By: Richard E. Guttentag, Esq., Stearns, Roberts & Guttentag, LLC

Commercial General Liability (“CGL”) policies are design to protect an insured against certain losses arising out of business operations.  CGL policies generally provide that if the insured is sued for “bodily injury” or “property damage” occurring during an applicable policy period, the insurer will defend the insured and indemnify the insured for sums it becomes legally obligated to pay, subject to certain exceptions.  The case of Trovillion Construction & Development, Inc. v. Mid-Continent Casualty Company deals with the insurer’s duty to defend and indemnify the insured under a CGL policy.

In Trovillion Construction & Development, Inc. v. Mid-Continent Casualty Company, 2014WL 201678 (M.D. Fla. 2014), a General Contractor entered into a contract with a Developer to build a condominium in Winter Park, Florida.  Construction was to take several years to complete.  The General Contractor purchased CGL policies from Mid-Continent Casualty Company (“MCC”) from 2003 through late 2008.  The policies provided that if the General Contractor was sued for “bodily injury” or “property damage” occurring during an applicable policy period, MMC would defend the General Contractor and indemnify it for sums it became legally obligated to pay. In late 2008, the General Contractor switched its CGL provider to Endurance American Specialty Insurance Company (“Endurance”), which had a policy period of February 2, 2009 through December 18, 2009.

In July 2009, the Developer turned control of the condominium over to the Association, and in October 2009, the Association had a company inspect the condominium.  The inspection revealed building code violations and system failures, which were allegedly causing deterioration of the building envelop, failures of the structural framing systems, damage to interior finishes and problems with organic growth in habitable areas.  The Association sued the General Contractor alleging building code violations, breach of statutory warranties, breach of contract, and deceptive and unfair trade practices. The General Contractor tendered its defense to MCC and Endurance.  Endurance provided a defense, however MCC denied coverage.

In response to MCC’s denial, the General Contractor filed a declaratory judgment action seeking a declaration that MCC had a duty to defend and indemnify it in the Association’s suit.  The General Contractor and the Association entered into a “Settlement Agreement, Assignment, and Covenant not to Execute” providing for a $1,800,000 consent judgment to be entered in favor of the Association against the General Contractor, pursuant to a Coblentz agreement.

A Coblentz agreement is a settlement agreement entered between an insured and a claimant in order to resolve a lawsuit in which the insurer has denied coverage and declined to defend.   In a Coblentz agreement, the insured: (1) enters into a consent judgment establishing its liability and fixing damages; and (2) assigns any cause of action it has against its insurer to the claimant. In return, the claimant covenants not to execute on the judgment against the insured.  A party seeking recovery from an insurer under a Coblentz agreement must prove: (1) a wrongful refusal to defend; (2) a duty to indemnify; and (3) that the settlement was objectively reasonable and made in good faith.

Duty to Defend:

For an insurer to deny a defense based on a policy exclusion, the complaint against the insured must allege facts that clearly bring the entire case within the applicable exclusion.  The CGL policies that MCC issued to the General Contractor were “occurrence” policies, meaning that the insurance covers “bodily injury” or “property damage” that occurs during the policy period. Coverage under the policies is not triggered until property damage occurs.

Florida courts have not clarified when property damage “occurs” for coverage purposes.  In this case, the court applied the ‘injury-in-fact’ rule, under which damage is determined to occur at the moment there is actual damage and the date of discovery is irrelevant.  Therefore, the Court held because the Association’s complaint inferentially suggested that the physical damage occurred between the commencement of construction and the company’s inspection of the property, and because MCC’s policies were in effect during this timeframe, MCC had a duty to defend the General Contractor in the underlying action.

Duty to Indemnify:

With respect to MCC’s duty to indemnify the General Contractor, the Court relied on Florida law, which states that the liability of an insurer depends upon whether the insured’s claim is within the coverage of the policy.

In this case, the General Contractor constructed the condominium exclusively through the use of subcontractors.  In determining the scope of coverage under standard-form CGL policies, Florida law has drawn a distinction between a claim for the cost of repairing the subcontractor’s defective work, which is not covered, and a claim for repairing the structural damage to the completed project caused by the subcontractor’s defective work, which is covered.  However, an insurer is only liable for structural damage caused by a subcontractor’s defective work if the damage occurs  during the policy period of a CGL policy that includes the “subcontractor exception” to the “your work” exclusion.

Only the General Contractor’s 2004-2005 CGL policy contained the subcontractor exception and covered certain types of damage caused by the General Contractor’s subcontractors.  Therefore, the MCC policies covered the General Contractor’s subcontractors’ defective work only if the work caused physical damage to the condominium, and only then if the damage began between April 15, 2004 and April 15, 2005 – the effective dates of the second MCC policy.  The Court concluded that the General Contractor did not provide evidence that the damage occurred during this policy period.

Further, the Court concluded that the General Contractor was required to allocate the settlement amount between covered and uncovered damages.  The Court concluded that the General Contractor’s failure to make any effort to apportion damages or produce evidence suggesting that it was capable of apportioning damages was fatal to its claim that MCC had a duty to indemnify.  Therefore, because the General Contractor failed to produce evidence suggesting that non-excluded property damage occurred at the condominium during the MCC policy periods and its failure to apportion damages, the Court held that MCC did not have a duty to indemnify the General Contractor.

This case demonstrates that an insurer’s duty to defend depends on the allegations in the complaint filed against the insured. And, the insurer’s duty to indemnify depends upon whether the insured’s claim is within the coverage of the policy.

About the Author: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].

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