Does an Insurer Have a Duty to Defend a Claim Immediately Upon Receipt of a Florida Chapter 558 Construction Defect Notice?

Construction projects are fragile and issues often arise when the project in practice doesn’t match the project in planning. Resolving these issues has become more standardized with the enactment of Florida Statutes Chapter 558, but the chapter may create as much litigation for insurance companies as it hopes to alleviate. Insurance companies play a large role in the construction industry, and it is critical to know how the chapter alters insurers’ duties. This post explains how Chapter 558 affects an insurer’s duty to defend a contractor after construction defects present themselves during or after construction.

Introduction to Construction Insurance

Because large projects require a variety of specialties, owners and designers are not the only parties operating on projects. General contractors are often hired to oversee operations, consulting with the owners, designers, and engineers. But when it comes to the nitty-gritty, subcontractors are hired for specific tasks like skilled trades. All of these subcontractors answer to the general contractor, and the general contractor chooses which subcontractors to hire.

In addition to their own insurance policies, general contractors require subcontractors to obtain insurance for their work on the project. These insurance policies are commonly referred to as “commercial general liability (CGL)” policies. Subcontractors then name the general contractors as additional insured parties to their policies so that there are many layers of coverage in the event that something goes awry on the project.

CGL policies cover common damages resulting from defects caused by accidents that are not the result of grossly negligent actions. See Couch on Insurance, 3d § 132:21 (citing Associated Engineers, Inc. v. American National Fire Ins. Co., 175 F.Supp. 352 (N.D. Cali. 1959)). However, willful and knowing violations of contract specifications are not usually covered under these insurance policies. Id. (citing Johnson v. Aid Ins. Co. of Des Moines, Iowa, 287 N.W.2d 663 (Minn. 1980)).

If a defect is discovered and a contractor faces suit, they may call upon their insurance company to front the legal expenses and provide legal counsel if their policy contains a “duty to defend” provision. The standard ISO (Insurance Services Office) forms do contain these provisions in their CGL policies, therefore requiring insurers to act at some point during litigation involving these CGL policies. But, at what stage of litigation are the duty to defend provisions triggered? When are insurance companies required to step in on behalf of their insureds?

In the state of Florida, Florida Statute Chapter 558 claimants are required to participate in pre-suit dispute resolution before filing claims in court. Florida Statutes § 558.001 outlines the purpose of the chapter, stating 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.” Once the notice is rendered, it typically begins a downstream notice relay to contractors and insureds alike, which may trigger duty to defend obligations. Although this process is taking place before a court filing, insurance companies should seriously consider when it is required to defend its insured, as well as the pros and cons of early defense of the insured-contractors once a notice of a construction defect is received.

Why a Duty to Defend May Exist for Chapter 558 Proceedings

Chapter 558 Proceedings are “Suits” Under Standard CGL Policies

In April of 2012, courts were unsure about insurers’ duties during Chapter 558 proceedings when Altman Contractors, Inc. (“ACI”) was served with notice of construction defects during its construction of a high-rise residential condominium in Broward County, Florida. Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., 832 F.3d 1318 (11th Cir. 2016). In January of 2013, ACI demanded that the CGL insurer, Crum & Forster Specialty Insurance Co. (“C&F”), defend and indemnify ACI during the Chapter 558 proceedings. The CGL policy stated that:

“[C&F] will have the right and duty to defend the insured against any ‘suit’ seeking those damages…[and] define[s] the term ‘suit’ as follows:

‘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.”

Id. at 1320-21 (boldface type added).

In the underlying action, before and after noticing C&F of the claim, ACI engaged it’s own counsel, requested reimbursement of counsel’s fees and subsequently settled the construction defect claims without the insurer’s involvement. Displeased with being deprived of the opportunity to meaningfully participate in the process, C&F filed a declaratory judgment action in Federal Court seeking judicial clarification of whether the insurer had a duty to defend, and ultimately indemnify the loss. C&F filed a motion for summary judgment, arguing that Chapter 558 proceedings were not a “suit” as defined by the CGL policy, and thus insurer duties had not arisen. The trial court agreed and ruled that Chapter 558 notice did not constitute “suit” as the policy defined, entering summary judgment in the insurer C&F’s favor. ACI appealed to the 11th Circuit Court of Appeals, arguing that “suit” is a term synonymous with several terms identified in the policy cited above.  Id. at 1321-24.

C&F argued that the issue is a matter of policy, citing statutory basis for same referencing Florida Statutes § 558.004(13) , which reads: “the providing of a copy of such notice to the person’s insurer, if applicable, shall not constitute a claim for insurance purposes unless the terms of the policy specify otherwise.” Id. at 1322. Thus, the terms of the policy govern duty to defend issues, and the policy at bar should not be construed to afford coverage in the Chapter 558 process. The appealable issue was framed as an insurance coverage dispute. The court needed to determine whether the CGL policy contemplated Chapter 558 proceedings to trigger C&F’s right and duty to defend.

The 11th Circuit Court of Appeals, rather than ruling on the issue itself and inadvertently affecting state policy considerations, certified a question to the Florida Supreme Court, asking it to determine whether the notice and repair process in Chapter 558 is a “suit” within the meaning of the CGL policy. Id. at 1323-24, 1326. The Florida Supreme Court determined that a Chapter 558 notice is a “suit” within the meaning of the Altman CGL policy (and presumably those with similar standard language), thus triggering an insurer’s duty to defend and indemnify if provided for by policy. Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Co., 232 So.3d 273, 279 (Fla. 2017)

As an afterthought to the surviving precedent, but not to ACI, on remand, the trial court’s summary judgment in favor of the insurer C&F was reversed in order for the parties to determine whether the CGL policy required C&F’s consent to ACI participating in the Chapter 558 proceedings before C&F would be saddled with a duty to defend. Id. at 279. Interestingly enough, in establishing this law, we are left with the following unanswered question: since Chapter 558 proceedings are statutorily required before proceeding to a lawsuit, but voluntary for a defendant, could C&F’s consent to participate in the proceedings be reasonably withheld? See Construction L. Update § 9.03 (2019).

Altman v. Crum & Forster stands as precedent that engagement of Chapter 558 proceedings with insurer consent and participation may trigger an insurer’s duty to defend under the language of standard CGL policies. To date, it does not appear that insurers are being crippled by Chapter 558 notice defense costs because insurers are relying on policy based consent protections. That’s not to say that insurers are absolved for later findings in a coverage action that consent rights were waived by the insurer.

In practice, the issue turns to the statute being fairly toothless in terms of penalties to contractors or insurers who are disengaged. The real concern for an insurer lies in a request from an insured contractor to an insurer to step up and help in handling the issue, an insurer correctly declining to assist, and a frustrated contractor resolving the matter and suing the insurer just like ACI did. Should an insurer be faced with a circumstance like that, a hard look should be given to the terms of the policy and the withholding of consent should be documented well. If policies have not been rewritten to adjust to the Altman v. Crum & Foster risk, they should be.

On the flip side, construction lawyers representing contractors should be keen to advise clients to pin their insurer down on consent to proceed with the Chapter 558 process, because failure to do so may forfeit the insured’s defense, and it may also create a coverage issue on the back end if the insurer acts in bad faith.

Chapter 558 Filings Affect Future Proceedings

Chapter 558 Filing Facts are Incorporated Into Lawsuit Complaints

Even if Chapter 558 proceedings do not legally trigger an insurer’s duty to defend, the realities of insurance litigation may beckon a response from the insurer if a contractor is served with Chapter 558 notice of construction defects. Insurers may find their hands tied by claimants in a state court lawsuit after the Chapter 558 proceedings because of the information exchanged and framing of issues that occurs in the Chapter 558 proceedings. See Morette Company v. Southern-Owners Insurance Company, 301 F.Supp.3d 1175 (N.D. Fla. 2017).

Morette Company v. Southern-Owners Insurance Company

In Morette, Southern-Owners Insurance Company (“Southern”) was allegedly obligated to defend two its insureds: Etheridge Construction, Inc. (“Etheridge”) and Wallace Sprinkler & Supply, Inc. (“Wallace”). Id. at 1175. Little Sabine, Inc. (“Sabine”) issued Chapter 558 notice of construction defects to Morette Company (“Morette”), who was the general contractor for the project and named as the additionally insured party on Etheridge’s and Wallace’s CGL policies. After the suit between Morette and the owner, Sabine, Morette brought suit against Southern alleging that the subcontractor’s CGL policies obligated Southern to defend and indemnify Morette in the suit against Sabine, and that Southern’s failure to do so constituted breach of contract. Id. at 1180-81.

To determine whether Southern had a duty to defend Morette, the allegations in the state court lawsuit must bring the action within the scope of the CGL policy’s coverage. Morette, 301 F.Supp.3d at 1182. The Morette court stated that “even where the underlying action alleges facts partially within and partially outside the scope of coverage, the insurer is obligated to defend the entire suit.” Id. at 1182 (internal quotations omitted). Furthermore, any doubts about whether the duty to defend exists are resolved against the insurer. Id. at 1182.

Although the Chapter 558 filings may seem disconnected from the state court lawsuit, the court noted that extrinsic documents may be incorporated into complaints by reference “if the document’s contents are alleged in the complaint (i.e., central to the plaintiff’s claim) and the document’s authenticity is undisputed.” Id. at 1182. Since the complaint referenced the Chapter 558 notice, the court held that it was incorporated into the complaint and “its contents may be considered in determining whether [Southern’s] duty to defend was triggered by the state court lawsuit.” Id. at 1182.

Insurance companies should take note of the Morette ruling because it allows for insurance companies to lose control of the facts at issue in their litigation. The court furthers precedent unfavorable to insurance companies, requiring ambiguity to be resolved against them and therefore defend entire suits even if the underlying allegations only contain partially covered actions. Chapter 558 notices of construction defects can provide grievances as to the same facts and defects that become disputed at an ensuing lawsuit, incentivizing (and likely obligating) insurance companies to step in earlier to help shape future litigation in their favor. As set forth above, duty to defend is a policy language driven determination at the early 558 stage, but insurers should not take a one size fits all approach to treating 558 notices. In projects that may carry substantial exposure, it behooves an insurer to actively engage in fact finding and defense at the earliest possible stage.

What to Do When Facing a Chapter 558 Notice

 Chapter 558 notices can have significant impacts on all parties involved. Not only can they create binding stipulations between owners and contractors, but they can also hamstring insurance companies. The Altman case indicates that insurance companies utilizing standard CGL policies do have a duty to defend contractors that are served with Chapter 558 filings, as long as other requirements to trigger the duty are met.

If insurers wish to avoid having their duty to defend unknowingly activated upon Chapter 558 filings, CGL policies should be drafted with this in mind and tailored to either require consent from the insurer before participation in Chapter 558 proceedings or expressly disallow the triggering of the duty to defend completely. Even without an express legal duty to defend, insurers should pay close attention to Chapter 558 proceedings because of the dramatic impact they can have on a range of subsequent issues.

To avoid missteps and mitigate bad faith exposure, it is critical for insureds to have knowledgeable construction law representation and advice. The best legal counsel will make the difference between being on wrong side of of a Chapter 558 coverage dispute, or underlying claim exposure.