WHAT TRIGGERS A LIABILITY INSURER’S DUTY TO DEFEND

Posted on October 31, 2013October 31, 2013 by Edward Garber

Parties 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 insured. Keen 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 coverage. Id.; 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 https://floridaconstru.wpengine.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.

A CERTIFICATE OF INSURANCE IS NOT INSURANCE COVERAGE

Posted on October 29, 2013October 29, 2013 by Edward Garber

Owners always want to see the certificate of insurance (“COI”) from the general contractor. The general contractor wants to see the COI from its subcontractors. Parties want to see the COI from an entity they are hiring to confirm they have applicable insurance (proof of insurance) and so that the COI identifies them as an additional insured. (Importantly, just because an entity is listed as a “certificate holder” on the COI does not make them an additional insured; it just means they are being provided proof of the insurance identified in the COI. This is not additional insured status!) Without seeing the actual policy, specifically with respect to a liability policy, it is uncertain (a) what that entity is actually covered for and (b) what entities would be covered as an additional insured under the liability policy.

The summary judgment opinion in Bluewater Builders, Inc. v. United Specialty Ins. Co., 2013 WL 5670957 (S.D.Fla. 2013), demonstrates that a COI is not all it is cracked up to be. In this case, a general contractor sued its subcontractor’s CGL carrier for indemnification. The general contractor did so after it obtained a judgment against the subcontractor for water damage arising from the subcontractor’s work at a commercial high-rise officer tower. (Under Florida Statute s. 627.4136, the general contractor could not sue the subcontractor without first obtaining a settlement or verdict against the subcontractor-insured.) The insurer moved for summary judgment because the insured-subcontractor’s policy provided on the Declarations page that the policy covered the subcontractor’s operations for the following classification: “carpentry-construction of residential property not exceeding three stories in height.” Buewater Builders, 2013 WL at *1. The Declarations page further provided that coverage was strictly limited to this classification and that no coverage would be provided for any other classification. The policy did not cover the subcontractor’s work at a commercial high-rise tower.

The general contractor argued that the insurer should be estopped from relying on the exclusionary language in the policy because it received a COI from the subcontractor and it detrimentally relied on this COI in hiring the subcontractor. Specifically, the general contractor relied on the doctrine of promissory estoppel which applies when a “plaintiff detrimentally relies upon a defendant’s promise, the defendant should have expected the promise to induce reliance, and injustice can only be avoided by enforcement of the promise.” Bluewater Builders, 2013 WL at *3. However, the general contractor could not point to any promise the insurer actually made because the insured-subcontractor was the one that transmitted the COI. And, the COI did not state that it would insure the subcontractor’s work for the project; it was simply evidence of insurance without any “promise.” In fact, the COI at-issue is believed to have not even listed the insurer as the liability insurer for the subcontractor. Thus, the Court granted summary judgment in favor of the insurer finding there was no coverage for the subcontractor’s work at the commercial high-rise under the policy.

It is important to remember that the COI does not create an obligation for an insurer. This is demonstrated by the following portion of the Court’s opinion:

The Certificate [of Insurance] does not suggest that Defendant [insurer] would insure Ferman [insured-subcontractor], nor does it create some other obligation on Defendant’s part. Further insight into the preparation of the Certificate [of Insurance] is therefore inapposite to whether Defendant owes any obligation to Ferman or Plaintiff [general contractor] under the Policy.”

Bluewater Builders, 2013 at *4.

Remember, the COI does not create insurance coverage which is why it is always beneficial to see the policy and, as it pertains to additional insured status, to see the actual additional insured endorsement.

For more information on a third party suing a liability carrier, please see https://floridaconstru.wpengine.com/a-third-party-suing-a-liability-carrier/

For more information on additional insured status, please see https://floridaconstru.wpengine.com/understanding-your-rights-as-an-additional-insured/

PRESERVING PERFORMANCE BOND CLAIMS

Posted on October 29, 2013October 29, 2013 by Edward Garber

Performance bonds can be a valuable source of protection to owners that want their general contractors to provide a performance bond and, likewise, to general contractors that want certain subcontractors to provide a performance bond. The performance bond is designed to benefit the obligee in the event the contractor that issues the bond defaults under its contractual obligations. It is absolutely crucial that parties take the proper steps under the terms of the performance bonds to preserve their rights and arguments under the bond. To do this requires an unequivocal formal default of the contractor that issued the bond and that the party will be looking solely to the surety to complete the defaulted party’s contractual obligations. Otherwise, a court will rule in favor of the surety finding that the obligee of the bond did not comply with conditions precedent to preserve the performance bond claim and/or breached the terms of the bond by not allowing the surety to investigate and complete performance. This is exactly the situation in two federal district court summary judgment opinions relying on Florida law: North American Specialty Insurance Co. v. Ames Corp., 2010 WL 1027866 (S.D.Fla. 2010) and CC-Aventura, Inc. v. Weitz Co., 2008 WL 2699577 (S.D.Fla. 2008). Both of these cases illustrate the importance of formally and unequivocally declaring the party that issued the performance bond in default irrespective of whether the issue arises pre-completion or post-completion. Both cases also pertain to a subcontractor that provided a performance bond identifying the general contractor as the obligee (or beneficiary) of the bond.

I. North American Specialty Ins. Co. v. Ames Corp. (Pre-Completion)

In this case, a general contractor hired a roofer for a federal project. The roofer provided performance bonds identifying the general contractor as the obligee. The bonds provided as follows (which is common language in performance bonds):

“Whenever Principal shall be, and be declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee’s obligations thereunder:

(1) Surety may promptly remedy the default …;

(2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal’s obligation under the subcontract …;

(3) … If the Surety arranges completion or remedies the default, that portion of the balance of the subcontract price as may be required to complete the subcontract or remedy the default and to reimburse the Surety for its outlays shall be paid to the Surety at the times and in the manner as said sums would have been payable to Principal had there been no default under the subcontract.”

Ames Corp., 2010 WL at *1.

During construction, the general contractor notified the surety that the roofer was refusing to perform and that the general contractor will look to the surety for costs incurred above the roofer’s subcontract amount. A follow-up notice advised the surety that expenses were being incurred to finish the roofer’s subcontract amount and no one from the surety visited the jobsite. The surety then commenced an investigation while advising the general contractor that the “prior letters were not accompanied by supporting documentation and/or prior notice to the principal of default and/or potential default.” Ames Corp., 2010 WL at *3. A meeting was coordinated with the owner, the general contractor, the roofer, and the roofer’s surety at which time the surety represented it would need up to 5 months to assume responsibility and take action. After this meeting, the general contractor sent another letter to the surety and the roofer explaining that the roofing subcontract was not terminated or declared in default and that the surety needed to appreciate the short time allotted for completing the roofer’s contract. The surety responded that because the general contractor had not declared the roofer in default, the surety had no obligation to act under the performance bonds.

Notwithstanding the general contractor never formally declaring the subcontractor in default, it supplemented the roofer’s scope of work. Both the roofer and the surety objected; the surety even advised that such efforts would be a material breach of the bonds. However, due to leaks with the roofing system (the manufacturer of the roofing system inspected the roof and found that there were installation defects), the general contractor incurred substantial costs to complete the roofer’s scope of work which exceeded the roofer’s subcontract balance. In addition, the general contractor incurred delay damages associated with completing the roofer’s scope of work.

The surety initiated this lawsuit based on the monetary demands from the general contractor. The surety moved for summary judgment based on the argument that a condition precedent to the bonds obligations was never triggered, that being that the general contractor never declared the roofer in default. The surety also argued that the general contractor breached the bonds by not allowing the surety the right to remedy any default and by not making available to the surety the unpaid subcontract balance in connection with the surety remedying the default.

Relying on Florida law, the Southern District found:

[A] surety’s liability on a bond is determined strictly from the terms and conditions of the bond agreement. The purpose of a performance bond is to guarantee completion of the contract upon default by the contractor.

***

A declaration of default sufficient to invoke the surety’s obligations under the bond must be made in clear, direct, and unequivocal language. The declaration must inform the surety that the principal has committed a material breach or series of material breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of the bond.

Ames Corp., 2010 WL at *6 (internal citations and quotations omitted).

Based on this law, the Southern District held that none of the letters the general contractor sent to the surety defaulted the roofer in clear, direct, and unequivocal language. While the letters urged the surety to become involved and threatened default, they did not formally and unequivocally default the roofer. Accordingly, the court granted summary judgment in favor of the surety.

Furthermore, the Southern District agreed with the surety that the general contractor breached the bond by completing / supplementing the subcontract without giving the surety the opportunity to remedy any default under the subcontract. As the court explained: “‘[O]nce Ames/Dawson [general contractor] engaged in the supplementation of work without allowing NAS [surety] to perform, its conduct constituted a material breach that voided the bond.” Ames Corp., 2010 WL at *9.

II. CC-Aventura, Inc. v. Weitz Co. (Post-Completion)

In this case, the general contractor was hired to construct a senior living facility. The general contractor hired a painter with a subcontract that contained an indemnification provision and a provision that required the painter to correct defective work. The painter provided a performance bond identifying the general contractor as the obligee.

After completion of the project, the owner sued the general contractor for water intrusion and damage. The general contractor sued subcontractors including its painting subcontractor. The general contractor also asserted a claim against the painting subcontractor’s performance bond surety for breach of the bond. The surety moved for summary judgment arguing that the bond obligations were never triggered because the general contractor never formally declared the painting subcontractor in default.

The general contractor argued that it did provide default notices when it transmitted the owner’s expert and its expert reports regarding the paint that the painter applied. In the notices, the general contractor demanded that the surety correct the defects and that the painter’s failure to take corrective action will be a default under the subcontract.

The surety took the position that these types of notices were insufficient. The Southern District of Florida agreed and granted summary judgment in favor of the surety finding:

“Both of Weitz’s [general contractor] letters do state that Delta [subcontractor] is in ‘default’ of its Subcontract-and had Weitz maintained that position and indicated that Weitz now looked to American Casualty [surety] alone, both of its letters could reasonably be interpreted as declarations of default sufficient to trigger American Casualty’s liability on the Bond. However, in its December 30, 2005 letter Weitz also advised Delta to ‘please accept this letter as The Weitz Company’s final written demand that Delta Painting or its Surety take appropriate corrective action’….In its April 11, 2006 letter, Weitz reiterated that it had made ‘numerous demands upon both Delta and American to correct [the painting] deficiency.’ Weitz then stated its intention to perform the corrective work itself and announced that ‘Weitz will seek such costs and all other damages from Delta and American.’ If Weitz wanted to trigger American Casualty’s obligations on the Bond, it would have had to clearly and unambiguously notify American Casualty that it now looked to it to complete Subcontract obligations, in accordance with the Bond.”

CC-Aventura, 2008 WL at *4.

As illustrated above, there are certainly procedural hurdles that are required to take place in order to properly default a contractor that provided a performance bond. Not doing so can be fatal to the performance bond claim. Default is always viewed as a last resort because parties do not want to be in material breach for incorrectly defaulting or terminating a party. However, by not defaulting a party, the performance bond’s obligations are not triggered. Due to these hurdles, general contractors are now obtaining subguard (subcontractor default insurance) instead of requiring individual subcontractors to provide performance bonds. This allows the general contractor to be more involved in the process since it is the one obtaining subguard and it eliminates subcontractors from having to obtain the bond (which could be problematic for certain subcontractors).

For more on performance bonds, please visit: https://floridaconstru.wpengine.com/statute-of-limitations-on-performance-bond-claims/

ACCELERATION COSTS MONEY

Posted on October 22, 2013October 22, 2013 by Edward Garber

Contractors know or should know the concept of acceleration because acceleration costs money. Acceleration occurs when a contractor expedites its performance due to an excusable delay (a delay not its fault) in order complete its performance earlier than it would have considering the delay.

Contractors accelerate by incurring increased labor costs to work overtime and premium time (nights and weekends), adding more manpower, or adding more crews (which also may mean adding more supervision to supervise the additional labor). These added labor costs are typically direct payroll costs (factoring in labor burden) as well as equipment costs associated with operating the equipment (especially if it is owned equipment) for longer hours or renting additional equipment to be utilized by the additional manpower or crews. In addition, acceleration can result in inefficient labor hours because manpower is now working longer hours, new manpower is added and there is a learning curve associated with new manpower that is not familiar with the work, and the labor is potentially working under resequenced conditions and in congested locations with other trades. Thus, just because the contractor takes reasonable efforts to accelerate does not mean that it is incurring efficient / productive labor costs or that its acceleration efforts are substantially improving the completion date of the project.

There are two types of acceleration claims. The first type is the straightforward direct acceleration claim when the government/owner directs the contractor to accelerate its performance to finish the job in advance of the completion date. Many times, in this circumstance, the government/owner understands that it will need to compensate the contractor for the acceleration efforts.

Constructive acceleration is the other type of acceleration claim and the type more likely to lead to a dispute because the dispute centers around both entitlement and quantum. Constructive acceleration occurs where the contractor seeks additional time to complete the project due to what it claims are excusable delays, but the government/owner is unwilling to grant the contractor the additional time. To prove construction acceleration, the contractor needs to prove:

there was a delay that was not its fault (an excusable delay) that impacted the completion date;
the contractor notified the government/owner of the delay and requested additional time to complete its performance;
the government/owner expressly directed the contractor to overcome the delay and complete the project in a shorter amount of time than the contractor was entitled to factoring in the delay or implicitly directed the contractor to overcome the delay through the refusal to grant additional time; and
the contractor did in fact incur costs in accelerating its performance.

See Armour of America v. U.S., 96 Fed.Cl. 726, 757 (Fed.Cl. 2011) (“To prove a constructive acceleration claim, and entitlement to an equitable adjustment, which Armour [contractor] did not attempt to do during the proceedings before the court, a contractor must show (1) that the contractor encountered a delay that was excusable; (2) that the contractor requested from the government an extension of time due to the delay; (3) that the government denied the contractor’s request for an extension of time; (4) that the government demanded completion of the contract in a shorter amount of time than the contractor was entitled to, given the excusable delay; and (5) that the contractor was required to expend additional resources to adhere to the schedule on which the government insisted.”). See also Fraser Const. Co. v. U.S., 384 F.3d 1354 (Fed.Cl. 2004).

What is important to remember is not only will the contractor need to prove the excusable delay that impacted its schedule, but it will need to prove it notified the government/owner of the delay and requested additional time to perform which was denied. After proving all of this, the contractor will still need to establish that it actually accelerated its performance and incurred costs in doing so.

As a basic example, assume a project was to be completed December 31, 2014. This marked the date the owner needed to use the project for its intended purpose. However, due to excusable delays (assume many owner-directed change orders and/or design-related issues), this completion date is postponed a year to December 31, 2015. The contractor notified the owner of the delays and impacts to its schedule and requested an extension of time to complete the project; but, for whatever reason, the owner refused to grant additional time and implicitly demanded that the contractor complete the project on schedule. The contractor, as the result of the owner’s refusal to grant additional time, accelerated its performance to finish the project earlier than December 31, 2015 and to avoid the consequence of the owner assessing liquidated damages (i.e., the contractor accelerated to mitigate the impact of the delay). Based on the contractor and its subcontractor’s efforts, the project was completed on May 30, 2015–5 months after the original completion date, but 7 months before the contractor should have been complete considering the excusable delays. In this basic example, the contractor’s acceleration efforts mitigated the overall delay by approximately 7 months (the difference between May 30, 2015 and December 31, 2015) even though the contractor finished 5 months later than the original schedule. The contractor will need to prove the costs associated with these acceleration efforts.

It is good practice for contractors to work with attorneys and experts to preserve the acceleration claim and prove the excusable delays through a critical path schedule analysis and the costs incurred in accelerating performance.

MORE ON A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY FROM THE CONTRACTOR BOND-PRINCIPAL AND BOND GUARANTORS

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

I previously discussed a surety’s right to demand collateral security from its bond principal and personal guarantors by discussing the case Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013). (Please see below for the link where this blog article can be located.)

To add to this discussion, the Middle District of Florida in Travelers Cas. and Sur. Co. of America v. Industrial Commercial Structures, Inc., 2012 WL 4792906 (M.D.Fla. 2012), a case that preceded Bi-Tech Construction, dealt with a similar issue of a performance bond surety demanding the bond principal and guarantor to post / deposit collateral to offset the surety’s liability exposure. In this case, the surety issued a performance bond to the contractor in connection with a residential project. A dispute arose between the contractor and the owner and the contractor sued the owner for, among other claims, breach of contract and to foreclose a construction lien. The owner countersued the contractor and the performance bond surety (which is not uncommon in a payment dispute where the owner asserts construction defects or incomplete performance). The dispute was hotly contested.

During the dispute with the owner, the surety demanded that the contractor post collateral – it demanded that the contractor deposit money into a reserve account that would be used to offset the surety’s liability. When the contractor did not post / deposit the amount of money the surety wanted, the surety filed a lawsuit against the contractor (principal) and the contractor’s guarantors that executed the General Agreement of Indemnity (the agreement the surety requires to be executed before it issues bonds on the principal’s behalf). The surety moved for a preliminary injunction asking the Court to order the contractor to deposit the money into a reserve account. The surety also moved for an injunction demanding that the contractor not transfer or encumber assets, allow the surety to have a full accounting of the contractor and guarantor’s assets, and allow the surety access to the contractor and guarantor’s books and records.

The Middle District, analyzing the requirements for a preliminary injunction, agreed with the surety and ordered that the contractor post / deposit collateral into the reserve account. Of interest, the surety prior to the lawsuit demanded collateral of $1.5 million that it subsequently reduced to $300,000. Although the surety in its motion for preliminary injunction demanded that the contractor deposit the $1.5 million in collateral, the court ordered the contractor to deposit $300,000 to the reserve account. (There was some indication in the opinion that the contractor posted approximately $139,000 as collateral, but it is uncertain whether this was collateral provided in connection with the issuance of the bonds or the lawsuit with the owner.)

The MIddle District elaborated:

“As one federal court of appeals has succinctly explained, ‘[a] collateral security provision [in an indemnity agreement] provides that once a surety…receives a demand on its bond, the indemnitor must provide the surety with funds which the surety is to hold in reserve. If the claim on the bond must be paid, then the surety will pay the loss from the indemnitor’s funds; otherwise, the surety must return the funds to the indemnitor.’ Moreover, ‘[s]ureties are ordinarily entitled to specific performance of collateral security clauses.’ This is because ‘[i]f a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced.’ Industrial Commercial Structures, supra, at *2 (internal citations omitted).

However, the court did not order the contractor or guarantor to give a full accounting, provide the surety access to books and records, or prohibit the transferring of assets as the surety did not establish it would be irreparably harmed (a requirement for an injunction) if this relief was not granted. Also, the court, unlike the court in Bi-Tech Construction, required the surety to post a $100,000 bond for the injunction to cover damages in the event the injunction was wrongly ordered.

Although the court in this case did not discuss the collateral security provisions, such provisions are virtually identical in most General Agreements of Indemnity. Even in a hotly contested dispute between the contractor and the owner (such as the situation in Industrial Commercial Structures), if a claim is asserted against the surety or it is sued, the surety can demand for the principal and guarantor to post collateral into a reserve account to offset the surety’s liability exposure. However, if the surety demands more, such as an accounting, access to books, etc., this case can support the argument that these remedies are not warranted because the surety has not established it will be irreparably harmed if this recourse is not ordered. Now, if the circumstances are different and the surety carries its burden of establishing irreparable harm, it is possible that this recourse will also be ordered; however, this additional recourse should ideally result in a higher injunction bond amount.

The objective is for the contractor (bond-principal) and guarantors to understand their rights and options in the event a claim or lawsuit is asserted against the bond.

To find out more about this issue and the requirements for a preliminary injunction, please see
https://floridaconstru.wpengine.com/a-suretys-right-to-demand-collateral-security/

PROVING LOST PROFIT DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY

Posted on October 13, 2013October 13, 2013 by Edward Garber

Lost profit damages are challenging damages to prove, but are an important form of consequential damages that parties seek based on the dynamics of the case. These damages must be proven with a reasonable degree of certainty. The recent Southern District of Florida opinion, Topp Paper Co., LLC v. ETI Converting Equipment, 2013 WL 5446341 (S.D.Fla. 2013), explained:

“Under Florida law, lost profits must be proven with a reasonable degree of certainty before the loss is recoverable. Courts have construed this standard as requiring that the mind of a prudent or impartial person be satisfied that the damages are not the result of speculation or conjecture. In unproven businesses such as Topp’s [plaintiff], Florida courts have allowed damages where the plaintiff proves that (1) the defendant’s action caused the damage and (2) there is some standard [yardstick] by which the amount of damages may be adequately determined.” Id. at *7 (internal citations and quotations omitted).

The first step is the causation requirement, i.e., that the defendant’s conduct caused the lost profit damages that the plaintiff seeks.

The second step is the lost profit methodology demonstrating the plaintiff’s lost profit damages with a reasonable degree of certainty and without speculation. Oftentimes parties retain experts to prove these damages based on the yardstick or standard in which the lost profit damages are determined. However, in Topp Paper, the Southern District maintained that both steps “may be satisfied without resort to expert testimony.” Topp Paper, supra, at *8. In this case, the plaintiff, a new business, planned to show lost profits without an expert by laying the foundation for cancelled contracts with its clients that were solely caused by the defendant’s actions. The plaintiff’s position was that but for defendant’s actions, it would have been able to satisfy the contracts with its actual clients and, because it was not able to, it lost the profit associated with those contracts.

On the other hand, the Southern District would not allow the plaintiff to prove its lost profit damages through income projections by comparing projected income with actual income to assess lost profits. The reason is that establishing lost profit damages through projections would be purely speculative, especially considering the plaintiff’s business was a new business without a history of profits.

In Topp Paper, the plaintiff could be in a position to establish lost profits because it actually had contracts with clients that had to be cancelled due to the defendant’s alleged actions. This was vital because the plaintiff could establish lost profits without the need to retain an expert. However, what if the plaintiff, as a new business, did not actually have cancelled contracts? It would not be able to prove damages through income or profit projections. In this scenario, the plaintiff would need to establish some yardstick to prove its damages with a reasonable degree of certainly. One yardstick could be the plaintiff’s past business and profit history. A plaintiff’s accountant or financial officer could assist in this methodology / calculation (although, if possible, it helps to have this supported by an expert). However, as a new business, the plaintiff did not have a business history. The other way would be to find a comparable business with a comparable business model as the yardstick to establish lost profits. This should require expert testimony and it will be important to work with the expert and cross-examine the expert to flesh out any speculative portion of the yardstick.

The bottom line is that lost profit damages are challenging and require a game plan that will be used to support (1) causation–that the defendant’s action caused these damages and (2) the standard or yardstick that will be utilized to support lost profit damages. A new business will likely have a different game plan than an established business unless there is documentary evidence (such as in Topp Paper) that the business had actual clients that would have been serviced but for the defendant’s actions. Also, knowing that income projections or pro forma profit and loss statements will be deemed speculative, getting an expert involved sooner than later is important to assist with establishing the yardstick or methodology that will be used to prove lost profits with a reasonable degree of certainty.

For more information on lost profit damages, please see https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/

PAY-WHEN-PAID PROVISIONS AND PAYMENT BONDS

Posted on October 12, 2013October 12, 2013 by Edward Garber

Pay-when-paid (also known as pay-if-paid) provisions are customary in subcontract agreements. These provisions provide that the contractor must be paid by the owner for the subcontractor’s work as an express condition precedent to the contractor’s payment to the subcontractor. Thus, if the contractor does not get paid by the owner, the subcontractor does not get paid by the contractor. This is a must-include provision to contractors as it shifts the risk of the owner’s nonpayment to the subcontractor.

However, on public projects and even many large-scale private projects, the contractor is required to obtain a payment bond that guarantees the contractor’s payment to subcontractors. Importantly, the pay-when-paid language does not protect a payment bond surety; it is not a defense to a payment bond surety. See OBS Co., Inc. v. Pace Construction Corp., 558 So.2d 404 (Fla. 1990) (finding that pay-when-paid language in subcontract does not prevent subcontractor from suing payment bond); see also Everett Painting Co. v. Padula& Wadsworth Const., Inc., 856 So.2d 1059, 1061 (Fla. 4th DCA 2003) (“However, this [pay-when-paid] contract provision is not a defense that is available to Surety.”).

From a subcontractor’s perspective, it is important on the front-end to know whether a payment bond is in place and, if so, what steps need to be taken to preserve a payment bond claim in the event of nonpayment. If there is any concern as to whether the general contractor was paid by the owner, it may be advisable to pursue the payment bond directly (instead of the contractor) unless there are reasons not too such as issues with the subcontractor’s compliance with statutory conditions precedent to sue on the bond. (Also, if there are concerns with the venue provision in the subcontract, pursuing a claim against the bond may create an argument to sue in a venue outside of the venue provision in the subcontract.)

From the general contractor’s perspective, if there is a payment bond in place, it needs to appreciate that the pay-when-paid defense will not apply to its surety. One thought is to include a provision in the subcontract that references that the subcontractor understands that the surety is an intended-third party beneficiary of pay-when-paid language and can utilize the pay-when-paid defense in the event the general contractor is not paid for the subcontractor’s work. There is, however, a strong argument that this language would not be enforceable based on caselaw set forth above that does not allow a surety to benefit from the pay-when-paid defense. The leading Florida Supreme Court case, OBS Co. (cited above), that finds that a surety cannot benefit from this pay-when-paid defense, states:

“The payment bond is a separate agreement, and any inability to proceed against the general contractor does not necessarily prevent recovery against the sureties under the bond. In this case recovery under the payment bond is in no way conditioned on the owner making final payment to Pace [general contractor]. Nor does the bond incorporate the payment terms of the subcontract.”

Based on that bolded language, it is an uphill battle to create an argument that the surety can be protected by the pay-when-paid defense because the payment bond does not incorporate each and every subcontract and such language would merely turn the bond into a conditional payment bond, i.e., a bond conditioned on the owner’s payment to the contractor. Including language in the subcontract that says the surety is an intended third-party beneficiary of the pay-when-paid language is definitely a tough sell, but it has little downside, as the worst that happens is that the pay-when-paid defense does not apply to claims against the surety no matter what, which is likely the case.

Notably, it is advisable for the general contractor to include language in subcontracts that provides to the extent the pay-when-paid provision conflicts with language in the prime contract, the pay-when-paid language shall govern. The reason being is to avoid any argument that the pay-when-paid language is ambiguous because it conflicts with language in the prime contract (that is incorporated into the subcontract) which would not have a pay-when-paid provision.

For motion information on pay-when-paid provisions, please see: https://floridaconstru.wpengine.com/careful-drafting-of-pay-when-paid-provisions/

THE INCLUSION OF LIMITATION OF LIABILITY PROVISIONS FOR DESIGN PROFESSIONALS

Posted on October 8, 2013October 8, 2013 by Edward Garber

Design professionals need to remember the benefit of newly enacted legislation effective July 2013 that authorizes a limitation of liability provision for design professionals in their individual capacity. Florida Statute s. 558.0035 authorizes a design professional to limit their personal liability if: (a) the professional’s company entered into the contract for professional services; (b) the contract does not name the professional as a party to the contract; (c) the contract provides in uppercase and at least 5 font points larger than the rest of the contract that an employee or agent of the professional’s company cannot be held individually liable in negligence, and (d) the professional’s company maintains professional liability insurance. See Fla. Stat. s. 558.0035 set forth below. Complying with this statute can limit a professional’s liability in an individual capacity for economic damages, although based on the language of the statute, it would not extend to personal injury or property damage not subject to the professional services contract.

When negotiating a contract for a design professional, it is good to include a limitation of liability provision to protect professionals working with the design professional company/ entity entering into the contract. I would include a provision identifying that it is specifically understood that employees or agents of the contracting party are not parties to the professional services contract. The reason being is many times professional services contracts will call out the specific professional(s) that is to act as the company’s representative or the professionals that will be performing the professional services. Additionally, I would include in uppercase and 5 font sizes larger than the balance of the text in the contract a provision to the effect: “PURSUANT TO FLORIDA STATUTE S. 558.0035, AN INDIVIDUAL EMPLOYEE OR AGENT OF_______ [CONTRACTING PARTY] MAY NOT BE HELD INDIVIDUALLY LIABLE IN NEGLIGENCE FOR ANY CLAIMS, DAMAGES, OR DISPUTES ARISING OUT OF AND SUBJECT TO THE CONTRACT.”

Although the statute provides that the limitation of liability provision does not apply to damages to personal injuries or property not subject to the contract, it does not define the circumstances in which this would apply. For instance, if a structure is deficiently engineered and a portion falls down or collapses and damages persons or property other than the structure itself, it would seem that the limitation of liability provision would not extend to these types of damages since the other property and personal injuries were not subject to the professional services contract. On the other hand, there could be the argument that these damages are subject to the professional services contract because they arose out of errors and omissions in the performance of professional service contractual obligations.

When negotiating a contract for an owner, the key is to ensure that the design professional has sufficient professional liability insurance based on the requirements of the project (i.e., sufficient insurance limits and potentially tail / extended reporting period coverage). An owner willing to agree to the limitation of liability provision could put a disclaimer that reflects that should the contracting party not continue its professional liability insurance for “x” years after the project’s completion with a date retroactive to the contract date or purchase tail coverage for the same period of time, the limitation of liability provision shall be deemed null and void.

Florida Statute s. 558.0035

(1) A design professional employed by a business entity or an agent of the business entity is not individually liable for damages resulting from negligence occurring within the course and scope of a professional services contract if:
(a) The contract is made between the business entity and a claimant or with another entity for the provision of professional services to the claimant;
(b) The contract does not name as a party to the contract the individual employee or agent who will perform the professional services;
(c) The contract includes a prominent statement, in uppercase font that is at least 5 point sizes larger than the rest of the text, that, pursuant to this section, an individual employee or agent may not be held individually liable for negligence;
(d) The business entity maintains any professional liability insurance required under the contract; and
(e) Any damages are solely economic in nature and the damages do not extend to personal injuries or property not subject to the contract.
(2) As used in this section, the term “business entity” means any corporation, limited liability company, partnership, limited partnership, proprietorship, firm, enterprise, franchise, association, self-employed individual, or trust, whether fictitiously named or not, doing business in this state.

CONTRIBUTION CLAIMS TO PASS-THROUGH LIABILITY

Posted on October 7, 2013October 7, 2013 by Edward Garber

In lawsuits, there are times the defendant elects to sue a third-party defendant to pass-through its liability to the plaintiff to the third-party defendant. For example, in a construction defect scenario where the owner sues the general contractor, the general contractor will often sue subcontractors (third-party defendants) in order to pass-through its liability to the owner to subcontractors that performed the scopes of work at-issue. In other situations, a defendant may assert a cross-claim against another defendant to, among other things, pass-through any liability it has to the plaintiff to the other defendant. For example, in a construction defect scenario where the owner sues both the general contractor and subcontractors, the general contractor will often assert a cross-claim against the subcontractors to pass through its liability to the subcontractors.

A claim for contribution used to be a common claim asserted to pass-through liability in negligence-related actions. Contribution claims were routine in negligence actions when there used to be joint and several liability, i.e., a party could be responsible for all of the plaintiff’s damages irrespective of its percentage of fault with other defendants. “To state a claim for contribution, the claimant must allege a common liability to the injured party [plaintiff].” Horowitz v. Laske, 855 So.2d 169, 174(Fla. 5th DCA 2003). In other words, the defendant and third-party defendant must be jointly liable / negligent to the plaintiff for the injuries the plaintiff sustained. Therefore, by asserting a contribution claim, the defendant ensures that fault is allocated to another party that is jointly liable for the damages sustained by the plaintiff.

However, Florida abolished joint and several liability in negligence actions and, now, a defendant can only be liable based on its determined percentage of fault. See Fla. Stat. s. 768.81; see also T&S Enterprises Handicap Accessibility, Inc. v. Wink Indus. Maintenance & Repair, Inc., 11 So.3d 411 (Fla. 2d DCA 2009) (affirming dismissal of defendant’s third party claim for contribution in underlying negligence action due to abolishment of joint and several liability). Because of this, third-party defendants or cross-claim defendants that are sued for contribution should argue that the contribution claim is moot because the party suing it can only be held liable for its percentage of fault or negligence. Some judges will dismiss a contribution claim for this reason on a motion to dismiss, but others will still allow the claim to proceed beyond a motion to dismiss for judicial efficiency and economy since it is easier to wrap up a dispute in one litigation instead of many (considering contribution claims have been routine claims to pass-through liability).

The opinion in Martinez v. Miami-Dade County, 2013 WL 5434159 (S.D.Fla. 2013) is a non-construction case that illustrates how a claim for contribution can proceed. In this case, a plaintiff sued Miami-Dade County and a bar for injuries the plaintiff sustained by off-duty police officers providing security for the bar. The claims against Miami-Dade Couty were sounded in intentional tort theories and not negligence theories. Miami-Dade County asserted a cross-claim against the bar and included a claim for contribution. The bar moved to dismiss the contribution claim arguing that contribution claims are obsolete under Florida law since there is no more joint and several liability. The Southern District Court disagreed expressing that because the plaintiff’s theories against Miami-Dade County were sounded in intentional tort and not negligence, section 768.81 did not apply. (Notably, section 768.81 section does not apply to intentional tort theories of liability.)

Under section 768.81, a negligence action means “without limitation, a civil action for damages based upon a theory of negligence, strict liability, products liability, professional malpractice whether couched in terms of contract or tort, or breach of warranty and like theories. The substance of an action, not conclusory terms used by a party, determines whether an action is a negligence action.” Fla. Stat. s. 768.81(1)(c). Therefore, even if the claims asserted are not labeled negligence claims, this section still applies to bar joint and several liability to ensure a party is only liable for their percentage of fault. It is designed so that substance over form is analyzed to determine whether the plaintiff’s underlying action is a negligence action even if it is not labeled as such.

This opinion in Martinez, however, could support the argument that a contribution claim could be asserted outside of a negligence claim such as a breach of contract action (since, in the case, a contribution claim was still allowed to proceed in an intentional tort action). And, even though section 768.81 shifts the focus from the label of the plaintiff’s claims to the actual substance underlying the claims, the objective is to argue that plaintiff’s claims are not based in negligence, but based in a material breach of a contractual provision. For example, in a construction defect setting, when the general contractor is sued for breach of contract, there may be strategic reasons why the general contractor would want to attempt to assert a contribution claim in addition to an indemnification claim against subcontractors to pass-through liability. The general contractor would argue that the plaintiff’s claims are not based in negligence but based in contract since the plaintiff is asserting that the project was not constructed per the contract documents (or in a workmanlike manner) per contractual provisions.

Finally, if a general contractor elects to assert a contribution claim, it is important to remember that the claim will only survive if it asserts and can establish that it and the subcontractor(s) share a common liability to the owner. This is challenging.

In Helmet House Corp. v. Stoddard, 861 So.2d 1178 (Fla. 4th DCA 2003), a contractor was sued by an owner for breach of contract and breach of warranty for defective construction of a roof. The contractor asserted a third party party complaint against its roofing subcontractor for contribution. The Fourth District held that the contractor could not pursue a contribution claim against its subcontractor because the subcontractor did not share a common obligation / liability to the owner. The Fourth District found that parties share a common liability if they are joint tortfeasors or co-obligors on an obligation. Importantly, many subcontracts contain flow-down provisions that bind the subcontractor to the general contractor to the same extent the general contractor is bound to the owner. Flow-down provisions attempt to impose the exact same liability on the subcontractor that the general contractor assumes towards the owner. With this type of provision, or an alternative provision that would make the owner an intended third-party beneficiary of the subcontract, there may be an argument that subcontractors do indeed share a common liability to the owner with the general contractor for defects with their scopes of work. From the general contractor’s perspective, the objective is to pass-through liability for defective construction with arguments based on the plaintiff’s allegations in the complaint.

THE SCOPE OF A RELEASE IN A SETTLEMENT AND CONTRACTUAL INDEMNIFICATION

Posted on October 4, 2013October 4, 2013 by Edward Garber

Pilot Construction Services, Inc. v. Babe’s Plumbing, Inc., 111 So.3d 955 (Fla. 2d 2013) is a case that touches on two relevant issues. The first issue pertains to the scope of a release in a settlement agreement. The second issue pertains to contractual indemnification—an issue of importance to all in construction.

I. Scope of Release

In Pilot Construction, a private college hired a general contractor to renovate a residence hall. After completion, the college discovered deficiencies in bathrooms and showers that resulted in leaks and water damage. The college sued the general contractor for breach of contract and breach of express warranty. The college also sued the plumber (subcontractor) for breach of express warranty due to plumbing deficiencies that caused water damage.

The plumber settled directly with the college and a settlement and release agreement was executed. The college, however, continued to pursue claims against the general contractor including defects and damage that arose out of the plumber’s work. The general contractor then settled with the college, but instead of this dispute being dismissed, the general contractor pursued cross-claims against the plumber for indemnity, breach of warranty, and equitable subrogation.

The issue on summary judgment was whether the general contractor could pursue claims (such as indemnity) against the plumber when the plumber settled with the college and was released by the college. The trial court found that the general contractor could not pursue such claims and entered summary judgment in favor of the plumber.

On appeal, the Second District analyzed the scope of the release which provided in two portions:

First Portion: “Nothing within this Release is intended to be nor shall it be construed as any kind of waiver, limitation, or compromise to any claim or defense New College has or may have against any party or entity other than Babe’s Plumbing, Inc.” Pilot Construction, 111 So.3d at 958.

Clearly, the college wanted this reservation in the settlement so that it could continue to pursue claims against the general contractor inclusive of damage that arose out of the subcontractor’s work.

Second Portion: The settlement also included a release of the plumber for everything (known and unknown damages) in connection with the plumber’s work at the college.

Clearly, the plumber wanted this provision so that it would be released by the college (owner) for its scope of work at the project.

So, what was the problem? The Second District found that the release to the plumber actually conflicted with the reservation language since the settlement was not limiting claims against other parties, especially as it relates to the subcontractor’s scope of work. Based on the conflicting portions, the court held as follows:

the general contractor could pursue its claims against the plumber because it was not an intended-third-party beneficiary of the college and plumber’s settlement as demonstrated by the fact that the settlement allowed the college to pursue damages (arising from the plumber’s work) against the general contractor;
the fact that the plumber settled with the college does not release the plumber from the general contractor’s claim for indemnification since the general contractor could still be liable to the college for the plumber’s scope of work; and
nothing in the release would prevent the general contractor from pursuing a breach of warranty claim against the plumber.

As the court explained, “Because the language of the release does not apply to bar Pilot’s [general contractor] claims against Babe’s [plumber], the trial court erred in granting summary judgment….” Pilot Construction, 111 So.3d at 959.

This decision is important to any party participating in a multi-party construction defect case. If a subcontractor is getting sued directly by the owner, its best bet is to effectuate a settlement directly with the owner and general contractor whereby the owner and general contractor both release the subcontractor relating to the project. Due to the subcontractor’s indemnification obligations and requirement to identify the general contractor as an additional insured, it will ideally want a release ending it and its insurance carrier’s involvement in the dispute. Or, if that is not possible, make certain that the settlement does not have reservation language that allows the owner to pursue any defects and damage arising from the subcontractor’s scope of work against the general contractor. Better language would reflect that the owner is not pursuing any defects or damage arising from the subcontractor’s scope of work against the general contractor pursuant to this settlement (i.e., a release of the general contractor relating to the subcontractor’s scope of work). The general contractor may still be able to pursue claims against the subcontractor; but, if the owner is releasing the general contractor for the subcontractor’s work, such claims could be tenuous since the owner cannot pursue such damage against the general contractor. (Although, the general contractor’s insurer could still pursue an additional insured claim to recoup defense costs associated with defending the general contractor.)

If a subcontractor is being sued by the general contractor only, some of the same rationale applies. The general contractor can settle directly with the subcontractor; however, it assumes the risk associated with the subcontractor’s work since the owner is still pursuing claims against the general contractor arising from the subcontractor’s work. This isn’t always a bad thing based on the dollar amount of the settlement and the ultimate settlement with the owner. In other scenarios, the general contractor only wants to settle with a subcontractor if it can contemporaneously settle with the owner so that it is getting a release from the owner for the subcontractor’s scope of work. An owner will likely not want to do this, nor should it, if damages cannot necessarily be isolated to that subcontractor’s scope of work (such as a water intrusion dispute where multiple scopes contribute to water intrusion and damage). Other times, the general contractor will not settle with subcontractors independent of a global settlement with the owner in perhaps an effort to minimize its contribution to the settlement.

Ultimately, there are numerous strategies that come into play when negotiating settlements and releases based on the party. There really is no one-size-fits-all model as it is dependent on the nature of the dispute. It is important to understand what is being released, what is not being released, and the scope of the release when entering into a settlement so that any risks can be appreciated.

II. Contractual Indemnification – Florida Statute s. 725.06

The plumber in Pilot Construction also argued that Florida Statute s. 725.06 barred the general contractor’s claims because the general contractor was seeking indemnification for its OWN negligence. The Second District dismissed this argument because the general contractor was only seeking indemnification for the subcontractor’s negligence:

“Section 725.06 would only bar Pilot’s claims for indemnification if Pilot’s claims were based on Pilot’s own negligence. A plain reading of Pilot’s claims against Babe’s shows that Pilot’s suit against Babe’s was based on Babe’s failures to correctly install shower pans and drains in the residence hall bathrooms. “
Pilot, 111 So.3d at 959.

The Second District’s ruling is interesting because it does not discuss the contractual indemnification language in the contract. Section 725.06 is a statute that essentially says that the first party cannot require the second party to indemnify it for its own negligence unless there is a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” See Fla. Stat. s. 725.06. Without compliance with this section, the indemnification provision is unenforceable. This is why it is always good practice to include a monetary limitation and identify it is part of the bid documents because most indemnifications are drafted in broad form that would require the second party to indemnify the first party for any and all damage caused wholly or partly by the second party. However, the Second District appears to focus less on the indemnification language in the subcontract and more on the actual claims that were asserted by the general contractor. Thus, if there is a concern with the enforceability of the indemnification provision, this case could support an argument for the general contractor that because the contractual indemnification claim being asserted is confined to the subcontractor’s (or second party) own negligence, the claim should be entitled to proceed.

For more information on contractual indemnification please see: https://floridaconstru.wpengine.com/buttoning-up-contractual-indemnification-language/