In Florida construction defect cases, does the statutory process embodied by Chapter 558 of the Florida Statutes, which is a condition precedent to commencing litigation, constitute a “suit” that must be recognized and adjusted by a contractor's liability insurer? That was the question that a federal appellate court put to the Florida Supreme Court.

The Florida construction industry has been closely watching the case of Altman Contractors v. Crum & Forster Specialty Insurance since a decision was issued last year by the U.S. Court of Appeals for the Eleventh Circuit, which certified the question to the Florida Supreme Court.

In mid-December, the state's highest court held that the pre-litigation notice and repair process does indeed constitute a claim which the carrier must recognize.

The state's pre-litigation defect procedure, outlined in Chapter 558, was enacted in 2003 to provide a means by which property owners could notify builders of alleged construction or design defects. The responsible contractors, subcontractors and design professionals must then either voluntarily resolve the defects or deny liability. The goal of the statute was to reduce the amount of complex, multiparty construction defect litigation, which had ballooned during the building boom prior to the collapse of the housing market and the foreclosure crisis.

For major construction projects such as residential and commercial high rises, the process usually takes several months and involves a number of inspections by contractors, subcontractors and designers. Similar procedures have been adopted by the majority of states due to the high costs associated with construction defect litigation and the burdens that these cases place on the courts.

Significant Question for Construction Industry

The question of whether the 558 process is considered a claim under a standard commercial general liability (CGL) policy is extremely significant for the state's construction industry. In Altman, the Eleventh Circuit court considered the contractor's appeal of a summary judgment from the U.S. District Court for the Southern District of Florida, which had determined that the Chapter 558 process was not a suit, and thus not a claim, within the meaning of the standard CGL policy.

The general liability policy required the insurer to defend the contractor from any suit seeking damages caused by bodily injury or property damage, but the federal district court ruled that because the Chapter 558 process does not provide for a final decision on disputed liability, it falls short of the policy's definition of a lawsuit.

On appeal, the contractor argued that the 558 process is part of a suit because it is mandated by state law before a suit can be filed. The Eleventh Circuit found that both the contractor and insurer presented reasonable interpretations of the term, but because there was no ambiguity in the policy over what constitutes a “suit” it was required to accept the contractor's interpretation. The court determined that its decision would have significant ramifications for the state's construction and insurance industries, so it certified the question for the Florida Supreme Court to resolve.

The state's Supreme Court found that the policy defines suit, in part, as “a civil proceeding in which damages … are alleged.” Thus, in order to be a claim by that definition, the 558 process must constitute a civil proceeding.

After reviewing several definitions, the justices found that the notice and repair process cannot be considered a civil proceeding under the policy terms because the recipient's participation is not mandatory—the notice recipients may choose to not respond, which then forces the claimant to file a lawsuit.

In addition, the justices concluded that the process does not take place in a court of law, employ any type of adjudicatory body, nor produce legally binding results. Rather, it establishes a pre-suit process in which the claim may be resolved through a negotiated settlement or voluntary repairs without the filing of a lawsuit, so it does not constitute a civil proceeding within the policy definition of suit.

Pre-Suit Process Is an ADR Proceeding

In Altman, however, the policy broadened the definition of a suit to include “any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.” Looking to the plain meaning of the policy's terms, alternative dispute resolution was defined as “a procedure for settling a dispute by means other than litigation.”

The court concluded that the process falls within this definition as a statutorily required pre-suit process aimed to encourage the claimant and insured to settle claims without resorting to litigation. It found that the process is therefore considered an alternative dispute resolution proceeding within the plain meaning of this policy term.

After reaching this conclusion, the justices ruled “that the notice and repair process set forth in Chapter 558 constitutes a suit within the meaning of the commercial general liability policy issued by C&F to Altman. Although the Chapter 558 process does not constitute a civil proceeding, it is included in the policy's definition of suit as an alternative dispute resolution proceeding to which the insurer's consent is required to invoke the insurer's duty to defend the insured.”

The implications of this decision are vexing. On one hand, insurers may choose to assist in resolving claims prior to a suit being initiated.  On the other hand, inclusion of insurers into the 558 process could make an already complicated process even more cumbersome. In that case, the statutorily prescribed 120-day time period could be difficult to meet.

Furthermore, once the insurer is involved, the insured's ability to resolve issues could be hampered. That said, if the insurer is not involved, an insured that resolves an issue that could be covered might jeopardize coverage based upon the voluntary payment provision in the policy. Moreover, the requirement of “insurer consent” further muddies the water.

In any case, the insured claimant will be wise to provide the insurer with notice of any 558 claim. How the process unfolds thereafter will be interesting to see.

B. Michael Clark Jr. is a partner with Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel in Coral Gables. He has focused on construction and insurance law since 2007 and is a Florida bar board certified construction law specialist. Contact him at [email protected]