Litigating Construction Defects in Community Association Property: Part III

Recap of Part II

This article is Part III of a four part series.  Part I was meant to inform the Board of a Condominium or Homeowners Association of some basic steps that should be taken when significant latent construction defects are discovered.  Part II was meant to inform the Board about the process of retaining an expert witness and serving a Notice of Claim.  This article will discuss how to determine if the Board is obligated to arbitrate its claims, whether to bring direct claims against the subcontractors and will discuss common insurance coverage issues.

Arbitration/Litigation and Whether to Bring Direct Claims against Subcontractors

Assuming the Notice of Claim doesn’t result in a resolution satisfactory to the Board, the Board, through its counsel, will need to decide whether it is required to litigate or arbitrate the claim and who the claim will be brought against.  For the purpose of this article, it will be assumed that the builder of the project was also the owner/developer of the project. [1]  Determining whether litigation or arbitration is required, requires an analysis of at least some of the purchase and sale agreements. [2] Generally, if the initial purchasers were required to arbitrate a claim the association will be also required to arbitrate a claim.  Pulte Home Corporation v. Vermillion Homeowners Association, Inc., 109 So.3d 233 (Fla. 2d DCA 2013); Pulte Home Corporation v. Bay at Cypress Creek Homeowners Association, Inc., 118 So.3d 957 (Fla. 2d DCA 2013).  It is not uncommon for different homeowners to have signed different arbitration agreements and is further not uncommon for some homeowners to have agreed to arbitrate and some homeowners to have not signed an agreement to arbitrate. [3]  That being said, it is often more costly to arbitrate but the benefit of arbitration is that it will often be concluded within two years.  Litigation of very complicated construction defects claims will almost certainly exceed two years and can take many more than two years to complete.

Determining whether to bring a claim just against the builder or to bring a claim against the builder and all of the subcontractors is a decision that will be based on the totality of the circumstances.  However, bringing suit solely against the builder will often simplify the case.  Often times in construction litigation, proving the existence of a defect is not difficult.  For example, if there is water leaking around the window which saturates the interior carpet it doesn’t take a rocket scientist to identify there is a problem.  If the Board only brings a claim against the builder, the claim is simpler because the builder is responsible for the work of its subcontractors and so the reason water is leaking around the window is largely irrelevant.  However, if the Board sues the subcontractors as well as the builder the Board will have the burden of proving exactly which subcontractors caused what damage.  Let’s assume in this window example that the problem is two-fold, a lack of head flashing at the top of the window and a failure to adequately tape the water resistant paper (like Tyvek) around the window.  The Board now has the difficult task of trying to apportion damages that are very difficult to apportion.  In this example, it will likely be difficult to determine how much of the damage came from the head flashing problem and how much came from the taping problem.  Additionally, sometimes it is difficult to prove exactly who performed work at this detailed of a level.  As you might imagine, if the documents don’t detail who did this specific work, the subcontractors often deny performing the work and point the fingers at the other subcontractors.  At first glance bringing a claim solely against the builder may seem like the better strategy.  However, it is not always the best strategy to bring a claim just the builder.  The Board and its counsel should evaluate all facts and circumstances to determine how to succeed.  For example, the builder may be out of business and uncollectible and the subcontractors and their insurers may be a very important source of money.

Insurance Coverage

Whether the subcontractors are sued directly by the Board or are brought in as third party defendants by the builder, the inclusion of the subcontractors in the claim usually injects complicated insurance coverage issues into the case.  For the purpose of this article, the specific coverage issues will not be addressed.  However, to provide a very basic explanation of the issue the Board need only understand that an insurer is not a guarantor of the work of a specific subcontractor (guarantying the work of a contractor or subcontractor is known as a performance bond and would be provided by a surety).  However, insurance does typically cover resulting damage caused by faulty work.  To use the prior window example, if the tape job was faulty and caused damage to drywall and the interior carpet the insurer would not pay to replace the tape because insurance is not a performance bond…it doesn’t pay for faulty work.  However, the insurance would pay for the damage to the drywall and the damage to the carpet because the faulty tape job caused damage to other property.  As you can imagine, the fighting amongst the insurers about which insurer is going to pay for what portion of the damage is simply compounded when there are multiple defects and multiple subcontractors.  This infighting amongst the insurers is expensive and time consuming but is a necessary process.  It is not uncommon for there to be twenty or more parties to a community association construction defects claim.  Having that many parties to one action just reinforces the time consuming and complicated nature of the process of community association construction defects cases.  It makes everything, even settlement talks, difficult to manage.

Conclusion

Part III of this article was meant to provide some very basic information about insurance coverage, who the claim should be brought against and whether the Board can be forced to arbitrate the claim.  Part IV of this article will conclude this series and will the process of quantifying damages and mediation.

[1] If the developer is separate from the builder, then the Board will have different rights and claims against these separate entities.

[2] An entire article could be written solely on arbitration.  The actual determination of whether there is an obligation to arbitrate a claim requires an analysis of the specific language of the relevant arbitration provision of the relevant contract(s) and an analysis of other relevant facts.

[3] Whether a lack of commonality of the agreements to arbitrate signed by the homeowners acts as a successful defense to a Motion to Compel Arbitration has not yet been ruled upon in Florida.