CGL INSURER’S DUTY TO DEFEND BROADER THAN DUTY TO INDEMNIFY AND BASED ON ALLEGATIONS IN UNDERLYING COMPLAINT

shutterstock_111496388The duty to defend an insured with respect to a third-party claim is broader than the duty to indemnify the insured for that claim.  The duty to defend is triggered by allegations in the underlying complaint. However, an insurer is only required to indemnify its insured for damages covered under the policy.   A recent case example demonstrating the duty to defend is broader than the duty to indemnify can be found in Southern Owners Ins. Co. v. Gallo Building Services, Inc., 2018 WL 6619987 (M.D.Fla. 2019).  

 

In this case, a homebuilder built a 270-unit condominium project where the units were included in 51-buildings.  Upon turnover of the condominium association to the unit owners, the condominium association served a Florida Statutes Chapter 558 Notice of Construction Defects letter. There was numerous nonconforming work spread out among various subcontractor trades including nonconforming stucco work.  The homebuilder incurred significant costs to repair defective work and resulting property damage, and relocated unit owners during repairs.  The homebuilder then filed a lawsuit against implicated subcontractors.  One of the implicated subcontractors was the stucco subcontractor.

 

 

The stucco subcontractor’s insurer filed an action for declaratory relief claiming it had NO duty to defend or indemnify the subcontractor in the underlying action because the subcontractor had a stucco/EIFS exclusion through an endorsement in its policy, referred tp as the “Exterior Finishing System and Stucco Exclusion.”  The subcontractor’s policy also did not contain a subcontractor exception to the “your work” exclusion.

 

Regarding the elimination of the subcontractor exception to the “your work” exclusion, the Court noted that the elimination of the subcontractor exception was largely irrelevant since the stucco subcontractor was a subcontractor so its work was not the entire project (unlike the homebuilder or general contractors’ work). Rather, the stucco subcontractor’s work was its scope of work and the underlying complaint referenced damages beyond the stucco subcontractor’s own work to other building components.  Thus, based on the allegations in the underlying complaint, the “your work” exclusion was not a basis to deny the duty to defend.

 

Regarding the stucco exclusion, the homebuilder argued that the subcontractor performed work outside of stucco work and the underlying complaint contained allegations unrelated to the application of stucco including framing work, miscellaneous work, and wrapping the buildings.  In other words, the Court did not have sufficient evidence that each allegation of nonconforming work related to the stucco subcontractor related to or arose out of the installation of stucco to trigger the full application of the stucco exclusion. Thus, this was not a basis to deny the subcontractor the duty to defend.

 

At this time, it is uncertain the magnitude of covered damages under the policy in light of the stucco exclusion and property damage resulting from the subcontractor’s defective work (certainly an issue to consider).  However, the insurer owed the subcontractor a duty to defend based on the allegations in the underlying complaint demonstrating the importance of crafting allegations in the underlying complaint.   The insurer’s indemnification obligation for covered damages, however, may be a different story and it is uncertain how a stucco subcontractor could have an endorsement that contains a stucco exclusion.  Take a look at your policy and, particularly, endorsements that further restrict coverage to ensure you do not have an exclusion relating to your own scope of work that would negate the value of the policy to you for property damage claims.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

APPLICATION OF FRYE TEST TO DETERMINE ADMISSIBILITY OF EXPERT

shutterstock_96050015Florida went back to the Frye test/standard, instead of the Daubert test utilized in federal court, to determine the admissibility of expert testimony.  The Frye test is more favorable to plaintiffs because it applies when an expert renders an opinion based on new or novel scientific principles.  See D.R. Horton, Inc. v.  Heron’s Landing Condominium Ass’n of Jacksonville, Inc., 44 Fla.L.Weekly D109b (Fla. 1st DCA 2018) (“The supreme court has described the Frye test as one in which the results of mechanical or scientific testing are not admissible unless the testing has developed or improved to the point where the experts in the field widely share the view that the results are scientifically reliable as accurate. Stated differently, under Frye, the proponent of the evidence has the burden of establishing by a preponderance of the evidence with the general acceptance of the underlying scientific principles and methodology.  However, as stated, the Frye standard only applies when an expert attempts to render an opinion that is based upon new or novel scientific principles.”). 

 

In D.R. Horton, Inc., a condominium association sued the developer and general contractor (same entity) for construction defects that included claims in negligence, violation of building code, and breach of statutory warranties.  The developer/general contractor moved in limine / to strike the association’s experts under, at the time, a Daubert analysis, but which became a Frye analysis during the pendency of the appeal.  The expert opined as to construction defects and damage and the appropriate repairs – really, no different than any construction defect dispute, from what it appeared. The trial court denied the motion and during trial the experts testified and a sizable damages judgment was entered against the developer/contractor prompting the appeal.  One issue on appeal was the admissibility of the expert’s opinion.  The appellate court noted that a Frye analysis is not necessary because the experts used a scientifically reliable and peer-reviewed methodology.  

 

A smart tactic, and I mean SMART tactic, that the association’s counsel seemed to utilize was to engage a third-party engineer to testify during a hearing that the methodology used by the association’s experts was industry standard methodology and generally accepted. Thus, the opinions were not based on new or novel scientific principles and the appellate court affirmed the trial court’s denial of the contractor/developer’s motion in limine.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

PAROL EVIDENCE CAN BE USED TO DEFEAT FRAUDULENT LIEN

shutterstock_162610553Parol or extrinsic evidence can be used to defeat an argument that a lien is a fraudulent lien.  And, just because a lien amount exceeds the total contract amount does not presumptively mean the lien is willfully exaggerated or recorded in bad faith.  Finally, a ruling invalidating a construction lien can create the irreparable harm required to support a petition for writ of certiorari.  All of these issues are important when dealing with and defending against a fraudulent lien and are explained in a recent case involving a dispute between an electrical subcontractor and its supplier.

 

In Farrey’s Wholesale Hardware Co., Inc. v. Coltin Electrical Services, LLC, 44 Fla.L.Weekly D130a (Fla. 2d DCA 2019), there were various revisions to the supplier’s  initial purchase order, both from a qualitative and quantitative perspective, and a ninth-revised purchaser order was issued and accepted.  The electrical subcontractor claimed that deliveries were late, unassembled, and did not include the required marking (likely the UL marking), to pass building inspections.  As a result, the subcontractor withheld money from the supplier and the supplier recorded a lien in the amount of $853,773.16 and filed a foreclosure lawsuit.

 

The subcontractor moved for a motion for partial summary judgment that the lien should be deemed a fraudulent lien and invalid because it was overstated by approximately $32,000.  The subcontractor argued that taking the amount of the ninth-revised purchase order and deducting the undisputed amount paid to the supplier would result in a lien amount of $825,417.06, approximately $32,000 less than the supplier’s lien amount.  The supplier, through an affidavit, argued this delta is nothing more than a good faith dispute and can be explained because the total cost of materials furnished to the job site was based on its initial purchase order and its revised purchase order.  The subcontractor countered that the affidavit is  parol evidence and should be disregarded because the parties agreed on the total amount of the supplies through the ninth-revised purchase order and the supplier was trying to create a new contract through the affidavit.  The trial court agreed and found the lien fraudulent, and issued a partial summary judgment invalidating the supplier’s lien.  The subcontractor moved for a petition of writ of certiorari.

 

Parol Evidence Rule

 

“[T]he parol evidence rule prevents the terms of a valid written contract or instrument from being varied ‘by a verbal agreement or other extrinsic evidence where such agreement was made before or at the time of the instrument in question.’” Farrey’s Wholesale, supra(citation omitted). The parol evidence rule, however, is not applied to exclude evidence of subsequent agreements modifying the original agreement, or of fraud, accident, or mistake.  Id.  

 

The appellate court, reversing the trial court, found that the parol evidence rule “does not bar extrinsic evidence offered for the purpose of showing whether the filing of a construction lien was made in good or bath faith.  This is a separate and distinct inquiry that does not trigger the parol evidence rule.”   Hence, the appellate court maintained there were disputed issues of material fact as to whether the lien was fraudulent.

 

The appellate court further found that the trial court erred in finding the lien fraudulent in that just because the lien amount exceeded the ninth-revised purchase order does not mean it was willfully exaggerated.  In other words, even if the ninth-revised purchase order was the complete agreement, the lien, in of itself, is not willfully exaggerated just because the lien exceeded the total amount of the contract. 

 

Appeal of Lien

 

On another important point in this case, because the appeal was based on a writ of certiorari (versus a final appeal of a final dispositive judgment), there had to be irreparable harm to justify the basis of the appeal.  The appellate court held there would be irreparable harm if the supplier had to wait until the end of the litigation to appeal because its judgment would then be unsecured (it would be without a remedy to pursue its lien which had been transferred to a lien transfer bond).  See Farrey’s Construction Wholesale, supra  (“This means that on remand [back to the trial court], all matters pertaining to Farrey’s construction lien, which includes the status of the lien transfer bond, will be returned to their prejudgment postures.”). 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

SUPREME COURT HOLDS ARBITRATOR CAN FULLY DECIDE THRESHOLD ARBITRABILITY ISSUE

shutterstock_1018025605The United States Supreme Court recently decided parties to a contract can agree, under the Federal Arbitration Act, an arbitrator, rather than a court, can fully resolve the initial arbitrability question.  Henry Schein, Inc. v. Archer and White Sales, Inc., 2019 WL 122164 (2019).  The arbitrability question is whether the dispute itself is subject to arbitration under an arbitration provision.  Parties that do not want to arbitrate try to circumvent this process by filing a lawsuit and asking the court to determine the threshold arbitrability question.  

 

In Henry Schein, Inc., the contract at-issue provided:

 

This Agreement shall be governed by the laws of the State of North Carolina.  Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.  The place of arbitration shall be in Charlotte, North Carolina.

 

The plaintiff in this case asserted a claim for injunctive relief (among other claims) and argued that, therefore, the dispute is not subject to arbitration based on the exception in the provision.  The initial, threshold issue became whether the dispute was subject to arbitration and, importantly, who decides this issue. The Court further looked at whether a trial court can resolve this issue under the “wholly groundless” exception, i.e.,the court can decide the issue if the argument for arbitration is wholly groundless.  

 

The Supreme Court held that, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.  In those circumstances, a court possesses no power to decide the arbitrability issue.  That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc, supra, at *4.  Through this ruling, the Court rejected the wholly groundless exception that would allow a trial court to rule on an threshold arbitrability question if the argument for arbitration is wholly groundless. 

 

The Court did not rule as to whether the arbitration provision at-issue delegated the arbitrability question to the arbitrator.   However, the American Arbitration Association’s rules provide that arbitrators have the power to resolve such threshold arbitrability questions so there is an argument that the provision through reference to the American Arbitration Association gave this authority to the arbitrator.  But, the best thing to do, as always, is to be clear.   Include language in the arbitration provision that specifically states that an arbitrator is authorized to decide the arbitrability of issues, particularly if it is your arbitration provision and you want disputes resolved by arbitration.  Conversely, if you want the initial, threshold issue of arbitrability to be decided by a court, make sure to specify that in the provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.