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.

Application of Frye Test to Determine Admissibility of Expert

David Adelstein | Florida Construction Legal Updates | February 2, 2019

Florida went back to the Frye test/standard, instead of the Daubert test utilized in federal court, to determine the admissibility of expert testimony.  The Frye test is more favorable to plaintiffs because it applies when an expert renders an opinion based on new or novel scientific principles.  See D.R. Horton, Inc. v.  Heron’s Landing Condominium Ass’n of Jacksonville, Inc., 44 Fla.L.Weekly D109b (Fla. 1st DCA 2018) (“The supreme court has described the Frye test as one in which the results of mechanical or scientific testing are not admissible unless the testing has developed or improved to the point where the experts in the field widely share the view that the results are scientifically reliable as accurate. Stated differently, under Frye, the proponent of the evidence has the burden of establishing by a preponderance of the evidence with the general acceptance of the underlying scientific principles and methodology.  However, as stated, the Frye standard only applies when an expert attempts to render an opinion that is based upon new or novel scientific principles.”). 

In D.R. Horton, Inc., a condominium association sued the developer and general contractor (same entity) for construction defects that included claims in negligence, violation of building code, and breach of statutory warranties.  The developer/general contractor moved in limine / to strike the association’s experts under, at the time, a Daubert analysis, but which became a Frye analysis during the pendency of the appeal.  The expert opined as to construction defects and damage and the appropriate repairs – really, no different than any construction defect dispute, from what it appeared. The trial court denied the motion and during trial the experts testified and a sizable damages judgment was entered against the developer/contractor prompting the appeal.  One issue on appeal was the admissibility of the expert’s opinion.  The appellate court noted that a Frye analysis is not necessary because the experts used a scientifically reliable and peer-reviewed methodology.  

A smart tactic, and I mean SMART tactic, that the association’s counsel seemed to utilize was to engage a third-party engineer to testify during a hearing that the methodology used by the association’s experts was industry standard methodology and generally accepted. Thus, the opinions were not based on new or novel scientific principles and the appellate court affirmed the trial court’s denial of the contractor/developer’s motion in limine.

After an Appraisal Award is Signed, Can One Side Unilaterally Change It?

J. Ryan Fowler | Property Insurance Coverage Law Blog | April 2, 2019

With appraisal becoming more popular in first-party insurance cases, I often get asked: When is the appraisal completed? As most answers for a first party insurance case – it depends on the policy. Recently a Federal District Court in Florida was asked to determine which of two appraisal awards was final and enforceable.1

The insureds filed a claim for hurricane damage with their insurance company. The claim eventually let to a lawsuit in federal court where the parties didn’t contest coverage and agreed to an appraisal under the insurance policy.

Each side appointed an appraiser: Kunzman (for the insurer) and Thomas (for the insureds), and the trial court appointed Leiby to serve as an umpire. The Appraisers and Umpire performed a property inspection in August of 2018. The trial court then outlined the following e-mail exchanges:

September 5, 2018:

1:54 p.m. – Umpire Leiby circulated an appraisal award (the “Disputed Award”) in the amount of $121,800.30 that included his electronic signature. The email stated, “See attached for review and comment. If one or both of you find this agreeable, please sign, scan, and return to me. I will then get out the originals.”

2:27 p.m. – Appraiser Kunzman expressed his objection to the Disputed Award, asked for a breakdown and itemization of the award amount and a copy of Appraiser Thomas’ estimate.

2:35 p.m. – Appraiser Thomas emailed Umpire Leiby and Appraiser Kunzman a signed copy of the Disputed Award that Umpire Leiby had circulated at 1:54 p.m., stating, “Please see the attached award signed by me.”

3:59 p.m. – Umpire Leiby responded to Appraiser Kunzman’s 2:27 p.m. email, requesting Appraiser Thomas forward him the missing documents and indicating that he would “hold off on the final until [Appraiser Kunzman] gets that.”

September 6, 2018:

9:37 a.m. – Umpire Leiby advised Appraiser Kunzman to provide any input based upon Appraiser Thomas’ estimate within five days. Umpire Leiby then indicated that the “the award [was] not yet final.”

September 17, 2018:

12:10 p.m. – Umpire Leiby sent the parties’ appraisers a revised appraisal award (the “Revised Award”) in the amount of $90,704.27.

12:59 p.m. – Appraiser Kunzman executed the Revised Award and returned it to Umpire Leiby.

The insurance company paid the insureds $90,704.27, the amount of the Revised Award.
The insureds then asked the court to confirm the First Award in the amount of $121,800.30, executed by the Umpire and the insured’s appraiser as the binding appraisal award. The insurance company argued that the insureds’ motion should be denied because the First Award was preliminary or, if the award was final, it was timely modified by the Umpire.

The court looked at the underlying insurance policy which stated:

The appraisers will state separately the value of the residential property and the amount of loss. If they fail to agree, they will submit their difference to the umpire. A decision agreed to by any two will be binding.

(Emphasis in original.)

The court granted the insureds’ motion, finding that the Umpire did not have the authority to unilaterally change the award after it was signed by two parties. In its order, the court explained that the express terms of the policy stated that a “decision agreed by any two [appraisers] will be binding.” Here, the court continued, the evidence supported the conclusion that the Disputed Award was final and there was a decision agreed to by any two. The court ruled that once the First Award was forwarded and signed by Appraiser Thomas it “became binding by the express and unambiguous terms of the insurance policy.”

The court pointed out that no party had moved to correct or clarify the award and there was no basis for modifying it. The court said that although subsequent emails reflected the Umpire’s statement that the Disputed Award was not intended to be final, those later emails “had no effect” on the Disputed Award’s “earlier binding effect under the express terms of the policy.”

In this case, the disputed (first in time) award was final and enforceable based on the insurance policy language.
1 Guzman v. American Security Ins. Co., No 18-cv-61195 (S.D. Fla. March 27, 2019).

Legislation to Significantly Refurbish Florida’s Construction Defect Law Moving Through the Legislature

Jeff Wertman | Berger Singerman | March 20, 2019

Florida SB 1246 (related HB 911) seeks major changes to Florida’s construction defect law, Chapter 558, Florida Statutes, including repealing the pre-suit notice and opportunity to repair requirements (notice of claim, reasonable inspection of the property, and settlement offers) and requiring nonbinding arbitration in all construction defect cases. The bill was introduced on February 20, 2019 by Senator Tim Wright, who represents the 14th district, encompassing parts of Brevard and Volusia counties.

Under the proposed legislation, the arbitration must be commenced once all the proper parties have been joined to the action, but no later than 180 days after the action is brought. However, any party joined to the action after 180 days is still subject to mandatory, non-binding arbitration. Although arbitration is mandatory, it is not binding. Each party must elect in writing to be bound by the arbitration award within 30 days after it is rendered. If a party does not agree to be bound by the arbitration award, that party may proceed with a traditional lawsuit on any unresolved portions of the claim.

The bill also requires that specific findings be made by the fact-finder, be it the arbitrator or a judge or jury, if the parties opt not to be bound by the arbitrator’s determination and pursue a lawsuit. The fact-finder must make specific written findings in determining the monetary award against a party (contractor, sub-contractor, etc.), including the nature of the defect, the amount awarded against each separate party, and the reasons the amount is being awarded against that party (including the amount of the award attributable to each party’s repair or replacement of its own defective work and the cost to repair and replace damage cause to the non-defective work of other parties).

The bill will affect all construction participants, including developers, owners, contractors, subcontractors, suppliers, design professionals, and insurers who insure contractors, subcontractors, and others under policies containing written provisions containing a duty to provide a defense to a lawsuit. Mandatory, non-binding arbitration meets the definition of a “suit” in most policies and will likely trigger the insurance company’s duty to defend the insured when an otherwise covered claim of construction defect is raised by a property owner. If the bill passes, it will be effective July 1, 2019. We are closely tracking this legislation.

Appellate Court asks Florida Supreme Court: What Kind of Damages Are Repair Costs?

Amandeep S. Kahlon | Bradley Arant Boult Cummings | February 26, 2019

On January 25, 2019, a Florida appellate court certified the following question to the Florida Supreme Court:


The answer to this question is of interest to the construction community because of the prevalence of consequential damage waivers in construction contracts.

In Keystone Airpark Authority v. Pipeline Contractors, Inc., an owner contracted with a general contractor for the construction of an airplane hangar and taxiways in Clay County, Florida. The owner separately contracted with an engineering firm to inspect, observe, and monitor the contractor to ensure compliance with the plans and specifications, including the use of suitable materials by the contractor. After the contractor completed the project, the owner alleged that the hangar’s concrete slabs and the concrete taxiways began to deteriorate prematurely because of the contractor’s use of the substandard stabilization materials underneath the structures. The owner sued the contractor and the engineering firm for the costs to repair and replace the hangar, taxiways, and underlying subgrades.

In response, the engineering firm moved for summary judgment arguing that the incidental, special, and consequential damages waiver in its contract precluded award of the repair and replacement costs sought by the owner. The firm argued that the owner could only recover the costs of the inspection services provided under the inspection contract for any breach. The trial court agreed and enforced the consequential damages waiver, and the owner appealed.

On appeal, the court analyzed whether the damages sustained by owner were general, special, or consequential in nature. The court determined that the repair costs were not special damages because the costs of repair were likely to result from the engineering firm’s failure to fulfill its explicit inspection obligations and did not involve special circumstances for which actual notice may have been required. In other words, the cost to repair and replace the hangar and taxiways was a natural and reasonable consequence of failing to inspect and verify the suitability of the materials used.

However, the appellate court also concluded that the repair costs were not general or direct damages since they did not arise from the immediate transaction between the engineering firm and the owner for provision of inspection services. Per the court, even assuming the engineering firm failed to inspect, the contractor could have completed construction correctly, so the repair costs were not a direct result of the engineering firm’s breach.

The court, instead, analogized the facts in Keystone Airpark to other failure to inspect cases, where Florida courts categorized repair costs as consequential damages, or foreseeable damages that stem from losses incurred by the non-breaching party’s dealings with third parties. But, the court also acknowledged that other failure to inspect cases did not address an express contractual duty to inspect and determine suitability of construction materials, as at issue in Keystone Airpark. Because of this concern, the appellate court, while affirming the trial court’s summary judgment ruling, certified the question recounted above to the Florida Supreme Court for final determination on how to classify repair cost damages arising from a breach of an express inspection requirement.

If the Florida Supreme Court determines that the repair costs should be treated as general or direct damages, that ruling may transform risk allocation under many Florida construction contracts. Where parties, like architects and engineers, have typically relied on consequential damages waivers to limit liability when performing services like inspections or submittal review, the treatment of repair and replacement costs as general damages will seriously undermine the effect of such waivers and create exposure to significant damages awards. Such damages may substantially exceed the actual costs of the services provided.

To prepare for such a contingency, contracting parties should consider other avenues to limit liability. For example, parties with this potential exposure may pursue hard liability caps tied to insurance policy limits or the price of the services provided. Ultimately, it may be that the Florida Supreme Court sides with past precedent and determines repair costs arising from the failure to inspect are consequential damages, but you should be prepared and plan for an alternative result when negotiating contracts in the interim. Of course, further guidance on this issue depends not only on the Florida Supreme Court’s decision, but also the extent to which other states follow the Florida Supreme Court’s lead on this issue.