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Monthly Archives: July 2012

17JUL 2012

            As those in the industry are aware, the standard AIA documents – as well many of the other form contracts in construction – include arbitration provisions, the result of which is that many construction matters are litigated in arbitration fora. While arbitration is theoretically not as expensive a means of dispute resolution as the court system, the concern is that, absent very limited circumstances, parties have virtually no appellate rights after a final ruling.  AFloridatrial court recently dealt with this issue and in doing so reminded us that there is, indeed, a modicum of appellate rights for parties in arbitration.  We thought our readers would benefit from the education of that court’s ruling. 


            The trial court has limited jurisdiction and power over decisions rendered by arbitrators, and is similarly limited in reviewing those decisions.  In Yeary v. Superior Pools, Spas, & Waterfalls, Inc., 19 Fla. L. Weekly Supp. 418a, the 17th Judicial Circuit in and for Broward County, in its appellate capacity, determined that the county court had no authority to modify an arbitration award to designate a contractor as the prevailing party and award attorney’s fees.  Specifically, in Yeary, a contractor brought an action in county court against owners of real property to recover damages for an alleged breach of contract and to foreclose on a construction lien, and the owners counterclaimed for breach of contract.  Pursuant to an arbitration provision in the contract, the contractor elected to transfer all claims to binding arbitration. 


            The arbitrators awarded more money to the contractor than to the owners, but the award did not identify a prevailing party and denied the contractor’s request for attorney’s fees.  The contractor then moved the county court to modify and correct the award, arguing that the arbitrator’s decision not to award attorney’s fees was contrary to established law because it was the prevailing party.  The trial court remanded the claims to the arbitrators and asked for clarification as to the basis for the award and as to why attorney’s fees had been denied.  The arbitrators responded that the award was “based only in equity, not on contract or lien.”  Following the clarification from the arbitrators, the trial court agreed with the contractor, and designated the contractor the prevailing party and awarded entitlement to attorney’s fees.  The owner appealed. 


            The circuit court, serving in its appellate capacity, overturned the order designating the contractor as the prevailing party, and the award of attorney’s fees.  The appellate court determined that trial court did not have the authority to designate the contractor as the prevailing party and to award it attorney’s fees.  Under the Florida Arbitration Code, an arbitrator has no authority to award attorney’s fees unless the parties by agreement expressly waive their statutory right to have the issue of attorney’s fees decided in court.  See Fla. Stat. § 682.11.  The court explained that by the contractor submitting the prevailing party issues to the arbitrators, initially, as a matter of law, the contractor waived its entitlement to have the prevailing party (along with a potential award of attorney’s fees) determined by the trial court. 


            The law inFloridais well-settled that attorney’s fees cannot be awarded as a matter of equity.  As mentioned above, the arbitrators responded, in clarifying the initial decision, that the award was based only in equity.  Thus, there was no basis to award fees.           


            The decision in Yeary cautions those individuals and/or entities wishing to reserve their rights to have a trial court retain jurisdiction to determine attorney’s fees.  Per this opinion, they must be careful at the contracting stage not to draft language that subsequently will be interpreted by a court to expressly waive such right.

02JUL 2012

For an insurer, numerous obligations are triggered upon notification of the existence of a claim.  One of these is when a coverage defense can be asserted.  The United States Court of Appeals for the Eleventh Circuit recently clarified that in order to raise valid coverage defenses and steer clear of preventable pitfalls, insurers must be cognizant of the timing provisions required under Florida Statute 627.426, also known as the Florida Claims Administration Statute (FCAS).  The Eleventh Circuit has jurisdiction over federal cases originating in the States of Alabama, Georgia, and Florida.  Under the FCAS, the term “coverage defense” means “a defense to coverage that otherwise exists.”  In other words, even though the insured’s loss does not fall outside the scope of its coverage, other factors justify relieving the insurer of its obligation to cover a particular loss.

The FCAS places two clearly-defined time requirements upon an insurer and the failure to strictly comply with those requirements can result in the failure of an otherwise valid coverage defense.  The operative portion of the FCAS states that a liability insurer may not deny coverage based on a coverage defense unless:

(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and

(b) Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:

(1) gives written notice to the named insured by registered or certified mail of its refusal to defend the insured;

(2) obtains from the insured a non-waiver agreement following full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation; or

(3) retains independent counsel which is mutually agreeable to the parties.

Fla. Stat. § 627.426(2).

In Mid-Continent Cas. Co. v. Basdeo, 11-12938, 2012 WL 2094376 (11th Cir. June 12, 2012), the U.S. Court of Appeals for the Eleventh Circuit held that “failure to comply with both requirements [of 627.426(2)] results in waiver of the coverage defense.”  That case involved Hurricane Wilma-related property damage in 2005.  The owner of the property, Southgate, hired First State, a contractor insured by Mid-Continent, to perform roof replacements.  During the repair work, tarps that First State installed were poorly secured and caused water damage to one of the resident’s units.  On September 11, 2006, the unit owner made a claim for damages stemming from First State’s work to its insurer, Mid-Continent.  On July 18, 2007, Basdeo and other residents filed suit against First State, but First State never notified Mid-Continent of the lawsuit, did not request that Mid-Continent provide a defense, and was uncooperative and generally unresponsive to Mid-Continent’s attempts to contact First State.

On or about August 8, 2007, Mid-Continent requested that First State provide further information and reiterated that First State was contractually obligated to cooperate.  On September 19, 2007, the Association also filed suit against First State.  On October 3, 2007, Mid-Continent received a copy of the Basdeo lawsuit from Basdeo’s attorney.  By April 2008, a default had been entered against First State in both lawsuits.  It was not until April 17, 2008, that Mid-Continent formally denied coverage to First State.

The Court addressed two issues that are important to the construction industry.  The first issue was whether coverage could be denied due to the insured’s failure to request a defense.  The Court held that Mid-Continent was estopped from asserting this coverage defense because it failed to comply with the FCAS.   The Court stated that “having received no response to its August 8, 2007 letter and having learned that a motion for default had already been granted against First State, Mid–Continent ‘should have known’ of its coverage defense relating to First State’s failure to request a defense on or shortly after October 3, 2007. At that point, Mid-Continent was obligated to comply with both conditions.”

The Court then addressed a second issue – whether Mid-Continent could deny coverage based on First State’s failure to cooperate pursuant to the terms of the insuring agreement.  The Court reached the same conclusion that it reached in relation to First State’s failure to request a defense: that the failure to cooperate is also a coverage defense and that Mid-Continent “should have known” of that defense by or shortly after October 3, 2007 when it first received a copy of the subject lawsuit.  That, in turn, triggered its obligation under the FCAS to notify First State within thirty days of its reservation of rights to assert the failure-to-cooperate coverage defense.

In other words, the time requirements under the FCAS begin to run as soon as the insurer knew or should have known of any potential coverage defense and it cannot raise a coverage defense, such as the failure to request a defense or the failure to cooperate, if it does not strictly comply with the FCAS.  Insurers should take note of this decision and be mindful of the strict time requirements the FCAS imposes so that all available coverage defenses are preserved.