CONTRACTOR PREVAILING AGAINST SUBCONTRACTOR ON COMMON LAW INDEMNITY CLAIM

Posted on February 9, 2020February 9, 2020 by Edward Garber

Common law indemnity is not an easy claim to prove as the one seeking common law indemnity MUST be without fault:

Indemnity is a right which inures to one who discharges a duty owed by him, but which, as between himself and another, should have been discharged by the other and is allowable only where the whole fault is in the one against whom indemnity is sought. It shifts the entire loss from one who, although without active negligence or fault, has been obligated to pay, because of some vicarious, constructive, derivative, or technical liability, to another who should bear the costs because it was the latter’s wrongdoing for which the former is held liable.

Brother’s Painting & Pressure Cleaning Corp. v. Curry-Dixon Construction, LLC, 45 Fla. L. Weekly D259b (Fla. 3d DCA 2020) quoting Houdaille Industries, Inc. v. Edwards, 374 So.2d 490, 492-93 (Fla. 1979).

Not only must the one seeking common law indemnity be without fault, but there also needs to be a special relationship between the parties (indemnitee and common law indemnitor) for common law indemnification to exist. Brother’s Painting & Pressure Cleaning Corp., supra (citation omitted). A special relationship has been found to exist between a general contractor and its subcontractors. Id. at n.2.

Brother’s Painting & Pressure Cleaning Corp. exemplifies the rare application of a common law indemnity scenario.

In this case, a fire occurred in a renovated condominium unit. The evidence revealed that that painters left rags with an oil-based product in a plastic bin overnight in the living room. The oil-based rags were not supposed to be left in the unit. The next morning it was discovered a fire started in the plastic bin where the painters left the oil-based rags. The determination was that the oil-based rags spontaneously ignited.

The unit owner sued the contractor and the painter and the contractor asserted a cross-claim against the painter for common law indemnity. The painter settled with the owner and, subsequently, the contractor settled with the owner. The contractor then pursued its common law indemnity claim against the painter seeking to recover the amount of its settlement against the painter. The trial court granted summary judgment in favor of the contractor for common law indemnity against the painter (that included the amount of the contractor’s settlement with the owner) and the painter appealed. The appellate court affirmed.

The evidence revealed that the fire and corresponding damages “were caused by [the painter’s] sole negligent act of leaving an oil-soaked rag in the plastic garbage bin that was in the condominium unit.” Brothers Painting & Pressure Cleaning Corp., supra. The painter argued that common law indemnity should not apply because the operative complaint alleged that the contractor was also at fault for its failure to supervise. The appellate court dismissed this argument explaining that allegations in a complaint do not control over the actual facts and “[t]he undisputed facts demonstrate that the fire was caused solely because [a painter’s] employee left a rag soaked in an oil-based stain in the condominium.” Brother’s Painting & Pressure Cleaning Corp., supra.

Lastly, the painter argued that the contractor’s settlement with the owner should preclude the common law indemnity claim. This argument was also dismissed by the appellate court. The settlement does not prevent the contractor from prevailing on a common law indemnity claim. Moreover, the painter was on notice of the claim and of the settlement amount prior to the settlement being formalized. Brother’s Painting & Pressure Cleaning Corp., supra, (“Once a legal obligation has been established in the underlying action on the part of the indemnitee, the indemnitor will become bound by a settlement agreement in a suit against the indemnitee if the indemnitor was given notice of the claim and was afforded an opportunity to appear and defend the claim, as long as the settlement was not the result of fraud or collusion.”) (quoting Heapy Eng’g, LLP v. Pure Lodging, Ltd., 849 So.2d 424, 425 (Fla. 1st DCA 2003)).

While the contractor was able to prevail on a common law indemnity claim, a better claim would have been a contractual indemnification claim. However, while not discussed, the subcontract evidently did not contain an indemnification provision. This should serve as a reminder that all subcontracts should include a contractual indemnification provision.

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.

BAILOUT FOR AN IMPROPERLY DRAFTED INDEMNIFICATION PROVISION

Posted on December 22, 2018January 30, 2022 by Edward Garber

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact. In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect).

This opinion arose from a construction defect case, CB Contractors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5^thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on the contractual indemnification provision in the subcontracts. Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06. The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06. (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.)

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail. But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.

This case leads to a couple of very important takeaways:

Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06. Have a construction attorney review the indemnification provision. Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed. That is not good practice.

Include a severability provision in your contract. Always. Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed.

THE INDEMNIFICATION LIMITATION IN SECTION 725.06 DOES NOT APPLY TO UTILITY / HORIZONTAL-TYPE PROJECTS

Posted on February 2, 2018February 2, 2018 by Edward Garber

One of the most important provisions in construction contracts is the indemnification provision. Appreciating contractual indemnification obligations are critical and certainly should not be overlooked. Ever!

Florida Statute s. 725.06 (written about here and here) contains a limitation on contractual indemnification provisions for personal injury or property damage in construction contracts. There should always be an indemnification provision in a construction contract that addresses property damage or personal injury. Always!

Section 725.06 pertains to agreements in connection with “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith…” If the contract requires the indemnitor (party giving the indemnification) to indemnify the indemnitee (party receiving the indemnification) for the indemnitee’s own negligence, the indemnification provision is unenforceable unless it contains a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” It is important to read the statute when preparing and dealing with a contractual indemnification provision.

A common defense from an indemnitor in a case dealing with contractual indemnification on a construction project is that the provision is unenforceable because it does not comport with s. 725.06.

In a recent case, Blok Builders, LLC v. Katryniok, 43 Fla. L. Weekly D253b (Fla. 4^th DCA 2018), the indemnitor argued the indemnification provision was not enforceable. Here, a utility company hired a contractor to improve its telecommunications services. Part of the work required the contractor to provide access to preexisting underground telecommunication lines located in neighborhood easements. The contractor hired a subcontractor to perform the required excavation to access the preexisting underground lines. This work resulted in a personal injury action where the injured person sued the contractor, subcontractor, and utility company.

The contractor’s subcontract with the subcontractor required the subcontractor to indemnify the contractor and its directors, officers, employees, and agents, from loss caused wholly or partially by the subcontractor. Thus, the indemnification provision required the subcontractor to indemnify the contractor for losses that were caused partially by the contractor’s own negligence (otherwise, the indemnification provision would be limited to losses solely attributable to the subcontractor).

The contractor and utility owner both claimed that the subcontractor was responsible for contractually indemnifying them for all losses including attorney’s fees. The subcontractor argued that the indemnification provision should be deemed unenforceable because it did not contain a monetary limitation on the extent of the indemnification.

Indemnification as to the Contractor

The appellate court affirmed the trial court that the indemnification provision as to the contractor was enforceable because the statute (s. 725.06) did not apply. What? That is right, the statute did not apply because the statute does not apply to utility contracts. What? That is right, the appellate court held that the statute applies to “any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” so if the excavation is not connected to a building, structure, appurtenance, or appliance, it does not apply. Since the project dealt with underground utility lines, s. 725.06 did not apply so the contract did not need to contain a monetary limitation on the indemnification provision.

Of course, in my opinion, it is hard to truly reconcile the distinction between a vertical project of a building or structure and a horizontal project, such as the project at-issue. In other words, why would a limitation on indemnification provisions apply to one type of project but not the other? I do not know the answer to this other than to say the court reading s. 725.06 noticed that it mentions nothing about applying to horizontal type projects that do not involve a building or structure.

Indemnification of Utility Owner

The appellate court however reversed the trial court as to the application of the indemnification provision extending to the owner. The indemnification provision mentioned nothing about the utility owner. That is true. The contractor argued that because the prime contract was incorporated into the subcontract, the subcontractor’s duty to indemnify the utility owner arose from the prime contract. But, the prime contract required the contractor to indemnify the utility owner; it mentioned nothing about subcontractors being required to indemnify the owner.

Interestingly, if this contract were governed by s. 725.06, this perhaps would be an issue because s. 725.06 provides that contractors may not require the indemnitor to indemnify the indemnitee for damage to persons or property caused in whole or in part by any person other than the (a) indemnitor, (b) the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, agents, or their employees, or (c) the indemnitee’s officers, directors, agents, or employees. Thus, the indemnification provision would not permissibly authorize the subcontractor to indemnify the owner for the owner’s own negligence.

Ultimately, what this means is that the owner can pursue contractual indemnity from the contractor based on the indemnification provision in the prime contract. The contractor would owe this indemnification (since any negligence attributable to the subcontractor would be attributable to the contractor that hired the subcontractor). This would get resolved (or play out at trial) and the contractor, based on this loss, would sue the subcontractor for indemnification for the loss connected with the subcontractor’s negligence.

Please read this article for an update / follow-up on this issue and this case.

CONTRACTUAL INDEMNIFICATION LIMITATION ON FLORIDA PUBLIC PROJECTS

Posted on July 17, 2016March 31, 2021 by Edward Garber

Construction contract indemnification provisions are governed under Florida Statute s. 725.06. This is a very important statute to know if you are drafting indemnification provisions for any type of construction contract. (There is also Florida Statute s. 725.08 that discusses indemnification provisions applicable to design professionals that is also worth knowing.)

Contained within s. 725.06, is a limitation on indemnification provisions applicable to public construction projects:

(2) A construction contract for a public agency or in connection with a public agency’s project may require a party to that contract to indemnify and hold harmless the other party to the contract, their officers and employees, from liabilities, damages, losses and costs, including, but not limited to, reasonable attorney’s fees, to the extent caused by the negligence, recklessness, or intentional wrongful misconduct of the indemnifying party and persons employed or utilized by the indemnifying party in the performance of the construction contract.

(3) Except as specifically provided in subsection (2), a construction contract for a public agency or in connection with a public agency’s project may not require one party to indemnify, defend, or hold harmless the other party, its employees, officers, directors, or agents from any liability, damage, loss, claim, action, or proceeding, and any such contract provision is void as against public policy of this state.

The key to this contractual indemnification limitation on public projects is the bolded language “to the extent caused by….” This language is comparative fault language meaning the indemnitor (party giving indemnification) is only responsible for indemnifying the indemnitee (party receiving the indemnification) “to the extent caused by the negligence, recklessness, or intentional wrongful misconduct” of the indemnitor. The language “to the extent caused by” is more limiting than an intermediate or broad form of indemnification provision that expands the scope of the indemnitor’s obligation to indemnify the indemnitee (for example, for negligence acts caused by the indemnitee). Stated differently, this limitation would certainly seem to preclude the indemnitor from indemnifying the indemnitee for the indemnitee’s negligence.

But, there is not yet a Florida case that truly discusses the application of this contractual indemnification limitation on public projects.

INDEMNIFICATION PROVISIONS AND “IN WHOLE OR IN PART” LANGUAGE

Posted on April 2, 2016April 2, 2016 by Edward Garber

If you negotiate or prepare construction contracts, then you should be familiar with Florida Statute s. 725.06. This statute contains requirements for indemnification provisions in construction contracts and is a must-know and must-read for all construction participants responsible for negotiating and preparing construction contracts, especially those that contain indemnification provisions for bodily injury and property damage (and all such contracts do and should contain such indemnification language!). For more on Florida Statute s. 725.06, please check out these articles:

Although not a construction case, the opinion in ATC Logistics Corporation v. Southeast Toyota Distributors, LLC, 41 Fla. L. Weekly D816b (Fla. 1^st DCA 2016), demonstrates the importance of drafting clear indemnification language. This case contained the following indemnification provision:

(a) ATC [Carrier] shall indemnify and hold harmless SET from and against any and all losses, liabilities, damages, costs, fines, expenses, deficiencies, taxes and reasonable fees and expenses of counsel and agents, including any costs incurred in enforcing this Agreement, that SET may sustain, suffer or incur arising from (i) Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder; (ii) any loss of or damage to a Vehicle while loaded onto, transported on or unloaded from a Car Carrier; (iii) any damage to any property of SET caused by the maintenance or operation of any Car Carrier or the loading or unloading of any Car Carrier; (iv) any claims by any third person with respect to death, injury or property damage caused by the maintenance or operation of any Car Carrier or the loading, transportation or unloading of Vehicles on or from a Car Carrier and (v) any claims resulting from or arising out of injury or death of any employee, agent of contractor of Carrier including claims alleging that SET failed to provide a safe place to work.

The indemnity obligation was broken into five (i – v) sections.

In this case, SET sued ATC (the named Carrier in the indemnification provision) to recover amounts it paid out in a settlement. SET argued that ATC was responsible for indemnifying it for its (SET’s own) negligence based on the language in section (i) that required ATC to indemnify SET for “Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder.”

The issue, however, was that SET was really seeking indemnification relating to section (iv) which did NOT contain any “in whole or in part” language. In other words, section (iv) did not require ATC to indemnify SET for its actions whether caused “in whole or in part” by ATC’s negligence. Had section (iv) contained this “in whole or in part” language, then ATC would have likely been required to fully indemnify SET for its actions even if the damages were partially caused by the negligence of SET. While SET wanted the “in whole or in part” language included in section (i) to be read into the language in section (iv), this was NOT how this clause was written and the court is not there to rewrite parties’ contracts. Accordingly, the First District held that ATC was not required to indemnify SET for SET’s negligence.

Importantly, if the indemnification provision pertained to a construction contract and required the indemnitee (e.g., subcontractor) to indemnify the indemnitor (e.g., contractor), it would need to include certain language for it to be enforceable under s. 725.06. Such indemnification provisions that require the indemnitee to indemnify the indemnitor for “liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” Fla. Stat. s. 725.06.

STATUTE OF LIMITATIONS AND REPOSE FOR INDEMNIFICATION CLAIMS (STEMMING FROM CONSTRUCTION DEFECT)

Posted on September 6, 2015September 6, 2015 by Edward Garber

I have written articles regarding the statute of limitations and statute of repose relating to construction disputes governed under Florida Statute s. 95.11(3)(c):

Within Four Years. An action founded on the design, planning, or construction of an improvement to real property, with the time running from 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; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action 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.

In the construction defect context, a claimant has four years to sue from the date they knew or reasonably should have known with the exercise of due diligence the defect (e.g, the latent defect). This is the statute of limitations. Nonetheless, a claimant must sue no matter what on a latent defect within ten years from the project’s completion (see statute above). This is the statute of repose. A construction defect lawsuit cannot be initiated after the expiration of the statute of repose.

Let’s assume the following dates:

Project completion (start of limitations) 2005

First discovery of water intrusion 2008

General contractor completes repairs 2011

General contractor sues subcontractor for indemnification 2013

In this scenario, the subcontractor may argue that the general contractor’s statute of limitations to sue the subcontractor for the defect and damage is barred by the statute of limitations since the first discovery of water intrusion was in 2008 and the general contractor waited to sue until 2013 (five years later).

But, wait…the general contractor is going to sue the subcontractor for indemnification (preferably, contractual indemnification based on the terms of the subcontract). In this scenario, the general contractor is suing after it completed repairs and established its liability to the owner for repairing the defects and damage.

“The statute of limitations for an action seeking indemnity does not being running until the litigation against the third-party plaintiff [general contractor] has ended or the liability [against the third-party plaintiff], if any, has been settled or discharged by payment.” Castle Constr. Co. v. Huttig Sash & Door Co., 425 So.2d 573, 575 (Fla. 2d DCA 1982) (finding general contractor’s indemnity claim against subcontractor did not accrue until the owner’s litigation against the general contractor ended or the general contractor’s liability determined). Stated differently, the statute of limitations for the general contractor’s indemnification claim did not begin to start running until 2011 when its liability to the owner for the defects was discharged / settled.

Now, let’s assume the following dates:

Project completion (start of limitations) 2005

First discovery of water intrusion 2008

General contractor completes repairs 2013

General contractor sues subcontractor for indemnification 2016

In this instance, the subcontractor may argue that the statute of repose expired because the general contractor waited until 2016 or eleven years after the statute of limitations started to accrue in 2005. Guess what? The subcontractor would be right. See Dep’t of Transp. V. Echeverri, 736 So.2d 791 (Fla. 3d DCA 1999) (explaining that the statute of repose for construction defect claims still applies to claims for indemnity). Stated differently, even though the general contractor sued the subcontractor for indemnification within three years of establishing its liability, it was still bound by the ten year statute of repose that started accruing in 2005, meaning such lawsuits were barred after 2015.

REQUESTING LIABILITY INSURANCE INFORMATION FROM RESPONSIBLE PARTIES FOR CONSTRUCTION OR DESIGN DEFECTS (FLA. STAT. s. 627.4137)

Posted on March 28, 2015March 28, 2015 by Edward Garber

If you are an owner and discover construction or design defects, you are going to want consult with a lawyer to make sure you know your rights under Florida Statutes Chapter 558. This includes sending a written notice of the construction or design defects identifying the defects with sufficient detail to the potentially responsible parties. Likewise, if you are a contractor and receive this written notice, you are going to want to make sure you forward that letter to potentially responsible parties (subcontractors or suppliers).

Coupled with this written notice of defects letter should be a written request on the parties and their known insurance agents and insurers for their liability insurance information. Start with culling Certificates of Insurance you have on these parties to obtain (some) of this information as to whom to send the request to. This request can be in a separate letter or the same letter (as the notice of defects letter) and should reference Florida Statute s. 627.4137 and request the information in the below statutory language:

(1) Each insurer which does or may provide liability insurance coverage to pay all or a portion of any claim which might be made shall provide, within 30 days of the written request of the claimant, a statement, under oath, of a corporate officer or the insurer’s claims manager or superintendent setting forth the following information with regard to each known policy of insurance, including excess or umbrella insurance:

(a) The name of the insurer.

(b) The name of each insured.

(c) The limits of the liability coverage.

(d) A statement of any policy or coverage defense which such insurer reasonably believes is available to such insurer at the time of filing such statement.

(e) A copy of the policy.

In addition, the insured, or her or his insurance agent, upon written request of the claimant or the claimant’s attorney, shall disclose the name and coverage of each known insurer to the claimant and shall forward such request for information as required by this subsection to all affected insurers. The insurer shall then supply the information required in this subsection to the claimant within 30 days of receipt of such request.

As discussed in prior articles, insurance is an important aspect of construction and design defect disputes.

If you are an owner, you want to understand potential insurance coverage so that you know how to best maximize any claim for insurance coverage against potentially liable parties. This includes knowing the limits of liability in any commercial general liability (CGL) or professional liability / errors & omissions policy, as applicable, and whether there is any umbrella / excess policy. This also includes understanding the exclusions in the policies and whether there are endorsements that add or modify exclusions in the policy.

If you are a general contractor, you also want to understand potential insurance coverage from subcontractors and other entities you are looking to flow-down an owner’s defect claims (ideally, through contractual indemnification language in your subcontract). Also, you are going to want to make sure you have additional insured status under these parties’ liability policies so that they contribute to the fees and costs incurred in your defense. For this reason, you also want to obtain copies of subcontractor insurance polices including all endorsements. Besides the limits of liability, you want to see the additional insured endorsement in the policy, and any endorsements that add or modify exclusions in the policy.

If you are a subcontractor, if you subcontracted aspects of your scope of work or there is a claim associated with deficient material you furnished, you also want to obtain this insurance information from these potentially liable entities because you are also going to try to flow-down liability (ideally, through contractual indemnification language in your subcontract).

And, if you are a manufacturer, if a claim is asserted against you arising out of the installation of that product, you also want to obtain insurance information from any authorized dealer or installer (perhaps through any agreement you have with that dealer or installer that would require this entity to indemnify you and name you as an additional insured).

One of the underlying reasons for s. 627.4137 is so that parties can obtain insurance coverage information and make reasonably informed decisions about settling a matter. In other words, you don’t want to settle a dispute for policy limits if you have damages that may exceed policy limits and find out the responsible party has additional or excess insurance to cover the excess damages. See, e.g., Schlosser v. Perez, 832 So.2d 179 (Fla. 2d DCA 2002) (in non-construction case, noncompliance with s. 627.4137 rendered settlement unenforceable). But, this statute does not create a private cause of action by a third-party if an insurer fails to timely provide this information. Any potential recourse the third-party would have, if any, against the insurer would have to be after the third-party obtains a judgment against the underlying insured. Lucente v. State Farm Mut. Auto. Ins. Co., 591 So.2d 1126, 1127-28 (4^th DCA 1992) (“[T]he statute does not contain an implicit cause of action for a third-party against an insurance company.”); see also Brannan v. Geico Indemnity Co., 569 Fed.Appx. 724, 728 (11^th Cir. 2014) (“But Brannan fails to point to any legal authority to show that s. 627.4137 creates a first-party private cause of action against an insurer [for failure to comply with the statute.]”).

MAKE SURE INDEMNIFICATION PROVISIONS CLEARLY REFLECT THE REQUIRED SCOPE OF THE INDEMNIFICATION

Posted on February 20, 2014February 20, 2014 by Edward Garber

Indemnification provisions are a vital component of construction contracts. Every construction contract (whether a prime contract, subcontract, professional services contract, etc.) should absolutely require that the party receiving compensation for performing a service to indemnify the party paying for that service (referred to as the indemnitee). No exception! Moreover, it is crucial that indemnification provisions are carefully drafted to not only comply with Florida law, but to eliminate any uncertainty regarding the scope of the indemnification. In other words, make sure the indemnification provision unequivocally reflects the scope of the indemnification that is sought and that the scope complies with Florida law.

In Florida, indemnification provisions for construction contracts are governed by Florida Statute s. 725.06, which is recited below. Also, please see https://floridaconstru.wpengine.com/buttoning-up-contractual-indemnification-language/ and https://floridaconstru.wpengine.com/the-scope-of-a-release-in-a-settlement-and-contractual-indemnification/ for more information on the application of this statute to ensure the indemnification provision, whether for a private or public project, complies with Florida law.

The recent Third District Court of Appeal decision in Royal Palm Hotel Property, LLC v. Deutsche Lufthansa Aktiengesellschaft, Inc., 2014 WL 444150 (Fla. 3d DCA 2014), albeit a non-construction dispute, exemplifies the significance of making sure the indemnification provision accurately reflects the scope of indemnification that the party receiving the indemnification (the indemnitee) truly wants or requires.

In this case, the indemnification provision read: “The Hotel agrees to indemnify and hold Lufthansa harmless from all liabilities, including damage to property or injury or death of persons, including Lufthansa property and Lufthansa personnel that may result from the negligence or wilful (sic) misconduct of the Hotel.”

The indemnification provision was between a hotel and an airline which had its employees stay at the hotel. In this personal injury action, the hotel was sued for negligence when a window fell out of a frame and injured a guest. Also, the airline was sued under the theory that it was vicariously liable for the negligence of its employee staying at the hotel. The issue was whether the hotel was required to indemnify the airline for the negligence of the airline and its employees staying at the hotel. However, a look at the indemnification clause above does not articulate that the hotel will be responsible for indemnifying and holding the airline harmless for the negligence of the airline or the airline’s employees. Rather, it says the hotel will indemnify the airline for its negligence or willful misconduct. This is a huge difference as the indemnification written is much narrower than the indemnification that the airline perhaps wanted.

Again, the airline was never sued for the hotel’s negligence. It was sued for the negligence of its employee staying at the hotel under a vicarious liability (respondeat superior) theory. While the airline prevailed in the underlying personal injury action, it wanted to recoup its defense costs against the hotel. The Third District construing the indemnification provision held that the provision was never kicked into effect because the hotel was not required to indemnify the airline for the negligence of the airline or its employee and the basis of the underlying claims against the airline related to the negligence of the airline’s employee.

The reason this case is worth discussing is because if an indemnitee wants an indemnification provision to cover its own negligence, the provision needs to clearly reflect this intent. Now, for construction contracts, an indemnitee should never negotiate an indemnification that covers it for its negligence without making sure the provision undoubtedly complies with Florida Statute s. 725.06. Otherwise, the indemnitee risks an unenforceable indemnification provision! In a nutshell, s. 725.06 provides that if an indemnification provision is going to indemnify an indemnitee for its negligence, the contract must contain a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and its part of the project specifications or bid documents, if any.”

Section 725.06

(1) Any portion of any agreement or contract for or in connection with, or any guarantee of or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman or any combination thereof wherein any party referred to herein promises to indemnify or hold harmless the other party to the agreement, contract, or guarantee for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any. Notwithstanding the foregoing, the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with such owner shall not be less than $1 million per occurrence, unless otherwise agreed by the parties. Indemnification provisions in any such agreements, contracts, or guarantees may not require that the indemnitor indemnify the indemnitee for damages to persons or property caused in whole or in part by any act, omission, or default of a party other than:

(a) The indemnitor;

(b) Any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees; or

(c) The indemnitee or its officers, directors, agents, or employees. However, such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.

(2) A construction contract for a public agency or in connection with a public agency’s project may require a party to that contract to indemnify and hold harmless the other party to the contract, their officers and employees, from liabilities, damages, losses and costs, including, but not limited to, reasonable attorney’s fees, to the extent caused by the negligence, recklessness, or intentional wrongful misconduct of the indemnifying party and persons employed or utilized by the indemnifying party in the performance of the construction contract.

(3) Except as specifically provided in subsection (2), a construction contract for a public agency or in connection with a public agency’s project may not require one party to indemnify, defend, or hold harmless the other party, its employees, officers, directors, or agents from any liability, damage, loss, claim, action, or proceeding, and any such contract provision is void as against public policy of this state.

(4) This section does not affect any contracts, agreements, or guarantees entered into before the effective date of this section or any renewals thereof.

CONSTRUCTION DEFECT INSURANCE CONSIDERATIONS

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

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

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

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

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

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

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

THE SCOPE OF A RELEASE IN A SETTLEMENT AND CONTRACTUAL INDEMNIFICATION

Posted on October 4, 2013October 4, 2013 by Edward Garber

Pilot Construction Services, Inc. v. Babe’s Plumbing, Inc., 111 So.3d 955 (Fla. 2d 2013) is a case that touches on two relevant issues. The first issue pertains to the scope of a release in a settlement agreement. The second issue pertains to contractual indemnification—an issue of importance to all in construction.

I. Scope of Release

In Pilot Construction, a private college hired a general contractor to renovate a residence hall. After completion, the college discovered deficiencies in bathrooms and showers that resulted in leaks and water damage. The college sued the general contractor for breach of contract and breach of express warranty. The college also sued the plumber (subcontractor) for breach of express warranty due to plumbing deficiencies that caused water damage.

The plumber settled directly with the college and a settlement and release agreement was executed. The college, however, continued to pursue claims against the general contractor including defects and damage that arose out of the plumber’s work. The general contractor then settled with the college, but instead of this dispute being dismissed, the general contractor pursued cross-claims against the plumber for indemnity, breach of warranty, and equitable subrogation.

The issue on summary judgment was whether the general contractor could pursue claims (such as indemnity) against the plumber when the plumber settled with the college and was released by the college. The trial court found that the general contractor could not pursue such claims and entered summary judgment in favor of the plumber.

On appeal, the Second District analyzed the scope of the release which provided in two portions:

First Portion: “Nothing within this Release is intended to be nor shall it be construed as any kind of waiver, limitation, or compromise to any claim or defense New College has or may have against any party or entity other than Babe’s Plumbing, Inc.” Pilot Construction, 111 So.3d at 958.

Clearly, the college wanted this reservation in the settlement so that it could continue to pursue claims against the general contractor inclusive of damage that arose out of the subcontractor’s work.

Second Portion: The settlement also included a release of the plumber for everything (known and unknown damages) in connection with the plumber’s work at the college.

Clearly, the plumber wanted this provision so that it would be released by the college (owner) for its scope of work at the project.

So, what was the problem? The Second District found that the release to the plumber actually conflicted with the reservation language since the settlement was not limiting claims against other parties, especially as it relates to the subcontractor’s scope of work. Based on the conflicting portions, the court held as follows:

the general contractor could pursue its claims against the plumber because it was not an intended-third-party beneficiary of the college and plumber’s settlement as demonstrated by the fact that the settlement allowed the college to pursue damages (arising from the plumber’s work) against the general contractor;
the fact that the plumber settled with the college does not release the plumber from the general contractor’s claim for indemnification since the general contractor could still be liable to the college for the plumber’s scope of work; and
nothing in the release would prevent the general contractor from pursuing a breach of warranty claim against the plumber.

As the court explained, “Because the language of the release does not apply to bar Pilot’s [general contractor] claims against Babe’s [plumber], the trial court erred in granting summary judgment….” Pilot Construction, 111 So.3d at 959.

This decision is important to any party participating in a multi-party construction defect case. If a subcontractor is getting sued directly by the owner, its best bet is to effectuate a settlement directly with the owner and general contractor whereby the owner and general contractor both release the subcontractor relating to the project. Due to the subcontractor’s indemnification obligations and requirement to identify the general contractor as an additional insured, it will ideally want a release ending it and its insurance carrier’s involvement in the dispute. Or, if that is not possible, make certain that the settlement does not have reservation language that allows the owner to pursue any defects and damage arising from the subcontractor’s scope of work against the general contractor. Better language would reflect that the owner is not pursuing any defects or damage arising from the subcontractor’s scope of work against the general contractor pursuant to this settlement (i.e., a release of the general contractor relating to the subcontractor’s scope of work). The general contractor may still be able to pursue claims against the subcontractor; but, if the owner is releasing the general contractor for the subcontractor’s work, such claims could be tenuous since the owner cannot pursue such damage against the general contractor. (Although, the general contractor’s insurer could still pursue an additional insured claim to recoup defense costs associated with defending the general contractor.)

If a subcontractor is being sued by the general contractor only, some of the same rationale applies. The general contractor can settle directly with the subcontractor; however, it assumes the risk associated with the subcontractor’s work since the owner is still pursuing claims against the general contractor arising from the subcontractor’s work. This isn’t always a bad thing based on the dollar amount of the settlement and the ultimate settlement with the owner. In other scenarios, the general contractor only wants to settle with a subcontractor if it can contemporaneously settle with the owner so that it is getting a release from the owner for the subcontractor’s scope of work. An owner will likely not want to do this, nor should it, if damages cannot necessarily be isolated to that subcontractor’s scope of work (such as a water intrusion dispute where multiple scopes contribute to water intrusion and damage). Other times, the general contractor will not settle with subcontractors independent of a global settlement with the owner in perhaps an effort to minimize its contribution to the settlement.

Ultimately, there are numerous strategies that come into play when negotiating settlements and releases based on the party. There really is no one-size-fits-all model as it is dependent on the nature of the dispute. It is important to understand what is being released, what is not being released, and the scope of the release when entering into a settlement so that any risks can be appreciated.

II. Contractual Indemnification – Florida Statute s. 725.06

The plumber in Pilot Construction also argued that Florida Statute s. 725.06 barred the general contractor’s claims because the general contractor was seeking indemnification for its OWN negligence. The Second District dismissed this argument because the general contractor was only seeking indemnification for the subcontractor’s negligence:

“Section 725.06 would only bar Pilot’s claims for indemnification if Pilot’s claims were based on Pilot’s own negligence. A plain reading of Pilot’s claims against Babe’s shows that Pilot’s suit against Babe’s was based on Babe’s failures to correctly install shower pans and drains in the residence hall bathrooms. “
Pilot, 111 So.3d at 959.

The Second District’s ruling is interesting because it does not discuss the contractual indemnification language in the contract. Section 725.06 is a statute that essentially says that the first party cannot require the second party to indemnify it for its own negligence unless there is a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” See Fla. Stat. s. 725.06. Without compliance with this section, the indemnification provision is unenforceable. This is why it is always good practice to include a monetary limitation and identify it is part of the bid documents because most indemnifications are drafted in broad form that would require the second party to indemnify the first party for any and all damage caused wholly or partly by the second party. However, the Second District appears to focus less on the indemnification language in the subcontract and more on the actual claims that were asserted by the general contractor. Thus, if there is a concern with the enforceability of the indemnification provision, this case could support an argument for the general contractor that because the contractual indemnification claim being asserted is confined to the subcontractor’s (or second party) own negligence, the claim should be entitled to proceed.

For more information on contractual indemnification please see: https://floridaconstru.wpengine.com/buttoning-up-contractual-indemnification-language/