New Florida Federal Court Decision Exposes Construction Insurance Gap
Brian A. Wolf | Smith Currie & Hancock
June 8, 2015
Your insurance policy may not cover the costs of an expensive Chapter 558 construction defect process. Florida's construction defect statute, Chapter 558, requires an owner to notify contractors of all alleged construction defects. After the notice is sent, the contractor notifies all of the trade contractors and a potentially expensive and time-consuming process of hiring experts, property inspections and letter writing ensues. Contractors will look to their insurance companies to cover the costs of hiring attorneys and experts to protect their interests during the process. Depending on the size and complexity of the project and the length of the owner's list of alleged defects the 558 process can be expensive.
In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, Case No. 9:13-cv-80831-KAM (S.D. Fla. June 4, 2015), Altman's insurer refused to cover Altman's legal and expert costs incurred in the 558 process. The insurance company successfully argued that the 558 process is not a lawsuit and it is not a formal dispute resolution proceeding; thus, the insurance company is not required under the policy language or Florida law to pay for the expenses of the 558 process.
The Federal Court noted that whether an insurer is required to defend a Chapter 558 proceeding is a case of first impression in Florida. The Court had to decide whether the 558 process triggered the insurance companies duties under the insurance contract even though the owner's allegations of construction defects were being asserted in a mandatory pre-suit notice and not in a formal dispute resolution process such as a lawsuit.
The Court reviewed the insurance policy and determined that the insurance policy specified that the insurer's duty to provide a defense was triggered by a formal "Suit" defined as litigation, arbitration or another formal dispute resolution proceeding. Next the Court evaluated whether the Section 558 process was a formal dispute resolution proceeding. The Court did not find any Florida cases on point so it reviewed cases outside of Florida that defined dispute resolution proceedings. Although the Court acknowledged some cases that broadly defined formal dispute resolution proceedings, the Court determined that the Section 558 notice and right to cure statute provides owners and contractors with a "mechanism" to resolve a dispute and not a formal "proceeding." Thus, the Court held that the insurance company properly denied the contractor with a defense.
The Court's decision has significant consequences for contractors. Contractors rely on their insurance and the insurance of their subcontractors to cover legal and other costs that are inherent in participating in a 558 process. There are three things that contractors and subcontractors can do to avoid going out of pocket for legal fees in a 558 process. The first option is to seek a modification of their insurance policy that would specifically require their insurer to pay for a legal defense during the 558 process. The second option is state in their contract with the owner that 558 will not apply to the contract and thereby avoid the process altogether. Section 558 specifically allows contracting parties to opt out of 558. The last option is to send an immediate formal denial of the allegations of any 558 notice rather than engaging in the process.
Remember, 558 is supposed to protect contractors by forcing owners to give notice of defects and provide a contractor with a reasonable opportunity to cure the defects and avoid litigation. However, if the 558 process itself presents a financial burden that your insurer will not cover, then you have options. Insurers should understand that the 558 process can lead to an early resolution of owner claims and a savings to the insurance company of defense and claims costs; thus, insurers should weigh the benefits of covering defense costs of a 558 process against the costs of a formal dispute resolution proceeding.
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