IMPAIRING YOUR INSURER’S SUBROGATION RIGHTS

Posted on April 21, 2024April 21, 2024 by David Adelstein

Liability insurance policies have a provision that allows them to subrogate to the rights of their insured. This provision is commonly referred to as a transfer of rights provision and reads:

If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them.

In a recent dispute, an insurer sued its insured claiming the insured breached the insurance policy-a contract—by impairing the insurer’s subrogation rights. In other words, the insurer claimed its insured breach the insurance contract and the transfer of rights provision above.

In this case, Seneca Specialty Ins. Co. v. Jade Condominium Ass’n, 49 Fla.L.Weekly D706h (Fla. 3d DCA 2024), a unit owner sued its association and another unit owner claiming that water flowing from limited common areas within the association’s control damaged its balcony. The other unit owner that was sued crossclaimed against the association. The association’s liability insurer provided the association with a defense in this lawsuit and ultimately paid policy limits to settle the crossclaim.

The association’s liability insurer did not know, however, that the association had a separate construction defect lawsuit going against the condominium’s developer, general contractor, design professional, and subcontractors. The lawsuit included construction defect allegations resulting in leaks to units and indemnification from unit owner claims brought against the association from the defects. The association settled with the defendants in the construction defect lawsuit for significant money and provided the defendants in the construction defect lawsuit with releases. The association did not notify its insurer before its insurer paid policy limits to settle the crossclaim in the separate lawsuit.

The association’s insurer sued the association for breach of contract claiming the association impaired its subrogation rights by settling with the construction defect defendants. The association moved to dismiss, which the trial court granted, arguing (i) the insurer was first required to sue the defendants and lose based on the releases before suing the association for breach of the insurance policy, and (ii) the damages the association recovered in the construction defect lawsuit are different damages, and do no overlap with the monies the insurer paid out, i.e., the insurer paid policy limits to settle a crossclaim due to damages to the interior of a condominium unit for which the association had no standing to sue. The appellate court reversed finding the association did not need to first “sue to lose” before filing its breach of contract lawsuit against the association for impairing its subrogation rights”

Regardless of whether [the insurer] will ultimately be successful in proving that (a) the releases are fatal to its right to recover from the Construction Defect Defendants, and (b) overlap exists between the settlement monies it paid and the damages it would have sought in an action against the Construction Defect Defendants, [the insurer] has met the burden of pleading these issues. We therefore hold that [the insurer] sufficiently pled a breach of contract claim against the Association. [The insurer] pled facts establishing all elements of a breach of contract claim, including damages arising from the Association’s alleged breach of the insurance policy, and the Association failed to set forth any legally cognizable basis for why such a claim should be deemed premature.

Seneca Specialty Ins. Co., supra.

The facts in this case should remind insureds that an insurer has subrogation rights and language in the policy prevents the insured from impairing those rights. Who knows what the outcome of this case will be as there is an argument the insurer should have “sued to lose” to bolster its breach of contract claim against its insured for impairing its subrogation rights.

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.

COMMENCING OF THE STATUTE OF REPOSE FOR CONSTRUCTION DEFECTS

Posted on October 24, 2021October 24, 2021 by Edward Garber

Florida has a ten-year statute of repose which applies predominantly to construction defect claims. This can be found in Florida Statute s. 95.11(3)(c). After ten years, any rights relative to a construction defect claim are time-barred. However, the statute of repose date has been watered down and can be made to be more of a factual question due to the lack of objectivity as to the date that starts the ten-year repose clock. The watering down of the statute of repose date benefits parties asserting construction defect claims provided they strategically appreciate the question of fact that can be created when up against the statute of repose. Stated differently, when up against the clock to assert a construction defect claim, strategically develop those facts, evidence, and arguments to maximize creating a question of fact as to when the statute of repose clock commenced. Conversely, as a defendant sued for construction defects, you want to maximize the facts, evidence, and arguments to fully establish the date the statute of repose clock had to commence for purposes of a statute of repose defense.

The recent opinion in Spring Isle Community Association, Inc. v. Herme Enterprises, Inc., 46 Fla. L. Weekly D2306b (Fla. 5^th DCA 2021) demonstrates the factual question associated with the clock that starts the statute of repose date. This factual question is created by Florida Statute s. 95.11(3)(c) that provides:

[T]he action [founded on the design, planning, or construction of an improvement to real property] must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

Spring Isle Community Association, supra. (Note, see also current s. 95.11(3)(c) version in effect per hyperlink above.)

Thus, the statute of repose must commence AFTER: (1) after the date of actual possession by the owner, (2) the date of the issuance of the certificate of occupancy, (3) the date of abandonment of construction if not completed, or (4) the date of completion or termination of the contract, WHICHEVER DATE IS LATEST. This foster the factual argument — which is the latest date and the facts supporting the latest date.

In this case, an association of a townhome community sued a homebuilder for construction defects. The homebuilder third-partied in implicated subcontractors. The homebuilder had a master contract with subcontractors and would issue applicable work orders to the subcontractors, which is a common practice with homebuilders. The stucco subcontractor moved for summary judgment based on the ten-year statute of repose arguing that the statute of repose period started when each townhome was issued a certificate of occupancy. This was based on this date occurring AFTER the homebuilders’ records reflecting it made payment to the stucco subcontractor after the stucco work was complete on a townhome building but prior to the certificate of occupancy on each townhome building. The trial court agreed and granted summary judgment as to the homebuilder’s third-party claim against the subcontractor. The homebuilder appealed arguing that the statute of repose period started when their contract was completed which occurred after the certificate of occupancy date. The appellate court found this was a question of fact and reversed summary judgment:

Additionally, the fact that [the homebuilder] may have made payments to [the stucco subcontractor] after completion of each unit does not establish that the payment constituted “final payment”…. Quite simply, the summary judgment evidence presented below was insufficient, as a matter of law, to determine the number of contracts that may have existed between [the homebuilder] and [stucco subcontractor] or to determine the completion date of the contract(s).

In the absence of competent evidence as to the date of occurrence for each of the four triggering events set forth in section 95.11(c)(3), or evidence that one or more statutory events is inapplicable, there is no way to determine which event occurred last. Therefore, without sufficient evidence to determine the contract completion date, a genuine issue of material fact remains as to the commencement date of the repose period. Accordingly, we conclude that the trial court erred in granting [the stucco subcontractor’s] motion for partial final summary judgment.

Spiring Isle Community Association, supra (internal citations omitted).

CONSTRUCTION DEFECT DAMAGES: BENEFIT-OF-THE-BARGAIN OR RELIANCE RECOVERY

Posted on July 27, 2020July 27, 2020 by Edward Garber

In the preceding article, I discussed a case where an owner sued its contractor and design professional for construction defects and design defects that contributed to the same damage. There was a valuable discussion in this case as to the measure of damages in a construction defect dispute. It is a discussion that construction defect parties and practitioners need to know. A plaintiff needs to know for purposes of proving damages at trial and working with an expert in furtherance of proving their damages. A defendant needs to know for the same reasons and to work with experts in establishing defenses to an owner’s construction defect and design defect damages.

“The proper measure of damages for construction defects is the cost of correcting the defects, except in certain instances where the corrections involve an unreasonable destruction of the structure and a cost which is grossly disproportionate to the results to be obtained.” Stated another way, “the measure of damages for breaching a construction contract is the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste.” However, “[i]f in the course of making repairs the owner elects to adopt a more expensive [i.e., a better] design, the recovery should be limited to what would have been the reasonable cost of repair according to the original design.” [This measure of damages is known as benefit-of-the-bargain damages.]

***

As an alternative to benefit-of-the-bargain damages, an injured party has a right to damages based on its reliance interest, including expenditures made in performance or in preparation for performance, the recovery of which will place the injured party in the position it occupied before entering into the contract. However, “[a]ny benefit retained from the expenditures made in reliance on the contract must be offset against the injured party’s damages.” In other words, a reliance recovery may be reduced to the extent that the breaching party can prove that a “deduction” is appropriate for any benefit received by the injured party. [This measure of damages is referred as a reliance recovery to damages.]

Broward County, Florida v. CH2M Hill, Inc., 45 Fla. L. Weekly D1736a (Fla. 4^th DCA 2020) (internal citations omitted).

In this case, the appellate court held that the trial court erred in its measure of damages because the owner’s damages were based on a redesign that was a different, better design than the bargained for original design (as there was evidence that the original design was doomed from the get-go even if constructed correctly). Thus, benefit-of-the-bargain damages did not apply–the owner did not present damages to correct defects per the original design but put on damages associated with its different and better redesign. Yet, the appellate court maintained that if the public owner could not repair the defects in the original design, “a viable alternative measure of damages [under the reliance recovery] was the [owner’s] out-of-pocket costs, less any benefits the [owner] received from the contracts.” Broward County, supra. For this reason, the Fourth District remanded back to the trial court to enter judgment based on the owner’s reliance recovery based on the evidence already presented at trial relating to the owner’s out-of-pocket costs for the original design and construction and a potential deduct for the benefit the owner received relative to the original design and construction.

COMPARATIVE FAULT APPLIED IN OWNER’S LAWSUIT AGAINST CONTRACTOR AND ENGINEER

Posted on July 26, 2020July 26, 2020 by Edward Garber

There is nothing like a good old-fashioned dispute between an owner and its general contractor and design professional relating to construction and design defects where both parties have a role in the owner’s damages. There are arguments that both the general contractor and design professional substantially contributed to the defects and damages. Are the contractor and design professional jointly and severally liable for the owner’s damages? Or, does comparative fault apply where the trial of fact allocates the contractor’s and engineer’s percentage of fault for the defects and damage? A recent case found that comparative fault applied such that the trier of fact, in this case the judge, could allocate damages based the judge’s finding of the parties’ percentage of fault. (For more information in comparative fault, please check this article.). Comparative fault is not what an owner ideally wants because joint and several liability would be preferred. However, this is what the contractor and engineer would want since their liability for damages is predicated on their percentage of responsibility as opposed to being liable for all of the damages.

In Broward County, Florida v. CH2M Hill, Inc., 45 Fla. L. Weekly D1736a (Fla. 4^th DCA 2020), a public owner hired an engineer for airport improvements that included a taxiway to be designed and constructed in accordance with the Federal Aviation Administration’s design requirements. The public owner also hired (i) a program manager to serve as its on-site representative and (ii) a separate engineering firm to provide materials testing and inspection services. The public owner also hired a contractor to construct the taxiway.

Prior to substantial completion of the taxiway, the public owner discovered indentations in the surface of the taxiway (referred to as rutting). This discovery prompted the public owner to investigate. The public owner directed the contractor to mill away two inches of asphalt and install new asphalt. The contractor achieved substantial completion in September 2008 and final completion in November 2008. The contractor then submitted its final payment application to the public owner. The public owner notified the contractor that it would retain money to deal with repairs associated with the indentations in the surface of the taxiway. The public owner hired a new engineer to design the repairs. The repair design was more robust (better) than the original engineer’s design because the repair engineer believed the new design was necessary to achieve a 20-year lifespan for the taxiway. A new contractor performed the repairs.

The contractor sued the public owner for nonpayment. The contractor also sued the engineer for professional negligence in the design of the taxiway. The pubic owner counter-sued the contractor for breach of contract and sued the engineer for breach of contract and indemnification. The public owner asserted that the contractor performed defective construction and the engineer committed errors, omissions, and defects in the design and was obligated to indemnify the public owner for liability arising out of the design. The public owner also sued its program manager (on-site representative) and testing engineer; these two parties settled prior to trial.

At trial, the public owner’s expert testified that both the contractor and engineer contributed to the indentations in the surface of the taxiway. The expert testified that the engineer’s design deviated from the Federal Aviation Administration’s requirements and was doomed to fail such that if the contractor complied with the design, it would still fail. The expert further testified that while the contractor contributed to the indentations as it failed to construct subgrade per the engineer’s design, it was to a lesser contributing factor than the engineer.

The engineer’s expert testified that the indentations were caused by undercompaction performed by the contractor. The expert further testified that the public owner’s program manager violated its standard of care by allowing the contractor to deviate from the engineer’s original design in numerous ways.

The contractor’s expert testified that the indentations were caused by the design and undercompaction.

The trial court found that both the engineer and the contractor’s breaches were the proximate cause of the redesign of the taxiway. The trial court also found that the public owner’s program manager, which had settled prior to trial, was also liable. The trial court further found that public owner’s total damages were $6,2703,303 of which $725,000 was paid to the public owner pre-suit by the program manager and testing engineer. After deducting this amount from the total damages, the trial court allocated damages as follows: (1) 60% was allocated to the non-party program manager (that had settled pre-suit); (2) 25% was allocated to the contractor; and (3) 15% was allocated to the engineer. The public owner appealed the allocation in the final judgment. The public owner argued that the trial court should not have apportioned liability at all because comparative fault does not apply in breach of contract cases. Instead, the public owner contended that the trial court should have found that the engineer and contractor were jointly and severally liable for the damage (indentations) because their separate contractual breaches caused a single, indivisible injury.

The Fourth District Court of Appeal disagreed with the public owner concluding that Florida Statute s. 768.81 dealing with comparative fault authorized the trial court to allocate fault. While comparative fault under s. 768.81 deals with negligence actions, it defines a negligence action as a “civil action for damages based upon a theory of negligence, strict liability, products liability, professional malpractice whether couched in terms of contract or tort, or breach of warranty and like theories. The substance of an action, not conclusory terms used by a party, determines whether an action is a negligence action.” Broward County, Florida, supra, quoting Fla. Stat. s. 768.81.

The public owner’s claim against the professional engineer was predicated on the engineer breaching a contractual standard of care that required it to design the taxiway pursuant to the Federal Aviation Administration’s standards. Although the public owner’s claims against the engineer were couched as a breach of contract, it was based on a theory of professional negligence (violation of a standard of care) warranting the application of comparative fault.

However, the public owner’s claims against the contractor were not based on a professional negligence theory. Nonetheless, the Fourth District held that comparative fault did apply:

Applying a holistic approach to analyzing the complaint, we conclude that the contract action against [the contractor] fell under the umbrellas of the ‘negligence action’ against [the engineer], so that the circuit court’s allocation of fault was appropriate. After all, [the contractor] was to perform the contract according to specifications designed by [the engineer], so the causes of action against each were necessarily intertwined. To prove its case against [the contractor], the public owner was required to prove that [the contractor’s] ‘breach of its contractual responsibilities was a substantial factor in causing the [public owner’s] extensive damages.’ This is compatible with the concept of ‘fault’…and parallels the tort notion of a violation of a duty of care that is the proximate cause of damages. Based on the evidence, the circuit court properly allocated fault among all actors whose conduct substantially contributed to the [public owner’s] damages.

CLASS ACTION CERTIFICATION BY ASSOCIATION FOR “MATTERS OF COMMON INTEREST”

Posted on July 4, 2020July 4, 2020 by Edward Garber

Associations have authority to pursue as a class, on behalf of all of their respective members, lawsuits “concerning members of common interest to the members.” Fla. R. Civ. P. 1.221. This includes, but is not limited to, the common property or the areas in which the association is responsible. But, what about matters or elements for which the association is not responsible or does not own? For example, issues or damages relative to a specific unit or owner that are prevalent throughout?

The Third District Court of Appeal addressed this question in Allied Tube and Conduit Corp. v. Latitude on the River Condominium Association, Inc., 45 Fla. L. Weekly D1518a (Fla. 3d DCA 2020) when in affirmed a class certification by a condominium association relating to the removal and replacement of the condominium building’s defective fire sprinkler system. In affirming the class certification by the condominium association, the Third District maintained:

Rule 1.221 expressly authorizes condominium associations to “institute, maintain, settle, or appeal actions or hearings in its name on behalf of all association members concerning matters of common interest to the members.” “[A]s to controversies affecting the matters of common interest . . ., the condominium association, without more, should be construed to represent the class composed of its members as a matter of law.” “[T]he common interest provision of the rule has been interpreted to permit a class action by the association for a construction defect located physically within a unit, rather than in the common elements, if the defect is prevalent throughout the building.” We, therefore, cannot say the trial court abused its discretion in finding that damages resulting from the replacement of the fire-sprinkler system throughout the building were a matter of common interest for purposes of certification at this stage of the litigation.

Allied Tube and Conduit Corp, supra (internal citations omitted).

Without knowing more, the association was presumably seeking damages that were prevalent throughout the building but may not have been damages owned exclusively by the association. This is the reason the association was seeking class certification. It could be damages associated with the removal and replacement of fire sprinkler in individual units. And, perhaps it is tied to the displacement of unit owners during this work. Regardless, the association at the class certification hearing established that the defect and damages were prevalent throughout the building and, therefore, a matter of common interest to the association. There is great value in having the association pursue the class on behalf of all of its members opposed to individual unit owners separately suing, where certain owners may not have the economics to pursue such individual lawsuit.

TEN-YEAR STATUTE OF REPOSE TO SUE FOR LATENT CONSTRUCTION DEFECTS

Posted on August 18, 2019August 18, 2019 by Edward Garber

If you are dealing with latent construction defects, it is imperative that you consult with counsel to understand your rights. This not only includes claims for property damage stemming from latent construction defects, but also personal injury stemming from such defects. There is a ten-year statute of repose to sue for latent construction defects. See Fla.Stat. s. 95.11(3)(c). After the expiration of this statute of repose you are out of luck, meaning you can no longer sue.

Now, I probably will not be the first to tell you that the statute of repose is not written so clear that you know the precise date it ends (or the last date you can sue for a latent defect). For this reason, you really want to operate conservatively, meaning it is always better to sue early if you think you could be running on the end of the statute of repose period. It is always advisable to avoid any legitimate argument that you filed your construction defect lawsuit too late.

In Harrell v. The Ryland Group, 44 Fla. L. Weekly D2054b (Fla. 1st DCA 2019), a subsequent owner of a house sued the original homebuilder in negligence for a construction defect causing a personal injury. The subsequent owner claimed the homebuilder defectively installed an attic ladder (that provided access to the attic for the original construction) which collapsed as he was using it. The homebuilder filed a motion for summary judgment that the statute of repose expired so the owner’s claim was time-barred. The First District agreed.

The subsequent owner tried to argue that the statute of repose did not apply because the installation of an attic latter does not constitute an “improvement” to real property and the statute of repose is based on actions “founded on the design, planning, or construction of an improvement to real property.” The First District was not having this argument because “the attic ladder at issue here was installed as part of the construction process of the home, required labor and money, made the property more useful/valuable in that it provides a more convenient means of access to another level, was not mere repair or replacement, and was affixed to the attic, making it an integral part of the home.”

Even something perceived as nominal like the installation or construction of an attic ladder can constitute an improvement to real property making it subject to the ten-year statute of repose to sue for latent defects. Hence, do not sit idle if you are dealing with a latent construction defect – take the conservative approach and start the required litigation process sooner than later.

RELEASE LANGUAGE EXTENDED TO SUCCESSOR ENTITY BUT ONLY COVERED “KNOWN” CLAIMS

Posted on June 8, 2019April 24, 2020 by Edward Garber

A recent case contains valuable analysis that has impact on whether a “successor” entity will be bound by a settlement agreement it was not a direct party to. This case contains arguments for contractors that can be raised in a number of different contexts if it is sued by a successor or related entity.

The same case discusses the difference between releasing a party for “known” claims without releasing the same party for “unknown” claims. This is an important distinction because unknown claims refer to latent defects so a release that only releases a party for known claims is not releasing that party for latent defects.

In MBlock Investors, LLC v. Bovis Lend Lease, Inc., 44 Fla. L. Weekly D1432d (Fla. 3d DCA 2019), an owner hired a contractor to construct a project. At completion, the owner transferred the project to an affiliated entity (collectively, the “Owner”). The contractor sued the Owner for unpaid work, the Owner claimed construction defects with the work, and a settlement was entered into that released the contractor for KNOWN claims. Thereafter, the Owner defaulted on the construction loan and agreed to convey the property through a deed in lieu of foreclosure to an entity created by the lender (the “Lender Entity”).

The Lender Entity sued the contractor for construction defects – in negligence (negligent construction) and a violation of Florida’s building code. The contractor argued that such claims should be barred by its settlement agreement with the Owner. There were two driving issues:

First, did the settlement agreement with the Owner extend to the Lender Entity because the Lender Entity was a successor entity to the Owner?

Second, even if the Lender Entity was a successor entity to the Owner, were the construction defects latent defects because the settlement agreement only provided a release of KNOWN (or patent) defects?

As to the first issue, the appellate court held that the Lender Entity was a successor entity to the Owner.

[I]t is rather clear that [Lender Entity] is in fact, [Owner’s] ‘successor’ for purposes of the settlement agreement with [contractor] because [Lender Entity] took over the Property and all of [Owner’s] rights with regard to the Property. Thus, [Lender Entity] clearly met the privity requirement for the application of res judicata in this case: it has a mutual or successive relationship to the same right that [Owner] had when it settled with [contractor]: a reduction in the amount owed to [contractor] for its services in exchange for releasing [contractor] from any claims of construction defects as provided for in the [settlement agreement].

As to the second issue, and really the driving issue whether or not the Lender Entity was a successor, was whether the release even protected the contractor from the types of construction defect claims sought. This is a question of fact because the settlement agreement only included a release of “known” claims and did NOT release the contractor for “unknown” claims, i.e., latent defects. Hence, the Lender Entity will establish such claims were unknown or could not reasonably have been discovered at the time of the settlement (a latent defect). The contractor will try to argue otherwise creating an issue of fact as to whether the settlement agreement released the contractor for the construction defects the Lender Entity is asserting.

SERVING THE 558 NOTICE OF CONSTRUCTION DEFECT LETTER IN LIGHT OF THE STATUTE OF REPOSE

Posted on October 13, 2018April 24, 2020 by Edward Garber

Florida Statutes Chapter 558 requires a Notice of Construction Defect letter (“558 Notice”) to be served before a construction defect lawsuit is commenced. This is a statutory requirement unless contractually waived for a completed project when latent defects or post-completion construction or design defects are pursued.

A recent Florida case held that this statutory requirement is NOT intended to bar a lawsuit based on Florida’s ten-year statute of repose for construction defects IF the 558 Notice is timely served within the statute of repose period. After the expiration of the statute of repose period, a construction defect lawsuit can no longer be commenced.

In Gindel v. Centex Homes, 43 Fla. L. Weekly D2112d (Fla. 4^th DCA 2018), homeowners took possession of townhomes on March 31, 2004. The homeowners discovered construction defects and on February 6, 2014 provided the 558 Notice to the homebuilder. This notice was served before the expiration of the ten-year statute of repose period. The homebuilder notified the homeowners it would not cure the defect and the homeowners initiated a construction defect lawsuit on May 2, 2014, more than ten years from when they took possession of their townhomes, and outside of the statute of repose period.

The issue was the application of Florida’s ten-year statute of repose in Florida Statute 95.11(3)(c).

The homeowners argued that its action commenced upon serving the statutorily required 558 Notice so that its lawsuit was timely filed.

The homebuilder argued that the homeowners commenced their action by filing the lawsuit after the ten-year statute of repose, irrespective of when the 558 Notice was served, meaning the construction defect lawsuit should be barred. The trial court agreed with this argument.

On appeal, however, the appellate court agreed with the homeowners that the presuit notice requirements called for in Florida Statutes Chapter 558 constitute an action for purposes of the statute of repose. In other words, by the homeowners serving the 558 Notice within the ten-year statute of repose period, the homeowners timely commenced their construction defect lawsuit. To hold otherwise would be to view Florida Statute Chapter 558 as a device to potentially bar claims when the required 558 Notice was timely served. This position makes sense considering a claimant cannot file a construction defect lawsuit without complying with Chapter 558. See Fla.Stat. s. 558.003.

When it is coming close to the ten-year statute of repose (or statute of limitations) deadline, the safer approach is to file the lawsuit and move to stay or abate the lawsuit pending compliance with the Florida Statues Chapter 558. This way this issue is fully avoided by the lawsuit already being initiated. This approach is also supported in Chapter 558 by stating the action shall be stayed pending compliance with the requirements of the statute. See Fla.Stat. s. 558.003.

SETTLING WITH SOME, BUT NOT ALL, OF THE DEFENDANTS IN A CONSTRUCTION DEFECT CASE

Posted on March 25, 2018March 25, 2018 by Edward Garber

Construction defect lawsuits can be complex multi-party disputes, especially when the plaintiff is doing what is necessary to maximize recovery. This means the plaintiff may sue multiple defendants associated with the defects and damage. For example, the owner (e.g., plaintiff) may sue the contractor, subcontractors, design professionals, etc. due to the magnitude of the damages. In many instances, the plaintiff is suing multiple defendants for overlapping damages. The law prohibits a plaintiff from double-recovering for the same damages prohibiting the windfall of a plaintiff recovering twice for the same damages. Perhaps this sentiment is straight common sense, but this sentiment is a very important consideration when it comes to settling with one or more of the defendants, while potentially trying the construction defect case as to remaining defendants. Analysis and strategy is involved when settling with some but not all of the defendants in a construction defect case (and, really, for any type of case). Time must be devoted to crafting specific language in the settlement agreements to deal with this issue. Otherwise, the settlement(s) could be set-off from the damage awarded against the remaining defendants.

The recent decision in Addison Construction Corp. v. Vecellio, 43 Fla.L.Weekly D625(a) (Fla. 4^th DCA 2018) details the analysis and strategy required when settling with some but not all of the defendants in a construction defect case, and the concern associated with a trial court setting-off the settlement amount from the damage awarded against the remaining defendants.

This dispute involved the sale of a high-end residential home where the buyer of the home sued numerous parties due to construction defects—the sellers, the developer, the general contractor, and subcontractors. Before trial, the buyer settled the dispute with certain subcontractors for a sum total of $2,725,000. The buyer then proceeded to trial with remaining defendants. Prior to trial, the buyer filed a motion in limine to exclude the remaining defendants from mentioning these subcontractor settlements. The trial court granted the motion. After trial, the plaintiff was awarded approximately $3.5 Million in damages associated with the construction defects. However, smartly, remaining defendants moved the trial court to set-off the sum total of the subcontractor settlements from the approximate $3.5 Million to reduce the overall principal judgment amount. The trial court granted the motion in most respects reducing the judgment amount finding that that the settlements covered the same damage. Remember, a party cannot recover double damages for the same issue.

An appellate issue dealt with this set-off of the subcontractor settlements from the total judgment awarded against the remaining defendants. This is a critical strategic legal issue, not to be taken loosely, when settling with defendants in a multi-party construction defect dispute, particularly when you may try the case against non-settling defendants.

The purpose of the setoff statutes is to prevent a windfall to a plaintiff by way of double recovery. Thus, any “settlement recovery sought to be set off must be ‘in partial satisfaction for the damages sued for.’ ” Accordingly, “[i]f the settlement funds are applicable to a claim asserted only against the settling co-defendant, the non-settling co-defendants are not eligible for a set-off in the amount of the settlement.” In the same vein, “[w]hen a settlement recovery is allocated between claims with different and distinctive damage elements, set-off should only be allowed to co-defendants jointly and severally liable for the same claims.”

***

Although the same-damages-sued-for prerequisite seems simple enough in theory, because settlement agreements are often so broadly worded, in practice it is not always easy to determine whether damages paid as part of a settlement overlap with damages awarded against a remaining co-defendant. To that end, the law provides that if settlement proceeds are “not apportioned between (a) claims for which co-defendants are jointly and severally liable with the settling co-defendant, and (b) claims which were only asserted against the settling co-defendant, the entire amount of the undifferentiated recovery is allowable as a set-off.” This is the case even where some of the settlement amount may have been for different damages and the settlement amount exceeded the damages it setoff.

Addison Construction Corp., supra, (internal citations omitted).

Clearly, while this law seems simple, it is not. And it certainly is not in a multi-party construction defect case which is why—again—settling with some but not all defendants in a construction defect case requires analysis and strategy. Otherwise, what could happen is a trial court setting-off the total sum of the settlements from the principal damages awarded at trial. Probably not what the plaintiff had in mind! This is what the trial court did in this case based on otherwise broad language in the respective settlement agreements. Guess what? The appellate court agreed:

In sum, because the subcontractor settlement agreements failed to differentiate the damages settled for, it is simply “impossible to know whether [Buyers] would be receiving a duplicate payment” for their breach of contract based claims. If Buyers wanted to prevent this problem, they should have allocated the damages encompassed in each subcontractor settlement. Buyers made a strategic and understandable decision not to do so, and this is the end result. We acknowledge that this may seem harsh, but it is the only pragmatic result. If courts were required to delve into the scope of undifferentiated settlement agreements for the purposes of making a setoff determination, then post-judgment proceedings would turn into a second trial. Principles of judicial economy prohibit this result.

Addison Construction Corp., supra, (internal citations omitted).

GENERAL CONTRACTORS: CONSIDER IMPORTANCE OF “PRIMARY AND NONCONTRIBUTORY” LANGUAGE

Posted on February 5, 2017February 5, 2017 by Edward Garber

In prior articles, I reinforced the importance of general contractors including “primary and noncontributory” language in subcontracts and requiring the subcontractor to provide an analogous “primary and noncontributory” endorsement. As a general contractor this is important, particularly since you are going to require the subcontractor to (i) indemnify you for claims relating to personal injury, property damage, or death, and (ii) identify you as an additional insured under its commercial general liability (CGL) policy for claims arising out of the subcontractor’s scope of work. The “primary and noncontributory” language in your subcontracts allows you to maximize the value of your additional insured status.

A recent opinion explains why I reinforced the importance of this language.

The case of Zurich American Insurance Co. v. Amerisure Ins. Co., 2017 WL 366232 (S.D. Fla. 2017) involved an underlying construction defect lawsuit where a condominium association sued a general contractor. The general contractor hired subcontractors and required them to identify the general contractor as an additional insured. This is all routine, right? A few of the subcontractors had CGL policies issued from the same insurer (Amerisure). They contained the same additional insured endorsement that included the following “other insurance” clause:

Any coverage provided in this endorsement is excess over any other valid and collectible insurance available to the additional insured whether primary, excess, contingent, or on any other basis unless the written contract, agreement, or certificate of insurance requires that this insurance be primary, in which case this insurance will be primary without contribution from such other insurance available to the additional insured.

When the general contractor was sued it, as it should, tendered the defense of the lawsuit to the responsible subcontractors as an additional insured under their policies demanding both a defense and indemnification from the association’s claims. The insurer, however, refused to defend the general contractor. The general contractor’s insurer (Zurich) defended the general contractor in the action.

Thereafter, the general contractor’s CGL insurer sued the subcontractors’ CGL insurer. (The general contractor had also assigned its additional insured rights under the policies to its CGL insurer.) The general contractor’s CGL insurer was seeking reimbursement for the attorney’s fees and costs expended in the defense of the general contractor in the underlying construction defect lawsuit. The subcontractors’ CGL insurer moved to dismiss the claims based on the clause above—that the subcontractors’ CGL insurance operated as excess insurance over the general contractor’s CGL insurance. In other words, the subcontractors’ CGL insurance was not primary and noncontributory. There was no allegation that the subcontract included language requiring the subcontractor’s CGL insurer to be primary and noncontributory.

The first reason this is an important point is because “when an insurance policy defines its coverage as secondary or “excess” to a primary policy, the excess insurer has no duty to defend the insured—so long as the primary policy provides for a defense and its coverage has not been exhausted.” Zurich American Ins. Co., supra, at *4. If the subcontractors’ CGL policy is excess, then than their CGL insurer does not have a duty to defend if the primary policy is not exhausted. This means they have no duty to defend the additional insured – not very helpful to a general contractor tendering the defense of the claim to responsible subcontractors.

The second reason this is an important point is because of what is known between liability insurers as the anti-contribution rule:

Florida courts have consistently held that, once the duty to defend is activated, every subject insurer assumes it on a personal and indivisible basis. That means that when an insured tenders a claim to multiple insurance providers, the entity that actually engages in the defense and incurs the fees and costs associated with it cannot subsequently seek contribution or equitable subrogation from the fellow insurer who “lagg[ed] behind.”

Zurich American Ins., Co., supra, at *5 (internal citations omitted).

Since the general contractor’s CGL insurer bore the costs of the general contractor’s defense in the construction defect lawsuit, it cannot now divvy up the defense fees and costs to other insurers that may have had a similar obligation unless an exception to this rule applies (see below).

The third reason this is an important point is because there is an exception to this anti-contribution rule:

A “responsive” insurer who complied with its insured’s tender for defense can extract reimbursement from the “nonresponsive” insurer when the insured had separately contracted with another entity, itself an insured of the nonresponsive carrier, to indemnify the first insured. The logic of the exception is that the insured parties’ express decision to “shift[ ] exposure” from one to the other is imputed to the insurer relationship and overcomes the general anti-contribution principle.

Zurich American Ins., Co., supra, at *8 (internal citations omitted).