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Insurance Coverage and Bad Faith

Florida Construction Insurance Coverage

All About Florida Construction Insurance Coverage and Bad Faith

Claimants considering initiating a defect claim are often faced with the prospect that the responsible party may not have the financial ability to pay a claim, or sufficient assets to satisfy a judgment in the event the claimant prevails. It therefore becomes even more critical to identify early on in the investigation of a claim whether the responsible party has liability insurance coverage or a performance bond that may pay for part or all of the claim. Liability policies serve a different function than performance bonds. The former protects its insured from third-party claims arising from defective work, while the latter guarantees to the named obligee (typically the owner or general contractor) that defects in the work will be corrected and that the work will be completed for the contract price (and in some instances within the contract time). Though serving different purposes, each, or both, may cover a claimant’s damages depending on the nature of the claim.

From the claimant’s perspective, at first glance, it should not matter where the money comes from to pay a claim, as having more than once source typically increases the chances of recovery. However, with multiparty claims involving multiple insurers and sureties, the source of recovery may dictate whether a claim settles voluntarily. Where an insurer pays a third-party claim, it has no subrogation rights against its insured, unlike a surety that may pursue the bond principal (contractor or subcontractor) to recover its losses under the bond. Therefore, an insured principal may be more “willing” to settle where its insurer is paying the claim as opposed to its surety. Thus, finding coverage—or more appropriately, convincing an insurer there is coverage—under a liability policy for a defect claim becomes an important step in the process of pursuing the claim. On the other hand, where a policy does not cover a claim, the claimant may be forced to pursue an available surety and must be aware of potential defenses to coverage under the bond. Accordingly, whether an insurance policy or bond exists to potentially cover a claim, the claimant should endeavor to obtain, and have a full understanding early on of, the specific policy or bond form, including its coverages and exclusions.

Professional liability policies, on the other hand, cover certain “damages” arising from the acts or omissions of the named insured as well as certain defense expenses for any claim that is first made during the relevant policy period that is caused by a specified “wrongful act” committed on or after any applicable retroactive date specified in the policy, provided the insured did not have any basis (as of a specified date) to believe that such “wrongful act” might reasonably be expected to be the basis of a claim. Under such policies, “damages” include sums which an insured is legally obligated to pay as settlements or judgments and includes compensatory damages, as well as punitive or exemplary damages if insurable under applicable law, along with pre- and post-judgment interest. However, insurable damages do not generally include fines, sanctions, liquidated damages, payroll or other taxes, penalties, equitable or injunctive relief, any return or reduction of professional fees, profits or other charges. Further, covered claims do not include the cost to repair or replace faulty workmanship in construction, manufacture, or remediation performed by an insured.

Unlike CGL policies which insure against accidental events which are neither expected nor intended by the insured, a “wrongful act” covered under a professional liability policy includes any actual or alleged act, error, or omission in the rendering of, or failure to render professional services by the insured, including certain specified intentional acts.

To be covered, the claim must be sufficiently related to the professional services provided. Therefore, coverage will not be afforded for negligent acts by a professional in the conduct of his or her business unrelated to the rendition of professional services. Neither will coverage be afforded for the professional’s own systematic, deliberate, wrongful conduct. Instead, errors and omissions policies are the equivalent of malpractice insurance for occupations other than those in the legal and medical fields and are designed to insure members of a particular professional group from liability arising out of negligence, omissions, mistakes and errors inherent in the practice of their profession.

Both CGL policies and professional liability policies contain various exclusions to coverage for claims.  In CGL policies, so-called “business risk” exclusions are typically relied upon by insurers to deny coverage for defect claims, such as those appearing at paragraph 2(j)(5) (known as the “j5” exclusion), paragraph 2(j)(6) (known as the “j6” exclusion), and paragraph 2(l) (known as the “your work” exclusion). These exclusions are designed to exclude coverage for an insured contractor’s “business risks.” In other words, these exclusions are intended to prevent recovery from an insurer for the contractor’s own failure to properly carry out its contractual obligations.  Professional liability policies, which are claims-made policies, protect an insured professional for acts reported during the policy period (as compared to CGL policies which are occurrence-based and require that a claim occur during the policy period). As such, professional liability policies generally contain a “prior knowledge” exclusion to prevent insureds from seeking coverage for conduct they already know will or could result in a claim under the policy. Some claims-made professional liability policies also contain retroactive date restrictions which preclude coverage if the alleged wrongdoing occurred before a specified date. These polices may also contain an exclusion for claims made against an insured which arise out of, or are based upon or attributable to, any pending or prior litigation or investigation of which an insured had notice, or which allege any “wrongful act” which is the same or a “related wrongful act” to that alleged in such pending or prior litigation or investigation. These so-called “prior/pending litigation” exclusions bar coverage where the claim or litigation arose before the effective date of the policy.

Because defect claims typically involve some aspect of liability insurance they implicate the potential for bad faith claims handling on the part of an insurer. A claimant should be mindful of these implications and the extent of the potential liability of an insurer that acts in bad faith. Bad faith claims can arise in favor of an insured or other injured parties, and may be brought pursuant to common law or statute.

Under the common law, an insurer, in handling the defense of claims against its insured (i.e., a third-party claim), has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. The insurer’s exercise of control over a case and its decisions concerning the litigation and settlement of claims must be in good faith with due regard for the insured, including an obligation to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. Further, an insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Failure to settle under such circumstances may give rise to a bad faith claim against the insurer. Moreover, an insurer has an affirmative duty to initiate such negotiations where liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely. The insurer’s bad faith, however, standing along, will not always result in an actionable claim, such as where the insured suffers no cognizable damages. Where the insurer’s wrongful refusal to settle a third-party claim is actionable, damages may include those beyond an excess judgment against the insured such as punitive damages or direct consequential damages resulting from execution of an excess judgment. In addition to the insured, a third party that suffers damages from an insurer’s bad faith refusal to settle a claim against the insured also has a right of action against the insurer.

In addition to the common law, bad faith claims may be brought pursuant to statute. Specially, section 624.155, Florida Statutes, was “designed and intended to provide a civil remedy for any person damaged by an insurer’s conduct.” The statute does not, however, create an independent statutory cause of action for third-party bad faith claims in the absence of an excess judgment against the insured. The statute sets forth certain notice requirements which must be complied with as a condition precedent to bringing a statutory bad faith action; if the insurer timely addresses the alleged violation, no action under the statute will lie. An action will also not lie where there has been no determination of the existence of liability by the insurer and the extent of damages, which are elements of a statutory cause of action.

To learn more about Florida Construction insurance coverage and bad faith, contact Florida construction mediator and lawyer Gary Brown at (954) 370-9970.