Disputes routinely arise on construction projects. State legislatures, like Florida’s, pass laws in an effort to make these disputes as painless as possible, but sometimes even the best intention can yield sour results. Florida has a required alternative dispute resolution (“ADR”) in place for construction defect disputes by way of Chapter 558 of the Florida Code. Unfortunately, the provision setting forth the alternative dispute procedure leaves a loophole that enables insurance companies dodge the bill for paying for it. This could leave contractors and subcontractors paying for expensive attorneys fees and other costs without insurance kicking in. Incurring this fees and/or fighting insurance carriers to pick up the bill could easily result in exactly what the ADR provisions were meant to avoid – an increase in long and costly litigation. A recent Florida case highlighted this problem.
The Chapter 558 Process
The alternative dispute resolution provision contemplated by Chapter 558 was designed and intended to allow for easier dispute resolution over construction defects. By allowing construction parties to enter into an agreement requiring arbitration, it was hoped that this more streamlined procedure could do away with some of the litigation surrounding this generally thorny issue. The specific provision of Fla. Stat. § 558.001 reads mad follows:
The Legislature finds that it is beneficial to have an alternative method to resolve construction disputes that would reduce the need for litigation as well as protect the rights of property owners. An effective alternative dispute resolution mechanism in certain construction defect matters should involve the claimant filing a notice of claim with the contractor, subcontractor, supplier, or design professional that the claimant asserts is responsible for the defect, and should provide the contractor, subcontractor, supplier, or design professional with an opportunity to resolve the claim without resort to further legal process.
It’s clear that the intention was to save money for all parties involved in the process, but that may not work out exactly as hoped.
The process requires that a written, detailed notice be served in a timely manner to the party that is believed to be liable for the construction defect. The time period depends on the nature of the parties involved in the claim. Requiring this notice allows, and mandates, the parties involved on the project to better communicate with one another in an attempt to resolve the defect/dispute before litigation is necessary. If the defect is first noticed by the property owner, the owner will send notice to the direct contractor, who must then notify other parties. As the notice trickles down the construction tiers, it eventually makes its way to the party performing the work as issue.
While arbitration or other alternative dispute resolution procedures are less expensive than a full-blown trial, it’s not necessarily a cheap, quick, and easy fix. With inspections, required communications, and potentially hiring experts, the process can seem similar to trial – and for defects on large projects, on which many parties are involved, ADR could be a significant expense. Contractors will look to insurance companies to cover the costs, bringing us to the case at issue.
Florida Federal Court’s Analysis
In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, (S.D. Fla. June 4, 2015), Altman found themselves in a very expensive 558 process, but when they ask their insurance company to cover legal and expert costs, the insurer argued that they were not obligated to cover these costs. Litigation ensued. Whether an insurer has to cover the costs of a Chapter 558 proceeding had not previously been examined in Florida.
The court first had to determine what exactly triggered the insurance company’s duties to cover costs and supply defense for Altman. After reviewing the insurance policy, the Court determined that the trigger was a formal “Suit” which, in this case, was defined as litigation, arbitration, or another formal dispute resolution proceeding. Now it was up the Court to determine whether the Chapter 558 process was a formal dispute resolution proceeding. As a reading of the provision goes, this process was categorized as a pre-litigation process. Therefore, the Court determined that the Chapter 558 process was not a formal dispute resolution proceeding and accordingly ruled that Crum & Forster rightly denied coverage of Altman’s Chapter 558 process expenses.
Fallout and Options
This Federal Court decision greatly impacts Florida contractors in a bad way. Many contractors will be forced to foot the bill and cover expensive costs for a mandatory Chapter 558 process. This could lead to more litigation, ironically resulting in the exact opposite of what the Chapter 558 process was originally intended to do. That being said, it is not the end of the world. Contractors have options.
First and foremost, be proactive. When you sign your insurance policy, make sure that it is expressly written down that the insurer must cover you for the Chapter 558 process costs. If you already have an insurance policy, you can get the terms modified before you are caught in a sticky situation. While it’s difficult to get an insurance company to “add” coverage, this process is meant to avoid lengthy and expensive litigation that insurance companies do have to cover, so it may makes sense for them to pick the cheaper option and elect to cover a 558 proceeding.
Another option is to bypass the insurance companies and start at the source: your contract with the owner. Chapter 558 allows for parties to opt out of the process if they expressly agree in the initial contract with the owner. Making sure a provision is in the contract can end up saving you a lot of money and aggravation if your insurance company will not cover the cost of the 558 proceeding.
With the Chapter 558 issue looming, construction parties and insurers should really think long and hard about the benefits and negatives of opting in or out of the process. A 558 process could be extremely beneficial for everyone if handled correctly from the start, but because of the most recent case law discussed above, Chapter 558 could spell chaos for a contractor.