Settling With Some, But Not All, Of The Defendants In A Construction Defect Case

David Adelstein | Florida Construction Legal Updates | March 25, 2018

Construction defect lawsuits can be complex multi-party disputes, especially when the plaintiff is doing what is necessary to maximize recovery.  This means the plaintiff may sue multiple defendants associated with the defects and damage.  For example, the owner (e.g., plaintiff) may sue the contractor, subcontractors, design professionals, etc. due to the magnitude of the damages.  In many instances, the plaintiff is suing multiple defendants for overlapping damages.  The law prohibits a plaintiff from double-recovering for the same damages prohibiting the windfall of a plaintiff recovering twice for the same damages.  Perhaps this sentiment is straight common sense, but this sentiment is a very important consideration when it comes to settling with one or more of the defendants, while potentially trying the construction defect case as to remaining defendants.  Analysis and strategy is involved when settling with some but not all of the defendants in a construction defect case (and, really, for any type of case).  Time must be devoted to crafting specific language in the settlement agreements to deal with this issue. Otherwise, the settlement(s) could be set-off from the damage awarded against the remaining defendants.

The recent decision in Addison Construction Corp. v. Vecellio, 43 Fla.L.Weekly D625(a) (Fla. 4th DCA 2018) details the analysis and strategy required when settling with some but not all of the defendants in a construction defect case, and the concern associated with a trial court setting-off the settlement amount from the damage awarded against the remaining defendants.

This dispute involved the sale of a high-end residential home where the buyer of the home sued numerous parties due to construction defects—the sellers, the developer, the general contractor, and subcontractors.   Before trial, the buyer settled the dispute with certain subcontractors for a sum total of $2,725,000.  The buyer then proceeded to trial with remaining defendants.  Prior to trial, the buyer filed a motion in limine to exclude the remaining defendants from mentioning these subcontractor settlements.  The trial court granted the motion.  After trial, the plaintiff was awarded approximately $3.5 Million in damages associated with the construction defects.  However, smartly, remaining defendants moved the trial court to set-off the sum total of the subcontractor settlements from the approximate $3.5 Million to reduce the overall principal judgment amount.  The trial court granted the motion in most respects reducing the judgment amount finding that that the settlements covered the same damage.  Remember, a party cannot recover double damages for the same issue.

An appellate issue dealt with this set-off of the subcontractor settlements from the total judgment awarded against the remaining defendants.  This is a critical strategic  legal issue, not to be taken loosely, when settling with defendants in a multi-party construction defect dispute, particularly when you may try the case against non-settling defendants.

The purpose of the setoff statutes is to prevent a windfall to a plaintiff by way of double recovery. Thus, any “settlement recovery sought to be set off must be ‘in partial satisfaction for the damages sued for.’ ” Accordingly, “[i]f the settlement funds are applicable to a claim asserted only against the settling co-defendant, the non-settling co-defendants are not eligible for a set-off in the amount of the settlement.”  In the same vein, “[w]hen a settlement recovery is allocated between claims with different and distinctive damage elements, set-off should only be allowed to co-defendants jointly and severally liable for the same claims.” 

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Although the same-damages-sued-for prerequisite seems simple enough in theory, because settlement agreements are often so broadly worded, in practice it is not always easy to determine whether damages paid as part of a settlement overlap with damages awarded against a remaining co-defendant. To that end, the law provides that if settlement proceeds are “not apportioned between (a) claims for which co-defendants are jointly and severally liable with the settling co-defendant, and (b) claims which were only asserted against the settling co-defendant, the entire amount of the undifferentiated recovery is allowable as a set-off.”  This is the case even where some of the settlement amount may have been for different damages and the settlement amount exceeded the damages it setoff. 

Addison Construction Corp., supra, (internal citations omitted).

Clearly, while this law seems simple, it is not.  And it certainly is not in a multi-party construction defect case which is why—again—settling with some but not all defendants in a construction defect case requires analysis and strategy. Otherwise, what could happen is a trial court setting-off the total sum of the settlements from the principal damages awarded at trial.  Probably not what the plaintiff had in mind! This is what the trial court did in this case based on otherwise broad language in the respective settlement agreements.  Guess what?  The appellate court agreed:

In sum, because the subcontractor settlement agreements failed to differentiate the damages settled for, it is simply “impossible to know whether [Buyers] would be receiving a duplicate payment” for their breach of contract based claims. If Buyers wanted to prevent this problem, they should have allocated the damages encompassed in each subcontractor settlement. Buyers made a strategic and understandable decision not to do so, and this is the end result. We acknowledge that this may seem harsh, but it is the only pragmatic result. If courts were required to delve into the scope of undifferentiated settlement agreements for the purposes of making a setoff determination, then post-judgment proceedings would turn into a second trial. Principles of judicial economy prohibit this result.

Addison Construction Corp., supra, (internal citations omitted).

My Insurance Claim Was Denied Because My Water Leak Lasted Over a Period of 14 Days or More – Was the Denial Proper?

Marie Laur | Property Insurance Coverage Law Blog | March 13, 2018

Many property insurance policies have a provision that states something similar to the following: “we do not insure…for loss…caused by…constant or repeated seepage or leakage of water…over a period of 14 or more days.” Insureds may find their claims for water loss under their homeowners’ policy denied on the grounds that the leak was present for a period of two weeks or more. However, Florida courts have ruled that the first thirteen days of damage may be covered, due to ambiguity in the language of the policy.

In Hicks v. American Integrity Insurance Company,1 the court ruled that the policy language did not preclude coverage for damage caused during the first thirteen days of a leak. In Hicks, the insured was out of town when the leak occurred, and he did not discover it until he returned to the property weeks later. He filed a claim under his “all-risks” policy with American Integrity Insurance Company of Florida (“American Integrity”), but his claim was denied based on American Integrity’s expert opinion that the leak had been present for five weeks or more. The insured sued American Integrity for breach of contract. The insured provided a report prepared by a forensic general contractor that reflected the amount of damage that was believed to have been caused within the first thirteen days of the leak. The trial court ruled in favor of American Integrity, stating to the insured, “basically, you’re asking [this court] to say whether the policy covered the loss in the first 13 days…It might, but I’m not so sure that the time frame of these particular facts would allow for that determination.”2

The insured appealed the trial court’s determination, and the appellate court reversed, stating that an insurance policy excluding losses caused by constant or repeated leakage or seepage over a period of fourteen days of more did, “not unambiguously exclude losses caused by leakage or seepage over a period of thirteen days or less.” Since ambiguous language in insurance policies is interpreted in the light most favorable to the insured, it must be interpreted in favor of coverage for the loss. The appellate court further remarked that once an insured demonstrates that a loss is within the policy terms, the burden shifts to the insurer to prove that a loss arose from an excluded cause.3

The appellate court instructed the trial court to enter partial summary judgment in favor of the insured on the sole issue of coverage within the first thirteen days of the leak, with the extent of the damage to be determined at trial. The appellate court also determined that for damage occurring after the first thirteen days, the burden was placed on American Integrity to prove that specific damage was sustained after the thirteenth day, and therefore excluded by the language of the policy.

Similar determinations have been reached in factually similar cases. Insureds should read their policies carefully, as a denial for a loss may not be proper.
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1 Hicks v. American Integrity Ins. Co., No. 5D17-1282 (Fla. 5th DCA Feb. 23, 2018).
2 Id. at 3.
3 Id. at 4.

Construction Defect Claim Must Be Defended Under Florida Law

Tred R. Eyerly | Insurance Law Hawaii | February 7, 2018

The Eleventh Circuit found that the insured caused property damage to areas beyond its own work, obligating the insurer to defend. Addison Ins. Co. v. 4000 Island Blvd. Condo. Ass’n, 2017 U.S. App. LEXIS 26870 (11th Cir. Dec. 28, 2017).

The condominium association contracted with Poma Construction Corp. to replace the building’s aging concrete balcony railings with new aluminum and glass railings. Poma subcontracted with Windsor Metal Specialties, Inc. to paint the new railings. Work was completed on February 24, 2012. Poma issued a 10-year warranty covering its installation of the railings. Windsor issued a 20-year limited warranty covering the paint job.

In October 2014, the association sued Poma and Windsor, alleging that the new railings were defective and would need to be removed and replaced. Claims for breach of contract, breach of implied warranty, and breach of express warranty were asserted. The amended complaint alleged that the defective railing system, including Windsor’s defective paint finishes on the railings, caused damage to other property such as the railing post pockets, the balcony concrete slabs, and finishes on the balcony concrete slabs.

Addison, Windsor’s insurer, sued for a declaratory judgment that it had no duty to defend. The policy provided that Windsor’s coverage did not apply to property damage to Windsor’s own work product or to that particular property that must be repaired because Windsor’s work “was incorrectly performed on it.”

Addison moved for summary judgment, arguing that the association had sued Windsor for breach of warranty, rather than for property damage. Windsor argued that a genuine issue of material fact existed as to whether the damage alleged in the association’s complaint constituted “property damage” to which no policy exclusion applied. An affidavit submitted with Windsor’s opposition stated there was railing failure and damage to the areas where the railings were installed.

The district court denied Addison’s motion for summary judgment. Addison appealed.

The Eleventh Circuit affirmed. Windsor’s work product was the paint finishes on the railings, and the railings were the particular part of the property on which Windsor’s work was allegedly performed incorrectly. The underlying complaint alleged that “the defective railing system, including the defective paint finish has caused and will continue to cause damage to other property . . . including but not limited to the railing post pockets, the balcony concrete slabs and finishes on the balcony concrete slabs.”

These allegations alleged facts that brought the action within the policy. Therefore, Addison had a duty to defend.

Compliance with Building Code Included in Property Damage

Tred R. Eyerly | Insurance Law Hawaii | February 5, 2018

A Circuit Court in Florida issued a final judgment determining that the insured’s obligation to comply with building code provisions was included in the property damage experienced. Pin-Pon Corp. v. Landmark, Am. Ins. Co., No. 312009CA012244 (Fla. Cir. Ct. Dec. 28, 2017). The decision is here.

At trial, the plaintiff’s architect testified that the total pricing for the code upgrades was $6.2 million. On appeal, the appellate court ruled that plaintiff’s Exhibit 98, an Upgrade Insurance Claim, was improperly admitted as a business record. The appellate court stated that the jury may have considered Exhibit 98 in determining the amount of code upgrade damages. Therefore, the verdict was reversed and remanded for a trial on the code upgrade damages only.

On remand, the plaintiff presented testimony from its architect that the code upgrades were required by the 2004 Florida Building Code because the storm damaged more than 50% of the aggregate area of the building. Another witness testified that the amount of code upgrade damages sustained by the plaintiff and submitted to Landmark was $6.2 million. The testimony and documentary evidence submitted by the plaintiff showed that the cost analysis and methodology used in preparing it was accurate.

Landmark did not present any testimony regarding the scope of code upgrade repairs required by the building code. Nor did Landmark present any testimony establishing that plaintiff’s claimed damages were unreasonable or unnecessary. Therefore, Pin-Pon was allowed to recover from Landmark the amount of $5,644,668.79, together with statutory interest.

Florida Supreme Court Confirms 558 is Not a Civil Proceeding, Allowing Contractors and Design Professionals to Resolve Defect Disputes as Intended by the Legislature

Brian A. Wolf and Joseph R. Young | Smith Currie & Hancock | December 14, 2017

Contractors and design professionals are entitled to notice of alleged defects in their work and the opportunity to fix them without intervention by insurance companies and needless litigation. Today, Florida’s Supreme Court in Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., No. SC15-1420 (Dec. 14, 2017), held that the Florida Statute Chapter 558 dispute resolution process is not a civil proceeding. This means that contractors and subcontractors who receive a 558 demand are free to participate in the notice and right to cure process without notifying their insurers of non-covered claims for construction defects unless otherwise specified in their insurance policy.

Chapter 558, Florida Statutes, was enacted almost 15 years ago with the express purpose of resolving construction defect claims without expensive and time-consuming litigation. Chapter 558 was originally known as the notice and right to cure statute. Unfortunately, the statute is now more commonly referred to as the “construction defect statute.” The trend has been for owners, contractors and design professionals to engage in expensive and protracted processes often lead by condo-lawyers and their engineering consultants, and on the other side, insurance companies, their lawyers and adjusters.

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., the contractor’s reaction to an extensive 558 notice was an attempt to force its insurer to pay for the 558 process. Altman Contractors argued that its commercial general liability policy contractually obligated its insurance company to defend against the 558 process because it was no different than a lawsuit. Altman attempted to convince the Supreme Court that the 558 notice and right to cure process was a “civil proceeding” as defined by language of their insurance policy.

The Supreme Court expressly held that the chapter 558 presuit process is a mechanism for resolving disputed construction defect claims but it is not a civil proceeding. The Court reasoned that chapter 558 is a notice and repair process which is not equivalent to a lawsuit because participation is voluntary and does not involve a third-party acting like a judge. The Court noted that the 558 process does not take place in a court setting and the parties are free to resolve or not resolve the defect claims as they choose.

It is critical to note that the Supreme Court determined that that the 558 process would fit the insurance policy’s definition of a “suit” if the insured submitted to the 558 process with the insurer’s consent. The Court reasoned that the 558 process is an alternative dispute resolution proceeding as defined by the insurance policy that Crum & Forster Specialty Insurance Co. sold to Altman Contractors, Inc. The Supreme Court relied on the language of the insurance policy which included a specific definition of a “suit” in the context of the insurer’s duty to defend.

The Court’s holding is important because it allows contractors to request and obtain consent of their commercial general insurance company for the insurance company to pay for and participate in the 558 process. The Court’s holding provides contractors with guidance for triggering their insurance company’s duty to pay for the defense of a 558 proceeding. If the contractor elects to trigger defense coverage, then it is incumbent on the contractor to notify its insurer of the 558 claims and specifically request the insurer’s consent to the process before participating in the 558 process.

Contractors and design professionals who receive a 558 notice and demand to cure should take care to consult with their construction attorney to review their insurance coverage and determine whether and how to involve insurance in the 558 process. The determination will depend on whether any of the defects alleged in the 558 notice are covered by insurance and the specific triggering language of all applicable insurance policies.