Middle District Of Florida Reiterates Florida’s Injury-In-Fact Trigger Rule

I have written about the insurance law concept of “trigger” several times before, most recently in the context of the Middle District of Florida’s decision in Axis Surplus Insurance Co. v. Contravest Construction Co., 921 F. Supp.2d 1338 (M.D. Fla. 2012).  An Insurance Law Florida reader from Colorado recently asked for an update on Florida trigger law.  The question came a week after the Middle District of Florida took up the issue again in Trovillion Construction & Development Inc. v. Mid-Continent Cas. Co. and Casa Jardin Condominium Association Inc., No. 12-914 (M.D. Fla. Jan. 17, 2014).

Trovillion, like many trigger cases, is a construction defect case.  Soon after Trovillion, the developer and general contractor, turned over the Casa Jardin condominium to its residents, the association sued for construction defects.  During the course of construction, Trovillion purchased a series of Comprehensive General Liability insurance policies from Mid-Continent Casualty Company and then Endurance American Specialty Insurance Company.  Endurance defended Trovillion against the association’s lawsuit but Mid-Continent refused to defend.  Mid-Continent then filed a declaratory judgment action seeking a declaration that it did not owe coverage, and Endurance soon followed with its own lawsuit.

Eventually, Trovillion, the association, and Endurance settled the lawsuit on the basis of a Coblentz agreement.  A Coblentz agreement is an assignment agreement in which the defendant settles a lawsuit with the plaintiff by agreeing to a consent judgment and assigning to the plaintiff the right to sue its insurer for coverage for the judgment.  In return, the defendant receives an agreement from the plaintiff not to execute on the judgment against the defendant’s assets.  In this particular case, the Coblentz agreement also included a loan-receipt agreement, since Endurance had paid significant sums to defend Trovillion.

I have discussed before Florida’s unusual rule that prohibits a defending insurer (i.e., the “good” insurer) from obtaining contribution from a non-defending insurer (i.e., the “bad” insurer), even if it is later found that both insurers had a duty to defend.  In other words, Florida law gives insurers the perverse incentive of refusing to defend when another insurer is already defending, since the defending insurer cannot force the non-defending insurer to contribute to the defense.  This is the no-good-deed-goes-unpunished rule.  To combat this nonsensical rule, some policyholders and defending insurers enter into what is known as a loan-receipt agreement, which creates the legal fiction of the defending insurer providing a “loan” to its policyholder to pay for the defense costs, rather than paying the defense costs itself.  The result is that the policyholder “pays” the defense costs out of its own pocket, and then repays the “loan” when it obtains a judgment against the non-defending insurer for breach of the duty to defend.  If this sounds convoluted and contrived then you understand the concept of a loan-receipt agreement.  It is not an elegant solution, but, until the Florida Supreme Court changes the no-contribution rule, it is the best approach a policyholder can take when it has one defending insurer and one non-defending insurer.

Back to the decision.  Judge Roy B. Dalton, Jr. recognized the validity of the Coblentz agreement and the loan-receipt agreement.  He also recognized that the duty to defend is broader than the duty to indemnify, and that an insurer owes a defense if the allegations of the complaint raise the possibility that there is coverage.  Given that the association alleged that property damage occurred throughout construction, and there were issues of fact regarding when the property damage occurred, Judge Dalton determined that Mid-Continent breached its duty to defend.

Turning to the duty to indemnify, Judge Dalton correctly determined that Mid-Continent’s duty to pay for the consent judgment was dependent on the trigger of coverage, since the duty to indemnify is based on the actual facts as developed in the case, and there were factual disputes regarding when the property damage occurred.  The reason trigger was so important was that only one of six Mid-Continent policies contained the subcontractor exception to the “your work” exclusion.  The subcontractor exception to the “your work” exclusion is yet another topic I have discussed before, in the context of Chinese Drywall litigation.  I will not rehash that issue here.  But the bottom line is that Trovillion did not have coverage in five out of six Mid-Continent policy years in which this exception was absent.  So if the policyohlder could not trigger the one year with coverage, then the policyholder was out of luck.

Judge Dalton surveyed the existing Florida trigger law, and determined that Florida is an injury-in-fact jurisdiction.  He rejected Mid-Continent’s arguments that a manifestation trigger rule should apply.  Instead, Judge Dalton correctly followed the trigger rule set forth by the Eleventh Circuit in Trizec Props., Inc. v. Biltmore Constr. Co., 767 F.2d 810 (11th Cir. 1985), and more recently by Judge Antoon in Axis Surplus Ins. Co. v. Contravest Constr. Co., 921 F. Supp.2d 1338 (M.D. Fla. 2012).  In doing so, Judge Dalton’s decision shows that the pendulum clearly has swung back in favor of the injury-in-fact trigger in Florida.

Ultimately, Judge Dalton determined that Trovillion failed to prove that property damage in fact occurred within the one policy year that had coverage.  Judge Dalton further found that Trovillion failed to carry its burden to properly allocate the amount of the consent judgment between covered and uncovered damages.  So he determined that Mid-Continent had no duty to indemnify any portion of the consent judgment.

On the whole, the decision is one of the better coverage decisions to come out of a federal or state court in Florida in recent years.  While the result was a mixed bag for the policyholder, Judge Dalton showed impressive mastery of some complicated coverage issues.  The decision is an important read for anyone who is interested in insurance law in Florida.

The only puzzling aspect of the decision is that Judge Dalton entered judgment in favor of Mid-Continent.  Why he did this, given that he found Mid-Continent to have breached its duty to defend, is a mystery.  Since the duty to defend is independent of the duty to indemnify, and is based on the “possibility” of indemnity coverage, even if that coverage turns out to not exist, judgment should have been entered in favor of Trovillion to the extent of its defense costs.  This would also entitle Trovillion to recover its Fla. Stat. § 627.428 fees for having pursued the litigation to a successful result, even though it lost on the duty to indemnify.  I presume this was an oversight that will be corrected before judgment is finally entered.  If it is not corrected, then it will create an additional perverse incentive for insurers to refuse to defend, since a non-defending insurer could avoid its broader defense obligation by waiting to win on its narrower indemnity obligation.  This could not be the result Judge Dalton intended.