LIABILITY INSURER’S DUTY TO DEFEND INSURED IS BROADER THAN ITS DUTY TO INDEMNIFY

When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify.   This broad duty to defend an insured is very important and, as an insured, you need to know this.   “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.”  Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted).  This means:

 

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists.  And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless.  As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.  Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

 

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor.   The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam.  The owner sued the general contractor and the general contractor third-partied in the subcontractor.  However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy.  In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.  

 

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam.   The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint.  (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage.  However, this is a very narrow exception that the court was not going to apply here.) 

 

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.

 

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.

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.

 

CGL POLICIES AND THE PROFESSIONAL LIABILITIES EXCLUSION

shutterstock_1140059885Commercial general liability (CGL) policies for contractors traditionally contain a professional liabilities exclusion.  This exclusion is generally added through a specific endorsement to eliminate coverage for professional services. Read the endorsement   The point of the exclusion, in a nutshell, is simply to eliminate a CGL policy for a contractor serving as a professional liability policy. 

 

Contractors need to appreciate a professional liabilities exclusion added through endorsement because oftentimes there are delegated design components they are responsible for. Perhaps the contractor value engineered a system and is responsible for engineering and signing and sealing the engineered documents (through its subcontractor) associated with that system.  Perhaps there is a performance specification that requires the contractor to engineer a system.  Perhaps there is a design-build component.  Regardless of the circumstance, this professional liabilities exclusion can certainly come into play, particularly if a defect is raised with the design or professional services associated with the engineered system.

 

In a non-construction case dealing with a professional liabilities exclusion, the Second District Court of Appeal in Alicea Enterprises, Inc. v. Nationwise Ins. Co. of America, Inc., 43 Fla.L.Weekly D1713b (Fla. 2d DCA 2018) held:

 

Whether a professional service has, or has not, been rendered is a fact-intensive analysis.  Thus, when deciding whether an act arises out of the rendering of or failure to render a professional service, the court must focus on the act itself and not the character of the individual performing the act.  The act from which the claim arises must be related to a professional service that requires the use of professional judgment or skill. 

 

Id. (internal citations omitted).

 

 

In this case, the insurer issued a CGL policy to a pharmacy.   The pharmacy was sued in a negligence action.  The pharmacy’s CGL insurer filed an action for declaratory relief claiming it had neither a duty to defend nor indemnify its insured (the pharmacy) since the underlying claims arose out of professional services and the CGL policy contained a professional liabilities exclusion.

 

The Second District maintained, as to the insurer’s duty to defend its insured, that the insurer had a duty to defend the pharmacy (insured) in the negligence action because the allegations in the underlying complaint could be deemed unrelated to professional services. 

 

The Second District maintained, as to the insurer’s duty to indemnify its insured, that this duty is more fact-intensive and without sufficient discovery, there was a genuine issue of material fact as to whether the evidence brought the pharmacy’s conduct within the meaning of the professional liabilities exclusion in the CGL policy.

 

Here, while the pharmacy will get the benefit of the insurer’s duty to defend since that is triggered by the underlying complaint, the duty to indemnify is different and triggered by the facts.  It is likely that the facts in this case trigger the application of the professional liabilities exclusion, meaning the CGL insurer does NOT have a duty to indemnify the insured for the damages proven against it.  Not the situation an insured wants to be in!

 

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.