INTERACTION BETWEEN CGL INSURANCE, OCIP, AND SUBCONTRACTOR DEFAULT INSURANCE

imagesHere is a great opinion and insurance coverage dispute about the interaction between a CGL policy, and particularly one provided under an Owner’s Controlled Insurance Program, and a subcontractor default insurance policy / subguard policy. 

 

In Pavarani Construction Co. v. Ace American Insurance Co., 2015 WL 6555434 (S.D.Fla. 2015), a general contractor constructed a high-rise condominium project.  The general contractor and subcontractors were enrolled in the Owner’s Controlled Insurance Program (“OCIP”).  This meant the general contractor and the subcontractors had the same CGL insurer.   In addition, and outside of OCIP, the general contractor had subcontractor default insurance which is insurance a general contractor maintains to insure the risk of subcontractor default (and, really, catastrophic subcontractor default).

 

Post-construction, it was discovered that that the structural shell subcontractors the general contractor hired to (a) install the concrete masonry units and (b) the cast-in-place concrete, performed their work defectively.  Specifically, reinforcing steel required to be installed within the concrete masonry units or cast-in-place concrete was omitted or improperly installed.    These deficiencies resulted in excessive movement of building components.  This movement caused stucco to debond, cracking in the walls, cracking of cast-in-place columns, beams, and shearwalls, and cracking in the mechanical penthouse enclosure on the roof that then resulted in water intrusion.

 

Upon discovering the deficiencies and/or resulting damage, the owner of the Project put the general contractor on notice.  The general contractor notified its subcontractors.  The general contractor (and subcontractors) sought indemnification under the CGL policy within OCIP. (Remember, with an OCIP policy, it is the same CGL insurer that covers all enrolled entities.)  The CGL carrier, however, denied coverage.  This resulted, applicable to the case, in the concrete masonry unit subcontractor defaulting on its subcontract because it was unable to perform repairs to its deficient work and cover the resulting damage without the CGL insurance proceeds.  As a consequence, the general contractor submitted a claim to its subcontractor default insurance policy to recover money to fund the repairs that were in excess of $25 Million.  The general contractor also worked out a deal with its subcontractor default insurance policy that it would pursue the CGL carrier for reimbursement.

 

The general contractor then sued the CGL insurer for indemnification by asserting a breach of contract claim and a declaratory relief claim against the insurer. 

 

RESULTING DAMAGE

 

The insurer argued that there was no coverage because there is no coverage under the CGL policy for the general contractor repairing defective work.   This is true, BUT “if the defective work causes damage to otherwise nondefective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the [mechanical] penthouse enclosure, and cracking in the critical concrete structural elements…[the general contractor] is entitled to coverage for the repair of that non-defective work.”  Pavarani, supra, at *4.   In other words, while repairing the defective work would NOT be covered, repairing damage resulting from the defective work WOULD be covered.

 

In discussing coverage for resulting damage, the court relied on a recent Eleventh Circuit Court of Appeals case, Carithers v. Mid-Continent Casualty Co., 782 F.3d 1240 (11th Cir. 2015).   This case is actually a very important case because it held “the complete replacement of defective subcontractor work may be covered when necessary to effective repair ongoing damage to otherwise non-defective work.”  Pavarani, supra, at *4.   (Please review the specifics of this case here).  Basically, if replacement of potentially defective work is necessary to repair resulting damage, then such replacement of the defective work would be covered under the policy. For instance, if you had to remove (or rip-and-tear out) defective work in order to fix the resulting damage, then such removal would be covered.

 

Here, it was clear that the defective work caused resulting damage triggering the CGL policy’s obligation to indemnify the general contractor and applicable subcontractors.

 

“OTHER INSURANCE” PROVISION

 

The CGL policy contained an “Other Insurance” provision.  This provision means that the policy will operate as excess (not primary) insurance over any other available insurance.  This provision is in virtually every CGL policy and in many other types of insurance policies such as a subcontractor default insurance policy.  The “Other Insurance” provision applies “when two or more insurance policies are on the same subject matter, risk and interest.”  Pavarani, supra, at *5.

 

The CGL insurer argued that based on this “Other Insurance” provision, the general contractor’s subcontractor default insurance should operate as the primary insurance with it serving as any excess insurance.  The court correctly dismissed this argument since a CGL policy and subcontractor default insurance policy insure completely different business risks.   Besides, the subcontractor default insurance policy insures the general contractor for a subcontractor default and does not insure a subcontractor for its default. 

 

Furthermore, the court held:

 

Courts disregard ‘Other Insurance’ provisions where, as here, there is a contractual right of indemnification between the parties insured by the relevant policy.  Here, AWS [concrete masonry subcontractor] contracted to indemnify Plaintiff [general contractor] for damages resulting from its work and Defendant [CGL insurer] insured AWS [per OCIP] for claims of property damage.  Therefore, Defendant cannot utilize the ‘Other Insurance’ provision to shift the loss.

Pavarani, supra, at *5 (internal citation omitted).

 

ATTORNEY’S FEES

 

Florida Statute s. 627.428 authorizes attorney’s fees against an insurer in an insurance coverage case.  Since the general contractor (insured) prevailed, it was entitled to its reasonable attorney’s fees.

 

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.

 

WHAT TRIGGERS A LIABILITY INSURER’S DUTY TO DEFEND

acParties in construction absolutely need to understand what triggers the duty of a liability insurer to defend a lawsuit. This needs to be understood not only by the insured-party being sued, but by the entity suing the insured-party. A liability insurer’s duty to defend its insured in a lawsuit is broader than its duty to indemnity its insuredKeen v. Florida Sheriff’s Self-Insurance, 962 So.2d 1021, 1024 (Fla. 4th DCA 2007). The duty to defend is based on allegations in the complaint if the allegations potentially bring the claim within the policy’s coverageId.; Pennsylvania Lumbermens Mut. Ins. Co. v. Indiana Lumbermens Mut. Ins. Co., 43 So.3d 182, 186 (Fla. 4th DCA 2010). “Once the insurer’s duty to defend arises [based on the allegations in the underlying complaint], it continues throughout the case unless it is made to appear by the pleadings that the claims giving rise to coverage have been eliminated from the suit.”  Pennsylvania Lumbermens, 43 So.3d at 186 quoting Baron’s Oil Co. v. Nationwide Mut. Ins. Co., 470 So.2d 810, 815 (Fla. 1st DCA 1985).

 

The recent opinion in Nationwide Mutual Fire Ins. Co. v. Advanced Cooling and Heating, Inc., 38 Fla. L. Weekly D2256a (Fla. 4th DCA 2013), demonstrates an insurer denying the duty to defend because the allegations against the insured did not potentially fall within the policy’s coverage. In this case, a service HVAC contractor was contacted because of a residential owner’s problem with an existing air conditioning system. The owner agreed to pay the HVAC contractor to install a new compressor. However, after the compressor was installed, the owner realized this did not cure his air conditioning problems and decided to stop the payment to the contractor. The HVAC contractor sued the owner and the owner counterclaimed asserting that the HVAC contractor breached the contract by failing to properly inspect his air conditioning system which resulted in unnecessary repair. The HVAC contractor tendered the counterclaim to its CGL carrier to defend it; the insurer denied coverage since the allegations in the complaint did not potentially trigger policy coverage.

 

The HVAC contractor retained counsel and successfully prevailed against the owner’s counterclaim. It also filed a lawsuit against its CGL insurer for a declaratory judgment that its insurer had a duty to defend it. The trial court agreed with the HVAC contractor and awarded fees and costs against the insurer pursuant to Florida Statute 627.428. (This statute allows for an insured to recover its attorneys’ fees and costs if it obtains a judgment against its insurer.)

 

The Fourth District, on appeal, reversed finding that the insurer did not have a duty to defend based on the owner’s allegations in the complaint. As the Fourth District found: “The [CGL] insurance policy issued to Advanced [insured-contractor] covers “bodily injury” or “properly damage” resulting from an “occurrence” pursuant to the policy definitions. The [residential owner’s] breach of contract claim alleges only that an improper or unneeded repair resulted in an unnecessary $438 expense to the customer. There are no allegations of bodily injury or property damage at all.”  Advanced Cooling and Heating, supra.

 

The insured-contractor tried to argue that the residential owner claimed that it installed the compressor in an unworkmanlike manner that caused a leak in the air conditioning system that damaged the compressor. However, the Fourth District shot this down because damage to the compressor or the air conditioning system was not resulting damage or property damage other than the property being repaired.

 

Liability insurance is not designed to cover the insured’s defective work or damage to the insured’s work caused by the insured. In the residential owner’s underlying claim, there was not personal injury or property damage resulting from the service HVAC contractor’s work. Understanding the duty of a liability insurer to defend a lawsuit should be important to any plaintiff seeking insurance coverage to pay for damage. Likewise, it is important to the insured-contractor that expects or wants its insurer to defend it in what can be a costly litigation.

 

For more information on liability insurance coverage, please see http://www.floridaconstructionlegalupdates.com/cgl-policies-and-the-importance-of-couching-the-claim-to-the-insurer/

 

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.