Are general liability insurers required to defend contractors in Chapter 558 pre-litigation proceedings?
As part of their standard insurance services, general liability insurers are usually required to defend contractors against lawsuits over construction defects. How far that obligation goes is about to be tested in a case currently before the Florida Supreme Court.
State Law Raises Questions About When An Insurer's Obligation to Defend Begins
To minimize litigation over construction defects, Florida state law provides a procedure for property owners and contractors to resolve disputes without going to trial. Under Chapter 558, when a property owner believes there are construction or design flaws, the property owner gives notice to the responsible parties and allows them to inspect. They can either deny liability or fix the defect.
If this process does not lead to a resolution of the dispute, the case can then go to court.
Seemingly straightforward, the Chapter 558 process can be complex and costly for large projects, such as an apartment tower. These can involve numerous notices to many different parties with possible liability for defects.
The question then arises: Are insurers required to defend contractors against claims in this pre-litigation, notice-and-repair stage of a dispute, or only after the case goes to court?
Is a Chapter 558 Proceeding a "Suit" For Purposes of a CGL Policy?
While a commercial general liability (CGL) policy usually provides that insurers must defend a contractor against a "suit" seeking damages, a lower court had previously concluded that the Chapter 558 notice-and-repair process did not fall with in the definition of "suit." The contractor in that case disagreed, maintaining that that the pre-litigation proceeding was still a "civil proceeding" that should be considered a "suit."
An appellate court, finding Florida case law unclear, certified the matter to the Florida Supreme Court for a definitive determination.
Potential Unintended Consequences for Contractors, Owners and Insurers
The court's ruling could inspire new strategies by plaintiffs, defendants and insurers involved in a dispute over construction defects. If an insurer is not required to assist a contractor during the Chapter 558 pre-litigation proceeding, the contractor might decide to ignore all notices that repairs are needed. That deliberate inattention would ensure that the case would end up in court, where the insurer would then be obligated to defend the contractor.
Property owners might also have an incentive to skip over the Chapter 558 proceeding, since involving the insurer might bring deeper pockets to any potential award or settlement. There are a variety of ways this could happen. One is that owners and contractors could contractually agree in advance to opt out of the Chapter 558 requirements.
Insurers, for their part, might raise premiums if their costs go up in the wake of the court's decision.
It remains to be seen what the impact of the outcome will be on the number of construction defects cases that go to trial. Whether you are a property owner, contractor or an insurer, an attorney with expertise in complex insurance litigation can advise you on the best strategy to pursue in cases involving construction defects.