UNDERSTANDING LIABILITY INSURER’S TWO DUTIES: TO DEFEND AND TO INDEMNIFY

Posted on December 10, 2022December 10, 2022 by Edward Garber

A liability insurer has two duties that are the crux of a liability policy: the duty to defend the insured in legal actions and the duty to indemnify the insured from losses covered under the policy. Many times, policyholders (insureds) do not fully understand or appreciate these two important duties. They need to and this is why having private counsel assist with coverage-related considerations is an absolute must.

An insurers’ duty to defend is separate from its duty to indemnify. A recent opinion out of the Middle District of Florida in Progressive Express Ins. Co. v. Tate Transport Corp., 2022 WL 16963815 (M.D.Fla. 2022) clarifies the distinction between these duties with a focus on an insurer’s initial duty — the duty to defend. Please read below so you can have more of an appreciation of these duties. The court does a good job discussing Florida law with the emphasis on when an insurer’s initial duty to defend kicks-in:

Duty to Defend

Under Florida law, “an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.” The duty to defend is a broad one, broader than the duty to indemnify, and “[t]he merits of the underlying suit are irrelevant.” We determine whether an insurer has a duty to defend its insured based only on “the eight corners of the complaint and the policy,” and only as the complaint’s alleged facts are “fairly read[.]” The “facts” we consider in evaluating the duty to defend come solely from the complaint, regardless of the actual facts of the case and regardless of any later developed and contradictory factual record. “Any doubts regarding the duty to defend must be resolved in favor of the insured,” and “where a complaint alleges facts that are partially within and partially outside the coverage of an insured’s policy, the insurer is not only obligated to defend, but must defend that entire suit[.]” But of course, because the lawsuit must be for something covered by the insurance policy, “the insurer has no duty to defend” when “the pleadings show the applicability of a policy exclusion.”

An insurance policy can, without creating a conflict or ambiguity, both provide coverage and exclude some things that might otherwise fall within that coverage. On the other hand, an insurance policy’s coverage becomes illusory if it grants coverage in one provision and completely takes it away in another provision.

Because [insurer] relies on an exclusion to deny coverage, “it has the burden of demonstrating that the allegations of the complaint are cast solely and entirely within the policy exclusion and are subject to no other reasonable interpretation.”

***

An insurer’s duty to defend an insured in a legal action under Florida law “arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.” Even if the allegations in the complaint are meritless, the duty to defend nonetheless arises. All doubts about whether the duty to defend applies are resolved in favor of the insured. “If an examination of the allegations of the complaint leaves any doubt regarding the insurer’s duty to defend, the issue is resolved in favor of the insured.”

Progressive Express Insurance, supra, at *3-5 (internal citations omitted).

Duty to Indemnify

“While the duty to defend is broad and based on the allegations in the complaint, the duty to indemnify is determined by the facts adduced at trial or during discovery.”

Therefore, unlike the duty to defend, the trial court must look beyond the allegations in the underlying complaint to decide whether an insurer has a duty to indemnify. The duty to indemnify arguably may not become fully ripened until the merits of the underlying litigation are resolved.

Progressive Express Insurance, supra, at *6 (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.

ALLOCATING COVERED AND UNCOVERED DAMAGES IN JURY VERDICT

Posted on January 16, 2021January 16, 2021 by Edward Garber

When a liability insurer defends an insured from a third-party claim, they oftentimes do so under a reservation of rights. A reservation of rights letter is issued to the insured that identifies certain coverage exclusions or reservations relative to the insurance policy that may impact the insurer’s duty to indemnify the insured for damages. In other words, just because the insurer is defending its insured does not mean it will be indemnifying its insured for damages asserted in the third-party claim.

Under Florida law, the party claiming insurance coverage has the initial burden to show that a settlement or judgment represents damages that fall within the coverage provisions of the insurance policy. An insured’s inability to allocate the amount of a judgment between covered and uncovered damages is therefore generally fatal to its indemnification claim. However, the burden of apportioning or allocating between covered and uncovered damages in a general jury verdict may be shifted to the insurer if the insurer did not adequately make known to the insured the availability and advisability of a special verdict.

QBE Specialty Ins. Co. v. Scrap Inc., 806 Fed.Appx. 692, *695 (11^th Cir. 2020) (internal citations omitted).

This is an important concept because even when the insurer is defending its insured under a reservation of rights, it may put its insured on notice that because of coverage concerns, the insured needs to include special interrogatory questions in the verdict form for the trier of fact (jury) to answer to determine covered versus uncovered damages. If the insured fails to do so, it will give the insurer a very strong argument to avoid any indemnification obligation it has with respect to the judgement. This mean the insured is on the hook to deal with the judgment without insurance coverage.

For example, in QBE Specialty Ins. Co., an insured was sued for a nuisance stemming from its metal shredding operations. The insured’s liability insurer defended the insured under a reservation of rights. During the course of the case, the insurer notified the insured that it needed special interrogatory questions in the verdict form because of coverage concerns. The jury awarded $750,000 in nuisance damages against the insured. There was no allocation for covered versus uncovered damages. The insurer then filed a separate declaratory relief coverage action claiming it was not obligated to indemnify the insured for the $750,000 in damages. The Eleventh Circuit Court of Appeals, affirming the trial court, agreed because “in the absence of an allocated verdict form in the underlying trial, [the insured] never provided the district court with a plausible method for separating those damages awarded by the jury that are covered by [the insurer’s] policies from those that are not.” QBE Specialty Ins. Co., supra, at *696.

INSURER’S DUTY TO INDEMNIFY NOT RIPE UNTIL UNDERLYING LAWSUIT AGAINST INSURED RESOLVED

Posted on November 3, 2019November 3, 2019 by Edward Garber

A liability insurer has two duties: 1) the duty to defend its insured; and 2) the duty to indemnify its insured.

With respect to the second duty – the duty to indemnify – this duty is typically “not ripe for adjudication unless and until the insured or putative insured has been held liable in the underlying action.” Hartford Fire Ins Co. v. Beazer Homes, LLC, 2019 WL 5596237, *2 (M.D.Fla. 2019) (internal quotation omitted).

For instance, Beazer Homes involved an insurance coverage dispute stemming from construction defects. An owner sued its general contractor for construction defects relating to stucco problems. The general contractor paid for the repairs. The general contractor then sued its stucco subcontractor to recover the costs it incurred. The subcontractor tendered the defense of the lawsuit to its commercial general liability insurer which is defending its insured-subcontractor under the commonly issued reservation of rights.

During the pendency of the general contractor’s lawsuit against its subcontractor, the subcontractor’s commercial general liability insured filed an action for declaratory relief in federal court seeking a declaration as to whether it owes its subcontractor a duty to indemnify. The issue was whether this action for declaratory relief was ripe since there was no adjudication against the insured-subcontractor in the general contractor’s lawsuit against the subcontractor. The Middle District Court of Florida held that it was not ripe: “The Eleventh Circuit agreed that an insurer’s duty to indemnify is not ripe until the underlying lawsuit is resolved.” Beazer Homes, 2019 WL at *2 (internal quotation omitted)

LIABILITY INSURER’S DUTY TO DEFEND INSURED IS BROADER THAN ITS DUTY TO INDEMNIFY

Posted on May 3, 2019April 24, 2020 by Edward Garber

When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify. This broad duty to defend an insured is very important and, as an insured, you need to know this. “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.” Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted). This means:

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists. And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless. As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy. Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor. The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam. The owner sued the general contractor and the general contractor third-partied in the subcontractor. However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy. In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam. The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint. (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage. However, this is a very narrow exception that the court was not going to apply here.)

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.

CGL INSURER’S DUTY TO DEFEND BROADER THAN DUTY TO INDEMNIFY AND BASED ON ALLEGATIONS IN UNDERLYING COMPLAINT

Posted on February 9, 2019April 24, 2020 by Edward Garber

The duty to defend an insured with respect to a third-party claim is broader than the duty to indemnify the insured for that claim. The duty to defend is triggered by allegations in the underlying complaint. However, an insurer is only required to indemnify its insured for damages covered under the policy. A recent case example demonstrating the duty to defend is broader than the duty to indemnify can be found in Southern Owners Ins. Co. v. Gallo Building Services, Inc., 2018 WL 6619987 (M.D.Fla. 2019).

In this case, a homebuilder built a 270-unit condominium project where the units were included in 51-buildings. Upon turnover of the condominium association to the unit owners, the condominium association served a Florida Statutes Chapter 558 Notice of Construction Defects letter. There was numerous nonconforming work spread out among various subcontractor trades including nonconforming stucco work. The homebuilder incurred significant costs to repair defective work and resulting property damage, and relocated unit owners during repairs. The homebuilder then filed a lawsuit against implicated subcontractors. One of the implicated subcontractors was the stucco subcontractor.

The stucco subcontractor’s insurer filed an action for declaratory relief claiming it had NO duty to defend or indemnify the subcontractor in the underlying action because the subcontractor had a stucco/EIFS exclusion through an endorsement in its policy, referred tp as the “Exterior Finishing System and Stucco Exclusion.” The subcontractor’s policy also did not contain a subcontractor exception to the “your work” exclusion.

Regarding the elimination of the subcontractor exception to the “your work” exclusion, the Court noted that the elimination of the subcontractor exception was largely irrelevant since the stucco subcontractor was a subcontractor so its work was not the entire project (unlike the homebuilder or general contractors’ work). Rather, the stucco subcontractor’s work was its scope of work and the underlying complaint referenced damages beyond the stucco subcontractor’s own work to other building components. Thus, based on the allegations in the underlying complaint, the “your work” exclusion was not a basis to deny the duty to defend.

Regarding the stucco exclusion, the homebuilder argued that the subcontractor performed work outside of stucco work and the underlying complaint contained allegations unrelated to the application of stucco including framing work, miscellaneous work, and wrapping the buildings. In other words, the Court did not have sufficient evidence that each allegation of nonconforming work related to the stucco subcontractor related to or arose out of the installation of stucco to trigger the full application of the stucco exclusion. Thus, this was not a basis to deny the subcontractor the duty to defend.

At this time, it is uncertain the magnitude of covered damages under the policy in light of the stucco exclusion and property damage resulting from the subcontractor’s defective work (certainly an issue to consider). However, the insurer owed the subcontractor a duty to defend based on the allegations in the underlying complaint demonstrating the importance of crafting allegations in the underlying complaint. The insurer’s indemnification obligation for covered damages, however, may be a different story and it is uncertain how a stucco subcontractor could have an endorsement that contains a stucco exclusion. Take a look at your policy and, particularly, endorsements that further restrict coverage to ensure you do not have an exclusion relating to your own scope of work that would negate the value of the policy to you for property damage claims.

CGL POLICIES AND THE PROFESSIONAL LIABILITIES EXCLUSION

Posted on August 11, 2018April 24, 2020 by Edward Garber

Commercial general liability (CGL) policies for contractors traditionally contain a professional liabilities exclusion. This exclusion is generally added through a specific endorsement to eliminate coverage for professional services. Read the endorsement The point of the exclusion, in a nutshell, is simply to eliminate a CGL policy for a contractor serving as a professional liability policy.

Contractors need to appreciate a professional liabilities exclusion added through endorsement because oftentimes there are delegated design components they are responsible for. Perhaps the contractor value engineered a system and is responsible for engineering and signing and sealing the engineered documents (through its subcontractor) associated with that system. Perhaps there is a performance specification that requires the contractor to engineer a system. Perhaps there is a design-build component. Regardless of the circumstance, this professional liabilities exclusion can certainly come into play, particularly if a defect is raised with the design or professional services associated with the engineered system.

In a non-construction case dealing with a professional liabilities exclusion, the Second District Court of Appeal in Alicea Enterprises, Inc. v. Nationwise Ins. Co. of America, Inc., 43 Fla.L.Weekly D1713b (Fla. 2d DCA 2018) held:

Whether a professional service has, or has not, been rendered is a fact-intensive analysis. Thus, when deciding whether an act arises out of the rendering of or failure to render a professional service, the court must focus on the act itself and not the character of the individual performing the act. The act from which the claim arises must be related to a professional service that requires the use of professional judgment or skill.

Id. (internal citations omitted).

In this case, the insurer issued a CGL policy to a pharmacy. The pharmacy was sued in a negligence action. The pharmacy’s CGL insurer filed an action for declaratory relief claiming it had neither a duty to defend nor indemnify its insured (the pharmacy) since the underlying claims arose out of professional services and the CGL policy contained a professional liabilities exclusion.

The Second District maintained, as to the insurer’s duty to defend its insured, that the insurer had a duty to defend the pharmacy (insured) in the negligence action because the allegations in the underlying complaint could be deemed unrelated to professional services.

The Second District maintained, as to the insurer’s duty to indemnify its insured, that this duty is more fact-intensive and without sufficient discovery, there was a genuine issue of material fact as to whether the evidence brought the pharmacy’s conduct within the meaning of the professional liabilities exclusion in the CGL policy.

Here, while the pharmacy will get the benefit of the insurer’s duty to defend since that is triggered by the underlying complaint, the duty to indemnify is different and triggered by the facts. It is likely that the facts in this case trigger the application of the professional liabilities exclusion, meaning the CGL insurer does NOT have a duty to indemnify the insured for the damages proven against it. Not the situation an insured wants to be in!

GOOD OLE DUTY TO DEFEND

Posted on July 30, 2017July 30, 2017 by Edward Garber

The good ole duty to defend. Certainly, a duty that should not be overlooked.

A commercial general liability insurer has two duties to its insured when it comes to third-party claims: 1) the duty to defend its insured and 2) the duty to indemnify its insured.

The insurer’s duty to defend its insured will always be broader than its duty to indemnify because this duty is triggered by the allegations in the lawsuit. (For this precise reason, insurers will oftentimes defend their insured under a reservation of rights.) The duty to defend is a very important duty as it is the first duty that typically comes into play when a third-party claim / action is initiated against the insured. Getting the insurer on board to provide a defense is an initial focus. One that cannot be neglected or overlooked.

If an insurer denies or refuses to defend its insured, this means the insurer is denying coverage outright. In other words, the insurer is coming out of the gate denying the duty to indemnify the insured and, as such, denying the duty to defend. There is no reservation of rights because the insurer is not going to provide a defense based on its denial of coverage. When this happens, it is imperative that the insured consult with counsel. Not later or tomorrow or down the road. But, now! Immediately. At a minimum, an insured wants to ensure that its insurer is picking-up the broader duty to defend and needs to make sure its rights are protected and preserved.

In Mid-Continent Casualty Company v. Flora-Tech PlantScapes, Inc., 42 Fla. L. Weekly D1649a (Fla. 3d DCA 2017), a general contractor initiated a third-party claim against a landscaper in a personal injury action. (It is uncertain whether the landscaper was hired by the general contractor or the developer.) The landscaper’s commercial general liability insurer denied coverage and, therefore, refused to defend the insured in the lawsuit. As a result, the landscaper initiated a fourth-party claim against its own insurer for coverage seeking a declaration that its insurer had a duty to defend it in the lawsuit and indemnify it for the third-party claims being asserted against it. Both the landscaper and its insurer filed motions for summary judgment and the trial court declared that the insurer had a duty to defend its insured, but that it was not making a determination as to the insurer’s duty to indemnify. From the insured-landscaper’s standpoint, this likely was fine because the landscaper was initially looking for a declaration that its insurer had a duty to provide it a defense in the personal injury action.

CONTRACTUAL LIABILITY EXCLUSION IN CGL POLICIES AND “INSURED CONTRACT” EXCEPTION

Posted on July 16, 2015July 16, 2015 by Edward Garber

Commercial General Liability (CGL) policies contain a CONTRACTUAL LIABILITY EXCLUSION (see adjacent picture). The contractual liability exclusion operates to BAR personal injury and property damage claims “which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.” Think indemnification claims which are assumption of liability claims and common in construction.

But, and this is an important but, there are two exceptions to this exclusion.

First, the contractual liability exclusion does not apply to liability for damages “that the insured would have in the absence of the contract or agreement.” Think tort claims.

Second, the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract’.” The key to this exception is the definition of an “insured contract.”

Applicable to construction, a key definition of an “insured contract” is “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.” This portion of the “insured contract” definition should ideally bring contractual indemnification claims back into play so that contractual indemnification claims are not barred by the contractual liability exclusion.

Be careful, though. There are endorsements to CGL policies that have modified the definition of “insured contract” to either remove the aforementioned definition all together, meaning contractual indemnification claims would be excluded. This is a bad endorsement to the definition of “insured contract” if you are involved in construction.

Or, this key definition of “insured contract” has been narrowed to include the following underlined language “that part of any contract…pertaining to your business…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 those acting on your behalf.” This means that if you contractually agree to indemnify another for that person’s negligence, this would not meet the definition of “insured contract” since you are agreeing to indemnify another for negligence not caused in whole or in part by you.

For example, the opinion in Mid-Continent Casualty Co. v. Royal Crane, LLC, 2015 WL 3609062 (Fla. 4^th DCA 2015), discusses this narrowed definition of “insured contract” with the underlined language above. In this case, a subcontractor leased a crane and crane operator from a rental company. The rental agreement between the subcontractor and rental company contained the following contractual indemnification language:

“Lessee [subcontractor] agrees to indemnify, defend and hold harmless Lessor [rental company], its employees, operators and agents from any and all claims for damage to property, damage to the work or bodily injury (including death) resulting from the use, operation, or possession of the crane and operator whether or not it be claimed or found that such damage or injury resulted in whole or in part from Lessor’s negligence, from a defective condition of the crane or operator or from any act, omission or default of Lessor.”

In other words, the subcontractor was agreeing to indemnify the rental company for the rental company’s negligence. This is known as a broad form indemnification provision.

During construction, a worker was hurt when a truss fell from the crane. The worker sued the rental company and the crane operator for negligence. The rental company and operator third-partied in the subcontractor based on the contractual indemnification provision in the rental agreement. However, the subcontractor’s CGL insurer denied coverage (and, thus, a defense in the lawsuit) based on the contractual liability exclusion.

As a consequence of the CGL insurer’s immediate denial of coverage, the subcontractor entered into a Coblentz settlement agreement with the rental company that allowed the rental company to sue the subcontractor’s CGL’s insurer for its wrongful refusal to deny the subcontractor a defense and for coverage under the subcontractor’s policy.

Coblentz Settlement Agreement

In a nutshell, a Coblentz settlement agreement is an agreement between an insured and a third-party claimant where the insurer denied coverage and, thus, the duty to defend its insured in an underlying lawsuit. The insured agrees to give the claimant a consent judgment to resolve the lawsuit and an assignment of its rights under its CGL policy to the claimant in exchange for the claimant not enforcing the consent judgment against the insured. This allows the claimant to now sue the insured’s CGL insurer directly to enforce the consent judgment. In doing so, the claimant must still prove: (a) the insurer wrongly refused to defend its insured, (b) there is coverage under the policy, and (3) the negotiated consent judgment was made in good faith and is reasonable. But, the consent judgment prevents the insurer from trying to argue the liability of the insured since that could have been argued in the underlying lawsuit that the insurer refused to defend its insured in. See Royal Crane, supra, at *4-5. (For more information on Coblentz settlement agreements, check out this presentation that discusses this in detail.)

“Insured Contract”

But, the heart of the case really pertained to the contractual liability exclusion and the definition of an “insured contract” as narrowed by endorsement. With respect to the definition of “insured contract” in the policy (see above language), the Fourth District Court of Appeals importantly held:

“[A]n indemnity agreement can be an ‘insured contract’ under the policy where the injury is caused by the indemnitee’s negligence, so long as the named insured ‘caused’ some part of the injuries or damages or is otherwise vicariously liable.”

Royal Crane, supra, at *7.

In other words, taking the above fact pattern, the indemnity agreement could constitute an “insured contract” to be excepted from the contractual liability exclusion if the worker’s injury was caused by the rental company’s (indemnitee) negligence, so long as the subcontractor (named insured in the CGL policy) caused some part of the injuries or was otherwise vicariously liable to the rental company for the injuries.

Unfortunately for the rental company, even under this favorable definition of an “insured contract”, the rental company’s third-party complaint against the subcontractor still did not trigger a duty of subcontractor’s CGL insurer to defend and cover the subcontractor:

“Hunter Crane’s [indemnitee-rental company] third party complaint did not assert a legal theory under which Cloutier [insured-subcontractor] can be said to have ‘caused’ the injury in whole or in part. No allegation described how Cloutier contributed to causing the accident. No allegation attempted to invoke the borrowed servant doctrine, which dictates that ‘one who borrows and exercises control over the servant or worker of another in effect assumes all liability for the activities of the borrowed servant or worker.’ Nor did the third party complaint cast Cloutier as the employer of an independent contractor who actively participated in or interfered with the job to the extent that it directly influenced the manner in which the work was performed.”

Royal Crane, supra, at *7 (internal quotations omitted).

For this reason, the Fourth District sided with the CGL insurer finding that the contractual liability exclusion barred coverage to the subcontractor such that the CGL insurer had no duty to defend or cover the subcontractor in the underlying litigation. This also meant that the rental company’s Coblentz settlement agreement provided it no value because it already agreed to give up rights to collect against the subcontractor and it could no longer collect against the subcontractor’s CGL insurer. What this case does exemplify, however, is the importance of pleading allegations to maximize insurance coverage as well as a more relaxed definition of an “insured contract” to hopefully prevent the application of the contractual liability exclusion.

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.