QUICK NOTE: LIABILITY INSURER’S BAD-FAITH BASED ON TOTALITY OF THE CIRCUMSTANCES

Posted on April 3, 2016April 3, 2016 by Edward Garber

Generally, whether a liability insurer engaged in bad-faith is a question of fact to be determined based on the totality of factual circumstances. In other words, there is more to it then the insured being exposed to a verdict / judgment in excess of the insured’s liability policy’s limits since it is based on a totality of circumstances and reasonablness standard. As explained by the Eleventh Circuit quoting the Florida Supreme Court: “The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.” Moore v. Geico Ins. Co., 2016 WL 736824, *2 (11th Cir. 2016) quoting Berges v. Infinity Ins. Co., 896 So.2d 665, 668-69 (Fla. 2004). For more on a general understanding of bad-faith claims in Florida, check out this article.

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.

QUICK NOTE: CGL INSURER LIABLE FOR ATTORNEY’S FEES IF IT UNJUSTIFIABLY REFUSED TO PROVIDE YOU DEFENSE

Posted on March 20, 2016March 20, 2016 by Edward Garber

If your CGL (or liability) insurer unjustifiably refuses to provide you a defense in a lawsuit, the insurer is liable for the reasonable attorney’s fees and costs you incur in defending that lawsuit. The operative word is “unjustifiably.” For instance, if you get sued and your CGL insurer refuses to provide you a defense and you retain private counsel to defend you, the CGL insurer will be liable for your attorney’s fees and costs if it should have provided you a duty defend in connection with that suit. Of course, on the other hand, if the CGL insurer justifiably refused to defend you (based on the allegations in the lawsuit / claim and coverage under the policy) then it will not be liable for your reasonable attorney’s fees and costs.

MAKE SURE YOU HAVE THE SUBCONTRACTOR EXCEPTION TO THE “YOUR WORK” EXCLUSION

Posted on February 15, 2016February 15, 2016 by Edward Garber

I previously discussed the importance of the subcontractor exception to the “your work” exclusion in CGL policies (exclusion l) for contractors and subcontractors that subcontract out scopes of work. Without this exception, the CGL policy provides minimal (and I mean minimal) coverage for property damage associated with construction defects. If you are involved in construction, you categorically need to make sure there is a subcontractor exception to the “your work” exclusion in your CGL policy. The subcontractor exception to the “your work” exclusion is the language bolded below that negates the application of the exclusion:

This insurance does not apply to:

l. Damage to Your Work

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

The Middle District in Auto-Owners Ins. Co. v. Elite Homes, Inc., 2016 WL 409577 (M.D.Fla. 2016) recently issued an opinion involving the application of the “your work” exclusion in a homebuilder’s CGL policy that did not have the subcontractor exception (the language bolded above). Ouch!!!! Without this exception, the policy excluded from coverage “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” Elite Homes, supra, at *2. But again,there was no subcontractor exception that negated the application of this provision to work performed by a subcontractor.

What is the impact of not having the subcontractor exception to the “your work” exclusion? This case explains. The owners sued the homebuilder for water intrusion and damage from window defects. The complaint alleged that the leaky window(s) caused damage to drywall, insulation, interior finishes, wood frame, and sheathing. The homebuilder’s CGL insurer denied the homebuilder a defense and coverage based on the “your work” exclusion—the owner alleged damage to the homebuilder’s work (the structure of the home) but nothing else. The Middle District concurred that the water damage alleged in the owner’s complaint arose out of the homebuilder’s work and was damage to the homebuilder’s work (the home). Hence, the “your work” exclusion barred coverage for the owner’s construction defect lawsuit against the homebuilder.

This opinion is painful because it illustrates the non-value the CGL policy provided to the homebuilder for property damage associated with defective windows. This outcome was the result of a CGL policy that eliminated the subcontractor exception to the “your work” exclusion. If the policy had this subcontractor exception, then there would have been coverage for the water damage caused by the defective windows and the homebuilder’s CGL insurer would have been obligated to defend the homebuilder in the owner’s lawsuit. The homebuilder would have been able to say that it hired a glazer (subcontractor) that performed the window installation and the glazer’s defective window installation caused damage to other subcontractors’ work.

Make sure to review your CGL policy. If you do not have the subcontractor exception to the “your work” exclusion, the outcome in this case could likely be the outcome in your case dealing with property damage caused by defective construction. Consult with your insurance broker because this subcontractor exception to the “your work” exclusion is a must in construction!

QUICK NOTE: HAVE YOU SEEN THE “SEPARATION OF INSUREDS” PROVISION IN YOUR CGL POLICY?

Posted on February 14, 2016August 1, 2020 by Edward Garber

Have you ever looked at your CGL policy and seen the “Separation of Insureds” provision? You must have seen it but perhaps it does not ring a bell. If you are an additional insured under another’s policy or have additional insured under your policy, this is an important provision. Check out this article to understand the application of the “Separation of Insureds” provision in your CGL policy.

CGL INSURER LIABLE FOR ATTORNEY’S FEES JUDGMENT AGAINST INSURED

Posted on January 3, 2016January 3, 2016 by Edward Garber

Commercial general liability (CGL) policies contain a section called “Supplementary Payments – Coverages A and B.” This section states in relevant part:

1. We [insurer] will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend:

e. All costs taxed against the insured in the “suit.”

In the recent decision, Mid-Continent Casualty Co. v. Treace, 41 Fla. L. Weekly D60c (Fla. 5^th DCA 2015), an owner obtained a judgment against its contractor in a construction defect case. The court then entered a judgment for attorney’s fees and costs in favor of the owner. The owner then initiated a proceeding against the contractor’s CGL insurer to recover the judgments. The trial court refused to allow the owner to recover its attorney’s fees against the insurer and the owner appealed. On appeal, the Fifth District examined the above language in the contractor’s CGL policy that said the insurer would pay for “[a]ll costs taxed against the insured in the ‘suit.’” In examining this language, the court found that the language “‘all court costs’ could be read to include attorney’s fees, especially since there was no definition of that term in the policy…[T]he insurer did not, but could have, defined ‘court costs’ to specifically exclude attorney’s fees.” Treace, supra. For this reason, the court held that the attorney’s fees judgment was recoverable by the owner against the contractor’s CGL insurer.

This case provides a strong argument for a claimant that recovers a judgment against an insured in a construction defect lawsuit that includes attorney’s fees that attorney’s fees are recoverable under the insured’s CGL policy.

BE COGNIZANT OF THE POLLUTION EXCLUSION IN YOUR CGL POLICY

Posted on December 30, 2015December 30, 2015 by Edward Garber

Be cognizant of the pollution exclusion in your commercial general liability (CGL) policy.

The non-construction decision in Evanston Insurance Co. v. Haven South Beach, LLC, 2015 WL 9459979 (S.D.Fla. 2015) illustrates the affect of the pollution exclusion.

In this case, the plaintiff was at a catered event and suffered injuries consuming a liquid nitrogen infused alcoholic beverage. The plaintiff sued the vendor. The vendor’s CGL policy contained the pollution exclusion and further defined pollutants as follows:

f. Pollution

(1) “Bodily injury” or “property damage” which would not have occurred in whole or part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants” at any time.

***

“Pollutants” mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditions or reclaimed.

The vendor’s CGL insurer argued that the liquid nitrogen constituted a pollutant; thus, there was no coverage under the vendor’s policy for plaintiff’s injuries. The Southern District Court of Florida agreed. The Court held that liquid nitrogen is an irritant (a substance causing irritation) falling into the definition of a pollutant. The Court further held that the irritant liquid nitrogen was discharged by the vendor into the plaintiff’s alcoholic beverage falling into the pollution exclusion, i.e., injury or damage which would not have occurred but for the actual discharge of a pollutant / irritant.

If you are working with products that could potentially fall within the definition of a pollutant and the pollution exclusion within your CGL policy, consider procuring pollution liability insurance to cover you for damages / injuries caused by that product.

COBLENTZ AGREEMENT AND ALLOCATION OF DAMAGES IN CONSENT JUDGMENT

Posted on November 28, 2015November 28, 2015 by Edward Garber

I previously discussed Coblentz agreements. A Coblentz agreement is an agreement between a claimant (e.g., property owner) and a third-party (e.g., general contractor that caused construction defects and damage) when the third-party’s liability insurer denies a defense (and coverage) to the third-party. The claimant and third-party enter into an agreement where a) the claimant obtains a consent judgment against the third-party, b) the third-party assigns its rights under its liability policy to the claimant based on the insurer’s refusal to defend and indemnify the third-party, and c) the claimant releases the third-party from any individual liability irrespective of whether the claimant recovers from the third-party’s liability insurer. (Check here for a presentation on Coblentz agreements.)

One of the key components of the Coblentz agreement is the consent judgment given by the third-party to the claimant. It is always a good idea to allocate between damages covered by insurance and damages not covered by insurance. The reason is that liability insurance is not designed to cover defective workmanship. Rather, it is designed to cover damages resulting from defective workmanship. In a construction defect dispute, the consent judgment should reasonably allocate the covered damage (damage caused by defective workmanship) and uncovered damage (the cost solely to repair defective workmanship). These amounts should not be arbitrarily decided but should be supported with expert opinions since this point would be litigated against the liability insurer when the claimant tries to recover from the third-party’s liability insurer.

For example, in the recent opinion of Bradfield v. Mid-Continent Casualty Company, 2015 WL 6956543 (M.D.Fla. 2015), an aspect of the opinion dealt with the lack of an allocation of damages in a consent judgment given in consideration of a Coblentz agreement. The contractor gave the owner a consent judgment in the amount of $671,050. But, there was no allocation of this lump sum amount for covered and uncovered damage or what this lump sum was designated for. The consent judgment was based on an estimate prepared by an expert but the estimate included costs to repair defective work, or work that was not covered by the liability insurance policy. The Middle District of Florida found that this failure to appropriately allocate covered verses uncovered damage was fatal to the owner’s claim against the third-party contractor’s liability insurer to recover the amount of the consent judgment. The court explained: “Florida law clearly requires the party seeking recovery…to allocate any settlement amount between covered and noncovered claims.” Bradfield, supra, at *24.

Even if damages were allocated, the consent judgment still needs to be reasonable and entered in good faith. The court discussed this aspect of the Coblentz agreement despite finding that the failure to allocate was fatal to the owner’s claims against the contractor’s liability insurer. As to the reasonableness of a consent judgment, the court importantly maintained:

When an injured party wishes to recover under a Coblentz agreement, [t]he claimant must assume the burden of initially going forward with the production of evidence sufficient to make a prima facie showing of reasonableness and lack of bad faith, even though the ultimate burden of proof will rest with the carrier. The courts impose good faith and reasonableness requirements in these cases due to the risk that the settlement of liability and damages in a settlement agreement may have little relationship to the strength of a plaintiff’s claim where the insured may never be obligated to pay and has little to lose if he stipulates to a large sum with the plaintiff.

In Florida, the test as to whether a settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant [the insurer] would have settled for on the merits of plaintiff’s claim. Objective and subjective factors are considered, including the degree of certainty of the tortfeasor’s subjection to liability, the risks of going to trial and the chances that the jury verdict might exceed the settlement offer. [P]roof of reasonableness is ordinarily established through use of expert witnesses to testify about such matters as the extent of the defendant’s liability, the reasonableness of the damages amount in comparison with compensatory awards in other cases, and the expenses which have been required for the settling defendants to settle the suit. Bad faith also may be established by evidence of the absence of any effort to minimize liability.

Bradfield, supra, at 27 (internal quotations and citations omitted).

When considering a Coblentz agreement on behalf of a claimant, make sure the judgment allocates between covered and noncovered claims / damages and is reasonable. The same experts utilized to support the allocation can be utilized to support the reasonableness of the allocation for covered claims / damages.

INTERACTION BETWEEN CGL INSURANCE, OCIP, AND SUBCONTRACTOR DEFAULT INSURANCE

Posted on November 14, 2015November 14, 2015 by Edward Garber

Here 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 (11^th 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.

ENSUING LOSS EXCEPTION IN PROPERTY INSURANCE POLICIES

Posted on October 3, 2015October 3, 2015 by Edward Garber

Property insurance policies such as builder’s risk policies contain a design defect / faulty workmanship exclusion (as well as other exclusions for excluded risks or perils). But, certain exclusions such as the design defect / faulty workmanship exclusion may contain what is referred to as the “ensuing loss exception.” Stated differently, a design defect / faulty work is excluded from the insurance policy BUT losses ensuing (or separately resulting) from the design defect / faulty work are excepted from this exclusion and covered under the policy. If your initial reaction as to the application of the ensuing loss exception is “huh?!?,” then that exact sentiment is shared by others. Trust me!

The Florida Supreme Court decision in Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003) dealt with a design defect exclusion that read:

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

This initial part of this exclusion is a design defect exclusion. The underlined part is the ensuing loss exception to this exclusion.

In Swire, errors and omissions with the structural design and, therefore, structural work, of a condominium project halted the issuance of the certificate of occupancy for the condominium. The developer incurred $4.5 million to retain a new structural engineer to modify the plans as well as corrective structural work in the field. The developer then submitted a builder’s risk insurance claim. The builder’s risk insurance carrier denied coverage based on the foregoing design defect exclusion arguing that the developer incurred money to correct a design defect, but there were no covered losses or damages ensuing from the design defect. The Florida Supreme Court agreed with the builder’s risk insurer:

Swire’s [developer’s] sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted [from the design defect] to invoke the exception to the exclusionary provision…. No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude…Swire is not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion….This [builder’s risk insurance] contract does not operate as a warranty for faulty workmanship and should not be transformed into a guarantee against design and construction defects.

Swire, 845 So.2d at 167-68.

In a more recent case, Peek v. American Integrity Ins. Co. of Florida, 2015 WL 5616294 (Fla. 2d DCA 2015), a property insurance policy contained the following ensuing loss exception:

“We do not insure loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”

Coverages A and B contained exclusions for latent defects, corrosion, faulty workmanship and pollution. Thus, the property insurance policy did not cover these items but it did cover “any ensuing loss…not excluded or excepted in this policy.”

Peek dealt with homeowners moving into a house with Chinese drywall. The homeowners contended that the Chinese drywall resulted in a noxious smell and corroded air conditioning coils. The homeowners contended that the defective drywall (exclusion) resulted in (a) the loss of use of their house due to the noxious smell and (b) damage in the form of corrosion to air conditioning coils, and that such items should be covered under the ensuing loss exception.

The Second District Court of Appeal disagreed with the homeowners regarding the application of the ensuing loss provision. The court explained:

An ensuing loss follows as a consequence of an excluded loss, and the crux of the ensuing loss provision is that there must be a covered cause of loss that ensues from the excluded cause of loss….Given that American Integrity [property insurer] proved that the Chinese drywall was an excluded defective construction material, it was the Peeks’ [homeowners] burden to demonstrate that the policy covered a loss that occurred subsequent to and as a result of that excluded peril.

First, the evidence below demonstrated that the odor present in the Peeks’ home was a manifestation of the sulfur gases emanating from the Chinese drywall and that the corrosion was caused by the chemicals released by the sulfur gases, which emanated from the Chinese drywall. As such, the losses were not “ensuing.” …

Additionally, both of the claimed ensuing losses are specifically excluded under the policy because an excluded cause of loss—defective Chinese drywall—led directly to another set of exclusions—pollution and corrosion….. Here, the damage to the Peeks’ home and consequently the odors and corrosion of metals and electronics were directly related to the defective Chinese drywall and thus directly stemmed from an excluded risk. Thus coverage was excluded under the express terms of the insurance contract.

Peeks, supra, at *4.

Recovering losses or damage under an insurance policy can be challenging in light of the various exclusions in the policy. Even the ensuing loss exception to exclusions, as demonstrated above, does not except from policy exclusions the types of losses that an insured may seek to recoup.

NEED TO BE A “CONTRACTOR” TO BE PROTECTED BY WORKERS COMPENSATION IMMUNITY

Posted on August 31, 2015August 31, 2015 by Edward Garber

Previously, I discussed the concept of “statutory employer” in the framework of workers compensation. Again, this concept is based on language in Florida Statute s. 440.10(1)(b) that provides:

In case a contractor sublets any part or parts of his or her contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment, and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

The recent case of Slora v. Sun ‘N Fun Fly-In, Inc., 40 Fla. L. Weekly D 1966a (Fla.2d DCA 2015) discussed the meanings of the term “contractor” and “contract work” as used in this section:

The statutory terms “contractor” and “contract work” plainly and unambiguously posit a party performing work pursuant to a contract with another. Thus, to be immune from tort liability as a contractor, a defendant’s primary obligation in performing a job or providing a service must arise out of a contract.

Slora, supra (quotation and citation omitted).

In this case, a company operated airshows for the general public. To put on these airshows, the company had to fill out various forms and get approval from the Federal Aviation Authority. The Federal Aviation Authority required security to be provided at airshow events. The company put on an airshow and hired a security company to provide the security services for the event. During the airshow, however, an employee of the security company got hurt. This employee sued the company that put on the airshow for her injuries. The company argued it should be immune from such claim under workers compensation immunity that provides that contractors that comply with Florida Statute 440.10 are immune from tort liability (absent an intentional tort).

The trial court agreed with the company and granted summary judgment in its favor finding it was immune from liability and could not be properly sued by the injured employee of the security company. The appellate court reversed based on the meanings of “contractor” and “contract” as used in Florida Statute s. 440.10. Particularly, the appellate court held that there was no evidence that the Federal Aviation Authority contracted the company to put on the airshow event (or that the company undertook an implied obligation to the Federal Aviation Authority). Thus, if the company was not contracted by the Federal Aviation Authority, it could not be a “contractor” as used in the statute since it was not performing work pursuant to a contract with another. And, if the company was not a contractor per the statute, the company could not be immune from tort liability under workers compensation law.