Elliotte Quinn IV | Law 360 | October 17,2017
A developing area in the law of insurance coverage for construction defects is whether a contractor’s commercial general liability (“CGL”) carrier is obligated to defend the contractor when the contractor receives a notice of alleged construction defects under a notice and opportunity to repair statute. Over the past few decades, the majority of American states enacted what are known as notice and opportunity to repair statutes. The statutes provide that prior to filing an action in court, a homeowner must provide notice of the claimed defects to the contractor, permit the contractor to inspect the property and engage in negotiations. While there are some variations among the statutes, they generally all have these requirements.
Following the passage of these statutes, insurers and insureds began litigating whether a CGL insurer must provide an insured contractor with a legal defense when the contractor receives a statutory notice and opportunity to repair letter. Insured contractors argue that the receipt of the notice letter begins the construction defect “suit” and thus triggers the insurer’s duty to provide a legal defense when a suit is filed. Insurers argue that a “suit” does not exist until an action is filed in court, and thus, insurers are not obligated to provide a defense until an action is filed in court.
The Florida Supreme Court is set to decide this issue following recent oral arguments on a certified question from the U.S. Court of Appeals for the Eleventh Circuit in Altman Contractors Inc. v. Crum & Forster Specialty Insurance Co. Florida is one of the six states where construction defect claims are most prevalent, and therefore, what the Florida Supreme Court does with the question will have a large impact on insurance carriers and will influence how the issue is handled in other states.
The Altman litigation arose from a contractor receiving a defect notice letter from condominium owners. Upon receiving the notice, the contractor tendered its defense and indemnity to its insurer, and its insurer denied the tender. The insurer’s basis for denying tender was that the dispute was not yet a “suit” and thus the duty to defend had not yet been triggered. The contractor filed a declaratory judgment action against the insurer in the U.S. District Court for the Southern District of Florida, and the parties proceeded to cross motions for summary judgment on whether the notice letter triggered the insurer’s duty to defend.
The district court found the CGL policy’s use of the term “suit” was not ambiguous and a statutory defect notice letter does not fit within the definition of “suit.” The policy defined “suit” as a “civil proceeding,” and the district court examined the Black’s Law Dictionary definition of “civil proceeding” and concluded a “civil proceeding” requires there “be some sort of forum and some sort of decision maker involved.” Reasoning that there is no forum and no decision maker following a notice letter and that a notice letter is just a “mechanism to guide the parties to enter into discussions,” the district court held that the notice letter is not a “civil proceeding,” and therefore, is not a “suit” and does not trigger the duty to defend.
The insured appealed, and the Eleventh Circuit issued a decision certifying the question to the Florida Supreme Court. While certifying the questions means that the Florida Supreme Court will provide the ultimate answer on whether a notice letter triggers a CGL insurer’s duty to defend under Florida law, in certifying the question the Eleventh Circuit gave a strong indication of its view. Considering the district court’s conclusion that the terms “suit” and “civil proceeding” in the CGL policy were not ambiguous, the Eleventh Circuit stated that it is “not as sure,” and that there were “reasonable arguments presented by both sides” on the issue. The indication that those policy terms may be ambiguous is significant, because ambiguous policy terms are to be construed in favor of the insured. If the terms were ambiguous, courts would construe them to include a defect notice letter as a “suit” triggering the insurer’s duty to defend.
The Eleventh Circuit also suggested that Florida Supreme Court precedent relied on by the district court is inapplicable. The Florida Supreme Court held in an earlier decision interpreting a statute using the term “proceeding” that arbitration was a proceeding, because it occurs in a tribunal before a person who renders a decision, and the district court in Altman relied on that holding to conclude that a “civil proceeding” exists only where there is a forum and a decision-maker. The Eleventh Circuit suggested that decision does not apply because the Florida Supreme Court was interpreting a statute, whereas in Altman, the court must interpret an insurance policy, and different interpretive rules apply in those two situations.
The Eleventh Circuit also highlighted the practical and policy implications for resolving the issue. If insurers are not obligated to defend an insured upon receipt of a notice letter, the insured likely will ignore the process and wait for the claimant to file an action in court. The insured purchased insurance for the benefits of having the insurer defend and indemnify it, and the insured has no incentive to undertake its own defense during the notice period. On the other side, insurers say that requiring them to defend insureds upon receipt of a notice letter would increase the cost of insurance. Insurers also say that requiring a defense would undermine the purpose of the notice and opportunity to repair statutes, because claimants would be more likely to hire counsel during the notice period — and would then have sunk costs that would make it more difficult to settle the dispute prior to filing an action in court.
When the Florida Supreme Court issues its decision later this year or early next year, Florida will be the seventh state to have addressed the issue. To date, five states enacted statutes that potentially address whether an insurer must defend an insured upon receipt of a notice letter, and two state appellate decisions address the issue. Additionally, the U.S. Court of Appeals for the Tenth Circuit addressed the issue under the Nevada notice and repair statute. Of the five statutes, only two — the Colorado and Hawaii statutes — appear to explicitly address the issue, with the Colorado statute providing the duty to defend is triggered but this “does not require the insurer to retain legal counsel for the insured.” The Hawaii statute provides that a notice letter “shall not give rise to a duty of any insurer to provide a defense.”
In California, one of the other states most notorious for construction defect claims, the Court of Appeal held that a notice letter under the California statute is a “suit” because it is the first step in the statutory construction defect litigation process. The court also relied on the fact that under the California statute the insurer’s actions during the notice period impact the insured in any resulting litigation.
In Colorado, the Court of Appeals addressed the issue, but that opinion is no longer good law due to a subsequent amendment to the Colorado statute to address the issue. While the precise holding of the Colorado Court of Appeals is difficult to discern and the opinion may be of less value to other jurisdictions for that reason, the opinion does present an alternative route to finding that a notice letter triggers an insurer’s duty to defend. The policy included “alternative dispute resolution proceedings” within its definition of the term “suit,” but only if the insurer consented to the insured submitting to the proceeding. The Court of Appeals found that the notice letter constituted an alternative dispute resolution proceeding, but that whether the insurer consented was a factual matter properly submitted to the jury.
Applying the Nevada notice and repair statute, the Tenth Circuit held that a notice letter does not create a “suit” triggering the insurer’s duty to defend. The Tenth Circuit reasoned that an insured’s failure to comply with the notice and repair process does not create adverse consequences for the insured like those resulting from failure to comply with a judicial action or arbitration.
As is apparent from the array of treatments the issue has received across the limited number of jurisdictions that have addressed the issue, whether a statutory defect notice letter triggers an insurer’s duty to defend an insured is an unresolved issue that will continue to result in litigation and divide courts. While the decision expected from the Florida Supreme Court will be significant both because so few courts have yet to address the issue and because of Florida’s outsize role in construction defect litigation in the United States, insurers and insureds in at least 27 of the 32 states with notice and repair statutes will still be left to litigate whether a statutory defect notice letter triggers the duty to defend.