The Right to Repair and Recovery

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1 The Right to Repair and Recovery The MC2 First Annual Florida Construction Defect Litigation and Claims Seminar By David Stern, R.P.A. Vice President West Coast Casualty Service, Inc 1445 East Los Angeles Avenue, Suite 205 Simi Valley, California Tel Fax The Westin Key West Resort and Marina Key West, Florida June 21, 2007

2 Speakers Bio s David Stern, RPA West Coast Casualty Service, Inc. Simi Valley, CA Dave has over 29 years of diverse experience spanning the insurer, self-insurer, third party administrator and independent adjusting arenas across the United States and in Europe. Since coming to West Coast Casualty Service, Dave s central focus has been on the investigation of all aspects of construction defect claims. He has been involved in the creation of innovative methods for the reduction of claims handling expenses to include joint defense ventures, joint destructive testing and facilitated mediation strategies. In addition, Dave is often called upon to testify as an expert in construction defect and insurance related litigation and has been asked to be a consultant on articles involving construction featured in the Los Angeles Times, the Boston Globe and the Orange County Register as well as numerous industry publications. Each year Dave coordinates West Coast Casualty s Construction Defect Seminar, the most highly attended construction defect event worldwide. He also speaks at and conducts seminars discussing vital issues facing the insurer and self-insurer communities. Dave serves as Secretary of the Construction Defect Claims Managers Association (CDCMA). In addition, he is a member of the Registered Professional Adjusters Program, the Society of Insurance Trainers and Educators, the National Association of Insurance Litigation Managers and the National Association of Professional Specialty Lines Officers. Dave is on the President Circle of Habitat for Humanity and also serves as Secretary/Treasurer of the Malibu Lost Hills Sheriffs Booster Club and an advisor to the Thousand Oaks Police Charitable Foundation (TOPCF). Table of Contents Page No.

3 Introduction 2.1 Breach of Contract Claims 2.1 Construction Negligence Claims 2.2 Breach Of Warranty - Express Warranty 2.2 Breach of Warranty - Implied Warranty 2.2 Misrepresentation and Fraud Claims 2.3 Strict Liability Claims 2.5 Indemnity Claims 2.5 Recovery For Investigative Costs 2.6 Emotional Distress Claims 2.6 Stigma Damages 2.7 Economic Waste 2.7 Economic Loss Rule 2.7 Insurance Coverage For Construction Claims 2.9 Recoverable Damages 2.9 Introduction to Right to Repair and Right to Cure Statutes 2.10 Notice and Opportunity to Repair 2.11 The Insurance Involvement Regarding Notice and Opportunity to Repair Statutes 2.12 Florida s Right to Repair and Right to Cure Statutes 2.15 Key Issues of Florida s Right to Repair Statutes 2.17 Other Issues of Florida s Right to Repair Statutes to Consider 2.19 Florida s Right to Repair Statute 2.20 Conclusion 2.26 Introduction As the explosion of construction defect lawsuits, which began in the mid-eighties, continues to spread throughout the United States and abroad, all sides of these specialized claims have been at odds on the best way to resolve them. This kind of litigation is spreading nationwide and is fueled by heavy media coverage and large jury verdicts.

4 Florida sits uniquely on the edge of an explosion of this kind of litigation since Florida remains one of the top fastest growing states, has a tough building code and is subject to weather conditions that set it uniquely apart from the rest of the nation. This paper will discuss present day construction defect issues relating to Florida as well as what changes will be made regarding Florida s construction defects in the future. Breach of Contract Claims Florida recognizes a cause of action in the construction context for breach of contract claims. The issue of liability is determined on a case by case basis dependant upon the language of the contract at issue. Typically, Florida law will apply to a Florida contract, especially when the terms of the contract itself dictate that Florida law will apply. However, there can be instances in which the law of another state will apply if there is a reasonable relationship between the other state and the language of the contract. For example if the contractor's operations are located in the other state, and where no conflict exists between the law in Florida and the law of that other state, the law of the other state may apply. Metrics Systems Corporation v. McDonald Douglas Corporation, 850 F Sup 1568 (N.D. Fla. 1994). Impossibility of performance is a viable defense under Florida law, however the phrase "impossibility of performance" is a term of art that requires far more than a belief on the part of the performer that the contract is impossible to perform. Under Florida law, substantial completion can be the equivalent to substantial performance under the contract. Substantial completion within the meaning of a construction contract means that the owner can utilize the construction for its intended purpose by putting tenants in possession in collecting rents. J.N. Beason Company v. Sartori, 553 So.2d 180 (Fla. 4 th DCA 1989). Under Florida law, it is the obligation of a general contractor to assure himself that subcontractors are performing their contracts in accordance with the owner's requirements as contained in the plans and specifications. Hawaiian Inn of Daytona Beach, Inc. v. Robert Myers Painting, Inc., 363 So.2d 125 (Fla. 1 ' DCA 1978). When a property owner prevails in an action brought to enforce a mechanic's lien, the property owner is entitled to recover reasonable fees for the retention of attorney. 2.1 Construction Negligence Claims Under Florida law, to recover on a negligence claim in a construction cause of action, a Plaintiff needs to establish: (1) the defendant owed him a legal duty;

5 (2) the defendant breached that duty, (3) the Plaintiff suffered injury as a result of the breach; and (4) the injury caused damage. Kayfetz v. AM. Best Roofing, Inc. 832 So.2d 784 (Fla. 3' d DCA 2002). A premises owner must use reasonable care in maintaining the premises in a reasonably safe condition and must give a contractor timely notice and warning of latent and concealed perils which are known to the owner and which by the exercise of due care should have been known to the owner and which were not known by the contractor or which by exercising due care could not have been known by the contractor, whether the contractor is an employee/invitee or business visitor invitee. Hall v. Holland, 47 So.2d 889 (Fla. 1950). Breach Of Warranty - Express Warranty Express warranties are recognized and enforceable under Florida law. However, there are various holes that exist in the application of express warranties. For example, the purchaser of a warehouse, who alleged that the vendor orally warned him that the warehouse had a ten year roof could not recover for breach of an express oral warranty when the roof subsequently failed, because the oral warranty was made at the time of closing and not at the time of the agreement for purchase and sale, and therefore it could not have been an inducement for the purchaser to enter into the transaction. K/F Development & Investment Corporation v. Williamson Crane & Dozer Corporation, 367 So.2d 1078 (Fla. 3`d DCA 1979). The Uniform Commercial Code requires that an express warranty must be in writing and conspicuous if it is to exclude or modify any implied warranty of merchantability. Florida Statutes (2). Breach of Warranty - Implied Warranty Florida recognizes various implied warranties. To be in compliance with a contractor's implied warranty of fitness, the contractor must provide work and materials which conform with generally accepted standards of workmanship of similar work and materials meeting the requirements specified in the contract. Leisure Resorts, Ina v. Frank J. Rooney, Inc., 654 So.2d 911 (Fla. 1995). See also, Florida Statutes (2). Florida has rejected the concept of caveat emptor in the purchase of new homes or condominiums. Gable v. Silver, 258 So.2d 11 (Fla. 4 d` DCA 1972), cert. discharged 264 So.2d 418 (Fla. 1972). Where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer. This duty is equally applicable to all forms of real property, new and used. Johnson v. Davis, 480 So.2d 625 (Fla. 1985). This duty imposed upon sellers does not require disclosure to third parties not in privity with the seller. Wallis v. South Florida Savings Bank, 574 So.2d 1108 (Fla. 2" d DCA 1990). Warranty of workmanlike performance extends to contracts for repair work. Corrao v. M/VAct III, 359 F.Supp (S.D. Fla. 1973). 2.2 Florida recognizes an implied warranty of workmanlike performance, and in those cases, liability should fall upon the party best situated to adopt preventative measures to reduce the likelihood of injury. Groupe Cbegray/V De Cbalus v. P & 0 Containers, 251 F. 3" ' 1359 (11 d' Cir. 2001). Under Florida law, warranty disclaimers are enforceable. Leasetec Corporation v. Orient Systems, Inc., 85 F. Sub 2 "d 1310 (S.D. Fla. 1999). Warranties made at the time of an initial bargain cannot be subsequently limited or modified by delivery of either printed or written documents unless agreed to by the party to whom the initial warranty was extended. Tropicana Pools, Inc. v. Boysen, 296 So.2d 104

6 (Fla. 1 ' DCA 1974). An express exclusion of implied warranties and other representations that pre-date a contract is enforceable under Florida law. Saunders Leasing System, Inc. v. Gulf Central Distribution Center, Inc., 513 So.2d 1303 (Fla. 2" d DCA 1987). A developer may be held liable for damage for breach of implied warranties and the failure to construct according to plans or in a workmanlike or acceptable manner, or for the failure to provide a unit or building which is reasonably habitable. Scbmeck v. Sea Oats Condominium Association, Inc., 441 So.2d 1092 (5 d' DCA 1983). The test for a breach of the implied warranty of habitability is whether the premises meet ordinary, normal standards reasonably to be expected of living quarters of comparable kind and quality. Putnam v. Roudebusb, 352 So.2d 908 (Fla. 2 "d DCA 1977). There is an implied warranty of habitability in the package sale of a new house and lot by a builder/vendor to an original purchaser. Hesson v. Wabnsley Construction Company, 422 So.2d 943 (Fla. 2 "d DCA 1982). The implied warranty of habitability extends only to the conditions in existence at the time of sale, as it is unfair to hold a builder/vendor liable for defects caused by conditions occurring subsequent to the sale, e.g., natural catastrophes, such as earth tremors and sink holes. I d The implied warranty of habitability does not extend to lots owned by a purchaser on which the builder subsequently constructs a house, or to the sale of used homes. Burger v. Hector 278 So.2d 636 (Fla. 1 " DCA 1973); Strathmore Riverside Villas Condominium Association v. Pave Development Corporation, 369 So.2d 971 (Fla. 2 d DCA 1979). Misrepresentation and Fraud Claims Under Florida law, to state a cause of action for promissory estoppel, a plaintiff must show: (1) that the plaintiff detrimentally relied on a promise made by the defendant; (2) that the defendant should have expected the promise to induce reliance in the form action or forbearance on the part of the plaintiff or a third person; and (3) that injustice can be avoided only by enforcement of the promise against the defendant. TER Townsend Contracting, Inc. v. Jensen Civil Construction, Inc., 728 So.2d 279 (Fla. 1 ' DCA 1999). To state a cause of action for unjust enrichment, a plaintiff must allege: (1) That a benefit was conferred upon the defendant; 2.3 (2) that the defendant either requested the benefit or knowingly and voluntarily accepted it; (3) that a benefit flowed to the defendant; and (4) that under the circumstances, it would be inequitable for the defendant to retain the benefit without paying the value thereof. To state a cause of action for fraud in the inducement, a plaintiff must allege:

7 (1) a false statement concerning a material fact; (2) knowledge by the person making the statement that the representation is false; (3) intent by the person making the statement that the representation induced another to act upon it; and (4) reliance on the representation to the injury of the other party. There is no cause of action for negligent misrepresentation under Florida law in the context of the contract to perform latent defect work required to remedy shortcomings in an initial contractor's work, where the extent of the latent defect work required is a matter of opinion, and by contract definition, latent defect work is not discoverable in the exercise of reasonable diligence by the persons possessing customary knowledge in the type of construction which was the subject of the agreement. H & S Corporation v. United States Fidelity & Guarantee Company, 667 So.2d 393 (Fla. 1 " DCA 1995). The seller of a home is under a duty to disclose facts of which he is aware which materially affect the value of the property, and where the builder of a home knows of material defects existing in the home prior to closing, and further where those defects are concealed from the home purchasers by nondisclosure, a plaintiff homebuyer can recover for fraud. U.S. Home Corporation, Rutenberg Homes Division v. Metropolitan Property and Liability Insurance Company, 516 So.2d 3 (Fla. 2 d DCA 1987). Where fraud is asserted as a defense to a contract claim, all of the essential elements of a claim for fraudulent conduct must be in place, including some injury. To establish the defense of fraud in a breach of contract action, the injuries sustained must cause the party to suffer some loss either pecuniary or otherwise; however, the showing of injury arising out of misrepresentation or concealment need not amount to actionable fraud to justify its use as an affirmative defense; all that is required is that the defensive pleadings set forth the essential elements of injury or damage. George Hunt, Inc. v. Wash Bowl Inc., 348 So.2d 910 (Fla. 2 d DCA 1977). 2.4 Strict Liability Claims The Florida building code does not impose a duty on a land owner to supervise the construction undertaken by an independent contractor especially where the independent contractor is hired by a third party to perform services which benefit only the third party. Sierra v. Allied Stores Corporation, 538 So.2d 943 (Fla. 3`d DCA 1989). Under the "military contractor's defense," a contractor must show compliance with specifications material to dispute at bar that were precisely prescribed and required by contract between it and the government; if the specifications are not precise and leave the contractor with substantial discretion, then the contractor is strictly liable to the

8 extent that its exercise of that discretion caused the injury. Dorse v. Armstrong World Industries, Inc., 513 So.2d 1265 (Fla. 1987). Principals of strict liability do not apply to structural improvements to real property except for injuries arising from a product manufactured by a defendant and incorporated into an improvement to that real property. Craft v. Wet n' Wil4 Inc., 489 So.2d 1221 (Fla. 5`h DCA 1986). The concept of strict liability does not apply to improvements to real property, except where the injuries result not from the real property as improved by allegedly defective product, but directly from the defective product which may have itself been incorporated into the improvement of realty before the injury from the product occurred. Jackson v. L.A.W. Contracting Corporation, 481 So.2d 1290 (Fla. 5`h DCA 1986). Indemnity Claims Florida applies a two pronged test in order to recover on a theory of common law indemnity. An indemnity plaintiff must prove: (1) the plaintiff is wholly without fault and the party against whom indemnity is sought is guilty of negligence, and (2) the party who seeks indemnity must be obligated to pay another party or entity only because of some vicarious, constructive, derivative, or technical liability. Gatelands Company v. Old Ponte Verde Beach Condominium, 715 So.2d 1132 (Fla. 5`h DCA 1988). As an example, in a contractor's third party complaint in an owner's breach of warranty action, the third party complaint was deficient in that it only alleged breach of contract, and did not properly allege a cause of action against the architects for common law indemnity, where there was no allegation that the contractor was wholly without fault, or that the architects were guilty of negligence, and there was no allegation that the contractor was obligated to pay the owner only because of some type of vicarious, constructive, derivative, or technical liability. A general contractor cannot recover common law indemnity against a subcontractor for defects and material supplied by the contractor, under a contract requiring an architect to approve materials, if the architect, who was the owner's representative had been made the general contractor's agent by estoppel, and if the defects could have been found during the inspection and approval by the architect. Federal Insurance Company v. Western Waterproofing Company of America, 500 So.2d 162 (Fla. 1986). A general contractor will be considered to be actively negligent and therefore barred from indemnification from subcontractors if it was on actual notice of the defects attributed to the subcontractors, and which are alleged to be the proximate cause of resulting injuries to the original plaintiff. 2.5 The special relationship requirement between a primary defendant and a third party defendant in a claim for indemnification is only necessary under a common law theory of indemnification, and is not a condition precedent to seeking to recover under a contractual indemnity clause. Camp, Dresser & McKee, Inc. v. Paul N. Howard Company, 721 So.2d 1254 (Fla. 5 th DCA 1988). Recovery For Investigative Costs The proper measure of damages under Florida law resulting from the negligent design of a building which suffered water leakage is the cost of repairs, and not the diminution in value to the building caused by the leakage. Pearce & Pearce, Inc. v. Kroh Brothers Development Company, 474 So.2d 369 (Fla. 1 "

9 DCA 1985). Florida courts have not passed on the issue of recovery of investigative costs, although the Pearce case, in dicta, does state that the trial court did not abuse its discretion in refusing to allow for recovery of investigative costs into the building's water leakage problem. Emotional Distress Claims Florida does not recognize any recovery for emotional distress claims in the context of construction. Florida applies what is called the impact rule, which requires some sort of physical impact before a plaintiff will be allowed to recover for the negligent infliction of emotional distress. For example, in Rivers v. Grinsley Oil Company, Inc, 842 So.2d 975 (Fla. 2 nd DCA 2003), the Second District Court of Appeals of Florida found that an employee could not maintain a cause of action for negligent infliction of emotional distress against an employer, based upon the employee's suffering psychological injuries after being robbed at work allegedly due to the employer's failure to install adequate security, because the claim of damages did not constitute a physical injury resulting from the robbery itself. Under the impact rule, a plaintiff must suffer physical impact before recovering for emotional distress caused by the negligence of another; in essence, the rule stands for the proposition that before a plaintiff can recover damages for emotional distress caused by the negligence of another, the initial distress suffered must flow from physical injuries the plaintiff sustained in an impact. Reynolds v. State Farm Mutual Automobile Insurance Company, 611 So.2d 1294 (Fla. 4 d ' DCA 1992). Under a limited exception to the impact rule, the existence of a familial relationship between the plaintiff and the injured person may allow the plaintiff to recover damages for any psychic trauma resulting from the negligent injury of that person by another; any recovery is further limited to those instances where the deceased or injured person is not only a close family member, but is one with whom the plaintiff has a relationship with a specially close emotional attachment. IA The Florida Supreme Court has been slowly moving away from the impact rule, as is evidenced by its opinion in Gracey v. Baker, 837 So.2d 348 (Fla. 2002). There, the Supreme Court ruled that the impact rule requiring a plaintiff seeking to recover emotional distress damages in a negligence action prove that emotional distress flowed from physical injuries the plaintiff sustained in an impact upon his or her person is inapplicable in cases in which a psychotherapist allegedly creates a fiduciary relationship with the patient and breaches that statutory duty of confidentiality to the patient. According to the Supreme Court, the impact rule should not have been imposed to override clear legislative intent to protect a patient from unauthorized disclosure of confidences reposed in a psychotherapist, and the logical injuries flowing from the violation of such protections were emotional in nature. 2.6 Stigma Damages There is no reported opinion from the state of Florida addressing the issue of stigma damages, and therefore it does not appear at this stage that stigma damages would be recognized under Florida law. Economic Waste Under Florida law, economic waste is a doctrine that applies to situations in which the cost of repairing the deficiencies in a building are grossly disproportionate to the value of the completed structure. In such circumstances, the damages can be measured by the difference in value of the structure contracted for and the structure received, as opposed to the cost of correcting the deficiencies. The doctrine contemplates that

10 one of the contracting parties did not receive what was contracted for, and that to insist on such compliance under the circumstances would be unreasonable and economically wasteful. AustinWestshore Construction Company, Inc. v. Federated Department Stores, Inc, 934 F. 2" d 1217 (11 d ' Circuit 1991). For defective or unfinished construction, a plaintiff can recover a judgment for either: (1) The reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste; or (2) The difference between the value that the product contracted for would have had and the value of the performance that has been received by the plaintiff, if the construction and completion in accordance with the contract would involve unreasonable economic waste. Grossman Holdings, Ltd v. Hourihan, 414 So.2d 1037 (Fla. 1982). Where the performance on a contract is defective, the proper measure of damages is the reasonable cost of making the performed work conform to the contract. This maxim is subject to the exception that, where construction in accordance with the contract would involve unreasonable economic waste, the measure of damage for defective construction is the difference between the value of the item contracted for and the value of the performance received. Aponte v. Exotic Pools, Inc., 699 So.2d 796 (Fla. 4 th DCA 1997). Economic Loss Rule Florida has adopted the Economic Loss Rule which bars recovery in tort when a product damages itself, causing economic loss, but does not cause personal injury or damage to any property other than itself. Casa Clara Condominium Association, Ina v. Charlie Toppino and Sons, Ina, 620 So.2d 1244 (Fla. 1993). This doctrine applies to the sale of houses. As an example of how the doctrine is applied in the state of Florida, Casa Clara homeowners attempted to sue a concrete supplier under a negligence theory because of high salt content of the concrete provided. The high salt content caused the reinforcing steel within the concrete to rust, which in turn caused the concrete used to construct the house to crack and break off. There was no personal injury to any individuals, and there was no damage to any property other than to the house itself. 2.7 Under these facts, the Supreme Court of Florida ruled that the economic loss rule barred the homeowners' negligence suit against the concrete supplier, as the home merely caused damage to itself, and no person or other property was damaged. The Supreme Court rejected the argument that the property purchased by the homeowner was the concrete itself, which in turn damaged other component portions of the house. The Court ruled that the house constituted the product purchased by the homeowners, and thus there was no "other property" damaged. The Economic Loss Rule does not bar statutory causes of action. Comptech Internationa4 Ina v. Milam Commerce Park, Ltd, 753 So.2d 1219 (Fla. 1999). As an example, in Comptech, the Florida Supreme Court ruled that the Economic Loss Rule could not bar a claim based upon a statutory provision providing a private cause of action for any injury resulting from a violation of the Southern Building Code during the course of construction. The Comptech court also modified the

11 "other property" restriction on the application of the Economic Loss Rule. There, negligent renovation of a warehouse resulted in water damage to computers being stored within the warehouse. The Supreme Court ruled that the computers constituted "other property," and therefore the Economic Loss Rule could not bar a negligence claim against the negligent contractors. It should be noted that the application of Economic Loss Rule will not bar recovery under Florida law if it can be shown that there was a negligent act separate and apart from the breach of contract that resulted in the economic loss. For example, separate torts such as fraud in the inducement or negligent misrepresentation can be alleged that will take the claim outside of the protection afforded under the Economic Loss Rule. Under the Economic Loss Rule, a contractor does not owe a duty of care to a third party sub lessee not in privity with the contractor who incurs economic loss due to deficiencies in performance by the contractor. Florida Building Inspection Services, Inc. vs. The Arnold Corporation, 660 So.2d 730 (Fla. 3 'd DCA 1995). In this case, a roof inspector hired by a lessee did not owe a duty of care to a third party sub lessee, in that the preparation of the inspection report was intended to benefit the lessee, not the sub lessee, and the fact that the sub lessee chose to accept the risk of relying upon the information supplied by the lessee did not impose a duty upon the inspector who did not know what the lessee was going to do with the report. 14 The recent trend in Florida courts is to move away from the application of the Economic Loss Rule to serve as a bar to recovery to plaintiffs under negligence theories. As an example, the Fourth District Court of Appeal in Hewett Kier Construction, Ina v. Lemuel Ramos and Associates, Inc., 775 So.2d 373 (Fla. 4 DCA 2000), the District Court held the Economic Loss Rule does not bar a professional negligence action for purely economic losses where a special relationship exists between the professional and a third party who is affected by the professional's negligent acts. In Hewett- Kier, a lawsuit was allowed to proceed including allegations that an architect had prepared an erroneous design document with knowledge that the owner would supply it to the successful bidder, and that the successful bidder would be injured as a result. The Court found that there was a sufficient allegation of fact in order to establish a special relationship between the architect and the general contractor that was the successful bidder, supporting the general contractor's action for professional malpractice against the architect, despite the lack of a contract between the general contractor and the architect. 2.8 In another example, the Fifth District Court of Appeal found that the Economic Loss Rule did not apply to preclude a general contractor from maintaining a tort claim against an engineer as an individual for professional malpractice in designing plans for a retaining wall, even absent any contractual relationship between the engineer and the contractor, in light of the foresee ability that the contractor would be injured if the design was below acceptable standards of care and resulted in damage. This is true in spite of the fact that the contract existed only between the general contractor and the professional service corporation for which the engineer made the plans. Southland Construction, Inc. v. The Richeson Corporation, 642 So.2d 5 (Fla. DCA 1994). Insurance Coverage For Construction Claims Typical Commercial General Liability ("CGL") policies that contain an express exclusion for products/completed operations will serve to exclude coverage for defective workmanship under Florida law,

12 although obviously the specific language of the policy in question as well as the complaint alleging damages have to be analyzed in conjunction with one another in order to determine whether coverage is afforded under the policy. The standard application of this policy provision under Florida law is that a CGL policy will only protect against personal injury or damages to personal property which might result from defective workmanship, and the policies do not afford coverage for the repair of the defective workmanship itself. Auto Owners Insurance Company v. Travelers Casualty and Surety Company, 227 F.Supp.2d 1248 (M.D. Fla. 2002). Florida law typically looks to the surety for the costs of replacement or repair of a defective product. The products/completed operations hazard exclusion within the typical CGL policy, excluding coverage for claims of bodily injury and property damage arising after a developer has completed its construction, has been found to apply to a homeowner's claim for structural damage allegedly caused by the developer's negligent construction of a home on pockets of debris. Auto Owners Insurance Company v. Marvin Development Corporation, 805 So.2d 888 (Fla. 2 DCA 2001). CGL policies generally do not provide coverage to a contractor for deficiencies in its own work. Other courts in Florida have reached the same conclusion: American Equity Insurance Company v. Van Ginhoven, 788 So.2d 388 (Fla. 5 th DCA 2001); Auto Owners Insurance Company v. Tripp Construction, Inc., 737 So.2d 600 (Fla. 3' d DCA 1999). Recoverable Damages In a case involving the breach of a construction contract, the recognized measure of damages is the reasonable cost of performing construction and repairs in conformance with the original contract's requirements, which also include relocation and financing costs, engineering and architectural fees reasonably necessary to accomplish reconstruction. The non-defaulting party bears the burden of showing actual expenditures occasioned by the breach, and the defaulting party then has the burden to show the unreasonableness of these expenditures. Centex Rooney Construction Company, Ina v. Martin County, 706 So.2d 20 (Fla. 4 ' DCA 1997). In a builder's claim for breach of a construction contract, the damages were to be measured either by quantum meruit (the value of the actual work performed), or the builder's lost profits together with the reasonable cost of labor and materials incurred in good faith in the course of partial performance of the contract. The percentage of completion of the project was not a proper method for calculating damages. Brooks v. Holsombach, 525 So.2d 910 (Fla. 4 DCA 1988). 2.9 When a contractor wrongfully breaches a construction contract for the construction of a home, or abandons construction, leaving it uncompleted, the owner is entitled to an award of the cost of completing the work in conformity with the contract and specifications, including actual expenditures deemed in good faith to be necessary to complete the job. The burden is upon the owner to show that the construction of the home was completed at a reasonable cost, or in good faith, in order for the owner to recover damages for loss of the bargain from the builder who breaches the contract. The amounts actually expended must be proven with a reasonable degree of certainty. American Structural Systems, Inc. v. R. B Gay Construction Company, 619 So.2d 366 (Fla. 1 s` DCA 1993); Young v. Johnston, 475 So.2d 1309 (Fla. 1 ' DCA 1985). The Florida Supreme Court has adopted 346 (1)(a) of the Restatement (First) of Contracts (1932) as the measure of damages for breach of a construction contact. Roseman Holdings, Ltd v. Hourihan, 414 So.2d 1037 (Fla. 1982). That section states as follows:

13 For defective or unfinished construction, the contracting party can obtain a judgment from the builder for either: The reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste; or The difference between the value that the product contracted for would have had and the value of the performance that has been received by the Plaintiff, if construction and completion in accordance with the contract would involve unreasonable economic waste. In addressing breach of construction contracts, under Florida law the measure of damages is the difference between what it would have cost to perform the contract, and the contract price had it been entirely executed. In estimating the cost of performance, the price of materials, labor, etc., at the time of the breach will govern, without regard to subsequent fluctuations. The elements of cost should be ascertained from reliable sources, from those having experience in the field, and not from speculative opinions. Pullum v. Regency Contractors, Inc 473 So.2d 824 (Fla. 1 s` DCA 1985). Introduction to Right to Repair and Right to Cure Statutes Since the explosion of construction defect lawsuits began, all sides of these specialized claims have been at odds on the best way to resolve them. Traditionally, a property owner is unhappy with workmanship that a contractor or its subcontractors have sold as acceptable. But the property owner and contractor are not seasoned in the science of dispute resolution, and so even the most well-intentioned may not be able to constructively address the claim so they have turned to lawyers, both plaintiff and defense for a solution to resolve these claims. Plaintiffs attorneys have responded to many of these claims by immediately instituting suits which have to be responded to by the contractors defense attorney s. Once this occurs, many other parties are added to the suit and discovery commences. Many times, the parties themselves are not aware of the specific claims until several years after the suit is filed In many states, court rules require litigation to be on a fast track system requiring the case to be tried within a specified time period. In many states, construction defect related cases are deemed complex litigation and are generally excused from the fast track system which is one of the major reasons they linger for so long. All parties realize that the lack of an effective framework to handle these claims is further exacerbated when layers of subcontractors are also involved, many of whom may have no relationship with the property owner or little allegiance to the prime contractor. Under these circumstances, it's not surprising that litigation may actually seem like the path of least resistance. Turn the mess over to the lawyers and let them sort out who is at fault seemd to be the order of the day. Unfortunately, under the distorting spotlight of litigation, a property owner's perception of a contractor's fault is magnified, and a contractor's conviction about the quality of its workmanship becomes immutable. Throw in a diverse cast of cantankerous subcontractors and you get a toxic mix leading to skyrocketing legal expenses and the potential for

14 significant damages. What all this also has lead to is skyrocketing insurance premiums for contractors and their subcontractors, if insurance is available at all. What many parties involved in construction defect claims and litigation all agree is that there should be a way to give property owners and contractor a constructive process designed to help them resolve their disputes without litigation. A majority of U.S. states have, or are in the process of, passing laws whose sole purpose is to promote dispute resolution early in the construction defect case without requiring litigation. Commonly known as right to repair or notice and opportunity to repair laws, these statutes establish a comprehensive set of alternate dispute resolution procedures, and are in place in a growing number of states and proposed in a number of other states Notice and Opportunity to Repair The overview of all Notice and Opportunity to Repair statutes are all centrally focused on early resolution of construction defect related disputes. Most require that a property owner place contractors on formal notice of a construction defect claims before a lawsuit can be filed. Contractors then have a right to inspect the dwelling and assess the alleged defect. If the property owner and contractor agree, this inspection can include destructive testing. Basically, it's a process for settling construction disputes in the home rather than in court room. If legitimate construction defects need to be repaired, the builder gets first crack at fixing them before the buyer can file a lawsuit. The contractor also has the right to put any other potentially responsible contractors and subcontractors on notice of the claim, and those contractors then have a right to inspect the dwelling All contractors on notice typically have to respond to the property owner and offer to: Repair the defect or damage at no cost to the property owner, Make a monetary offer to compromise, or Dispute the claim. Many builder groups such as the National Association of Home Builders (NAHB), the Building Industry Association (BIA) and legislative groups such as the American Legislative Exchange Council's (ALEC) Civil Justice Task Force endorse Notice and Opportunity to Repair laws and statutes. Notice and Opportunity to Repair laws and statutes establish a process for settling construction disputes out of court and is considered a critical step toward alleviating the construction industry's general liability insurance crisis. Commonly, Notice and Opportunity to Repair laws and statutes have a central focus which include the following elements:

15 Make the process of resolving construction disputes more streamlined and transparent by allowing a contractor to inspect an alleged defect and making a claimant provide a reason for not accepting a reasonable settlement offer. Offer incentives for settling disputes out of court and exclude the contractor from liability for certain defects, such as those that that the home owner knew about before the home was purchased or when a contractor is not allowed to perform warranty service work. Make the process fairer for builders by limiting a homeowners association s ability to bring claims against builders. The Insurance Involvement Regarding Notice and Opportunity to Repair Statutes A key factor that is seriously impacting both builders and insurers is the increased level of construction defect litigation initiated by the plaintiffs' bar. Insurance companies are paying defense costs, attorneys' fees, and settlements and passing these expenses on to builders in the form of increased premiums or, in some areas of the country, pulling out of the residential construction market altogether. Further, most (if not all) of the exclusions currently included in GLI policies are often the result of litigation. The bottom line is that insurers consider builders as a class unprofitable and very costly. Further, litigation is spreading nationwide and is fueled by heavy media coverage and large jury verdicts. It remains common knowledge that homes cannot be built without contractors having affordable insurance coverage and if traditional construction defect litigation is allowed to continue, insurers may abandon this marketplace in its entirety How will these statues benefit both contractors and their insurers remain difficult to access because of the recent implementation of all of these right to repair or notice and opportunity to repair laws and there have not been enough test cases to determine if the right to repair or notice and opportunity to repair laws actually work. Conceptually, the right to repair or notice and opportunity to repair laws may have a benefit for contractors to resolve cases early and not involve the insuer. Because of high deductibles and/or self-insured retentions currently on contractors insurance policies, the contractor may make an economic decision to resolve construction defect claims without seeking insurance coverage. This is especially true particularly in the case of smaller claims where contractors may have to pay the claim anyway under their deductible or self insured retention and will be leery of reporting the claim as to avoid future premium increases if they tender these claims for coverage. Where insurers are put on notice of a claim made under an opportunity and notice to repair statue, insurers have an opportunity to investigate and review the facts to assess whether they have any indemnity amd/or defense obligations obligations since many opportunity and notice to repair statue are equvilent to a suit undser the insurers policy. This is preferable to reviewing coverage obligations when litigation has commenced, as the duty

16 to defend is typically broader than the duty to indemnity, and the defense obligation is typically governed by the allegations of complaints that are often specifically drafted with an eye toward triggering insurance recovery. To the extent that coverage may exist, the insurer has an opportunity to work with contractors to settle claims under the statute. Given the significant traditional costs associated with defending these cases, both the insurer and the contractor may have significant incentive to make proactive and meaningful offers to repair or compromise. Some insurance trade groups have expressed concerns that notice and opportunity to repair statutes might be used to preclude insurers from participating in the adjustment of claims, and bind insurers to cover agreed upon costs of repair or offers of compromise. This is a legitimate concern, although well-known policy conditions may minimize this risk. For example, the policy's notice clause should be triggered by claims made under notice and opportunity to repair statues, and a contractor that settles a claim under the statute without putting its insurer on notice, but who later seeks coverage for a settlement reached through the statutory process, may have breached the policy's notice clause and arguably prejudiced the insurer in the process. Similarly, a contractor that puts its insurer on notice but does not involve the insurer in the claims process risks breaching the policy's cooperation clause. In addition, a settlement agreed to without putting the insurer on notice, or allowing the insurer to participate in the claim process, may constitute a voluntary payment that is not covered under the policy In Florida, the notice and opportunity to repair statute directly addresses concerns that contractors will use the statutory process to avoid contractual obligations, but still recover under their policies. Florida's statute expressly provides that nothing in the law precludes a contractor from meeting all of its obligations under liability insurance policies, including contractual provisions that serve as conditions precedents to coverage, like the policy's notice requirements. Another potential ramification of these statutes arises under first party policies where property owners seek recovery under first-party coverage before availing themselves of a notice and opportunity to repair statute. Under these circumstances, if the first-party insurer pays the claim, then it might lose a right of subrogation against the contractor if a subrogation action against the contractor is barred because the requirements of the notice and opportunity to repair statue were not satisfied. The failure of a property owner to first engage in the notice and opportunity to repair process arguably breaches the policyholder's contractual obligation to mitigate loss and prejudices the first-party insurer's interests by potentially jeopardizing its subrogation right.

17 Insurers are in the business of managing risks, and notice and opportunity to repair statues aid those efforts by creating mechanisms to resolve claims before they reach perhaps the riskiest and costliest forum around the courtroom. Taking most lawsuits out of the equation may help make the construction industry more attractive to insurers. By potentially heading off litigation, defense cost exposure which is often a driver of insurance exposure in these cases may be alleviated. If insurers are engaged in the dispute resolution process, potential indemnity exposure may also be minimized and contractors may present themselves as useful allies with the common goal of resolving claims outside of litigation. The laws in the construction defect hotbed states of Arizona, California and Washington are relatively new, so there isn't enough evidence to determine whether or not the laws have had an effect on the cost and availability of general liability insurance yet. However, at least two large insurance carriers in California indicated that they will reconsider their decision to leave the market because of the new construction defect law that passed in that state. Because of the traditional nature of the insurance market, it may take two or three years before the Right to Repair and Opportunity to Repair laws have any demonstrable effect on the price and availability of general liability insurance. Normally, insurance carriers need to experience a couple of years of reduced lawsuits before they will change their pricing structure Florida s Right to Repair and Right to Cure Statutes By way of brief history, Florida is consistently subject to many natural disasters such as hurricanes and fires and has some of the toughest building codes nationally. Florida also experienced a housing boom which started in the late 1970 s which continues through today. Given these basic elements, the vast majority (90+%) of construction defect litigation issues in Florida come from residential occupancies and Florida remains ripe for increased construction defect claims and litigation activity in the future. Given current statistics, Florida will be a strong contender for leading the nation in this area of specialized claims and litigation. In 2002 Florida s legislature recognized the problems associated with construction defects in Florida and in the closing days of the 2003 session, the Florida Legislature adopted Senate Bill 1286 which requires homeowners to give contractors 60 days written notice before filing a lawsuit to give contractors and their subcontractors an opportunity to cure and/or repair construction defects. Governor Bush signed it into law effective May 27, 2003, as Chapter , Laws of Florida. The 2003 law was codified as Florida Statutes Sections It says it applies to all homeowner construction defect claims accruing after that date, even if the contract was entered into before then.

18 This new law became effective on July 1, By way of brief history, Florida s legislature intended to create a process to give homeowners, subsequent purchasers of a dwelling, tenants, associations, and construction professionals the opportunity to settle legal claims related to construction defects arising out of the construction of a dwelling before a lawsuit is filed. Florida s legislature recognized that civil actions relating to construction defects are filed like any other lawsuits relating to contract or tort but current law does not require a prelawsuit screening process, or require notice to a contractor, subcontractor, supplier, or design professional ( construction professional ) before a civil action can be initiated. Comparing construction defect litigation with medical malpractice litigation, Florida s legislature recognized that the current law did require pre-suit notice before initiating a medical malpractice action. Florida s Medical Malpractice Act in chapter 766, F.S., requires the claimant to conduct a suit investigation before bring suit. Section , F.S., requires the claimant to notify the defendant of his or her intent to file suit. Section (2), F.S., requires the defendant to investigate the claim, and further requires that within 90 days he or she reject the claim, make a settlement offer, or admit liability and offer to arbitrate damages. The lawsuit may proceed if the pre-suit suit process does not resolve the dispute. Several cases, including Lindberg v. Hospital Corp. of America, 545 So.2d 1384 (Fla. 4th DCA 1989), have held that the pre-suit screening process for medical malpractice claims is constitutional and does not violate the access to the court's provision in art. I, s. 21, of the State Constitution Further, Section (11), F.S., requires a notice of intent to initiate litigation against an insurer as a condition precedent for an action related to an overdue personal injury claim. This section gives the insurer an opportunity to pay the overdue claim before litigation is commenced. It also tolls the applicable statute of limitation for 15 business days. Section 95.11(3)(c), F.S., provides a 4 year statute of limitations for an action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 15 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest. It was clearly the Florida legislature s intent that under this bill, homeowners, subsequent purchasers of a dwelling, tenants, or associations and their attorneys will have to comply

19 with the notice provisions of this bill before bringing a legal action for construction defects arising out the construction of a dwelling. Construction contractors, subcontractors, suppliers and design professionals will also have to comply with the notice and response requirements in the bill. It was the belief of Florida s legislature that this bill may reduce the number of civil suits in the court system related to construction defects arising from the construction of a dwelling Key Issues of Florida s Right to Repair Statutes While a copy of the Florida s Right to Repair Statute is included in this paper, this portion will address some of the key issues of Florida s Right to Repair Statute. Florida s construction community believes that the major problem that was solved with this legislation is that of prohibiting the owner from suing those who were on the construction site but did not cause or contribute to the construction defect. The new law requires that should a defect (water leakage for example) be identified, the owner is obligated to file a notice to the suspected culprit(s) and allow them the opportunity to correct the problem before a lawsuit is filed. With anticipation that some will file lawsuits anyway, the Florida Legislature added the following to the Florida Statutes: If a claimant files an action without first complying with the requirements of this act, on motion by a party to the action the court shall abate the action, without prejudice, and the action may not proceed until the claimant has complied with such requirements. The contractual agreement between the owner and the contractor contains specific language and this new Florida law requires the addition of the following notice:

20 FLORIDA LAW CONTAINS IMPORTANT REQUIREMENTS YOU MUST FOLLOW BEFORE YOU MAY FILE A LAWSUIT FOR DEFECTIVE CONSTRUCTION AGAINST A CONTRACTOR, SUBCONTRACTOR, SUPPLIER, OR DESIGN PROFESSIONAL FOR AN ALLEGED CONSTRUCTION DEFECT IN YOUR HOME. SIXTY DAYS BEFORE YOU FILE YOUR LAWSUIT, YOU MUST DELIVER TO THE CONTRACTOR, SUBCONTRACTOR, SUPPLIER, OR DESIGN PROFESSIONAL A WRITTEN NOTICE OF ANY CONSTRUCTION CONDITIONS YOU ALLEGE ARE DEFECTIVE AND PROVIDE YOUR CONTRACTOR AND ANY SUBCONTRACTORS, SUPPLIERS, OR DESIGN PROFESSIONALS THE OPPORTUNITY TO INSPECT THE ALLEGED CONSTRUCTION DEFECTS AND MAKE AN OFFER TO REPAIR OR PAY FOR THE ALLEGED CONSTRUCTION DEFECTS. YOU ARE NOT OBLIGATED TO ACCEPT ANY OFFER MADE BY THE CONTRACTOR OR ANY SUBCONTRACTORS, SUPPLIERS, OR DESIGN PROFESSIONALS. THERE ARE STRICT DEADLINES AND PROCEDURES UNDER FLORIDA LAW. The homeowner cannot file suit for damages until first giving the contractor 60 days written notice specifying the defects. The bill requires that the claimant must serve a written notice of claim on the construction professional The construction professional has a right to inspect the dwelling within 5 days of the notice of claim. Within 10 days of the notice of claim the construction professional must serve a copy of the notice of claim to any other construction professional that he or she thinks is responsible for the construction defect. These construction professionals also have a right to inspect the alleged construction defect. Within 20 after the notice of claim, the construction professional must respond to the claimant with a written offer to remedy the claim, a written offer to settle the claim, or a written dispute of the claim. The claimant has 15 days to accept or reject the offer to settle and compromise the claim or to remedy the alleged construction defect. The claimant can file suit without further notice if he or she rejects the construction professionals offer to remedy the alleged construction defect, or offer to settle and compromise the claim. The claimant may also file a lawsuit without further notice after the construction professional rejects the claim or the construction professional does not meet the agreed timetable to remedy the construction defect or make the settlement payment. Failure by any party to follow the procedures in the bill is admissible in court. The procedures in the bill do not bar or limit a claimant from making any emergency repairs to the claimant s dwelling.

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