Many states have enacted construction trust fund statutes to protect payments for lower-tier project participants. Despite Florida not having a trust fund statute, there are some similar trust obligations and requirements that are applied to insurance proceeds on private projects.
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Construction trust fund statutes
Generally speaking, trust fund statutes impose a fiduciary duty upon general contractors. Whenever an owner releases funds to the general contractor, the money earned by the subs are “held in trust.” This creates liability on behalf of the GC for the benefit of the subs and suppliers that they have hired. Accordingly, those funds should only be used to the benefit of those parties.
Florida does not have an explicit construction trust fund statute, as some other states have in their laws. However, there is a similar mechanism imposing a fiduciary duty regarding insurance proceeds. Let’s take a look at this statute a bit closer.
For further reading on construction trust fund statutes:
Florida insurance proceeds statute
The statute in question is Fl. Stat. §713.32. This statute places specific liability on the party receiving the insurance proceeds. This applies when an improvement is damaged or destroyed by fire or any other casualty, but covered by property damage insurance. Certain obligations are placed on the person who receives the proceeds (typically the owner), as per the insurance policy contract.
Proceeds are to be held in trust
The named insured is considered a trustee of the insurance proceeds. Meaning that the person receiving payments are required to hold those funds in trust for any party holding mechanics liens related to the damaged improvement.
Being a trustee imposes a fiduciary duty, which means they must act in the best interests of the beneficiary (i.e. the lien holders). They are legally prohibited from diverting or using the funds for any other purpose than to the benefit of the lien holders. Any violation of this duty can lead to personal liability for the unpaid amounts. This obligation runs for a period of one year from the date of receipt of the proceeds.
Distribution of proceeds
Once the funds have been received, liability for the payments shifts from the insurance company to the policyholder. Upon receipt, the first thing to do is deduct the premiums paid for coverage. Once the named insured has been compensated for the insurance coverage, the remainder of the proceeds are then held in trust and paid in the agreed upon priority and conditions that were set forth in the initial contract.
There is one exception carved out in the statute. The requirements of this statute don’t apply to holders of liens that were perfected before the recording of a notice of commencement. If these parties are the policyholder of the insurance coverage, then this liabilities and responsibilities of this statute are not imposed on them.
Florida clearly doesn’t have a construction trust fund statute like some other states. However, this insurance proceeds statute does impose similar trust obligations; only it is restricted to insurance payments. This is an important aspect of Florida construction law to keep in mind.
For lower tier project participants and lien holders, this affects your rights to payment. From an owner or named insured perspective, this imposes personal liability on the distribution of funds. Since the insurance proceeds are considered trust funds, caution should be taken in regards to their distribution.