UNDERSTANDING LIABILITY INSURER’S TWO DUTIES: TO DEFEND AND TO INDEMNIFY

Posted on December 10, 2022December 10, 2022 by Edward Garber

A liability insurer has two duties that are the crux of a liability policy: the duty to defend the insured in legal actions and the duty to indemnify the insured from losses covered under the policy. Many times, policyholders (insureds) do not fully understand or appreciate these two important duties. They need to and this is why having private counsel assist with coverage-related considerations is an absolute must.

An insurers’ duty to defend is separate from its duty to indemnify. A recent opinion out of the Middle District of Florida in Progressive Express Ins. Co. v. Tate Transport Corp., 2022 WL 16963815 (M.D.Fla. 2022) clarifies the distinction between these duties with a focus on an insurer’s initial duty — the duty to defend. Please read below so you can have more of an appreciation of these duties. The court does a good job discussing Florida law with the emphasis on when an insurer’s initial duty to defend kicks-in:

Duty to Defend

Under Florida law, “an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.” The duty to defend is a broad one, broader than the duty to indemnify, and “[t]he merits of the underlying suit are irrelevant.” We determine whether an insurer has a duty to defend its insured based only on “the eight corners of the complaint and the policy,” and only as the complaint’s alleged facts are “fairly read[.]” The “facts” we consider in evaluating the duty to defend come solely from the complaint, regardless of the actual facts of the case and regardless of any later developed and contradictory factual record. “Any doubts regarding the duty to defend must be resolved in favor of the insured,” and “where a complaint alleges facts that are partially within and partially outside the coverage of an insured’s policy, the insurer is not only obligated to defend, but must defend that entire suit[.]” But of course, because the lawsuit must be for something covered by the insurance policy, “the insurer has no duty to defend” when “the pleadings show the applicability of a policy exclusion.”

An insurance policy can, without creating a conflict or ambiguity, both provide coverage and exclude some things that might otherwise fall within that coverage. On the other hand, an insurance policy’s coverage becomes illusory if it grants coverage in one provision and completely takes it away in another provision.

Because [insurer] relies on an exclusion to deny coverage, “it has the burden of demonstrating that the allegations of the complaint are cast solely and entirely within the policy exclusion and are subject to no other reasonable interpretation.”

***

An insurer’s duty to defend an insured in a legal action under Florida law “arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.” Even if the allegations in the complaint are meritless, the duty to defend nonetheless arises. All doubts about whether the duty to defend applies are resolved in favor of the insured. “If an examination of the allegations of the complaint leaves any doubt regarding the insurer’s duty to defend, the issue is resolved in favor of the insured.”

Progressive Express Insurance, supra, at *3-5 (internal citations omitted).

Duty to Indemnify

“While the duty to defend is broad and based on the allegations in the complaint, the duty to indemnify is determined by the facts adduced at trial or during discovery.”

Therefore, unlike the duty to defend, the trial court must look beyond the allegations in the underlying complaint to decide whether an insurer has a duty to indemnify. The duty to indemnify arguably may not become fully ripened until the merits of the underlying litigation are resolved.

Progressive Express Insurance, supra, at *6 (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.

TIMELY WRITTEN NOTICE TO INSURER AND COOPERATING WITH INSURER

Posted on June 16, 2017June 16, 2017 by Edward Garber

I harp on notifying a liability insurer in writing once a claim is asserted against you. As soon as possible. I harp on this because as an insured you want to remove any doubt or argument that the insurer was prejudiced due to a lack of timely notice.

In a recent opinion, Zurich American Insurance Co. v. European Tile and Floors, Inc., 2017 WL 2427172 (M.D.Fla. 2017), the insurer moved for summary judgment in a coverage action arguing that its insured failed to provide it timely written notice. Specifically, the insurer argued that the insured violated the clause in the liability policy that states:

2. Duties in the Event of Occurrence, Offense, Claim or Suit

b. If a claim is made or “suit” is brought against any insured, you must:

1. Immediately record the specifics of the claim or “suit” and the date received; and

2. Notify us as soon as practicable.

You must see to it that we receive written notice of the claim or “suit” as soon as practicable.

c. You and any other insured must:

1. Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or “suit”;

2. Authorize us to obtain records and other information;

3. Cooperate with us in the investigation, settlement or defense of the claim or “suit”; and

4. Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

Here, the insured claimed it orally called the insurer about the nature of the suit and a representative told it that there would be no coverage for the lawsuit. The insurer, however, claimed it has no record of such a call and only learned of the lawsuit after a judgment had already been entered against the insured. Particularly, a seven-figure judgment was entered against the insured and the judgment creditor then sued the insurer which prompted the insurer to file a coverage lawsuit.

The insurer argued that there should be no coverage because the insured violated the clause regarding being provided timely written notice of the lawsuit. An insured can forfeit otherwise valid coverage by failing to provide timely notice to the prejudice of the insurer.

Under Florida law, if an insured’s notice is untimely, a presumption of prejudice arises. European Tile and Floors, supra, at *5. The insured can only prevail if it rebuts the presumption of prejudice by demonstrating with competent evidence that the insurer was not prejudiced by the untimely notice. Id. However, although the policy required written notice, this requirement can be waived when the insurer has actual notice of the claim. Id.

In this case, the Middle District denied the insurer’s motion for summary judgment because there was a material fact dispute as to whether the insured provided notice of the lawsuit to the insurer—the insured claims it did so through an oral call which the insurer disputes.

The insurer also moved for summary judgment arguing the insured failed to cooperate with it. An insurer may deny coverage for an insured’s failure to cooperate when “(1) the lack of cooperation was material, (2) the insurer exercised diligence and good faith in bringing about the cooperation of its insured and itself complied in good faith with the terms of the policy and (3) the lack of cooperation substantially prejudiced the insurer.” European Tile and Floors, supra, at *6 quoting Mid-Continent Cas. Co. v. Basdeo, 477 Fed.Appx. 702, 706-07 (11^th Cir. 2012).

SUBCONTRACTOR’S LIABILITY INSURER’S DUTY TO DEFEND THE “ADDITIONAL INSURED” GENERAL CONTRACTOR

Posted on April 22, 2017April 22, 2017 by Edward Garber

Construction projects can lead to insurance coverage disputes. One such dispute arises when a general contractor is sued for construction defects and resulting property damage and it tenders the defense of the claim / lawsuit to an implicated subcontractor’s liability insurer. A general contractor does this because it (hopefully) will be an additional insured under the subcontractor’s liability policy. Being identified as an additional insured under a subcontractor’s liability policy is imperative for a general contractor as part of its normal risk assessment. The issue will typically come up in any construction defect lawsuit because if the general contractor is an additional insured it will, and should, tender the defense of the lawsuit to implicated subcontractors’ insurers.

Sometimes, a subcontractor’s liability insurer will deny the duty to defend the general contractor. Yes, this happens. When it does, the general contractor’s insurer will provide a defense to the general contractor but may pursue the subcontractor’s insurer for reimbursement of fees and costs based on the general contractor being an additional insured under the subcontractor’s liability policy.

For example, in Travelers Property Casualty Co. of America v. Amerisure Ins. Co., 161 F.Supp.3d 113 (N.D.Fla. 2015), the general contractor’s liability insurer (Travelers) sued a stucco subcontractor’s liability insurer (Amerisure) where the underlying issue was whether the general contractor was an additional insured under the subcontractor’s liability policy. The subcontractor’s insurer refused to defend the general contractor in an underlying construction defect lawsuit. The general contractor’s insurer provided a defense in the underlying lawsuit and sued the subcontractor’s insurer for reimbursement.

“Under Florida law, a liability insurer’s duty to defend extends to an entire lawsuit if any claim in the lawsuit may come within the policy’s coverage.” Travelers Property Casualty Co., 161 F.Supp.3d at 1137. The underlying complaint against the general contractor alleged property damage caused by defective stucco installation. This meant that the complaint triggered the duty to defend and the Court held the general contractor was an additional insured under the subcontractor’s liability policy. For this reason, the Court maintained that the subcontractor’s insurer (Amerisure) owed the general contractor’s insurer (Travelers) the reasonable attorney’s fees incurred in the defense of the general contractor in the underlying lawsuit:

When Amerisure [subcontractors’ insurer] failed to step up, Travelers [general contractor’s insurer] did what Amerisure should have done: Travelers provided Yates [general contractor] a defense. The attorneys Travelers hired chose to defend the case not only by answering the claims but also by asserting third-party claims against subcontractors, including Jemco [stucco subcontractor]. Travelers paid the fees and costs incurred in connection with the third-party claims, apparently concluding that this was the best strategy for defending the claims and that its duty to defend Yates thus obligated it to pay for the third-party claims as well. There is support for that view.

***

Had Amerisure provided a defense as it should have done, the attorneys it hired might or might not have made the same strategic decision as the attorneys hired by Travelers. But now Amerisure can complain, at most, about unreasonable decisions, not about decisions that reasonably could have gone either way. As a leading commentator has put it, when an insurer breaches its duty to defend,

the insured is justified in assuming the defense of the action and is released from the contractual obligation to leave the management of the case to the insurer. Not only does the insurer lose the power to control the defense or dictate to the insured how the case should be handled, but the insurer cannot complain about the conduct of the defense by the insured or the negligent handling of the case by the insured’s attorney.

Travelers Property Casualty Co. of America, 161 F.Supp.3d at 1138-39 (internal citations omitted).

“IS THE DEFECTIVE WORK COVERED BY INSURANCE?”

Posted on March 12, 2017March 12, 2017 by Edward Garber

I have been asked this question quite a bit from owners, in particular: “The contractor committed defective work, but it has insurance. Doesn’t the insurance cover this defective work?” Ugh, NO! There is this misconception that liability insurance, specifically, is the be-all-and-end-all when it comes to defective work. This could not be further from the truth. Don’t get me wrong – liability insurance is important; it is very, very important. However, liability insurance does not cover the risk of an insured’s defective work. Rather, liability insurance is designed to cover the risk of resulting damage: damage resulting from defective work. This is a significant distinction and one that is often overlooked. This is also why anyone encountering defective work should be working with an attorney to maximize insurance coverage or realize that the issue is not covered by insurance.

Let’s give easy examples to summarize this application:

Example 1 – My windows are defectively installed. They all need to be removed and replaced. Insurance should cover this defective installation, right? Ugh, NO! Remember, insurance does not cover the risk of an insured’s defective work. Removing and replacing the windows would not be covered by insurance.

Example 2– My windows are defectively installed and this defective installation has resulted in water intrusion and extensive water damage. Insurance should cover the defective installation and water damage, right? Yes and No. As mentioned, insurance is still not going to cover the defective work. But, the insurance should cover the water damage resulting from the defective work.

Example 3 – A spalling piece of concrete that was defectively installed fell and substantially damaged a vehicle. Insurance should cover the damage to the vehicle, right? Insurance should cover this damage because the third-party damage was the result of the defective work.

Example 4 – The balcony waterproofing was defectively installed resulting in water getting into the balcony system. In order to fix this defective waterproofing, the balcony concrete topping needs to be ripped out. Insurance covers remediating the waterproofing, right? Yes and no, perhaps. Again, insurance is not going to cover the defective waterproofing. But, there may be an argument that insurance should cover the removing and replacing of the concrete topping since this work had to be ripped out in order to repair the underlying defective waterproofing.

These are just easy examples to illustrate the application of insurance in different contexts. Of course, these are not all of the contexts and most contexts are more challenging. But, the point is that insurance, contrary to what many may believe, is not designed to insure defective work. Insurance is more complex than it may seem and, again, it is important to consult with a practitioner that understands insurance, how to maximize insurance, and to to advise you when the issue in reality is not an insurance-coverage issue.

SOMETIMES YOU NEED TO CONSIDER THE COBLENTZ AGREEMENT

Posted on January 19, 2017January 19, 2017 by Edward Garber

Since insurance, particularly liability insurance, is such an important component when it comes a construction project, understanding certain nuances such as a Coblentz Agreement (a what kind of agreement agreement?!?—keep reading) becomes helpful.

If there is a construction defect claim / lawsuit, the implicated parties (e.g., contractor, design professional, subcontractor, sub-consultants) are going to tender the claim / lawsuit to their respective liability insurer. This is what they should be doing – notifying the insurer so that the insurer can defend them from the claim / lawsuit and indemnify them from covered damages associated with the claim / lawsuit.

And, if a contractor is an additional insured under an implicated subcontractor’s liability policy, it is going to demand that the insurer defend it (or share in the defense costs with other implicated subcontractors) and indemnify it based on the negligence of the primary insured-subcontractor.

This is all par for the course in a construction defect lawsuit–really, any construction defect lawsuit.

But, there may come a point where a liability insurer denies coverage meaning they are declining to defend their insured in connection with the claim / lawsuit. In this situation, the claimant may consider entering into a Coblentz agreement with the insured. This was the topic in a recent non-construction case in In Re: The Estate of Jorge Luis Arroyo, Jr. v. Infinity Indemnity Insurance Co., 42 Fla. L. Weekly D192a (Fla. 3d DCA 2017), when a personal injury negligence lawsuit was brought against an Estate as the result of a deadly car accident. The Estate tendered the defense of the negligence lawsuit to the decedent’s insurer, but the insurer declined to defend the Estate of the insured. The Estate and the personal injury claimant then entered into a Coblentz agreement where the Estate (1) agreed to a consent judgment entered against it, (2) assigned its rights under its liability policy to the claimant, and (3) the claimant agreed not to pursue the consent judgment against the insured. The Coblentz agreement and consent judgment gave the claimant a path to sue the insured’s liability insurer based on the liability against the insured as set forth in the consent judgment. (The consent judgment establishes the liability of the insured.)

“In order to enforce a consent judgment entered pursuant to a Coblentz agreement, the assignee [claimant] must bring an action against the insurer and prove: (1) insurance coverage, (2) the insurance company wrongfully refused to defend its insured, and (3) the settlement was reasonable and made in good faith.” In Re: The Estate of Jorge Luis Arroyo, Jr. supra.

“[W]hen an insurer refuses to defend its insured from a lawsuit, and the insured later settles the suit by entering into a Coblentz agreement, the insurer is precluded from relitigating the issue of its insured’s liability in subsequent proceedings.” In Re: The Estate of Jorge Luis Arroyo, Jr. supra. Stated differently, the insurer is precluded from later raising defenses on behalf of its insured that it could have previously raised had it simply defended its insured.

In this case, the insurer ultimately tried to intervene in an underlying lawsuit once it was sued per the Coblentz agreement. Although the trial court permitted this intervention, the appellate court reversed because the insurer couldn’t relitigate issues it could have raised had it not declined to defend its insured– it was this declination that gave rise to the Coblentz agreement in the first place. The consent judgment established the insured’s liability to the claimant; thus, the issues to determine were (1) was there coverage, (2) did the insurer wrongfully refuse to defend the insured; and (3) was the settlement reasonable. As this case shows, sometimes a claimant needs to consider entering into a Coblentz Agreement to pursue recourse against an insurance policy.

TENDER THE DEFENSE OF A LAWSUIT TO YOUR LIABILITY CARRIER

Posted on January 13, 2017January 13, 2017 by Edward Garber

Sometimes you come across a head scratcher. This would be a decision that does not seem to make a whole lot of sense. For instance, if you are sued and you maintain liability insurance that would potentially provide you a defense and indemnification, not notifying your insurance carrier is a head scratcher. You pay substantial dollars towards the premium of that policy. So, not then notifying your carrier about a lawsuit is a head scratcher, and I mean a head scratcher!! If you are sued, not only should the carrier be notified, but the defense of that lawsuit should be tendered to your liability carrier.

This madness is exactly what occurred in Embroidme.com, Inc. v. Travelers Property Casualty Co. of America, 2017 WL 74694 (11^th Cir. 2017) where an insured was sued and incurred over $400,000 in legal fees (yes, I said that amount right!) before notifying its liability carrier and tendering the defense of the lawsuit to its carrier. The liability carrier, upon notification, picked up the defense of its insured but refused to reimburse the insured for the pre-tender legal fees the insured incurred. Although the court gives a lengthy discussion on Florida’s Claim Administration Statute (Florida Statute s. 627.426) based on a very crafty argument by the insured, the bottom line is that the insurer was not liable to the insured for pre-tender litigation fees the insured incurred prior to tendering the claim to its insurer. See Embroidme.com, Inc., supra, at *13 (finding that the Claims Administration Statute “does not apply to prevent Travelers [insurer] from enforcing a provision of the liability insurance policy that excludes EmbroidMe [insured] from obtaining reimbursement for attorney’s fees it chose to incur prior to requesting Travelers to defend and indemnify it in its pending litigation.”).

Again, if you have liability insurance and a claim / lawsuit is asserted against you, there is generally no reason not to notify the insurer of the lawsuit and tender the defense of that lawsuit to the insurer. If you don’t you can wind up like the insured in this case which is to expend over $400,000 in legal fees (when the carrier owes you a defense) that is not reimbursable. This doesn’t make sense—a head scratcher—considering the premium you pay to your insurer.

COBLENTZ AGREEMENT AND ALLOCATION OF DAMAGES IN CONSENT JUDGMENT

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

I previously discussed Coblentz agreements. A Coblentz agreement is an agreement between a claimant (e.g., property owner) and a third-party (e.g., general contractor that caused construction defects and damage) when the third-party’s liability insurer denies a defense (and coverage) to the third-party. The claimant and third-party enter into an agreement where a) the claimant obtains a consent judgment against the third-party, b) the third-party assigns its rights under its liability policy to the claimant based on the insurer’s refusal to defend and indemnify the third-party, and c) the claimant releases the third-party from any individual liability irrespective of whether the claimant recovers from the third-party’s liability insurer. (Check here for a presentation on Coblentz agreements.)

One of the key components of the Coblentz agreement is the consent judgment given by the third-party to the claimant. It is always a good idea to allocate between damages covered by insurance and damages not covered by insurance. The reason is that liability insurance is not designed to cover defective workmanship. Rather, it is designed to cover damages resulting from defective workmanship. In a construction defect dispute, the consent judgment should reasonably allocate the covered damage (damage caused by defective workmanship) and uncovered damage (the cost solely to repair defective workmanship). These amounts should not be arbitrarily decided but should be supported with expert opinions since this point would be litigated against the liability insurer when the claimant tries to recover from the third-party’s liability insurer.

For example, in the recent opinion of Bradfield v. Mid-Continent Casualty Company, 2015 WL 6956543 (M.D.Fla. 2015), an aspect of the opinion dealt with the lack of an allocation of damages in a consent judgment given in consideration of a Coblentz agreement. The contractor gave the owner a consent judgment in the amount of $671,050. But, there was no allocation of this lump sum amount for covered and uncovered damage or what this lump sum was designated for. The consent judgment was based on an estimate prepared by an expert but the estimate included costs to repair defective work, or work that was not covered by the liability insurance policy. The Middle District of Florida found that this failure to appropriately allocate covered verses uncovered damage was fatal to the owner’s claim against the third-party contractor’s liability insurer to recover the amount of the consent judgment. The court explained: “Florida law clearly requires the party seeking recovery…to allocate any settlement amount between covered and noncovered claims.” Bradfield, supra, at *24.

Even if damages were allocated, the consent judgment still needs to be reasonable and entered in good faith. The court discussed this aspect of the Coblentz agreement despite finding that the failure to allocate was fatal to the owner’s claims against the contractor’s liability insurer. As to the reasonableness of a consent judgment, the court importantly maintained:

When an injured party wishes to recover under a Coblentz agreement, [t]he claimant must assume the burden of initially going forward with the production of evidence sufficient to make a prima facie showing of reasonableness and lack of bad faith, even though the ultimate burden of proof will rest with the carrier. The courts impose good faith and reasonableness requirements in these cases due to the risk that the settlement of liability and damages in a settlement agreement may have little relationship to the strength of a plaintiff’s claim where the insured may never be obligated to pay and has little to lose if he stipulates to a large sum with the plaintiff.

In Florida, the test as to whether a settlement is reasonable and prudent is what a reasonably prudent person in the position of the defendant [the insurer] would have settled for on the merits of plaintiff’s claim. Objective and subjective factors are considered, including the degree of certainty of the tortfeasor’s subjection to liability, the risks of going to trial and the chances that the jury verdict might exceed the settlement offer. [P]roof of reasonableness is ordinarily established through use of expert witnesses to testify about such matters as the extent of the defendant’s liability, the reasonableness of the damages amount in comparison with compensatory awards in other cases, and the expenses which have been required for the settling defendants to settle the suit. Bad faith also may be established by evidence of the absence of any effort to minimize liability.

Bradfield, supra, at 27 (internal quotations and citations omitted).

When considering a Coblentz agreement on behalf of a claimant, make sure the judgment allocates between covered and noncovered claims / damages and is reasonable. The same experts utilized to support the allocation can be utilized to support the reasonableness of the allocation for covered claims / damages.

CONTRACTUAL LIABILITY EXCLUSION IN CGL POLICIES AND “INSURED CONTRACT” EXCEPTION

Posted on July 16, 2015July 16, 2015 by Edward Garber

Commercial General Liability (CGL) policies contain a CONTRACTUAL LIABILITY EXCLUSION (see adjacent picture). The contractual liability exclusion operates to BAR personal injury and property damage claims “which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.” Think indemnification claims which are assumption of liability claims and common in construction.

But, and this is an important but, there are two exceptions to this exclusion.

First, the contractual liability exclusion does not apply to liability for damages “that the insured would have in the absence of the contract or agreement.” Think tort claims.

Second, the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract’.” The key to this exception is the definition of an “insured contract.”

Applicable to construction, a key definition of an “insured contract” is “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.” This portion of the “insured contract” definition should ideally bring contractual indemnification claims back into play so that contractual indemnification claims are not barred by the contractual liability exclusion.

Be careful, though. There are endorsements to CGL policies that have modified the definition of “insured contract” to either remove the aforementioned definition all together, meaning contractual indemnification claims would be excluded. This is a bad endorsement to the definition of “insured contract” if you are involved in construction.

Or, this key definition of “insured contract” has been narrowed to include the following underlined language “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or those acting on your behalf.” This means that if you contractually agree to indemnify another for that person’s negligence, this would not meet the definition of “insured contract” since you are agreeing to indemnify another for negligence not caused in whole or in part by you.

For example, the opinion in Mid-Continent Casualty Co. v. Royal Crane, LLC, 2015 WL 3609062 (Fla. 4^th DCA 2015), discusses this narrowed definition of “insured contract” with the underlined language above. In this case, a subcontractor leased a crane and crane operator from a rental company. The rental agreement between the subcontractor and rental company contained the following contractual indemnification language:

“Lessee [subcontractor] agrees to indemnify, defend and hold harmless Lessor [rental company], its employees, operators and agents from any and all claims for damage to property, damage to the work or bodily injury (including death) resulting from the use, operation, or possession of the crane and operator whether or not it be claimed or found that such damage or injury resulted in whole or in part from Lessor’s negligence, from a defective condition of the crane or operator or from any act, omission or default of Lessor.”

In other words, the subcontractor was agreeing to indemnify the rental company for the rental company’s negligence. This is known as a broad form indemnification provision.

During construction, a worker was hurt when a truss fell from the crane. The worker sued the rental company and the crane operator for negligence. The rental company and operator third-partied in the subcontractor based on the contractual indemnification provision in the rental agreement. However, the subcontractor’s CGL insurer denied coverage (and, thus, a defense in the lawsuit) based on the contractual liability exclusion.

As a consequence of the CGL insurer’s immediate denial of coverage, the subcontractor entered into a Coblentz settlement agreement with the rental company that allowed the rental company to sue the subcontractor’s CGL’s insurer for its wrongful refusal to deny the subcontractor a defense and for coverage under the subcontractor’s policy.

Coblentz Settlement Agreement

In a nutshell, a Coblentz settlement agreement is an agreement between an insured and a third-party claimant where the insurer denied coverage and, thus, the duty to defend its insured in an underlying lawsuit. The insured agrees to give the claimant a consent judgment to resolve the lawsuit and an assignment of its rights under its CGL policy to the claimant in exchange for the claimant not enforcing the consent judgment against the insured. This allows the claimant to now sue the insured’s CGL insurer directly to enforce the consent judgment. In doing so, the claimant must still prove: (a) the insurer wrongly refused to defend its insured, (b) there is coverage under the policy, and (3) the negotiated consent judgment was made in good faith and is reasonable. But, the consent judgment prevents the insurer from trying to argue the liability of the insured since that could have been argued in the underlying lawsuit that the insurer refused to defend its insured in. See Royal Crane, supra, at *4-5. (For more information on Coblentz settlement agreements, check out this presentation that discusses this in detail.)

“Insured Contract”

But, the heart of the case really pertained to the contractual liability exclusion and the definition of an “insured contract” as narrowed by endorsement. With respect to the definition of “insured contract” in the policy (see above language), the Fourth District Court of Appeals importantly held:

“[A]n indemnity agreement can be an ‘insured contract’ under the policy where the injury is caused by the indemnitee’s negligence, so long as the named insured ‘caused’ some part of the injuries or damages or is otherwise vicariously liable.”

Royal Crane, supra, at *7.

In other words, taking the above fact pattern, the indemnity agreement could constitute an “insured contract” to be excepted from the contractual liability exclusion if the worker’s injury was caused by the rental company’s (indemnitee) negligence, so long as the subcontractor (named insured in the CGL policy) caused some part of the injuries or was otherwise vicariously liable to the rental company for the injuries.

Unfortunately for the rental company, even under this favorable definition of an “insured contract”, the rental company’s third-party complaint against the subcontractor still did not trigger a duty of subcontractor’s CGL insurer to defend and cover the subcontractor:

“Hunter Crane’s [indemnitee-rental company] third party complaint did not assert a legal theory under which Cloutier [insured-subcontractor] can be said to have ‘caused’ the injury in whole or in part. No allegation described how Cloutier contributed to causing the accident. No allegation attempted to invoke the borrowed servant doctrine, which dictates that ‘one who borrows and exercises control over the servant or worker of another in effect assumes all liability for the activities of the borrowed servant or worker.’ Nor did the third party complaint cast Cloutier as the employer of an independent contractor who actively participated in or interfered with the job to the extent that it directly influenced the manner in which the work was performed.”

Royal Crane, supra, at *7 (internal quotations omitted).

For this reason, the Fourth District sided with the CGL insurer finding that the contractual liability exclusion barred coverage to the subcontractor such that the CGL insurer had no duty to defend or cover the subcontractor in the underlying litigation. This also meant that the rental company’s Coblentz settlement agreement provided it no value because it already agreed to give up rights to collect against the subcontractor and it could no longer collect against the subcontractor’s CGL insurer. What this case does exemplify, however, is the importance of pleading allegations to maximize insurance coverage as well as a more relaxed definition of an “insured contract” to hopefully prevent the application of the contractual liability exclusion.

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

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

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

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

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

(a) The name of the insurer.

(b) The name of each insured.

(c) The limits of the liability coverage.

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

(e) A copy of the policy.

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

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

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

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

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

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

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

QUALIFYING FOR ADDITIONAL INSURED STATUS

Posted on May 31, 2014May 31, 2014 by Edward Garber

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

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

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

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

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

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

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

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

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

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

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

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

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

This case contains a couple of important take-aways:

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

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