Category Archives: Insurance

A “LOSS RUNS” IS…

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Ever hear the terms “loss runs” or “loss runs report?”  These are actually common terms in the insurance industry. Insurance companies generate loss runs reports that reflect a history of the claim activity on your policies.  In other words, loss runs reports document claim history on a particular policy which is taken into consideration when an insurance company is underwriting a policy (including renewing a policy) and determining rates  / the premium for the policy.  The loss runs report will itemize the respective claims and will include the amount paid on a claim or held in reserve (set aside) to cover the claim provided the claim remains open.  The amount an insurer pays out on claims in addition to the amount held in reserve to cover claims are important determinations that affect the rate / premium of the policy.

 

An insured interested in their loss runs history or interested in procuring insurance can obtain their loss runs history from their insurer (or requesting directly from their broker).  Understanding claims history is important which is why requesting this important piece of underwriting information can be beneficial to you.

 

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.

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

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The recent Eleventh Circuit decision in J.B.D. Construction, Inc. v. Mid-Contintent Casualty Co., 2014 WL 3377690 (11th 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

 

Screen Shot 2014-07-23 at 5.47.19 AM

  • 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.

 

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.

“FORFEITURE” PROVISIONS IN INSURANCE POLICIES

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Insurance policies contain what are referred to as “forfeiture” provisions.  These are provisions where an insured through its actions / conduct can arguably forfeit coverage under the policy for a peril or claim that would otherwise be covered under the policy.  Typical examples of forfeiture provisions are post-loss obligations contained within the policy such as submitting timely notice, submitting a proof of loss, or complying with an examination under oath provision in a policy. As it pertains to these post-loss obligations (submitting timely notice, submitting a proof of loss, or agreeing to submit to an examination under oath), an insured should comply with them in order to remove any argument from the insurer that the insured forfeited coverage through non-compliance.

 

The recent case of Axis Surplus Ins. Co. v. Caribbean Beach Club Association, Inc., 39 Fla. L. Weekly D1350c (2d DCA 2014), demonstrates how an insurer can waive a forfeiture provision in a policy.  In this case, the insured condominium had a property insurance policy.  Fire was a covered peril under the policy.  The policy also contained additional coverage (at an additional insurance premium) through an Ordinance or Law Coverage endorsement.  This endorsement stated:

 

 

“b. With respect to the Increased Cost of Construction:

(1) We will not pay for the increased cost of construction:

(a) Until the property is actually repaired or replaced, at the same or another premises; and

(b) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.”

 

A fire damaged the property in April 2003.   After the governing authority inspected the damage, in late 2004, it implemented the 50% rule that provided “if a building is more than 50% damaged, any reconstruction or repair must comply with current building codes.”  This is the reason the insured condominium paid the additional premium for the Ordinance or Law Coverage endorsement. The implementation of this rule resulted in a huge increase to required construction costs because this meant that the condominium would need to replace the damaged building to comply with current flood elevation codes.

 

Initially, the insurer was cooperating with the insured condominium and was prepared to pay for the replacement work for the fire damage since fire damage was a covered peril.  It engaged a contractor that prepared a replacement estimate and intended to pay the full replacement cost.  However, in late June 2005, more than two years after the fire damage, the insurer told its insured condominium that it will not pay the increased costs of construction pursuant to the endorsement as it would rely on the two-year clause contained in the endorsement that provided: “Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.”  In other words, since the repairs were not made within two years from the loss or damage and never extended by the insurer, the insurer was denying the increased construction costs as a consequence of the governing authority requiring the repairs to comply with current code requirements.

 

The insured filed a lawsuit against the property insurer arguing that the insurer waived the right to rely on the two-year repair period in the endorsement.  The insured argued that the two-year provision was essentially a forfeiture provision that an insurer can waive.  The Second District agreed that the two-year provision was a forfeiture provision and, relying on Florida law, explained:

 

“Florida law abhors forfeitures. As a result, [i]f an insurer intends to stand on any forfeiture reservation, it should inform the insured as soon as practicable after it has ascertained facts upon which it bases its forfeiture.  It is equally well established that when an insurer has knowledge of the existence of facts justifying a forfeiture of the policy, any unequivocal act which recognizes the continued existence of the policy or which is wholly inconsistent with a forfeiture, will constitute a waiver.”

Caribbean Beach Club Association, supra (internal citations and quotations omitted).

 

Based on this law, the Second District held that the insurer waived its right to rely on this two-year forfeiture provision.  The insurer knew about the two-year provision to complete repairs from the date of loss and never brought it to its insured’s attention knowing full well that its insured expected that the insurer was going to pay the claim including the increased costs of construction as the result of the local governing authority implementing the 50% rule.  And, the insurer continued to adjust the claim even after the two-year window actually expired.   Since the insurer was not substantially prejudiced by the insured’s noncompliance with the two-year provision, and the insurer could not support that it was prejudiced, the Second District found that the two-year window did not apply and the insured was entitled to the increased costs of construction per the endorsement. To that end, the Court further held:

 

“The trial court correctly found as a matter of law that the two-year clause was a forfeiture provision waived by Axis [insurer]. When an insurer acquiesces to an insured’s failure to strictly adhere to a timetable of payment or performance, courts are inhospitable to the insurer’s sudden invocation of strict enforcement of forfeiture provisions.”

Caribbean Beach Club Association, supra.

 

For more information on forfeiture provisions, such as complying with post-loss obligations in a policy, please see: https://floridaconstru.wpengine.com/complying-with-post-loss-policy-conditions-under-an-insurance-policy/.

 

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.

CGL POLICIES AND THE EXCLUSION FOR POLLUTANTS

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Owners, contractors, and subcontractors, etc. need to understand the liability insurance coverage they maintain so that in event of a claim relating to bodily injury or property damage they know whether there is potential coverage for the claim.  Not only does this include understanding the exclusions in the policies, but also understanding endorsements that may further restrict or modify coverage.

 

CGL policies contain a pollution exclusion that excludes environmental pullutants / contaminants (as it has been referred to as an absolute pollution exclusion). If an entity requires the type of insurance to cover potential environmental liabilities, there is pollution liability insurance that can be procured, but this is separate from the CGL policy.

 

Although not a construction dispute, the recent case of Endurance American Specialty Ins. Co. v. Savits-Daniel Travel Centes, Inc., 2014 WL 2600071 (S.D.Fla. 2014), illustrates the general application of the pollution exclusion in a personal injury situation.  In this case, a woman was at a bar and was exposed to pepper spray causing her to fall and fatally hit her head. Her estate sued the owner of the premises and the owner tendered the claim to its CGL carrier.  The carrier denied coverage and an action for declaratory relief ensued to determine whether the CGL carrier was responsible for a duty to defend and indemnify.  The issue in the case was whether the pepper spray constituted a pollutant; if it was a pollutant, then bodily injury arising out of the pepper spray pollutant was excluded from coverage.

 

The policy contained the following language (common to CGL policies):

 

2. Exclusions This insurance does not apply to:

* * * *

f. Pollution

(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants”:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.

* * * *

SECTION V—DEFINITIONS

* * * *

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

 

In addition, there was an endorsement that further restricted coverage known as the “Mold, Fungus, Bacteria, Virus, and Organic Pathogen Exclusion:”

 

ENDORSEMENT

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE FORM

MOLD, FUNGUS, BACTERIA, VIRUS AND ORGANIC

PATHOGEN EXCLUSION

It is hereby agreed that this policy shall not apply:

1. to “bodily injury”, “property damage”, or “personal and advertising injury”;

2. to damages for devaluation of property or for the taking, use or acquisition or interference with the rights of others in property or air space;

3. to any loss, cost or expense, including but not limited to fines and penalties, arising out of any governmental direction or request, or any private party or citizen action, that an insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize “organic pathogens”; or

4. to any “suit” or administrative or regulatory procedure or process in which an insured may be involved as a party;

arising, directly or indirectly, or in concurrence or in any sequence out of or in any way relating to actual, alleged or threatened existence, discharge, dispersal, release or escape of “organic pathogens,” whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is sudden, accidental or gradual in nature.

 

This insurance shall not apply to any “bodily injury”, “property damage”, “personal and advertising injury”, loss, cost or expense arising out of or in any way related to any form of “organic pathogens,” whether or not such actual, alleged or threatened existence, discharge, dispersal, release or escape is intentionally caused, or whether or not such injury, damage, devaluation, cost or expense is expected or intended from the standpoint of the insured.

 

“Organic pathogen” means any organic irritant or contaminant, including but not limited to mold, fungus, bacteria or virus, including but not limited to their byproducts, such as mycotoxins, mildew, or biogenic aerosols.

 

 

The Southern District agreed with the CGL insurer based on the exclusionary pollution language in the policy that pepper spray was a pollutant excluded from coverage.

 

Check your CGL policy and corresponding endorsements.  You will see the pollution exclusion.  During construction, there are certainly pollution / environmental risks that would require a contractor to obtain such insurance to cover and address these risks.  The objective is know the risks you need covered and the policies you have in place to ensure you are being covered for those risks.

 

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.

QUALIFYING FOR ADDITIONAL INSURED STATUS

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

 

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

 

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

 

 

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

 

 

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

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

 

This case contains a couple of important take-aways:

 

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

 

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

 

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

APPLICATION OF CLAIMS MADE PROFESSIONAL LIABILITY POLICIES

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

 

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

 

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

 

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

 

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

 


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

 

 

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

 

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

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

 

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

 

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

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

 

 

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

 

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

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

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

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

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

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

           1. A description of the potential Damages[.]

 

 

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

 

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

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

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

 

 

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

 

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

 

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.

 

MAKE SURE ADDITIONAL INSURED COVERAGE IS FOR COMPLETED OPERATIONS

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

 

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

 

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

 

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

 

 


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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

B. CGL is not a performance bond

 

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

 

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

 

C. Take-aways

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

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

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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/

 

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.

CONSTRUCTION DEFECT INSURANCE CONSIDERATIONS

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

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.

WHAT TRIGGERS A LIABILITY INSURER’S DUTY TO DEFEND

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Parties in construction absolutely need to understand what triggers the duty of a liability insurer to defend a lawsuit. This needs to be understood not only by the insured-party being sued, but by the entity suing the insured-party. A liability insurer’s duty to defend its insured in a lawsuit is broader than its duty to indemnity its insured.  Keen v. Florida Sheriff’s Self-Insurance, 962 So.2d 1021, 1024 (Fla. 4th DCA 2007). The duty to defend is based on allegations in the complaint if the allegations potentially bring the claim within the policy’s coverage.  Id.; Pennsylvania Lumbermens Mut. Ins. Co. v. Indiana Lumbermens Mut. Ins. Co., 43 So.3d 182, 186 (Fla. 4th DCA 2010). “Once the insurer’s duty to defend arises [based on the allegations in the underlying complaint], it continues throughout the case unless it is made to appear by the pleadings that the claims giving rise to coverage have been eliminated from the suit.”  Pennsylvania Lumbermens, 43 So.3d at 186 quoting Baron’s Oil Co. v. Nationwide Mut. Ins. Co., 470 So.2d 810, 815 (Fla. 1st DCA 1985).

 

The recent opinion in Nationwide Mutual Fire Ins. Co. v. Advanced Cooling and Heating, Inc., 38 Fla. L. Weekly D2256a (Fla. 4th DCA 2013), demonstrates an insurer denying the duty to defend because the allegations against the insured did not potentially fall within the policy’s coverage. In this case, a service HVAC contractor was contacted because of a residential owner’s problem with an existing air conditioning system. The owner agreed to pay the HVAC contractor to install a new compressor. However, after the compressor was installed, the owner realized this did not cure his air conditioning problems and decided to stop the payment to the contractor. The HVAC contractor sued the owner and the owner counterclaimed asserting that the HVAC contractor breached the contract by failing to properly inspect his air conditioning system which resulted in unnecessary repair. The HVAC contractor tendered the counterclaim to its CGL carrier to defend it; the insurer denied coverage since the allegations in the complaint did not potentially trigger policy coverage.

 

The HVAC contractor retained counsel and successfully prevailed against the owner’s counterclaim. It also filed a lawsuit against its CGL insurer for a declaratory judgment that its insurer had a duty to defend it. The trial court agreed with the HVAC contractor and awarded fees and costs against the insurer pursuant to Florida Statute 627.428. (This statute allows for an insured to recover its attorneys’ fees and costs if it obtains a judgment against its insurer.)

 

The Fourth District, on appeal, reversed finding that the insurer did not have a duty to defend based on the owner’s allegations in the complaint. As the Fourth District found: “The [CGL] insurance policy issued to Advanced [insured-contractor] covers “bodily injury” or “properly damage” resulting from an “occurrence” pursuant to the policy definitions. The [residential owner’s] breach of contract claim alleges only that an improper or unneeded repair resulted in an unnecessary $438 expense to the customer. There are no allegations of bodily injury or property damage at all.”  Advanced Cooling and Heating, supra.

 

The insured-contractor tried to argue that the residential owner claimed that it installed the compressor in an unworkmanlike manner that caused a leak in the air conditioning system that damaged the compressor. However, the Fourth District shot this down because damage to the compressor or the air conditioning system was not resulting damage or property damage other than the property being repaired.

 

Liability insurance is not designed to cover the insured’s defective work or damage to the insured’s work caused by the insured. In the residential owner’s underlying claim, there was not personal injury or property damage resulting from the service HVAC contractor’s work. Understanding the duty of a liability insurer to defend a lawsuit should be important to any plaintiff seeking insurance coverage to pay for damage. Likewise, it is important to the insured-contractor that expects or wants its insurer to defend it in what can be a costly litigation.

 

For more information on liability insurance coverage, please see https://floridaconstru.wpengine.com/cgl-policies-and-the-importance-of-couching-the-claim-to-the-insurer/

 

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