ILLUSORY INSURANCE COVERAGE: REAL OR UNREAL?

shutterstock_585394823In insurance coverage declaratory relief actions, there are times an insured will argue that the insurance policy coverage is illusory.  Typically, an insured will raise this illusory argument if its insurer is denying coverage based on an exclusion or limitation in the policy.  If a court agrees and deems the coverage illusory, the court will construe the policy to afford coverage to the insured.  This is the obvious value of the argument: coverage!

 

A policy is illusory only if there is an internal contradiction that completely negates the coverage it expresses to provide.”  The Warwick Corp. v. Turetsky, 42 Fla.L.Weekly D1797a (Fla. 4th DCA 2017).    Thus, if a policy grants coverage in one section but then excludes the same coverage in another section, the coverage would be deemed illusory.  Id. quoting Tire Kingdom, Inc. v. First S. Ins. Co., 573 So.2d 885, 887 (Fla. 3d DCA 1990).  An illusory policy was found in the following examples: (a) a policy covered certain intentional torts but then excluded intended acts; (b) a policy covered advertising injury but elsewhere excluded advertising injury; and (c) a policy covered parasailing but excluded watercrafts.  Id. (citations omitted). In all examples, coverage in the policy was completely swallowed up by an exclusion rendering the coverage illusory.  Stated differently, coverage was completely contradicted by an exclusion in the policy rendering the policy absurd.

 

However, if an exclusion or limitation in the policy does not entirely swallow up the coverage, the policy is not illusory.  The Warwick Corp., supra.  For example, if a policy covers advertising injury but excludes advertising injury caused by a violation of law, the coverage is not illusory.   The exclusion does not completely swallow up the coverage as it only excludes advertising injury cased by a violation of law.  Id. (citation omitted). 

 

In The Warwick Corp., the insured argued that the excess commercial property insurance policy that covered four hotels was illusory because its coverage was limited to the value of the hotel, which equaled the amount payable under the primary property insurance policy.  Although the court acknowledged that it would be very rare that the excess policy would ever be triggered for one of the hotels, it held that the policy was not illusory because the limitation did not completely swallow up the coverage (as there was an unlikely circumstance that could trigger coverage for the hotel).  Additionally, the court noted that the insured was a sophisticated entity that paid a minimum premium for minimum coverage under the excess policy for the hotel, meaning it elected to buy the policy and coverage it bought which is a choice it cannot change after-the-fact.

 

As you know from reading my prior posts, insurance coverage is important so make sure you know what risks are covered and what risks are not for your business interests.

 

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.

 

 

 

THE RELEVANCE AND REASONABLENESS OF DESTRUCTIVE TESTING

shutterstock_617053133Destructive testing is a routine investigatory procedure in construction defect disputes.   The destructive testing is necessary to determine liability (causation), the extent of damage, and the repair protocol.   Destructive testing is designed to answer numerous questions:  Why did the building component fail?  Was the building component constructed incorrectly?  What is the magnitude of the damage caused by the failure? What specifically caused the damage?  What is the most effective way to fix the failure and damage?  There are different iterations to the same questions, but in many instances, destructive testing is necessary to answer these questions.

 

Claimants sometimes prohibit destructive testing.  Of course, destructive testing is intrusive.  In many instances, it is very intrusive.  But, this testing is a necessary evil.  Without this testing, how can a defendant truly analyze their potential exposure and culpability?  They need to be in a position to prepare a defense and figure out their liability.  This does not mean destructive testing is warranted in every single construction defect dispute.  That is not the case.   However, to say it is never warranted is irrational. 

 

Florida Statutes Chapter 558 (the pre-suit notice of construction defects process) addresses the issue of destructive testing when parties are participating in this obligatory pre-suit notice of construction defect process:

 

(a) If the person served with notice under subsection (1) determines that destructive testing is necessary to determine the nature and cause of the alleged defects, such person shall notify the claimant in writing.

(b) The notice shall describe the destructive testing to be performed, the person selected to do the testing, the estimated anticipated damage and repairs to or restoration of the property resulting from the testing, the estimated amount of time necessary for the testing and to complete the repairs or restoration, and the financial responsibility offered for covering the costs of repairs or restoration.

(c) If the claimant promptly objects to the person selected to perform the destructive testing, the person served with notice under subsection (1) shall provide the claimant with a list of three qualified persons from which the claimant may select one such person to perform the testing. The person selected to perform the testing shall operate as an agent or subcontractor of the person served with notice under subsection (1) and shall communicate with, submit any reports to, and be solely responsible to the person served with notice.

(d) The testing shall be done at a mutually agreeable time.

(e) The claimant or a representative of the claimant may be present to observe the destructive testing.

(f) The destructive testing shall not render the property uninhabitable.

(g) There shall be no construction lien rights under part I of chapter 713 for the destructive testing caused by a person served with notice under subsection (1) or for restoring the area destructively tested to the condition existing prior to testing, except to the extent the owner contracts for the destructive testing or restoration.

If the claimant refuses to agree and thereafter permit reasonable destructive testing, the claimant shall have no claim for damages which could have been avoided or mitigated had destructive testing been allowed when requested and had a feasible remedy been promptly implemented.

Florida Statute s. 558.004(2).

 

Under this pre-suit process, if a claimant refuses to permit reasonable destructive testing, the claimant shall have no claim for damages which could have been mitigated or avoided had destructive testing been allowed and had a feasible remedy been promptly implemented.  In my opinion, this has very little teeth as it raises too many factual issues such as 1) was the destructive testing reasonable, 2) what damages could have realistically been mitigated and how do you prove this, 3) what is a feasible remedy and how is one to know whether the defendant would have even proposed or implemented a feasible remedy, 4) is the feasible remedy a remedy that mitigates future damage or fully addresses the root of the problem, and 5) what is the quantum of damages that could have been mitigated or avoided.   Establishing the reasonableness of the destructive testing is likely easy as an expert would support this.  But the same expert would have to establish the other requirements as a basis to establish an affirmative defense that some of the claimed damages the plaintiff is seeking could have been mitigated had the claimant allowed pre-suit destructive testing.

 

Oftentimes, however, a defendant wants to undertake certain destructive testing after a lawsuit has been initiated.  What happens if the plaintiff refuses such testing in this scenario?  In a recent products liability case, Westerbeke Corp. v. Atherton, 42 Fla.L.Weekly D1741c (Fla. 2d DCA 2017), a defendant wanted to perform destructive testing on a gas generator that caused an explosion on a boat.  The plaintiff did not want this testing to be performed.   In support of the testing, the defendant relied on a federal district case that applied four factors to consider whether the destructive testing is warranted:

 

1) Whether the proposed testing is reasonable, necessary, and relevant to proving the movant’s case; 2) Whether the non-movant’s ability to present evidence at trial will be hindered, or whether the non-movant will be prejudiced in some other way; 3) Whether there are any less prejudicial alternative methods of obtaining the evidence sought; and 4) Whether there are adequate safeguards to minimize prejudice to the non-movant, particularly the non-movant’s ability to present evidence at trial.

 

 Westerbke Corp., supra, quoting Mirchandani v. Home Depot, U.S.A., Inc., 235 F.R.D. 611, 614 (D.Md. 2006).

 

The trial court did not apply these four factors and denied the defendant’s request to perform destructive testing on the gas generator.  On appeal (through a petition for writ of certiorari), the appellate court reversed.  Unfortunately, the appellate court punted without providing specific guidance as to what standard the trial should follow when granting or denying a request for destructive testing.  The appellate court simply held that the four factors above may provide guidance to the trial court, but are not controlling in Florida.  The appellate court further summarily pointed to the Florida’s Rules of Civil Procedure to address the issue:

 

The Florida law regarding discovery in general provides that a party in a civil case is entitled to discover evidence that is relevant to the subject matter of the case and that is admissible or reasonably calculated to lead to admissible evidence. Fla. R. Civ. P. 1.280(b)(1); Allstate Ins. Co. v. Langston, 655 So. 2d 91, 94 (Fla. 1995). In addition, “[a]ny party may request any other party . . . to inspect and copy, test, or sample any tangible things that constitute or contain matters within the scope of rule 1.280(b) and that are in the possession, custody, or control of the party to whom the request is directed.” Fla. R. Civ. P. 1.350(a)(2). “The discovery rules . . . confer broad discretion on the trial court to limit or prohibit discovery in order to ‘protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.‘ ” Rasmussen v. S. Fla. Blood Serv., Inc., 500 So. 2d 533, 535 (Fla. 1987) (citing Fla. R. Civ. P. 1.280(c)). We conclude that the trial court departed from the essential requirements of the law in failing to apply the proper discovery standard…..

 

 

The four factors outlined above are reasonable factors that comport with Florida law – whether the testing is relevant to the subject matter of the case. The factors provide guidance as to how to determine relevancy of destructive testing during the course of a lawsuit.  Plus, the court can always impose limitations or restrictions to reduce any intrusion and protect the claimant’s interests while allowing testing to be performed.   By the appellate court punting and not even ruling on whether the destructive testing would be relevant in the underlying action, the court is simply inviting another appeal.

 

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.

 

 

GOOD OLE DUTY TO DEFEND

shutterstock_513564982The good ole duty to defend. Certainly, a duty that should not be overlooked.

 

A commercial general liability insurer has two duties to its insured when it comes to third-party claims: 1) the duty to defend its insured and 2) the duty to indemnify its insured.

 

The insurer’s duty to defend its insured will always be broader than its duty to indemnify because this duty is triggered by the allegations in the lawsuit.  (For this precise reason, insurers will oftentimes defend their insured under a reservation of rights.)  The duty to defend is a very important duty as it is the first duty that typically comes into play when a third-party claim / action is initiated against the insured.  Getting the insurer on board to provide a defense is an initial focus. One that cannot be neglected or overlooked.

 

If an insurer denies or refuses to defend its insured, this means the insurer is denying coverage outright.  In other words, the insurer is coming out of the gate denying the duty to indemnify the insured and, as such, denying the duty to defend.  There is no reservation of rights because the insurer is not going to provide a defense based on its denial of coverage.  When this happens, it is imperative that the insured consult with counsel.  Not later or tomorrow or down the road.   But, now!  Immediately.  At a minimum, an insured wants to ensure that its insurer is picking-up the broader duty to defend and needs to make sure its rights are protected and preserved.

 

In Mid-Continent Casualty Company v. Flora-Tech PlantScapes, Inc., 42 Fla. L. Weekly D1649a (Fla. 3d DCA 2017), a general contractor initiated a third-party claim against a landscaper in a personal injury action.  (It is uncertain whether the landscaper was hired by the general contractor or the developer.)  The  landscaper’s commercial general liability insurer denied coverage and, therefore, refused to defend the insured in the lawsuit. As a result, the landscaper initiated a fourth-party claim against its own insurer for coverage seeking a declaration that its insurer had a duty to defend it in the lawsuit and indemnify it for the third-party claims being asserted against it.   Both the landscaper and its insurer filed motions for summary judgment and the trial court declared that the insurer had a duty to defend its insured, but that it was not making a determination as to the insurer’s duty to indemnify.  From the insured-landscaper’s standpoint, this likely was fine because the landscaper was initially looking for a declaration that its insurer had a duty to provide it a defense in the personal injury action.

 

 

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.