Insurer’s Duty to Indemnify not Ripe Until Underlying Lawsuit Against Insured Resolved

David Adelstein | Florida Construction Legal Updates

A liability insurer has two duties:  1) the duty to defend its insured; and 2) the duty to indemnify its insured.

With respect to the second duty – the duty to indemnify – this duty is typically “not ripe for adjudication unless and until the insured or putative insured has been held liable in the underlying action.” Hartford Fire Ins Co. v. Beazer Homes, LLC, 2019 WL 5596237, *2 (M.D.Fla. 2019) (internal quotation omitted).

For instance, Beazer Homes involved an insurance coverage dispute stemming from construction defects.  An owner sued its general contractor for construction defects relating to stucco problems.  The general contractor paid for the repairs.   The general contractor then sued its stucco subcontractor to recover the costs it incurred.  The subcontractor tendered the defense of the lawsuit to its commercial general liability insurer which is defending its insured-subcontractor under the commonly issued reservation of rights.

During the pendency of the general contractor’s lawsuit against its subcontractor, the subcontractor’s commercial general liability insured filed an action for declaratory relief in federal court seeking a declaration as to whether it owes its subcontractor a duty to indemnify.  The issue was whether this action for declaratory relief was ripe since there was no adjudication against the insured-subcontractor in the general contractor’s lawsuit against the subcontractor.   The Middle District Court of Florida held that it was not ripe: “The Eleventh Circuit agreed that an insurer’s duty to indemnify is not ripe until the underlying lawsuit is resolved.”  Beazer Homes, 2019 WL at *2 (internal quotation omitted)

Liability Insurer’s Duty to Defend Insured is Broader than its Duty to Indemnify

David Adelstein | Florida Construction Legal Updates | May 3, 2019


When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify.   This broad duty to defend an insured is very important and, as an insured, you need to know this.   “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.”  Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted).  This means:

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists.  And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless.  As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.  Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor.   The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam.  The owner sued the general contractor and the general contractor third-partied in the subcontractor.  However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy.  In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.  

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam.   The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint.  (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage.  However, this is a very narrow exception that the court was not going to apply here.) 

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.

CGL Insurer’s Duty to Defend Broader Than Duty to Indemnify and Based on Allegations in Underlying Complaint

David Adelstein | Florida Construction Legal Updates | February 9, 2019

The duty to defend an insured with respect to a third-party claim is broader than the duty to indemnify the insured for that claim.  The duty to defend is triggered by allegations in the underlying complaint. However, an insurer is only required to indemnify its insured for damages covered under the policy.   A recent case example demonstrating the duty to defend is broader than the duty to indemnify can be found in Southern Owners Ins. Co. v. Gallo Building Services, Inc., 2018 WL 6619987 (M.D.Fla. 2019).  

In this case, a homebuilder built a 270-unit condominium project where the units were included in 51-buildings.  Upon turnover of the condominium association to the unit owners, the condominium association served a Florida Statutes Chapter 558 Notice of Construction Defects letter. There was numerous nonconforming work spread out among various subcontractor trades including nonconforming stucco work.  The homebuilder incurred significant costs to repair defective work and resulting property damage, and relocated unit owners during repairs.  The homebuilder then filed a lawsuit against implicated subcontractors.  One of the implicated subcontractors was the stucco subcontractor.

The stucco subcontractor’s insurer filed an action for declaratory relief claiming it had NO duty to defend or indemnify the subcontractor in the underlying action because the subcontractor had a stucco/EIFS exclusion through an endorsement in its policy, referred tp as the “Exterior Finishing System and Stucco Exclusion.”  The subcontractor’s policy also did not contain a subcontractor exception to the “your work” exclusion.

Regarding the elimination of the subcontractor exception to the “your work” exclusion, the Court noted that the elimination of the subcontractor exception was largely irrelevant since the stucco subcontractor was a subcontractor so its work was not the entire project (unlike the homebuilder or general contractors’ work). Rather, the stucco subcontractor’s work was its scope of work and the underlying complaint referenced damages beyond the stucco subcontractor’s own work to other building components.  Thus, based on the allegations in the underlying complaint, the “your work” exclusion was not a basis to deny the duty to defend.

Regarding the stucco exclusion, the homebuilder argued that the subcontractor performed work outside of stucco work and the underlying complaint contained allegations unrelated to the application of stucco including framing work, miscellaneous work, and wrapping the buildings.  In other words, the Court did not have sufficient evidence that each allegation of nonconforming work related to the stucco subcontractor related to or arose out of the installation of stucco to trigger the full application of the stucco exclusion. Thus, this was not a basis to deny the subcontractor the duty to defend.

At this time, it is uncertain the magnitude of covered damages under the policy in light of the stucco exclusion and property damage resulting from the subcontractor’s defective work (certainly an issue to consider).  However, the insurer owed the subcontractor a duty to defend based on the allegations in the underlying complaint demonstrating the importance of crafting allegations in the underlying complaint.   The insurer’s indemnification obligation for covered damages, however, may be a different story and it is uncertain how a stucco subcontractor could have an endorsement that contains a stucco exclusion.  Take a look at your policy and, particularly, endorsements that further restrict coverage to ensure you do not have an exclusion relating to your own scope of work that would negate the value of the policy to you for property damage claims.

Eleventh Circuit: When an Insurer Has a Duty to Defend, Its Duty to Indemnify Is Not Ripe Until Resolution of the Underlying Lawsuit

Bradley R. Ryba and Steven P. Nassi | Goldberg Segalla | April 9, 2019

With limited exception, an insurer that owes a duty to defend to its insured cannot litigate whether it also has a duty to indemnify the insured for the same matter until after the insured’s liability has been resolved. In a unanimous decision, the U.S. Court of Appeals for the Eleventh Circuit, applying Florida law, affirmed this principle and held that an insurer’s duty to indemnify is not justiciable until the insured’s liability has been adjudicated in the underlying case. Mid-Continent Cas. Co. v. Delacruz Drywall Plastering & Stucco, Inc., No. 18-14195, 2019 WL 1093211 (11th Cir. Mar. 8, 2019).

The lawsuit stemmed from a homeowners’ suit against its general contractor for construction defects, and the general contractor in turn sued its subcontractor for various claims, including contractual indemnity. After the subcontractor’s insurer accepted its defense in the lawsuit, the insurer sought a declaration in a different lawsuit that it had no duty to indemnify the subcontractor for the claims against it because the allegedly defective construction at issue did not occur during the effective term of the policy.

On summary judgment, the district court held that the insurer’s duty to indemnify was not yet justiciable because the underlying lawsuit was still pending and the subcontractor’s liability was not established. The eleventh circuit agreed, finding that a court must wait until the underlying case is resolved before ruling on the insurer’s duty to indemnify. Although several Florida district courts have recognized the prematurity doctrine, as it is known, this is ostensibly the first time the eleventh circuit has squarely addressed this issue.

The eleventh circuit acknowledged the well-recognized exception to the prematurity rule for when the underlying complaint has not triggered the insurer’s duty to defend. In that instance, a court could determine that an insurer has no duty to indemnify pursuant to the fundamental maxim that where no duty to defend exists, there can be no duty to indemnify. In other words, when a complaint does not trigger coverage in the first instance, the final result in the underlying action will not have any effect upon the insurer’s duty to indemnify. However, in this case, the duty to defend was not contested. As such, the exception to the prematurity rule was inapplicable.

The decision is significant as it illuminates and affirms the parameters of an insurer’s duty to defend and indemnify under Florida law. Specifically, the decision illustrates that when an insurer has a duty to defend, a court cannot address the duty to indemnify until the underlying case is resolved.

11th Circuit Finds Duty to Indemnify Is Not Ripe until Underlying Action Is Resolved

Eric Gold | Policyholder Pulse Blog | March 28, 2019

It’s a familiar story to anyone involved in insurance claims. A policyholder is sued and tenders the claim to its insurer. The insurer agrees to defend subject to a reservation of rights, but it also asserts that policy exclusions may ultimately preclude coverage. While the underlying litigation is ongoing, the insurer files suit against the policyholder seeking a declaration that it does not have a duty to indemnify if liability is established against the policyholder in that litigation.

This common scenario often places the policyholder in the untenable position of having to defend against liability in an underlying suit, while simultaneously taking legal positions and answering discovery in the coverage action that may be at odds with its defense strategy. The insurer’s coverage action also drives up the insured’s costs and creates stress over whether the insured will be left on the hook for any judgment that is ultimately entered against it. Where liability has yet to be established against the policyholder in the first place, insureds are often left wondering why the insurer’s suit against indemnification should be allowed to move forward while they are still defending themselves in the underlying action.

In a recent decision, the U.S. Court of Appeals for the Eleventh Circuit gave a clear answer to this question, finding under Florida law that the duty to indemnify is not ripe for decision until the underlying lawsuit is resolved or the insured’s liability is established. While the decision does not alter an insurer’s obligation to defend, it makes clear that coverage questions regarding indemnity must wait until liability is resolved.

In Mid-Continent Casualty Co. v. Delacruz Drywall Plastering & Stucco, Inc., Mid-Continent agreed to defend Delacruz in an underlying state court action brought by a general contractor, who asserted that Delacruz performed defective work in connection with the construction of a community of single-family homes in Fort Myers, Fla. While that underlying lawsuit was pending, Mid-Continent filed a coverage action in federal court seeking a declaration that it had no duty to indemnify Delacruz and no duty to defend or indemnify the general contractor. The federal court denied summary judgment and dismissed Mid-Continent’s complaint without prejudice, finding that Mid-Continent’s duty to indemnify was not ripe for a decision.

On appeal, the Eleventh Circuit affirmed, quoting a decision of the former Fifth Circuit, which held that the claim was not ripe “because the issue ‘might never arise’” where “the damage suits had never been tried, no one had yet paid or become legally liable to pay,” and no party could state whether anything would be paid in the future. While the court acknowledged an exception to this rule when “the court can determine that the allegations in the complaint could under no circumstances lead to a result which would trigger the duty to indemnify,” the court held that the exception was not binding and refused to address the issue because Mid-Continent had failed to raise the argument in the lower court.

The court also rejected Mid-Continent’s argument regarding the lower court’s alleged failure to address the duty to defend. Noting that “the duty to defend is broader than the duty to indemnify, and ‘courts must look to the underlying complaint to determine the duty to defend, not the true facts of the cause of action against its insured,’” the court found that Mid-Continent failed to seek affirmative relief on the duty to defend and, while it might be ripe, it was not at issue in the operative complaint. Accordingly, the court dismissed Mid-Continent’s complaint without prejudice.

The Eleventh Circuit’s opinion has positive implications for policyholders. For example, the decision stops insurers from unnecessarily expanding the scope of a coverage action to include the policyholder’s ultimate liability in the underlying suit. This will keep discovery and expert costs down at the outset and focus the parties on the duty to defend, which is both significantly broader than the duty to indemnify and a substantively different analysis, one that only requires the policyholder to show a potential for coverage based on the allegations in the underlying complaint and the terms of the insurance policy. The court’s ruling also protects policyholders from having to take positions in the coverage action regarding indemnification that may be inconsistent with their strategy in the underlying action to deny liability.