Waiver of Fee/Interest Challenges and Proof of “Reasonable and Necessary” Repair Costs in Insurer-Influenced Construction Disputes (Alaska)

1. Introduction

After a December 2015 fire damaged the First Evangelical Covenant Church of Anchorage (“First Covenant”), the church negotiated with a general contractor, Michael L. Foster & Associates, Inc. (“MFA”), to repair the property. The written contract included a fee schedule of hourly labor rates and required MFA to “work directly with the Church’s insurance carrier and adjuster.” In parallel, Foster made an oral assurance later characterized by the trial court as a promise that MFA would “not cause[] the church to incur any expenses not covered by” the insurer.

As repairs progressed, the insurer (Church Mutual Insurance Co.) objected to invoices—especially engineering-related charges and certain labor rates—and eventually stopped paying. MFA halted work with a small portion remaining and sued the church for unpaid invoices. The church counterclaimed (including breach of contract and breach of the duty of good faith and fair dealing). After an eight-day bench trial, the superior court largely credited MFA’s proof of damages and dismissed the counterclaims.

On appeal, the Alaska Supreme Court mostly affirmed, requiring only a modest arithmetic correction to the damages award and holding that the church waived challenges to prejudgment interest and attorney’s fees by failing to oppose the motions below.

2. Summary of the Opinion

• Damages—reasonableness and necessity: The court upheld the superior court’s finding that MFA proved, by a preponderance of the evidence, that most billed labor rates and charges were “reasonable and necessary” to restore the church.
• Single correction: The superior court undercounted hours billed at an unreasonable rate for one employee (Gerwig). The Supreme Court ordered an additional reduction of $3,808, bringing damages from $129,326.39 to $125,518.39.
• Administrative time/expenses and subcontractor charges: The court approved billing for insurer-facing documentation work and certain administrative costs, as supported by contract terms and testimony, and rejected the church’s attempt to treat insurer “earmarked” payments as extinguishing particular line items.
• Counterclaims dismissed: The court affirmed dismissal of breach and bad-faith counterclaims, holding (among other things) that nonpayment excused MFA from completing remaining work and that the oral promise was not breached because the insurer indemnified the church.
• Fees and prejudgment interest: Challenges were waived by failure to object below; additionally, AS 45.45.010(b) did not bar an 18% rate because the statute exempts contracts over $25,000.

3. Analysis

3.1. Precedents Cited (and How They Shaped the Decision)

A. Standards for contract interpretation and the role of extrinsic evidence

• Nautilus Marine Enters., Inc. v. Exxon Mobil Corp. (quoting Villars v. Villars): Cited for de novo review of contract interpretation as a general rule. The Supreme Court used this to frame the appellate lens.
• Little Susitna Constr. Co. v. Soil Processing, Inc.: Supplies the key qualification—interpretation becomes a factual task when extrinsic evidence is offered, points to conflicting meanings, and the contract is reasonably susceptible of either meaning. This underwrote the court’s deference (clear-error review) to the trial court’s findings about the parties’ intent and expectations regarding Foster’s oral promise and performance obligations.
• Krossa v. All Alaskan Seafoods, Inc.: Reinforces that when interpretation turns on extrinsic testimonial evidence, the appellate court reviews the trial court’s factual determinations for clear error.
• Norville v. Carr-Gottstein Foods Co. and Mun. of Anchorage v. Gentile (quoting Fairbanks N. Star Borough v. Tundra Tours, Inc.): These cases support deference to trial courts where contract meaning turns on conflicting extrinsic evidence; the Supreme Court’s role is to decide whether the facts support the interpretation adopted below.

B. Proof of damages and the “reasonable basis” requirement

• Fletcher v. Trademark Constr., Inc.: The church and MFA agreed MFA had to prove costs were “reasonable and necessary,” and this case is cited for the burden—contract damages must be established by a preponderance of the evidence.
• Griffith v. Hemphill (quoting Conam Alaska v. Bell Lavalin, Inc.): Central to the court’s treatment of evidence. It emphasizes that “the testimony of a single witness” can provide a reasonable basis to compute damages once actual damages are shown; documentary proof is not invariably required. The court relied on this to accept Foster’s testimony about comparable Church Mutual projects and to reject the church’s insistence on different forms of proof.

C. Evidence rules and the limited use of counsel’s letters

• Dobos v. Ingersoll (and Alaska Rules of Evidence 801(c) and 802): Used to explain why the church could not use factual assertions in its attorney’s letters for their truth once the letters were admitted only to show Church Mutual’s position. This was decisive because the church attempted to treat those letters as substantive proof of job classifications and alleged billing issues.

D. Appellate deference to trial courts on credibility and factfinding

• Curran v. Hastreiter: Repeatedly invoked for the principle that appellate courts give “due regard” to the trial court’s credibility determinations and view evidence in the light most favorable to the prevailing party. This supported affirmance of the trial court’s rejection of the adjuster’s rate-calculation approach and its assessment of Foster’s and Gerwig’s explanations.
• Alaska Far E. Corp. v. Newby: Provides the “definite and firm conviction that a mistake has been made” articulation of the clear-error standard.

E. Material breach and suspension of performance

• RESTATEMENT (SECOND) OF CONTS. § 237 cmt. a: Cited for the rule that a material failure by one party prevents the other party’s remaining duties from becoming due (temporarily) and can discharge them if not cured in time.
• Com. Recycling Ctr., Ltd. v. Hobbs Indus., Inc.: Applied to conclude that the church’s failure to pay (invoices “payable upon receipt,” with substantial arrears) gave MFA a right of non-performance—justifying stopping work before completing all items.

F. Duty of good faith and fair dealing (scope, components, and fact question)

• RESTATEMENT (SECOND) OF CONTS. § 205: Establishes that every contract carries an implied duty of good faith and fair dealing.
• Casey v. Semco Energy, Inc.: Cited for the subjective and objective components—no deprivation of explicit benefits and conduct must be objectively fair.
• Kimp v. Fire Lake Plaza II, LLC: Used to frame “reasonableness” and to support that responding “in a reasonable amount of time” can defeat a bad-faith theory even where there is delay.
• Becker v. Fred Meyer Stores, Inc. (quoting Mills v. Hankla): Confirms that whether the covenant was breached is generally a question for the trier of fact—supporting affirmance on a clear-error standard.
• Laybourn v. City of Wasilla: Supports the appellate assumption that issues not expressly discussed in a written order can be implicitly rejected when the trial court summarily dismisses a claim.

G. Damages must reflect actual loss; indemnity and “no damage” theory

• Galipeau v. Bixby: Used to reject “mere breach” damages; damages must correspond to the loss “actually sustained.” Because the insurer indemnified the church for the judgment, the church’s damages theory (equating damages to the amount of the judgment) failed on the court’s view of actual loss.

H. Waiver for failing to oppose fee/interest motions

• Taylor v. Wells Fargo Home Mortg. and Johnson v. State: These cases provided the waiver doctrine applied here: failing to object in the trial court (by opposing the motion or seeking reconsideration) waives appellate challenges to prejudgment interest calculations and fee awards.

I. Statutory interpretation

• Beaux v. Jacob: Cited for de novo review of statutory interpretation, used to confirm that AS 45.45.010(b)’s 10% limitation did not apply because the contract exceeded $25,000 (an express statutory exemption).

3.2. Legal Reasoning

A. “Reasonable and necessary” damages: what proof counted

The core merits issue was whether MFA proved its billed charges were “reasonable and necessary” to restore the church. The Supreme Court affirmed largely because:

• Comparable insurer acceptance: Foster testified MFA used identical rates on another Church Mutual-insured church project without objection. Under Griffith v. Hemphill, that testimony alone could supply a reasonable basis to calculate damages.
• Substantial backup anyway: MFA produced extensive records (timesheets, jobsite reports, telephone records) supporting labor charges, undercutting the church’s argument that the proof was too thin.
• Church’s “proof” problems: The church relied heavily on letters written by its (insurer’s) attorney. Because the letters were admitted only to show the insurer’s position, they could not be treated as substantive evidence of the facts asserted (hearsay limits per Dobos v. Ingersoll).
• Trial-court discretion on dueling narratives: The superior court found the adjuster’s software-driven wage rates unpersuasive (lack of transparency and Alaska wage realities). Under clear-error review and Curran v. Hastreiter, the Supreme Court deferred.

B. The single reversible issue: a straightforward arithmetic/record mistake

Where the superior court found $85/hour reasonable for Gerwig, it nevertheless allowed some later hours to remain billed at $105 because it incorrectly assumed all post-November 2016 hours were billed at $85. The record (and MFA’s concession) showed 190.4 off-site hours billed at $105. The Supreme Court treated this as clear error and ordered the damages reduced by $3,808.

C. Administrative charges and insurer-documentation work

A notable feature of this dispute is that the insurer’s objections generated extra work. The Supreme Court affirmed awarding MFA time spent responding to Church Mutual’s requests because the contract expressly required MFA to “work directly with the Church’s insurance carrier and adjuster,” and because the contract contemplated billing for “administrative” work at an hourly rate. The court also upheld certain administrative expenses (e.g., copies) where testimony connected them to the contract’s equipment/cost-billing structure.

D. Subcontractor payments, earmarked checks, and the “oldest invoice” application clause

The church attempted to reduce MFA’s damages by claiming some subcontractors had effectively been “paid” because the insurer earmarked payments for those expenses. The court rejected that accounting theory as inconsistent with the contract’s payment-application term (payments applied to accrued service charge, then principal unpaid amount) and with the evidence showing MFA actually paid the subcontractors (Florcraft and Franklin & Associates). The decision reinforces a practical construction principle: earmarks in insurer communications do not necessarily control the contractual allocation of payments once the insured pays the contractor under the contract’s own terms.

E. Subcontractor handling fee: enforceable “cost plus” structure tied to management responsibility

The court upheld MFA’s 15% charge for managing Taylored Restoration because the contract stated MFA would bill “[c]ost plus 15 percent for subcontracted expenses,” and because the record supported that MFA managed Taylored Restoration on-site at the church’s request. Importantly, the court found it “immaterial” that Taylored Restoration was initially retained by the church rather than directly subcontracted by MFA, reasoning that MFA’s project-control responsibilities made the arrangement functionally equivalent for risk and management burden.

F. Counterclaims: oral promise, completion obligation, and good faith

• Oral promise and indemnity: The superior court construed Foster’s oral promise as a promise that MFA would not cause the church to incur out-of-pocket expenses beyond what the insurer covered—not a promise never to sue. Because Church Mutual entered an agreement to “defend and indemnify” the church, the court concluded MFA did not breach the promise by suing to obtain payment. The Supreme Court acknowledged one timing error (the complaint preceded the indemnity agreement) but held it harmless because the interpretive and damages analysis did not depend on that sequencing.
• Nonpayment excused completion: With substantial unpaid invoices for completed work, the court applied Restatement § 237 and Com. Recycling Ctr., Ltd. v. Hobbs Indus., Inc. to hold MFA could suspend performance, defeating the church’s “failure to restore pre-loss condition” breach theory.
• Good faith and fair dealing: The church argued MFA acted in bad faith by delaying documentation to the insurer, pointing to Foster’s deposition answer (“No”) to a question about good faith. The court treated actual reasonableness and ultimate performance as the key inquiry, crediting testimony about unclear/contradictory insurer demands and MFA’s eventual production of narratives and supporting documentation. Under Kimp v. Fire Lake Plaza II, LLC and the clearly-erroneous standard, the finding of no breach was affirmed.

G. Waiver and the interest-rate statute

The fee/interest portion is doctrinally sharp: the court enforced waiver under Taylor v. Wells Fargo Home Mortg. and Johnson v. State because the church did not oppose MFA’s motions or seek reconsideration. The court also added that AS 45.45.010(b)’s 10% cap did not apply because contracts exceeding $25,000 are exempt—an important statutory backstop even if waiver had not applied.

3.3. Impact

• Practical evidentiary lesson for construction cases: The decision underscores that a contractor can prove “reasonable and necessary” damages through credible testimony—sometimes even a single witness—without perfect documentation (Griffith v. Hemphill), especially in a bench trial where credibility findings are hard to overturn.
• Do not litigate through letters: Parties cannot convert counsel correspondence into substantive proof if admitted only for a limited purpose; the hearsay boundary can decide classification/rate disputes when live testimony is thin.
• Insurance friction does not rewrite the contract: Insurer objections, earmarks, and documentation demands do not necessarily alter payment allocation, subcontractor responsibility, or compensability of insurer-facing administrative work if the contract assigns those roles and allows those charges.
• Nonpayment as an excuse to stop work: The opinion reiterates a contractor’s ability to suspend performance when the owner materially fails to pay, limiting owner counterclaims based on incomplete punch-list items.
• Procedure matters for fees and interest: The waiver holding is a direct warning: failure to oppose post-judgment motions in the trial court can forfeit appellate review—particularly consequential where contract provisions set high interest rates and fee-shifting.

4. Complex Concepts Simplified

• “Reasonable and necessary” costs: In repair/restoration contracts tied to an insured loss, the contractor must show the amounts claimed are sensible (reasonable) and actually required (necessary) to accomplish the restoration, not merely that the contractor billed them.
• “Preponderance of the evidence”: The contractor wins on damages if it is more likely than not that the claimed amounts meet the legal standard.
• “Clearly erroneous” review: On appeal after a bench trial, factual findings stand unless the appellate court is firmly convinced the trial judge made a mistake—especially on credibility.
• Extrinsic evidence: Evidence outside the written contract (testimony about negotiations, oral promises, context) used to interpret meaning when the writing is susceptible to more than one reasonable interpretation.
• Hearsay and limited admission: A document may be admitted only to show something like “the insurer’s position,” but not to prove the facts asserted inside it (e.g., “this worker was a lead carpenter”).
• Indemnify: An agreement where a third party (here, the insurer) promises to cover losses and defense costs—central to the court’s view that the church did not “actually sustain” the claimed damages from being sued.
• Implied duty of good faith and fair dealing: A background rule in every contract requiring honest, fair, and reasonable performance that does not deprive the other party of the contract’s benefits.
• Waiver (appellate): If you do not raise an objection at the proper time in the trial court—such as opposing a motion for prejudgment interest or fees—you may lose the right to complain about it on appeal.

5. Conclusion

Although nonprecedential, the opinion offers a coherent, practice-relevant synthesis of Alaska contract and damages principles in a common setting: post-loss restoration where an insurer’s payment decisions drive conflict between owner and contractor. The Supreme Court largely deferred to trial-level credibility findings, accepted that testimony (even without perfect documents) can establish reasonable-and-necessary repair damages, enforced contract terms allocating insurer-facing work and subcontractor handling, and treated owner nonpayment as excusing the contractor’s remaining performance. Procedurally, the decision’s sharpest warning is that failing to oppose fee and prejudgment-interest motions in the superior court can waive appellate review—leaving contract-based interest and fee-shifting provisions fully operative.