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.

Supreme Court’s Latest Construction Defect Decision and Its Impact on Construction Insurance Claims

David B. Haber, Frank Soto and Brett Silverberg | Daily Business Review | January 12, 2018

Prior to the Altman decision, homeowners and/or condominium associations were frustrated during the Chapter 558 process after sending a notice of claim because insured construction parties could not get insurers to become involved in pre-suit negotiations. Such a result was antithetical to the purpose of Chapter 558—which was instituted specifically to streamline the construction defect claims process and encourage early alternative dispute resolution.

In Altman, the following question was presented 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 CGL policy issued by the insurer, C&F, to the general contractor, Altman Contractors, Inc. (Altman)?” The Florida Supreme Court recently answered in the affirmative and held that the notice process set forth in Chapter 558 does indeed constitute a “suit” within the meaning of the CGL policy at issue—which in turn means that insurance carriers can no longer sit back following receipt of a 558 notice and must instead take an active role earlier in the process.

‘Duty to Defend’

The Altman case stems from defects in the construction of Sapphire Condominium, a high-rise residential condominium in Broward County. C&F insured Altman for the Sapphire project through a policy that provided, in pertinent part, as follows: “[w]e 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.” Altman sought a declaratory judgment that C&F owed it a duty to defend and indemnify as part of the Chapter 558 pre-suit process to resolve claims for construction defects, and that C&F breached the liability insurance policy by refusing to initially defend Altman in the suit against Sapphire. C&F denied that Sapphire’s 558 notices invoked its duty to defend Altman under the policy because the notices did not constitute a “suit.” Notwithstanding, the Florida Supreme Court held that the Chapter 558 process is included in the policy’s definition of “suit” as an “alternative dispute resolution proceeding.”

The insurance policy at issue in Altman is a standard commercial general liability policy and as such it is likely to have a profound impact on future Chapter 558 construction defect litigation. Accordingly, defense carriers are more likely to be engaged in construction disputes, particularly during the pre-suit stage after a Chapter 558 notice is received—or at least they should in light of this decision. As such, the 558 process, unlike in many past years, is now likely to encourage the claimant and insured to attempt to settle construction defect claims prior to expending time and resources litigating those claims. Such a notion is consistent with the legislature’s aim in creating Chapter 558 as an effective alternative dispute resolution mechanism, intended to curb construction defect litigation.

In light of the foregoing, it is imperative that individual homeowners, homeowner associations and/or condominium associations, along with their experts, prepare detailed inspection reports that set forth the various construction defects affecting their property, what resulting damage is occurring as a result of those defects, the locations of the defects throughout the property, and determine compliance with the applicable building code, plans and specifications. By virtue of more detailed reports in compliance with the requirements of Chapter 558, it seemingly becomes more likely that construction defect disputes will result in settlements at an earlier stage—thereby saving the parties exorbitant amounts of money that otherwise would be expended in litigation.

Court Rules That Insurers Must Treat Notice of Claim for Construction Defects as a “Suit”

Mike Seemuth | The Real Deal | January 21, 2018

The Florida Supreme Court ruled on a case centering on construction of the Sapphire Condominium in Fort Lauderdale and Altman Contractors Inc.

The Sapphire Condominium in Fort Lauderdale (Credit: Keller Williams Realty)

The Florida Supreme Court ruled that filing notice of a claim for a construction defect is equivalent to a filing a “suit” that a general liability insurer may have to defend.

The ruling came in response to a question about the state’s procedural requirements before filing a court claim for a construction defect.

The case centered on the Sapphire Condominium, a high-rise condo in Fort Lauderdale on North Ocean Boulevard.

In 2012, Altman Contractors Inc., the general contractor for the construction of Sapphire, got several notices of claim in 2012 from Sapphire owners, who alleged more than 800 construction defects.

Altman notified its commercial liability insurer of the Sapphire notices of claim and demanded that the insurer defend and indemnify the general contractor against the allegations of defective construction.

But the insurer, Crum & Forster Specialty Insurance Company (C&F), denied Altman’s demand, asserting the notices of claim didn’t amount to a “suit,” which would invoke the insurer’s duty to defend and indemnify the general contractor.

Altman ultimately settled all the Sapphire claims out of court without the involvement of C&F.

Altman also asked the U.S. District Court for the Southern District of Florida to rule that C&F had a duty to provide defense and indemnity against the Sapphire claims. The district court ruled in favor of the insurer, and Altman appealed to the U.S. Court of Appeals for the 11thCircuit.

The appellate court responded by certifying a question for the Florida Supreme Court about chapter 558, Florida Statutes, which lays out a notice-and-repair process that must happen before claimants can sue for construction defects.

The Florida Supreme Court ruled that the notice-and-repair process that Sapphire initiated was a “suit” within the meaning of the general liability insurance policy that Altman bought from C&F.

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.