QUALIFYING FOR ADDITIONAL INSURED STATUS

Posted on May 31, 2014May 31, 2014 by Edward Garber

Additional Insured status is a vital part of risk management in construction. I’ve previously discussed additional insured status under general liability policies in https://floridaconstru.wpengine.com/understanding-your-rights-as-an-additional-insured/ and https://floridaconstru.wpengine.com/make-sure-additional-insured-coverage-is-for-completed-operations/.

The recent decision in King Cole Condominium Association, Inc. v. Mid-Continent Casualty Co., 2014 WL 2191944 (S.D.Fla. 2014), further elaborates on additional insured status under a general liability (CGL) policy. In this case, a condominium unit owner injured herself while the condominium was undergoing construction work. The unit owner sued the association and the general contractor the association hired to perform the work. As it pertained to the association, the unit owner contended that the association was negligent including being negligent for selecting the general contractor that caused her injuries. The general contractor, as typically is the case, had a CGL policy. The association tendered the defense of the unit owner’s claims to the contractor’s liability insurer as an additional insured; however, the insurer denied coverage. The association then sued the insurer seeking a declaratory judgment asking for the court to declare that it was an additional insured under the contractor’s policy and, thus, the insurer had a duty to defend and indemnify the association in the unit owner’s action against the association and general contractor.

The dispositive issue in this dispute was whether the association should qualify as an additional insured under the general contractor’s liability policy. The association claimed it was an additional insured because any liability assessed against it was directly attributable to the defective condition created by the general contractor that caused the unit owner’s injuries. The insurer countered that the association would only qualify as an additional insured with respect to liability directly attributable to the general contractor’s performance at the condominium.

The additional insured endorsement in the contractor’s policy provided that an additional insured was:

“Any person or organization for whom the named insured has agreed by written “insured contract” to designate as an additional insured subject to all provisions and limitations of this policy …

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability directly attributable to your performance of ongoing operations for that insured.”

The general contractor’s liability policy further contained a definition for the term “insured contract” that provided:

“f. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization, provided the “bodily injury” or “property damage” is caused, in whole or in part, by you or by those acting on your behalf. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

Based on this policy language, the Southern District stated that for the association to qualify as an additional insured under the general contractor’s policy, it must establish (a) its contract with the general contractor was an insured contract within the meaning of the policy and (2) the association only sought coverage as an additional insured under the policy regarding liability directly attributable to the general contractor’s performance, i.e., the additional insured status is for vicarious liability or negligence directly caused by the contractor for which the association was sued. If the association failed to provide either requirement, then it failed to qualify as an additional insured.

The contract between the association and general contractor provided that the general contractor would identify the association as an additional insured. Presumably, this contract met the definition of an insured contract within the meaning of the policy as it likely required the contractor to indemnify the association for bodily injury and property damage caused by the contractor’s performance. Thus, the crux of whether the association qualified as an additional insured under the contractor’s policy turned on whether the unit owner was suing the association for liability directly attributable to the general contractor’s performance (i.e., vicarious liability).

To determine whether the unit owner’s claims contained allegations triggering vicarious liability, the Southern District looked to the allegations in the unit owner’s underlying complaint against the association and contractor. In analyzing the unit’s owner complaint and finding that the association did not qualify as an additional insured, the Southern District held:

“Florida law requires a claimant to specifically plead vicarious liability as a separate cause of action. Because Satarsky’s [unit owner] complaint contains no separate cause of action for vicarious liability, the Court rejects King Cole’s [association] contention. Furthermore, even if Florida procedural law did not apply or if the separate cause of action requirement was not the law in Florida, there is nothing in the complaint to suggest that Satarsky sued King Cole for vicarious liability. To the contrary, the allegations against King Cole all relate to its own alleged negligence. Therefore, under the facts here, Mid–Continent has no duty to defend or indemnify King Cole with respect to the Satarsky lawsuit.”

King Cole Condominium Association, supra (internal citations omitted).

This case contains a couple of important take-aways:

Additional insured status is not designed to protect the additional insured for its OWN negligence. Rather, it is designed to defend and indemnify the additional insured for the negligence directly caused / attributable to the primary insured; hence, the Southern District explaining that the underlying complaint by the unit owner needed to trigger vicarious liability such that the association was being sued for the negligence of the contractor.

To determine whether an insurer has a duty to defend, the court will look to the allegations in the underlying complaint. In this instance, the underlying complaint asserted claims against the association for its own negligence, but not for vicarious liability associated with the negligence of the contractor. When preparing a complaint in which a party is seeking insurance coverage, it is important to plead allegations that may give rise to potential coverage.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

APPLICATION OF CLAIMS MADE PROFESSIONAL LIABILITY POLICIES

Posted on April 12, 2014April 12, 2014 by Edward Garber

General liability policies (CGL) are occurrence based policies meaning an “occurrence” within the policy period triggers insurance coverage even if the claim is reported outside the policy period. (For more information on an occurrence within a CGL policy, please see https://floridaconstru.wpengine.com/insurance-risk-assessment-occurrence-duties-to-defendindemnify-coblentz-agreement/).

Professional liability policies (also known as errors and omissions policies), on the other hand, are routinely “claims made” policies, not occurrence based policies, meaning a “claim” for a wrongful act must be reported to the insurer within the policy period to trigger coverage.

There are claims made policies that have extended reporting (referred to as tail coverage) periods that allow the policy to still be triggered even if the claim is reported outside the policy’s period but within the extended reporting period. The insured may have to purchase this feature for additional premium in its claims made policy, but it is an important feature to protect the insured from gaps in coverage when a policy is not renewed, replaced with another policy, and/or cancelled. The reason is that if a policy is not renewed and replaced, the new carrier often advances the retroactive date to the start date of the new policy. Well, without an extended reporting period from the prior carrier, this means the insured may not have coverage for claims that are submitted to the new carrier due to a wrongful act prior to the retroactive date.

Claims made policies oftentimes contain a “retroactive date,” as mentioned above, that negates coverage for claims (wrongful acts) that took place prior to a specified date. Again, the retroactive date is often the start of the policy period. For instance, let’s say a professional liability claims made policy was written from April 1, 2014 through April 1, 2015 (the policy period). It may contain the April 1, 2014 as the retroactive date meaning that claims brought within the policy period but are the result of a wrongful act pre-April 1, 2014 would not be covered under the policy. This is why the extended reporting period / tail coverage becomes important!

Professional liability policies need to be reviewed because there are variations in policies and it is important to know what triggers a claim and when notice of a claim / potential wrongful act should be reported to the insurer.

An example of a professional liability claims made policy and its complicated application is discussed in Gidney v. Axis Surplus Insurance Co., 39 Fla. L. Weekly D741a (Fla. 3d DCA 2014). In this case, a mortgage brokerage firm arranged for privately funded mortgages through private investors. The firm was sued by a sole investor that claimed the firm negligently brokered and serviced the mortgages. The firm notified its professional liability carrier of the complaint (claim) within the policy period. Subsequently, a class action on behalf of all investors was filed against the firm. The professional liability insurer, in response to the complaint, filed a declaratory judgment action asking the court to declare there was no coverage under the policy for the class action since it was reported outside the policy period. The trial court issued the declaration in favor of the professional liability insurer and the investors appealed.

Of importance to understanding claims made policies, the Third District Court of Appeal analyzed importation provisions in the professional liability policy that are common to claims made policies although the language in the policies may be different. The Court first looked at the “claims first made” provision which discusses when the insurance will apply:

This insurance applies when a written Claim is first made against any Insured during the Policy Period. To be covered, the Claim must also arise from a Wrongful Act committed during the Policy Period.

The Company will consider a Claim to be first made against an Insured when a written Claim is first received by any Insured.

Next, the Court looked at the “related claims” provision that allowed related claims to relate back to the original notice of the claim (so that related claims reported outside the policy period would still be covered since they relate back to the timely reported claim). The related claims provision in the subject policy was to:

(a) to allow insurers to confine related wrongful acts to a single policy period and, thereby, a single liability limit, and

(b) to allow an insured to buy a new policy, despite facing additional liability exposure from its past acts, by having future related claims covered by the prior policy.

The Court then looked at the “reported wrongful acts” provision that allowed coverage if a written claim was submitted after the policy period but related to a wrongful act committed between the policy’s retroactive date and end of policy period and the insurer had notice during the policy period from the insured of the wrongful act. This provision is why providing the insurer notice of a potential wrongful act / claim that took place within the policy period is important. The reported wrongful acts provision provided:

This policy will apply to a written Claim first made against any Insured after the end of the Policy Period, but only if all of the following conditions are met:

(1) The Wrongful Act giving rise to the Claim is committed between the Retroactive Date and the end of the Policy Period;

(2) The Company receives written notice from the Insured during the Policy Period of the Wrongful Act. The notice must include all of the following information:

(a) The names of those persons or organizations involved in the Wrongful Act;

(b) The specific person or organization likely to make the Claim;

(c) A description of the time, place and nature of the Wrongful Act; and

1. A description of the potential Damages[.]

Lastly, the Court looked at the “multiple claims” provision that read:

All Claims arising from the same Wrongful Act will be deemed to have been made on the earlier of the following times:

(1) The date the first of those Claims is made against any Insured; or

(2) The first date the Company receives the Insured’s written notice of the Wrongful Act.

In reviewing this multiple claims provision, the Third District expressed: “[T]he Multiple Claims provision does not require that the insured anticipate the subsequent related claim or provide a description of the estimated damages that might result from any subsequent claim. Instead, in language crucial to this case, the policy states that all wrongful acts ‘related by common facts, circumstances, transactions, events and/or decisions . . . will be treated as one Wrongful Act.’” Based on this language, the Third District held that the class claim related back to the original investor’s claim which was within the policy period since it related to common circumstances, facts, events, and transactions; hence, there was coverage under the claims made policy.

As you can see, insurance policies are complicated and understanding all of the provisions is not an easy feat. It is important to work with your insurance broker and counsel, whether dealing with a claims made professional liability policy or occurrence based general liability policy, to preserve rights under policies and properly notify carriers of potential claims.

MAKE SURE ADDITIONAL INSURED COVERAGE IS FOR COMPLETED OPERATIONS

Posted on March 15, 2014March 15, 2014 by Edward Garber

Commercial general liability (“CGL”) insurance and additional insured coverage play an integral role in construction defect disputes. Specifically, general contractors want to ensure that they are an additional insured under their subcontractors CGL policies. (Subcontractors that engage other subcontractors to perform a portion of their scope likewise want to be an additional insured under their subcontractors’ CGL policies.) However, just being an additional insured is not enough. The key is that a general contractor should be an additional insured for ongoing operations and, importantly, completed operations since construction defects typically arise out of completed operations.

The recent Fifth Circuit decision in Carl E. Woodward, L.L.C. v. Acceptance Indemnity Insurance Co., 2014 WL 902575 (5th Cir. 2014), discusses additional insured coverage and the importance of additional insured coverage for completed operations. This case deals with the construction of a condominium in Mississippi. The general contractor hired a concrete subcontractor that performed work from January 2006 to October 2006 with the entire project being completed in August 2007. The general contractor was an additional insured under the concrete subcontractor’s CGL policy. Subsequent to completion, a construction defect dispute arose in arbitration that involved the concrete subcontractor’s scope of work. The concrete issues appeared to be that the subcontractor failed to properly slope concrete floors including balconies preventing water to drain and that it failed to install a step in the balcony slab at the balcony exterior walls and doors damaging exterior walls of condominium units.

The general contractor demanded that the concrete subcontractor’s CGL carrier indemnify and defend it in the dispute since it was an additional insured under the subcontractor’s policy (and the CGL carrier was responsible for indemnifying / defending it due to the negligence of the primary insured-concrete subcontractor). The concrete subcontractor’s CGL carrier refused to defend the general contractor because the additional insured endorsement stated that additional insured coverage was “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured.” The endorsement also provided a specific exclusion to additional insured coverage–the additional insured coverage did NOT apply to property damage occurring after all work to be performed by or on behalf of the additional insured has been completed. Basically, there was NO additional insured coverage for completed operations.

The general contractor and its insurer filed suit against the concrete subcontractor’s CGL carrier. The argument was that the CGL carrier failed to indemnify and contribute to defense costs in connection with the arbitration. After trial, the district judge entered a judgment in favor of the contractor for approximately $1 Million. The Fifth Circuit reversed this judgment because the dispute arose out of completed operations for which there was no additional insured coverage owed to the general contractor.

A. What does the additional insured coverage “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured” mean

The Fifth Circuit (relying on Mississippi law) held that under the additional insured language for ongoing operations, liability simply needs to arise out of ongoing operations–liability needs to be causally connected to the the subcontractor’s ongoing operations. But, what exactly does this mean? To determine what this specifically means, the Fifth Circuit examined the case of Noble v. Wellington Assoc., 2013 WL 6067991 (Miss.Ct.App. 2013), that involved post-completion foundation cracks in a house attributable to the site subcontractor’s compaction (before the house was even constructed). In Noble, the court maintained:

“Noble [additional insured] was only an additional insured for liability caused by Harris’s [site subcontractor] active [ongoing] work on the site and…did not cover property damage manifesting itself after Harris stopped working on the site…. [I]f Harris’s performance caused the damage for which Noble was liable, the cause was Harris’s completed work, not its ongoing operations. ” Carl E. Woodward, supra, at *6.

The Fifth Circuit further examined the Colorado case, Weitz Co., LLC v. Mid-Century Ins., Co., 181 P.3d 309 (Colo.App. 2007), whereby an owner observed water intrusion damage five months after the subcontractor completed its work. In Weitz, the court maintained:

“Because the contractor’s [additional insured] liability for the water intrusion damage arose out of the subcontractor’s completed operations–the work was completed five months before the intrusion–rather than its ongoing operations, there was no coverage under the additional-insured endorsement.” Carl E. Woodward, supra, at *7.

Additionally, the Fifth Circuit maintained that the additional insured endorsement (factoring in the specific exclusion that excluded property damage occurring after all work has been completed) only provided coverage for the concrete subcontractor’s ongoing (active) operations. In other words, it does not matter when the claim is actually filed as long as the liability does not arise out of completed operations.

Typically, and even as the Fifth Circuit noted, liability for construction defects arise out of completed operations. Even if liability arose out of the concrete subcontractor’s scope of work, the liability did not arise out of the subcontractor’s active / ongoing operations, but from the completed construction (when the owner received the completed building-substantial completion). Thus, once all work is completed, the liability and damage will arise from completed operations.

B. CGL is not a performance bond

CGL insurance is not a performance bond. I repeat, CGL insurance is not a performance bond. The reason for the repetition is because oftentimes arguments are made to essentially convert CGL insurance into a performance bond. The Fifth Circuit explained the difference between these two products that insure different risks:

“Allowing coverage under this [additional insured] endorsement because of an allegation that the additional insured failed to follow plans and specifications, effectively converts a CGL policy into a performance bond.
***
[A] performance bond is a form of insurance that guarantees the completion of the general contractor’s work on the project. This Circuit has previously noted the significance of the difference between these two forms of insurance [CGL and performance bond]: A CGL policy generally protects the insured when his work damages someone else’s property. The ‘your work’ exclusion [in the policy] prevent a CGL policy from morphing into a performance bond covering an insured’s own work.” Carl E. Woodward, supra, at *7 (internal quotations and citations omitted).

C. Take-aways

Take a look at the CGL policy and additional insured endorsement. There is a good chance the additional insured endorsement only provides additional insured status for ONGOING OPERATIONS and NOT COMPLETED OPERATIONS! This is absolutely not what a GC wants. It wants additional insured status for both ongoing and completed operations so that it can seek indemnification and defense for issues that arise post-completion.

Construction defect disputes often arise after substantial completion and after the owner receives the project. It is the owner that asserts the claim against the general contractor and the general contractor seeks indemnification and defense as an additional insured under subcontractors’ policies. If the subcontractor’s CGL policy does not provide for additional insured coverage for completed operations, courts and insurers will likely apply the same logic taken by the Fifth Circuit in this case. This is why obtaining a copy of the endorsement and requiring additional insured status for completed operations is important.

Even though contracts typically require the subcontractor to include additional insured coverage for completed operations, what the contract requires and what the policy states are oftentimes two different things. So, what is the recourse if a subcontractor’s policy does not comply with this provision? Well, you could include that the subcontractor failing to provide additional insured coverage for completed operations constitutes a material breach of contract. But, even if the contractor learns the right additional insured coverage is not being provided during construction, the chances of it terminating the subcontractor (and delaying the job) and finding a new subcontractor are probably slim to none. So what other recourse is there if this is learned during construction? Perhaps, if learned during construction, the provision can state that the general contractor is entitled to keep the subcontractor’s retainage as a form of liquidated damages based on damages that are not readily ascertainable. The subcontractor probably will not agree to such a provision. And, oftentimes, like this case, the additional insured coverage is not learned until after-the-fact when it is too late. Then what? Well, the contract already has an indemnification provision that would make the subcontractor responsible. The problem is that this provision is not additional insured coverage. Therefore, obtaining copies of subcontractors’ additional insured endorsements on the front end to determine whether there is coverage for completed operations is important.

CGL insurance is not a performance bond. They are two different insurance-type products with different purposes. Both can play a role in construction defect disputes. It is important to understand and appreciate their differences.

Finally, parties oftentimes try to navigate complicated CGL issues by themselves. This is a mistake. Parties should retain the services of counsel to assist them to ensure insurance claims are maximized and, if there is a performance bond in place, rights are preserved.

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

INSURANCE RISK ASSESSMENT: OCCURRENCE; DUTIES TO DEFEND/INDEMNIFY; COBLENTZ AGREEMENT

Posted on February 2, 2014February 2, 2014 by Edward Garber

Understanding when an “occurrence” under a CGL policy occurs is very, very important for purposes of submitting claims to insurers. It is important relating to its duties to defend and indemnify the insured.

The opinion in Trovillion Const. & Development, Inc. v. Mid-Contintent Cas. Co., 2014 WL 201678 (M.D.Fla. 2014), is a good opinion that discusses liability insurance considerations in a construction defect dispute including the triggering of liability insurance. In this case, a general contractor built a condominium over a multi-year period. Construction commenced in 2003. From 2003 through 2009, the contractor’s CGL carrier was Mid-Continent. Towards the end of 2009, it switched carriers to Endurance.

In 2009, the developer turned over control over the condominium to the unit owners. The association hired a company to perform an inspection of the condominium which revealed certain defects and building code violations (i.e., structural framing failure, organic growth, damage to interior finishes, etc.). The association sued the general contractor and developer in 2010 for violations of the building code, breach of statutory warranties, and deceptive and unfair trade practices.

The general contractor, as it should, notified and tendered the defense of its lawsuit to Mid-Continent and Endurance. Mid-Continent denied coverage and refused to participate in the defense. As a result, the contractor sued its insurer Mid-Continent for breach of contract and for a declaratory action arguing that Mid-Continent has a duty to defend and indemnify it in the association’s lawsuit. While this lawsuit was going on, the association’s lawsuit against the contractor was proceeding to trial. The contractor’s insurer, Endurance, was providing a defense. Right before trial, the association and the contractor (with the agreement of Endurance) entered into a consent judgment (known as a Coblentz agreement) for $1,800,000 which was entered in favor of the association against the contractor. The settlement provided that the association would not execute against the contractor. Following the court’s entry of the judgment, the contractor amended its complaint against Mid-Continent arguing that Mid-Continent is obligated to indemnify the contractor for the $1,800,000 judgment.

A Coblentz agreement is a settlement agreement between a third-party claimant and an insured to resolve a lawsuit where the insured’s liability insurer has denied coverage and its duty to defend. “Under Florida law, a party seeking recovery from an insurer under a Coblentz agreement must provide: (1) a wrongful refusal to defend; (2) a duty to indemnify; and (3) that the settlement was objectively reasonable and made in good faith.” Trovillion Const., supra, at *3. “In a traditional Coblentz agreement, the insured: (1) enters into a consent judgment establishing its liability and fixing damages; and (2) assigns any cause of action it has against its insurer to the claimant [in consideration of the claimant not executing on the judgment against the insured].” Id. at n.2.

In order to determine whether Mid-Continent had a duty to defend, the Court needed to determine what legal theory triggered the occurrence under the CGL policies. Numerous Florida courts have applied the manifestation theory meaning that the occurrence is triggered when the damage is discovered. There are courts that have applied the injury-in-fact theory meaning that the occurrence is triggered the moment there is actual damage irrespective of whether that damage is actually discovered. This is a significant difference and important for parties in liability-related disputes dealing with property damage to understand.

The underlying complaint the association asserted against the contractor alleged that the defects were causing ongoing damage and was silent as to the specific date the defects began to damage the condominium. But, the association’s inspection report after the developer turned the association over indicated that damages started to occur between the time construction commenced in 2003 and the 2009 inspection performed for the association. The report further alleged that the defects were not discovered until expert consultants were retained, i.e., in 2009. Mid-Continent argued that it had no duty to defend under the manifestation theory because the complaint alleged that the manifestation (when the defects were discovered) was 2009 at a point when it was no longer insuring the contractor. However, the court applied the injury-in-fact theory in this case. This meant that Mid-Continent’s policies were triggered because the triggering point was when actual damage started to occur, and not when it was actually discovered. Again, this is a crucial distinction–for this reason the Court found that Mid-Continent had a duty to defend.

Finding that a duty to defend existed, the Court’s next analysis was whether Mid-Continent had a duty to indemnify based on the actual coverage in the policies. An insurer’s duty to defend is much broader than an insurer’s duty to indemnify. Under a CGL policy with a “subcontractor” exception to the “your work” exclusion, a contractor’s insurer is not liable for the defective work caused by a subcontractor, but it is liable for the repairing the damage caused by the subcontractor’s defective work. (See the “subcontractor” exception to the “your work” exclusion in the CGL policy.)

Interestingly, in this case, of the six annual policies Mid-Continent issued between 2003-2009, only one policy contained the “subcontractor” exception to the “your work” exclusion. The other policies, through endorsement, eliminated the “subcontractor” exception. Without the “subcontractor” exception to the “your work” exclusion in CGL policies, the insurer is able to exclude coverage for damage arising from a subcontractor’s defective work. But, with the “subcontractor” exception, the insurer is liable for damage caused by a subcontractor’s defective work. Stated differently, without the “subcontractor” exception, the contractor is probably not getting the CGL coverage it thinks it is getting or needs when constructing a project with the potential for claims down the road (such as condo projects).

Because only one policy contained the “subcontractor” exception, the contractor needed to establish when the property damage occurred. Obviously, it is in its best interest to have expert testimony establishing that the date the damage occurred / was occurring was with the policy period where there was a “subcontractor” exception to the “your work” exclusion. Otherwise, Mid-Continent had no duty to indemnify!

Furthermore, Mid-Continent argued that even if the contractor proved that damage occurred within the policy period with the “subcontractor” exception, the consent judgment did not allocate covered damage to uncovered damage. In other words, the consent judgment did not allocate the portion of the damage attributable to repairing damage caused by subcontractors’ defective work. “Florida law requires Trovillion [contractor], the party seeking recovery, to allocate the settlement amount between covered and uncovered claim [and] [i]nability to allocate precludes recovery.” Trovillion Const., supra, at *8.

The contractor, unfortunately, presented no evidence that it could apportion damages. Based on this issue, the Court ruled:

“Trovillion is not relieved of its duty to apportion damages, and its failure to make any effort to do so or to produce evidence suggesting it is capable of doing so is fatal to its indemnification claim. For that reason, and because Trovillion has failed to produce more than a scintilla of evidence suggesting that non-excluded property damage occurred at the condominium community during the MCC [Mid-Continent] policy periods, MCC’s motion for summary judgment is due to be granted….”

There are quite a few important take-aways from this case. First, know what argument needs to be made to trigger an occurrence under a liability policy. Whether it is the manifestation theory or injury-in-fact theory, consider both theories when presenting an argument and claim to a carrier. Second, know that an insurer’s duty to indemnify is much narrower than its duty to defend which is based on the allegations of the complaint. Third, if entering into a Coblentz agreement and corresponding consent judgment, include something that apportions damage between uncovered damage (a subcontractor’s defective work) and covered damage (damage caused by a subcontractor’s defective work). And, fourth, know whether your liability policy has a “subcontractor” exception to the “your work” exclusion or whether the carrier issued an endorsement that eliminated that exception. This “subcontractor” exception is important to contractors in Florida so if the endorsement that eliminated this exception was issued, make sure that you know your risks. Insurance is a critical part of risk assessment. Know your rights and appreciate your risks!

For more on construction defect insurance considerations, please see https://floridaconstru.wpengine.com/construct-defect-insurance-considerations/

CONSTRUCTION DEFECT INSURANCE CONSIDERATIONS

Posted on January 12, 2014January 12, 2014 by Edward Garber

Construction defect cases most always involve CGL insurance consideration and claims. And they should. A contractor that received a defect claim from an owner (developer or association) will want to notify their CGL insurer to provide a defense and coverage. The contractor will also want to notify the responsible subcontractors that may be liable to the contractor for the owner’s claims as well as the subcontractors’ CGL carriers. The contractor will do so claiming the responsible subcontractor is responsible to indemnify the contractor for damage arising out of the subcontractor’s work pursuant to their contractual indemnification provision. The contractor will also claim that it is an additional insured under the subcontractor’s CGL policy (as required by the contract and hopefully confirmed by the additional insured endorsement) and the carrier is responsible for contributing to its defense and providing coverage for the negligence caused by the carrier’s insured-subcontractor.

The Middle District opinion in Redfish Keys Villas Condominium Association, Inc. v. Amerisure Insurance Co., 2014 WL 92710 (M.D.Fla. 2014), illustrates certain CGL considerations. In this dispute, a general contractor was hired by a developer to construct a condominium. After the condominium was turned over to the association, leaks were discovered. The association claimed the leaks originated from defects. The association sent a construction defects notice to the contractor (pursuant to Florida Statutes Chapter 558) and the contractor failed to respond. The association then filed suit against the contractor. For whatever reason, although the contractor’s counsel filed a notice of appearance in the case, nothing else was done and a final default judgment was entered against the contractor for the damages the association incurred in repairing the leaks.

After the judgment was obtained, the contractor’s CGL insurer reached out to the association, apparently not realizing a judgment had been entered against its insured. Upon receiving a copy of the judgment, the insurer denied coverage based on the contractor’s failure to provide notice of the claim to the insurer. However, although not discussed in the opinion, the insurer knew about the contractor’s claim as it was the one that followed-up with the association. Most likely, the association, as it should, notified the contractor’s carrier of the defect claims although it is uncertain whether they notified the carrier of the lawsuit. Or, perhaps, the contractor, as it should, notified its carrier when it received the construction defects notice from the association.

The association filed suit against the contractor’s insurer in federal court for a declaratory action and for the insurer’s breach of an intended third party beneficiary contract, that being the CGL insurance policy was for the benefit of third parties such as the association. The insurer moved to dismiss the breach of intended third party beneficiary contract claim. The Middle District denied the insurer’s motion to dismiss. The Middle District found that as a condition precedent to the association suing the insurer, the association needed to comply with Florida Statute s. 627.4136 which essentially requires a third party not insured by a liability insurer to first obtain a settlement or verdict against the insured as a condition precedent to suing the insurer for coverage under the policy. The association complied with this condition precedent as it sued the insured-contractor and obtained a judgment. The Middle District further found that in Florida, “an injured third party may maintain a cause of action against an insurer as an intended third party beneficiary under a liability insurance policy.” Redfish, supra, at *3 citing Shingleton v. Bussey, 223 So.2d 713 (Fla. 1969). In other words, the MIddle District found that as long as the association complied with Florida Statute s. 627.4136 (the condition precedent to a third party suing a liability insurer statute) it could maintain a breach of an intended third party beneficiary contract claim against the CGL insurer.

When representing the owner, it is good practice to notify the contractor’s insurer of not only the defect claim but of any potential lawsuit (to avoid any lack of notice coverage defense, especially if the contractor does not have an attorney on board at the time of the lawsuit). Further, when representing the contractor, it is good practice to not only notify the contractor’s CGL insurer, but to notify the responsible subcontractors’ carriers of the same (based on additional insured and indemnity requirements). And, irrespective of a subcontractor’s insurer’s position, it is good practice to keep the insurers apprised of any third party lawsuit the contractor files against the insured-subcontractors (again, to avoid any lack of notice coverage defense). While the Middle District in Redfish only entered a ruling on the insurer’s motion to dismiss at this stage, the insurer’s lack of notice coverage defense will certainly be a defense that the insurer relies on in the dispute.

Insurance considerations are a crucial part of construction defect claims. Understanding how to preserve rights and navigate through the process cannot be overstated.

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/

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/

CGL POLICIES AND THE “YOUR PRODUCT” EXCLUSION

Posted on September 10, 2013September 10, 2013 by Edward Garber

Understanding exclusions in insurance policies is important to understand what is and what is not covered under the policy. The recent case of Liberty Mutual Fire Insurance Co. v. MI Windows & Doors, 38 Fla. L. Weekly, D1890a (Fla. 2nd DCA 2013), discusses the “your product” exclusion that is found in CGL policies.

In this case, MI is a manufacturer of sliding glass doors. It sold its doors to All Seasons which installed the sliding glass doors in condominium projects. In some of the condominiums, All Seasons manufactured and installed transoms along the top of the sliding glass doors. Condominium associations sued MI and All Seasons when the condominiums experienced damage from tropical storms and hurricanes. MI settled the lawsuits. It then sued its CGL carrier to recover consequential damages and for the costs of replacing defective sliding glass doors in the condominiums.
The CGL carrier argued at the trial level that the “your product” exclusion barred coverage for MI’s damages to its products, i.e., sliding glass doors. The trial court found that the “your product” exclusion did not apply to the doors with transoms because adding the transoms to the top of the sliding glass doors significantly changed the doors. Thus, the doors were no longer MI’s product.

The “your product” exclusion in MI’s CGL policy provided that the insurance did not apply to:

“Damage to Your Product. ‘Property Damage’ to ‘your product’ arising out of it or any part of it.”

On appeal, the Second District reversed finding that “[t]he addition of transoms to the sliding glass doors did not fundamentally change the nature and function of those doors.” MI Windows & Doors, supra. In other words, because the sliding glass doors continued to operate as sliding glass doors even with the addition of the transoms, the doors remained MI’s product. For this reason, the Second District held that the “your product” exclusion applied to bar damages to replace the doors.

In MI Windows & Doors, the Court found that if alchemy alters the original product, then the “your product” exclusion may not apply based on cases outside of Florida that discuss this exclusion. Importantly, however, the Court footnoted Auto-Owners Ins. Co. v. American Building Materials, Inc., 820 F.Supp.2d 1265, 1272 (M.D.Fla. 2011), where the Middle District of Florida also discussed this exclusion. The Middle District in this case maintained that drywall that was incorporated into a house was not barred by the “your product” exclusion based on the language of the exclusion because the drywall, once incorporated, became real property and the exclusion did not apply to real property. Because this case or issue was not framed on appeal in MI Windows & Doors, the Court did not apply this case to the facts.

The “your product” exclusion can be found in CGL policies to bar coverage. Understanding the exclusion as written in the policy (as well as other exclusions) is important so that coverage is understood before or when a dispute arises.

A THIRD PARTY SUING A LIABILITY CARRIER

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

It is important to understand liability coverage, especially if you are a third party seeking liability coverage.

Florida Statute s. 627.4136 provides in material part:

“It shall be a condition precedent to the accrual or maintenance of a cause of action against a liability insurer by a person not an insured under the terms of the liability insurance contract that such person shall first obtain a settlement or verdict against a person who is an insured under the terms of such policy for a cause of action which is covered by the policy.”

Under this statute, a third party cannot sue a liability policy seeking a declaration that there is coverage for its claims without first obtaining a settlement or verdict against the insured of the liability policy. See Lantana Insur., Ltd. v. Thornton, 38 Fla. L. Weekly D1537a (Fla. 3d DCA 2013) (finding that trial court should have dismissed third party’s claim against liability policy where there had been no settlement or verdict against the insured and, thus, no compliance with Fla.Stat. s. 627.4136).

What if the third party is an additional insured under the primary insured’s liability policy? Section 627.4136 has also been referred as the non-joinder statute because even though an additional insured is technically an insured under the liability policy, a claim seeking coverage under the primary insured’s policy should either be stayed or severed from the third party’s claim against the primary insured. The reason is so the availability of insurance has no effect whatsoever on a jury’s determination of the primary insured’s liability and damage. See General Star Indemnity Co. v. Boran Craig Barber Engel Construction Co., Inc., 895 So.2d 1136 (Fla. 2d DCA 2005).

For example, in General Star Indemnity, a general contractor sued its fire sprinkler subcontractor for damages when the fire sprinkler ruptured. In the same lawsuit, the general contractor sued the subcontractor’s liability carrier for a declaratory judgment seeking coverage as an additional insured under the subcontractor’s policy. The insurer moved to sever and stay the claims against it which the trial court denied. On appeal through a petition for writ of certiorari, the Second District, relying on s. 627.4136, reversed the trial court holding that the general contractor’s claims against the subcontractor’s liability carrier should have been severed or stayed from the contractor’s action against its subcontractor.

Although an additional insured (e.g., general contractor) is an insured under a liability policy provided by the primary insured (e.g., subcontractor) and can sue the liability carrier (without first obtaining a settlement or verdict against the primary insured), it should not be able to do so in its action against the primary insured. It would be prejudicial to the primary insured and liability carrier because the jury would know about the availability of insurance. Notwithstanding, there is nothing that would prevent the additional insured from trying to file a separate declaratory action against the primary insured’s liability carrier and at least trying to consolidate the cases for purposes of discovery if the suits remain pending in the same court.

UNDERSTANDING AN INSURER’S SUBROGATION RIGHTS

Posted on May 30, 2013May 30, 2013 by Edward Garber

There are situations where an owner sues its property insurer (or builders risk insurer) in addition to suing its contractor or design professional for defects / damage. Sometimes, the owner’s lawsuit against its insurer is filed simultaneously with the lawsuit against its contractor and sometimes it is filed before or after it settles its dispute with its contractor. The contractor, if it knows the owner is suing its insurer, wants to ensure that once it settles with an owner, that the owner’s insurer will not pursue a subrogation claim against it. (In a subrogation claim, an insurer that pays its insured can stand in the shoes of the insured and sue third parties deemed liable for the claim.)

If a contractor settles with an owner and obtains a well-written release (that would release the contractor for all claims [known and unknown], damages, etc. arising out of or relating to the project and subject matter of the lawsuit/claim, etc.) the insurer will be precluded from asserting a subrogation claim against the contractor. The reason being is that the insured owner already released the contractor. See, e.g., Landmark American Ins. Co. v. Santa Rosa Beach Development Corp., 107 So.3d 1135 (Fla. 1st DCA 2012) (condominium development’s agreement with developer and contractor that was interpreted as containing release barred development’s insurer from seeking subrogation claim).
However, if the insurer is already suing the contractor in a subrogation claim or has perfected its rights, the contractor cannot try to settle with the owner and obtain a release thinking that the insurer’s claim would then be barred. The insurer cannot be prejudiced like this, especially if it already perfected its subrogation rights. For instance, in Twin City Fire Ins. Co. v. Jones, 918 So.2d 403 (Fla. 5th DCA 2006), an insurer paid an insured’s claim and then sued the defendants in a subrogation claim. The insured also filed a separate lawsuit against the defendants. The insured settled with the defendants and released the defendants. The defendants used the release to argue that the insurer should be barred from its subrogation claim. The Fifth District held that “a settlement executed by the insured cannot act as a bar to an action for subrogation by the insurer against a third party tortfeasor if, prior to the settlement, the tortfeasor learns of the insurer’s perfected subrogation rights. Twin City Fire Ins. Co., 918 So.2d at 404 quoting Lincoln Nat’l Health & Cas. Ins. Co. v. Mitsubishi Motor Sales of Am., Inc., 666 So.2d 159, 163 (Fla. 5th DCA 1995).

Understanding an insurer’s subrogation rights is important in construction. Oftentimes, there are waiver of subrogation rights that are set forth in contracts. Sometimes, these provisions are either stricken or the contract does not contain a waiver of subrogation. It is important to consider subrogation as a contractor if you have knowledge that the party suing you is also suing an insurer and/or you are being sued by an insurer in a subrogation claim (or the insurer has taken steps to perfect subrogation rights) so that you know your rights and options as the dispute progresses to settlement.