On April 7, 2015, a federal appellate court issued a critical opinion on insurance coverage for construction-defect cases. In Carithers v. Mid-Continent Casualty Company, the Eleventh Circuit held that (1) the duty to defend is triggered unless there is certainty (factual and legal) that no coverage exists; (2) there is coverage under a contractor’s commercial general liability policy for property damage caused by one subcontractor’s work to another subcontractors work; and (3) “rip and tear” costs are covered “property damage.”
These critical holdings provide experienced and creative construction defect lawyers the necessary tools to create insurance coverage and maximize results for clients.
Duty to Defend
Triggering a duty to defend should not be challenging for experienced construction defect and insurance coverage lawyers. However, we are consistently encountering insurers who deny defense to insureds in construction defect cases, like what occurred in Carithers. The holding of the Eleventh Circuit in Carithers was expected, but the reasoning gives practitioners additional ammunition to attack insurers who refuse to defend their insureds. While most cases (and lawyers) throughout the Country focus on the factual uncertainty in determining whether a duty to defend exists, the Carithers case held that the legal uncertainty as to which coverage trigger applied required Mid-Continent to defend. Indeed, the Eleventh Circuit Court held that “Mid-Continent was required to resolve this [legal] uncertainty in favor of the insured and offer a defense.”
This holding is particularly valuable to triggering coverage because, as most lawyers will advise, there is almost always uncertainty in the law. Under Carithers, if an uncertainty in the law or the facts exist in favor of coverage, a duty to defend exists.
Covered “Property Damage”
The Eleventh Circuit also held that covered property damage includes any property damage caused by one sub-contractor’s work to other property, including work performed by another sub-contractor. As an example from Carithers, if the brick coating was negligently installed by one subcontractor which damaged the underlying brick (which was installed by a different subcontractor), then the damage to the brick would be covered property damage. Also worth noting, Carithers imposed the burden on the Plaintiff to establish that one sub-contractor damaged another sub-contractors work. Thus, it is critical for the insured or third-party claimant to discover this information. In Carithers, it was not discovered, and it cost the claimant thousands.
While most lawyers understand the above to be black letter law for many years, over the last few years, insurers for contractors have been narrowly interpreting Amerisure Mutual Insurance Co. v. Auchter Co., 673 F.3d 1294 (11th Cir. 2012) to mean that property damage to any work performed by the general contractor is not covered. Carithers is an important reminder to insurers that such is not the case.
Perhaps most importantly, the Eleventh Circuit held that “rip and tear” costs are covered property damage. “Rip and tear” costs are all costs required to repair covered property damage, including defective work. Specifically, the court found that the costs to remove and replace defectively constructed balconies were covered property damage because the removal and replacement of the balconies were necessary to reach the property damage caused by the defectively installed balconies. In other words, the balconies were defectively constructed which permitted water intrusion that caused damaged to the garage. To reach and repair the water damaged garage, the defective balconies had to be removed. Thus, the cost to remove and replace the defectively installed balconies, which might have otherwise been not covered, was covered property damage.
Practical Analysis
Carithers provides guidance to lawyers representing construction-defect plaintiffs or insureds on how to plead and prove your case into coverage. First, the insured carries the burden proving that one subcontractor damaged another’s subcontractor’s work.
Second, lawyers must carefully plead claims maximize the scope and necessity of “rip and tear” costs, especially when some damage would otherwise not be covered. For example, many cases in Florida involve the negligent installation of stucco. Applying Carithers, there may not be coverage to remove and replace the defective stucco. But if the defective stucco must be removed and then replaced in order to reach damaged framing or other structural components, then the cost to remove and replace the stucco is a covered loss. This distinction can mean millions of dollars of insurance recovery.