessary scope of repairs. On or about June 23, 2011, Inspector Mendoza responded in an e-mail, stating that Gila County would not approve new construction that was supported by existing construction unless the existing construction was code compliant. Inspector Mendoza concluded that because the supporting structure and foundation of Complainants’ existing residence were not code compliant, the residence would have to be rebuilt. [1] Respondent sent a copy of Inspector Mendoza’s e-mail to Complainants’ insurance agent at State Farm, Gary Grounds, and verified that Complainants’ insurance policy limits were sufficient to demolish and rebuild their residence. Mr. Grounds obtained an estimate in the amount of $59,111.24 from R Riggs Construction,[2] a contractor with whom he had previously done business, to repair only the back part of the residence, without repairing the foundation. In July 2011, Respondent retained an engineer to obtain a variance from the Gila County Community Development Wastewater Department to allow Complainants’ existing cesspool to be used for a septic system for the new construction.[3] Mr. Owen testified that by avoiding the cost of a new septic system, Complainants saved at least $10,000.00. Mr. Harden signed an application for a demolition permit that Respondent had prepared for his signature. On or about August 17, 2011, Gila County issued the demolition permit. In the meantime, Respondent retained an architect to design a residence for Complainants that would meet their needs and comply with Gila County’s requirements for setbacks and connection to the cesspool. Mr. Decker testified that the architect revised the plans four times and that two or three times, he presented the plans to Complainants for their approval. On or about August 31, 2011, State Farm issued a check to Complainants in the amount of R Riggs Construction’s bid to repair the back part of the residence, $59,111.24. Complainants endorsed the check over to Respondent.

State Farm informed Complainants that it would not pay insurance proceeds to demolish and rebuild Complainants’ residence, but only to repair it. On or about September 19, 2011, at Respondent’s suggestion, Complainants hired public adjuster Loss Analytics, Inc. (“Public Adjuster”) to help them deal with State Farm’s refusal to pay to demolish and rebuild their residence. Public Adjuster’s employees Barry Chadwick and Troy Payne worked on Complainants’ insurance claim. Mr. Owen testified that the role of a Public Adjuster is to deal with recalcitrant insurance companies who refuse to pay for necessary repairs. After Complainants hired the Public Adjuster, Respondent and State Farm submitted correspondence and documentation about the claim to Mr. Chadwick or to Mr. Payne, not directly to Complainants. Mr. Owen testified that Respondent prepared a line item proposal to demolish and rebuild Complainants’ residence and submitted the proposal to Public Adjuster Mr. Payne. Mr. Owen testified that Mr. Payne submitted the estimate to State Farm. During the second week of October 2011, Respondent scheduled its subcontractor to demolish Complainants’ residence and prepared to submit the architect’s plans to obtain a permit for construction of the new residence.[4] Because State Farm refused to commit to fund anything more than repair of Complainants’ residence, the demolition did not occur. On October 24, 2011, State Farm adjuster Mike Donner sent a letter to Public Adjuster Mr. Payne, with a copy to Complainants, informing him that Inspector Mendoza had informed Justin Riggs of R Riggs Construction that Gila County was not requiring construction of a new residence because the existing residence could be repaired.[5] On November 7, 2011, State Farm adjuster Mr. Donner sent another letter to Public Adjuster Mr. Payne, with a copy to Complainants, in relevant part as follows: As you may be aware, Mr. Mendoza called me on Friday morning, November 4. He told me that he could not commit to approving construction on the Harden’s existing foundation without input from an engineer. It does not appear that he has yet involved one to inspect the foundation. Nor, apparently, have the Hardens done so. He did not share with me what particular code violations, if any, are present, or whether he believes they are located in the fire-damaged portion of the residence, or whether the repairs can be performed without having to completely demolish the entire structure. Unfortunately, his current position does not resolve the outstanding coverage issues.

We are diligently working to complete our coverage analysis; however, we still lack sufficient information to do so. You have urgently pressed for a complete demolition of the Harden’s residence and have asked State Farm to bless that decision. Based upon the information available to date (or rather lack thereof), State Farm is unable to do so. At this point, we do not know if the existing foundation actually violates code and if so, how, or whether, even if the foundation does violate code [sic]. The fire-related repairs can be performed without regard to the condition of the foundation. We have never received any information from you (or anyone else for that matter) suggesting that the fire-related damage in any way impacted the foundation, or that any foundation work would be necessary to complete the fire-related repairs. Finally, we have not been informed as to whether, assuming the foundation violates code and the repairs will involve foundation work, that portion of the foundation involved can be addressed without completely tearing down the residence as you are advocating be done.

In order to attempt to answer these questions, we are planning to have an engineer inspect the premises and will get that inspection scheduled as soon as possible. . . .

The record in this matter does not indicate that State Farm ever arranged for an engineer to inspect Complainants’ foundation. On or about November 7, 2011, Public Adjuster Mr. Chadwick sent a letter to State Farm adjuster Mr. Donner and his supervisor, in relevant part as follows: I just spoke to the building inspector regarding your recent call to me that it was not required to replace the building. I have to say at this point I am very concerned as to the underlying intent of your call as it was very misleading and appears to have been an attempt to unfairly represent the facts of your call to the building official.

Mr. Mendoza clearly still feels strongly that the building must be demolished and a total rebuild take place. And in his own words is very surprised at your attitude and indicated that when he called you to further explain and remove any misunderstandings that you were clearly upset with his position.

It is very concerning that an adjuster would unfairly handle a claim for its insured in this manner. Why would you care to do anything other than to treat your insured in the proper manner[?] You should handle the claim in a fair and honest manner and that is what we expect yet it appears that is not the case.

You have been supplied with all the documentation required and we expect payment for this claim immediately.[6]

On November 9, 2011, the Registrar’s inspector, Dennis Cook, performed a jobsite inspection as part of his investigation into Complainants’ complaint. Complainants, Mr. Decker, and Public Adjuster Mr. Chadwick attended the jobsite inspection. Public Adjuster Mr. Chadwick informed Inspector Cook that Complainants might lose their insurance coverage if Respondent demolished the residence as Gila County strongly recommended without obtaining approval from State Farm. Mr. Chadwick also informed Inspector Cook that although State Farm had approved repairs to the residence, Gila County would not permit repairs due to the numerous preexisting code violations, especially in the foundation. Inspector Cook testified that in his opinion, Respondent had not abandoned the project because it was prepared to proceed, but State Farm would not authorize the actions that Gila County required to issue a permit. Inspector Cook testified that in his opinion, Respondent also had not departed from code, because it had not started the repairs that State Farm required because such repairs would violate code unless the foundation and other preexisting construction were made code compliant. On or about November 18, 2011, Gila County Building Inspector Mendoza inspected Complainants’ residence. Inspector Mendoza’s 5-page single- spaced typewritten report of his inspection noted severe fire damage to the kitchen and attic and numerous code violations, including the absence of studs in one wall, lack of insulation in the attic and around water pipes, lack of support for rafters in the ceiling, lack of support for floor joists, termite activity, and plumbing and electrical systems that were not up to code. Inspector Mendoza described the residence’s foundation as follows: The home has no foundation or footings. It is supported on stacked pieces of a 4” thick concrete slab. These pieces are roughly 12” square and are laid on the ground at various locations under the floor of the home. Some of these supports are located under the exterior walls and some under the floor of the home at about 4’ to 6’ apart.

The attached carport has no foundation or footings. The posts supporting the carport are supported by pre-cast concrete piers 8” tall and measuring 8” x 8” at the base. These piers are embedded about 3” into the ground.[7]

Inspector Mendoza noted and provided code references for at least 10 specific existing code violations that would need to be brought into compliance, including the residence’s foundation, before repairs could be performed. Inspector Mendoza closed the report with the following remarks: This report is intended to identify the general areas needing to be replaced, repaired or rebuilt to bring the existing (fire- damaged) home into compliance with code. Where an alteration or repair must be made that requires alteration to another portion of the home, that portion must also be brought into compliance with code. While we are willing to review any proposal to repair and/or rebuild the existing home, we strongly recommend that the existing home be demolished and a new structure be built in its place.[8]

No evidence was produced at the hearing that State Farm or R Riggs Construction ever submitted a proposal to Gila County to repair Complainants’ residence. Complainants made a complaint to the Gila County Public Fiduciary against Respondent because no work was being done to repair their residence. The Public Fiduciary appointed attorney John S. Perlman to investigate Complainants’ complaint. On February 6, 2012, Mr. Perlman sent a letter to the Public Fiduciary, concluding that there was no evidence that Respondent was engaged in malfeasance. Mr. Perlman noted that at the direction of Respondent, Complainants had hired a Public Adjuster “who appears poised to file a bad-faith action” against State Farm if it did not authorize necessary repairs before February 10, 2012.[9] On the date of the hearing, the fence was still around Complainants’ residence and no work had been performed on the project since Respondent finalized the plans for the new residence. At the hearing, Complainants continued to blame only Respondent for the lack of progress on the repair or rebuilding of their residence. Complainants submitted a motion for summary judgment requesting that the Registrar find that Respondent abandoned its contract in violation of A.R.S. § 32-1154(A)(1) and order Respondent to return to Complainants as restitution all monies paid. Complainants attached to their motion for summary judgment a copy of the first page of a letter from State Farm dated February 3, 2012,[10] to Public Adjuster Mr. Payne, in relevant part as follows: This letter is to follow up with you regarding our letter to you dated January 5, 2012. To date we have not received correspondence from you regarding any further documentation you may have regarding the above referenced claim for your review. If you have any documentation for our review such as a contractor[‘]s estimate for repairs, please forward to me as soon as possible. This will enable me to properly evaluate this claim.

As neither you nor the Hardens have ever provided State Farm with an alternative estimate, we will need to rely upon the one that R Riggs Construction submitted. In order to ensure that the Hardens have adequate time to complete the necessary repairs, State Farm has extended the Additional Living Expense portion of this claim for an additional two months—through April 6, 2012. Please be advised that the Additional Living Expense coverage will cease on April 6, 2012.

Mr. Harden argued that the Work Order Agreement required Respondent to provide all paperwork that State Farm requested, and since State Farm indicated on its February 3, 2012 letter that it did not have an estimate for repairs, Respondent must have abandoned the contract by failing to provide such estimate. Mr. Harden testified that he fears that if he and his wife file suit against State Farm in court for bad faith and lose, Respondent will take a lien out against their property and they will be in debt. CONCLUSIONS OF LAW The Registrar has jurisdiction to determine whether Respondent violated the charged statutes.[11] The Registrar lacks jurisdiction to determine whether State Farm committed bad faith by unreasonably restricting Complainants’ insurance claim to repairs. Complainants’ bad faith claim can only be resolved by a court of competent civil jurisdiction. The Registrar also lacks jurisdiction to determine whether State Farm and its adjustor violated any of the statutes relating to insurance contracts in Arizona set forth in Arizona Revised Statutes, Title 20. Any administrative claim that Complainants may have against State Farm can only be resolved by the Department of Insurance. Complainants bear the burden of proof to establish Respondent’s statutory violations by a preponderance of the evidence.[12] Respondent bears the burden to establish affirmative defenses by the same evidentiary standard.[13] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[14] Respondent established that it was ready, willing, and able to perform its contract with Complainants to repair or to demolish and rebuild their residence but that Gila County would not permit repair and State Farm would not authorize demolition and rebuilding. Therefore, Complainants did not establish that Respondent abandoned the contract in violation of A.R.S. § 32-1154(A)(1).[15] Respondent also established that it obtained a permit to demolish Complainants’ fire-damaged residence, but State Farm would not authorize demolition. Respondent also established that it has not started any work because Gila County will not permit work that does not address the substantial code violations at Complainants’ residence, including the foundation. Therefore, Complainants did not establish that Respondent violated any building code in its repair of the residence in violation of A.R.S. § 32-1154(A)(2).[16] RECOMMENDED ORDER In view of the foregoing, it is recommended that on the effective date of the Registrar’s final order, the Registrar dismiss Complainants’ complaint in Case No. 2011-5755 against Respondent Monster Medical, L.L.C. dba Flood Impact Xpert’s License No. KB-1.270557-D. In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be 40 days from the date of that certification. Done this day, March 29, 2012.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] See Respondent’s Ex. 2. [2] R Riggs Construction, Inc. dba R Riggs Development (“R Riggs Construction”) holds License No. B.110047-R. The evidence at hearing indicated that R Riggs Construction may have violated A.R.S. § 32- 1154(A)(2) by proposing to repair the back part of Complainants’ residence, even though Gila County and the building code required demolition and rebuilding of the entire foundation. The evidence also indicated that State Farm unreasonably restricted the payout on Complainants’ insurance claim based on R Riggs Construction’s proposal. If Complainants had accepted R Riggs Construction’s proposal and it had performed the proposed repairs, it appears that at best, Gila County would have declined to issue a Certificate of Occupancy and at worst, would have required demolition of the noncompliant new construction. The Registrar may wish to investigate R Riggs Construction’s apparent violation. [3] See Respondent’s Ex. 1. [4] See Respondent’s Ex. 5. [5] See Respondent’s Ex. 4. [6] Respondent’s Ex. 9 (footnote added). [7] Respondent’s Ex. 7 at 2 (footnote added). [8] Id. at 5. [9] Respondent’s Ex. 8. [10] The single page that Complainants submitted does not identify the name of the letter’s author. [11] See A.R.S. § 32-1101 et seq. [12] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119(A) and (B)(1); see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [13] See A.A.C. R2-19-119(B)(2). [14] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [15] A.R.S. § 32-1154(A)(1) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[a]bandonment of a contract or refusal to perform after submitting a bid on work without legal excuse for the abandonment or refusal.” [16] A.R.S. § 32-1154(A)(2) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[d]eparture from or disregard of plans or specifications or any building codes of any state or any political subdivision of the state in any material respect which is prejudicial to another without consent of the owner or the owner’s duly authorized representative and without the consent of the person entitled to have the particular construction project or operation completed in accordance with such plans and specifications and code.”

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