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INSURANCE COVERAGE FOR 558 CLAIMS NOW POSSIBLEBruce E. Loren, Esq. and Kyle W. Ohlenschlaeger, Esq. | Jan 24 2018

Contractors are often frustrated by the expense of the Section 558 process in construction defect litigation. Section 558 of the Florida Statutes provides for pre-suit notice of construction defect claims, along with the potential for settlement by repairs or payment. As we previously explored, the process can be very beneficial to contractors even if they are unable to settle the owner’s claims. However, some clients have decided not to seriously participate in the 558 process simply because of the legal costs involved. These clients believe that, because their insurance company will cover both the defense and any associated liability later if the owner files suit, it was not worth the expense or aggravation of hiring their own attorney to handle the 558 process.

This issue was compounded by insurance companies regularly refusing to pay for the defense of the 558 process. In addition to the many reasons insurance companies deny contractors coverage under a policy, they always appeared to have an easy out to paying for the defense to the 558 process—that it wasn’t a “suit” within the meaning of most general liability policies. Fortunately for contractors, the Florida Supreme Court recently issued an opinion that changes that landscape and puts insurance companies, in limited circumstances, on the hook for the defense costs in the 558 process. As a result of this case, contractor’s insurance companies now need to provide a defense in the 558 process where the claim involves a covered loss and the insurance company consents to the contractor’s participation in the 558 process.

The 558 Process is an Alternative Dispute Resolution Proceeding Under Most Policies.

As a brief recap of the case, the Court looked at whether the 558 process was a “suit” as defined by Crum & Foster’s general liability policy. Under the policy, the word “suit” included “civil proceedings,” “arbitration proceedings,” and “alternative dispute resolution proceedings.” Without much difficulty, the Court found that the 558 process was neither a civil proceeding nor an arbitration proceeding. The Court did, however, find that the 558 process is an alternative dispute resolution proceeding within the meaning of the policy. This distinction is important because the insurance company must consent to the contractor’s participation in an alternative dispute resolution proceeding to be on the hook to pay the legal costs, as discussed further below. As a final note on the case, it was decided based upon the language of the Crum and Foster Policy. Although most general liability policies come from a standardized form, the language of your policy will determine if your insurance company is required to provide a defense for alternative dispute resolution proceedings.

Does the 558 Notice Allege a Covered Claim?

Regardless of the Court’s recent decision, insurance companies only need to provide a defense to the 558 process if the owner’s 558 Notice alleges a covered claim with respect to a contractor’s work. We have previously evaluated some the most common examples of why defect claims are not covered by general liability policies. Most importantly in this context, unless the 558 Notice alleges that the contractor’s defective work caused damage to something other than the contractor’s work itself, the claim may not be covered by insurance. As a result, without allegations that a contractor’s defective work damaged something else, insurance companies can continue to refuse to pay to defend the 558 process.

Obtain the Insurance Companies’ Consent to Participate in the 558 Process

As mentioned above, under most general liability policies, the insurance company will only be required to provide a defense to the 558 process if it consents to the contractor’s participation in the 558 process at the outset. We agree with your initial reaction that this is completely counterintuitive. However, there are reasons—mainly an early opportunity to resolve the matter without the expense of litigation—that an insurance company might agree. In fact, insurance companies have long encouraged and even required contractors to participate in the 558 process, without agreeing to pay for the defense.

Practically, this recent case adds an additional step contractors should take upon receipt of a 558 Notice of Claim, asking for their insurance companies’ written consent to participate in the 558 process. We always advise our clients that 558 notices should be sent to their insurance companies right away to avoid an allegation that the contractor failed to timely notify its insurance company of the claim (yet another reason insurance companies typically deny insurance claims). Now, when you do so, add to your cover letter and/or email a request that the insurance company provide its consent for you to participate in the 558 process. Once the insurance company provides its consent, evaluate the 558 Notice to see if it alleges damage to something else as a result of your allegedly defective work. If it does, you may be in luck and the insurance company should pay for your attorney to defend the 558 process.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701.