In Florida, those lucky carriers and attorneys who defend subcontractors in construction-defect claims have long appreciated an unpleasant reality: To settle third-party claims by builders, it is often not enough to consider the subcontractor’s exposure to the builder in the pending liability action; one must also consider that builder’s express or implied threat of a separate action against the carrier for additional-insured defense costs. Agreements between builders and subcontractors routinely require that the subcontractor procure a policy of commercial general liability insurance that names the builder as an additional insured.
In complex construction-defect matters, allegations against a builder can implicate numerous subcontractors’ work. As a percentage of the claimant’s total alleged damages, some allegations reflect large exposures, while others—often several—are relatively small. Because a builder’s right to additional-insured coverage, if any, is premised in part on whether the allegations against it in the liability actions implicate the work of the subcontractor, there is an inherent factual nexus between the liability action and any putative breach action. This may lead a builder to believe it is entitled to additional-insured coverage under most, if not all, of those subcontractors’ policies at issue. Even when builders tender timely, it is rare for the subcontractors’ carriers to immediately agree with a builder’s coverage interpretation and pick up the builder’s defense. However, it is equally rare for a builder to immediately pursue a breach action against a carrier that accepts the builder’s demand for additional-insured coverage for defense costs.
More typically, before filing any breach action against the subcontractor’s carrier, the builder uses the disputed additional-insured claim as settlement leverage in the liability action by demanding an amount from the subcontractor (who is being defended by the subcontractor’s carrier) that reflects not only the subcontractor’s supposed liability for the alleged construction defect, but also the amount that represents the builder’s “defense costs.” Sometimes broken out separately and sometimes not, these defense-cost demands can—and many times do—exceed the damages allegedly resulting from the construction defect.
It is worth noting that, in Florida, damages generally recoverable by a thirdparty plaintiff under a theory of indemnity include not only damages imposed on the defendant/third-party plaintiff that arise from the fault of a third-party defendant, but also the defense costs incurred due to the fault of the third-party plaintiff— though they do not include amounts incurred by the indemnitee to enforce its right to indemnity. [See Fallstaff Group, Inc. v. MPA Brickell Key, LLC, 143 So. 3d 1139 (Fla. 3d DCA 2014)—The general rule is that an indemnitee is entitled to recover, as part of his damages, reasonable attorneys’ fees and reasonable and proper legal costs and expenses, which he is compelled to pay as a result of suits by or against him in reference to the matter against which he is indemnified; Cf. Post Houses, Inc. v. Fireman’s Fund Ins. Co., 469 So. 2d 863, 864 (Fla. 1st DCA 1985)—“[A] ttorney fees incurred in establishing the right to indemnification are not allowed.”]. Indeed, the general rule is that defense costs incurred by an indemnitee to defend against a plaintiff’s claims are recoverable from an indemnitor regardless of whether the defense is successful. [See Shannon v. Kaiser Aluminum and Chemical Corp., 749 F.2d 689 (11th Cir. 1985)].
AI/CI
In the context of settlement, parties often refer to a builder’s defense costs as “AI/ CI”—shorthand for “additional insured/contractual indemnity”—because, as a practical matter, the two concepts overlap. A builder’s defense costs associated with the subcontractor’s alleged fault could potentially be recoverable under either theory and the ultimate payee may (but not necessarily must) be the same: the subcontractor’s carrier. That said, the nominal parties in interest are very different, and, accordingly, the extent of a subcontractor’s obligation to reimburse a builder’s defense costs as a component of the subcontractor’s indemnification of the builder is very different from the extent of a carrier’s obligation to pay the builder’s defense costs based on the builder’s status as an additional insured.
In Florida, it is well understood that a carrier’s duty to defend, should it arise, includes defense costs for the entire lawsuit. [See Metropolitan Dade County v. Fla. Aviation Fueling Co., Inc., 578 So. 2d 296, 298 (Fla. 3d DCA 1991)—“[W]hen a complaint contains a covered claim and a claim which is not covered by the indemnity agreement, then the duty to defend extends to the entire lawsuit.”; see also Metropolitan Dade County v. CBM Indus. of Minn., Inc., 776 So. 2d 937, 938–39 (Fla. 3d DCA 2000)—holding that the indemnitor breached its duty to defend the indemnitee despite some of the claims against the indemnitee being for its own negligence]. However, a subcontractor’s obligation to indemnify a builder for defense costs is generally more limited. In circumstances where the scope of indemnity is limited to damages incurred due to the fault of the indemnitor, Florida law precludes recovery of such “defense costs” even when the defense is successful, to the extent they are the result of the fault of the indemnitee. [See e.g., Unisys Corp. v. Frank H. Poe, Inc., 576 So. 2d 874, 875 (Fla. )3d DCA 1991)].
In such cases, the scope of the indemnity is often understood to encompass only those defense costs that were incurred by the builder to defend against the claims involving the fault of the subcontractor. As to common law indemnity, Dade County Sch. Bd. v. Radio Station WQBA, 731 So.2d 638, 642 (Fla.1999) states that to prevail on a common law indemnity claim, the indemnitee must be without fault and its liability must be solely vicarious for the wrongdoing of the indemnitor. As to contractual indemnity, see, e.g., Am. & Foreign Ins. Co. v. Avis Rent-A-Car Sys., Inc., 401 So. 2d 855, 857 (Fla. 1st DCA 1981), which states, “As a general rule, an indemnitee is entitled to recover, as part of his damages, reasonable attorney’s fees and reasonable and proper legal costs and expenses, which he is compelled to pay as a result of suits by or against him in reference to the matter against which he is indemnified.” (emphasis added). [See also Fla. Stat. §725.06(1)— providing qualifications, limitations, and exclusions to the scope of an indemnitor’s indemnification for an indemnitee’s own fault]. Consequently—and setting aside, for purposes of this article, any statutory right of subrogation and/ or contribution between carriers that might exist, or any enforceable duty to defend provisions in the subcontract—a subcontractor’s exposure to defense costs incurred by a builder, is often evaluated by allocating it based on the percentage of the subcontractor’s exposure to the builder for those damages that result from the subcontractor’s alleged defect, relative to the entirety of the plaintiff’s alleged defect damages.
The prospect of continued defense of the subcontractor, liability to the builder for defense costs that continue to accumulate, and future defense costs in a yet-to-be filed additional-insured action by the builder can tempt a carrier to “staunch the bleeding.” Indeed, incorporating a carrier’s release of a builder’s genuinely disputed additional-insured demand into a settlement of the underlying liability action against the subcontractor can prove very efficient when a named-insured subcontractor has actual, substantial exposure to the builder in the underlying liability action. However, it is a tougher call when a subcontractor’s carrier is defending an indemnity action that is flimsy, and/or the subcontractor’s exposure is extremely limited, and the builder makes an exorbitant demand (exorbitant because it pairs a relatively reasonable amount for defects with an unreasonably high share of defense costs and insists on resolving both its inchoate additional-insured claims and the underlying liability action). This scenario not only imperils the cost-effective resolution of the liability action (and arguably the breach action); it also has the potential to place the subcontractor’s carrier in a thorny situation—forcing it to choose between “sticking to its guns” and continuing to defend a seemingly unending liability action, or “overpay” to protect its insured subcontractor and settle a potentially defensible additionalinsured dispute.
Forming a Strategy
There is no “silver bullet” in these situations. However, there are strategies that can be employed to counter the leverage held by the builder. The first is negotiating a settlement with the plaintiff that obtains a release in favor of both the insured subcontractor and the builder for damages deriving from the subcontractor’s scope of work. This is not to suggest that a plaintiff will always be interested or reasonable, however, plaintiffs benefit from a streamlined case by eliminating the need to develop and present evidence at trial for minor or discreet defect claims, particularly if those claims appear poorly supported. While any such deal is likely to be made at a premium, it is still likely to be premised upon the subcontractor’s alleged fault and unencumbered by concerns about defense costs.
Though the third-party action would remain active, obtaining a release in favor of the builder for the subcontractorinsured’s scope of work provides valuable benefits to the subcontractor’s carrier:
• It releases the builder for any defect damages derived from the subcontractor’s work (including damages resulting from the builder’s supervision of the subcontractor).
• It halts, as of the effective date of the release, accrual of defense costs for which the subcontractor may be liable under a theory of indemnity—liquidating the amount in controversy.
• It halts, as of the effective date of the release, any ongoing additionalinsured defense obligation the subcontractor’s carrier may have owed the builder—liquidating that amount in controversy as well.
In short, it reduces the value of builder’s claims to those defense costs that accrued between inception and the effective date of settlement, with the defense costs in the liability action also limited to those defense costs that derive from the subcontractor’s scope of work. Given that the builder’s defense costs would exclude amounts incurred to pursue its various third-party claims and would likely be apportioned to each third-party defendant subcontractor relative to the value of the alleged defect damages attributed to each subcontractor, the amount of defense costs apportionable to a subcontractor with minor defect exposure or would likely be correspondingly minor.
Determining the total amount accrued during the relevant period, and for what activities, should be (largely) discoverable by defense counsel. Moreover, proving this amount would be the builder’s burden at trial, and, to have any chance at recovery, the builder would need to incur additional fees which, while potentially recoverable as a prevailing party (assuming the subcontract provides for it), would not be recoverable as “defense costs” under a theory of indemnity. [See e.g. Dade County Sch. Bd.(supra)].
A final part of this strategy involves mitigating the ongoing fees for defending the subcontractor and hedging against any prevailing party fee provision. One potential method is service of a proposal for settlement or offer of judgment (PFS). In Florida, this is governed by §768.79, Florida Statutes and Florida Rules of Civil Procedure, Rule 1.442. Serving a PFS for an amount reflective of the subcontractor’s remaining estimated exposure as soon as the settlement with the plaintiff is culminated— and periodically issuing an updated PFS based on the builder’s response to discovery—can create a backstop to any fee claims the builder may have and increase the subcontractor’s settlement leverage. Provided a subcontractor complies with the form and timing requirements of Fla. R. Civ. P. 1.442, a subcontractor can serve a builder with a PFS as many times as it wants.
In sum, when a builder attempts to leverage a weak additional-insured claim to obtain a settlement of the underlying liability action for substantially more than the liability action is worth, there are strategies a subcontractor’s carrier can pursue in the liability action to mitigate the risk and costs of rejecting a builder’s unreasonable demands and proceeding with defense of the subcontractor.
About the Author:
Stephen W. Stukey is a partner at Cole Scott & Kissane. Stephen.Stukey@csklegal.com