For businesses in Florida, the cost of commercial general liability (“CGL”) insurance can be overwhelmingly expensive, but it is a necessity for financial protection. After it is purchased, a business will generally feel reassured that they are “protected” from any and all potential claims for “bodily injury” or “property damage.” This is doubly true when it comes to contractors and subcontractors in the construction field given the potential liabilities existing on multiple projects at any given time. Under a standard CGL policy, an insurer obligates 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.” Because of this language, the insurance company, or insurer, has a right and duty to defend the business against any suit seeking damages that are covered by the insurance policy. Thus, when claims are made for damages, insurers will invariably question whether a duty to defend has arisen.
In order to protect its rights, the insurer will review the CGL policy upon receiving a claim, and will issue an “advisory” opinion of sorts in the form of a “Reservation of Rights” letter, which is usually prepared by an insurance adjuster. In these letters, the insurers state the facts of the claim, as they know them to be, and analyze those facts with the terms and content of the insurance policy. More often than not, the insurers will cite to certain provisions as potentially excluding coverage; but will agree to defend the business while reserving its rights to deny coverage in the future. This letter effectively serves as a notification to the business that coverage for the claim may not apply.
These “Reservation of Rights” letters are sent as a means of protecting the insurance company. Under section 627.426(2)(a), Florida Statutes, an insurer must provide written notice of a Reservation of Rights to the insured within 30 days after the insurer knew or should have known of the coverage defense; otherwise, all of the insurance company’s rights to deny coverage are waived. If an insurer provides a statutory Reservation of Rights under section 627.426(2)(a), the insurer is obligated to retain “independent counsel which is mutually agreeable to the parties.” As such, the insurance company must ensure that there is a mutual assent between the insurer and the business. If the insurance company, after serving the Reservation of Rights letter, chooses to proceed with defending the claim with legal counsel that it unilaterally hired, then the insurance company will be unable to deny coverage, as set forth in American Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So. 2d 904, 906 (Fla. 4th DCA 1997).
Given the frequency at which insurance companies send Reservation of Rights letters in response to insurance claims, it is important for Florida businesses, particularly construction contractors and subcontractors, to remember their legal right to demand “mutually agreeable counsel.” The complexity of Florida’s construction law calls for counsel that is well-versed in both insurance coverage and construction law. To that end, when an insurer “reserves” their right to deny coverage in a construction defect or contract claim, construction contractors and subcontractors should remember that they have the right to demand independent legal counsel that is well-attuned to the nuances of Florida construction law.