Florida Supreme Court Rules on Extent of Insurance Coverage Regarding Construction Defects

ALEXANDRIA, Va. — Subcontractors in the Sunshine State won an important legal victory Dec. 20 as the Florida Supreme Court ruled that unexpected and unintended property damage arising out of the work of a subcontractor constitutes a covered occurrence of property damage under the general contractor’s commercial general liability (CGL) policy. The legal victory was the result of the court’s consolidated decision on two disputes that dealt with the extent of coverage afforded by standard-form CGL policies, under Florida law, regarding construction defects. The American Subcontractors Association (ASA), ASA of Florida (ASAF), and their allies filed “friends of the court” briefs in both cases, with legal fees paid by ASA’s Subcontractors Legal Defense Fund (SLDF).

In their Aug. 4, 2006, brief, ASA and ASAF argued that excluding coverage in the case J.S.U.B., Inc. v. United States Fire Insurance Co. would render the provisions of a standard CGL policy superfluous and effectively defraud a contractor that relied on the plain meaning of the policy language. Agreeing with ASA, the court concluded that defective work that is neither intended nor expected from the standpoint of the contractor can constitute an “occurrence” under a standard-form CGL policy — and that physical injury to the completed project that occurs as a result of a subcontractor’s defective work can constitute “property damage” as defined in a CGL policy.

J.S.U.B. originally contracted to build a series of homes using subcontractors to prepare the foundations. After completion of project, damage to the homes appeared — due to the subcontractors’ use of poor soil and improper soil compaction and testing — leading the homeowners to demand J.S.U.B. make repairs. United States Fire Insurance Company (USF) acknowledged coverage for damage to the homeowners’ personal property (e.g., wallpaper), but refused to cover the structural damage. The circuit agreed and denied coverage under the CGL policy, citing LaMarche v. Shelby Mutual Insurance Co. (Fla. 1980), which found that CGL policies exclude coverage for defective work and the damages it causes. J.S.U.B. appealed and the Florida 2nd District Court of Appeals reversed. Because the reversal was in direct conflict with a separate decision made by the 4th District Court of Appeal, the Florida Supreme Court accepted jurisdiction to resolve the conflict.

While the Florida Supreme Court said coverage was provided for damages accidentally caused by defective work, it did not apply the same reasoning to the repair and replacement of the work itself. In the second case of the consolidated decision, Pozzi Window Co. v. Auto-Owners Ins, the court ruled that “there is no coverage for the costs of repair or replacement of the defective work” and that damage to a defective product installed by a subcontractor did not constitute property damage. The case involved supplier Pozzi Window Company (Pozzi), which manufactured windows for a multimillion dollar home. Upon experiencing water leakage around its windows, the homeowner sued Pozzi, the builder, and the subcontractor that installed the windows for defective construction. After entering into a settlement with the homeowner, Pozzi settled with the builder, and as the builder’s assignee, filed a lawsuit against the builder’s insurer, Auto-Owners Insurance Co. (AOI). While the federal district court ruled that the CGL policies issued by AOI provided coverage for the repair or replacement of the defective windows, on appeal the 11th Circuit Court reversed the decision.

“ASA will seek to clarify why the court distinguishes between damage to the defective work itself and other work, for purposes of the definition of property damage,” said ASA Executive Vice President E. Colette Nelson.

The SLDF is funded entirely by voluntary contributions, and is earmarked for cases where ASA determines that important legal precedents affecting subcontractor rights are at stake. For more information, visit the ASA Web site at www.asaonline.com or call ASA at (703) 684-3450. On the Web site, click on “Subcontractor Advocacy” and then on “Subcontractors Legal Defense Fund.”

Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA’s vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.

Matthew Cass
Manager of Communications
American Subcontractors Association
1004 Duke Street
Alexandria, Va. 22314
Phone: (703) 684-3450, Ext. 1317
Fax: (703) 836-3482
www.asaonline.com
MCass@asa-hq.com