SUBCONTRACTOR’S LIABILITY INSURER’S DUTY TO DEFEND THE “ADDITIONAL INSURED” GENERAL CONTRACTOR

Posted on April 22, 2017April 22, 2017 by Edward Garber

Construction projects can lead to insurance coverage disputes. One such dispute arises when a general contractor is sued for construction defects and resulting property damage and it tenders the defense of the claim / lawsuit to an implicated subcontractor’s liability insurer. A general contractor does this because it (hopefully) will be an additional insured under the subcontractor’s liability policy. Being identified as an additional insured under a subcontractor’s liability policy is imperative for a general contractor as part of its normal risk assessment. The issue will typically come up in any construction defect lawsuit because if the general contractor is an additional insured it will, and should, tender the defense of the lawsuit to implicated subcontractors’ insurers.

Sometimes, a subcontractor’s liability insurer will deny the duty to defend the general contractor. Yes, this happens. When it does, the general contractor’s insurer will provide a defense to the general contractor but may pursue the subcontractor’s insurer for reimbursement of fees and costs based on the general contractor being an additional insured under the subcontractor’s liability policy.

For example, in Travelers Property Casualty Co. of America v. Amerisure Ins. Co., 161 F.Supp.3d 113 (N.D.Fla. 2015), the general contractor’s liability insurer (Travelers) sued a stucco subcontractor’s liability insurer (Amerisure) where the underlying issue was whether the general contractor was an additional insured under the subcontractor’s liability policy. The subcontractor’s insurer refused to defend the general contractor in an underlying construction defect lawsuit. The general contractor’s insurer provided a defense in the underlying lawsuit and sued the subcontractor’s insurer for reimbursement.

“Under Florida law, a liability insurer’s duty to defend extends to an entire lawsuit if any claim in the lawsuit may come within the policy’s coverage.” Travelers Property Casualty Co., 161 F.Supp.3d at 1137. The underlying complaint against the general contractor alleged property damage caused by defective stucco installation. This meant that the complaint triggered the duty to defend and the Court held the general contractor was an additional insured under the subcontractor’s liability policy. For this reason, the Court maintained that the subcontractor’s insurer (Amerisure) owed the general contractor’s insurer (Travelers) the reasonable attorney’s fees incurred in the defense of the general contractor in the underlying lawsuit:

When Amerisure [subcontractors’ insurer] failed to step up, Travelers [general contractor’s insurer] did what Amerisure should have done: Travelers provided Yates [general contractor] a defense. The attorneys Travelers hired chose to defend the case not only by answering the claims but also by asserting third-party claims against subcontractors, including Jemco [stucco subcontractor]. Travelers paid the fees and costs incurred in connection with the third-party claims, apparently concluding that this was the best strategy for defending the claims and that its duty to defend Yates thus obligated it to pay for the third-party claims as well. There is support for that view.

***

Had Amerisure provided a defense as it should have done, the attorneys it hired might or might not have made the same strategic decision as the attorneys hired by Travelers. But now Amerisure can complain, at most, about unreasonable decisions, not about decisions that reasonably could have gone either way. As a leading commentator has put it, when an insurer breaches its duty to defend,

the insured is justified in assuming the defense of the action and is released from the contractual obligation to leave the management of the case to the insurer. Not only does the insurer lose the power to control the defense or dictate to the insured how the case should be handled, but the insurer cannot complain about the conduct of the defense by the insured or the negligent handling of the case by the insured’s attorney.

Travelers Property Casualty Co. of America, 161 F.Supp.3d at 1138-39 (internal citations omitted).

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.

SHOULD CGL INSURER HAVE DUTY TO DEFEND INSURED DURING CHAPTER 558 NOTICE OF CONSTRUCTION DEFECTS PROCESS???

Posted on August 12, 2016August 12, 2016 by Edward Garber

Does a CGL insurer have a duty to defend its insured-contractor during Florida Statutes Chapter 558 notice of construction defects pre-suit process? This answer is currently undecided and will be up to the Florida Supreme Court to decide. (It is on appeal stemming from a federal district court saying that an insurer does not have a duty to defend its insured-contractor in the 558 process based on the definition of the word “suit” in the CGL policy.)

Why is this an important issue?

The 558 pre-suit notice of construction defects process is designed to facilitate an avenue for construction defect lawsuits to get resolved without having to file a lawsuit or, at least, have issues narrowed before a lawsuit needs to be filed. (Check here for a summary of the 558 process.) It requires pre-suit notifications so that implicated parties can become aware of the defects and have an opportunity to inspect the defects / damage, test the defects / damage, and respond to the notice of construction defects; it provides an avenue for beneficial pre-suit discovery. Through participating in the 558 process, the contractor and/or design professional (and those downstream from them) can: (i) offer to remedy the defect, (ii) settle the defect, whether through money or a combination of money and repairs, (iii) dispute the defect, or (iv) advise that available insurance proceeds will be determined by its liability insurer. See Fla. Stat. s. 558.004.

There are definitely some pros and cons to the 558 pre-suit process. There is no doubt about this. But, if the insured-contractor’s insurer is not on board with the process, then it invariably will fail (unless the defects are relatively minor in nature). Why will it fail? Because 558 notice of construction defect letters can contain an extensive laundry list of defects–some minor, some major and complicated. This means that the insured-contractor really needs an expert or experts on board to truly analyze these issues from a liability and damages standpoint including the most cost effective approach to remedy the defects and corresponding damage. This, as you can imagine, is costly. The insured-contractor also wants to know that if a monetary settlement is made, the settlement includes insurance proceeds for damages covered by the CGL policy.

All of this can really only effectively take place if the insurer defends the insured-contractor in this process to best assess its risk and any forthcoming lawsuit that should (hopefully) nevertheless trigger the insurer’s duty to defend its insured-contractor. Hence, there is no reason for the insurer not be engaged in the process and defend its insured-contractor, at least under a reservation of rights. Unfortunately, if the liability insurer disengages from the process and is not willing to defend its insured in the process, then the insured-contractor in many instances is best-off waiting for that lawsuit that will then (a) trigger the insurer’s duty to defend and (b) require the insurer to now incur the costs of the defense, including experts, to defend its insured. By the insurer not defending its insured-contractor earlier, such as the 558 process, all it is doing is inviting an expensive multi-party lawsuit and not educating itself of the nature of the defects and damage (i.e., its risk assessment) so that efforts can be made to resolve the defect claim, narrow the issues, or develop the framework of the defense.

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.

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

Posted on April 11, 2015April 3, 2023 by Edward Garber

I previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11^th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house. This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

In this case, the owners hired a general contractor to build their house. The general contractor had CGL insurance with products completed operations coverage. Upon discovering construction defects, the owners sued the general contractor. The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear). The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008. Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy. (This forms the framework for what is known as a Coblentz agreement.) The owners then sued the general contractor’s CGL insurer.

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

(A) Duty to Defend

The insurer’s duty to defend is triggered by the allegations in the complaint. Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.” Id.

(B) Triggering of an Occurrence Under CGL Policy

The insurer wanted the manifestation theory to trigger CGL coverage. Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage. Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later. Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010). Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

(C) Resulting Damage Covered Under a CGL Policy

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy. In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered. The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

(1) Brick

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself. If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work. However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors. Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

(2) The Tile and Mud Base

The trial court found that defective adhesive and an inadequate base caused damage to the tile. The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors. And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

(3) Balcony

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy. The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

Important take-aways:

This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered. Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.

Don’t forget about the injury-in-fact theory to trigger CGL coverage. If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy. This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.

Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship. Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.

Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.

If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant. The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you.

DO NOT LET LACK OF NOTICE VOID YOUR INSURANCE COVERAGE

Posted on September 7, 2014September 7, 2014 by Edward Garber

Unknown The Southern District of Florida’s opinion in Pharm. D v. Founders Insurance Co., 2014 WL 32557844 (S.D.Fla. 2014) illustrates that absolute importance of notifying a liability insurer of a claim and a lawsuit; otherwise, coverage that would be afforded to an insured could be voided. This should never occur!

In this matter, a water pipe ruptured and a fire occurred at the insured’s premises. This resulted in damage to a pharmacy located below the insured’s premises. Due to this damage, the pharmacy filed a lawsuit against the insured. The insured failed to take any action in the lawsuit and a default judgment was entered against the insured for in excess of $500,000.

Years later, the (third party) pharmacy sued the insured’s CGL (commercial general liability) insurer to recover the amount of its default judgment against the insurer. The insurer argued that coverage should be voided because its insured violated the terms of the policy. Specifically, the insured had the obligation to notify the insurer of any claim or suit as soon as practicable and to send copies of any lawsuit to its insurer. Apparently, the insured never did this and the insurer had no notice of the lawsuit. The Southern District agreed with the insurer that the lack of notice voided coverage:

“The insurance policy in question had a continuing notice obligation for a reason: the insured had the best information on legal action brought against it and, therefore, the insured was required to keep its insurer informed of developments. Accordingly, the insured had two distinct duties: (1) to notify Defendant [insurer] of any claims and (2) to notify Defendant of any lawsuits filed which may implicate the insurance policy.

***

The record shows there is no genuine dispute of material fact that the insured failed to notify Defendant of the state lawsuit and, thus, materially breached the insurance policy. As a matter of law, this breach absolved Defendant of its contractual requirement to defend in the state lawsuit and renders Defendant not liable on the default judgment entered in state court.”

Pharm. D, supra, at *3, *5.

The lesson learned from this matter is that if suing a party in which liability insurance is applicable (such as any case involving property damage or personal injury), take affirmative steps to ensure that the party’s liability insurer (CGL insurer) is notified of a claim and of the lawsuit. Even if the party does not respond to the lawsuit, send a copy of the lawsuit to the party’s insurer. Take steps to locate the insurer or the party’s insurance broker to ensure that proper notice is served and so that you are not relying on a potentially silent party to notify its insurer of a lawsuit (especially, when you are relying on insurance to cover your damages). Clearly, in this matter, the insured-party did nothing despite having CGL coverage that perhaps would have covered some of the pharmacy’s damages.

THE OH NO! MOMENT – REALIZING THE SUBCONTRACTOR EXCEPTION WAS ELIMINATED FROM THE “YOUR WORK” EXCLUSION

Posted on July 24, 2014July 24, 2014 by Edward Garber

The recent Eleventh Circuit decision in J.B.D. Construction, Inc. v. Mid-Contintent Casualty Co., 2014 WL 3377690 (11^th Cir. 2014), demonstrates the unfortunate applicability of the “your work” exclusion in CGL policies when the subcontractor exception (see image) to this exclusion was eliminated from the policy through an endorsement. This subcontractor exception to the “your work” exclusion is important…I repeat, important…to the general contractor and anyone performing construction work that subcontracts out their work. Realizing the subcontractor exception to the “your work” exclusion has been removed or eliminated through an endorsement will create the dreadful “Oh No!” (or one its many wonderful euphemisms) moment! Just ask the contractor in J.B.D. Construction.

In this case, a general contractor was hired to construct a fitness center as an addition to an existing building. The fitness center was going to be constructed with prefabricated components making up the shell, slab, and flooring. The general contractor engaged subcontractors to install the prefabricated components and subcontractors to install the required mechanical, electrical, and plumbing.

After construction, water damage was discovered in the fitness center caused by leaks from the roof, windows, and doors. The water damage consisted of blistering stucco, rusting steel, and the peeling paint. The general contractor implemented repair measures to stop the water intrusion. The owner, however, refused to pay the general contractor its final payment. The general contractor filed a lawsuit for this payment and the owner filed a counterclaim due to the leaks for breach of contract, negligence, and a violation of building code. The owner’s counterclaim alleged that the general contractor’s deficient work caused “damages to the interior of the property, other building components and materials, and other, consequential and resulting damages” as well as “damage to other property.” J.B.D. Construction, supra, at *2.

At issue was whether the general contractor’s commercial general liability (CGL) carrier owed the insured-general contractor a duty to defend and duty to indemnify. In particular, the general contractor tendered the owner’s counterclaim to its insurer for defense and indemnification. While the CGL insurer was conducting its investigation to determine if it would provide a defense, the general contractor settled the counterclaim with the owner, paying the owner from its own funds. The general contractor then notified its insurer of the settlement and required reimbursement (indemnification) for the settlement amount in addition to legal/defense costs it incurred. Thereafter, the insurer tendered an amount it determined it owed for legal fees minus the policy’s deductible, but did not reimburse the general contractor for the settlement amount.

The trial court granted the insurer’s motion for summary judgment in part finding that if any of the owner’s claims were for costs to repair the defectively installed roof, windows, and doors, these costs were NOT covered by the policy—they were excluded under the “your work” exclusion. The trial court further stated that the insurer did NOT have a duty to defend or indemnify the general contractor in the counterclaim because there was nothing in the counterclaim that alleged damage to property other than to the fitness center (the “your work”).

The “your work” exclusion in the policy excluded:

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 did not include what is commonly known as the subcontractor exception to the “your work” exclusion that says this exclusion does not apply if the damaged work or work out of which the damage arose was performed by a subcontractor. This is the Oh No! moment! It turned out that the subcontractor exception was eliminated through an endorsement that completely changed the application of the “your work” exclusion.

The Eleventh Circuit made it clear that removing or replacing defectively installed work is not property damage covered by the CGL policy. Ok. That should be clear. But, what about resulting damage or damage that arose from the defective work? With the subcontractor exception to the “your work” exclusion, resulting damage should be covered if the defective work was performed by a subcontractor; in other words, damage to another subcontractor’s work (e.g., drywall, flooring) should be covered if the damage arose out of a separate subcontractor’s defective work (e.g., roofer, glazer). The question, though, is whether this resulting damage is covered if the subcontractor exception was eliminated from the “your work” exclusion. Hence, if a roof leaks and causes damage to other property or work not performed by the roofing subcontractor, would this resulting damage be covered? The Eleventh Circuit held NO as any claims against the general contractor for damage to the fitness center (“your work”) arising from the general contractor or its subcontractors’ defective work are NOT covered under the policy:

Originally, the MCC Policy [CGL policy] also included a subcontractor exception to the “your work” exclusion, which stated that the “your work” exclusion did “not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” As originally written, therefore, the MCC Policy covered claims for damage to J.B.D.’s [general contractor] “work” arising from the faulty construction of J.B.D.’s subcontractors. However, this exception was eliminated by Endorsement CG 22 94 101 01. By eliminating the subcontractor’s exception, the MCC Policy no longer covered any claims for damage to J.B.D.’s “work” arising from work performed by J.B.D.’s subcontractors.

***

Therefore, the “your work” exclusion, absent the subcontractor’s exception, bars coverage for damages to the completed fitness center or its components (J.B.D.’s “work”) arising from J.B.D. or its subcontractor’s defective construction.

J.B.D. Construction, supra, at *6-7.

Now, even though the Eleventh Circuit held that there was no CGL coverage (thus, no duty for the insurer to indemnify the general contractor), the insurer still had a duty to defend. How could this be? Because the duty to defend is broader than the duty to indemnify and is dictated by the allegations in the complaint. If a complaint potentially triggers coverage, the insurer has a duty to defend unless there is an exclusion that applies to bar coverage based strictly on the allegations in the complaint. Since the complaint alleged buzz language “damage to other property” caused by the general contractor’s actions, this arguably included damage to non-fitness center property that would be covered and not considered the general contractor’s work. Based on this, and even though the Eleventh Circuit held that the insurer did not have to reimburse the general contractor for the settlement amount paid the owner, it found that the insurer breached the duty to defend by not defending the general contractor with respect to the counterclaim. The insurer argued that it tendered defense costs to the general contractor based on the attorney’s fees the general contractor incurred from the date of the tender to the insurer through the settlement with a deduct for the deductible. The Eleventh Circuit did not buy this argument stating that the general contractor accepted the money making it clear that it was not in satisfaction of the general contractor’s claim for additional payments/costs. For this reason, the Eleventh Circuit remanded the case back to the trial court to determine whether the general contractor is entitled to damages, including consequential damages, as a result of the insurer’s breach of its duty to defend the general contractor.

Practical Considerations

For the general contractor (or subcontractors that engage sub-subcontractors) – Look at your CGL policy. Does it have the subcontractor exception to the “your work” exclusion? If so, is there an endorsement that eliminates this subcontractor exception. In this case, it was endorsement CG 22 94 101 01 (see image without subcontractor exception) that simply did not include the subcontractor exception language. You do NOT want this endorsement as it strengthens the “your work” exclusion for many construction defect claims. Again, as a contractor that subcontracts work, you do NOT want an endorsement eliminating the subcontractor exception.

For the party asserting the complaint and party receiving the complaint– Remember the duty of the insurer to defend its insured is broader than the duty to indemnify so include buzz language in the complaint that there is “damage to other property” other than the work itself. It is always good to review the insurance policy of a party that you are suing to see whether there is an endorsement that eliminates the subcontractor exception to the “your work” exclusion. But, irrespective of whether you have the policy, including general buzz language could at least bring an insurer to the table and give an argument to the insured-defendant to get its insurer to defend the allegations in the complaint. If the insurer refuses to defend, there may be a potential avenue to explore that the insurer breached its duty to defend that may entitle the insured to certain, provable damages.

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.

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/

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/

UNDERSTANDING YOUR RIGHTS AS AN ADDITIONAL INSURED

Posted on March 9, 2013March 9, 2013 by Edward Garber

Being an additional insured is a topic discussed, and it absolutely should be, in the negotiation of construction contracts. It is an important part of risk management in construction. An owner wants its contractor and consultants to name it as an additional insured under their liability policies. A contractor, likewise, wants its subcontractors, etc. to name it as an additional insured under their liability policies.

Let’s say a general contractor wants its window/glazing subcontractor to name it as an additional insured under the subcontractor’s commercial general liability (CGL) policy. The window subcontractor would be the primary or named insured under its CGL policy. The general contractor, smartly, wants the window subcontractor’s CGL policy to have an endorsement that identifies the general contractor as an additional insured under that policy (ideally, for both ongoing and completed operations). By adding the general contractor as an additional insured, the window subcontractor is protecting / providing coverage to the general contractor for the window subcontractor’s negligence. It is not designed to protect the general contractor for its negligence — so the general contractor will still need its own liability insurance; rather, it is again designed to provide coverage to the general contractor for the window subcontractor’s negligence.

Let’s also say that during the subcontractor’s operations or after, an incorrectly installed window simply fell and caused an injury to a person or damage to property other than the window. (Yes, an extreme example!) As a result of the injury / damage, both the general contractor and the window subcontractor get sued. The general contractor will seek indemnification from the window subcontractor and the subcontractor’s CGL policy as an additional insured under the subcontractor’s policy. The reason being is that the general contractor wants to be indemnified by the subcontractor and have the subcontractor’s insurer provide it a defense and coverage because the window fell out due to the subcontractor’s negligence.

In this situation, either the window subcontractor’s CGL insurer should provide (pay for) a defense for both the window subcontractor (named insured) and the general contractor (additional insured) subject to the insurer’s reservation of rights. This can be done by the insurer retaining counsel for both the named insured or additional insured or, which may be the case in a multi-party litigation such as a multi-party construction defect case, contributing to the general contractor’s defense.

Importantly, in the recent decision of University of Miami v. Great American Insurance Co., 38 Fla. Law Weekly D392a (Fla. 3d DCA 2013), the Third District maintained that where both the named insured and additional insured have been sued in negligence with allegations that both caused the injury / damage to the plaintiff, the insurer (for the named insurer) is required to provide separate defense counsel for each in order to avoid conflicts of interest with one defense counsel. This is done to ensure that the additional insured has independent counsel to represent its interests.

Understanding rights of an additional insured is a must for any construction project in order to maximize insurance coverage and indemnification rights.