Monthly Archives: January 2018

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

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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

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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”

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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.

Subcontractor Pass-Through Claims Are Vulnerable to the Severin Doctrine

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Eric Frechtel and Amy Elizabeth Garber | Bradley Arant Boult Cummings LLP | January 24, 2018

Two recent decisions – one from the U.S. Civilian Board of Contract Appeals and the other from the U.S. Court of Federal Claims – provide opposing holdings on whether the government can raise a “Severin doctrine” defense to subcontractor “pass-through” claims based on broad language in subcontractor progress payment releases. In light of these different perspectives, contractors should take steps to ensure that such releases do not doom legitimate subcontractor pass-through claims.

Pass-Through Claims and the Severin Doctrine

Subcontractors cannot directly sue the government because they do not contract with the government, i.e., they are not in “privity” of contract. A pass-through claim is a subcontractor claim against the government that a prime contractor (who is in privity of contract with the government) brings on behalf of a subcontractor. The Severin doctrine holds generally that a prime contractor presenting a pass-through claim can recover damages only if the prime contractor remains liable to the subcontractor for those damages.

The Board (Turner Construction Co. v. Smithsonian Institution)

Turner, the prime contractor, passed through approximately $7 million in subcontractor delay and disruption claims in a dispute involving the renovation of the National Museum of American History. Each progress payment release stated, in relevant part, that the subcontractor: “represents and warrants that there are no outstanding claims by the [subcontractor]… through the date of Application for Payment No. __ except for any retention, pending modifications and changes, or disputed claims for extra work as stated herein[;]” and “does hereby forever release, waive, and discharge … any and all … claims and demands … by reason of delivery or material and/or performance of work relating to the project through Application for Payment No. __, except for those items listed under No. 1 above.” The relevant progress payment releases did not list the pass-through delay and disruption claims under No. 1. The board held that even though the progress payment releases did not carve out the pass-through claims, the Severindoctrine did not bar them mainly because the releases were “clearly tied” to each progress payment. Their main purpose was to ensure that subcontractors had paid lower tiers and that the project site remained unencumbered, not to relieve Smithsonian, vis-à-vis releasing Turner, from any liability for overall project delay.

The Court (MW Builders, Inc. v. United States)

The court in MW Builders, on the other hand, broadly applied subcontractor progress payment releases to bar pass-through claims. MW Builders, the prime contractor, passed through approximately $1 million in subcontractor delay claims in a dispute involving the construction of an Army Reserve Center in Sloan, Nevada. The progress payment releases in question were from one subcontractor, Bergelectric, which stated in relevant part: “[Bergelectric] irrevocably and unconditionally releases and waives … any other claims whatsoever in connection with this Contract … through the end of the period covered by this Application ….” These releases covered the entire period of Bergelectric’s delay claim.

In contrast with the Smithsonian disposition, the court held that the Severin doctrine barred the Bergelectric pass-through claim. Unlike the board’s narrow interpretation of the progress payment releases in Smithsonian, the court declined to consider evidence of the limited intent of the releases. Instead, based on the broad language in the releases and the fact that the releases did not expressly reserve Bergelectric’s delay claim, the court determined that the releases barred all claims by the subcontractor.

Takeaway Points

These two recent decisions involved similar language in progress payment releases but had opposite results. In the board case, the subcontractor claims survived under a narrow interpretation of the progress payment releases, while in the court case, the subcontractor claims fell victim to the government’s Severin doctrine defense based upon a broad interpretation of the release language. Together these cases demonstrate the unpredictability of whether a judge will construe broad language in progress payment releases as a bar to subcontractor pass-through claims; and they serve as a reminder that contractors must be wary of the Severin doctrine. In anticipation of the government’s defense, contractors should carve out subcontractor pass-through claims from progress payment releases. It is also prudent for prime contractors and subcontractors to enter into “liquidation agreements” to define and preserve subcontractor pass-through claims. Without such vigilance, otherwise meritorious claims could be vulnerable to the government’s Severin doctrine defense.

Kentucky Supreme Court Holds “Pay-if-Paid” Provision in Subcontract Is Valid and Enforceable, Shifting Risk to Subcontractor

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Michelle Beth Rosenberg | Pepper Hamilton LLP | January 25, 2018

Superior Steel, Inv. v. Ascent at Roebling’s Bridge, LLC, 2017 Ky. LEXIS 511 (December 14, 2017)

Corporex Development and Construction Management, LLC (“Corporex”), a design builder, contracted with Dugan & Meyers Construction Company (“D&M”), a construction manager and general contractor on the Ascent at Roebling’s Bridge (the “Project”), a 21-floor luxury condominium in Covington, Kentucky.

As a cost saving measure, D&M asked Superior Steel, Inc. (“Superior”) to fabricate the steel and to have Ben Hur Construction Company (“Ben Hur”) complete the erection and installation work. Superior and D&M entered into a fixed price contract for $1,814,000. In turn, Superior subcontracted with Ben Hur to erect the steel and metal decking for $444,000. As structured, the payments would flow from Corporex to D&M to Superior. Superior would then pay Ben Hur.

During the course of the Project, D&M instructed both Superior and Ben Hur to perform extra work. Ben Hur and Superior submitted work orders to D&M who in turn submitted work orders to Corporex. Ultimately, Corporex refused to pay for Superior and Ben Hur’s additional work and refused to pay Superior’s retainage.

Superior and Ben Hur filed a complaint against Corporex and D&M for breach of contract, among other claims, in order to recover monies owed. The trial court held that a contract existed between Superior and D&M and that an implied contract existed between Ben Hur and D&M, as a matter of law. The trial court entered judgment in favor of Superior for $124,017.26 for extra work performed and $195,143.40 for unpaid retainage. Additionally, the trial court entered judgment in favor of Ben Hur for $284,295.53 for extra work performed.

The Court of Appeals vacated the trial court judgment, reasoning that the jury should have been explicitly instructed as to the “pay-if-paid” provisions in the Superior/D&M contract. Such provisions essentially mandated that Superior was entitled to payment from D&M only if D&M received payment from Corporex. The Kentucky Supreme Court agreed with the Court of Appeals on this issue.

At the center of Superior and Ben Hur’s breach of contract claims, was the “pay-if-paid” provisions which condition D&M’s payment of Superior on D&M having first been paid by Corporex. “Pay-if-paid” conditions shift the risk of nonpayment from the contractor to the subcontractor. The Superior/D&M contract contains two sections with pay-if-paid language. First, Article 7.11 “Claims Payment,” states:

[n]o additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.

Second, Article 8.2.4, “Time of Payment” states:

[r]eceipt of payment by the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work.

The Supreme Court held that these provisions unambiguously created a condition precedent that D&M must receive payment prior to its obligation to pay Superior. Therefore, the provisions unequivocally allocated the risk of nonpayment by Corporex to Superior and relieved D&M of its obligation to pay Superior unless and until it received payment from Corporex. As it was undisputed that Corporex never paid D&M, D&M was not obligated to pay Superior under the contract terms. The Supreme Court held the “pay-if-paid” provisions were consistent with public policy because Kentucky has long respected freedom of contract and allowed the parties to allocate foreseeable risk among themselves. Furthermore, the Supreme Court refused to invalidate such a policy without clear direction from the Legislature.

Thus, because the Supreme Court held that the “pay-if-paid” provisions were valid and enforceable, those provisions precluded judgment in favor of Superior against D&M. Nevertheless, the Supreme Court also held that Superior and Ben Hur, which had obtained a judgment for unjust enrichment against Corporex for the extra work claims, could sustain that judgment.