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.

Important Florida Lien Law Update

Brian A. Wolf | Smith Currie & Hancock

Under Florida law, a claim of lien must be recorded in the real property records within 90 days of the claimant’s last date of work. Many contractors and subcontractors wait as long as possible before recording a claim of lien to exhaust efforts to obtain payment without recording a lien. During the COVID-19 pandemic, waiting to record a lien has created a real problem since county clerk offices charged with recording claims of lien were forced to limit access and reduced staff. Many contractors delivered their claims of lien on time for recording electronically, but the clerk’s offices did not officially record the claims of lien until days or even weeks later. In many cases, the county clerks recorded the claims of lien after the 90-day deadline.

A new decision by a Florida Appellate Court, Phillips v. Pritchett Trucking, No. 1D20-2068, Fla. 1st DCA (Oct. 6 2021), provides contractors and subcontractors with relief when they deliver a claim of lien to the clerk’s office and pay their recording fee prior to the expiration of the 90-day deadline. The Court determined as a matter of law that a claim of lien must be recorded by the clerk’s office on the date the clerk received the lien for recording with the recording fee. The Court reasoned that the clerks are required as a matter of law to record a claim of lien immediately upon receipt of payment. As a result, all county clerk offices will be required to record claims of lien on the date they receive both the lien and payment for recording.

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.

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.

Lights, Camera, Action: Florida Court Rules Insured Can Record Appraisal Inspection

Timothy Engelbrecht and Bret Freeman | Butler Weihmuller Katz Craig

On July 7, 2021, Florida’s Fourth District Court of Appeal ruled that an insured may electronically record an insurer’s appraiser during an inspection of the insured’s property.  The case is Silversmith v. State Farm Ins. Co., 2021 WL 2910240, 4D20-2685 (4th DCA July 7, 2021).

The case arose after an insured made a first-party property insurance claim.  The insurer requested the claim be submitted to appraisal under the insurance policy’s appraisal provision.  The insured filed a lawsuit seeking declaratory judgment that it had the right to electronically record the insurer’s appraiser while he inspected her property.  The insured moved for summary judgment. The trial court denied the motion finding that Florida privacy laws prohibited the interception of certain oral conversations and that all participants involved must consent to any electronic recording of the appraisal.

The appellate court disagreed and ruled that privacy concerns do not apply when the insurer’s appraiser is on the insured’s property, because the appraiser does not have a legitimate expectation of privacy while performing an appraisal at the insured’s property.  Thus, nothing in Florida law prevents the insured from electronically recording the appraiser.  Also, the appellate court noted that nothing in the insurance policy prohibited the recording.