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FINRA Arbitration and Emerging Trends

FINRA arbitration, the mandatory dispute resolution forum for brokerage firms, is experiencing an all-time low in new case filings. Positive market conditions have influenced the number of new customer claims filed against registered representatives and FINRA member firms. Generally, case filings decrease when the markets perform well and increase when the markets perform poorly. Obviously, investors who see stable or increased portfolio values do not complain or file claims against their registered representatives or brokerage firms. Nevertheless, should the economy take a downturn in the future, a significant increase in new case filings will likely follow.

FINRA arbitration offers certain advantages to its users: it is much quicker than a typical court proceeding and typically more cost-effective. The costs for conducting discovery are generally less than traditional litigation, given the lack of depositions in FINRA arbitration, and the total amount of money spent on arbitration is typically less than State or Federal court. When comparing FINRA arbitrations to State or Federal cases that go to a final hearing, FINRA arbitrations generally reach the merits hearing quicker than trials, thus saving the parties time and money.

There are also disadvantages to the FINRA arbitration process for brokerage firms. For example, arbitration does not have formal rules of procedure or evidence and participants run the risk of ending up with an unsophisticated arbitration panel.
Arbitrators are not required to be members of the securities industry and they are not required to issue written explanations for their awards unless requested by both parties (which is not typical and rarely occurs).

FINRA has precluded class actions from arbitration, but with regard to claims involving large monetary amounts or multiple respondents, we encourage brokerage firms to continue to press for the resolution of these claims in State and Federal court whenever possible.

Background of FINRA

FINRA is a quasi-governmental agency that was created in 2007 through the consolidation of the National Association of Securities Dealers (“NASD”) and New York Stock Exchange Regulation, Inc. (“NYSE Regulation”), the regulatory arm of the New York Stock Exchange, LLC.

FINRA arbitration is the primary venue for investors (“customers”) to resolve disputes against their registered representatives and brokerage firms.
Alternative dispute resolution is mandatory for all members of FINRA (brokers and brokerage firms). Virtually all brokerage firms include provisions in their standard-form customer agreements requiring the arbitration of customers’ disputes in the FINRA forum.

When a client signs a brokerage account agreement, they are submitting to the jurisdiction of FINRA.

By all accounts, FINRA arbitration is distinguishable from typical consumer, commercial and other commercial arbitration proceedings because it has the oversight of the Securities and Exchange Commission (“SEC”). The SEC reviews and approves the procedural rules governing the arbitral forum, adding a layer of protection above and apart from the Federal Arbitration Act (“FAA”).
However, FINRA arbitration is a less attractive option for brokerage firms than the traditional judicial process and U.S. Courts. Especially in complex cases, FINRA arbitration does not appear to have the necessary apparatus and structure to allow the parties to fully develop and litigate their claims.

For example, twenty days before the final arbitration hearing commences, the parties exchange documents they wish to use at the final hearing (which may or may not have been provided during discovery), along with a list of witnesses they intend to call. Arbitrators are not required to follow evidence rules, either State or Federal.

The tenor of a typical FINRA arbitration proceeding is much more relaxed and informal than a courtroom hearing and typically takes place in a private conference room. These differences may lead to the likeability of the parties and counsel coming into play, as opposed to in State or Federal Court, where rules govern the content and context of the proceeding.

The advantages of litigation to securities firms should entice these firms to seek to litigate matters in either State or Federal court when both parties will agree to opt out of arbitration. As discussed above, the advantages to formal litigation are numerous; the arbitration panel may not have anyone with securities experience or understand the subject matter of the dispute, the panel may not follow formal rules of evidence and the parties may not have an opportunity to fully develop their cases during discovery.

Current Trends in Arbitration

Case filings are at an all-time low, based on statistics maintained by FINRA. When compared to the overall U.S. economy (based on the Standard and Poor 500 economic index), the number of filings directly correlates to the market conditions. After rising 65% from the same period in 2008 and spiking at a high of 7,137 claims in 2009, case filings have now leveled off to an all-time low (3,714 in 2013 and 1,344 through April 2014). This spike in filings in 2009 and continuous drop off during the following years mirrors the Great Recession which took place in the latter part of 2008.

This rise and fall in claims filing is easy to understand when looking at the overall economic picture; when the economy is doing well, customers are less likely to sue their broker. In the short term, we can expect that this trend will continue. If and when the current economic expansion ends, we can expect an increase in the filing of FINRA arbitration claims. (See Charts “A,” “B” and “C,” showing the economic index, FINRA dispute statistics, and trends in the types of claims filed over time).

Monitoring of Markets and Proper Reserves

Given the drop-off in claims submitted to FINRA arbitration and the correlation to market performance, savvy brokerage firms should monitor and track economic forecasts to determine when to reserve for increased litigation and arbitration costs. Based on current trends, when the securities market dips, FINRA arbitration claim filings will again rise. Firms that have reserved appropriately will have the ability to weather the storm to deal with increased litigation.

Arbitration Cases Filed

S&P 500 Index

Cases Served by Controversy Involved

Does Your Exculpatory Contract Say The Magic Words?

Cole, Scott & Kissane has highly trained attorneys who focus on the defense of the fitness, travel and entertainment industries.  Quite often, these industries offer facilities or services to the public or to private members that involve a heightened risk of sustaining personal injuries.  As a means of reducing potential exposure to personal injury claims, our clients often require patrons or guests to sign membership contracts or release agreements that contain exculpatory clauses purporting to limit liability for personal injuries sustained by the patron or guest.

These defenses are rarely ironclad.  In fact, Florida law imposes very stringent requirements on exculpatory clause defenses because public policy disfavors them.  Exculpatory contracts are not favored because they attempt to relieve a party of the duty to exercise due care while simultaneously shifting the risk of injury to a party who is perhaps less equipped to take the necessary precautions to avoid the risk of injury or to bear the risk of loss.1  Of course, there is a countervailing public policy—that which favors the enforcement of contracts.2

In order to strike a balance between these competing public policies, Florida courts have limited the enforcement of exculpatory contracts to instances where such agreements were unambiguous and the intention to be relieved from liability was clear, unequivocal and so understandable that an ordinary and knowledgeable person would know what he or she is contracting away.3  For decades, our District Courts of Appeal have interpreted these requirements to mean that an exculpatory clause was only effective to bar a negligence action if it expressly stated that it released a party from liability for its own negligence.4  This rule required an exculpatory clause to make reference to the terms “negligence” or “negligent acts” as a predicate to its enforcement.5

When analyzing an exculpatory clause defense, our trial courts typically ask at least four questions:

Did the plaintiff personally sign the contract containing the exculpatory clause?

Was it signed before the injury occurred?

Was the plaintiff over the age of 18 when he or she signed it?  And,

Did the exculpatory clause contain the magic language?  (e.g. “I hereby release X from all liability, whether caused by X’s own negligence or otherwise.”)

If the answer to any one of those questions was “no,” then the likelihood of prevailing on such a defense was, in most circumstances, practically nil.

However, in 2015, the Florida Supreme Court in Sanislo v. Give Kids the World, Inc. may have changed that analysis, at least as it pertains to the magic language requirement.6  Give Kids the World, Inc. was a non-profit organization that provided free “storybook” vacations to seriously ill children at its resort village.7  Ms. Sanislo’s child received one such vacation package.8  As part of her application, and again upon arriving at the resort, Ms. Sanislo signed a release, which read, in pertinent part:

I/we hereby release Give Kids the World, Inc. and all of its agents, officers, directors, servants, and employees from any liability whatsoever in connection with the preparation, execution, and fulfillment of said wish, on behalf of ourselves, the above named wish child and all other participants. The scope of this release shall include, but not be limited to, damages or losses or injuries encountered in connection with transportation, food, lodging, medical concerns (physical and emotional), entertainment, photographs and physical injury of any kind . . .

I/we further agree to hold harmless and to release Give Kids the World, Inc. from and against any and all claims and causes of action of every kind arising from any and all physical or emotional injuries and/or damages which may happen to me/us . . . 9

(Emphasis added.)  While at the resort, Ms. Sanislo stepped onto a wheelchair lift that malfunctioned, causing her to fall and sustain injuries to her hip and back.10  Ms. Sanislo filed suit.

Give Kids the World, Inc. filed a motion for summary judgment based upon the language of the exculpatory clause, which the trial court denied.11  The Sanislos prevailed at the trial court level and Give Kids the World, Inc. appealed.12  The Fifth District Court of Appeal, rejecting decades of jurisprudence from Florida’s other District Courts of Appeal, reversed the trial court’s denial of the defendant’s motion for summary judgment and found that the language of the exculpatory clause was unambiguous and enforceable, despite the lack of any reference to the terms “negligence” or “negligent acts.”13  This presented a conflict among the District Courts of Appeal on an important issue of law.

In a landmark 4-3 decision, the Florida Supreme Court held that the absence of the words “negligence” or “negligent acts” in the exculpatory clause did not render the agreement per se ineffective to bar a negligence claim.  In so holding, the Court reasoned that the term “liability” was more readily understandable than “negligence” to an ordinary and knowledgeable person.14  Thus, an agreement that expressly relieved a party from “any liability whatsoever” and which also provided that the scope of the exculpatory agreement included “damages or losses or injuries” could be enforceable even though it did not reference the term “negligence.”15

Although Sanislo appears on its face to broaden the enforceability of pre-injury releases, the fact remains that exculpatory clauses are in derogation of common law and public policy and will, therefore, continue to be strictly construed by our courts.  In fact, the United States District Court for the Southern District of Florida has already observed that Sanislo may have limited applicability based upon the Florida Supreme Court’s note that it was important to its decision that the activities at issue in the Sanislo case “were not inherently dangerous.”16  Nonetheless, Sanislo represents a significant and perhaps promising departure from decades of jurisprudence that could have a positive impact on the fitness, travel and entertainment industries’ abilities to limit potential exposure to personal injury claims.



1      Applegate v. Cable Water Ski, L.C., 974 So.2d 1112, 1114 (Fla. 5th DCA 2008).
2      Ivey Plants, Inc. v. FMC Corp., 282 So.2d 205, 208 (Fla. 4th DCA 1973).
3      Cain v. Banka, 932 So.2d 575, 578 (Fla. 5th DCA 2006).
4      Levine v. A. Madley Corp., 516 So.2d 1101 (Fla. 1st DCA 1987); Van Tuyn v. Zurich Am. Ins. Co., 447 So.2d 318 (Fla. 4th DCA 1984); Goyings v. Jack & Ruth Eckerd Found., 403 So.2d 1144 (Fla. 2d DCA 1981).
5      Id.
6      Sanislo v. Give Kids the World, Inc., 157 So.3d 256 (Fla. 2015).
7      Id. at 258.
8      Id.
9      Id. at 259.
10     Id.
11     Id.
12     Id.
13     Id.
14     Id. at 260.
15     Id. at 270.
16     Salas v. Schachter, 2015 WL 7007803, at *2 (S.D. Fla. 2015) quoting Sanislo, 157 So.3d at 271.



The Legal Implications of Cell Phone Use While Driving

By Melissa D. Crowley, Esq.

As the prevalence of sending emails, texting, posting on social networks, and making calls from smartphones while driving has increased, the legal implications for doing so has increased as well. One government study found that more than two-thirds of adult drivers in the United States reported talking on their cell phones while driving and nearly one-third of United States adult drivers sent or read a text or email while driving in the preceding thirty days.1 In 2014, the National Safety Council reported that cell phone use while driving causes distractions that result in over 1 in 4 car accidents in the United States.2 Not surprisingly, a simple internet search reveals a number of plaintiff’s attorneys who advertise that it may be possible in some cases to make a punitive damages claim against a driver when use of a cellular device at the time an accident becomes evident.

Florida’s Criteria for Making a Punitive Damage Claim

In 1994, the Florida Supreme Court held that punitive damages are only appropriate when a defendant engages in conduct that is “fraudulent, malicious, deliberately violent or oppressive, or committed with such gross negligence as to indicate a wanton disregard for the rights of others.”3 Later, in 1997, Florida’s Legislature set forth the criteria necessary to plead a punitive damages claim and the pertinent burden of proof in civil cases. These are found in Section 768.72(1) & (2), Florida Statutes.

In order to state a claim for punitive damages, the plaintiff must first seek leave of court in accordance with the statute. Section 768.72(1), Florida Statutes. When considering whether or not to grant leave to amend, our courts must first ask whether the plaintiff has demonstrated “a reasonable showing by evidence in the record or proffered by the claimant which would provide a reasonable basis for recovery of such damages.” Id. Thereafter, if the court permits the punitive damages claim, then the trier of fact must find the defendant driver personally guilty by clear and convincing evidence of “intentional misconduct” or “gross negligence” in order to warrant an award of punitive damages.4 Section 768.72(2), Florida Statutes. Then, after the plaintiff proves entitlement to a punitive damages award, the jury must apply the “greater weight of the evidence” burden of proof in determining the amount of the punitive damages award. Section 768.725, Florida Statutes (1999).

The Case Law

In 2011, a trial court in Collier County, in Florida’s Twentieth Judicial Circuit, allowed a punitive damages claim against a defendant whose conduct, i.e. texting while driving, allegedly resulted in a death.5 Although the defendant denied that he was texting, the plaintiff relied on cellular data, which revealed that the defendant had checked his voicemail and sent a text message within one minute of the accident.6 News reports at the time indicated that this ruling was possibly a case of first impression. Clearly, Florida courts need to address the question of whether the use of cellular devices while driving constitutes punitive damages where evidence exists that a driver was using a cellular device at or near the time of an accident.7 However, to date no Florida appellate court has addressed whether a punitive damages claim can be made against an at-fault driver where there is evidence of cell phone use. In addition, several appellate courts in other states have considered the issue and have declined to impose punitive damages in this context, including the following:

  • Lindsey v. Clinch County Glass, Inc., 718 S.E. 2d 806 (Ga. Ct. App. 2011): holding an injured driver could not recover punitive damages against an at-fault driver who caused an accident even after the driver admitted he was distracted while looking up a number on his mobile phone at time of accident.
  • Thompson v. Cooper, 290 P.3d 393 (Alaska 2012): disallowed punitive damages despite evidence showing the at-fault driver was speeding, talking on his phone, impaired by Parkinson’s disease, under the influence of medication, and failed to use required eye-wear at time of accident.
  • Southard v. Belanger, 966 F. Supp. 2d 727, 739 (W.D. Ky. 2013): denying plaintiff’s claim for punitive damages despite allegations the defendant was talking while using a hands free device at time of impact.
  • Ellis v. Old Bridge Transp., LLC, 4:11-CV-78 CDL, 2012 WL 6569274 (M.D. Ga. 2012): precluding a claim for punitive damages for talking on the phone and driving because clear and convincing evidence showing a pattern or policy of dangerous driving was not found.
  • Sipler v. Trans Am Trucking, Inc., CIV. 10-3550 DRD, 2010 WL 4929393 (D.N.J. 2010): granting defendant’s motion for summary judgment on plaintiff’s claims for punitive damages based on allegations that defendant was talking on a hands-free cell phone at time of accident.
  • Anderson v. Foglesong, A09-453, 2009 WL 4910489 (Minn. Ct. App. 2009): denying plaintiff’s motion to amend to add punitive damages based on an allegation the defendant admitted to reaching for her cell phone at time of accident.

Opposing the Punitive Damages Claim

Even though the fact that Florida’s appellate courts have yet to decide whether a claim for punitive damages based upon a driver’s cell phone is viable, there is certainly increased awareness, research, and reports of such drivers causing accidents that result in damages and injuries. Therefore, until Florida’s law is clear, we should anticipate that plaintiff’s attorneys and their experts will likely request leave to plead punitive damages in cases where there is evidence of unlawful cell phone use while driving with catastrophic injuries. Counsel and their experts will analogize cell phone use while driving to that of driving under the influence of alcohol, for which Florida law does allow the imposition of punitive damages.8 Experts can easily support the analogy since, according to the National Highway Traffic Safety Administration, driving a vehicle while texting is six times more dangerous than driving while intoxicated.

For example, in Ingram v. Pettit, the Florida Supreme Court held that a defendant driver, whose blood alcohol level exceeded the legal limit, could be subjected to an award of punitive damages. The Court reasoned that the defendant’s level of intoxication was equivalent to that required to establish criminal manslaughter.9 Notably, the nature of the offense in cases such as Ingram, allowing a punitive damages claim for driving under the influence of alcohol, differs from that of cases involving cell phone usage while driving. 10 Specifically, while it is a criminal offense to drive when a “person’s normal faculties are impaired” in Florida, it is not a criminal offense to use a cell phone while driving.11 However, defense counsel should remain cognizant of the fact that the evidence of “intentional misconduct” or “gross negligence” required to establish entitlement to a punitive damages claim does not have to constitute a criminal act.12

Florida’s Ban on the Use of Certain Cell Phone Features While Driving

While there is currently no law in Florida that makes cell phone use while driving a criminal act, the Florida Legislature did enact the Florida Ban on Texting While Driving Law in 2013.13 Section 316.305, Florida Statutes, forbids the operator of a motor vehicle from “manually typing or entering multiple letters, numbers, symbols, or other characters into a wireless communications device or while sending or reading data on such a device for the purpose of non-voice interpersonal communication, including, but not limited to, communication methods known as texting, e-mailing, and instant messaging.”14 Violation of this statute constitutes a traffic infraction, not a criminal offense.15 However, in asserting a claim for an award of punitive damages, plaintiff’s attorneys will likely argue that violation of Section 316.305, Florida Statutes, or the unlawful use of a cell phone, is evidence of intentional misconduct or gross negligence.

The Implications

The law in Florida as to whether a plaintiff may assert a punitive damages claim where evidence exists of the defendant driver’s unlawful cell phone use at or about the time of accident, therefore, remains uncertain. Attorneys and insurers should anticipate that plaintiff’s counsel will sometimes seek leave to plead a punitive damages claim where there is evidence of unlawful cell phone use. In evaluating and defending these claims, it would be wise to gather information that relates to cell phone use early during the investigation phase of a claim.

Nonetheless, even when the relevant conduct does not rise to the level of intentional misconduct or gross negligence necessary to proceed with a punitive damages claim, the defendant driver may still be found negligent. If a jury determines that the defendant driver was negligent as a result of unlawful cell phone use, an insurer may be obligated to provide coverage for any judgment against its insured that does not exceed the applicable policy limits. Therefore, whenever possible, insurers and defense attorneys should assess to what extent an insured’s unlawful cell phone use while driving might result in a determination of negligence. Not only may a jury determine that an insured’s unlawful cell phone use while driving constituted negligence, but such proof could possibly also result in a jury’s enhancement of a compensatory damages award irrespective of whether the court allows the plaintiff to assert a punitive damages claim.

1 See Gunning, Patrick, Seeking Punitive Damages against Drivers Distracted by HandHeld Electronic Devices, Journal of Consumer Attorneys Association for Southern California Advocate, April 2014 (citing Naumann, Rebecca B. et al. Mobile Device Use While Driving – United States and Seven European Countries). In this study, adult drivers are identified as drivers aged 18-64.
2 In 2014, the National Safety Council reported the annual estimate of cell phone crashes for the year 2013. The study shows that more than a quarter of all car crashes in America, or a minimum of 27%, are likely caused by drivers talking and texting on cell phones. The NSC model estimated that 21% of crashes in 2013, or 1.2 million crashes, involved talking on handheld and hands-free cell phones, and an additional 6% or more of crashes in 2013, or a minimum of 341,000 crashes, involved text messaging. See Also see Distracted Driving: Facts and Statistics at, the official US Government website for distracted driving; and see Injury Prevention & Control: Motor Vehicle Safety, Distracted Driving found at cdc. gov, the website for the Centers for Disease Control and Prevention.
3 See W.R. Grace & Co.-Conn. v. Waters, 638 So.2d 502, 503 (Fla. 1994).
4 The plaintiff’s burden of proof in making a claim for punitive damages must be satisfied by clear and convincing evidence, which is higher than the preponderance of the evidence standard required to prove negligence, but less than the beyond a reasonable doubt standard required in criminal cases.
5 Margaret S. Caskey, et al. vs Astellas Pharma US, Inc. et al., Collier County Case No.: 112010CA0005820001XX (Fla. Collier Cir. Ct. 2011). (Note that the Second District Court of Appeal denied appellants’ motion requesting issuance of a written opinion, Astellas Pharma US, Inc. v. Caskey, 88 So.3d 157 (Fla. 2DCA 2012)).
6 Id.
7 See Swift, Aisling, Collier Judge Allows Enhanced Damages in Suit Alleging Driver was Texting in Fatal Crash, Naples Daily News, November 6, 2011, available at http://www.
8 Ingram v. Pettit, 340 So.2d 922 (Fla. 1976).
9 Id. at 923-924.
10 Id. at 924.
11 Fla. Stat. § 316.193.
12 Cf. Southstar Equity, LLC v. Lai Chau, 998 So.2d 625 (Fla. 2d DCA 2008) (upholding a punitive damages award for non-criminal conduct in action involving intentional misrepresentation and gross negligence in providing security).
13 Fla. Stat. § 316.305.
14 Id. § 316.305(3)(a).
15 Id. § 316.305(4)(a).
16 Id. § 768.72(3) (detailing the instances where punitive damages may be imposed against an employer, principal, corporation, or other legal entity for the conduct of an employee or agent).

Defending the Insured Under a Reservation of Rights

By David S. Harrigan, Esq.

Insurers providing coverage under a standard CG 00 01 insuring agreement obligate themselves to “pay those sums that the insured becomes obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which [the] insurance applies.” In doing so, insurers assert the “right and duty to defend the insured against any ‘suit’ seeking those damages.” Invariably, when claims are made for damages that may be covered under the insuring agreement, questions arise as to whether a duty to defend has arisen, and if so, whether the insured has a right to “mutually agreeable counsel.”

The Duty to Defend

A standard CG 00 01 insuring agreement generally defines a “suit” as follows:

   …a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising    injury” to which this insurance applies are alleged. “Suit” includes:

      An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit       with our consent; or Any other alternative dispute resolution proceeding in which such damages are claimed and to       which the insured submits with our consent.1

Florida law requires courts to construe insurance contracts “in accordance with the plain language of the policies as bargained for by the parties.”2 Where the policy language is plain and unambiguous, no special rule of construction or interpretation applies; and the court should give the plain language in the contract the meaning it clearly expresses.3

The United States District Court for the Southern District of Florida, in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., recently discussed the duty to defend under a standard CG 00 01 insuring agreement. Specifically, the Court analyzed what constitutes a “suit” under a standard CG 00 01 policy, thereby giving rise to the insurer’s right and duty to defend.4

In deciding whether a Notice of Claim served pursuant to Chapter 558, Florida Statutes, constituted a “suit,” the Court relied upon the Black’s Law Dictionary definition of the phrase “civil proceeding” contained in the policy’s definition of the term. A civil proceeding is defined as “a judicial hearing, session or lawsuit in which the purpose is to decide or delineate private rights and remedies, as in a dispute between litigants in a matter relating to torts, contracts, property, or family law.”5 The Court also considered the Florida Supreme Court’s “reasoned analysis” in determining that the collective meaning of “civil action” and “proceeding” includes “[a] procedural means for seeking redress from a tribunal or agency.”6

Ultimately, the Court declined to expand the definition of the term “suit” to include a Notice of Claim served pursuant to Chapter 558, Florida Statutes.7 Since the term “suit” is clearly and unambiguously defined within the policy, the Southern District held that the “right and duty to defend” under a CG 00 01 insuring agreement arises when the insured is faced with a “suit”.8

The Right to “Mutually Agreeable Counsel”

Once a determination is made that the “right and duty to defend the insured against any “suit” exists under the policy, the question becomes whether the insured is entitled to counsel of its choice, or at least “mutually agreeable counsel.” Strictly speaking, within the confines of the standard CG 00 01 insuring agreement, the answer is “NO”. The standard CGL policy provides no entitlement for an insured to hire legal counsel of its choosing at the expense of the insurer.

However, the manner in which the insurer acts upon this duty to defend may alter the parties’ obligations and unwittingly create new rights and obligations in both the insurer and the insured. This is particularly true where the insurer provides notice that the defense will be provided under a “Reservation of Rights” – a notification to an insured that coverage for a claim may not apply.9 This notification allows an insurer to investigate, or even defend, a claim to determine if coverage applies, without waiving its right to later deny coverage based on information revealed during the investigation.10 The entitlement of an insurer to defend under a Reservation of Rights does not arise from the language of the policy itself. Rather, the insurer’s entitlement to defend must arise by operation of statute or a contractual relationship independent of the insuring agreement.

Florida Claims Administration Statute

Florida Statutes provide that an insurer must provide written notice of a Reservation of Rights to the insured or those rights are otherwise waived. Florida’s Claims Administration Statute, in particular, provides that “a liability insurer shall not be permitted to deny coverage based on any particular coverage defense” unless the insurer gives written notice of Reservation of Rights to the named insured within thirty days after the liability insurer knew or should have known of the coverage defense.11

A “coverage defense” is “a defense to coverage that otherwise exists,”12 examples of which include a failure to cooperate or a failure to provide timely notice of claims. However, coverage defenses do not include a disclaimer of liability based upon an express exclusion in the policy.13 It follows, then, that an insurer is not statutorily obligated under the Claims Administration Statute to issue a Reservation of Rights where coverage may simply be excluded by the terms of the insuring agreement.

If a coverage defense is available and the insurer provides a statutory Reservation of Rights, the Claims Administration Statute will trigger an obligation for the insurer to retain “independent counsel which is mutually agreeable to the parties.”14 Therefore, the insurer must ensure that there is mutual assent between the insurer and the insured. If the insurer unilaterally retains counsel, it is the literal antithesis of the concept of mutual selection and constitutes the insurer’s failure to comply with its statutory obligations.15 The consequence of such a failure to comply will result in an insurer’s inability to deny coverage, and the insured may then proceed independently toward settlement and bind the insurer to its bargain.16

An example of the insurer’s obligation to obtain mutual assent is found in American Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., in which the insurer belatedly learned of a lawsuit served upon its insured.17 As a result, the trial court entered a default against the insured.18 Once the insurer received notice of the lawsuit, it promptly assigned counsel to provide a defense. Although the counsel assigned had not been mutually selected, the insured voiced no objection.19 Nonetheless, the Court declined to interpret the insured’s silence as acquiescence, which would have lead to deeming the selection of counsel as mutually agreeable.20 Instead, the Court determined that the insurer’s failure to affirmatively obtain assent from the insured constituted a violation of its statutory duty to assign mutually agreeable counsel, and thus, its conduct was tantamount to a refusal to defend under the policy.21 The Court held that the insured was free to settle the claims without the consent of the insurer and could thereafter seek reimbursement from the insurer.22

Reservation of Rights Issued as Disclaimer of Terms in the Insuring Agreement

Insurers often provide notice that a defense will be provided pursuant to a Reservation of Rights despite the absence of any correlation with an asserted “coverage defense” under the Claims Administration Statute. In such cases, the Reservation of Rights does not fall within the framework of Claims Administration Statute, and by its express terms should not implicate the insured’s statutory right to “mutually agreeable counsel.” Instead, the Reservation of Rights operates more so as a reminder to the insured that the duty to defend is honored, but subject to the terms, conditions and exclusions set forth in the policy. Nevertheless, insurers should be cautious because this approach could still bind the parties to the insuring agreement to new and previously uncontemplated rights and obligations.

For example, in Colony Ins. Co. v. G & E Tires & Service, Inc., the insured requested a defense on numerous occasions, but each time was denied a defense due to the applicability of policy exclusions.23 Although the insurer did not assert a coverage defense and had no statutory duty to issue a Reservation of Rights or assign mutually agreeable counsel, the insurer nevertheless tendered a Reservation of Rights, stating that:

   This letter is to serve as a reservation of Colony’s rights to deny coverage and/or defense under the Policy and/or    applicable law and further, with respect to defense costs incurred or to be incurred in the future, to be reimbursed     and/or obtain an allocation of attorney’s fees and expenses if it is determined that there is no coverage.24

The insured accepted the defense under this express Reservation of Rights. However, the lower court ultimately determined that the substance of the suit was unequivocally excluded from coverage under the policy.25 Thereafter, the First District found that the insured had accepted the tendered performance and could not thereafter materially alter the terms of its agreement to accept the defense on a Reservation of Rights. Under those circumstances, the Reservation of Rights created independent contractual obligations, and once the lower court adjudicated that coverage under the policy did not exist for the underlying claims, the insured was required to reimburse Colony for the attorney’s fees and expenses incurred in the defense.26

A Reservation of Rights in such circumstances is not provided pursuant to any statutory requirement or a requirement of the policy. Therefore, a separate contractual relationship with entirely new obligations might arise; and an insured’s right to mutually agreeable counsel could ultimately be grounded in these new contractual terms. Thus, the insurer must be careful to ensure that all terms contained in the Reservation of Rights are clearly stated, and that both the insured and the insurer have a clear understanding of all terms.

Even under circumstances where there is no statutory obligation to issue a Reservation of Rights, if there is any doubt regarding whether coverage exists for the damages claimed, the insurer may wish to provide this notice to the insured in an abundance of caution once the duty to defend is triggered. Although the doctrines of waiver and estoppel do not operate to create coverage where none originally existed, “when an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage.”27


Where a duty to defend is triggered, no right exists under a standard CG 00 01 insuring agreement for an insured to select counsel of its choice, or otherwise insist on the selection of “mutually agreeable counsel.” Rather, the Legislature created the insured’s right to select counsel under the strict and limited circumstances that arise under Florida’s Claims Administration Statute. However, Florida Courts continue to generate an ever-expanding minefield of ambiguity and uncertainty where insurers tender Reservations of Rights outside the context of an insurer’s statutory obligations. It is, therefore, vital that adjusters, attorneys and insurers understand and properly consider the possible implications of electing to provide a Reservation of Rights as a “reminder” to the insured as to the terms, conditions and exclusions under the policy, or of deciding to forego a Reservation of Rights notice to the insured.

1 Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831-CIV, 2015 WL 3539755 (S.D. Fla. June 4, 2015).
2 Auto–Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000).
3 See Fla. Farm Bureau Ins. Co. v. Birge, 659 So. 2d 310, 312 (Fla. 2d DCA 1994) (Parker, A.C.J., dissenting) (citing Jefferson Ins. Co. of N.Y. v. Sea World of Fla. Inc., 586 So. 2d 95 (Fla. 5th DCA 1991)); U.S. Liab. Ins. Co. v. Bove, 347 So. 2d 678 (Fla. 3d DCA 1977).
4 Altman Contractors, Inc., No. 13-80831-CIV, 2015 WL 3539755.
5 See Black’s Law Dictionary 300 (10th ed. 2014).
6 Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186, 190 (Fla. 2013).
7 Altman Contractors, Inc., 2015 WL 3539755.
8 Id.; see also North Pointe Cas. Ins. Co. v. M&S Tractor Services, Inc., 62 So. 3d 1281, 1282-83 (Fla. 2d DCA 2011) (noting that only if the relevant policy language is susceptible to more than one reasonable interpretation – one providing coverage and the other limiting coverage – is the insurance policy considered ambiguous).
9 See Glossary of Insurance Management Terms (9th ed.).
10 Id.
11 Fla. Stat. §627.426(2)(a) (2014) (emphasis added).
12 See AIU Ins. Co. v. Block Marina Inv., Inc., 544 So. 2d 998, 1000 (Fla. 1989).
13 See Travelers Indemn. Co. of Ill. V. Royal Oaks Enter., Inc., 344 F.Supp. 2d 1358, 1369-70 (M.D. Fla. 2004).
14 Fla. Stat. § 627.426(2)(b) (emphasis added).
15 See Int’l Risk Management Institute (2004); see also American Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So. 2d 904, 906 (Fla. 4th DCA 1997).
16 American Empire Surplus Lines Ins. Co., 701 So. 2d at 906.
17 Id.
18 Id.
19 Id.
20 Id.
21 Id.
22 Id. (citing Steil v. Florida Physicians Ins. Reciprocal, 448 So. 2d 589 (Fla. 2d DCA 1989)).
23 777 So. 2d 1034 (Fla. 1st DCA 2000).
24 Id. at 1036. (emphasis added).
25 Id. (emphasis added).
26 Id.
27 Cigarette Racing Team, Inc. v. Parliament Ins. Co., 395 So. 2d 1238, 1239-40 (Fla. 4th DCA 1981).

Proposals for Settlement and the New Breed of Strict Construction

By Kathryn L. Ender, Esq.

Proposals for settlement have become common-place in litigation as a strategic means to engage settlement, and as a feeshifting mechanism in the event settlement reaches impasse. Florida Rule of Civil Procedure 1.442 governs the content of proposals for settlement. Although a rule of procedure, the Florida Supreme Court has definitively held that it must be strictly construed due to its penal implications.1 However, what used to be strict construction based upon a reasonable interpretation of the statute has morphed into an imbalanced treatment of the rule’s provisions at the behest of strict construction.2 The result is inconsistent application of the rule’s provisions by the Florida courts; thereby invalidating otherwise unambiguous proposals for settlement, and leaving counsel and claims professionals to speculate as to what is sufficient to satisfy the rule’s requirements.

The Florida Supreme Court has recently accepted jurisdiction over this issue to determine whether a proposal for settlement can satisfy the requirements of Rule 1.442(c)(2)(F) when it does not directly “state whether the proposal includes attorneys’ fees and whether attorneys’ fees are part of the legal claim.”3 Until now, finding the legally-correct answer to this question has created a conflict in Florida in cases where attorneys’ fees are not explicitly part of the plaintiff’s legal claim. Specifically, the Third and Fourth District Courts of Appeal have upheld proposals that do not precisely adhere to the language of Rule 1.442(c)(2)(F), concluding that no ambiguity existed and that the terms were sufficient for the party to make an informed decision.4 Whereas, the First District has rejected this approach, concluding that “the test is strict compliance, not the absence of ambiguity.”5

Notably, the impact of this yet-to-be resolved conflict is that there are likely many pending proposals for settlement that would be unenforceable if the Florida Supreme Court adopts the First District Court of Appeal’s analysis. Given this present legal conflict, it is prudent for counsel and claims professionals to be mindful of the Florida courts’ ever-increasing scrutiny, and strictly adhere to the rule’s requirements.

The case recently certified to the Florida Supreme Court is that of Borden Dairy Company of Alabama, LLC and Major O. Greenrock v. Susanne L. Kuhajda.6 The particular issue certified is whether, in cases where a complaint does not make a claim for attorneys’ fees, a proposal for settlement can satisfy the requirements of Rule 1.442 when it does not explicitly “state whether the proposal includes attorneys’ fees” and “whether attorneys’ fees are part of the legal claim.”7

In Kuhajda, no legal claim for attorneys’ fees was made in the complaint.8 The proposals stated that they included “costs, interest, and all damages or monies recoverable under the complaint by law,” but did not include the specific fee language set forth in Rule 1.442(c)(2)(F).9 The defendants argued that the proposals were ambiguous because they did not include the specific fee language of Rule 1.442(c)(2)(F) and, therefore, did not strictly follow the rule’s requirements.10 The trial court disagreed and found that the failure to include the attorneys’ fee language did not create an ambiguity because the plaintiff never sought attorneys’ fees in the complaint.11 On appeal, the First District Court of Appeal reversed, concluding that “the supreme court has made the test strict compliance, not the absence of ambiguity.”12

This holding is directly contrary to that of the earlier Fourth District Court of Appeal decision in Bennett.13 In Bennett, the Fourth District Court of Appeal considered a substantially similar issue and upheld the validity of a proposal for settlement, calling the fee language “mere surplussage” when there is no claim for attorneys’ fees made in the complaint.14 As the Fourth District Court of Appeal explained, the purpose of Rule 1.442 is to “provide an efficient mechanism to convey an offer of settlement to the opposing party free from ambiguities so that the recipient can fully evaluate its terms and conditions.”15 Thus, although the provisions of Rule 1.442 are to be strictly construed, “this rule of construction should not eviscerate the legislature’s policy choice. When reviewing offers of judgment courts should use reason and common sense and interpret the offer as a whole to avoid unreasonable results.”16

In spite of the Florida District Courts’ inconsistent treatment of what constitutes “strict construction,” the Florida Supreme Court has determined that the most critical characteristics of a proposal are that it: (1) follow the technical requirements of Rule 1.442; and (2) not be ambiguous.17 Thus, the key is clarity. As the Fourth District Court of Appeal has commented, the parties should not “nit-pick” the validity of a proposal for settlement based upon allegations of ambiguity unless the asserted ambiguity could “reasonably affect the offeree’s decision on whether to accept the proposal for settlement.”18

Practically, just as it is inequitable to allow parties to be subject to attorneys’ fees when they cannot reasonably evaluate the terms and conditions of a proposal due to ambiguities, so too would it be inequitable for a party to benefit from the Florida courts’ reliance on strict construction to create ambiguities that do not otherwise exist. One example of a so-called ambiguity appears in the argument made in Kuhajda, where there was no legal right to fees, yet liability for fees was circumvented as a result of an ambiguity that was allegedly created by not formally referencing the fee provision of Rule 1.442(c)(2)(F). Similar concerns may result where no legal claim for fees is made, yet the proposal purports to “include” attorneys’ fees in an effort to satisfy the rule’s requirements. A further practical concern arises when parties argue that strict construction equates to “verbatim recitation” of the rule, because anything less could be deemed an “ambiguity.”19

The Florida Supreme Court’s consideration of this issue is necessary in order for Rule 1.442 to maintain its utility. While we await the outcome of the Florida Supreme Court’s decision on the certified question in Kuhajda, counsel and claims professionals should remain cognizant of this conflict in the law and ensure their proposals comply with the First District Court of Appeal’s more strict interpretation of Rule 1.442’s requirements. Additionally, a renewed evaluation of pending proposals for settlement may help ensure litigation goals are reached by confirming the proposals satisfy the rule’s requirements, and by allowing new proposals to be served in cases where they do not.

1 Willis Shaw Express, Inc. v. Hilyer Sod, Inc., 849 So.2d 276 (Fla. 2003).
2 Cf. State Farm Mut. Auto. Ins. Co. v. Nichols, 932 So.2d 1067, 1070 (Fla.2006) (requiring a proposal merely to be “sufficiently clear and definite to allow the offeree to make an informed decision without needing clarification”); Diamond Aircraft Indus., Inc. v. Horowitch, 107 So.3d 362, 377-78 (Fla. 2013) (holding that, under the facts of that case, the party’s failure to include a provision of rule 1.442 created an ambiguity by omission). Compare Bennett v. American Learning Systems of Boca Delray, Inc., 857 So.2d 986 (Fla. 4th DCA 2003) (hereinafter “Bennett”) (“The purpose of the rule is to provide an efficient mechanism to convey an offer of settlement to the opposing party free from ambiguities so that the recipient can fully evaluate its terms and conditions.”), and Three Lions Construction, Inc. v. The Namm Group, Inc., 2015 WL 4464494, at *1 (Fla. 3d DCA July 22, 2015) (hereinafter “Three Lions”) (holding that a proposal satisfied the requirements of Diamond Aircraft even though it did not track the language of Rule 1.442(c)(2)(F)), with Borden Dairy Company of Alabama, LLC and Major O. Greenrock v. Susanne L. Kuhajda, 171 So.3d 242, at 243 (Fla. 1st DCA 2015) (hereinafter “Kuhajda”) (concluding that the test is “strict compliance, not the absence of ambiguity”).
3 Suzanne L. Kuhajda v. Borden Dairy Co. of Alabama, LLC and Major O. Greenrock, 2015 WL 8204268, SC15-1682 (Fla. Nov. 30, 2015); see also Colvin v. Clements and Ashmore, P.A. d/b/a North Florida Women’s Care, 2015 WL 167010 (Fla. 1st DCA Jan. 15, 2016) (relying on Kuhajda to find a proposal unenforceable and certifying same conflict to Florida Supreme Court).
4 Bennett, 857 So.2d at 986; Three Lions, 2015 WL 4464494, at *1.
5 Bennett, 857 So.2d at 986 (holding that the proposal does not have to state whether it “includes attorneys’ fees and whether attorneys’ fees are part of the legal claim” in a case in which the plaintiff’s complaint did not contain a plea for attorneys’ fees), with Kuhajda, 171 So.3d at 243 (holding that the proposal does have to state whether it “includes attorneys’ fees and whether attorneys’ fees are part of the legal claim” in a case in which the plaintiff’s complaint does not contain a plea for attorneys’ fees, and certifying the issue as a conflict for determination by the Florida Supreme Court).
6 Kuhajda, 171 So.3d at 243.
7 Fla. R. Civ. P. 1.442(c)(2)(F).
8 Kuhajda, 171 So.3d at 242.
9 Id. at 242-43.
10 Id. at 243.
11 Id. at 243.
12 Id. (quoting R.J. Reynolds Tobacco v. Ward, 141 So.3d 236, 238 (Fla. 1st DCA 2014)).
13 Id. (certifying conflict with Bennett).
14 Bennett, 857 So.2d at 988.
15 Id.
16 Jacksonville Golfair, Inc. v. Grover, 988 So.2d 1225, 1227 (Fla. 1st DCA 2008).
17 Nichols, 932 So.2d at 1078.
18 Alamo Financing, L.P. v. Mazoff, 112 So.3d 626, 629 (Fla. 4th DCA 2013) (quoting Carey-All Transp., Inc. v. Newby, 989 So.2d 1201, 1206 (Fla. 2d DCA 2008)).
19 Cf. Miley v. Nash, 171 So.2d 145 (Fla. 2d DCA 2015) (holding that a proposal resolving “all claims” sufficiently identified the claims to be resolved without specifically identifying the consortium claim, and explaining that “[t]he wording of these conditions does not create any ambiguity as to what the effect of accepting the proposal will be.”), cert. denied 2015 WL 9306766 (Fla. Dec. 18, 2015); Three Lions, 2015 WL 4464494, at *1 (observing that a proposal for settlement satisfied the requirements of Diamond Aircraft where it simply stated that the “proposal includes any attorney fee claim [the offeree] may have against [the offeror]” and did not track the language of Rule 1.442(c)(2)(F)).

Landmark EUO Decision

Cole, Scott & Kissane, P.A. wishes you a Happy and Healthy Holiday Season! It would, however, seem as though the Holidays have arrived just a bit early for the defense bar, ushered in by the first-ever, comprehensive decision on the viability of the Examination Under Oath No-Show Defense post the 2013 Amendments to the No-Fault Law.

As many of us recall, the Florida Supreme Court’s footnotes in Custer v. United Automobile Insurance Company, 62 So.3d 1086 (Fla. 2010) sounded what would ultimately become the “death knell” of the Examination Under Oath and its use as a viable defense to payment of No-Fault Benefits. Three years later, the Court clarified its holdings in Custer in Nunez v. Geico General Insurance Company, 117 So.3d 388 (Fla. 2013) explained that because the No-Fault statute did not provide for Examinations Under Oath an insurer could not require an insured to attend same as a condition precedent to recovery of Personal Injury Protection benefits. This was ultimately remedied by the Legislature in 2012 by revisions made to the No-Fault statute. See Ch. 2012-197, §10, Laws of Fla. (amending/creating §627.736(6)(g), Fla. Stat., effective 01/01/13). That being said, since the statutory amendment there have been no decisions addressing the validity and effect of the statutory amendment; its incorporation within policies of insurance or its legal classification as a condition precedent (as opposed to a condition subsequent) and the implications thereof. That is, until now!

December 4, 2015 the Honorable Donald Cannava, in the cases of Savin Medical Group, LLC (a/a/o Teresita Machado) v. State Farm Mutual Automobile Insurance Company (Case No.: 13-3408-CC-24) entered a ten page Order granting Defendant’s Motion for Final Summary Judgment predicated upon the insured’s failure to attend Examinations Under Oath. In this first-of-its-kind decision the Court held that the 2013 Statute unequivocally established an obligation for those seeking benefits under the policy to submit to an Examination Under Oath, categorizing same as a statutory condition precedent to receiving benefits. This decision is the first judicial acknowledgment and “ratification” of the “Custer/Nunez Fix” and permits carriers to adopt this provision within their policies of insurance.

The Court then analyzed the policy of insurance under which the claim was being made and under which the insurer was seeking to deny benefits, and in doing so the Court determined that not only was the statutory language appropriately adopted, giving notice to the insureds of their contractual obligation to submit to Examinations Under Oath, but that the policy language also created a condition precedent to receipt of Personal Injury Protection benefits. The Examination Under Oath provisions within the policy, along with the “No-Action” clauses contained therein, unequivocally barred the insured (and its assignees) from recovery of benefits once the claimant failed to submit to the insurer’s requests for Examinations Under Oath.

Yet, the foregoing would not be the most significant finding made by the Court that day. Judge Cannava astutely recognized the lack of any mitigating factors within either the statute or the policy of insurance, which would otherwise create an “unreasonable refusal standard” such as that which exists in §627.736(7)(a), Florida Statutes (concerning Compulsory Medical Examinations). Thus, the insurer need not prove the absence and the claimant may not plead the presence of reasonable circumstances leading to the failure to attend.

Having established submission to Examinations Under Oath as both statutory and contractual conditions precedent to receipt of benefits [distinguishing State Farm Mutual Automobile Insurance Company v. Curran, 135 So.3d 1071 (Fla. 2014)] the Court addressed the issue of prejudice and the insurer’s need to show substantial prejudice by the claimant’s failure to submit to the Examinations Under Oath requested, finding that as a condition precedent, there was no need to show substantial prejudice in order to properly deny benefits.

Of course, the details and nuances of a ten page order cannot be fully addressed in such a brief article. Accordingly, and until the Orders are published in the Florida Law Weekly we invite you to contact the attorney responsible for arguing the motions which gave rise to this truly ground-breaking and important articulation of the defense bar’s position on the issue of post-amendment application of  the Examination Under Oath No-Show Defense.

Florida Community Association Litigation: Homeowners’ Associations and Condominiums

Florida Community Association Litigation: Homeowners’ Associations and Condominiums

See an Excerpt

Attorneys that practice community association law regularly prosecute and defend against claims that sound in the law of contracts, real property, civil rights, and more. Each of these topics is discussed to provide the reader with a set of practical tools that may be used to approach community association disputes.

This book also discusses the motivations that underlie common community association disputes. Emotions run high when neighbors feud. The book places dry legal issues in their context, creating a framework for understanding the root cause of the legal dispute.

This Edition includes advice on:

  • Community boards can preserve their claim for attorney’s fees.
  • Changing requirements for mandatory liability insurance for Condominium Associations and Homeowners’ Associations.

Lessons Learned: Give Me an Aspirin — Change Work is a Headache

 A Primer on the difficulties a Contractor Faces When Dealing With Change Work

(published in the Magazine for the University of Florida’s School of Building Construction)

Click Here to View Article

A. The Traditional Setting

1. The Relationship

In this setting, there is no contract between the general contractor and architect but rather only contracts between the owner/general contractor and owner/architect. This creates a triangular relationship that often leads to tension.  This is because the construction process seldom unfolds as anticipated. Things change – especially in construction – and this is the subject of our article.

2. The Standard Contract

The American Institute of Architects (“AIA”), among many other things, sells construction contract forms which all the various trades utilize. Because of their popularity, we use AIA forms as our examples in this article.

3. The Work Begins

With a complete design, and with bidding finalized, contractors are chosen and the work begins.  Thereafter, the need for numerous changes almost certainly arises. Why? The reasons are endless.  Examples include design conflict, change of owner preference, out of sequence construction, and problematic physical condition(s).  After generating questions to the designers, the various trades then submit proposed changes to the construction administrator.

4. Change Work

Change work is typically done by way of a written modification to the contract; most often as a change order. The AIA’s general conditions define “Modifications” as (1) a written amendment to the contract signed by both parties, (2) a change order, (3) a construction change directive or (4) a written order for a minor change in the work issued by the Architect.  Per the AIA, a change order shall be based upon agreement between the developer, contractor, and architect.  The AIA requires the architect to prepare the change order and the developer to sign it, indicating an agreement as to (1) change in the work, (2) the amount of the adjustment, if any, in the contract sum and (3) the extent of the adjustment, if any, in the contract time.  An unsigned change order may mean the general contractor does not get paid.

5. Schedule

Perhaps most important to any developer is the project’s schedule and change in the work tends to affect that schedule. This is why construction contracts typically provide for liquidated damages, which are damages to which parties contractually stipulate as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.

B. The Conundrum in Contracting

1. Changes Tend to Disagree with the Schedule

Given the importance of the schedule and the potential for damages, should a contractor stop the work to get the change order signed? In other words, does the contractor proceed with the work, or should it wait for the signed change order?

2. Risk Management

While there are no simple answers to these questions, there are protections the contractor can put in place to better manage this dilemma, which include:

  1. Minimizing disputed change work based upon ambiguities, errors, omissions, or discrepancies in the bid documents.  These disputes often arise because of design conflict, as in a mechanical plan conflicting with a structural plan because, say, a drainage pipe cannot run through a structural beam. Owners often take the position that contractors should properly study the design during the bid phase and therefore refuse to pay for change work and attendant project delays based upon a design conflict.  Modification to the contract documents during the bid phase can serve to eliminate, if not minimize, these design conflicts.
  2. Address this dilemma at a pre-construction conference and build protections into the contract.  Meeting minutes should be kept and signed by all the parties present to confirm accuracy.
  3. Prepare detailed change order proposals to reduce the time associated with questions from the construction administrator regarding the change order.  Price and schedule analyses should be enclosed in the proposed change orders.
  4. Document the file.  While the contractor may be confident, even certain, that the change order will be signed, it can never be too sure.  When in doubt, document the file.  When not in doubt, document the file.

So the contractor has sent its letter memorializing why the change order is necessary and detailing its efforts to get it signed without delaying the work.  But what should be done in the meantime?  If the contractor proceeds, it may not get paid for that work.  If it doesn’t proceed, it may be in breach of its contract and face a lawsuit for construction delays.  The practical approach is to (1) submit the detailed proposed change order, (2) enclose within the submission the documents showing the changes (e.g., the architect’s revisions), and (3) and specify that the project will be delayed, through no fault of the contractor, until the change order is signed.

  1. Beware of field orders.   The architect issues these orders to clarify specifications, deal with technical execution problems, or resolve site access difficulties.  The architect has the authority to order minor changes in the work not involving adjustment in the contract sum or extension of the contract time and not inconsistent with the parties’ intent.  Such changes shall be done in writing and shall bind the owner and contractor.  If the field order increases costs or time, it should lead to a change order.
  2. If there is disagreement or delay on the change order, demand a construction change directive (“CCD”).  The AIA defines a CCD as a written order prepared by the Architect and signed by the developer and architect, directing a change in the work prior to agreement on adjustment, if any, on the contract sum or contract time or both.  CCDs are used in the absence of a total agreement on a change order.  The architect resolves disagreements about CCDs, per the AIA.  The AIA, in fact, provides that, pending final determination of the CCD’s cost, the contractor may request payment for CCD work, subject to the architect’s interim determination. Because the AIA requires the architect to prepare the CCD, a contractor may attempt to modify that language to state that the contractor shall prepare the CCD.
  3. Agree to a third-party decision-maker, other than the architect, to make onsite determinations.  Dispute over change order work typically arises because the owner and/or architect believe (1) the proposed change work was part of the contractors’ initial scope, (2) the cost of the proposed change is unreasonable, (3) the additional time necessary to complete the change work is unreasonable, or (4) a change is deemed minor and the contractor disagrees. Someone, other than the architect, may arguably be more objective with respect to these disputes.
  4. Require that someone with authority to sign off on change orders remain at the site.
  5. Utilize two-part change orders to separate the portion of the estimate about which the parties disagree and the portion about which the parties agree.
  6. Enter into a guaranteed maximum price (with open books) contract and share in the savings so as to incentivize everyone to finish the project expeditiously.

Consult a construction lawyer.  The manner in which a contractor may protect itself will vary with virtually every project.  A qualified construction lawyer should be able to assist with a thoughtful and deliberate approach to a contract that preliminarily addresses most of the contractor’s change work concerns.

C. Conclusion

Although problematic, there are measures that can be put in place, preferably early in the process, that can make the change work process more manageable.  That said, construction contracts will always be a minefield ripe for conflict.  So, document your file and try to avoid performing work on an unsigned change order.


Implied Warranty of Fitness and Merchantability: Maronda Homes v. Lakeview Reserve

See the full article on CSK’s Florida Construction Law Update

The Florida Supreme Court recently issued an opinion in the Maronda Homes case[1] and broadened the common law implied warranty of fitness and merchantability, also known as an implied warranty of habitability. Maronda Homes dealt with whether a developer’s common law implied warranty of fitness and merchantability extends to initial purchasers of residential property for defects in offsite improvements. The Supreme Court answered the question in the affirmative.

The Florida Supreme Court’s Decision in Maronda Homes

To fully understand Maronda Homes and its import, one must understand its underpinnings. The developer’s common law implied warranty of habitability has its origins in the doctrine of caveat emptor, i.e., buyer beware.

Caveat emptor, with few exceptions, stood for the proposition that a buyer must identify latent defects prior to purchasing real estate or live with the consequences after the purchase without any legal redress against the seller. In other words, under this ancient doctrine, a purchaser of residential real property bought at his or her own risk.

Florida’s Departure from the Caveat Emptor Doctrine

In 1972, in Gable v. Silver, 264 So.2d 418 (Fla. 1972), Florida’s Supreme Court for the first time departed from caveat emptor in a residential real estate transaction and extended the implied warranty of habitability to initial purchasers of new homes and condominiums. The warranty there covered a malfunctioning air conditioning system.

The rationale was that the time when the seller and buyer were on equal footing had passed – the seller was now typically far more sophisticated than the buyer and in a superior position to know of, or discover, latent defects. Accordingly, it was no longer sound policy to protect the seller. As a result, the common law implied warranty of habitability was created so as to overcome caveat emptor with respect to new residential property.

In 1983, in Conklin v. Hurley, 428 So.2d 654 (Fla. 1983), a case involving investors who purchased vacant lots, not dwellings, Florida’s Supreme Court held that this warranty extended only to construction of a new home and other improvements “immediately supporting the residence thereon, such as water wells and septic tanks.” However, the Court intimated that, unlike purchasers of new residential property who buy a home to live in, investors are not entitled to the same protections created in Gable.

In Port Seawall Harbor & Tennis Club Owners Assoc., Inc. v. First Fed. Savings & Loan Assoc. of Martin County, 463 So.2d 530 (Fla. 4th DCA 1985), the appellate court held that the warranty did not extend to a lender which had foreclosed on the property at issue, unless the defects pertained to defects in the property completed by the lender. The defects there included “certain roads and drainage areas.” Id. at 531.

Fifth DCA Opinion in Maronda Homes

More recently, the Fifth District Court of Appeals, in Maronda Homes held that the warranty applied to offsite improvements, e.g., roadways, retention ponds, underground pipes, and drainage systems because they are “essential” to the habitability of the homes. While on appeal to the Florida Supreme Court, however, the Florida legislature passed section 553.835 of the Florida Statutes which took effect in July 2012. The Florida Supreme Court then issued its opinion after the law took effect.

Florida Legislature Responds to Fifth DCA’s Maronda Homes

Section 553.835 was passed to directly address the Fifth District’s holding in Maronda Homes. The statute thus expressly states that, “as a matter of public policy” Maronda Homes “goes beyond the fundamental protections that are necessary for a purchaser of a new home and that form the basis for imposing” the warranty and “creates uncertainty in the state’s fragile real estate and construction industry.” (emphasis added). The statute, per its express terms, purports to apply retroactively.

The statute further provides that the warranty does not apply to “offsite improvements”. The statute defines “offsite improvements” as streets, utilities, roads, drainage, driveways, and other improvements or structures not on or under the lot, excluding improvements shared by and part of the overall structure of two or more separately owned but adjoined homes when the improvements affect the fitness and merchantability or habitability of one of the adjoining structures, e.g., cable, broadband, internet, phone.

During the legislative process, there was a strong lobby against the passing of section 553.835. The arguments against it included:

  • The law will result in greater loss for Florida homeowners, e.g., repairing shoddy construction and lead to more foreclosures;
  • The populace does not support it, e.g., the governor received thousands of emails against it and the opposition outnumbered supporters 4-1; and
  • The statute’s unconstitutional retroactive application impaired vested substantive rights.

Florida Supreme Court’s Opinion in Maronda Homes

The Supreme Court has now affirmed the Fifth District’s decision and held that section 553.835 of the Florida Statutes does not apply in Maronda Homes, as its retroactive provision amounts to an unconstitutional abrogation of Maronda Homes’ vested substantive rights. It is unclear, however, whether section 553.835 will be upheld prospectively.

Accordingly, the Maronda Homes’ holding is that the warranty applies to “services ‘essential to the habitability of the residence;’” specifically identifying “roads for ingress and egress, drainage systems to divert flooding, retention ponds to correct water flow damage, and underground pipes (whether they be storm water or sanitary sewer pipes) which are necessary for living accommodations.” “Items to be excluded from the definition of essential services are those that provide mere convenience or aesthetic beauty, such as landscaping, sprinkler systems, recreational facilities, or a security system.”

[1]: Maronda Homes, Inc. of Fla. v. Lakeview Reserve Homeowners Ass’n, Inc., 2013 WL 3466814 (Fla. 2013) (note: the final opinion has not been released for publication in the permanent law reports and until release, it is subject to revision or withdrawal).