Identifying Underutilized Defenses in Condominium Defect Lawsuits

While there has been a notable decline in the construction industry over recent years, no such drop has occurred in the volume of construction defect lawsuits involving condominium (“condo”) projects. As adjusters are aware, these actions tend to last three or more years and involve many parties.

Although it is true that the insured’s lawyers are tasked with raising the appropriate defenses to protect the insured, adjusters carry the unenviable burden of evaluating these mind-numbing claims for the carrier. The purpose of this article is to pinpoint several areas underutilized in the defense of an insured against condo defect allegations.

The first matter to address in a construction defect action is whether the insured is sued under a breach of contract theory.

There are two primary reasons for this inquiry by the adjuster. The main reason is that under a breach of contract claim, the insured’s duties to the party who brought the claim against the insured flow from the contract. Commonly, construction contracts limit the scope of recoverable damages, such as by waiving consequential damages.

Many of the industry-standard construction agreements, such as the AIA contracts, contain a waiver of consequential damages. This detail is critical, given that parties sometimes allege a right to damages beyond what they are actually permitted to recover under the contract.

In addition to repair costs, it is not uncommon for parties to demand business interruption losses or lost rental income. These inflated damages can significantly increase the overall settlement matrix to the insured during the lawsuit. Understanding the contract will permit the adjuster to recognize the fallacy of the demand from the outset and summarily cut off the overstated amounts during settlement negotiations.

The second reason to analyze the contract is to evaluate the contractual indemnification and duty-to-defend demands that come with virtually every condo lawsuit. If the insured happens to be on the wrong end of the demand, all is not lost.

Some states have enacted statutes to limit or bar indemnification when a contract contains a broad form of indemnification, i.e., where the indemnification clause requires a party to indemnify another party even if the party demanding indemnification was responsible in whole or in part for the damages.

Florida Statute 725.06, holds that any agreement indemnifying a party for its own acts is void and unenforceable, unless the contract contains a monetary limitation on the extent of the liability.

It is not uncommon for national construction companies to use the same master template contracts for several years without modifying the agreements to comply with changes in the law or accounting for every state-specific law. A red flag should rise if an adjuster encounters an agreement that indemnifies the contractor for its own acts without any monetary limitation.

There is a separate obligation that runs with a duty to indemnify, i.e., the duty to defend. The trick with this separate duty is that if it is intertwined within the same provision as the unenforceable indemnification clause, then the duty to defend provision may likewise be unenforceable.

In Florida, parties are not necessarily obligated to defend if the duty-to-defend provision is combined with an unenforceable indemnification provision.

Well drafted contracts contain distinct subsections, i.e., one for indemnification and one for the duty to defend. It is the author’s experience, however, that some construction contracts may not contain separate provisions or if they have separate provisions, improperly incorporate the invalid indemnification language in the defense subsection. Carriers who represent general contractors should audit their insured’s contracts to ensure the agreements will pass any state-specific laws.

Settlement agreements are a familiar occurrence in the construction industry regardless of any lawsuits having been filed. In payment disputes, parties perform work, do not receive timely payment, and file a claim of lien or make a demand upon the surety. There are strict timelines for recording a claim of lien in non-bonded projects, as well as serving the proper notices on bonded projects. As a result, parties record documents and make claims without having to immediately file a lawsuit.

In response to the demands, payment negotiations typically occur, prior to a lawsuit being filed. In exchange for payment, the party demanding the money is typically required to enter into a release. The release may be broad and can potentially bar any future defect claims.

Because the party signing the release may be focused on payment rather than the potential of waiving future rights, an adjuster should demand, or have insured’s counsel, demand any releases as part of the investigation since it could be the “smoking gun” document that bars the claims against an insured.

It is shocking how many actions proceed for years before a statute of repose issue is addressed. It appears this defense is alleged at the outset of the lawsuit in the insured’s defenses; however, the question is not analyzed or addressed until mediation or immediately before mediation – an event that occurs after years of litigation and significant attorneys’ fees and costs.

This defense is the single-most decisive weapon an insured possesses in its arsenal during a condo defect lawsuit. Why? The answer is simple. Some states have enacted statutes creating an outer boundary, which serves as the ultimate cut-off point for a construction defect lawsuit. These laws are called statutes of repose.

It is important to understand that this is not the same as a statute of limitations. For example, in Florida, actions concerning construction defects have a four year statute of limitations. The four years is somewhat deceiving. A plaintiff will often allege the defects were “latent,” meaning they were not noticeable. This permits the plaintiff to bring an action within four years from the date the damages were discovered, regardless of whether this date is greater than four years after the damages actually occurred.

By contrast, the statute of repose has no discovery element for latent defects. Instead, it is the outermost time that a party can be sued, regardless of when the damages were discovered. The premise is that parties should be entitled to rely upon some point in time when any potential lawsuits are barred due to the amount of time that has passed.

In Florida, the statute of repose is 10 years (Florida Statute 95.11(3)(c)). This was changed in July 2006 before which the repose period was 15 years. Thus, any condo defect actions commenced on or after July 1, 2006 are subject to the 10 year repose period.

Theoretically, the statute of repose defense is a straightforward computation that is calculated from a certain event, such as a certificate of occupancy. The complication, or perhaps confusion, seems to occur when the insured is a third party defendant.

Here is an example. A project is completed and the certificate of occupancy is issued in 2000. The condo association notices defects in the stucco, windows and roof in late 2008. The association files its lawsuit against the project’s general contractor and architect in 2009. The contractor, in turn, files its third party lawsuit against the subcontractors who performed the scope of work at issue in the association’s primary lawsuit. The contractor’s attorney investigated the association’s claims and did not file the third party lawsuit against the subcontractors until 2011.

The key is to understand that there is no exception to the statute of repose for third party actions. Once the ten year timeframe lapses, the potential exposure ceases. It is not unusual for subcontractors to presume that a condo defect lawsuit is timely against them, since the main action by the association was timely filed against the general contractor. Do not presume anything.

Adjusters should pay special attention when an association makes a demand for contractual indemnification from a contractor. This could occur in a scenario where a unit owner makes a claim against his/her condo association for an alleged issue involving common elements.

A condo has a defective fire sprinkler system, and a unit owner brings a claim against the condo association “Fake Lakes Condominium Association, Inc.” for water damage. The association’s next move may be to initiate a demand for contractual indemnification and defense from the contractor, based upon the contract between the developer (Fake Lakes, LLC) and contractor. The names of the developer and the association may be similar since the developer created the association prior to turning over the condominiums to the unit owners.

However, “Fake Lakes Condominium Association, Inc.” and “Fake Lakes, LLC” are two separate legal entities. In Florida, a contractual indemnification clause in a contract between a developer and the contractor does not create an obligation by the contractor to indemnify the condo association unless the contract states otherwise.

This issue was addressed in Florida with the case of Marseilles Condominium Owners Ass’n, Inc. v. Travelers Casualty and Surety Co. of America, 2009 Fla. App. LEXIS 16138 (Fla. 1st DCA 2009)(“Marseilles”).

In Marseilles, a Florida court was faced with an argument by a condo association whereby the association claimed to be a successor in interest to a developer for purposes of a bond claim. The court initially held that the association was a successor in interest. However, the court later withdrew its opinion. Thus, there are presently no cases in Florida holding that condo associations are successors in interest to developers.

Mr. Rendzio, a partner with the Florida law firm Tritt|Henderson, practices in the area of construction litigation where he represents construction professionals and insurance companies in the defense of construction defect actions. He holds a board certification by the Florida Bar in the area of construction law.