Serving the 558 Notice of Construction Defect Letter in Light of the Statute of Repose

David Adelstein | Florida Construction Legal Updates | October 13, 2018

Florida Statutes Chapter 558 requires a Notice of Construction Defect letter (“558 Notice”) to be served before a construction defect lawsuit is commenced.  This is a statutory requirement unless contractually waived for a completed project when latent defects or post-completion construction or design defects are pursued.

 

A recent Florida case held that this statutory requirement is NOT intended to bar a lawsuit based on Florida’s ten-year statute of repose for construction defects IF the 558 Notice is timely served within the statute of repose period.  After the expiration of the statute of repose period, a construction defect lawsuit can no longer be commenced.

 

In Gindel v. Centex Homes, 43 Fla. L. Weekly D2112d (Fla. 4th DCA 2018), homeowners took possession of townhomes on March 31, 2004.  The homeowners discovered construction defects and on February 6, 2014 provided the 558 Notice to the homebuilder.  This notice was served before the expiration of the ten-year statute of repose period.  The homebuilder notified the homeowners it would not cure the defect and the homeowners initiated a construction defect lawsuit on May 2, 2014, more than ten years from when they took possession of their townhomes, and outside of the statute of repose period.

 

The issue was the application of Florida’s ten-year statute of repose in Florida Statute 95.11(3)(c).

 

The homeowners argued that its action commenced upon serving the statutorily required 558 Notice so that its lawsuit was timely filed.

 

The homebuilder argued that the homeowners commenced their action by filing the lawsuit after the ten-year statute of repose, irrespective of when the 558 Notice was served, meaning the construction defect lawsuit should be barred.  The trial court agreed with this argument.

 

On appeal, however, the appellate court agreed with the homeowners that the presuit notice requirements called for in Florida Statutes Chapter 558 constitute an action for purposes of the statute of repose.  In other words, by the homeowners serving the 558 Notice within the ten-year statute of repose period, the homeowners timely commenced their construction defect lawsuit.  To hold otherwise would be to view Florida Statute Chapter 558 as a device to potentially bar claims when the required 558 Notice was timely served.  This position makes sense considering a claimant cannot file a construction defect lawsuit without complying with Chapter 558.  See Fla.Stat. s. 558.003.

 

When it is coming close to the ten-year statute of repose (or statute of limitations) deadline, the safer approach is to file the lawsuit and move to stay or abate the lawsuit pending compliance with the Florida Statues Chapter 558.  This way this issue is fully avoided by the lawsuit already being initiated. This approach is also supported in Chapter 558 by stating the action shall be stayed pending compliance with the requirements of the statute.  See Fla.Stat. s. 558.003.

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.

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.

Altman Contractors v. Crum & Forster: Florida Supreme Court Answers the 11th Circuit’s Certified Question in the Affirmative

Jaret J. Fuente | Carlton Fields | December 20, 2017

In Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 832 F.3d 1318 (11th Cir. 2016), the Eleventh Circuit certified the following question to the Florida Supreme Court: “Is the notice and repair process set forth in Chapter 558 of the Florida Statutes a ‘suit’ within the meaning of the CGL policies issued by Crum & Forster to Altman Contractors?” The Florida Supreme Court has now answered in the affirmative in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. SC16-1420, 2017 WL 6379535 (Fla. Dec. 14, 2017).

Altman was the general contractor for the construction of a high-rise condominium in South Florida. Crum & Forster insured Altman. The policy language at issue provided:

We 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. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

  1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
  2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

The policy did not further define “civil proceeding” or “alternative dispute resolution proceeding” as used within its definition of “suit.”

The condominium served Altman with notices of claim pursuant to Chapter 558, Florida Statutes, covering more than 800 construction defects at the condominium. Altman, in turn, notified Crum & Forster and demanded, pursuant to the policy, a defense and indemnification. Crum & Forster denied the notices invoked the duty to defend reasoning that the notices did not constitute a “suit.”

The condominium subsequently served Altman with a supplement claiming additional defects and demanding that Altman take all measures necessary to correct the defects. Crum & Forster maintained its position, but hired counsel to defend Altman under a reservation of rights in anticipation of litigation. Altman objected to the selection of counsel, demanded its original counsel, and requested reimbursement of fees and expenses incurred since the time it provided notice of the claim. Crum & Forster denied Altman’s requests, Altman settled the claims without Crum & Forster’s involvement, and then Altman filed a declaratory judgment action in the Southern District of Florida seeking a declaration that Crum & Forster owed it a duty to defend and indemnify.

The Southern District determined that the condominium’s written notices of claim pursuant to Chapter 558 did not trigger a duty to defend because the Chapter 558 process did not constitute a “suit” as defined in the policy, and entered summary judgment in Crum & Forster’s favor. See Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 124 F. Supp. 3d 1272 (S.D. Fla. 2015).

Altman appealed to the Eleventh Circuit, and argued that the Chapter 558 process meets the policy’s definition of “suit” because it is a “civil proceeding” or “proceeding,” as defined by Black’s Law Dictionary and Merriam-Webster’s Dictionary of Law, and that even if it is not, it nonetheless constitutes an “alternative dispute resolution proceeding,” and is therefore a “suit” as defined in the policy. Altman further argued that without the benefit of insurer participation and defense during the Chapter 558 process, policyholders may decline to participate in that process and even invite litigation in order to trigger insurer participation, thereby undermining the intent of Chapter 558.

Crum & Forster argued that imposing a duty to defend during the Chapter 558 process will fuel an insurance crisis by dramatically increasing the cost of insurance and limiting its availability. The American Insurance Association and Florida Insurance Council, in support of Crum & Forster, argued that if insurers must appoint counsel at the Chapter 558 stage, claimants are likely to retain counsel as well, and once they do, their legal fees will make it more difficult to settle cases, thereby frustrating the intent of Chapter 558.

The Eleventh Circuit certified the question above to the Florida Supreme Court. In answering the certified question in the affirmative, the Florida Supreme Court explained that whether Crum & Forster has a duty to defend during the Chapter 558 process is determined by whether the process is a “suit” as defined by the policy. The Court noted that at the time of the condominium’s notice, section 558.001, Florida Statutes, provided:

The Legislature finds that it is beneficial to have an alternative method to resolve construction disputes that would reduce the need for litigation as well as protect the rights of property owners. An effective alternative dispute resolution mechanism in certain construction defect matters should involve the claimant filing a notice of claim with the contractor, subcontractor, supplier, or design professional that the claimant asserts is responsible for the defect, and should provide the contractor, subcontractor, supplier, or design professional with an opportunity to resolve the claim without resort to further legal process.

(Emphasis added.)

The Court noted that the policy initially defines “suit” as a type of “civil proceeding” and found that the Chapter 558 process is not a “civil proceeding” under the terms of the policy because a notice of claim recipient’s participation in the Chapter 558 process is not mandatory or adjudicative. A recipient may choose to not respond and thereby force a claimant to file suit.

The court further noted that the Chapter 558 framework has never been anything other than a voluntary dispute resolution mechanism on the part of the insured. It does not take place in a court of law or employ any type of adjudicatory body. Nor does it produce legally binding results. Rather, it sets forth a presuit process whereby a claim may be resolved solely by the parties through a negotiated settlement of voluntary repairs without ever filing suit.

However, the court noted that the policy broadened the definition of “suit” to include “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent” and that, pursuant to Black’s Law Dictionary, “alternative dispute resolution” means “[a] procedure for settling a dispute by means other than litigation.”

The court found that Chapter 558 falls within that definition as a statutorily required presuit process aimed to encourage claimants and insureds to settle construction defect claims without resorting to litigation, and in doing so noted that the Legislature explicitly described Chapter 558 as “[a]n effective alternative dispute resolution mechanism.” The court further found that Chapter 558 provides for damages as required by the policy’s definition of “suit” because it defines a “claimant” as one asserting a claim for damages, requires that a notice of claim provide a description of the damage or loss alleged, and includes a “monetary payment” as a potential resolution of a claim.

As a result, the Florida Supreme Court answered the certified question in the affirmative and held that the notice and repair process set forth in Chapter 558 constitutes a “suit” within the meaning of the Crum & Forster policy at issue and that, although it is not a “civil proceeding,” it is included in the policy’s definition of “suit” as an “alternative dispute resolution proceeding” to which the insurer’s consent is required to invoke the insurer’s duty to defend the insured. The court remanded the case to the Eleventh Circuit for further proceedings.