Does a Mediation Trigger the Duty to Defend Under a CGL Insurance Policy?

Joshua Fruchter | Merge Mediation Group | September 4, 2019

Standardized commercial general liability (CGL) insurance policies impose a “duty to defend” that obligates insurers to defend insureds against “suits” seeking damages for claims potentially covered by the policy. The existence of a duty to defend is determined by the allegations in the “suit” filed against the insured.

Does a mediation qualify as a “suit” under a standardized CGL policy? That question was recently litigated in Illinois state court. See Illinois Tool Works, Inc. v. Ace Specialty Ins. Co., 2019 IL App (1st) No. 18-1945 (August 23, 2019). In that case, the insured manufacturer, ITW, operated a facility at a location (referred to as “AUS-OU”) that was later declared a Superfund site by the United States Environmental Protection Agency (EPA) after the discovery of environmental contamination.

In August 2004, another manufacturer notified ITW that it was negotiating with the EPA concerning the payment of cleanup costs related to the AUS-OU site, and claimed that ITW was partially responsible for those costs because manufacturing activities at ITW’s facility had allegedly released hazardous substances. In response, ITW agreed to share in the expense of remediating the AUS-OU site, and entered into a mediation with the EPA and other manufacturers to allocate cleanup costs. ITW notified its insurers about the mediation, and submitted bills for costs incurred, but the insurers did not reimburse ITW for those costs.

Subsequently, ITW was sued for contribution to cleanup costs for an adjacent site (“Site 36”). The insurers funded ITW’s defense of the Site 36 lawsuit.

After the Site 36 lawsuit settled, ITW filed an action against its insurers seeking a declaratory judgment that the insurers had a duty to defend and indemnify it for claims against it regarding both the Site 36 lawsuit and the AUS-OU mediation. The insurers acknowledged that they had a duty to defend ITW in the Site 36 lawsuit, but argued that the same duty did not apply to the AUS-OU mediation because it was not a “suit” under the policies.

The trial court agreed with the insurers that the AUS-OU mediation did not trigger a duty to defend because it was not a “suit” under the policies.

On appeal, ITW abandoned its argument that the mediation qualified as a “suit” under the policies, and instead maintained that the duty to defend triggered by the Site 36 lawsuit extended to the AUS-OU mediation because the contamination at issue in the Site 36 lawsuit and the AUS-OU mediation arose out of the same allegedly hazardous releases. That argument failed, and the appellate court affirmed.

Why did ITW decide, on appeal, not to press its argument below that the mediation qualified as a “suit” under the policies? The appellate court’s decision indicates that the relevant policies were issued to ITW’s predecessor between 1974 and 1985.

As per an August 2002 article published on the International Risk Management Institute, Inc. (IRMI) website by risk management consultant Craig Stanovich, it was only in 1986 that standardized CGL policies began defining the term “suit” to include (i) arbitration proceedings “in which such damages are claimed and to which the insured must submit or does submit with our consent;” and (ii) “any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

While the definition of “suit” in the new standardized CGL policy does not specifically mention mediation, it seems clear that mediation would qualify as an “alternative dispute resolution proceeding.” Importantly, however, the new definition of “suit” obligates the insured to obtain the insurer’s consent to submit to an ADR proceeding before the insurer becomes obligated to defend the proceeding. Accordingly, assuming a mediation qualifies as a “suit” under the policy, an insured would first need to obtain the insurer’s consent to participate in pre-litigation mediation before the insurer would be obligated to cover mediation costs.

At any rate, given that ITW made its insurers aware of the mediation, and they appeared to have consented (or at least not objected), ITW might have prevailed under the newer definition of “suit” that imposes a duty to fund the costs of an “alternative dispute resolution proceeding” to which the insurer consents.

The importance of obtaining the insurer’s consent to ADR is illustrated by a recent California federal court decision. See Harper Constr. Co., Inc. v. Nat’l Union Fire Ins. Co., 377 F. Supp. 3d 1134 (S.D. Cal. 2019). In Harper, the court held that even if an insured’s interaction with the federal government in a construction dispute under the Contract Disputes Act constituted a form a type of ADR proceeding under the new CGL policy, the duty to defend was not triggered because the insurer had never consented to the proceeding.

Court of Appeals Finds Additional Insured Coverage Despite “Care, Custody or Control” Exclusion

Garret Murai | California Construction Law Blog | July 30, 2019

When things go wrong on a construction project it’s often a scramble of finger pointing. In McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company, Case No. D074219 (June 5, 2019), the California Court of Appeals for the 4th District considered whether an additional insured exclusion, excluding “property in the care, custody or control of the additional insured,” precluded a duty to defend by an insurer.

McMillin Homes Construction, Inc. v. National Fire & Marine Insurance Company

McMillin Homes Construction, Inc. was the developer and general contractor on a residential project known as Auburn Lane in Chula Vista, California.  McMillin subcontracted with Martin Roofing Company, Inc. to perform roofing work. Under the subcontract, Martin was required to obtain commercial general liability insurance naming McMillin as an additional insured.

The commercial general liability insurance policy secured by Martin was issued by National Fire and Marine Insurance Company. As is typical, the policy covered “property damage” and “personal injury” arising out of an “occurrence” during the policy period. McMillin was covered as additional insured under ISO endorsement form CG 20 09 03 97.

In 2014, homeowners at Auburn Lane sued McMillin for construction defects. The complaint alleged water intrusion and damages due to roofing defects. McMillin tendered defense to National Fire. However, National Fire denied the claim on the ground that an exclusion contained in the commercial general liability insurance policy, excluding “property in the care, custody or control of the additional insured,” precluded coverage and defense.

In 2016, McMillin sued National Fire for declaratory relief, breach of contract and breach of the implied covenant of good faith and fair dealing. The case was bifurcated, with the parties trying first, the issue of whether the exclusion precluded coverage. During the first phase of the bifurcated trial, McMillin argued that exclusion, excluding “property in the care, custody or control of the additional insured,” required that the property be in the “exclusive or complete” control of McMillin, and that here the property was not in the “exclusive or complete” control of McMillin, since McMillin subcontracted the roofing work to Martin.

National Fire, in turn, argued that nowhere in CG 20 09 03 97 are the terms “exclusive” or “complete” control used. Moreover, argued National Fire, ISO endorsement form CG 21 39 10 93, which precluded coverage for indemnity obligations, underscored the intent of the policy to preclude coverage for construction defects like the one at issue.

The trial court agreed with National Fire and McMillin appealed.

The Court of Appeal Decision

On appeal, the 4th District Court of Appeal identified several well-established principles applicable to the interpretation of insurance policies in California. Among them:

  • An insurer’s duty to defend is broader than its duty to indemnify and an insurer “must defend even where the evidence suggests but does not conclusively show the loss is not covered.”
  • An insurer’s duty to defend arises at the outset of a case “arising upon tender and lasting until litigation is resolved, or until the insurer has established there is no potential for coverage.”
  • Where an insurer denies coverage and a duty to defend, and an insured files an action for declaratory relief, the insured must only prove the existence of a “potential for coverage” while the insurer must establish “the absence of any such potential.”
  • Doubts as to whether an insurer owes a duty to defend is resolved in the insured’s favor.

The Court of Appeals, relying on Home Indemnity Company v. Leo L. Davis (1978) 79 Cal.App.3d 863), which involved a similar exclusion in which the court held that the exclusion did not apply where there was “shared” control, explained that while “McMillin was responsible for the whole project and coordinating schedules to ensure the project finished on time” “Martin was responsible for controlling its job site and supervising the roofing work.”  Thus, held the Court, “Martin an McMillin shared control over Martin’s roofing work.”

Moreover, explained the Court of Appeals, interpreting the policy in the manner urged by National Fire would not be consistent with McMllin’s objectively reasonable expectations, which was that, as an additional insured, it would be covered under Martin’s commercial general liability policy for property damage arising from Martin’s work.

Finally, as to National Fire’s CG 21 39 10 93 argument – which basically boiled down to: the policy was intended to preclude coverage for construction defect claims like the one involved, because together with CG 20 09 03 97, they were intended to preclude coverage for construction claims based in both tort and contract  – the Court of Appeal described the argument “convoluted.”

In interpreting insurance policy provisions, explained the Court, provisions are not interpreted to “protect the subjective beliefs of the insurer, but rather the objectively reasonable expectations of the insured.” And, here, the objectively reasonable expectation of McMillin was that as an additional insured, it would be covered by Martin’s commercial general liability insurance policy.

Duty to Defend Pre-Litigation Construction Defect Claims

Christopher P. Ferragamo and Alexis P. Joachim | DRI

Coverage disputes between insureds and their insurance companies over the scope of  the term “suit” and whether insurers are obligated to provide insureds with a defense for quasi-judicial proceedings relating primarily to environmental clean-up actions initiated by state and federal environmental agencies have been waged for decades. The Insurance Services Office (ISO) attempted to end the dispute by inserting a definition of the term “suit” that specifically addressed the types of proceedings that do and do not give rise to insurers’ duty to defend. Although a small handful of skirmishes continue to arise in the environmental context with respect to older versions of the general liability policies, ISO’s clarifying change in policy language has largely laid the issue to rest, at
least in the environmental context.

Yet, a new wave of coverage disputes interpreting the term “suit” in the construction
defect arena promises to resurrect this coverage question and spur renewed litigation
over an insurer’s obligations, if any, to defend such pre-litigation claims when traditional
litigation has not yet commenced against an insured. In this regard, 32 states enacted “Right to Repair” statutes, which require homeowners to comply with certain “pre-litigation” measures before filing a lawsuit against a homebuilder-insured. The issue over an insurer’s obligation to defend homebuilder-insureds during this “pre-litigation” process is fast becoming a new focal point of duty to defend disputes
between insureds and their insurers.

Defense Provisions in Standard Commercial General Liability Policies

The insuring agreement of Coverage A contained in standard Commercial General Liability (CGL) policies obligates insurers to pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which the insurance applies. In addition, the insuring agreement provides that the insurer will defend the insured against any suit seeking those damages. Prior to 1986, the term “suit” was not defined in the ISO CGL policy form, which, as discussed below, gave rise to highly contested coverage litigation and a vast array of differing approaches taken by numerous courts throughout the country confronting the issue. The  inconsistency and uncertainty in approaches taken by courts between and within the states ultimately led to changes in the standard policy form. The changes are discussed in detail below.

Coverage Litigation Involving the Term “Suit” in the Environmental Context

The absence of a definition of “suit” in pre-1986 CGL policies resulted in significant coverage litigation over the meaning of “suit” and the types of conduct that
gave rise to insurers’ duty to defend in the environmental context. Coverage disputes
arose as to whether requests by state and federal authorities for insureds to investigate
and clean-up contaminated properties and adversarial actions short of litigation
gave rise to insurers’ duty to defend.

Some state courts find in favor of policyholders by applying a broad interpretation
of the term “suit.” Adopting such an approach expands insurers’ defense obligations
by focusing on the nature of the proceeding in which a claim for damages
against an insured is made. Many courts around the United States adopt
this broad approach and conclude that all types of coercive administrative actions
constitute “suits” giving rise to insurers’ defense obligations under CGL policies.
These courts reason that “an insured who is being ‘proceeded against,’ albeit in a
unorthodox fashion, is no less entitled to a defense than his insured contemporaries
who are legally attacked in a more conventional manner.” See Cont’l Cas. Co.
v. Cole, 809 F.2d 891, 898 (D.C. Cir. 1987). The Supreme Court of North Carolina, for
example, noted that so-called “compliance orders,” although not issued by a court, are
in fact “an attempt by the State to ‘gain an end by legal process.’” C.D. Spangler Constr.
Co. v. Indus. Crankshaft & Eng’g Co., 388 S.E.2d 557, 570 (N.C. 1990). Similarly, the
Alabama Supreme Court determined that the authority invested in the EPA in issuing
letters to potentially responsible parties (PRP) for environmental pollution is almost absolute and that “a decision by the EPA to designate an insured as a PRP cannot
on any practical level be understood as anything less that the initiation of a ‘legal
action’ constituting a ‘suit’ within the contemplation of [a CGL policy].” Travelers
Cas. Co. and Sur. Co. v. Ala. Gas Corp., 117 So. 3d 695, 708 (Ala. 2012).

Other courts, however, adopt a more traditional meaning of the term “suit” and find
in favor of insurers by limiting the term to mean only a formal complaint filed in a
court of law. By way of example, the California Supreme Court concluded that the word
“suit” means a civil action commenced by filing a complaint and, as a result, a PRP
letter would not fall within that definition. Foster-Gardner v. Nat’l Union Fire Ins. Co.,
959 P.2d 265 (Cal. 1998). The Illinois Supreme Court reached a similar conclusion
and held that a “duty to defend extends only to suits and not to allegations, accusations,
accusations or claims which have been embodied within the context of a complaint.”
Lapham-Hickey Steel Corp. v. Prot. Mut. Ins. Co., 655 N.E.2d 842, 847 (Ill. 1995).

ISO Defines the Term “Suit” in Standard CGL Policies

In 1986, ISO modified the standard CGL policy form to include a definition for the
term “suit.” In 1988, the definition was modified again to be more inclusive of
alternative dispute resolutions. Finally, in 1996, a further revision was made to
broaden the arbitration and dispute resolution forums. The term “suit” is now defined
in standard CGL policies as follows:
“Suit” means a civil proceeding in which damages because of “bodily injury,”
“property damage,” “personal injury,” or “advertising injury’ to which this insurance
applies are alleged. Suit includes
a) An arbitration proceeding in which such damages are claimed and to which the          insured must submit or do submit with our consent; or
b) Any other alternative dispute resolution proceeding in which such damages are          claimed and to which the insured submits with our consent.

The policy language change appears to eliminate most disputes between insureds
and insurers in the environmental context as insureds are no longer able to argue that
the term “suit” is undefined and, therefore, ambiguous. Courts, in turn, apply the definition and reject attempts by insureds to broaden its application beyond the proceedings set forth in the definition. See Hester v. Navigators Ins. Co., 917 F. Supp. 2d 290, 296–99 (S.D.N.Y. 2013) (rejecting insured’s request to broaden term and finding definition plain and unambiguous). As a result, any ongoing coverage disputes between insureds and insurers over what constitutes a “suit” in the environmental context involve
pre-1986 policy language. Insureds in the construction defect arena, however, are now beginning to challenge the definition of “suit,” arguing that pre-litigation repairs processes constitute “suits” giving rise to insurers’ duty to defend.

States’ Enactment of Pre-Litigation “Right to Repair” Statutes

At least 32 states enacted legislation requiring homeowners to notify builders of potential construction defects and provide builders with an opportunity to correct the
defect before homeowners initiate litigation. See e.g. Alaska Stat. §§09.45.881 – 09.45.899 (2016); Ariz. Rev. Stat. §§12-1361 – 12-1366 (2016); Cal. Civ. Code 895 – 945.5 (2016); Colo. Rev. Stat. §§13-20-802 – 13-20-807 (2016); Fla. Stat. §§558.001 – 558.005 (2016); Nev. Rev. Stat. §§40.600 – 40.695 (2015); Tex. Prop. Code Ann. §§27.001-27.007 (2016).

Generally, “right to repair” statutes set forth certain procedural requirements that
a homeowner must follow prior to filing a civil action in court. The statutes typically
require the homeowner to notify the builder of an alleged defect within a specified
time after discovery; although, in most states, failure to comply with this requirement
does not bar the claimant from sending a notice. Notable requirements by the
builder include: (1)  responding to the claimant within a specified time, (2)  the
right to inspect the property and notify subcontractors of the defect, (3)  conducting
destructive testing, if necessary, and/or (4) offering to repair the alleged deficiency,
settle the claim, or deny the claim. Many states, however, allow the homeowner to
reject the builder’s offer, thus converting an opportunity for resolution into a mere hurdle
to the homeowner filing a civil action. Further, some statutes are limited in scope
and only apply to certain types of construction and/or defects.

Each state characterizes their “right to repair” statutes differently. By way of
example, the Florida Legislature characterizes “right to repair” statutes as follows:
The Legislature finds that it is beneficial to have an alternative method to resolve
construction disputes that would reduce the need for litigation as well as protect
the rights of property owners. An effective alternative dispute resolution mechanism
in certain construction defect matters should involve the claimant filing a notice of           claim with the contractor … that the claimant asserts is responsible for the defect,           and should provide the contractor … and the insurer of the contractor … with an             opportunity to resolve the claim through confidential settlement negotiations without       resort to further legal process.

Fla. Stat. §558.001 (2016) (emphasis added). In contrast, the California “right to repair”
statute specifically states that the claimant’s notice to the builder “…shall have the
same force and effect as a notice of commencement of a legal proceeding.” Cal. Civ.
Code §910 (2016) (emphasis added).

Policyholders Challenge Whether “Right to Repair” Statutes Give Rise to a Duty to Defend Right to Repair Statutes That Qualify as “Suits”

Certain “right to repair” statutes have a coercive and binding effect on insured builders.
By way of example, in California, the Calderon Process was statutorily established
to allow a homeowner’s association to take pre-litigation steps against a developer for
construction defects. In Clarendon America Ins. Co. v. StarNet Ins. Co., a California
appellate court determined that a notice of commencement pursuant to a Calderon Notice constituted a “suit” under a CGL policy. 113 Cal. Rptr. 3d 585 (Cal. Ct. App. 2011), granting review, 242 P.3d 67 (Cal. 2010) (deferring the matter pending the disposition of Ameron Int’l Corp. v. Ins. Co. of the State of Penn., 242 P.3d 1020 (Cal. 2010)), dismissing review, 121 248 P.3d 191 (Cal. 2011).

In Clarendon, a homeowners association presented its residential developer with a
list of alleged construction defects to which the developer sought coverage under several of its subcontractors’ CGL policies. Id at 587. In addition to notifying the builder of the defects and the builder responding to these claims, the parties were required to select a dispute resolution facilitator to “preside over the mandatory resolution process.” Id at 589. The final event, pursuant to the statute, was a “[f]acilitated dispute resolution
of the claim, with all parties, including peripheral parties, as appropriate, and insurers,
if any, present and having settlement authority.” Id. (internal quotation marks omitted). Although the purpose of the Act was to discourage unnecessary litigation, the court determined that the process was more than just a pre-litigation alternative dispute resolution requirement, as the procedures undertaken during the process and
the results of the process were incorporated into and became part of the post-complaint
litigation. Id. at 592. Furthermore, if timely notice was received of any testing and inspection, no additional inspection or testing was allowed during the actual litigation.
Id. The court, therefore, determined that the Calderon Process was an integral part of the litigation process because of the application and legal effect described in the Act and therefore constituted a “suit” for purposes of an insurer’s duty to defend. Id. at 592–93.

Similarly, in D.R. Horton Los Angeles Holding Co., Inc. v. American Safety Indemnity Co., the United States District Court for the Southern District of California determined that California’s “right to repair” statute set forth in the California Civil Code, Cal. Civ. Code 910, required an insurer to defend the policyholder at the time the defect notice was sent to the builder. 2012 WL 33070 *19 (S.D. Cal. 2012). The focus of the court’s holding was on the language of the statute, which stated that it “shall have the same force and effect as a notice of commencement of a legal proceeding.” Id. (internal quotation marks omitted).

Courts view other “right to repair” statutes, not as a “civil proceeding,” but as “other
alternative dispute resolution proceedings.” For example, in Melssen v. Auto-Owners, Inc. Co., a Colorado appellate court determined that the Colorado “right to repair” statute constitutes “alternative dispute resolution proceedings” within the post-1988 definition of “suit.” 285 P.3d 328 (2012). In that case, homeowners filed a notice of claim in accordance with the Colorado Defect Action Reform Act (CDARA) against their homebuilder for certain defects to their home. Id. at 332. The homebuilder tendered the
claim to its insurer, who eventually denied the claim. Id. A lawsuit for breach of contract
was filed against the insurer, who argued that the notice of claim did not constitute a “suit.” Id. at 333–34. The court disagreed, however, finding that not only did the notice
of claim constitute “a civil proceeding,” but that the notice of claim also constituted an
“alternative dispute resolution proceeding.” Id. at 334. In so holding, the court explained
that, according to Black’s Law Dictionary, “alternative dispute resolution proceedings”
are procedures “for settling a dispute by means other than litigation, such as arbitration
or mediation.” Id.(internal quotation marks omitted).

The procedure was less litigious than California’s process and the court focused on the legislative intent, which was to “encourage[] resolution of potential defect claims before suit is filed” and to “establish[] procedures that facilitate out-of-court resolution of construction defect claims.” Id. at 335 (emphasis added) (internal quotation marks omitted). Interestingly, the statute’s intent was set forth in a previous court ruling describing the “right to repair” statute, rather than articulated by the legislature in the statute itself. Id. Based on the language and purpose of the statute, the court concluded that the notice of claim process constituted an “alternative dispute resolution proceeding” and, as such, qualified as a “suit” since the term “suit” was defined to include “alternative dispute resolution proceedings.” Id. As far as consent, a requirement needed if the proceeding is deemed to be an “alternative dispute resolution proceeding,” the court concluded that there was sufficient evidence in the record to raise a question of fact for the jury as to whether the insurer impliedly consented to the insurers’ notice of claim process. Id.

Right to Repair Statutes That Do Not Qualify as “Suits”

Courts do not universally conclude, however, that all pre-litigation proceedings
mandated by right to repair statutes qualify as “suits” so as to give rise to an insurer’s
duty to defend. Some courts view right to repair statutes as a non-litigious process
put in place to encourage resolution of construction defect claims.

For example, the United States Court of Appeals for the Tenth Circuit in Cincinnati
Insurance Co. v. AMSCO Windows, addressed whether Nevada’s “right to repair” statute was a “suit.” 593 Fed. App’x. 802 (10th Cir. 2014) (applying Utah law). In that case, the policyholder, which manufactured windows used in homes, was sued for defective products that allegedly caused property damage. Id. at 804. According to the Nevada statute, before a claimant pursued a construction defect claim in a judicial proceeding, a detailed written notice must be provided affording the opportunity to inspect and repair the damage. Id. At the conclusion of the prelitigation process, any unresolved claims may proceed to state court. Id. Some of the homeowners’ claims developed into a civil lawsuit, whereas others remained in the pre-suit phase. Id. at 805. The policyholder tendered the claims for defense to its insurer, but the insurer refused to defend and filed a declaratory judgment action. Id.

The trial court determined that the insurer had a duty to defend only those claims in active litigation and not the statutory prelitigation claims. Id. On appeal, the policyholder
argued that the statutory pre-litigation process was equivalent to a “civil proceeding”
and required a defense. The court looked to the statute for guidance on the issue. Id. at
809. According to the court, although the statute mandates participation, noncompliance
does not result in an adverse judgment. Id. at 810–11. In other words, a party who fails to comply with the provisions of the statute faced limited consequences, which are not parallel to the case-determinative consequences of noncompliance in the context
of lawsuits or mandatory arbitrations. Id. Despite the fact that the statute specifically
required the insurer to treat the claim as if a civil action had been brought against the
contractor, the court found such a requirement a non-determinative factor based on
the statutes nonbinding effect. Id. In dicta, the court noted that the Nevada “right to repair” statute would be an “alternative dispute resolution” as to which the policy required the insurer’s consent, and which had not been given. Id.

Similarly, in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., a Florida
federal court determined that a construction defect notice did not constitute a “suit.” 124 F. Supp. 3d 1272, 1274 (S.D. Fla. 2015). In that case, Altman Contractors, Inc. (ACI) was served with a Notice of Claim and Supplemental Notices of Claim pursuant to Chapter 558 of the Florida statutes, which provides a pre-suit procedure for a property owner to assert a claim for construction defects against a contractor. Id. ACI demanded that its insurer Crum & Forster defend and indemnify it relative to the claims. Id. Although Crum & Forster hired a law firm to participate in the response to the notice, Crum & Forster denied ACI’s request to select its own counsel and denied ACI’s request to be reimbursed for the fees and expenses it incurred prior to retention of counsel by Crum & Forster. Id. at 1275.

ACI filed suit seeking a declaration that Crum & Forster had a duty to defend and
indemnify it against the 588 Notice. Id. The policy defined “suit” to include a civil
proceeding, a term that was not further defined in the policy. Id. at 1279. The court
therefore turned to the Black’s Law Dictionary definition of “civil proceeding,” which
defined proceeding as a “judicial hearing, session or lawsuit in which the purpose is
to decide or delineate private rights and remedies, as in a dispute between litigants
in a matter relating to torts, contracts, property, or family.” Id. (internal quotation
marks omitted). According to the court, nothing about the Chapter 558 process
satisfied the definition. Id. The court further noted that for something to be a “civil
proceeding,” pursuant to the definition, there must be some forum and some decision
maker involved. Id. at 1281. The Florida Legislature described Chapter 558 as a
“mechanism,” not a “proceeding.” Id.

Because the court concluded that the Chapter 558 mechanism did not constitute a “civil proceeding,” it also could not constitute an alternative dispute resolution “proceeding” and therefore did not constitute a “suit” under the Crum & Forster policy. Id. The court distinguished the dicta set forth in AMSCO, supra, as inconsistent with the court’s view of the definition of civil proceeding. Id. at 1282. The court, therefore, determined that Crum & Forster had no obligation under the terms of the insurance policies at issue to defend or indemnify ACI relative thereto, and that Crum & Forster did not breach the terms of the policies as a matter of law. Id.

The ruling in Altman was subsequently appealed to the United States Court of Appeals for the Eleventh Circuit. On August 2, 2016, the Eleventh Circuit determined that both Crum & Forster and ACI had reasonable interpretations of the term “suit,” but certification of the issue to the Florida Supreme Court was appropriate, given the policy implications with respect to the question of first impression. Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 832 F.3d 1318 (11th Cir. 2016). The Eleventh Circuit certified the following question: “Is the notice and repair process set forth in Chapter 558 of the Florida Statutes a ‘suit’ within the meaning of the CGL policies issued by C&F to ACI?” Id. at 1326. The Florida Supreme Court accepted the certified question and the partiesare currently briefing the issue.

Analyzing Tenders for Defense of “Right to Repair” Claims Right to Repair Notices and Jurisdictional Case Law

If the jurisdiction requires an insurer to defend the pre-litigation process, like California
or Colorado, an insurer, on receiving notice, should review the letter for potentially covered claims. If the letter is vague as to the damages sought, the insurer should consider retaining defense counsel for the insured to investigate the loss immediately, including a review of the alleged damages for potentially covered claims.

If courts in the jurisdiction conclude that the right to repair claim does not give rise to a duty to defend in the particular jurisdiction at issue, such as Nevada or Florida, the insurer should not ignore the notice provided by its policyholder. Rather, the insurer should conduct, at a minimum, a preliminary investigation of the claim, knowing that the claim may proceed to litigation in the future. The more difficult claims facing insurers are those in jurisdictions where courts have not yet addressed the issue (i.e., jurisdictions other than California, Colorado, Florida or Nevada). As discussed below, in such situations, insurers will need to analyze the policy language and the language and intent of the statute at issue in the context of the jurisdiction’s duty to defend standard to determine whether the pre-litigation process could give rise to a defense obligation.

Policy Language and Definition of the Term “Suit”

As noted above, prior to 1986, the term “suit” was not defined in the ISO form CGL policy, which has led to a body of well-settled law and has resulted in insurers in
a number of jurisdictions defending a variety of claims and pre-litigation demands.
The post-1986 commercial general liability form now contains a specific definition of
the term “suit” such that current liability policies differentiate between the term “claim” and “suit.” Although only the latter gives rise to an insurer’s duty to defend, a policyholder is still required to notify its insurer of a claim. Claim is not defined in the CGL policy, but is referenced in the conditions part of the policy, titled “Duties In
The Event of Occurrence, Offense, Claim or Suit.” Based on this provision, it is clear
that policyholders, regardless of whether they are seeking a defense, are required to notify the insurer of claims. Right to repair notice letters would likely constitute, at a minimum, a claim for which the policyholder must provide notice. If notice is not provided “as soon as practicable,” an insurer has a potential late notice defense,
depending on the jurisdiction, even for the late notice of a right to repair letter. It is
therefore imperative that an insurer first review its policy to determine if “suit” is
defined at all and, if so, how it is defined.

Right to Repair Statutes at Issue

As discussed above, courts appear inclined to review the language and intent of the
statute itself to determine if an insurer has a duty to defend. If the statute is similar to
California in that it involves an adversarial proceeding that is later incorporated
into later-filed litigation, insurers should be prepared to retain counsel to defend the
policyholder (assuming the notice relates to covered damages). If the statute is less
litigious and merely involves certain procedures that have no binding effect on the
post-legal proceeding, insurers may opt to monitor the loss, rather than retain defense

Of important note, the post-1986 definition of the term “suit” specifies that it includes not only civil proceedings, but also mandatory arbitration proceedings (or arbitration proceedings consented to by the insurer) and “any other alternative dispute resolution proceeding consented to by the insurer.” The first scenario is fairly straightforward and would involve situations in which an insured is compelled to arbitrate a matter pursuant to a mandatory arbitration requirement in the statute or a voluntary arbitration  proceeding consented to by the insurer. Some “right to repair” statutes allow parties to engage in voluntary arbitration, which may be a suitable avenue to resolve the dispute with the insurer’s consent.

The second scenario is a bit different. Insureds seeking a defense in non-litigation
or non-arbitration scenarios have argued that the term “other alternative dispute resolution proceedings” broadly encompasses situations involving such activities as formal and informal settlement discussions and/or mediation sessions with adverse
parties, when the discussions or voluntary mediation sessions are undertaken with
the assistance of attorneys for the disputing parties. If either of these procedures is
encompassed within the pre-litigation procedures under the right to repair statute,
the claim could give rise to a defense obligation on the part of the insurer.

The Duty to Defend Standard Absent a Complaint

After examining the policy language, the notice, and the right to repair statute, the
final step in evaluating whether a defense is owed in a pre-litigation construction
defect procedure is to determine the allegations and/or facts that can and cannot be
relied on to make such a determination. In this regard, most pre-litigation procedures
present difficulties because the mechanism to initiate the claim (often times some form
of demand letter) does not involve a traditional complaint.

The majority of jurisdictions use the “four corner” or “eight corner” rule in determining an insurer’s duty to defend. That is, the court compares the allegations of the complaint with the terms of the policy to determine if a duty to defend exists. See, e.g., Jones v. Fla. Guar. Ass’n, Inc., 908 So. 2d 435 (Fla. 2005); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Co., 908 A.2d 888 (Pa. 2006). When the actual facts are inconsistent with the allegations of the complaint, the allegations of the complaint generally control in determining an insurer’s duty to defend. Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5 (Fla. 2004). These rules allow for a definite document to be analyzed and reviewed to evaluate whether the plaintiff has asserted a potentially covered claim for which a defense is owed.

In holding that insurers are required to defend right to repair notices, courts have
presented insurers with a practical problem: What claim documents should an insurer
look to in determining whether the right to repair notices involve a covered claim and
thus a duty to defend? By way of example, Florida’s 558 notice does not require the
homeowner to assert that the contractor or builder is liable for damages or plead facts
in good faith supporting a claim for relief. The notice need only “describe the claim
in reasonable detail sufficient to determine the general nature of each alleged construction defect and a description of the damage or loss resulting from the defect, if known.” Fla. Stat. §558.004(1). With such minimal requirements, and no applicable good faith standard in drafting the notice letters (as is required for pleadings in all jurisdiction), the statutory right to repair process is not conducive to a “four corner” or “eight corner” analysis.

In jurisdictions that allow insurers to look to extrinsic evidence to establish or negate coverage, the determination of a duty to defend is a bit easier. In these states, an insurer is allowed to review facts outside a complaint to determine if a duty to defend exists. E.g., Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153 (Cal. 1993);
Northern Ins. Co. v. Morgan, 918 P.2d 1051 (Ariz. 1995). The extrinsic evidence exception not only allows insurers to analyze and review the notice, but insurers are also permitted to investigate the claim for covered and non-covered damages. If, after an investigation, there are no potentially covered claims, an insurer should have an adequate basis to deny a defense.

Thus, insurers need to understand the applicable duty to defend standard in the state in which the notice is pending to determine whether facts outside the notice (assuming the notice is treated as a complaint) can be considered in analyzing coverage. If the jurisdiction applies either a “four corners” or “eight corners” test and there is no direct or analogous case law that provides guidance on what can be relied upon to determine the duty to defend, insurers may be limited to the sparse facts and/or allegations contained
in the demand to determine their defense obligations unless and until they are  developed further in the pre-litigation process.


“Right to repair” statutes will undoubtedly re-kindle the debate over what types of pre-litigation claims require a defense by an insured when traditional litigation has not been brought against an insured. Similar to the issue of whether an insurer has a duty to defend state and federal environmental cleanup claims, this issue has (and likely will continue) to result in a split of authority on the issue and resolution will likely depend upon the nature of the pre-litigation demand/process at issue, the policy language, and the facts of the claim. Until courts in more jurisdictions issue decisions addressing the scope of insurers’ duty to defend the state-specific statutory pre-litigation procedures, insurers should carefully analyze and consider the issues discussed above when determining whether pre-litigation construction defect claims give rise to a duty to defend in the absence of traditional litigation.


An Insurer’s Duty to Defend is Now Triggered by Pre-Suit Notices Under Florida’s Construction Defect Statute, But Only With an Insurer’s Consent

Gary Brown and Steven Appelbaum | Construction Industry Counselor | January 5, 2018

In a case of first impression that will undoubtedly have significant effects on Florida’s construction and insurance industries, the Florida Supreme Court recently decided that an insurer’s duty to defend under a standard form commercial general liability (CGL) policy was triggered by the notice and repair process for resolving construction defect claims set forth under Chapter 558, Florida Statutes, because it constitutes an “alternative dispute resolution proceeding” within the policy’s definition of a “suit.” The case is Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420 (Fla. Dec. 14, 2017). Importantly, the insurer must provide its consent to the ADR process for coverage to apply.

Before a construction defect lawsuit may be filed in Florida, Chapter 558 requires that the project owner (or claimant) and other parties participate in a pre-suit dispute resolution process. To initiate the process, the claimant must serve a written notice on the contractors, subcontractors, suppliers, or design professionals that may be responsible for the alleged defects, identifying the defects and offering an opportunity to inspect and/or make repairs. The recipient of the notice has the option to participate in the process, or ignore the claim. If the recipient participates, it must serve a written response within the statutorily prescribed period offering to settle the claim by remedying the alleged defects, making payment (or a combination of both), or disputing the claim in whole or in part. If a response is not timely received or the claim is disputed, the claimant may proceed with filing a lawsuit.

In Altman, the owner of a high-rise residential condominium served its general contractor with several Chapter 558 notices alleging various construction defects. The general contractor tendered the claims to its insurer and demanded a defense and indemnity under its CGL policy.

The CGL policy provided, in relevant part, that the insurer “will have the right and duty to defend against any ‘suit’ seeking” damages covered under the policy. The policy defined the term “suit” as “a civil proceeding in which damages [covered under the policy] are alleged.” (Emphasis added.) Significantly, the term “suit” included “any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

The insurer initially denied coverage, asserting that the notices of claim did not invoke its duty to defend because the notices did not constitute a “suit” under the CGL policy. Shortly thereafter, the general contractor received and tendered to its insurer a supplemental notice of claim. The insurer, maintaining its position that the notices of claim did not invoke its duty to defend, hired counsel to defend the claims under a reservation of rights. The general contractor objected to the insurer’s selection of counsel and demanded that its original counsel be retained and reimbursed for past expenses. The insurer refused, and the general contractor thereafter settled the claims without the insurer’s involvement. The general contractor then filed a declaratory judgment action in federal district court seeking a declaration that its insurer owed a duty to defend and to indemnify it under the CGL policy.

The district court sided with the insurer, concluding that the Chapter 558 process did not constitute a “civil proceeding” within the meaning of the CGL policy. The general contractor appealed to the United States Court of Appeals for the Eleventh Circuit. Noting that no Florida court (or federal court sitting in diversity) had addressed the issue in any reported decision, the appellate court certified the following question to the Florida Supreme Court:

Is the notice and repair process set forth in chapter 558, Florida Statutes, a “suit” within the meaning of the commercial general liability policy [at issue]?

The Florida Supreme Court concluded that the pre-suit process under Chapter 558 is an “alternative dispute resolution proceeding” within the policy’s definition of “suit.” In reaching its conclusion, the Florida Supreme Court examined the legislative intent behind Chapter 558, which “aimed to encourage the claimant and insured to settle claims for construction defects without resorting to litigation.” However, the ADR coverage only applies if both the insured and insurer consent to the insured’s participation in the ADR process.

Prior to the Florida Supreme Court’s decision, a pre-suit Chapter 558 notice did not trigger an insurer’s duty to defend, leaving insured contractors and subcontractors on their own to investigate — and settle — these claims. Now, contractors may be more apt to participate in pre-suit process, provided the insurer consents to coverage. This decision also may lead to disputes between contactors and insurers because the ADR process is voluntary for contractors/insureds and coverage only applies with an insurer’s consent. There likely will be both instances where an insurer does not consent and also times when an insurer prefers the pre-suit process, but the insured/contractor declines to participate. We will continue to monitor and report on future developments resulting from this important decision.

For further guidance on this new development and any other construction law matter, please contact a member of Saul Ewing Arnstein & Lehr’s Construction Practice Group.

Oregon Supreme Court Reaffirms Broad Nature of the Duty to Defend, even in the Face of Ambiguous or Unclear Allegations

Kevin Mapes | The Policyholder Report | December 14, 2016

Back in August 2015, I wrote this post about the Oregon Court of Appeals opinion in West Hills Development Co. v. Chartis Claims, Inc., where the court confirmed that Oregon’s broad duty to defend extended to parties claiming rights as “additional insureds.” Last week, the Oregon Supreme Court affirmed that decision, broadly holding that “regardless of ambiguity or lack of clarity, the duty to defend is triggered if the complaint’s allegations, reasonable interpreted, could result in the insured being held liable for damages covered by the policy.”

As noted in my prior post, contracting parties rely on indemnity agreements and additional insured status to protect against liability arising from the other party’s negligence. Insurers, however, frequently ignore or summarily deny tenders from parties who qualify as additional insureds under the policies they issued. That is exactly what happened in West Hills. A general contractor was sued for alleged construction defects in a townhome project. The general contractor then tendered the defense of that lawsuit to a subcontractor’s insurer as an additional insured under the subcontractor’s insurance policy. The subcontractor’s insurer denied coverage, and the general contractor, West Hills, sued the insurer, Oregon Automobile Insurance Company (“Oregon Auto”), for breach of the duty to defend. The trial court agreed with West Hills, granting summary judgment in the contractor’s favor, and the Court of Appeals affirmed.

In ruling in favor of the additional insured last week in West Hills Development Co. v. Chartis Claims, Inc., the Oregon Supreme Court focused on the application of the four-corners rule, which holds that the duty to defend is determined by reference to two, and only two, documents: the allegations of the complaint and the terms of the insurance policy. “On its face, the four-corners rule seems clear. Applying that rule to real world complaints, however, can create more of a challenge. In particular, a complaint may not definitively allege the facts that ultimately will determine whether a claim is covered by the policy.” After a four-paragraph discussion of a 1949 Second Circuit opinion by Chief Judge Learned Hand, the Oregon Supreme Court reaffirmed long-standing Oregon law: that the duty to defend is triggered wherever “the court can reasonably interpret the allegations to include an incident or injury that falls within the coverage of the policy,” soundly rejecting the insurer’s argument that there is no duty to defend unless the complaint “rules in” coverage.

The Court rejected Oregon Auto’s argument that it had no duty to defend because the underlying complaint did not identify its insured subcontractor, L&T Enterprises, by name. “The complaint expressly alleged that West Hills was liable for subcontractor operations that had been performed for West Hills[.] … L&T may not have been identified by name in the complaint, but that is not the issue. The allegations of the complaint reasonably could be interpreted to result in West Hills being held liable for conduct covered by the policy: L&T’s operations for West Hills.”

Finally, the Court rejected Oregon Auto’s attempt to avoid its defense obligation on the grounds that its additional insured endorsement provided coverage only for liabilities arising from L&T’s “ongoing operations.” “The complaint alleges that damages had occurred by the time the owners purchased their townhomes. It is possible that the damages occurred earlier. Reasonably interpreted, then, the complaint could result in West Hills being held liable for conduct covered by the ploy.”

The Supreme Court’s opinion in West Hills doesn’t really break new ground in Oregon coverage law. Nonetheless, the case presents an important reminder of the broad nature of the duty to defend, whether that duty is applied to the named insured or to a contractually-required “additional insured.” Insurers cannot hide behind vague factual allegations in a complaint to avoid their defense obligations. Nor can insurers deny coverage solely based on poorly defined “ongoing operations” language. “[R]egardless of ambiguity or lack of clarity, the duty to defend is triggered if the complaint’s allegations, reasonably interpreted, could result in the insured being held liable for damages covered by the policy.” Oregon policyholders should not hesitate to force insurers to apply that broad standard and honor their contractual defense obligations.