Pre-Suit Notice of Construction Defect Claims Constitutes a Suit

Alexandra V. Dattilo | Brouse McDowell | March 1, 2018

Insurers and policyholders continue to debate the age-old question vital to the determination of insurance coverage – what triggers the insurer’s duty to defend? States are complicating this question by enacting various statutes that provide individuals avenues to remedy disputes and claims outside of, or prior to filing a traditional suit or civil procedure. These statutes have created confusion and disagreements between the insurers and policyholders. Courts are now trying to help insurers’ clarify their obligations under their policies with respect to these statutes.

This issue was recently addressed by the Florida Supreme Court in Altman Contractors Inc. v. Crum & Forster Specialty Insurance Co., No. SC-16-1420, 2017 WL 6379535 (Fla. December 14, 2017). In Altman, the Florida Supreme Court evaluated whether the notice and repair process set forth in chapter 558 of the Florida state statute constituted a “suit” within the meaning of the commercial general liability policy issued by the insurer to the policyholder. Chapter 558, which is titled “Construction Defects”, sets forth certain procedural requirements before a claimant may file an action for a construction defect. The statute requires a claimant to serve a written notice of a claim on the contractor, subcontractor, supplier, or design professional, as applicable before a claimant may file an action for a construction defect.

In this case, Altman Contractors Inc. was the general contractor for the construction of a condominium and was insured by Crum & Forster Specialty Insurance Company on a general liability policy. Under the terms of the policy, Crum & Forster had a duty to defend Altman in any “suit,” as defined by the policy, arising from the project. The policy defined “suit” to mean “a civil proceeding in which damage because of ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ to which the insurance applies is alleged.” The policy further states that “suit” includes arbitration proceedings or any “other alternative dispute resolution” alleging the above-mentioned damages and which the insured must submit to or does submit to with the consent of Crum & Forster. The policy did not otherwise define “civil proceeding” or “alternative dispute resolution proceeding.”

The Florida Supreme Court answered the certified question in the affirmative, holding that the notice and repair process set forth in chapter 558 constituted a “suit” within the meaning of the commercial general liability policy. The Court went on to state that while “the chapter 558 process does not constitute a ‘civil proceeding,’ it is included in the policy’s definition of ‘suit’ as an ‘alternative dispute resolution proceeding’ to which the insurer’s consent is required to invoke the insurer’s duty to defend the insured.”

This case highlights just one issue that can arise when interpreting insurance policies. As case law and statutory law continue to evolve, make sure you re-examine your insurance policies to ensure you are adequately protected.

Ways to Make Sure the Indemnity Clause You Just Negotiated Is Not Your Enemy

Garry R. Boehlert and Trevor Ashbarry | For The Defense | February 2018

Look within the general conditions of virtually every construction contract and you will find a clause captioned “indemnity” or “indemnity and duty to defend.” Often these clauses have been cut, pasted, and cobbled together so many times that they become a jumble of concepts and difficult to interpret. Indemnity clauses govern potential future claims and liabilities that mature only if something goes wrong. As a result, indemnity provisions frequently receive relatively little attention while the parties focus on reaching consensus on a host of other terms that seem more central to actual work on the project. Consequently, many owners, contractors, subcontractors, and suppliers enter into contracts and purchase orders in blissful ignorance of the full scope and potential liability inherent in these provisions.

When problems arise—which is altogether too common on multi-year, complex construction projects—the parties inevitably begin to ask their lawyers questions such as:

• What, if anything, does this indemnity clause cover in terms of first-party claims (i.e., disputes between the contracting parties), or does it only cover third-party claims (i.e., disputes concerning parties that lack contractual privity with the indemnitee)?

• To what extent, if any, can I recover my attorneys’ fees and litigation expenses under this indemnity clause?

• Will I be able to recover my attorneys’ fees under this indemnity provision even though the clause does not mention them and there is no express prevailing party clause in the contract?

Two recent decisions, one from the Maryland Court of Appeals, Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group, Ltd. P’ship, 164 A.3d 978 (Md. 2017), and the other from the District of Columbia Court of Appeals, James G. Davis Construction Corp. v. HRGM Corp., 147 A.3d 332 (D.C. 2016), have given broad interpretation to indemnity provisions, allowing the recovery of attorneys’ fees in first-party actions for breach of contract (much to the surprise and displeasure of the indemnitors). This article discusses emerging precedent governing the recovery of attorneys’ fees under indemnity provisions in construction contracts, identifies pitfalls and traps for the unwary, and offers practice tips on the interpretation and drafting of sound indemnity provisions.

Indemnity Provisions Covering Third-Party Claims

In its most basic form, indemnity is an obligation by one party (the “indemnitor”) to compensate for a loss suffered by another party (the “indemnitee”). Participants in construction projects commonly use indemnification to address exposure to claims asserted against the indemnitee (often the owner) by strangers to the contract (third-party claims). Indeed, public sector owners often rely heavily on these provisions to counterbalance the full scope of potential liability that is posed by a project in relation to the minimal level of control that an owner exerts over that project’s day-to-day operations.

For example, if a contractor’s plumbing system fails, causing water damage to an adjacent apartment building, the owner will call on the contractor to indemnify the owner against demands made to the owner by tenants of the adjacent building. Similarly, if a contractor’s crane collapses, causing death or personal injury to workers or members of the public, the owner will seek indemnity from the contractor to protect the owner from wrongful death and personal injury claims filed against that owner by third parties.

Most construction contracts contain indemnity provisions protecting against third-party claims. Such an example of coverage for third-party claims appears in frequently encountered Article 3.18 of AIA Document A-201-2017 “General Conditions of the Contract for Construction,” which provides in pertinent part:


To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder.

Such clauses are generally interpreted to cover third-party claims, given the “from and against” language in the clause. Courts reason that third-party claims constitute the type of demands that an owner can reasonably expect to be protected “from and against.” Similarly, clauses that address property damage “other than the work itself” are generally interpreted to cover third-party claims and the type of injury that is readily insured by the indemnitor’s insurer.

Contractual indemnity clauses covering exposure to third-party claims are similar in concept to common law theories of equitable indemnity. Both share the premises that everyone should be accountable for the damages that they cause and that parties without fault should not be held accountable for the financial consequences of the actions of others over whom they have no control. Where the theories differ is that the precise language of contractual indemnity provisions will be strictly construed to determine what the parties agreed is covered in the indemnity obligation, and conversely, what is excluded. A court will not substitute its notions of equity for the actual language adopted by the contracting parties.

Indemnity Provisions Covering First-Party Claims

In addition to addressing third-party claims, some construction contracts contain indemnity provisions covering the risk of loss arising from a party’s negligence or breach, or both, of the parties’ contractual obligations (first-party claims). Courts widely respect the concept of freedom of contract and grant broad flexibility to the parties to specify the nature of their own commercial bargains. Courts will generally enforce the indemnity clauses in those agreements based on the precise language chosen by the parties. In interpreting such provisions, courts are constrained by what is contained in the four corners of the parties’ written agreement and are reluctant to go beyond those express terms.

The following is an example of an indemnification clause taken from an owner’s contract with its design engineer, addressing both first- and third-party claims:

The Consultant is responsible for any loss, personal injury, death and any other damage (including incidental and consequential) that may be done or suffered by reason of the Consultant’s negligence or failure to perform any contractual obligations. The Consultant must indemnify and save the Owner harmless from any loss, cost, damage and other expenses, including attorneys’ fees and litigation expenses, suffered or incurred due to the Consultant’s negligence or failure to perform any of its contractual obligations.

In this clause, there is no need for damage to occur to a stranger before the consultant’s exposure to damages for breach of the parties’ contract, including the payment of attorneys’ fees and litigation costs, is invoked.

Although some argue that the concept of indemnity, and therefore, the reach of indemnity provisions, should extend to only third-party claims, there is considerable judicial authority rebutting that argument. For example, courts have explicitly rejected that notion by holding that the definition of “indemnity” itself contains no suggestion that the loss indemnified must involve a third party; rather, an indemnity provision is a comprehensive provision intended to make the wronged party whole. See Kraft Foods N. Am., Inc. v. Banner Eng’g & Sales, Inc., 446 F. Supp.2d 551, 577 (E.D. Va. 2006) (holding that the “plain meaning definition of indemnification does not limit reimbursement to losses suffered as a result of third party claims”); Rexam Beverage Can Co. v. Bolger, No. 06 C 2234, 2008 WL 5068824, at *2 (N.D. Ill. Nov. 25, 2008) (rejecting the argument that indemnification in first-party actions would be an unreasonable result), aff’d, 620 F.3d 718 (7th Cir. 2010); Medcom Holding Co. v. Baxter Travenol Labs., Inc., 200 F.3d 518, 519 (7th Cir. 1999) (“An indemnity clause is designed to make the wronged party whole—to put it in the same position it would have occupied had the other side kept its promise.”); Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1031–32 (9th Cir. 1992) (citation omitted) (stating that the word “indemnify refers to compensation for loss in general, not just particular types of loss… [and it] is not to compensate for losses caused by third parties, but merely to compensate”).

Recovering Attorneys’ Fees in Third-Party Indemnity Claims

The law of Maryland, similar to that of many other jurisdictions, is clear when it comes to the recovery of attorneys’ fees in third-party indemnity claims: the indemnitee is entitled as a matter of law to recover attorneys’ fees in defense of an action, irrespective of whether the parties’ contract or whether the clause in dispute mentions attorneys’ fees. See Jones v. Calvin B. Taylor Banking Co., 253 A.2d 742 (Md. 1969).

Jones served as a clear abrogation of the American rule when it established an implied right to attorneys’ fees and costs incurred in third-party claims, even when the indemnity clause was silent about attorneys’ fees. On appeal, the Jones court did not engage in any contract interpretation or construe any contract language to reach its decision. Instead, that court created a new exception to the American rule on the recovery of attorneys’ fees by implying a fee-shifting provision for all third-party indemnity claims. Id. at 748–49. In Maryland, for more than 45 years, third-party indemnification provisions have impliedly encompassed the recovery of attorneys’ fees without the need for any express reference to attorneys’ fees in the indemnity provision in question.

More than 55 years ago, the Virginia Supreme Court reached a similar holding in Hiss v. Friedberg, 112 S.E.2d 871 (Va. 1960). In Hiss, the court found reasonable attorneys’ fees to be recoverable even if the contract was silent on the issue of fees, stating, “where a breach of contract has forced the plaintiff to maintain or defend a suit with a third person, he may recover the counsel fees incurred by him in the former suit provided they are reasonable in amount and reasonably incurred.” Id. at 876. It is in this context that many have come to understand that attorneys’ fees will be recoverable for defending third-party claims.

Recovering Attorneys’ Fees in First-Party Indemnity Claims

The intersection of the American rule and the parties’ apparent intent, or lack of it, to include a fee-shifting provision has been the more problematic area for litigants and courts. In contrast to an implied right in many jurisdictions to recover attorneys’ fees for the defense of third-party claims, attorneys’ fees are recoverable in first-party actions when expressly provided by contract. See Atl. Contracting & Material Co. v. Ulico Cas. Co., 844 A.2d 460 (Md. 2004); Nova Research, Inc. v. Penske Truck Leasing Co., 952 A.2d 275 (Md. 2008). In both Atlantic Contracting and Nova Research, the Maryland court was examining indemnity clauses that were silent with respect to attorneys’ fees in the context of arguments that the right to recover attorneys’ fees should nevertheless be implied (as in Jones) to first-party indemnity actions. The Maryland Court of Appeals has been consistent, however, that the right to indemnification of attorneys’ fees in first-party claims can be contractually manifested by evidence of express intent to encompass recovery for first-party claims—even when the mention of attorneys’ fees is lacking in the subject clause.

In Atlantic Contracting, the Maryland Court of Appeals determined that the language of the indemnification provision provided sufficient evidence of the parties’ intent to encompass potential attorneys’ fees incurred in first-party claims, even though the clause at issue was silent regarding attorneys’ fees. 844 A.2d at 469–70, 477–79. In Atlantic Contracting, the plaintiff acted as a surety for the defendant and brought an action for indemnification for a payment bond made on behalf of the defendant. Id. at 464–66. The plaintiff also sought attorneys’ fees incurred during its pursuit of establishing its right to indemnity. Id. The indemnification provision obligated the defendant to “indemnify [the plaintiff] from and against any and all Loss,” and “Loss” was defined as “[a]ny and all damages, costs, charges, and expenses of any kind sustained or incurred in connection with or as a result of: (1)  the furnishing of any Bonds; and (2)  the enforcement of this Agreement.” Id. at 469. The indemnification provision did not mention attorneys’ fees. Therefore, Atlantic Contracting expanded the court’s earlier holding in Jones pertaining to third-party claims by adding a contractual exception to the American rule that applied to first-party claims.

Similar to the situation in Atlantic Contracting, in Nova Research the plaintiff was seeking attorneys’ fees incurred in pursuit of its right to indemnity from the defendant, but the indemnification provision was completely silent on the issue of attorneys’ fees. 952 A.2d at 278– 79. There, the defendant was obligated to “indemnify and hold harmless [the plaintiff]… from and against all loss, liability and expense caused or arising out of Customer’s failure to comply with the terms of this Agreement.” Id. The court found that this language was insufficient compared to the language that the parties used in Atlantic Contracting, and as a result, the court refused to imply a fee-shifting provision when the indemnity clause did not otherwise mention attorneys’ fees. Id. at 285, 289. The court explained:

Because of our holdings in Jones, that the indemnity agreement need not contain the express phrase “attorney’s fees,” and Atlantic, where indemnifying against loss “including in the enforcement of the agreement” encompassed first party attorney’s fees, we adopt the approach… that the contract provide expressly for recovery in first party enforcement actions.

Id. at 289.

The court’s holding in Nova Research is consistent with Atlantic Contracting in that the holding refused to imply a fee-shifting provision when there was no explicit inclusion of the phrase “attorneys’ fees” or sufficiently broad language to support a conclusion that the parties intended first-party claims to be covered.

In Bainbridge St. Elmo Bethesda Apartments, LLC v. White Flint Express Realty Group Ltd. P’ship, the Maryland Court of Appeals recently affirmed an award of $3,931,648 of attorneys’ fees and expenses in a breach of contract action between the contracting parties under an indemnification clause that provided as follows:

Indemnity. Bainbridge hereby indemnifies, and agrees to defend and hold harmless White Flint… from any and all claims, demands, debts, actions, causes of action, suits, obligations, losses, costs, expenses, fees, and liabilities (including reasonable attorney’s fees, disbursements, and litigation costs) arising from or in connection with Bainbridge’s breach of any terms of this Agreement or injuries to persons or property resulting from the Work, or the activities of Bainbridge or its employees, agents, contractors, or affiliates conducted on or about the White Flint Property, including without limitation, for any rent loss directly attributable to any damage to the White Flint Property caused by the construction of the Project.

164 A.3d 978, 979, 981 (Md. 2017).

The Maryland Court of Appeals rejected Bainbridge’s assertion that the indemnification clause covered only third-party claims against which Bainbridge was to “defend” and “hold harmless.” Id. at 987. In reaching that holding, the court noted:

There are four exceptions to the American Rule where a prevailing party may be awarded attorneys’ fees: (1) the parties to a contract have an agreement to that effect, (2) there is a statute that allows the imposition of such fees, (3) the wrongful conduct of a defendant forces a plaintiff into litigation with a third party, or (4) a plaintiff is forced to defend against a malicious prosecution. Id. at 985 (quoting Nova Research, 952 A.2d at 281). The court found that the indemnification clause contained in the parties’ contract fit squarely within exception “1,” above, to the American rule. Id. at 986–87.

The court rejected Bainbridge’s further assertion that to cover first-party claims, the clause needed to contain the exact language “in the enforcement of the agreement” that was present in the Atlantic Research clause. Id. at 988. In rejecting the premise that the clause needed any specific or “magic” language, the court said: “The language in Atlantic, however, is analogous to the case at issue, as an action for ‘enforcement of the contract’ is effectively the same as an ‘action for breach of contract.’” Id. (citation omitted). The court also noted that “[e]ach item in a string of terms, separated by the disjunctive ‘or,’ is given independent meaning.” Id. at 491. Also important is that Bainbridge was decided outside of the insurance and surety contexts, dispelling the sometimes mistaken belief that recovery of attorneys’ fees in first-party indemnity claims is limited to the insurance and surety industries.

In James G. Davis Construction Corp. v. HRGM Corp., 147 A.3d 332 (D.C. 2016), the District of Columbia Court of Appeals also awarded attorneys’ fees incurred by a plaintiff in its first-party claims under an indemnification provision. The Davis court also rejected the contractor’s argument that that indemnity clause needed to have any special or “magic” language to allow recovery of attorneys’ fees in a first-party claim for breach of contract— as long as the parties’ intention was clear from the words that they chose to use. Id. at 341–42.

The indemnification provision that the court addressed in Davis Construction provided that the defendant “shall indemnify and save harmless [the plaintiff]… from and against any and all claims, demands, losses, damages, liabilities,… costs and expenses (including but not limited to reasonable attorneys’ fees) arising directly or indirectly… out of any breach of the forgoing provisions.” Id. at 336 (emphasis in original). The court found that the “express reference to attorney’s fees” was an “unmistakable fee-shifting provision” and that the “any-and-all language… delineate[d] the provision’s scope in similarly expansive terms.” Id. at 341. The court determined that its decision did not offend Nova Research because Nova Research did not address the relevant issue, which was “under what circumstances a contract that does expressly make reference to attorney’s fees authorizes the recovery of such fees in first-party actions.” Id. at 342. The court in Davis Construction went on to conclude: “In light of this key difference, the absence of the word ‘enforcement’ in Article XXI is not dispositive, and Nova Research does not bar the award of fees in the circumstances of this case.” Id.

Highlighting the need to ensure that such a fee-shifting provision is clear is the New York Court of Appeals’ determination of the issue of the recovery of attorneys’ fees in a first-party indemnity action in Hooper Associates, Ltd. v. AGS Computers, Inc. 548 N.E.2d 903 (N.Y. 1989). There, as in the other authority cited above, the court found it possible to shift responsibility for attorneys’ fees in first-party indemnity actions for breach of contract. Id. at 492. Nevertheless, the court declined to assess fees in that case because the clause in question did not contain “unmistakably clear” language requiring indemnification for attorneys’ fees. Id. at 492–93. As in other jurisdictions, the courts of New York will not infer a party’s intention to shift fees unless the clause is explicit in its intent. As a consequence, each word of an indemnity clause needs to be scrutinized carefully to determine whether it embodies a clear intention to indemnify for attorneys’ fees in first-party actions.

Effect of Indemnity Provisions on Insurance Coverage

As much as clients dislike the surprise of paying the attorneys’ fees and litigation costs of counsel of their adversary, another important consideration for design professionals (and others who may look to insurance to cover their acts and omissions) is that reimbursement of an adversary’s attorneys’ fees may not be insurable under the standard errors and omissions (E & O) policy. Although traditional E & O policies cover a design professional’s liability for violation of the professional standard of care, and for the defense of claims arising out of such alleged violations, design professionals may experience coverage problems when they contract to pay another party’s attorneys’ fees for breach of contract. In fact, most professional liability policies exclude coverage for liability assumed by contract unless there would have been liability even without the contractual obligation. As a precaution, contractual indemnity provisions must be examined closely while assessing insurance coverage for a project. No design professional wants to find him- or herself in the uncomfortable position of not having coverage for liability unwittingly assumed by contract. Moreover, no owner wants the unwelcome surprise that the costs that the owner was expecting to have covered as the indemnitee are excluded by the indemnitor’s insurance. Such a situation often leads only to one direction, and that is a road to ruin for the design professional.

Practice Pointers for Crafting Indemnity Clauses

As counsel, we pride ourselves on our ability to identify and properly assign risk, and to plan for the eventuality that sometimes the risk becomes reality. Among the most overlooked risks of construction projects is the liability being assigned and assumed through indemnity provisions. When negotiating those provisions it is important to keep the following in mind because it is too late to do so when a problem arises:

• Indemnity clauses deal with potential future problems, errors, and omissions that parties seldom care to anticipate during the glow of putting together the framework for a new project.

• Indemnity provisions often are the product of “cut and paste” efforts to string together disparate concepts in an attempt to make them as comprehensive as possible—sometimes resulting in hopeless confusion.

• Indemnity provisions can cover both third- and first-party claims; only carefully selecting the words that you choose to include will establish what is covered by your indemnity clauses.

• Regardless of how carefully you may have considered the pros and cons of including a prevailing party clause in your contract to govern the award of Indemnity, from page 57 attorneys’ fees in the event of a dispute, the indemnity clause that you have negotiated may unwittingly permit recovery of attorneys’ fees for first- and third-party claims, even if the clause makes no mention whatsoever of attorneys’ fees.

• The indemnity language that you choose to include in your contract should be consistent with the insurance coverage obtained for the work that your client will undertake. This is especially important for design professionals.

While no client likes paying the attorneys’ fees and litigation expenses of an opponent, when the obligation to do so is unexpected, the prospect is even less palatable. To prevent unintended consequences, it is important that counsel, in concert with your insurance professional, pay particularly close attention to the language of the indemnity provisions of your contracts.

In Washington, an Insurer Cannot Refuse to Defend, Change Its Mind, and Still Expect to Control the Defense or Avoid Bad Faith

Kevin Mapes | The Policyholder Report | February 20, 2018

A recent decision from the U.S. District Court for the Western District of Washington again demonstrates the decidedly pro-policyholder nature of insurance-coverage law in the state of Washington. Like so many coverage cases, 2FL Enterprises, LLC v. Houston Specialty Insurance Co., arose from underlying construction-defect litigation.

The insured, 2FL Enterprises, first notified its insurer, Houston Specialty, when a dispute arose between 2FL and the owner of an apartment building that 2FL had worked on. The next month, the owner filed suit, and 2FL promptly tendered the lawsuit to Houston Specialty. Five months later, Houston Specialty issued a letter denying any coverage for the lawsuit. After a default judgment was entered against 2FL, Houston Specialty reconsidered and offered to retain counsel on behalf of its insured. 2FL rejected Houston Specialty’s offer of a defense.

Photo by GotCredit

In the ensuing coverage litigation, the court initially set out the broad nature of the duty to defend under Washington law, finding that “all that is required to trigger the duty to defend is the ‘potential’ for liability,” asking “whether allegations in the complaint could conceivably impose liability on the insured,” and concluding that “if there is any reasonable interpretation of the law that could result in coverage, the insurer must defend.” Applying these standards, the court found that Houston Specialty had breached its duty to defend and acted in bad faith. The court was particularly bothered by the Houston Specialty’s attempt to rely on extrinsic evidence to support its denial. Under Washington law, extrinsic evidence may be used in support of coverage, but an insurer can never rely on documents beyond the complaint and the policy in denying coverage.

Significantly, the court was unimpressed by Houston Specialty’s belated change of heart and attempt to provide a defense. Houston Specialty argued that any breach was “cured” when it belatedly offered to participate in 2FL’s defense, and that 2FL had breached its duty to cooperate when it rejected the offered defense. The court disagreed, finding that Houston Specialty “had already breached the contract by the point in time it argues that Plaintiff was required to cooperate. ‘An insured … should no longer be bound by contractual obligations if the insurer breaches its duty to defend the insured.’” Releasing the insured from its duty to cooperate was not the only consequence of Houston Specialty’s denial of coverage. The Court went on to conclude that by breaching its contractual obligation to defend, the insurer lost the right to control the insured’s defense, despite its later offer to defend.

Finally, the Court found that Houston Specialty had acted in bad faith, and its later offer to defend did not change the court’s position:

The fact that both the delay and the denial were unfounded and unreasonable dictate a finding of bad faith which is unmitigated by the insurer’s later change of heart.

For insurers, this decision reinforces the general state of Washington law: deny the insured a defense at your own peril. The decision also adds a new wrinkle: an insurer that denies a defense cannot simply change its mind and still expect to control the defense of the insured in order to guard against bad-faith exposure. For policyholders, that same wrinkle presents a potential opportunity. Once an insurer has denied coverage, the policyholder should be free to retain counsel of its choosing and to control the defense going forward, even if the insurer later agrees to defend. At a minimum, the decision gives the policyholder a good argument that the insurer should agree to fund the defense through the insured’s choice of counsel, rather than insisting on the insurer’s own panel counsel.

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.

Florida Supreme Court Ruling to Have Big Impact on Duty to Defend Construction Cases

Elizabeth B. Ferguson | Insurance Journal | January 4, 2018

A recent case out of the Florida Supreme Court will likely have a big impact on the duty of insurers to defend Florida construction cases.

The case, Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company arises out of a declaratory judgment action filed in the Southern District of Florida: Case No.: SC16-1420 (Fla. 2017).

Altman Contractors, Inc. served as the general contractor on a high-rise condominium project. Crum & Forster Specialty Insurance Company insured Altman during the project under a series of commercial general liability policies.

From April 2012 to November 2012, Altman received multiple notices of construction defects under Chapter 558, Florida Statutes, following completion of the project. Included in the Chapter 558 Notices, the owner claimed property damage to the building. Chapter 558 lays out a process for the resolution of construction defect claims prior to litigation and is in fact a condition precedent to filing suit on such claims in Florida.

In January 2013, Altman tendered to Crum for defense and indemnity of the 558 Notices. Crum denied, arguing the 558 Notices were not a “suit” as defined in the policies. Altman then hired its own counsel to defend the 558 Notices. In May 2013, Altman received a supplemental 558 Notice, bringing the total number of construction defects claimed to over 800.

In August 2013, Crum hired counsel to defend Altman against the claims under a Reservation of Rights, maintaining the position that the Chapter 558 Notices were not a “suit” under the policy. Altman objected to the counsel assigned by Crum and requested its existing counsel be hired to continue to defend the claims. Altman also demanded Crum reimburse it for the fees incurred since tendering to Crum in January 2013 and Crum denied Altman’s requests. Eventually, Altman resolved the claims without Crum’s involvement and prior to suit being filed.

After settling the claims, Altman filed a declaratory judgment against Crum in the Southern District of Florida on the issue of Crum’s duty to defend and indemnity to Altman. The Southern District sided with Crum, ruling that the Chapter 558 Notices did not meet the definition of “civil proceeding” under the policies and therefore granted Crum’s summary judgment.

Altman then appealed to the Eleventh Circuit, who certified the following question: Is the notice and repair process set forth in chapter 558, Florida Statutes, a “suit” within the meaning of the commercial general liability policy issued Crum & Forster to Altman.

Policy Language

The Crum & Forster policy language stated, “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply. We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”

The policy further defined “suit” as “a civil proceeding in which damages because of ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged.”

The policy language defining “suit” included:

  1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
  2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

Court’s Decision

The Florida Supreme Court’s review of the Chapter 558 process found it did not qualify as a “civil proceeding” under the policy, arguing participation was not mandatory and there was no adjudication. However, it ruled the Chapter 558 process does qualify as a form of “alternative dispute resolution,” noting the Chapter 558 process was intended to allow the parties a chance to reach a settlement or perform repairs in lieu of a lawsuit. And, as a form of “alternative dispute resolution,” the Florida Supreme Court held the Chapter 558 process meets the definition of a “suit” under the policies.

In light of the question presented, the Supreme Court did not have to go the next step to the issue of whether the Chapter 558 Notices specifically trigger the duty to defend and indemnify under the policy. But, as the Supreme Court ruled the Chapter 558 Notice was a “suit” under the policy, we can expect the Altman ruling to be cited in every demand for defense and indemnity from insureds moving forward.

Justice C. Alan Lawson also issued a separate opinion, concurring in part and dissenting in part that requires note.

Looking back at the policy, Lawson notes the duty to defend only arises as to “suits” for “bodily injury” or “property damage,” but there is no duty to defend suits for “which this insurance does not apply.” Arguing construction defects are not covered by the policy, it is Lawson’s opinion there would not be a duty to defend the Chapter 558 Notices. Although he does concede that in the Chapter 558 Notices in the instant matter, the owner included claims for “property damage to the building” which would arguably be covered.