West Palm Beach Partner’s Column on Construction Defect Litigation Costs Runs in Daily Business Review
by Joshua M. Atlas
This was published as a column called, “Construction Defects: Will the Florida Supreme Court End the Battle?” on November 23, 2016, in the Daily Business Review.
The Florida construction industry will wait to find out if state law requires general liability insurers to defend contractors from claims during the pre-litigation defect process outlined in Chapter 558, Florida Statutes.
That is because a recent decision by the U.S. Court of Appeals for the Eleventh Circuit certified to the Florida Supreme Court the issue of whether the notice and repair process is considered a “suit” within the meaning of a standard insurance services office commercial general liability, or CGL, policy.
Enacted in 2003, Chapter 558 provides a process for a property owner, before filing a lawsuit, to give notice of construction or design defects and allow the responsible parties to inspect. Parties receiving this notice must then either make an offer to voluntarily resolve the defect claim or deny liability.
If there is no resolution, the owner can then proceed to court. The goal of the statute is to reduce the amount of litigation over construction defects.
For larger projects like condominiums, the process usually takes months and involves multiple inspections by different designers, contractors and subcontractors. This process was instituted by the Florida Legislature in response to the pre-recession construction boom that flooded Florida courtrooms with complex multi-party lawsuits.
At least 30 other states have similar statutes because defect cases are costly to the parties and taxing to the judiciary’s limited resources.
Suit Or Not?
In Altman Contractors v. Crum & Forster Specialty Insurance, the Eleventh Circuit was asked to consider a contractor’s appeal of a summary judgment order finding in favor of the insurer and determining that the Chapter 558 process was not a “suit” within the meaning of the standard ISO CGL policy.
The U.S. District Court for the Southern District of Florida found that the CGL policy required the insurer to defend the contractor from any “suit” seeking damages that the insured was obligated to pay caused by bodily injury or property damage but ruled that because the Chapter 558 process does not provide for a means to reach an ultimate decision on disputed liability, it does not fall within the policy definition of a “suit.”
In the district court and again on appeal, the contractor argued that the Chapter 558 process is part of a “suit” because under Florida law it is a mandatory step that must be completed before a lawsuit can be filed. Because it is part of the larger action of bringing a lawsuit, the contractor asserted that the Chapter 558 process should be considered a “civil proceeding” that falls within the policy definition of a “suit.”
The Eleventh Circuit held that the contractor and insurer both presented reasonable interpretations of the term “suit” but did not find an ambiguity in the policy. Under Florida law, that would have required the court to accept the contractor’s interpretation and reject the insurer’s.
Instead, after noting the lack of clear case law to guide it and determining that its decision would have significant practical and policy implications, the Eleventh Circuit decided that the issue was of such importance that the Florida Supreme Court should resolve it.
As noted by the Eleventh Circuit, there may be a significant impact on the Florida construction industry depending on where the Florida Supreme Court comes down. For example, a contractor receiving a Chapter 558 notice may simply decide to not respond and wait to be sued so its insurer will pick up the cost of defense.
Project owners wanting to trigger a contractor’s insurance coverage and bring an additional source of settlement money to the table may also just file suit without complying with Chapter 558 (and may even do so with the contractor’s cooperation). Under the statute, the only penalty would be a limited stay of the owner’s lawsuit while the process is completed.
Alternatively, parties may also contractually agree that the Chapter 558 process does not apply to their project with much more regularity than is common now. Under Chapter 558, the only way to opt out of the otherwise mandatory pre-litigation process is to agree by contract that a project is exempt.
If the Florida Supreme Court determines that a “suit” includes the Chapter 558 process, insurers may react by increasing insurance rates to cover the cost of what they contend are increased risks and obligations.
It is questionable though whether insurer costs would actually increase as even before the Altman Contractors case, carriers typically participated in the Chapter 558 process if there was otherwise coverage. If rates do increase, those additional costs will likely be passed on to owners and developers making projects more expensive.
Regardless of how the Florida Supreme Court rules, the likely effect may be an increase in defect litigation in Florida. Since that contradicts the Florida Legislature’s express purpose for enacting Chapter 558, it is easy to see why the Eleventh Circuit concluded that the Florida Supreme Court should decide this issue of state law. Now, Florida contractors and insurers must simply wait a little longer to find out how they will be impacted.
Joshua M. Atlas is a partner in the firm’s West Palm Beach office and a member of the construction law and commercial litigation practice groups.