An insurance coverage dispute is the central issue in this case involving Auto-Owners Insurance Company, Pozzi Window Company, Coral Construction of South Florida, Inc., and its president, James J. Irby. Auto-Owners had issued two commercial general liability policies to Coral and Irby, which Coral assigned to Pozzi. The conflict arose over whether these policies cover Coral and Irby's liability related to the defective installation of windows manufactured by Pozzi.
The district court ruled in favor of Pozzi, affirming that coverage existed under the policies, which led to partial summary judgment against Auto-Owners. Subsequently, a jury trial was held regarding Pozzi's claims of bad faith and breach of contract against Auto-Owners, resulting in a $500,000 punitive damages award for Pozzi. However, the magistrate judge later overturned this award, granting Auto-Owners' motion for judgment as a matter of law concerning the bad faith claim.
In its appeal, Auto-Owners contends that the policies do not cover the costs associated with repairing or replacing the defective windows. After reviewing the matter and hearing oral arguments, the court decided to certify the coverage issue to the Florida Supreme Court. In Pozzi's cross-appeal, the court upheld the magistrate judge's ruling in favor of Auto-Owners regarding the bad faith and punitive damages claims.
The underlying case involved Coral constructing a residence for Jorge Perez, during which the windows were improperly installed, leading to water damage claims. Although Auto-Owners defended Coral under a reservation of rights and settled some claims with Perez, it continued to dispute coverage for the window repairs. Irby claimed that Auto-Owners initially denied covering his defense in the litigation with Pozzi.
In April 2002, a mediation was scheduled by Klett, during which Auto-Owners asserted there was no coverage under the relevant Policies. Consequently, Pozzi's lawyers instructed Auto-Owners to withdraw, allowing Pozzi, Coral, and Irby to pursue settlement discussions independently. Auto-Owners subsequently initiated a declaratory judgment action in state court to confirm non-coverage for repair or replacement costs, though the district court denied its motion to dismiss, a ruling not contested in the current appeal. The mediation led to a preliminary settlement agreement where Pozzi would recover from Coral and Irby, releasing claims against them, while Coral and Irby assigned their insurance claims against Auto-Owners to Pozzi.
Post-mediation, Auto-Owners had its retained attorney, Thomas Berger, file a notice of appearance for Irby without prior notice to Irby or Klett, who had been representing Irby. Auto-Owners refused to reimburse Klett for past defense costs. Subsequently, Coral and Irby settled with Pozzi, leading to a Consent Judgment entitling Pozzi to recover $646,726 in principal, $163,298 in prejudgment interest, and post-judgment interest.
Pozzi then filed a lawsuit against Auto-Owners, alleging breach of the insurance contract for denying coverage and defense, and bad faith. Pozzi also claimed entitlement to recover fees and costs as the assignee of Coral’s and Irby’s rights under the Policies. Auto-Owners counterclaimed for declaratory relief regarding its duty to defend and coverage issues. The district court ruled that the Policies covered the defective windows and that Auto-Owners breached its duty to defend Irby, resulting in partial summary judgment for Pozzi.
The parties consented to a magistrate judge overseeing the jury trial on damages, bad faith, and punitive damages. Before the jury's deliberation, Auto-Owners sought a directed verdict on bad faith and punitive damages, which the magistrate judge reserved. Ultimately, the jury ruled in favor of Pozzi, finding bad faith and awarding $500,000 in punitive damages against Auto-Owners.
The jury found that the settlement between Coral or Irby and Pozzi was not due to collusion or fraud. While Pozzi, Coral, and Irby acted reasonably in settling the underlying lawsuit, the agreed settlement of $646,726 was deemed unreasonable, with $300,000 identified as a reasonable amount. Auto-Owners was found to have acted in bad faith by denying coverage for Pozzi's cross-claims against Coral and Irby and breaching its duty to defend Irby. The jury awarded $500,000 in punitive damages. The magistrate judge ultimately ruled in favor of Pozzi, awarding the specified compensatory and punitive damages but partially granted Auto-Owners' motion for judgment as a matter of law, concluding insufficient evidence existed to support the findings of bad faith and punitive damages, leading to the punitive damages award being set aside. The magistrate judge conditionally allowed a new trial for bad faith and punitive damages if the decision was overturned on appeal. Regarding coverage, Auto-Owners contended that its insurance policies did not cover repair or replacement of defective work but only the resultant bodily injury and property damage. The district court rejected this argument, affirming that the policies provided coverage for such repairs. The policies state that they cover damages for bodily injury and property damage if caused by an occurrence during the policy period and define “Products-Completed Operations Hazard” coverage, limited to $1 million, with specific exclusions regarding products in possession and incomplete work.
Work is considered completed under the contract when any of the following occurs: 1) all contractual work is finished; 2) all work at multiple sites is completed; or 3) completed work at a job site is utilized by anyone other than contractors or subcontractors involved in the project. Even if work requires subsequent service or repair, it is regarded as complete. Exclusions from coverage include: 1) property damage related to transportation unless linked to loading/unloading conditions; 2) damage linked to tools, uninstalled equipment, or unused materials; and 3) products or operations defined within the coverage rules. Pozzi argues that defective windows installed in Perez's home constitute completed work falling under the "products-completed operations hazard" (PCOH) coverage. The term "your work" encompasses operations performed on behalf of the insured and related materials, and includes warranties or instructions associated with that work. Pozzi asserts that work done by Coral's subcontractor Scott is also covered. The definition of "property damage" includes both physical injury to tangible property and loss of use of property not physically injured. There are two relevant exclusions: 1) property damage to any part of property requiring repair due to incorrectly performed work; and 2) property damage to "your work" itself. However, these exclusions do not apply if the work was performed by a subcontractor on behalf of the insured. In this case, the defective work was indeed performed by subcontractor Scott on Coral's behalf, potentially allowing for coverage under the PCOH despite the exclusions.
The relevant legal issue in this appeal pertains to whether the Policies’ PCOH coverage encompasses Coral and Irby’s liability for the costs associated with repairing or replacing defective work performed by Coral’s subcontractor. The district court's interpretation suggests that coverage exists, as the Policies cover PCOH property damage caused by occurrences within the coverage territory during the designated period. Under Florida law, defective construction qualifies as an "occurrence," and it is acknowledged that the defective work occurred within the appropriate timeframe and area. According to Pozzi, the costs for repair or replacement are covered since they represent damages the insureds were obligated to pay due to property damage from the subcontractor's work.
However, the Florida Supreme Court’s ruling in LaMarche v. Shelby Mutual Insurance Co. establishes that CGL policies do not cover the costs of repair or replacement of defective work but rather only cover damage resulting from such work. The LaMarche case involved a homeowner seeking repair costs from a contractor’s CGL insurance due to deficient work, and the court determined that the policy only covered resultant personal injury or property damage, not repair costs. The court argued that allowing coverage for repair costs would enable contractors to receive payments from both homeowners and their insurance for the same deficiencies, which was not the intent of the insurance contract.
The court further illustrated the distinction between "business risks" and insurable occurrences, citing an example where faulty work leads to damage, which is insurable, versus the obligation to repair that faulty work, which is not. While the policy language in LaMarche differs from the current case, the overarching principle remains that CGL policies generally exclude coverage for the costs of repairing or replacing defective work.
The Florida Supreme Court has not evaluated the specific policy language in question, but the majority of Florida's intermediate appellate courts have broadly interpreted the LaMarche decision, holding that Commercial General Liability (CGL) policies do not cover the costs of repair or replacement of defective work. Notably, cases such as Auto-Owners Ins. Co. v. Marvin Dev. Corp. and Auto-Owners Ins. Co. v. Tripp Constr. Inc. emphasize that CGL policies are not designed to cover deficiencies in a contractor's own work. These policies are intended to protect against personal injury or property damage arising from defective work, not the repair of that work itself, as reiterated in Aetna Cas. Sur. Co. of Am. v. Deluxe Sys. Inc. of Fla. and other precedents.
Several cases, including Home Owners Warranty Corp. v. Hanover Ins. Co. and Tucker Constr. Co. v. Michigan Mut. Ins. Co., affirm this principle, indicating that CGL policies do not extend coverage for repair or replacement costs related to defective work. While distinctions exist in the specifics of policy language or factual scenarios in some cases, the courts consistently reaffirm the LaMarche precedent regarding coverage limitations.
However, a split has emerged within Florida courts, highlighted by J.S.U.B. Inc. v. United States Fire Insurance Co., where the Second District Court of Appeal ruled contrary to the prevailing interpretation. This case involved claims related to damages from a subcontractor's faulty work, with the court recognizing the evolution of CGL provisions and legal interpretations since LaMarche, suggesting a shift in coverage understanding.
The Florida court determined that insurance policies included broad coverage for property damage resulting from an "occurrence," defined as an accident or continuous exposure to harmful conditions. Although "accident" was not explicitly defined in the policies, Florida law traditionally excluded the natural consequences of deliberate actions from coverage. However, the Florida Supreme Court later expanded this definition to include unexpected injuries from intentional acts, establishing that unintended damages could still be considered accidental. This led to the conclusion that claims for repair or replacement of faulty subcontractor work may be covered under Commercial General Liability (CGL) policies.
The court examined policy exclusions and clarified that exclusions cannot create coverage but can inform the interpretation of coverage provisions. Specifically, it noted that an exclusion for restoration due to incorrectly performed work contained an exception for damages classified under "products-completed operations hazard." The court reasoned that if coverage exists under the policy, this exception would apply since the damages arose from the subcontractor's poor soil handling.
Ultimately, the court concluded that the prior ruling in LaMarche did not apply, confirming that the policies provided coverage for the claims involved and that the relevant exclusions were inapplicable. The Florida Supreme Court accepted jurisdiction over the case, focusing on the legal interpretation of standard CGL policy terms, with the facts of the case largely undisputed by the parties.
Federal courts may certify ambiguous state law questions to state supreme courts to avoid uncertainty and allow for state interpretation. There is ongoing disagreement among Florida's intermediate appellate courts and federal district courts regarding the relevance of the case LaMarche to standard Comprehensive General Liability (CGL) policies. Consequently, this appeal requires clarification on Florida law with implications for numerous other cases, prompting a certification to the Florida Supreme Court. The certified question asks whether a standard CGL policy with product completed operations hazard coverage, issued to a general contractor, includes liability for costs to repair or replace defective work performed by a subcontractor. The phrasing of this question allows the Supreme Court flexibility in addressing the issue.
Additionally, in the cross-appeal by Pozzi, it is argued that the magistrate judge wrongly granted judgment in favor of Auto-Owners regarding bad faith and punitive damages. The Florida Supreme Court has identified specific factors relevant to bad faith determinations, which the parties agree upon. The magistrate judge found that Auto-Owners acted reasonably under the belief that the claims were not covered, as evidenced by its actions such as denying coverage and defending under a reservation of rights. The judge concluded that Auto-Owners did not engage in unreasonable conduct or mislead its insureds, and thus, each LaForet factor favored Auto-Owners. Pozzi's challenges to the magistrate judge's application of these factors were found to lack merit, leading to the affirmation of the judgment in favor of Auto-Owners on both the bad faith and punitive damages claims. The appeal concludes with the magistrate judge's decision being affirmed in part, while the certification question is forwarded to the Florida Supreme Court.
