Construction defect cases most always involve CGL insurance consideration and claims. And they should. A contractor that received a defect claim from an owner (developer or association) will want to notify their CGL insurer to provide a defense and coverage. The contractor will also want to notify the responsible subcontractors that may be liable to the contractor for the owner’s claims as well as the subcontractors’ CGL carriers. The contractor will do so claiming the responsible subcontractor is responsible to indemnify the contractor for damage arising out of the subcontractor’s work pursuant to their contractual indemnification provision. The contractor will also claim that it is an additional insured under the subcontractor’s CGL policy (as required by the contract and hopefully confirmed by the additional insured endorsement) and the carrier is responsible for contributing to its defense and providing coverage for the negligence caused by the carrier’s insured-subcontractor.
The Middle District opinion in Redfish Keys Villas Condominium Association, Inc. v. Amerisure Insurance Co., 2014 WL 92710 (M.D.Fla. 2014), illustrates certain CGL considerations. In this dispute, a general contractor was hired by a developer to construct a condominium. After the condominium was turned over to the association, leaks were discovered. The association claimed the leaks originated from defects. The association sent a construction defects notice to the contractor (pursuant to Florida Statutes Chapter 558) and the contractor failed to respond. The association then filed suit against the contractor. For whatever reason, although the contractor’s counsel filed a notice of appearance in the case, nothing else was done and a final default judgment was entered against the contractor for the damages the association incurred in repairing the leaks.
After the judgment was obtained, the contractor’s CGL insurer reached out to the association, apparently not realizing a judgment had been entered against its insured. Upon receiving a copy of the judgment, the insurer denied coverage based on the contractor’s failure to provide notice of the claim to the insurer. However, although not discussed in the opinion, the insurer knew about the contractor’s claim as it was the one that followed-up with the association. Most likely, the association, as it should, notified the contractor’s carrier of the defect claims although it is uncertain whether they notified the carrier of the lawsuit. Or, perhaps, the contractor, as it should, notified its carrier when it received the construction defects notice from the association.
The association filed suit against the contractor’s insurer in federal court for a declaratory action and for the insurer’s breach of an intended third party beneficiary contract, that being the CGL insurance policy was for the benefit of third parties such as the association. The insurer moved to dismiss the breach of intended third party beneficiary contract claim. The Middle District denied the insurer’s motion to dismiss. The Middle District found that as a condition precedent to the association suing the insurer, the association needed to comply with Florida Statute s. 627.4136 which essentially requires a third party not insured by a liability insurer to first obtain a settlement or verdict against the insured as a condition precedent to suing the insurer for coverage under the policy. The association complied with this condition precedent as it sued the insured-contractor and obtained a judgment. The Middle District further found that in Florida, “an injured third party may maintain a cause of action against an insurer as an intended third party beneficiary under a liability insurance policy.” Redfish, supra, at *3 citing Shingleton v. Bussey, 223 So.2d 713 (Fla. 1969). In other words, the MIddle District found that as long as the association complied with Florida Statute s. 627.4136 (the condition precedent to a third party suing a liability insurer statute) it could maintain a breach of an intended third party beneficiary contract claim against the CGL insurer.
When representing the owner, it is good practice to notify the contractor’s insurer of not only the defect claim but of any potential lawsuit (to avoid any lack of notice coverage defense, especially if the contractor does not have an attorney on board at the time of the lawsuit). Further, when representing the contractor, it is good practice to not only notify the contractor’s CGL insurer, but to notify the responsible subcontractors’ carriers of the same (based on additional insured and indemnity requirements). And, irrespective of a subcontractor’s insurer’s position, it is good practice to keep the insurers apprised of any third party lawsuit the contractor files against the insured-subcontractors (again, to avoid any lack of notice coverage defense). While the Middle District in Redfish only entered a ruling on the insurer’s motion to dismiss at this stage, the insurer’s lack of notice coverage defense will certainly be a defense that the insurer relies on in the dispute.
Insurance considerations are a crucial part of construction defect claims. Understanding how to preserve rights and navigate through the process cannot be overstated.
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