Part of Contractor's Settlement Payment Covered by Insurer under the Duty to Defend

The California Court of Appeals in Navigators Specialty Insurance Co. v. Moorefield Construction, Inc. concluded that a general contractor's general liability (CGL) insurer must pay the general contractor for at least part of its settlement obligation notwithstanding there was no coverage.

The general contractor entered into a contract with the owner to construct a Best Buy store.  Years after the project was completed, the owner of the building sued the general contractor (and others) for breach of contract and negligence based on "claims the flooring had failed." The insurer accepted tender of defense from the general contractor with a  reservation of rights.

During the litigation it was revealed that the "flooring tiles had been installed on top of a concrete slab that emitted moisture vapor in excess of specifications." Worse, evidence came out that the general contractor knew about the excessive moisture vapors, but had directed its subcontractor to install the flooring anyway. The cost to repair the floor was $377,404.  The general contractor settled for $1,310,000. The insurer contributed the policy limits of $1 million and then filed suit that it had no duty under the policies to defend or indemnify the general contractor.

After a non-jury trial, the court agreed with the insurer and ordered the general contractor to reimburse the insurer for the entire $1 million that the insurer paid. The general contractor appealed and the Court of Appeals reversed in part.

The Court was faced with two questions - was the floor failure an "occurrence" giving rise to coverage? And did the supplementary payments provision of the policies require the insurer to still pay a part of the settlement?


For the first question, the Court answered "no" because "occurrence" under the policies was defined as an "accident." There could be no accident from the general contractor's deliberate act. As such: the insurer had no duty to indemnify the general contractor for damages and "was entitled to recoup that portion of the $1 million paid toward settlement that was attributable to damages."

As for the second question, however, the Court held that the standard CGL provision--"with respect to any claim . . . or any `suit' against an insured we defend," the insurer will pay "all costs taxed against the insured"--did require the insurer to pay for settlement "costs" and that those costs includes attorneys' fees when there, as here, was a "prevailing party attorney fees under a contract."  The Court concluded that the insurer's "duty [to defend] was not extinguished by the determination that [the insurer] had no duty to indemnify" for the damages the insured caused. The case was remanded "for a new trial limited to the issue of the amount of the $1 million paid by [the insured] that is attributable to damages, not attorney fees and costs of suit under the supplementary payments provision."
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

NJ Superior Court Halts End Run Around the Statute of Repose

In the matter Caprioti et al. v. Beazer Homes Corp., the Superior Court of New Jersey halted some artful pleading by the Plaintiffs seemingly intended to avoid the state statute of repose. The homeowner plaintiffs claimed that the builder had violated the New Jersey Consumer Fraud Act “by selling homes . . . without including allegedly pertinent information regarding the type of septic tank used on the properties.” All the homes included a septic system comprised of a chamber tank rather than a conventional stone and pipe system. This chamber characteristic is noteworthy because chamber systems fail prematurely more often than the conventional systems.  The plaintiffs argued is that a reasonable person would want to know this information prior to purchasing the home as it speaks to the homes useful life. They also claimed that the builder had concealed or omitted this information from the plaintiffs.  Many of the plaintiffs did indeed experience major problems including failure of the system, backup, odor, and the cost of more frequent service.

The builder moved for summary judgment on the plaintiffs’ complaints that “were more than 10 years after the purchase of their homes, and are thereby beyond the applicable 10-year Statute of Repose." See N.J. Stat. 2A:14-1.1(a) (“No action, whether in contract, in tort, or otherwise, to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property . . . . shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction.").  The builder framed the issue as one of alleged inadequate or inferior construction whereas the homeowner plaintiffs stated that their claims “[arose] out of defendant’s unlawful sales practices, not negligent design, planning or construction of their homes.”

The Superior Court sided with the builder and summarily decided and dismissed the plaintiffs’ claims.  In so deciding, the Court emphasized that statutes of repose are intended to be read broadly to “limit the expanding liability of contractors . . . .”  The Court also focused on the fact that the plaintiffs did not dispute that the chamber septic system was an “improvement to real property” alleged to be “insufficient, inadequate, and not functioning properly.”  The Court reasoned that although couched as a misrepresentation “but for the alleged septic system failures, there would be no cause of action.”

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

OCIP Liability Insurer Required to Indemnify Florida Contractor for $23M in Property Damage Arising Out of Defective Subcontractor Work

Jeffery R. Mullen, Associate, Pepper Hamilton LLP

Pavarini Construction Co. v. Ace American Insurance Co., 2015 U.S. Dist. LEXIS 151247 (S.D. Fla. Oct. 29, 2015)

This action arose out of a construction project to build a 63-story luxury condominium tower located in Miami, Florida (“Project”). Pavarini Construction Co. (“Pavarini”) was the general contractor for the construction of the Project.  Pavarini hired a subcontractor for the installation of the concrete masonry unit walls and certain reinforcing steel, and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls. The work performed by both of these subcontractors was deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed, including within important concrete structural elements, resulting in destabilization throughout the building. This, in turn, caused stucco debonding and cracking on the walls of the building, worsening cracking of cast-in-place concrete elements, and cracking in the mechanical penthouse enclosure on the roof, which led to water infiltration.

In December of 2010, upon becoming aware of the deficiency, the owner served Pavarini with a formal demand to repair all of the damage. Pavarini completed the work, incurring more than $25 million in costs relating to the remediation effort, including amounts paid to: consultants to investigate the damage and design a plan of remediation; install hurricane netting to prevent bodily injury and additional property damage; install a structural steel exoskeleton and a metal panel façade to provide the required structural support in the absence of functional steel beam;, and repair the mechanical penthouse enclosure on the roof.

Pavarini sought indemnification through the Project’s Owner Controlled Insurance Program (“OCIP”) designed to provide the owner, Pavarini and its subcontractors with uniform insurance coverage for claims of property damage and bodily injury. The OCIP included a commercial general liability policy issued by American Home Assurance Company (“American Home”) containing a $2 million per occurrence limit, and a first-layer umbrella policy issued by ACE American Insurance Company (“ACE”) containing a $25 million per occurrence limit. American Home ultimately acknowledged coverage, but ACE refused to pay for any costs associated with the repairs. After accounting for the $2 million recovered from the American Home policy and related salvage efforts, Pavarini brought suit against ACE seeking over $23 million in damages.

The parties filed cross-motions for summary judgment on, among other issues, whether the damage caused by the defective work of Pavarini’s subcontractors was covered under the policy. While the amount was undisputed, the parties disputed the nature and character of the loss. Pavarini claimed that none of the costs included the repair of defective work itself; rather all repairs were of damage to otherwise non-defective building components. ACE countered that much of the repair effort amounted to a de facto repair of the defectively installed steel.

The Court agreed with Pavarini, holding that the property damage caused by the subcontractors’ defective work to other property was covered under the policy.

The policy defined “property damage” as “all physical injury to tangible property, including all resulting loss of use of that property,” and included “[l]oss of use of tangible property that is not physically injured.” The policy excluded from coverage, in relevant part, “[p]roperty damage to ‘your work’ arising out of it or any part of it and included in the products-completed operations hazard.” This exclusion is known as the “your work” exclusion.  However, the “your work” exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, the policy provided coverage for damage to the completed Project caused by subcontractors’ negligent work, but did not provide coverage for the repair of the defective subcontractor work itself.

The question before the Court, therefore, was whether the subcontractors’ defective work caused covered “property damage.” Answering in the affirmative, the Court held that the complete replacement of defective subcontractor work may be covered when necessary to effectively repair ongoing damage to otherwise non-defective work. The Court found that because the subcontractors’ defective work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, Pavarini was entitled to coverage for the repair of that non-defective work. And the Court found that in order to adequately repair the non-defective Project components, the building had to be stabilized. Even if the predominant objective of the repair effort was to fix the instability caused by the subcontractors’ defective work, the Court reasoned that the same effort was required to put an end to the ongoing damage to otherwise non-defective property, e.g., damage to stucco, the penthouse enclosure and critical concrete structural elements.

Consequently, the Court entered partial summary judgment in favor of Pavarini, holding that ACE was contractually required to reimburse Pavarini for the costs incurred.

Article originally posted March 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Certificates of Merit are Not Required to Assert Third-Party or Cross-Claims Against a Design Professional in Texas.

In certain states, a plaintiff seeking to file a lawsuit against a design professional (such as an architect or engineer) based on the provision of professional services must include a “certificate of merit” with the initial pleading. In Texas, this certificate must be a sworn affidavit from a professional with the same license as the defendant that is knowledgeable in the defendant’s area of practice. Tex. Civ. Prac. & Rem. Code § 150.002. It must specifically describe the allegedly negligent acts of the defendant, including the factual basis for each claim. Id. Failure to file the certificate of merit with the initial pleading will result in dismissal, possibly with prejudice. Id.

As a practical matter, this requirement has created tactical problems for general contractors and other construction companies whose scope of work includes responsibility for design. If an owner sues a general contractor for damages arising from alleged design problems, the general contractor must evaluate whether to bring in its design professional as a third-party defendant to bear responsibility for the claims. If the certificate-of-merit requirement applies to such claims, then the general contractor is left with the dilemma of deciding whether to provide sworn proof of the design problems (potentially admitting the general contractor’s liability to the owner) or refraining from joining the design professional (and therefore giving up the benefits of seeking indemnity while the owner’s lawsuit is pending).

In Texas, this issue was recently resolved. In Jaster v. Comet II Construction, the Texas Supreme Court held, in a 5-4 plurality opinion, that defendants and third-party defendants who filed third-party claims or cross-claims against design professionals are not required to file certificates of merit accompanying those claims.

The Court’s decision rested on an analysis of the language of Chapter 150 which requires “the plaintiff” in “any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional” to file a certificate of merit (an affidavit signed by a design professional specifically stating what was done incorrectly) with the petition. The Court drew a distinction between “plaintiff” and “third-party plaintiff”/ “cross-claimant” by finding that a plaintiff initiates the lawsuit whereas a “third party-plaintiff”/ “cross-claimant” does not. The Court also found support for that distinction when it interpreted “action” to mean the filing of a lawsuit as opposed to “causes of action” which are the individual claims that make up a lawsuit. The action would be filed brought by the plaintiff as well as causes of action whereas only causes of action would be brought by third-party plaintiffs/cross-claimants.

The Court explicitly did not render an opinion as to whether, in multi-plaintiff suits, each plaintiff would be required to submit a certificate of merit, as that issue was not before the Court.

Notably, there is no majority opinion in this case, which means that the case technically cannot be used as binding precedent. However, the similarity of the concurrence written by Justice Willet to the plurality opinion written by Justice Boyd makes it likely that lower courts can and will consider the majority opinion binding. The concurrence takes the same textual approach as the plurality but instead of focusing on the distinction between “plaintiff” and “third-party plaintiff”/ “cross claimant” the plurality honed in on the phrasing of the statute that describe “the plaintiff” and “the complaint.” The concurrence found that the modifier “the” means a singular plaintiff, thus excluding later claimants, and the initial pleading, not subsequent causes of action added to the complaint. Thus, coming to the same conclusion as the plurality, that the first plaintiff filing the original petition must include a certificate of merit, but subsequent third-party plaintiffs and cross-claimants need not.

Jaster v. Comet II Const., Inc., No. 12-0804 (Tex. July 3, 2014).

Thanks to Nick Brooks at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.

Common Law Implied Warranties in Construction

When dealing with construction defects, lawyers seeking recovery on behalf of owners often turn to implied warranties arising under state law to provide grounds for an owner to recover for losses that otherwise might not be recoverable. Such situations arise often when the "owner" has changed from being a developer in direct privity with a contractor to being a condominium or homeowners' association with no privity.  

Today's discussion relating to this topic specifically in Florida -- but providing food for thought elsewhere also -- come from Division 1 member Jason M. Rodgers-da Cruz of Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, P.A. of Coral Gables, Florida.  Jason's practice relates specifically to construction defect claims that often are raised on behalf of condominium associations.  This article discusses a Florida Supreme Court decision issued late last year called Maronda Homes, Inc. v. Lakeview Reserve Homeowners Ass'n, 127 So. 3d 1258 (Fla. 2013). 

(Note: There are four footnotes in this article, which are denoted with a bracketed number: e.g., [1].)

Florida’s Common Law Implied Warranties: A brief review of the scope and application of Florida’s common law implied warranties. 

In representing a purchaser, developer or a developer/builder involved in a warranty dispute pertaining to a residence in the State of Florida, consider the Florida Supreme Court’s most recent ruling concerning the scope and application of common law implied warranties in Maronda Homes, Inc. v. Lakeview Reserve Homeowners Ass’n,  127 So. 3d 1258 (Fla. 2013).

In Maronda, a homeowner’s association filed suit against its developer for breach of common law implied warranties for a defective storm water drainage system serving the entire property. The association experienced buckling, splitting of pavement and asphalt, excessive flooding, soil erosion, mosquito infestation and swamp-like conditions, which directly affected the homes and access to the homes. 

The developer filed a third party action against the contractor seeking indemnification for the allegations raised by the association. The developer and the contractor filed a motion for summary judgment against the association, and relied, in part, on the Fourth District Court of Appeal’s application of common law implied warranties in Port Seawall Harbor & Tennis Club Owners Association, Inc. v. First Federal Savings & Loan Association of Martin County, 463 So. 2d 530 (Fla. 4^th DCA 1985).  They argued that the defects did not meet the elements required for asserting common law implied warranties because the alleged defects did not immediately support the residences.[1]  

The trial court agreed with the developer and contractor and granted the motion for summary judgment.  The association appealed to the Fifth District Court of Appeal.  The Fifth District reversed the trial court and certified a conflict (to the Florida Supreme Court) with the Fourth District’s application of common law implied warranties in Port Seawall.  An appeal to the Florida Supreme Court ensued.   

The Florida Supreme Court conducted a historical review of the rationale and standards supporting common law implied warranties, including 1) the privity requirement between the seller and the owner,[2]  and 2) that common law warranties were not extended to investors. [3]  

The court then adopted the standard set forth by the Fifth District, known as the “’essential services’” standard.  The essential services standard provides that if the improvement provides an essential service to the habitability of the residence, then common law implied warranties apply. Conversely, if the improvement does not provide essential services to the residence, then the common law implied warranties do not apply. Further, the improvements need not be physically attached to the homes but rather provide essential services to the habitability of the home.  The court opined that the essential services standard is consistent with the “Florida requirement that the implied warranties apply to improvements that are ’immediately supporting’ a residence.”  However, the court noted that essential services do not include “items that provide mere convenience or aesthetic beauty, such as landscaping, sprinkler systems, recreational facilities or other similar improvements.”

The court also addressed the Florida Legislature’s attempt to limit common law implied warranties in Section 553.835, Florida Statutes. [4]   The legislative impetus for enacting Section 553.835, can be found in Section 553.835(1):

[t]he Legislature finds that the courts have reached different conclusions concerning the scope and extent of the common law doctrine or theory of implied warranty of fitness and merchantability or habitability for improvements immediately supporting the structure of a new home, which creates uncertainty in the state’s fragile real estate and construction industry.

Section 553.835(4) specifically limits common law implied warranties as a cause of action for an offsite improvement.  Section 553.835(4) provides, in part, that: 

[t]here is no cause of action in law or equity available to a purchaser of a home or to a homeowners’ association based upon the doctrine or theory of implied warranty of fitness and merchantability or habitability for damages to offsite improvements…

Although the court briefly reviewed the Legislature’s definition of an offsite improvement, it primarily focused on whether the statute could be retroactively applied. The Court held that the statute could not be retroactively applied as the Legislature attempted to limit vested common law implied warranties.  The court opined that Section 553.835 violated the right of access to the courts and that the Legislature’s attempt was a “clear violation of separation of powers because the Legislature does not sit as a supervising appellate court over our district courts of appeal.”  Accordingly, Section 553.835 “does not apply to any causes of action that accrued before the effective date of this section.”

In closing, if you are litigating in a jurisdiction that allows for common law implied warranties, consider: 1) the scope of the warranty; 2) to whom the warranty extends; 3) whether the legislature has attempted to limit those warranties; and 4) although not addressed in this article, whether those warranties can be or have been disclaimed.

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[1]Port Seawall Harbor & Tennis Club Owners Association, Inc. v. First Federal Savings & Loan Association of Martin County, 463 So. 2d 530 (Fla. 4^th DCA 1985)(declined to extend common law implied warranties to the facts in the case because "[t]he foot bridge in question and the defective work complained of involved roads and drainage in the subdivision and did not pertain to the "construction of homes or other improvements immediately supporting the residences.")

[2] Gable v. Silver, 264 So. 2d 418 (Fla. 1972).

[3] Conklin v. Hurley, 428 So. 2d 654 (Fla. 1983).

[4] The Florida Legislature enacted Section 553.835, Florida Statutes, on July 1, 2012, and intended for the statute to apply retroactively.