Eleventh Circuit Finds No “Property Damage” Where Defective Component Failed to Cause Damage to Other Non-Defective Components

Anthony L. Miscioscia and margo Meta | White & Williams

In Florida, damage caused by faulty workmanship constitutes “property damage;” however, the cost of repairing or removing defective work does not. Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294 (11th Cir. 2012) (Auchter). But what happens when the cost of repairing or removing defective work results in loss of use of the tangible property which is not physically injured?

The United States Court of Appeals for the Eleventh Circuit was recently faced with this question in Tricon Development of Brevard, Inc. v. Nautilus Insurance Company, No. 21-11199, 2021 U.S. App. LEXIS 27317 (11th Cir. Sep. 10, 2021). Tricon arose out of the construction of a condominium. Tricon was hired to serve as general contractor for the project and hired a subcontractor to fabricate and install metal railings. The railings installed by the subcontractor were defective and damaged, improperly installed, and failed to meet the project’s specifications. Tricon filed an insurance claim with Nautilus Insurance Company, the subcontractor’s commercial general liability insurer, for the cost to remove and replace the railings.[1]

Relying on Auchter, the court concluded that the repair and removal of defective work does not constitute “property damage”. The court rejected Tricon’s contention that Auchter failed to consider that the repair and removal of defective components may result in a “loss of use of tangible property that is not physically injured”, and thus, qualify as “property damage”. It noted that the Auchter court held that “after interpreting the policy as a whole [and] ‘endeavoring to give every provision its full meaning and operative effect’” there was no coverage for the defective installation. The Eleventh Circuit therefore concluded that “the entire definition of ‘property damage’ in the post-1986 standard form commercial general liability policy must fail to cover the kinds of costs that Tricon incurred from its subcontractor’s deficient work.”


[1] Tricon was an additional insured under the subcontractor’s policy for liability for “property damage” caused, in whole or in part by the subcontractor’s direct or vicarious acts or omissions.

Asserting Non-Disclosure Claim Involving Residential Real Property and Whether Facts are “Readily Observable”

David Adelstein | Florida Construction Legal Updates

Under Florida law, there is a claim dealing with the purchase and sale of residential real property known as a Johnson v. Davis or a non-disclosure claim:  “[W]here the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.” Lorber v. Passick, 46 Fla.L.Weekly D1952a (Fla. 4th DCA 2021).   A seller’s duty to disclose extends to a seller’s real estate agent/broker.  Id.

A non-disclosure claim is asserted by the buyer of residential real property when the buyer discovers defects or damages with the real property that he believes materially affects the value of the property.  While there may be the sentiment these are easy claims to prove, they are not.

Remember, a non-disclosure claim deals with facts that materially affect the value of residential real property and are NOT readily observable.  The use of the language “readily observable” has been found to mean:

“[I]nformation [that] is within the diligent attention of any buyer.  To exercise diligent attention…a buyer would be required to investigate any information furnished by the seller that a reasonable person in the buyer’s position would investigate and take reasonable steps to ascertain the material facts relating to the property and to discovery them—if, of course, they are reasonably ascertainable.”

Lorber, supra, quoting Nelson v. Wiggs, 699 So.2d 258, 260-61 (Fla. 3d DCA 1997) (internal quotations and citations omitted).

When a buyer asserts a non-disclosure claim, the buyer should also consider adding a negligent misrepresentation claim.  “[E]ven when a defect can probably be discovered through the exercise of diligent attention, the requisite level of diligent attention is of less importance in claims involving misrepresentations – especially those involving fraud.”  Lorber, supra.  The issue appears to be one that involves comparative negligence and despite readily observable defects, a buyer is entitled to rely on a seller’s representations.  Id.

Lorber provides a good discussion of a residential real property non-disclosure claim and related claims for a seller’s misrepresentation.

In this case, a buyer did not move through with closing because he smelled an odor in the house and learned, right before closing, the home had experienced substantial water damage/ a prior flood event.  The buyer claimed this was never disclosed by the seller, was not readily observable, and materially affected the value of the property.

The seller sued the buyer for failing to close and the buyer countersued for breach of contract, fraudulent inducement, and negligent misrepresentation.

During the course of litigation, the seller moved for summary judgment.  Testimony established that the buyer knew there was a musty odor when he first stepped foot in the house and asked about the odor.  The buyer was told by the seller’s agent it was due to the air conditioning being off but acknowledged the odor might be mold.  Moreover, the buyer’s real estate agent testified the odor was similar to other properties he had seen that had water intrusion; although, the agent testified he did not inform the buyer that water intrusion was possible.  Based on this testimony, the seller argued the water intrusion and mold was readily observable thereby defeating a non-disclosure claim.   The buyer argued that while he was not denying he smelled the odor from the get-go, the seller’s real estate agent dismissed the odor and there was nothing readily observable that connected the odor to a prior flood, as supported by the seller’s disclosure form which indicated the property suffered no water intrusion or flood damage.  In other words, the buyer claimed how could he investigate a flooding condition he did not know existed and was not disclosed to him, and how could he have knowledge the odor’s existence was related to a past flood event.

The trial court granted summary judgment in favor of the seller.  The trial court held the fact that the buyer smelled the musty odor that could be mold made the fact there was a prior water intrusion event readily observable.   The Fourth District Court of Appeal disagreed.

Buyer’s Breach of Contract Claim

The buyer’s breach of contract claim against the seller was a non-disclosure claim.  Thus, the buyer’s failure to exercise diligent attention would be fatal to a non-disclosure claim because the facts would be readily observable.  In this regard, the Fourth District Court of Appeal noted that if the buyer’s claim was premised on mold, his non-disclosure claim would fail because he observed the musty odor.

However, the buyer’s claim was not predicated on the existence of mold, but on the existence of a past flood event/damage; the buyer testified “he was unaware of any steps he could have taken to investigate a prior flood about which he was never informed, and he had no knowledge that the mold’s existence was in any way related to a prior water intrusion event.”   For this reason, the Fourth District found that there was a genuine issue of material fact as to whether the prior flood event was readily observable.  There was also an issue of material fact as to whether the flood event/damage materially impacted the value of the property as the buyer testified the home was worth much less after having suffered a flood.

Buyer’s Fraudulent Inducement Claim

As to the buyer’s fraudulent inducement claim, the Fourth District Court of Appeal held there was a genuine issue of material fact as to whether the seller knew its representations concerning the property were false with the intent to induce the buyer to enter into the purchase-sale agreement.

While a party cannot recover for fraud that is contradicted or covered by the actual contract, the sale of residential real property creates an exception.  “The inclusion of an ‘as is’ clause in a contract for the sale of residential real property does not waive the duty imposed upon a seller under Johnson [v. Davis].”  Lorber, supra (citation omitted).

Buyer’s Negligent Misrepresentation Claim

As to the buyer’s negligent misrepresentation claim, the Fourth District Court of Appeal held that the “issue was one of comparative negligence.”  Lorber, supra.  Genuine issues of material fact remained “as to whether Seller knew or should have known about the Disclosure Form’s falsity, whether Seller intended to induce Buyer to rely on the Disclosure Form, and whether Buyer acted in justifiable reliance upon the Disclosure Form, in conjunction with seller’s agent’s statement that the smell was attributable solely to the air conditioning being off.”  Id.

Eleventh Circuit Finds No “Property Damage” Where Defective Component Failed to Cause Damage to Other Non-Defective Components

Margo Meta and Anthony Miscioscia | White and Williams

In Florida, damage caused by faulty workmanship constitutes “property damage;” however, the cost of repairing or removing defective work does not. Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294 (11th Cir. 2012) (Auchter). But what happens when the cost of repairing or removing defective work results in loss of use of the tangible property which is not physically injured?

The United States Court of Appeals for the Eleventh Circuit was recently faced with this question in Tricon Development of Brevard, Inc. v. Nautilus Insurance Company, No. 21-11199, 2021 U.S. App. LEXIS 27317 (11th Cir. Sep. 10, 2021). Tricon arose out of the construction of a condominium. Tricon was hired to serve as general contractor for the project and hired a subcontractor to fabricate and install metal railings. The railings installed by the subcontractor were defective and damaged, improperly installed, and failed to meet the project’s specifications. Tricon filed an insurance claim with Nautilus Insurance Company, the subcontractor’s commercial general liability insurer, for the cost to remove and replace the railings.[1]

Relying on Auchter, the court concluded that the repair and removal of defective work does not constitute “property damage”. The court rejected Tricon’s contention that Auchter failed to consider that the repair and removal of defective components may result in a “loss of use of tangible property that is not physically injured”, and thus, qualify as “property damage”. It noted that the Auchter court held that “after interpreting the policy as a whole [and] ‘endeavoring to give every provision its full meaning and operative effect’” there was no coverage for the defective installation. The Eleventh Circuit therefore concluded that “the entire definition of ‘property damage’ in the post-1986 standard form commercial general liability policy must fail to cover the kinds of costs that Tricon incurred from its subcontractor’s deficient work.”


[1] Tricon was an additional insured under the subcontractor’s policy for liability for “property damage” caused, in whole or in part by the subcontractor’s direct or vicarious acts or omissions.

Private Statutory Cause of Action Under Florida’s Underground Facility Damage Prevention and Safety Act

David Adelstein | Florida Construction Legal Updates

Florida’s Underground Facility Damage Prevention and Safety Act is set forth in Florida Statutes Chapter 556.  Any owner or operator of underground infrastructure as well as contractors that perform underground excavation and demolition operations are familiar (or, need to be familiar) with this Act and the requirements it imposes on them.

In a nutshell, this Act requires excavators to notify operators of underground facilities (e.g., pipelines, cables, sewers) through a notification system before excavating or demolishing an underground location.  Then notification system gives the operator of the underground facility two days’ advance notice that an excavation will be taking place.  After receiving this notice, the operator of the underground facility must mark the area where its infrastructure is located which could be affected by the underground excavation or demolition operations.  The Act further imposes duties on excavators to use increased caution, supervise mechanized equipment, perform excavation and demolition operations in a careful an prudent manner, and to re-notify the notification system if the operator’s marking is no longer visible so the location of the operator’s underground facility can be re-marked.

The Florida Supreme Court in Peoples Gas System v. Posen Construction, Inc., 46 Fla.L.Weekly S166b (Fla. 2021) recently analyzed whether the Act creates a private statutory cause of action.  This case dealt with a road contractor that ruptured an underground gas pipeline during an excavation.  The rupture caused an explosion that injured an employee of the road contractor.  A dispute arose between the operator of the underground gas line and the road contractor with the operator of the gas line claiming the excavator’s advance notification was deficient.  The injured employee sued the operator of the underground gas line and the operator settled with the employee.  The operator then sued the road contractor  to recover the amount of the settlement claiming it should be entitled to recover the settlement payment as damages under the Act or for “statutory indemnity.”  The issue was whether the Act provides any such private statutory cause of action.  The Florida Supreme Court held it does create a private statutory cause of action for violations sounding in negligence, but not for “statutory indemnity”:

(1) that the Underground Facility Damage Prevention and Safety Act creates a standalone cause of action; (2) that the cause of action sounds in negligence; (3) that liability under the Act is subject to proof of proximate causation [i.e., the defendant’s negligence needs to be the proximate cause of the plaintiff’s injury] and to the defense of comparative fault  [i.e., a party is liable for the damages they caused per Florida Statute s. 768.81]; (4) that “losses” recoverable under the Act can include purely economic damages, independent of personal injury or property damage; and (5) that the Act does not create a cause of action for “statutory indemnity.

Peoples Gas System, supra.

This decision that the Act creates a negligence-based cause of action  is supported by Florida Statute s. 556.106(2)(a) and (b) contained in the Act that discusses liability for violations of the Act.

It is uncertain what doors will be opened by this Florida Supreme Court decision.  However, what is clear is that a negligence-based statutory cause of action can be asserted for violations of the Act and the damages can include economic damages that have nothing to do with personal injury or property damage.

CGL, Builders Risk Coverage and Exclusions When Construction Defects Cause Property Damage

Jeffrey Cavignac | Construction Executive

Direct damage to property under construction caused by faulty or defective work or defective materials has been a coverage issue for decades. Two specific policies, the Commercial General Liability for the contractors building the structure and the Builders Risk Policy on the project both are sources of potential coverage. 

A CGL policy protects the named insured (the contractor in this case) from third party liability arising out of the insured’s operations that results in either bodily injury or property damage. Damage to property caused by poor workmanship or defective materials would qualify as property damage. To understand how the CGL policy might respond to claims such as these, it is necessary to evaluate several exclusions in the CGL policy. 

CGL policies cover “property damage,” defined as physical injury to tangible property, including loss of use of such property, and loss of use of tangible property that has not been physically injured. 

Exclusion M provides that there is no coverage for loss of use of property that has not been physically injured due to a defect in the work. This is significant, because it means that there is no CGL coverage for defective work without physical injury to the work. 

For example, prior to completion on a construction project, inspection revealed that windows were not properly installed, making them prone to leaks. But no leaking had occurred. Removing and reinstalling the windows delayed the project by two weeks. The owner made a claim against the GC for lost revenue for the two weeks. There is no CGL coverage because the loss of use was purely due to defective work, with no physical injury (the CGL only covers liability that results in bodily injury or tangible property damage). 

There are two additional exclusions applicable to property damage in the course of construction, exclusions J.5 and J.6:

  • Exclusion J.5 excludes property damage to that particular part of property on which the insured or its contractors are working if the property damage arises out of their work. This exclusion typically applies where a mistake in performance causes damage. Resultant property damage caused by the mistake would be covered, but damage to “that particular part” that caused the loss would not be covered. For example, an electrical contractor caused a fire while working in the mechanical room that triggered the fire suppression system building-wide, causing widespread water damage. The exclusion applies only to the electrical components in the mechanical room damaged by fire. 
  • Exclusion J.6 excludes property damage to that particular part of property that must be repaired or replaced because the insured’s work was defectively performed on it. For example, a concrete subcontractor improperly mixed a concrete batch, resulting in a section of foundation that cracked, causing a shift in the structure. Structural components supported by the faulty area were damaged. The section needed to be demolished and re-poured with major repairs needed to the rest of the structure. The re-pour is excluded but the damage to the rest of the structure was not.
    Сonfidence in the future

In both cases, the CGL affords coverage for physical damage to the work caused by defects or defective work–basically the ensuing damage. In neither case would the General Liability policy cover that particular part that was either worked on or needed to be repaired or replaced due to defective work. 

Project-Specific CGL Coverage (OCIPs and CCIPs) needs to be considered in a different light. Nearly every OCIP or CCIP will include an exclusion for property damage to the insured project during the course of construction (note, that a small minority of insurers may remove this exclusion if the contractor can provide evidence of a LEG 2 or 3 endorsement). These are often referred to as “Course of Construction” or “Builder’s Risk Exclusions.” These exclusions are added with the expectation that the builder’s risk insurance should provide coverage for damage to the structure during the course of construction. 

Providing coverage under a first party property form is preferred to a third- party liability form because it should eliminate any litigation. The key is negotiating broad and favorable terms under the Builders Risk policy. A well-written Builders Risk policy will include:

  • all stakeholders as insureds;
  • comply with the contractual terms of the contract;
  • possibly include earthquake and flood;
  • include water related damage other than flood; and
  • ideally include not only resultant damage caused by defective work or materials but if available damage to that “particular part” that caused the problem. 

The U.S. builder’s risk market is dominated by manuscript forms. There are some consistencies, but each form must be carefully reviewed. With respect to coverage for property damage during the course of construction caused by defective work, domestic forms generally fall into two categories. 

The first type, which is less common, excludes all damage caused by, or arising out of faulty workmanship. This removes coverage for repairing defective work as well as for any damage to the project resulting from the defective work. These forms offer less coverage than the ISO CGL policy and should be avoided. 

The second, more common, domestic form excludes loss or damage caused by faulty work, unless the damage is caused by a covered cause of loss. These are commonly referred to as “ensuing loss exceptions.” Taking the example of the concrete subcontractor who improperly mixed the concrete that resulted in structural damage, in this case the re-pour is excluded but the damage to the rest of the structure is not because collapse is a covered peril. 

Most domestic builder’s risk policies with ensuring loss exceptions provide roughly the same scope of coverage for property damage during the course of construction as an ISO CGL policy. Neither policy provides coverage for the cost of replacing defective work, but both policies cover direct damage to the rest of the project caused by the defective work. In the case of a Builders Risk policy this ensuing loss must be caused by a covered peril. 

An underwriting syndicate in London came up with proposed endorsements that specifically address the faulty workmanship issue. Authored by the London Engineering Group, these have come to be known as LEG1, LEG2 and LEG3: 

  • LEG1 is the most restrictive. It excludes coverage for all loss or damage “due to defects of material workmanship, design plan or specification,” whether damage to other property has occurred or not. LEG1 is the basic equivalent of the first category of US market forms that exclude all damage caused by defective work, without the “ensuing loss exception.” 
  • LEG2 excludes coverage for all loss or damage “due to defects of material workmanship, design plan or specification,” but maintains coverage for insured property damaged by the defect, except for the cost that would have been incurred if the replacement or rectification had been done before the damage. LEG2 is roughly equivalent to the U.S. market form with the “ensuing loss exception.” It covers resulting property damage to the project, but not damage to the part causing the problem. This makes LEG2 also roughly equivalent to an ISO CGL policy in terms of the scope of coverage for property damage during the course of construction. 
  • LEG3 provides the broadest coverage. This endorsement extends coverage to not only the ensuing damage, but damage to that “particular part” that caused the damage. Coverage does not extend to costs “incurred to improve the original material workmanship, design plan or specification.” As long as there is resulting property damage, the LEG3 form covers all repair costs, including the cost of repairing or replacing the defective work. 

LEG2 and LEG3 each contain an additional provision stating that “it is understood and agreed” that insured property shall not be considered damaged “notes solely by virtue of the existence of any defect of material workmanship, etc…”. In other words, there must be a covered cause of loss to trigger coverage. In simple terms, LEG3 coverage excludes the cost to repair a defect where there is no resulting damage, and the cost of improvements over and above the original work.

Here, in the example of the concrete subcontractor who improperly mixed the concrete that resulted in structural damage, the re-pour is covered along with damage to the rest of the structure. If, as an added safety precaution, the foundation was reinforced with metal rods, the cost of adding the metal rods would not be covered. The LEG3 form provides broader coverage for damage caused by defective work than the ISO CGL policy. The ISO CGL policy does not cover the cost of repairing or replacing defective work whereas LEG3 does. It should also be pointed out that LEG3 Endorsements are usually not available on smaller projects or frame construction.

Insuring construction projects are complex. There are numerous stakeholders as well as significant exposures, General Liability, property under construction, pollution, workers compensation, professional liability, etc. 

 Here are a few things to keep in mind: 

  • It is always better to have a loss covered by a property policy than a liability policy to avoid the litigation costs, ill will and time litigation can take. 
  • Negotiate the most favorable Builders Risk terms available. All Builders Risk policies are different and all are negotiable. 
  • Understand how construction defects caused by faulty workmanship or defective products will be treated. Whenever possible a LEG3 type endorsement should be sought. 
  • Communicate the coverage provided, or lack thereof to the named insureds. Just because the broker knows it, doesn’t mean the insured knows it. 

There is no substitute for taking the time to understand the risks of a project and negotiating favorable terms for all stakeholders. A well written and coordinated insurance program is a critical piece to a successful project.