CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS – COVERED VS. NON-COVERED CGL CLAIMS

If you are a contractor or subcontractor and a construction defect claim is asserted against you, then you have tendered such claim to your commercial general liability (CGL) insurer.  No doubt about it.  In doing so, you have wondered whether your CGL insurer will indemnify you for the damages asserted against you by the third-party.  You have wondered whether the damages asserted against you are covered by your CGL policy.   If you have not wondered and asked these questions, then you should!  Below is a portion of a presentation I recently put on regarding construction defect indemnity obligations under CGL policies and, particularly, covered claims versus non-covered claims.  

 

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Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding CGL insurance. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

IMPACT OF LIS PENDENS ON UNRECORDED INTERESTS / LIENS

Foreclosure-1In a previous article, I discussed the importance of recording a lis pendens in a construction lien foreclosure action.

 

There is another noteworthy point relating to the impact of lis pendens that can provide quite a bit of consternation.

 

Florida Statute 48.23(1)(d) provides:

 

Except for the interest of persons in possession or easements of use, the recording of such notice of lis pendens, provided that during the pendency of the proceeding it has not expired pursuant to subsection (2) or been withdrawn or discharged, constitutes a bar to the enforcement against the property described in the notice of all interests and liens, including, but not limited to, federal tax liens and levies, unrecorded at the time of recording the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice. If the holder of any such unrecorded interest or lien does not intervene in the proceedings and if such proceedings are prosecuted to a judicial sale of the property described in the notice, the property shall be forever discharged from all such unrecorded interests and liens. If the notice of lis pendens expires or is withdrawn or discharged, the expiration, withdrawal, or discharge of the notice does not affect the validity of any unrecorded interest or lien.

 

The language in this statute requires persons with unrecorded interests / liens to intervene in a lawsuit subject to a lis pendens within 30 days or else they are barred from proceeding against the property (unless the property subject to the lis pendens is not foreclosed on or the lis pendens is discharged).  This is a harsh outcome because such a person’s (unrecorded) interest may not accrue until it is already too late—beyond the 30 days of the recording of the lis pendens.

 

The best way to explain the potentially harsh application of this statute is to examine its application in a few cases.

 

In Adhin v. First Horizon Home Loans, 44 So.3d 1245 (Fla. 5th DCA 2010), a lender recorded mortgages associated with a construction loan.  The borrower entered into an agreement to sell parcels and any homes currently built on the parcels.  The parcels were sold, however, the closing agent failed to record the deeds and mortgages associated with the closing, and failed to secure any release from the construction lender as to the parcels that had been sold.   Subsequently, the construction lender foreclosed on its mortgage which included a foreclosure that applied to the parcels that had been sold.  A lis pendens had been recorded.   Approximately two months after the lis pendens was recorded, the purchasers of the parcels recorded their deeds and corresponding mortgages and moved to intervene in the construction lender’s foreclosure lawsuit.   The construction lender opposed the motion to intervene arguing that the purchasers of the parcels failed to timely intervene pursuant to s. 48.23(1)(d) since the lender’s foreclosure action impacted their rights to the parcels they purchased.  The appellate court agreed with the lender finding that the language operates as a nonclaim statute that bars enforcement against the property by a holder of an unrecorded interest (such as the purchasers of the parcels in this case) after the prescribed statutory period (30 days), provided the litigation proceeds to a final judgment and judicial sale of the foreclosed property.  This meant the purchasers of the parcels could not intervene and their rights as it related to their parcels were entirely dependent on whether the construction lender’s foreclosure action proceeded to a final foreclosure judgment and judicial sale of the property (inclusive of their property).  Ouch!!!

 

In Jallali v. Knightsbridge Village Homeowners Ass’n, Inc., 2016 WL 3548843 (Fla. 4th DCA 2016), a homeowner’s lender filed a mortgage foreclosure action and recorded a lis pendens.   While the mortgage foreclosure action was pending, the homeowner’s association recorded a lien for unpaid assessments and moved to foreclose its assessment lien.  The issue was whether the lender’s notice of lis pendens barred the homeowner’s association’s subsequent foreclosure action based on its lien for unpaid assessments.   The appellate court held it did not because the lien was based on a recorded Declaration of Covenants that was recorded prior to the filing of the lis pendens—thus, s. 48.23(1)(d) did not apply because the Declaration was an interest recoded prior to the lis pendens.

 

In Ober v. Town of Lauderdale-by-the-Sea, 2016 WL 4468134 (Fla. 4th DCA 2016), a lender filed a foreclosure action and recorded a lis pendens.  The lender obtained a final judgment in foreclosure.  Subsequent to the final judgment in foreclosure, but before any foreclosure sale, the Town of Lauderdale-by-the-Sea recorded liens against the property for code violations that occurred post-final judgment.  The property was sold at a foreclosure sale and the new owner filed suit to quiet title and remove the Town’s liens.  The appellate court held that s. 48.23(1)(d) does not operate to bar liens that accrue and are recorded AFTER the final judgment.  Hence, recording a lis pendens does not operate to bar liens that occur (accrue) and are recorded post-final judgment but before a foreclosure sale.

 

When it comes to construction projects, sometimes there are multiple construction lien foreclosure actions relating to the same property. All of these foreclosure actions are routinely accompanied by a lis pendens.  Some of these actions could arguably be barred under s. 48.23 since they may be based on liens recorded outside of the 30-day window of the first lis pendens that was recorded.  So, if the initial foreclosure action results in a judicial sale of the property, the subsequently recorded liens on the property whose holder’s failed to timely intervene may be out of luck – they would not be able to foreclose on the same property that was already sold at a judicial sale.  On the other hand, under Jallali, liens relate to a notice of commencement, and similar to a Declaration of Covenants (or Condominium), could be considered a recorded interest.  The notice of commencement would be recorded prior to any construction lien, meaning that any construction lien is not based on an unrecorded interest at the time a lis pendens is recorded.  If this is true, than s. 48.23(1)(d) arguably would not apply to bar any liens that accrue and/or are recorded after 30 days from the initial lis pendens.  To preserve this argument, it is important that liens are recorded within the effective period of a notice of commencement so that the liens can relate back to the date the notice of commencement is recorded. 

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding construction liens and lis pendens. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

KNOW YOUR RIGHTS AS AN INSURED UNDER FLORIDA’S CLAIM ADMINISTRATION STATUTE

UnknownFlorida Statute s. 627.426 is known as Florida’s Claims Administration Statute.   The Claims Administration Statute contains important information relating to your rights as an insured when a claim is asserted against you and you tender that claim to your liability insurer.  Of applicability, s. 627.426 provides:

 

 

 

(2) A liability insurer shall not be permitted to deny coverage based on a particular coverage defense unless:

(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and

(b) Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:

1. Gives written notice to the named insured by registered or certified mail of its refusal to defend the insured;

2. Obtains from the insured a nonwaiver agreement following full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation; or

3. Retains independent counsel which is mutually agreeable to the parties. Reasonable fees for the counsel may be agreed upon between the parties or, if no agreement is reached, shall be set by the court.

 

In short, “[u]nder Fla. Stat. s. 627.426(2), an insurer cannot deny coverage based upon a particular ‘coverage defense’ unless ‘within 30 days after the liability insurer knew or should have known of the coverage defense’ the insurer sends the insured ‘written notice of reservation of rights to assert a coverage defense.’”  See also Mid-Continent Cas. Co. v. King, 552 F.Supp.2d 1309, 1316 (N.D.Fla. 2008) quoting s. 627.426(2).

 

Importantly, an insurer does not need to comply with the Claims Administration Statute if there is no coverage under the liability policy—noncompliance with the Claims Administration Statute does not automatically create insurance coverage that never existed.  See Doe on Behalf of Doe v. Allstate Ins. Co., 653 So.2d 371, 374 (Fla. 1995).  Stated differently, the Claims Administration Statutes does not apply when the insurer is denying coverage because there is a complete lack of insurance coverage under the policy.  See Florida Municipal Ins. Trust v. Village of Golf, 850 So.2d 544 (Fla. 3d DCA 2003).

 

But, the Claims Administration Statute does apply:

 

[W]here coverage exists under an insurance policy, but the insurer seeks to assert a coverage defense. “[T]he term ‘coverage defense,’ as used in section 627.426(2), means a defense to coverage that otherwise exists. We do not construe the term to include a disclaimer of liability based on a complete lack of coverage for the loss sustained.

 

Danny’s Backhoe Service, LLC v. Auto Owners Ins. Co., 116 So.3d 508, 511 (Fla.  1st DCA 2013) quoting AIU Ins. Co. v. Block Marina Inv., Inc., 544 So.2d 998, 1000 (Fla. 1989).

 

Now, assume the insurer timely issues the reservation of rights letter to its insured and will assume the defense for the insured.  The insurer must select mutually agreeable independent counsel as the Claims Administration provides:

 

Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:…3.  Retains independent counsel which is mutually agreeable to the parties. Reasonable fees for the counsel may be agreed upon between the parties or, if no agreement is reached, shall be set by the court.

 

Failure to select mutually agreeable counsel could result in a noncompliance with the Claims Administration Statute, meaning the insurer cannot now rely on a coverage defense to deny coverageSee American Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So.2d 904, 906 (Fla. 4th DCA 1997) (“We find the language of the statute to be clear, and that unilateral retention of counsel by the insurer, which was the very antithesis of a mutual selection, did not comply. We therefore affirm the summary judgment determining that the insurer cannot deny coverage because it violated the statute….”); State Farm Mutual Automobile Ins. Co. v. Brown, 767 F.Supp. 1151, 1153 (S.D.Fla. 2012) (“Section 627.426…states that an insurer may not deny coverage based on a particular coverage defense unless, within 60 days of the receipt of a summons and complaint naming the insured as a defendant, the insurer retains independent counsel which is mutually agreeable to the parties.”)

 

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding construction insurance issues. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.

 

 

SHOULD CGL INSURER HAVE DUTY TO DEFEND INSURED DURING CHAPTER 558 NOTICE OF CONSTRUCTION DEFECTS PROCESS???

UnknownDoes a CGL insurer have a duty to defend its insured-contractor during Florida Statutes Chapter 558 notice of construction defects pre-suit process?  This answer is currently undecided and will be up to the Florida Supreme Court to decide.  (It is on appeal stemming from a federal district court saying that an insurer does not have a duty to defend its insured-contractor in the 558 process based on the definition of the word “suit” in the CGL policy.)

 

Why is this an important issue?

 

The 558 pre-suit notice of construction defects process is designed to facilitate an avenue for construction defect lawsuits to get resolved without having to file a lawsuit or, at least, have issues narrowed before a lawsuit needs to be filed.  (Check here for a summary of the 558 process.)  It requires pre-suit notifications so that implicated parties can become aware of the defects and have an opportunity to inspect the defects / damage, test the defects / damage, and respond to the notice of construction defects; it provides an avenue for beneficial pre-suit discovery.  Through participating in the 558 process, the contractor and/or design professional (and those downstream from them) can:  (i) offer to remedy the defect, (ii) settle the defect, whether through money or a combination of money and repairs, (iii) dispute the defect, or (iv) advise that available insurance proceeds will be determined by its  liability insurer.  See Fla. Stat. s. 558.004.

 

There are definitely some pros and cons to the 558 pre-suit process.  There is no doubt about this.  But, if the insured-contractor’s insurer is not on board with the process, then it invariably will fail (unless the defects are relatively minor in nature).  Why will it fail?  Because 558 notice of construction defect letters can contain an extensive laundry list of defects–some minor, some major and complicated.  This means that the insured-contractor really needs an expert or experts on board to truly analyze these issues from a liability and damages standpoint including the most cost effective approach to remedy the defects and corresponding damage.  This, as you can imagine, is costly.  The insured-contractor also wants to know that if a monetary settlement is made, the settlement includes insurance proceeds for damages covered by the CGL policy.  

 

All of this can really only effectively take place if the insurer defends the insured-contractor in this process to best assess its risk and any forthcoming lawsuit that should (hopefully) nevertheless trigger the insurer’s duty to defend its insured-contractor.   Hence, there is no reason for the insurer not be engaged in the process and defend its insured-contractor, at least under a reservation of rights.  Unfortunately, if the liability insurer disengages from the process and is not willing to defend its insured in the process, then the insured-contractor in many instances is best-off waiting for that lawsuit that will then (a) trigger the insurer’s duty to defend and (b) require the insurer to now incur the costs of the defense, including experts, to defend its insured.  By the insurer not defending its insured-contractor earlier, such as the 558 process, all it is doing is inviting an expensive multi-party lawsuit and not educating itself of the nature of the defects and damage (i.e., its risk assessment) so that efforts can be made to resolve the defect claim, narrow the issues, or develop the framework of the defense.

 

  

Please contact David Adelstein at dma@kirwinnorris.com or (954) 759-0026 or (407) 740-6600 if you have questions or would like more information regarding construction defects. You can follow David Adelstein on Twitter @DavidAdelstein1 and Facebook at Florida Construction Legal Updates.