Tag Archives: indemnification

RES JUDICATA NOT APPLY TO BAR OVERLAPPING DAMAGES IN SEPARATE SUITS AGAINST CONTRACTOR AND SUBCONTRACTOR

Posted on by

Can the doctrine of res judicata bar an owner’s claim against the general contractor after the owner also sued and obtained a satisfied judgment against the subcontractor when there are identical, overlapping damages pursued in separate lawsuits.  A recent case says, not really.

In Pickell v. Lennar Homes, LLC, 48 Fla.L.Weekly D2037a (Fla. 6th DCA 2023), a homeowner sued a homebuilder and the homebuilder’s mechanical subcontractor in separate lawsuits.  The claims and damages asserted in the separate lawsuits were substantially identical. The homeowner obtained a judgment against the mechanical subcontractor which was satisfied (i.e., paid).  The homebuilder tried to use this as a get-out-jail-free card and claimed the homeowner was barred from suing it under the doctrine of res judicata based on overlapping claims and damages.

“To successfully assert a defense of res judicata, a party must prove four “identities”: “(1) identity of the thing sued for; (2) identity of the cause of action; (3) identity of persons and parties to the action; and (4) identity of the quality of the persons for or against whom the claim is made.” Pickell, supra (citation omitted).

The issue in this case was the third identity – the identity of the parties which applies to the “same parties or their privies.” Pickell, supra (citation omitted).

Here, though, the mechanical subcontractor was NOT the privy of the homebuilder.  First, the homebuilder’s interest in the separate lawsuit was not bound by the final judgment of the mechanical subcontractor. This could occur if the homebuilder had indemnification responsibilities to the mechanical subcontractor. However, that was not the case.  While the mechanical subcontractor owed the homebuilder an indemnification obligation, that indemnification was not reciprocal meaning the homebuilder did not owe the indemnification obligation to the mechanical subcontractor.  (“But the obligation of indemnification must run from the party asserting the res judicata defense to the party who was sued in the separate action.  Here, the indemnification responsibility does not run from [the home builder] to the [mechanical contractor]; rather, the subcontract requires [the mechanical subcontractor] to indemnify the homebuilder.”)

Now, you may sit back and say this seems unfair if the claims and damages are substantially identical because it allows the homeowner to double dip in damages. However, it does not. It may be inefficient in that it would have made more sense for the lawsuits to be in the same lawsuit versus separate lawsuits. I would agree with this. But there is no double dipping because “satisfaction of ‘overlapping items of compensation’ in different judgments is a ‘post-judgment collections issue.’” Pickell, supra, at n.1.  In other words, “any recovery from [the mechanical subcontractor] would be set-off post-judgment from a potential future judgment against [the homebuilder].” Id

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.

 

FUNDING THE SELF-INSURED RETENTION (SIR)

Posted on by

Unlike a deductible, a self-insured retention (referred to an “SIR”) is, as the name suggests, a self-insured obligation of the insured before its insurer picks up coverage.  The SIR needs to be exhausted by the insured (as the primary self-insurance component) before the carrier’s excess defense and indemnification obligations kick-in under the terms of the policy.  However, an insured can generally exhaust an SIR by paying legal fees and costs associated with a claim.

Oftentimes, the language in the policy requires the SIR to be paid for by the named insured or an insured under the policy.    This was an issue addressed by the Florida Supreme Court in Intervest Const. of Jax, Inc. v. General Fidelity Ins. Co., 133 So.3d 494 (Fla. 2014).

In this matter, a personal injury claimant asserted a claim against the contractor dealing with a residential home.  The contractor hired a subcontractor to install attic stairs and the subcontract required the contractor to indemnify it.  The owner of the house injured herself on the attic stairs and sued the contractor.  The contractor, in turn, sought indemnification against the subcontractor that installed the attic stairs.

The contractor’s general liability policy had a $1 Million SIR (meaning it was self-insured for the first million that needed to be exhausted before its general liability policy applied).

The matter was mediated and a $1.6 Million settlement was reached.  The subcontractor’s carrier was paying the contractor $1 Million to resolve the indemnification claim.   This left a remaining $600,000 to fund the settlement.  A dispute arose between the contractor and its carrier as to this money because the contractor claimed its SIR was paid for by virtue of the $1M it received through its indemnification action so the $600,000 should come from the carrier.  The insurer claimed it was not as the SIR had to be paid by the insured.  As a result, both the contractor and its insurer each paid $300,000 to settle the personal injury action and reserved rights to seek reimbursement from the other in a separate lawsuit.

In this separate lawsuit, and during the appellate process, the question was posed to Florida’s Supreme Court whether indemnification payments received from the insured can be used to satisfy the contractor’s $1M SIR.  The policy provided that the SIR “will only be reduced by payments made by the insured” and that payment of the SIR “is a condition precedent for our [insurer’s] obligation to pay any sums either in defense or indemnity and shall not pay any such sums until and unless the insured has satisfied” its SIR.

The Florida Supreme Court held that the indemnification payment received by the subcontractor could be used to satisfy the contractor’s $1M SIR.

First, the policy did not contain a provision expressly stating “that regardless of other insurance the insured would continue to be responsible for the full SIR before the limits of the policy applied.” Intervest Const. of Jax, 133 So.3d at 502.   Likewise, the policy did not contain a provision  that stated “[p]ayment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.”  Id.

Second, there was nothing in the policy that required the insured “to pay all amounts within the retained amount [SIR] ‘from its own account.’”  Id.   Other policies have included this language with specific language that states that the SIR “‘is the responsibility of the Insured and is to be paid from the Insured’s own account.’” Id.   Based on this, the Florida Supreme Court found that while the payment must come from the insured, it does not specify where the funds to pay the SIR must originate. Id.

If you are working with a policy with a SIR, it is important to work with counsel to understand your obligations when it comes to a SIR and, importantly, how the SIR operates.

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.FUN

 

PRIORITY OF LIABILITY INSURANCE COVERAGE AND HORIZTONTAL AND VERTICAL EXHAUSTION

Posted on by

Recently, I participated in a webinar involving the horizontal and vertical exhaustion of insurance coverage.  Say what?

This pertains to the PRIORITY of liability insurance coverage and the interface between a general contractor’s (or upstream party’s) primary insurance and the subcontractor’s (or downstream party’s) excess insurance, particularly when the general contractor is required to be indemnified by the subcontractor and named as an additional insured under the subcontractor’s liability policies.

For instance, let’s assume the general contractor has a $2M primary policy and a $5M excess policy.  Its subcontractor has a $1M primary and a $5M excess policy. The general contractor is an additional insured under the subcontractor’s policies and the subcontractor is required to contractually indemnify the general contractor.  An issue occurs caused by the subcontractor’s negligence resulting in a $5M judgment against the general contractor and the subcontractor.

A. Horizontal Exhaustion

Under the horizontal exhaustion approach, the court will look primarily to the “other insurance” provision in the policies–specifically, the subcontractor’s excess policy–which will take precedence over the contractual indemnification language. Since the “other insurance” provision in excess policies typically state it is excess over the exhaustion of primary policies, under the horizontal exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from subcontractor’s primary policy;
2) $2M from general contractor’s primary policy; and
3) $1M from the general contractor’s excess policy and $1M from the subcontractor’s excess policy, as the excess policies share in coverage after the primary coverage is exhausted.

The general contractor and its insurers do not perceive this to be equitable as it dilutes the indemnification and additional insured requirement. Further, it results in the general contractor’s carriers subrogating to the rights of the general contractor to pursue a separate action against the subcontractor, which gets sent right back to the subcontractor’s excess insurer (as its primary insurance was exhausted) for reimbursement.  Under the above example, the subcontractor’s excess insurer still had a remaining $4M in coverage to reimburse the general contractor’s primary and excess insurer.  This is known as a circular chain of events because the priority of coverage under horizontal exhaustion invariably results in a separate subrogation claim for reimbursement.

B. Vertical Exhaustion

Under the vertical exhaustion approach, the court will look primarily to the contractual indemnification and additional insured language, irrespective of the “other insurance” provision in the excess policy, to avoid the circular chain of events with the general contractor’s carriers pursuing a separate subrogation claim. Under the vertical exhaustion approach, the policies would be exhausted as follows relative to the $5M judgment:

1) $1M from the subcontractor’s primary policy; and
2) $4M form the subcontractor’s excess policy.

The subcontractor’s primary and excess policies would be exhausted BEFORE the general contractor’s primary policy comes into play.  This is designed to avoid the the separate subrogation claim since the subcontractor’s insurance coverage is being exhausted first.

C. Priority of Insurance Coverage

The priority of insurance coverage can become a very significant consideration in sizable claims.  There is a reason parties contractually negotiate insurance coverage in the contract.  For this reason, during the contract negotiation, it is important to appreciate this consideration on the frontend. Consult with counsel and an insurance broker as to the following:

 The contractual indemnification language – make sure it is enforceable in your jurisdiction;
 The additional insured language and applicable insurance endorsements – make sure you get the right endorsement for ongoing and completed operations that covers issues wholly or partially caused by the subcontractor’s (or downstream party’s) negligence;
 The primary and noncontributory language and applicable endorsements in the primary and excess policy-this modifies the “other insurance” provision from a priority of coverage standpoint and you want this in both the primary policy and excess policy; and
 The “other insurance” language in the general contractor’s (or upstream party’s) policy — the objective is to maximize vertical exhaustion of coverage to avoid the circular chain of events discussed above so this may result in manuscript language to the general contractor’s “other insurance” language to reflects its priority.

Claims that involve or rely on construction insurance claim can become complex.  But, insurance is crucial in order to properly assess risk, flow down risk, and manage risk.   In order to evaluate associated risk, it requires consultation with lawyers and insurance brokers and understanding the type of claim exposure relative to the project, and maximizing value of insurance–primary and excess insurance–for which you are an additional insured.

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

 

GENERAL TIPS WHEN IT COMES TO CONSTRUCTION CONTRACT DRAFTING AND NEGOTIATION

Posted on by

When it comes to construction contracts, there are many good industry form templates that can be used.   All are templates and all are designed to be modified to conform to the jurisdiction’s law and, of course, the parameters of the project.  There are industry form templates from the American Institute of Architects, ConsensusDocs, Engineers Joint Contract Documents Committee, and Design-Build Institute of America.  All include good provisions.  Regardless of the industry form template utilized, or whether your own template is utilized, contract drafting and negotiation is all about assessing risk and allocating risk to the party best equipped to manage that risk.  Oftentimes, management of the risk is considered in conjunction with insurance coverage to cover that associated risk.  Construction contract drafting and negotiation should not be taken lightly because “you want to know what you are getting into” so that you can best manage and address issues that arise, and you know issues always arise in construction.

Here are some general tips when it comes to construction contract drafting and negotiation:

  • Work with a construction attorney. Yes, I had to go there, because too frequently parties want to draft the contract without legal assistance, or negotiate without legal assistance, and this is not always fruitful.  Working with a construction attorney can at least help you assess the risk and ensure that a contract is sufficiently drafted or negotiated based on your understanding and appreciation of risk. I am routinely involved in some capacity when it comes to construction contract drafting and negotiation.

 

  • Obtain documents that are incorporated or flowed-down into the contract. Most contracts will either incorporate other documents or, in the case of a subcontract, contain flow-down provisions that flow-down obligations from the prime contract into the subcontract.  To best understand and appreciate the risk you are accepting, including risk associated with your scope of work, obtain these documents incorporated or flowed-down into the contract.   Not doing so is a mistake when these documents will impose obligations or requirements on you.

 

  • Review the insurance coverage language and consult with your insurance broker to make sure you have the required insurance. Insurance coverage is key.  Many times, contracts require heightened insurance coverage requirements that, realistically, are not available to a certain contractor.  Consider the insurance coverage requirements and consult with your insurance broker (and your construction attorney, if possible) regarding the insurance coverage, additional premium associated with the coverage, whether the coverage is available to you, and whether there is additional insurance coverage you should consider based on your scope of work.

 

  • Have an appreciation of the following driving provisions that will be important no matter the project:
    • Indemnification
    • Insurance coverage
    • Dispute resolution including forum selection, prevailing party attorney’s fees, joinder, and abatement or staying of certain disputes or claims
    • Termination for default and for convenience
    • Default and notification of default and any cure period
    • Suspension of work
    • Payment timing and requirements including any pay-if-paid language and conditions precedent to payment
    • Claims procedures including timing requirements when to submit claims and the waiver of claims
    • Change orders and directives
    • Scope of work to make sure you understand the scope of work in the contract as it will likely include work and risk not included in your proposal
    • No-damage-for-delay and all schedule-based language (since time is money)

The construction contract serves as the backbone governing your relationship with the project.  Do not neglect the importance of the construction contract or deprioritize its importance.

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.

 

 

“OTHER INSURANCE” PROVISIONS TO LIMIT INSURER’S RISK

Posted on by

Insurance policies often contain an “Other Insurance” provision to limit or control an insurer’s risk if another insurer covers the same risk / loss.  See Pavarini Construction Co. (Se) Inc. v. Ace American Ins. Co., 161 F.Supp.3d 1227, 1234 (S.D.Fla. 2015) (“Other Insurance” provisions apply “when two or more insurance policies are on the same subject matter, risk, and interest.”).  This is an important provision to insurers and may be modified by an endorsement to your insurance policy.  It is designed to determine whether the policy, as discussed below, should serve as a primary policy or excess policy.  It is important to understand this “Other Insurance” provision and its application because it will come up, particularly in a multi-party construction defect dispute.

An example of an “Other Insurance” provision in a commercial general liability (CGL), subject to any modification through an endorsement to the policy, may provide something to the effect:

 

 

 

 

4. Other Insurance

If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:

a. Primary Insurance

This insurance is primary except when b. below applies.  If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary.  Then we will share with all that other insurance by the method described in c. below.

b. Excess Insurance

This insurance is excess over:

1. Any of the other insurance, whether primary excess, contingent, or on any other basis:

(a) That is Fire, Extended Coverage, Builder’s Risk, Installation Risk or similar coverage for “your work”;

2. Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement.

c. Method of Sharing

If all of the other insurance permits contribution by equal shares we will follow this method also.  Under this approach, each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.

If any of the insurance does not permit contribution by equal shares, we will contribute by limits.  Under this method, each insurer’s share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.

If a policy is deemed as excess coverage, than “liability attaches only after a predetermined amount of primary coverage has been exhausted.”  Tudor Ins. Co. v. American Casualty Co. of Reading Pennsylvania, 274 F.Supp.3d 1278, 1283 (N.D.Fla. 2017) (quotation and citation omitted).  Hence, the “Other Insurance” provision allows an insurer to limit or control its risk by turning the policy into an excess policy.  Id. (when excess provision applies than limits of the primary policy need to first be exhausted).

When deciding the priority of coverage among multiple insurers, Florida courts generally rely on the language of the several policies, with careful attention to the other insurance clauses.  Where two insurance policies contain conflicting excess other insurance clauses, those clauses cancel one another out….  [W]here a court must allocate between two policies at the same level that contain incompatible excess clauses, the majority rule is that the two excess clauses cancel each other out, and the loss is pro-rated between the two policies. The proper method of allocation is to disregard the other insurance clauses, treat the two excess insurers as co-excess insurers, and pro-rate the loss between the two policies.

***

Florida law recognizes an exception to the rule governing competing “Other Insurance” provisions where a right of indemnification exists between the parties insured under the respective policies of insurance, especially where … one of the policies happens to cover the indemnity obligation. In this circumstance, a clear majority of jurisdictions give controlling effect to the indemnity obligation of one insured to the other insured over the ‘other insurance’ or similar clauses in the policies of insurance.  Florida cases have consistently recognized that where a loss is covered by two or more primary policies of insurance, the operation of an indemnification agreement between the common insureds has the result of shifting responsibility for the entire loss to the carrier for the indemnitor. [U]nder Florida law an indemnity agreement control[s] all the rights and obligations of the parties and their privies (the insurers), and the fact that the parties carried insurance did not ‘detract from or modify’ their indemnity agreement.

Amerisure Ins. Co. v. Auchter Company, 2017 WL 3601387, *24 (M.D.  2017) (internal quotations and citations omitted).   See also Pavarini Construction Co. (Se) Inc., 161 F.Supp.3d at 1235 (“Courts disregard “Other Insurance” provisions where…there is a contractual right or indemnification.”).

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 by

shutterstock_1060051475A 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. 5thDCA 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. 

 

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.

INDEMNIFICATION PROVISIONS DO NOT CREATE RECIPROCAL ATTORNEY’S FEES PROVISIONS

Posted on by

shutterstock_121868692In a good, recent decision, the Eleventh Circuit in International Fidelity Insurance Co. v. Americabe-Moriarity, JV, 2018 WL 5306683 (11th Cir. 2018), held that Florida Statute s. 57.105(7) cannot be used to shift attorney’s fees in a contractual indemnification clause in a dispute between a general contractor and subcontractor’s performance bond surety, when the dispute does not involve an actual indemnification claim stemming from a third-party.

 

In this case, a prime contractor terminated a subcontractor and looked to the subcontractor’s performance bond surety to pay for the completion work.  The subcontractor had a standard AIA A312 performance bond that requires the prime contractor to comply with the terms of the bond, as well as the incorporated subcontract, in order to trigger the surety’s obligations under the bond.  The surety filed an action for declaratory relief against the prime contractor arguing that the prime contractor breached the terms of the performance bond through non-compliance thereby discharging the surety’s obligations.  The trial court agreed and the surety moved for attorney’s fees. 

 

The surety’s argument for attorney’s fees was threefold: (1) the indemnification provision requiring the subcontractor to indemnify the prime contractor required the subcontractor to indemnify the prime contractor for, among other things, attorney’s fees; (2) Florida Statute s. 57.105(7) provides that one-sided contractual attorney’s fees provisions must apply to both parties (and treated reciprocally), hence the inclusion of attorney’s fees in the indemnification provision means that the surety should be entitled to attorney’s fees; and (3) since the subcontract was incorporated into the performance bond, the surety should be entitled to attorney’s fees since it steps in the shoes of the subcontractor under principles of surety law.

 

Surprisingly, the trial court agreed with the surety.  However, thankfully, the Eleventh Circuit held that the indemnity provision in the subcontract was an indemnity clause that applies only to third-party claims and not suits between the general contractor and subcontractor.  Thus, the requirement of reciprocity for attorney’s fees provisions pursuant to Florida Statute s. 57.105 does not apply.  The Eleventh Circuit, however, did not enter a ruling as to whether even if s. 57.105 did apply such that attorney’s fees must be reciprocal in an indemnification clause, whether such rationale would allow the performance bond surety to recover attorney’s fees under principles of surety law. 

 

This decision is useful for a few reasons:

 

(1)  If a contractor, subcontractor, etc. is trying to create an argument for attorney’s fees based on an indemnification clause, this decision is helpful to put that issue to bed since the indemnification provision applies in the context of third-party claims, and is not related to independent claims between the contracting parties;

(2) A party looking to take advantage of a performance bond must, and I mean, must, make sure to properly comply with the terms of the bond.  Certain sureties will raise any argument to avoid obligations under a performance bond hoping that the beneficiary of the bond undertakes an act that allows the surety to discharge its obligations; and

(3) General (prime) contractors should explore subcontractor default insurance, which is a first-party insurance policy, as an alternative to performance bonds to avoid the issues associated with delays and other arguments a surety may raise in furtherance of avoiding obligations under the bond.

 

 

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.

 

UPDATE: DOES FLORIDA STATUTE s. 725.06 APPLY TO (HORIZONTAL) UTILITY CONTRACTS?

Posted on by

shutterstock_486800107In a prior article, I discussed a recent case that held that Florida Statute s. 725.06–the statute that governs indemnification provisions where the indemnitor is required to indemnify the indemnitee for personal injury or property damage caused wholly or partially by the indemnitee–does not apply to a horizontal, utility project as it only applies to the “construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance” per the wording of the statute.  (Please refer to the article regarding the facts of the case.)  From a logic standpoint, the case did not make a whole lot of sense as there would be restrictions on indemnification provisions for vertical projects but not a horizontal project such as underground utility improvements.  The reason this was an important issue in the case is because if s. 725.06 did govern the indemnification provision, it was not in compliance with the requirements of the statute.  If it was not in compliance, then it was not an enforceable indemnification provision.  The enforceability of an indemnification provision is a BIG deal!

 

Recently, the Fourth District substituted a new opinion, Block Builders, LLC v. Katryniok, 2018 WL 194095 (Fla. 4th DCA 2018), although I cannot say it is that helpful.  The appellate court still maintained that Florida Statute s. 725.06 did not apply to the contract at-issue since the contract involved underground utility improvements and the wording of s. 725.06 only applied to the “construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance.”  However, in this substituted opinion, the appellate court held that while s. 725.06 did not apply to the contract at-issue, this does not mean it can never apply to a utility contract.  Whatever that specifically means is unknown.     

 

Indemnification is a very importation provision in any construction contract. Very important.   It is a provision that should never be overlooked and it should be drafted with an eye towards the requirements of s. 725.06.  Parties need to understand the application of the indemnification provision, particularly in light of the liability insurance they maintain for purposes of the project.  Irrespective of this appellate court’s opinion, parties really should make sure their indemnification provision complies with s. 725.06.  Banking on the hopeful position that s. 725.06 does not govern their construction contract seems overly optimistic and quite unnecessary since a ruling that the provision is unenforceable can be damaging.  

 

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.

THERE ARE TIMES AN EQUITABLE SUBROGATION CLAIM IS THE MOST PRACTICAL RECOURSE FOR REIMBURSEMENT

Posted on by

shutterstock_627721505Equitable subrogation is a claim that can be pursued when a party (referred to as the subrogee) pays for damages to protect its interest–perhaps to mitigate its own exposure–seeks reimbursement from another party primarily liable for the damages.  There are times a party seeking reimbursement for purely economic losses is best able to pursue an equitable subrogation claim, as opposed to a common law indemnification or negligence claim.

 

Equitable subrogation is generally appropriate where: (1) the subrogee made the payment to protect [its] own interest, (2) the subrogee did not act as a volunteer, (3) the subrogee was not primarily liable for the debt, (4) the subrogee paid off the entire debt, and (5) subrogation would not work any injustice to the rights of a third party.

Tank Tech, Inc. v. Valley Tank Testing, L.L.C., 43 Fla.L.Weekly D868a (Fla. 2d DCA 2018) quoting Dade Cty. Sch. Bd. v. Radio Station WQBA, 731 So.2d 638, 646 (Fla. 1999).

 

Equitable subrogation is not dependent on a contract—it is simply an “equitable remedy for restitution to one [the subrogee] who in the performance of some duty has discharged a legal obligation which should have been met, either wholly or partially, by another.”  Tank Tech, Inc., supra, quoting W. Am. Ins. Co. v. Yellow Cab Co. of Orlando, Inc., 495 So.2d 204, 206 (Fla. 5th DCA 1986).

 

As shown in the recent decision below, there are times an equitable subrogation claim will generate more traction for purposes of a reimbursement claim than a negligence claim or common law indemnification claim, because an equitable subrogation claim does not require the party seeking reimbursement to show a duty is owed to it by the party it is seeking reimbursement from.

  

The recent decision of Tank Tech, Inc. involved damage to underground petroleum storage tanks at Circle K locations.  Company “A,” the subrogee, had been hired by Circle K to retrofit existing tanks by adding an interior wall inside of the tanks.  Company “B” was separately hired by Circle K to test the interstitial space between the new interior wall installed by Company “A” and the existing tank wall.  There was no contractual relationship between Company “A” and Company “B.”

 

After the tanks were retrofitted, Circle K notified Company “A” that the modified tanks were damaged and failing.  Although Company’s “A” investigation revealed the failure was the result of Company’s “B’s” testing methodology, Company “A” nevertheless repaired the damage to the tanks because its contract with Circle K required it to do so regardless of whether the damage was caused by a third party, such as Company “B.”

 

Company “A” then sued Company “B” for reimbursement of its repair costs under various claims, one of which was equitable subrogation.  Each party had expert opinions that pointed to the other for the cause of the tanks’ failure and damage.  The trial court granted a motion for summary judgment in favor of Company “B” finding that equitable subrogation did not apply.  This summary judgment was reversed on appeal as the Second District maintained that there were factual issues supporting the basis of the equitable subrogation claim:

 

Tank Tech’s [Company “A”] contract with Circle K obligated it to repair damages to the USTs [tanks]. But Tank Tech’s contractual obligation to Circle K did not convert Tank Tech into a “volunteer” to pay for damages caused by a third party and thus did not prevent the application of the equitable subrogation doctrine. Instead, Tank Tech was merely fulfilling its legal obligation to Circle K which was a necessary means of protecting itself from liability to Circle K. And Tank Tech, by virtue of Dr. Cignatta’s affidavit [expert opinion establishing Company “B” caused failure to tanks], established a genuine issue of material fact regarding whether Tank Tech or Valley Tank [Company “B”] was primarily liable for the damages. If Tank Tech is ultimately successful in proving that Valley Tank caused the damage to the USTs, then it would be entitled to seek any damages it incurred as a result of having to repair the damaged USTs.  To hold that Tank Tech is precluded from pursuing a claim for subrogation would leave Tank Tech without a remedy, a “most unfair and inequitable result.” 

Tank Tech, Inc., supra (internal citations omitted).

 

Negligence and Common Law Indemnification

 

Relatedly, Company “A” also sued Company “B” for negligence and common law indemnification for repairing tanks it claimed were caused by Company “B’s” testing methodology.  The trial court also granted summary judgment in favor of Company “B” on these claims.  Unlike the equitable subrogation claim, the Second District affirmed the summary judgment in favor of Company “B” on these claims. 

 

For Company “A” to sustain a negligence claim, it would have to establish that Company “B” owed it a duty.  Without a duty owed, there is no negligence claim.  Whether there is a duty is a question of law for the court.   In this case, when dealing with only economic losses, the relationship between the parties—Company “A” and Company “B”—needs to be examined to determine whether a special relationship exists to warrant creating a duty to protect the economic interests of another.  “[I]n order to proceed on a common law negligence claim based solely on economic loss, there must be some sort of link between the parties or some other extraordinary circumstance that justifies recognition of such a claim.”  Tank Tech, Inc., supra.   Here, the Second District agreed that Company “B” did not owe Company “A” a duty to support a negligence claim:

 

The reason why the negligence claim fails here is because there is neither a special relationship between Valley Tank [Company “B”] and Tank Tech [Company “A”] nor any extraordinary circumstance that would require imposition of a duty. Tank Tech’s injury did not flow from Valley Tank’s testing of the USTs [tanks]. Instead, Tank Tech seeks to recover the money it spent in repairing the USTs, an expense that was the result of a negotiated contract between Tank Tech and Circle K. There was no contract between Valley Tank and Tank Tech obligating Valley Tank to repair any USTs it damaged during testing or otherwise obligating Valley Tank to repay Tank Tech for the expenses incurred pursuant to Tank Tech’s contract with Circle K. And Valley Tank’s testing did not cause any personal injury or property damage to Tank Tech, the types of injuries for which the common law of negligence has historically permitted recovery.

***

This is simply a case of a party attempting to bring a tort claim to recover monies that it spent as a result of a contractual obligation to a third party. But negligence claims cannot proceed based on a party’s desire to relieve itself from a bad bargain.

Tank Tech, Inc., supra.

 

 

Likewise, regarding the common law indemnification claim, “actions for indemnity have been restricted to situations involving either a duty, an express contract, or the existence of active and passive negligence.”  Tank Tech, Inc., supra, quoting Hiller Grp., Inc. v. Redwing Carriers, Inc., 779 So.2d 602, 603 (Fla. 2d DCA 2001).  Since the Second District already agreed there was no special relationship between Company “A” and Company “B” and, thus, no duty owed, the common law indemnification claim failed for the same reasons as the negligence claim.

 

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

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

Posted on by

shutterstock_486800107One 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. 4th 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.

 

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.