Recently, a federal district court in Florida held that the Chapter 558 process is not a “suit” under a commercial general liability policy and the insurer had no obligation to defend the insured during this process. Under Chapter 558 of the Florida Statutes, before a lawsuit can be commenced concerning construction defects, the claimant must provide notice of the claim to the contractor and provide the contractor with an opportunity to resolve the claim (often referred to as the “558 process”).
This process can be expensive as it may require the hiring of counsel and experts and entail property inspections. Normally, a contractor will send the 558 Notice to its insurer and request the insurer hire counsel to protect the contractor’s interests. In most cases, the insurers will abide. Unfortunately for one contractor, its insurer denied to do so.
In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, Altman Contractors, Inc. (“Altman”) was served with a Chapter 558 Notice of Claim regarding the construction of a high-rise residential condominium. Altman forward the Notice to its insurer, Crum & Forster, and demanded that Crum & Forster defend and indemnify Altman during the process. Crum & Forster denied that it had a duty to defend Altman because the matter was not in “suit.” Altman filed suit against Crum & Forster for breach of contract as well as for a declaration determining whether Crum & Forster owed Altman a duty to defend the 558 process. Both Altman and Crum & Forster filed motions for summary judgment on these issues. First, the Court rejected Crum & Forster’s argument that Florida Statute 558.004(13) precluded Altman’s claim. Specifically, Crum & Forster argued that Florida Statute 558.004(13) provided that a 558 Notice of Claim is not a claim for insurance purposes. The Court found “nothing in this section [Florida Statute 558.004(13)] to support the extreme position taken by Crum & Forster that the Florida Legislature intended to bar a notice under Chapter 558 from constituting a claim for insurance purposes such that an insurer would have no duty to defend or indemnify an insured in connection therewith.” In fact, the Court pointed to a recent amendment to Florida Statute 558.004(13) which provided that the terms of the policy control, not the language in the statute.
The Court then turned to the language of the Crum & Forster policy. The Court looked to the Insuring Agreement, wherein it provided that “We [Crum & Forster] will have the right and duty to defend the insured against any ‘suit’ seeking those damages.” The term “suit” was defined as “a civil proceeding” and included “an arbitration proceeding” and “any other alternative dispute resolution proceeding.”
In analyzing various definitions of “civil proceeding,” the Court stated that for a matter to be considered a “proceeding,” “there must be some sort of forum and some sort of decision maker involved.” In finding that the 558 process was not a “civil proceeding,” the Court stated “[n]o part of Chapter 558 provides for a setting where the parties would appear before anyone to assist with this process. There is no procedure contained therein that results in a decision or delineation of private rights and remedies.” Rather, “Chapter 558 encourages settlement by providing a procedure to lead the parties to the waters of compromise; it does not make them drink.” As a result, the Court found Crum & Forster had no obligation to defend Altman in the 558 process.
This decision has significant consequences for contractors and insurers alike. As mentioned above, the 558 process can be costly. Many contractors rely on their commercial general liability policies for a defense when claims are made. If insurers begin to follow Crum & Forster’s lead, and deny defense for the 558 process, then contractors will end up simply denying any liability and not participating in the 558 process. Contractors will do this to quickly get to a point where the insurer will appoint defense counsel. At the same time, the insurers are missing potential opportunities to settle matters pre-suit and to avoid costly litigation.