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
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.