Second DCA Analyzes Measure of Damages for Defects Rendering Home “Worthless”

Florida’s Second District Court of Appeals reaffirmed the applicability of the Restatement (First) of Contracts to construction defect cases. The Court of Appeals also tackled the difficult question of what that means when construction defects are so extensive as to render a newly built structure “worthless.”

The structure at issue in Gray v. Mark Hall Homes, Inc., 2016 WL 45936 (Fla. 2d DCA Feb. 5, 2016), was a single family residence. The defects in the residence included missing roof flashing which allowed significant moisture penetration throughout the structure. Witnesses for Gray, who had paid Mark Hall Homes $168,000 to build the residence, testified that Gray needed to “get a bulldozer” and start from scratch.

At the conclusion of the trial, the jury awarded Gray the entire $168,000 that he had paid to Mark Hall Homes, as damages for breach of contract. However, the trial court had already granted a motion for directed verdict limiting the amount of recoverable damages to $16,000, the only amount which the judge believed to have been supported by witness testimony.

In overturning the trial court’s order, the Court of Appeals first observed that there was sufficient evidence presented at trial to support a finding that the residence was completely worthless. The opinion then turned to the application of the Restatement (First) of Contracts, which was adopted by the Florida Supreme Court in Grossman Holdings Ltd. V. Hourihan, 414 So. 2d 1037 (Fla. 1982).

Pursuant to the Restatement, one potential measure of damages is “the difference between the value that the product contracted for would have had and the value of the performance that has been received.” Quoting Grossman the court noted that the goal was to put the inured party in as good a position as they would have been with “full performance.” The court observed that an alternate measure of damages would be the cost to remedy the defect, but that the defects were so extensive in the present case that such a remedy, if even possible, would cause undue economic waste.

While the Second DCA did not break new ground in Gray it did reaffirm the application of the Restatement to construction defect claims. Perhaps more significantly, Gray provides guidance on the application of the alternate measures of damages set forth in the Restatement.

Florida’s Middle District Finds No Duty to Defend Based “Your Work” Exclusion

Bucking the trend of recent opinions continuing to expand the duty to defend in the construction arena, the Middle District declared that a carrier had no duty to defend in the recent opinion of Auto-Owners Insurance Co. v. Elite Homes, Inc., 2006 WL 409577 (M.D. Fla. Feb. 3, 2016). The crux of the Elite Homes ruling was the “your work” coverage exclusion contained within the Auto-Owners policy.

Elite had contracted in 2007 to build a single family residence for the Crozier family. The Croziers then bought suit against Elite, alleging the windows installed by Elite leaked, causing water damage to their home. Elite tendered the claim to Auto-Owners, its commercial general liability carrier. Auto-Owners initially provided a defense, but bought an action for declaratory relief seeking a ruling that it had no duty to defend.

Auto-Owners argued that its property damage coverage excluded damage to “your work,” which was defined by the policy as “work or operations performed by you (the insured) or on your behalf.” Auto-Owners further noted that the allegations of the underlying complaint asserted that Elite had done all the work on the residence. Accordingly, based on the allegations of the complaint, the only items damaged by they allegedly leaking windows were other elements built by Elite.

The District Court agreed and distinguished case law in which there was some allegation of damage to property other than property built by the contactor that was the insured. There was no allegation of damage to a preexisting structure as in J.B.D. Construction, Inc. v. Mid-Continent Casualty Co., 571 F. App’x 918 (11th Cir. 2014), or to property installed post-construction, as in Voller Construction v. Southern-Owners Insurance Co., 2015 WL 1169420 (M.D. Fla. March 13, 2015.) A mere allegation of damage to “interior portions of the home” was insufficient where the allegations also established that Elite had built all the interior portions of the home.

In the final paragraphs of its ruling, the Middle District provided some quotable phrases which are likely to be cited by carriers contesting the duty to defend in cases having nothing to do with “your work” exclusions. After noting that any doubts as to the duty to defend are to be resolved in favor of the insured, the court observed that it “would not give credence to conclusory buzzwords” or indulge in “impermissible inferences” in order to find that the allegations of the complaint were sufficient to “bring the suit within policy coverage.”

Self-Insured Retention Applies to General Contractor Named as Additional Insured

In a recent opinion, the Middle District addressed the question of whether a self-insured retention applied to an additional insured and examined which third-party expenditures would count toward the retention. Core Construction Services Southeast, Inc. v. Crum & Forester Specialty Insurance Co., 2016 WL 37940 (M.D. Fla. Feb. 1, 2016).

Core was the general contractor for a project known as the Artisan Club Condominium. Core had contracted with Dunn Lumber & Overhead Door Co. to install windows on the condominium project. When Core was sued by the condominium association, it tendered to Dunn’s commercial general liability carrier, Crum & Forester, claiming coverage as an additional insured.   Crum & Forester denied coverage on the grounds that Core was not an additional insured, and even if it were, the self-insured retention had not yet been exhausted. Core filed an action for declaratory relief.

The Middle District addressed Crum & Forester’s arguments in the context of Core’s motion for summary judgment. The court concluded that disputed issues of material fact prevented a ruling on the issue of whether Core was an additional insured.   However, the court still addressed whether the retention applied to an additional insured.

The court held that the retention did apply to additional insureds and rejected Core’s reliance on policy language providing the “Named Insured” accepted the retained limit. While this language standing by itself might indicate that only a Named Insured was subject to the retention, the court noted the policy further stated that Crum & Forester’s duty to “pay damages and defend claims” only applied after the retention was exhausted. Viewing the policy as a whole, the court concluded that the retention must apply to additional insureds because the carrier’s obligations did not exist until the retention was exhausted.

The Middle District then went on to tackle the issue of whether money spent by or on behalf of Core counted against the retention.   Crum & Forester contended that it did not, relying on policy language stating that payment “by the Insured” counted toward the retention. The Middle District quickly dispensed with this argument as being directly contrary to a Florida Supreme Court opinion holding that payment by a third party counted toward the retention despite policy language that only payment “made by the insured” would be counted toward the retention. Intervest Construction of Jax, Inc. v. General Fidelity Insurance Co., 133 So. 2d 494 (Fla. 2014).

Finally, the court examined whether the $250,000.00 retention had been exhausted, in light of evidence that Core had already spent more than $300,000.00 on its defense. This question was not so easily answered. The court observed that the allegations against Core extended well be beyond the alleged window defects potentially covered by the Dunn policy with Crum & Forester. Based on policy language, the self-insured retention could only be exhausted by expenditures on claims that would otherwise be covered by the policy. Accordingly, the court concluded that additional facts were necessary so that it could allocate how much of the $300,000.00 expended by Core and its carrier was attributable to defending the window defect claims.

In the end, the Middle District denied all elements of Core’s motion on the grounds there were disputed issues of material fact. However, the courts methodical analysis of issues related to the self-insured retention provides a roadmap for carriers and parties to evaluate such issues.