A THIRD PARTY SUING A LIABILITY CARRIER

Posted on July 17, 2013July 17, 2013 by Edward Garber

It is important to understand liability coverage, especially if you are a third party seeking liability coverage.

Florida Statute s. 627.4136 provides in material part:

“It shall be a condition precedent to the accrual or maintenance of a cause of action against a liability insurer by a person not an insured under the terms of the liability insurance contract that such person shall first obtain a settlement or verdict against a person who is an insured under the terms of such policy for a cause of action which is covered by the policy.”

Under this statute, a third party cannot sue a liability policy seeking a declaration that there is coverage for its claims without first obtaining a settlement or verdict against the insured of the liability policy. See Lantana Insur., Ltd. v. Thornton, 38 Fla. L. Weekly D1537a (Fla. 3d DCA 2013) (finding that trial court should have dismissed third party’s claim against liability policy where there had been no settlement or verdict against the insured and, thus, no compliance with Fla.Stat. s. 627.4136).

What if the third party is an additional insured under the primary insured’s liability policy? Section 627.4136 has also been referred as the non-joinder statute because even though an additional insured is technically an insured under the liability policy, a claim seeking coverage under the primary insured’s policy should either be stayed or severed from the third party’s claim against the primary insured. The reason is so the availability of insurance has no effect whatsoever on a jury’s determination of the primary insured’s liability and damage. See General Star Indemnity Co. v. Boran Craig Barber Engel Construction Co., Inc., 895 So.2d 1136 (Fla. 2d DCA 2005).

For example, in General Star Indemnity, a general contractor sued its fire sprinkler subcontractor for damages when the fire sprinkler ruptured. In the same lawsuit, the general contractor sued the subcontractor’s liability carrier for a declaratory judgment seeking coverage as an additional insured under the subcontractor’s policy. The insurer moved to sever and stay the claims against it which the trial court denied. On appeal through a petition for writ of certiorari, the Second District, relying on s. 627.4136, reversed the trial court holding that the general contractor’s claims against the subcontractor’s liability carrier should have been severed or stayed from the contractor’s action against its subcontractor.

Although an additional insured (e.g., general contractor) is an insured under a liability policy provided by the primary insured (e.g., subcontractor) and can sue the liability carrier (without first obtaining a settlement or verdict against the primary insured), it should not be able to do so in its action against the primary insured. It would be prejudicial to the primary insured and liability carrier because the jury would know about the availability of insurance. Notwithstanding, there is nothing that would prevent the additional insured from trying to file a separate declaratory action against the primary insured’s liability carrier and at least trying to consolidate the cases for purposes of discovery if the suits remain pending in the same court.

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.

HOMEOWNERS ASSOCIATIONS AND COMMON LAW IMPLIED WARRANTIES

Posted on July 17, 2013July 17, 2013 by Edward Garber

The Florida Supreme Court’s decision in Maronda Homes, Inc. of Florida v. Lakeview Reserve Homeowner’s Association, Inc., 38 Fla. L. Weekly S573a (Fla. 2013) has been a long awaited decision for both homeowners associations and home builders.

This case started when a homeowners association sued the home builder of the residential subdivision for common law breach of implied warranties of fitness and merchantability (also known as the warranty of habitability in the residential context) due to construction defects. The association asserted that infrastructure, particularly as it pertained to the storm water drainage system, was defective and was causing substantial flooding and other damage (e.g., severe soil erosion, damage to roadways, etc.).

The trial court entered summary judgment for the home builder finding that common law implied warranties do not extend to infrastructure, private roadways, drainage systems, retention ponds, or other common locations in a subdivision because these structures (or construction improvements) do not immediately support the homes.

On appeal, the Fifth District reversed the trial court holding that the common law implied warranties are applicable to the facts of the case. The Fifth District maintained that the common law implied warranties “have application to improvements to real property that not only support residences in a structural sense, but also apply to improvements which provide ‘essential services’ for the habitability of homes.” Maronda Homes, supra. Essential services for the habitability of homes include “roads for ingress and egress, drainage systems to divert flooding, retention ponds to correct water flow damage, and underground pipes (whether they be storm water or sanitary sewer pipes) which are necessary for living accommodations.” Id. In other words, the Fifth District held that the common law implied warranties apply to structures / construction improvements in a subdivision that immediately support the homes in the form of essential services. Id.

After the Fifth District’s holding, the Florida Legislature enacted Florida Statute s. 553.835 which it intended to apply retroactively (meaning the homeowners association would have no claims against the home builder in Maronda). This statute was enacted as a reaction to the Fifth District’s ruling to apply common law implied warranties to improvements that support the homes in a subdivision. This statute provided:

“There is no cause of action in law or equity to a purchaser of a home or to a homeowners association based upon the doctrine or theory of implied warranty of fitness and merchantability or habitability for damages to offsite improvements.”

Offsite improvements were defined in the statute as follows:

“(a) The street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is not located on or under the lot on which a new home is constructed, excluding such improvements that are shared by and part of the overall structure of two or more separately owned homes that are adjoined or attached whereby such improvements affect the fitness and merchantability or habitability of one or more of the adjoining structures; and

(b) The street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is located on or under the lot but that does not immediately and directly support the fitness and merchantability of the home itself.”

Based on this new statute, the Florida Supreme Court needed to determine (a) whether the statute applied retroactively and (b) if it did not apply retroactively, do the common law implied warranties apply to structures / construction improvements in a subdivision that immediately support the homes in the form of essential services.

The Florida Supreme Court, agreeing with the homeowners association, held that (a) the statute did not apply retroactively, and (b) the Fifth District’s ruling was correct with their “essential services” test or standard to “determine whether a defect in an improvement beyond the actual confines of a home impacts the habitability and residential use of the home.” Maronda Homes, supra.

However, what the Florida Supreme Court importantly touched upon was the enforceability or constitutionality of Florida Statute s. 553.835 moving forward. Under this new statute, if the homeowners in Maronda sued today, its common law implied warranty claims would be barred by virtue of this statute (since its claims were asserted after the enactment of the statute).

An important portion of the Florida Supreme Court’s opinion provides:

“Article I, section 21 of the Florida Constitution declares the right to access the courts, stating that ‘The courts shall be open to every person for redress of any injury, and justice shall be administered without sale, denial or delay. In Kluger v. White, 281 So.2d 1, 3-4 (Fla. 1973), this Court interpreted the meaning of the phrase ‘redress of any injury.’ It held that where a cause of action exists under the statutory or common law of Florida, the Florida Legislature may not abolish that action unless it provides a reasonable alternative for redress of injuries, or demonstrates an overpowering public necessity for its abrogation and no other means by which to meet that necessity.”

Here, Lakeview Reserve [association] contends that section 553.835 violates article 1, section 21, because it abolishes the cause of action for breach of the implied warranties and fails to provide a reasonable alternative or demonstrate an overpowering public necessity for that abrogation. Maronda Homes…allege that although section 553.835 curtails the cause of action for breach of the implied warranties, it preserves other viable remedies that may exist in tort, contract, or by statute, such as negligence, misrepresentation, and rescission.

Section 553.835 violates the right of access to courts because it attempts to abolish the common law cause of action for breach of the implied warranties for certain injuries to property. In section 553.835(4), the Legislature establishes its intent to abolish some implied warranties by expressly limiting a cause of action for their breach by eliminating “offsite improvements for that action’s scope, even if such improvements impact the on-site habitability of the home….The statute even provides that the purpose of the law is to place limitations on the applicability of the doctrine or theory of implied warranty of fitness and merchantability, and to reject the decision by the Fifth District Court of Appeal in the Maronda case. This is a clear violation of separation of powers because the Legislature does not sit as a supervising appellate court over our district courts of appeal.”

Based on this portion of the decision, a homeowners association that has potential claims for “offsite improvements” after the enactment of s. 553.835 may still have these common law implied warranty claims based on an argument that the statute violates constitutional rights. If the statute is determined to violate constitutional rights by trying to abrogate common law implied warranties, the association will still have to satisfy the “essential services” standard set forth by the Fifth District and approved by the Florida Supreme Court in Maronda.

APPRECIATING THE RISKS OR FRUSTRATIONS OF ARBITRATION

Posted on July 11, 2013July 11, 2013 by Edward Garber

Arbitration, just like litigation, can come with its own risks and frustrations. Once an arbitration award is rendered, the prevailing party will usually file an action or move to compel a circuit court to confirm the arbitrator’s award so that the award is turned into a judgment. However, a party that does not like the arbitrator’s award, will try to move to modify or vacate the award in accordance with Florida’s Arbitration Code (Florida Statutes Chapter 682). Although there are specific statutory grounds in order to move to modify or vacate an arbitrator’s award (and the motion must be filed within a specific window of time – typically, 90 days after delivery of the award), non-prevailing parties will still make an effort to vacate or modify the award with the circuit court within their required time parameters. The bases to modify or vacate an award are different than appellate rights afforded to litigants in court because an arbitration award is not supposed to be vacated or modified if an arbitrator erred as to the law.

The case of Wells v. Castro, 38 Fla. L. Weekly D1509a (Fla. 3d DCA 2013), illustrates certain frustrations. Without going into the factual details of the dispute, an arbitrator entered an award in favor of a claimant (party demanding arbitration) against one respondent (party responding to the demand for arbitration) and against the claimant as to another respondent. All of the parties agreed that the arbitrator is vested with the authority to determine the prevailing party for purposes of being entitled to attorneys’ fees. The respondent that prevailed as to the claimant’s claim wanted to be the prevailing party in order to recover its attorneys’ fees. However, the arbitrator found that neither party was the prevailing party meaning neither the respondent nor claimant would be entitled to recover their attorneys’ fees (as to the claimant’s claim against the prevailing respondent). Notably, under the Florida Supreme Court’s decision in Trytek v. Gale Indus., Inc., 3 So.3d 1194 (Fla. 2009), a court is to look at which party prevailed on the significant issues in the case for purposes of determining the prevailing party and has discretion to determine that there is not a prevailing party; stated differently, there is now uncertainty as to whether a party will be deemed the prevailing party and be entitled to their attorneys’ fees under the “significant issues” standard.

The respondent that prevailed moved the circuit court to essentially modify the arbitration award arguing that the arbitrator erroneously concluded that neither party was the prevailing party and that the respondent should have been deemed the prevailing party because it prevailed as to the claimant’s claims. The trial court granted the motion and deemed the respondent the prevailing party for purposes of being entitled to attorneys’ fees.

On appeal through a petition for a writ of mandamus (in this case, an appeal for the appellate court to order the trial court to confirm the arbitrator’s award), the Third District reversed the trial court maintaining: (a) the parties agreed to have the arbitrator determine the issue of prevailing party for purposes of attorneys’ fees (and need to live by that determination) and (b) an arbitrator’s error of law is not a basis to vacate or modify an award. Thus, if the arbitrator erred in determining the prevailing party under Florida caselaw, the parties need to live with that determination because they agreed to have the arbitrator determine this issue in their arbitration.

While there are certain benefits to arbitration, it can come with its own risks and frustrations. Again, the reasons to modify or vacate the award are limited under Florida statute and not designed to correct an arbitrator’s potential errors in law. Also, if the parties want the arbitrator to determine the prevailing party for purposes of attorneys’ fees (which makes sense since the arbitrator will be the most familiar with the factual nature of the dispute), the parties will more than likely have to live by that determination.

VENUE FOR PAYMENT BOND DISPUTES IN FLORIDA

Posted on July 9, 2013July 9, 2013 by Edward Garber

Two main Florida payment bond statutes are Florida Statute s. 713.23 (payment bonds for private projects) and Florida Statute s. 255.05 (payment bonds for Florida public projects-not federal projects). Both statutes prohibit a payment bond issued after October 1, 2012 from restricting venue. In other words, if the payment bond contains a venue provision after this date, it is not enforceable.

This prohibition is important because there are times where the project is located in a venue that is not where the subcontractor resides and/or is contrary to the venue provision in the subcontract (typically, a venue where the general contractor resides).

It is good practice for the general contractor to include in its subcontract a venue provision that applies to its surety such that the subcontractor must sue the payment bond in the same venue that governs the subcontract. While it is uncertain how the new prohibition from restricting venue in a payment bond will apply in this context, the counter-argument is that the payment bond is not restricting venue, rather the “negotiated” subcontract governs the venue of any and all disputes between the parties including claims against the general contractor’s surety (and the general contractor is indemnifying and defending the surety). Worst case scenario is that the venue provision is deemed inapplicable to the surety. However, courts do not favor splitting causes of action (due to, among other things, the concern for conflicting results over the same facts) and should not favor a subcontractor lawsuit against the general contractor in one venue and a simultaneous subcontractor lawsuit against the general contractor’s payment bond surety in another venue. Indeed, courts have refused to enforce venue provisions in subcontracts in order to avoid splitting of causes of action. See, e.g., Miller & Solomon General Contractors, Inc. v. Brennan’s Glass Co., Inc., 837 So.2d 1182 (2003) (refusing to enforce subcontract venue provision when action as to lien transfer bond was filed in correct venue). Including a venue provision that also covers claims against the payment bond surety is useful in the event the general contractor wants to countersue the subcontractor or simply wants to create an argument that its subcontractor disputes should be confined to its preferred venue versus the subcontractor’s preferred venue.

On the other hand, there are situations where a subcontractor may not want to sue the general contractor and strategically prefers to just sue the payment bond surety. One situation may be the subcontractor knows the general contractor was not paid and the subcontract contains a pay-when-paid provision which would be enforceable as to the general contractor, but not against the payment bond surety. Another situation may be due to the venue provision in the subcontract; the subcontractor prefers to sue in a venue outside of the venue provision in the subcontract and has a better argument around the venue provision if it does not join the general contractor. There is caselaw that supports an argument to sue a payment bond surety in a venue where the subcontractor (lienor) resides that, depending on the dispute, could be appealing to the subcontractor. See, e.g., American Insurance Co. v. Joyner Electric, Inc., 618 So.2d 799 (Fla. 1st DCA 1993) (finding that action under s. 255.05 public payment bond was proper where lienor / subcontractor resided); Coordinated Constructors v. Florida Fill, Inc., 387 So.2d 1006 (Fla. 3d DCA 1980) (finding that venue was proper under s. 713.23 private payment bond action where lienor / supplier resided).

Venue is a pretty heavily litigated procedural strategic issue. Just like any dispute, venue as to a payment bond claim should not be ignored and should absolutely be considered at the onset of a dispute.

For more information on venue provisions, please see:

https://floridaconstru.wpengine.com/venue-provisions-read-what-you-sign/

and

https://floridaconstru.wpengine.com/subcontractors-read-and-understand-the-implications-of-venue-provisions/

TAKING THE TIME TO UNDERSTAND ASSIGNMENT, ASSET-PURCHASE OR ASSUMPTION OF LIABILITY AGREEMENTS TO CREATE ARGUMENTS AGAINST THE ASSIGNEE OR BUYER

Posted on July 6, 2013July 6, 2013 by Edward Garber

Assignment agreements, asset-purchase agreements, or other assumption of obligation agreements (collectively, “Assumption Agreements”) are documents that are not unique to the construction industry. There are numerous corporate and business reasons why these documents are executed, whether it being a contractor selling its assets to another company or assigning receivables or obligations to another contractor for financial reasons. Irrespective of the reason, it is not uncommon for construction contracts to contain an anti-assignment provision that prevents the hired or performing party (e.g., subcontractor) from assigning its rights, obligations, or receivables under the contract without express written consent from the hiring or paying party (e.g., general contractor).

When one of these Assumption Agreements are executed, a dilemma occurs if the assignor / seller (the party assigning its rights and/or selling its assets) is liable to a third party for providing labor, services, or materials on a construction project. There are two major reasons for this dilemma. First, the third party naturally will be concerned over the solvency of the assignor / seller and may want to assert an argument (in successor liability, alter ego, or other) to go after the assignee / buyer (the party receiving the assigned rights and/or buying the assets). Second, the third party may want to maximize potential insurance coverage thinking that the assignee will have separate liability insurance and assert a claim against the assignee / seller.

The new case of The Weitz Company, LLC v. MCM Acquisitions, LLC, 38 Fla. L. Weekly D1472a (Fla. 3d DCA 2013), illustrates this dilemma. In this case, a general contractor was building an assisted living facility and hired a waterproofing subcontractor. Their subcontract contained an anti-assignment clause that prohibited the waterproofing subcontractor from assigning its rights under the subcontract without prior written consent from the general contractor. Notwithstanding, the water proofing subcontractor (“Seller”) sold its assets to another waterproofing company (“Buyer”) as construction was winding down. Under the Buyer and Seller’s asset-purchase agreement, the Buyer expressly assumed the Seller’s obligations under its subcontracts including the Seller’s subcontract with the general contractor for the assisted living facility project. After the closing of the asset-purchase agreement, the Buyer performed punch-list waterproofing work at the project and submitted two payment applications to receive payments for completing the Seller’s subcontract. The anti-assignment provision was not raised by the general contractor when the Buyer was performing punch-list work and/or submitted its two payment applications.

After the project was finished, the owner sued the general contractor and others for water-intrusion related defects. The general contractor filed a third-party claim against the Seller (original waterproofing subcontractor it hired), but did not initiate a claim against the Buyer. This action was settled and included releases by and amongst the Seller, the project owner, and the general contractor. The Buyer was not a party to this settlement and the settlement and release agreement specifically carved out claims the general contractor may have against the Buyer.

The general contractor then sued the Buyer asserting, among other claims, that the Buyer breached the subcontract (and the contractual indemnity obligations) it assumed from the Seller. The Buyer moved for summary judgment arguing: (i) the Seller performed the waterproofing work that the owner alleged was defective; (ii) any work it performed after the closing date with the Seller was minor punch-list work that had nothing to do with the defects alleged by the owner; and (iii) the general contractor was not a third-party beneficiary under its asset-purchase agreement with the Seller. The general contractor opposed the summary judgment contending: (i) the Buyer not only performed punch-list work but performed warranty-related work years after the Buyer and Seller’s closing date; (ii) the Buyer billed the general contractor for completing the Seller’s subcontract; and (iii) the general contractor was sued by the owner, and incurred damages, due to the Buyer’s waterproofing work at the project. The trial court however granted the Buyer’s summary judgment.

The Third District reversed the summary judgment finding an issue of fact precluded summary judgment because the Buyer assumed liabilities under the Seller’s subcontracts after the closing date and the Buyer performed certain work after the closing date.

Although the Buyer argued that the general contractor was not an intended third party beneficiary of the asset-purchase agreement because the general contractor never consented to the assignment, the Third District dismissed this argument. The Third District held that the anti-assignment provision was a matter within the general contractor’s discretion, i.e., the general contractor could unilaterally elect to waive the enforcement of this provision.

A third party (whether an owner against a general contractor or a general contractor against a subcontractor) should not dismiss arguments against an assignee or buyer. The argument can focus on work the buyer performed after it purchased the assets or was assigned certain rights from the seller as was the case in Weitz Company. The argument can focus on language in the Assumption Agreement to understand what liabilities the buyer assumed from the seller. Or, the argument can focus on successor liability, etc. (legal theories not discussed in this article) to establish that the buyer should be liable for ALL of the seller’s liabilities to the third party. This last argument does not appear to be the focus in Weitz Company, nor did it need to be the focus because the seller had separate CGL liability insurance that contributed to an original settlement. However, in certain cases where insurance coverage is not triggered or a concern in the case, such as a payment dispute or when there may not be any resulting damage, the third party will likely want to explore all arguments to ensure the collectibility / recoverability if it prevails on its claims. As shown in Weitz Company, an issue of material fact will preclude a party from being entitled to a summary judgment. With this in mind, there are times when it is worth asserting the claim against the assignee / buyer to create or expose potential liability against the assignee / buyer based on the circumstances and dynamics of the dispute.