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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

FLOWING DOWN LIABILITY IN CONSTRUCTION DEFECT LAWSUITS

Posted on September 17, 2016September 17, 2016 by Edward Garber

In construction defect lawsuits, third-party (or fourth-party) claims are routine to flow-down liability downstream. Right, a general contractor sued by an owner will want to flow-down its liability to the subcontractors. And, subcontractors will want to flow down their liability to sub-subcontractors and suppliers. Common, and appropriate, flow-down claims are indemnification and contribution claims.

In an appellate opinion with little factual discussion, Gozzo Development, Inc. v. Esker, 2016 WL 2908442 (Fla. 4^th DCA 2016), the trial court entered summary judgment in favor of subcontractors dismissing the contractor’s indemnification and contribution claims. The owner sued the contractor for a violation of building code (and corresponding defects and damage) and the contractor, in turn, sued subcontractors for indemnification and contribution. The contractor was seeking indemnity for the statutory building code violations as well as contractual breaches that caused the construction defects and damage.

On appeal, the Fourth District reversed the trial court’s summary judgment as to the indemnification claim, but affirmed the trial court’s dismissal of the contribution claim (as Florida abolished joint and several liability in negligence-based actions):

Further, as appellant [contractor] sought indemnity for violations of both statutory and non-statutory building standards, it was error to grant summary judgment on the indemnity claim under a provision that applies only to statutory liability. The statutory building code does not preclude liability for violating a contractual duty to adhere to local building standards.

However, we affirm the trial court’s summary judgment on the contribution claim, as appellant’s right to contribution had not arisen by the effective date of the revised statute barring joint and several liability.

Gozzo Development, 2016 WL at *1.

It is important to understand the manner in which liability is flowed downstream (passed-through) in construction defect lawsuits. It is generally this reason why construction defect lawsuits contain many parties, from the general contractor hired by the owner to the subcontractors, sub-subcontractors, and suppliers implicated by the defective work. These articles on indemnification (common law and contractual) and contribution explain these very important flow-down claims in more detail.

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.

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

Posted on November 22, 2014November 22, 2014 by Edward Garber

Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured. Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government? In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor? The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

In this case, the government hired a prime contractor to abate asbestos at a post office. The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project. The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused. The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim. After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee. The thrust of the claim was that the government breached the indemnification provision. The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government. The Court of Federal Claims agreed and dismissed the lawsuit. Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government. While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor. I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

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.

UNDERSTANDING COMMON LAW INDEMNITY

Posted on May 22, 2013May 22, 2013 by Edward Garber

Common law indemnification is a “common” third party claim in multi-party litigation, particularly construction defect litigation. For instance, if a general contractor is sued by an owner for defects, the contractor may third party in the applicable subcontractors and assert a common law indemnification theory against the subcontractors to flow through liability. However, common law indemnity does not have to be asserted as a third party claim, but can be asserted as an affirmative claim after a judgment is entered against a party.

For example, in Diplomat Resorts Limited Partnership v. Tecnoglass, LLC, 38 Fla. L. Weekly D1126a (Fla. 4th DCA 2013), a hotel owner hired a contractor to furnish and install glass shower doors in hotel rooms. The subcontractor, naturally, purchased the glass doors from a fabricator / manufacturer and then installed the doors at the hotel. Unfortunately, many of the glass shower doors spontaneously fractured. The hotel owner obtained a judgment against the contractor in arbitration for the damages it incurred in replacing the doors. However, because the contractor was likely not collectible, the hotel owner took an assignment of the contractor’s claims against the fabricator / manufacturer because the thought was the glass fractured due to a defect in the fabrication process.

The hotel owner, standing in the shoes of its contractor through the assignment, sued the fabricator / manufacturer and asserted a common law indemnification claim which was dismissed with prejudice by the trial court. On appeal, the Fourth District reversed finding that the hotel owner (standing in the shoes as the contractor) properly asserted the following elements of common law indemnification: 1) that the contractor is wholly without fault, 2) the fabricator / manufacturer is at fault, and 3) the fabricator / manufacturer is liable to the contractor because the contractor was vicariously, constructively, derivatively, or technically liable to the hotel owner for the wrongful acts of the fabricator / manufacturer.

One of the challenges with common law indemnification is that there are court decisions that require the party seeking indemnification to be in a “special relationship” with the party it is seeking indemnification from. The Fourth District, however, maintained that a party does not need to specifically plead the existence of a special relationship because this “merely describes a relationship which makes a faultless party ‘only vicariously, constructively, derivatively, or technically liable for the wrongful acts” of the party at fault.” Diplomat Resorts Limited Partnership.

Although the Fourth District’s decision in Diplomat Resorts appears to make a common law indemnification claim easier to prevail on a motion to dismiss, it is still a challenging claim to prove because it requires the party seeking indemnity to be wholly without fault. In other words, if that party is slightly at fault, there is no common law indemnity. Putting this in context, if the contractor is slightly at fault regarding installing the shower doors, it will not prevail on its common law indemnification claim.

In fact, the fabricator / installer in Diplomat Resorts argued that the contractor failed to properly install the glass doors for this very reason; however, there was no finding by the arbitrator that the contractor improperly installed the glass doors. Had there been a specific finding, there likely would be no common law indemnification claim because “a former adjudication against an indemnitee [e.g., contractor], finding the indemnitee’s acts to be wrongful, is binding against the indemnitee and precludes indemnification.” Diplomat Resorts Limited Partnership.

Notably, there are times in arbitration or litigation where parties do not want specific findings of fact. One of those is in a situation where a defendant may look to another for a common law indemnification claim (such as against a manufacturer) because that party does not want a finding that it did anything wrong that would be contradictory to its position that its liability flows 100% from the party it is pursuing the common law indemnification claim against.

UNDERSTANDING YOUR RIGHTS AS AN ADDITIONAL INSURED

Posted on March 9, 2013March 9, 2013 by Edward Garber

Being an additional insured is a topic discussed, and it absolutely should be, in the negotiation of construction contracts. It is an important part of risk management in construction. An owner wants its contractor and consultants to name it as an additional insured under their liability policies. A contractor, likewise, wants its subcontractors, etc. to name it as an additional insured under their liability policies.

Let’s say a general contractor wants its window/glazing subcontractor to name it as an additional insured under the subcontractor’s commercial general liability (CGL) policy. The window subcontractor would be the primary or named insured under its CGL policy. The general contractor, smartly, wants the window subcontractor’s CGL policy to have an endorsement that identifies the general contractor as an additional insured under that policy (ideally, for both ongoing and completed operations). By adding the general contractor as an additional insured, the window subcontractor is protecting / providing coverage to the general contractor for the window subcontractor’s negligence. It is not designed to protect the general contractor for its negligence — so the general contractor will still need its own liability insurance; rather, it is again designed to provide coverage to the general contractor for the window subcontractor’s negligence.

Let’s also say that during the subcontractor’s operations or after, an incorrectly installed window simply fell and caused an injury to a person or damage to property other than the window. (Yes, an extreme example!) As a result of the injury / damage, both the general contractor and the window subcontractor get sued. The general contractor will seek indemnification from the window subcontractor and the subcontractor’s CGL policy as an additional insured under the subcontractor’s policy. The reason being is that the general contractor wants to be indemnified by the subcontractor and have the subcontractor’s insurer provide it a defense and coverage because the window fell out due to the subcontractor’s negligence.

In this situation, either the window subcontractor’s CGL insurer should provide (pay for) a defense for both the window subcontractor (named insured) and the general contractor (additional insured) subject to the insurer’s reservation of rights. This can be done by the insurer retaining counsel for both the named insured or additional insured or, which may be the case in a multi-party litigation such as a multi-party construction defect case, contributing to the general contractor’s defense.

Importantly, in the recent decision of University of Miami v. Great American Insurance Co., 38 Fla. Law Weekly D392a (Fla. 3d DCA 2013), the Third District maintained that where both the named insured and additional insured have been sued in negligence with allegations that both caused the injury / damage to the plaintiff, the insurer (for the named insurer) is required to provide separate defense counsel for each in order to avoid conflicts of interest with one defense counsel. This is done to ensure that the additional insured has independent counsel to represent its interests.

Understanding rights of an additional insured is a must for any construction project in order to maximize insurance coverage and indemnification rights.

BUTTONING-UP CONTRACTUAL INDEMNIFICATION LANGUAGE

Posted on May 15, 2012May 15, 2012 by Edward Garber

A contractual indemnification provision is one of the most important provisions in construction contracts. Owners want to be indemnified from the general contractor to the extent a person or entity performing a scope of the general contractor’s work asserts a claim against the owner or a person is injured on the owner’s property. Likewise, general contractors want their subcontractors to indemnify them to the extent the owner asserts a claim against them arising out of the general contractor’s work or a person or entity performing a scope of the subcontractor’s work asserts a claim against the general contractor.

Indemnification (hold harmless) provisions need to be carefully drafted because Florida Statute §725.06 includes a limitation on indemnification for construction contracts. In short, this statute provides in material part that if a contract requires an indemnitor (such as a subcontractor required to indemnify a general contractor) to indemnify and hold harmless the indemnitee (such as the general contractor receiving the indemnification) “for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee…[the indemnification provision] 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.” Stated simply, if the indemnification provision does not comply with Florida law, it may be unenforceable – a very bad thing for a party expecting to be indemnified!

Recently, the First District Court of Appeal in Griswold Ready Mix Concrete, Inc. v. Reddick, 2012 WL 1216268 (Fla. 1st DCA 2012), dealt with the enforceability of an indemnification provision. In this case, a concrete supplier leased a pump truck (to facilitate pouring concrete). The lease agreement provided that the concrete supplier was to:

“(g) To assume all risks and liabilities for and to indemnify Lessor [of the pump truck]…and Lessor’s agents against all claims, actions, suits, penalties, expenses and liabilities, including attorneys fees, whether or not covered by insurance, for (i) loss or damage to the Equipment; (ii) injuries or deaths of any persons; and (ii)[sic] damage to any property, howsoever arising or incurred from or incident to the use, operation or possession of the Equipment, unless such claims, actions, suits, penalties, expenses or liabilities are caused solely by the intentional conduct of the Lessor or its agents.”

When concrete was being poured, a construction worker was injured and asserted a claim against the concrete supplier and the lessor of the pump truck. The lessor settled the claim and asserted a claim for contractual indemnification against the concrete supplier based on the contractual language above. Among other arguments, the concrete supplier argued that the indemnification provision was unenforceable under Florida Statute §725.06 because it contained no monetary limitation.

Although the trial court found the indemnification provision to be enforceable, the First District disagreed, maintaining, “The indemnity provision at issue in this case does not contain a dollar limit to Griswold’s [concrete supplier] potential liability. For that reason, it is void and unenforceable as provided in section 725.06, and the trial court erred in ruling otherwise.”

While this case does not contain a lengthy discussion with respect to the language of the indemnification provision between the concrete supplier and the lessor of the pump truck, it appears clear that the provision required the concrete supplier to indemnify the lessor for the lessor’s potential negligence (i.e., damage or injury caused in whole or in part by any act, omission, or default of the lessor). For this reason, the indemnification provision needed to include a monetary limitation and should have under the law also expressed that it was part of the bid documents or project specifications.

This case illustrates the importance of making sure an indemnification provision is properly worded and drafted in accordance with Florida law, especially if you are a contractor or an owner where the indemnification provision is a material portion of the contract. As you can see, not doing so can have the harsh effect of having the indemnification provision declared unenforceable.