The latest in a series of decisions by the 11th Circuit Court of Appeals confirms an insurers duty to defend contractors against complaints of defective work and damages during construction. The three appeals, stretching from 2019 through 2024, provide a lot of insight into the importance of the allegations of the complaint, how coverage can be affected by them, and the breadth of the duty to defend even where coverage may be questionable.
The three appellate decisions, all styled Southern Owners Insurance v. MAC Contractors of Florida, LLC d/b/a KJIMS Construction, arise from a dispute over the construction of a custom home. The general contractor entered into a contract in December 2014 with a homeowner to build a custom home. When problems arose between the general contractor and the homeowner, the general contractor ultimately stopped work and left the project. The homeowner served a notice on the general contractor pursuant to 558.004, Florida Statutes, claiming multiple defects in the work at the project, including damage to wood floors and the metal roof that were never repaired despite promises to do so. In August 2016, the homeowner sued the general contractor.
The homeowner’s complaint included the following allegations of defective work at the property:
“[r]epair loose, broken or chipped pavers in driveway and walkways and install edge restraints”; “[r]epair underside of lap siding – inconsistent paint finish at bottom of boards”; “[r]epair chatter marks on T&G ceilings”; “repair damage to all exterior doors” and “[r]epair all pocket doors”; “[r]eplace damaged top stair tread”; “[r]emedy damage to hardwood floors, includ[ing] damage resulting from use of blue tape and dirt”; “[r]epair metal roof dents, scratches and hems”; “[c]lean wall and ceiling paint on cabinets”; “[r]emove paint spots on baseboards throughout the house”; “[r]emedy scratches in granite”; and “[p]atch and paint all holes in ceilings and walls and twin holes in exterior hardi plank.”
The complaint also alleged that the general contractor used subcontractors to work on the residence and that the work was replete with defects and various instances of damage.
The general contractor submitted its claim to its commercial general liability insurance carrier. The carrier initial agreed to defend the contractor in the lawsuit filed by the homeowners, but then withdrew its defense, and filed a lawsuit seeking a declaration that it did not owe the contractor a duty to defend it under the insurance policy. Ultimately the lawsuit between the homeowner and the general contractor settled in September 2019. The lawsuit between the general contractor and its insurance carrier, however, persisted, and resulted in three appeals addressing the insurance carriers’ duty to defend.
The First Appeal (2019)
The first appeal arose from the trial court’s grant of the insurance carrier’s motion for summary judgment where the carrier had argued that the “Your Work”: exclusion contained in the insurance policy barred coverage. The court began its analysis by noting that under Florida law, an insurance carrier’s duty to defend arises where the alleges facts bring the case within the scope of coverage. Doubts about a duty to defend should be resolved in favor of finding that a duty exists.
The Court then turned to the insurance policy at issue in the lawsuit. The policy contained a “Your Work” exclusion that excluded coverage for property damage to '“your work” arising out of it or any part of it and included in the “products-completed operations hazard.” The definition of a “products-completed operations hazard” excluded work that had not yet been completed or work that had been abandoned. The trial court had granted summary judgment in favor of the insurance carrier, finding that because the homeowners’ complaint alleged that the contractor had abandoned the work, there was no coverage under the policy and therefore no duty to defend.
On appeal, the general contractor argued that the complaint was ambiguous about when the property damage had occurred, and that because it could have occurred before the work was completed or abandoned, it fell outside the “Your Work” exclusion, specifically the definition of a “products-completed operations hazard.” The 11th Circuit Court of Appeals agreed with the general contractor, noting that the complaint alleged that the contract had promised to remedy certain claimed damages and that created a reasonable inference that the damages and promise to remediate occurred before the abandonment of the project. The appellate court reversed summary judgment and remanded the case for further litigation.
The Second Appeal (2020)
On remand, the parties apparently moved very quickly for summary judgment again, and this time the insurance carrier argued that the complaint did not allege “property damage” within the meaning of the insurance policy. The trial court granted summary judgment in favor of the insurance carrier again, reasoning that the complaint did not allege any damage beyond the faulty workmanship or defective work, which did not qualify as “property damage” under Florida law. The general contractor again appealed to the 11th Circuit Court of Appeals, arguing that summary judgment was improper and that the insurance carrier had a duty to defend.
Again the appellate court started by outlining the relevant Florida law, noting that defective work by itself is not “property damage,” but defective work that causes damage to something else is “property damage” for the purposes insurance coverage and a duty to defend. The court also noted that the determination of whether work is merely defective or has been damaged can turn on how many contractors or subcontractors were performing the scope of work, using the following example:
[I]f defective work performed by one subcontractor damages work performed by another subcontractor, then there is “damage apart from the defective work itself” and therefore “property damage.” “[I]f the bricks were installed by one sub-contractor, and a different sub-contractor applied the brick coating, then the damage to the bricks caused by the negligent application of the brick coating was not part of the sub-contractor's defective work, and constituted property damage.
But if only one subcontractor performed both tasks, then there would be no property damage.
The appellate court then turned to the complaint, noting that while it alleged defects, damage, and performance of work by the contractor and various subcontractors, it did not specifically allege whihc subcontractors performed which work or how the damage alleged was caused. Accordingly, the complaint was broad enough to allow proof that the defective work of one contractor or subcontractor had caused damage to other work, resulting in property damage. Based on this, the court determined summary judgment was improper and reversed the judgment in favor of the insurance carrier again and again remanded the case for further litigation.
The Third Appeal (2024)
On remand the parties continued litigating and the general contractor moved for summary judgment, arguing that two additional policy exclusions relied on by the insurance carrier to deny its duty to defend did not exclude coverage. Those exclusions were as follows:
(6) That particular part of real property on which any insured or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or
(7) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
The trial court concluded that the provisions did not eliminate coverage and therefore granted summary judgment in favor of the general contractor and concluding that the insurance carrier had a duty to defend. The insurance carrier appealed the ruling.
On appeal the insurance carrier argued that the exclusion in paragraph (6) should exclude coverage because “the Your Work exclusion excludes damages occurring once operations ceased . . . [and] all damages alleged in the [underlying lawsuit]—no matter when they occurred—are cast solely and entirely within these exclusions cumulatively.” Thus, according to the carrier, because the insured was the general contractor on the project, the exclusions barred coverage for any property damage at the project caused by it or its subcontractors.
In response, the general contractor argued that the language should be construed more narrowly and that the phrase “particular part” bars coverage for damages only for a distinct part or unit of the project being worked on, rather than the entire scope of the contractor’s work.
In evaluating these arguments the appellate court looked to determine whether the law applying these exclusions was sufficiently settled on either a more broad or more narrow application such that the insurance carrier, at the time the lawsuit was filed, could have unequivocally known that coverage was precluded by the exclusions. Finding that Florida’s courts had adopted differing views, but that other states and other guidance suggested a narrower application was proper, the court concluded that the insurance carrier would not establish that the damages alleged in the complaint were solely within the two policy exclusions. Accordingly, the carrier had a duty to defend the underlying lawsuit because, at a minimum, there was uncertainty about whether coverage under the policy would exist.
For contractors, there are two key takeaways here. First, pay attention to your insurance policy and the policies your subcontractors use. Understand that there may be work you perform, or that your subcontractors perform, that could result in claims against you that your insurance policy may not cover. Obviously you want to try to minimize that as much as possible, or find other ways to cover those potential gaps in coverage.
Second, and as always, look at the timelines in this case. The construction contract was signed in 2014. The underlying litigation between the homeowner and general contractor started in 2016 and was resolved by settlement three years later. Litigation with the insurance carrier began in 2018, and now in 2024 is finally resolved (assuming no further appeals). That’s a decade of fighting this issue for this contractor. Anything you can do to try to avoid that is going to be a benefit for you and your business.