As construction of condominiums in Miami continues, developers have migrated north and are building new residential condominium towers in Broward County, including in Downtown Fort Lauderdale and Fort Lauderdale Beach area. According to published reports, developers are constructing 17 new condominium buildings with units in the Downtown Fort Lauderdale and Beach area. An additional 27 new condominium buildings with nearly 2,600 units are in the planning or pre-sale phase of development in the Fort Lauderdale market. Robust condominium construction is also taking place in Palm Beach County.
Many expect the enormous volume of condominium construction to lead to a surge in the number of construction defect cases. Condominium defect cases involve one or more of the following defects: (1) design deficiencies (a failure caused by an architect or engineer in the design of the building or system); (2) material deficiencies (a failure due to defective or damaged building materials); and (3) construction deficiencies (a failure caused by poor quality workmanship). These cases are complex, costly and time-consuming to litigate as they often involve dozens of parties, including the association, developer, general contractor, subcontractors, architects, engineers, material suppliers, and product manufacturers.
Following the 2008 housing bubble, there was a vast increase in the number of construction defect cases both with residential and commercial properties. Inundated developers were unable to keep up with demand. Quality suffered due to untrained contractors, unsupervised labor, and untested products.Today, with high land and construction prices, narrow profit margins, and shortages of skilled construction workers, the potential for a new tide of defect cases is real. However, unlike in the past, many developers have implemented better construction practices, and improved quality control by hiring their own third-party inspectors and keeping more detailed and accurate records of the construction. Building codes have also become more stringent and code inspections have improved.
An increase in construction defect claims and ensuing lawsuits is expected by the sheer volume of condominiums being built and which will be turned over by developers to owner-controlled Boards of Directors. However, a recent legal development may affect the number of future construction defect lawsuits. The Florida Supreme Court will soon decide a significant issue involving Chapter 558, Florida Statutes, also known as Florida’s construction defect law. Chapter 558 sets forth a notice and opportunity to cure procedure for associations, owners, contractors, and others who design and construct improvements to real property, to resolve claims before filing a construction defect lawsuit.
After developers and contractors receive a notice of defects, officially called a “notice of claim,” claim, under Chapter 558, they typically notify their insurance carriers to trigger insurance coverage. This often requires that insurance carriers provide a defense to developers and contractors during the Chapter 558 pre-suit process, including paying for experts and attorneys to assist in the investigation.
A recent Florida Federal District Court case addressed whether insurance companies issuing insurance policies in Florida must provide a defense to their insureds from construction defect claims. (Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831-CIV (S.D. Fla. June 4, 2015)). The District Court ruled in favor of the insurance company deciding that a notice of claim is not a ‘suit’ under Section 558 and the insurance company is not required to defend the contractor, including paying for fees, such as including the insured’s expert’s fees.
That ruling is on appeal to the Eleventh Circuit Court of Appeals.
On August 2, 2016, the Eleventh Circuit stated it would greatly benefit from the guidance of the Florida Supreme Court on the meaning of the policy at issue here and its relationship to Chapter 558. (Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 15-12816 (11th Cir. Aug. 2, 2016)). The Eleventh Circuit asked the Florida Supreme Court to decide whether the defect notice and cure process in Chapter 558 of the Florida Statutes is a ‘suit’ within the meaning of a comprehensive general liability policy.
The Florida Supreme Court’s decision will have important implications for the construction industry. If the pre-litigation process in Chapter 558 is a “suit”, insurance companies with policies containing similar language will be required to pay expert’s fees and attorney’s fees incurred because of a Chapter 558 notice of claim as part of the duty to defend. This could curtail an increase in condominium defect lawsuits because early insurance carrier participation during the Chapter 558 process, including payment of the investigation costs, may resolve defect disputes before costly and time-consuming litigation ensues. A contrary ruling could have the opposite effect. Developers and contractors could abandon pre-suit proceedings to avoid incurring extraordinary out-of-pocket costs by opting out of the Chapter 558 process in their contracts with owners. As new condominiums rise in Florida, only time will tell if a surge in new construction defect lawsuits is on the way.