Florida Insurance Law 2014 Second-Half Review

One of my New Year’s resolutions for 2015 is to post more regularly to this blog.  It was a very busy 2014, especially the second half of the year, and I have not been able to provide updates as frequently as I would like.  So before we ring in the new year, let’s review some of the more significant Florida insurance law decisions from the second half of 2014.

We start with a case from June out of the Middle District of Florida that addressed a familiar question: how long can an insurance company take to tender policy limits to a claimant before it is subject to a bad faith claim?  Kropilak et al. v. 21st Century Security Ins. Co., Case No. 8:12-cv-01816-EAK-TGW (M.D. Fla. June 25, 2014) is a third-party bad faith decision.  The policyholder was at fault in an automobile accident that caused serious injury to the claimant.  The policy was a 10/20 policy ($10,000 limit per person and $20,000 per accident).  It was obvious based on the accident report and the fact that the claimant was airlifted from the accident scene that the claim was worth far more than $10,000.  Two days after the accident, the insurance adjuster wrote to the policyholder to warn him that the claim likely would exceed the policy limits and to urge him to hire personal counsel.  However, the insurer waited 37 days to tender the $10,000 limit.  The claimant rejected the tender and filed suit, which resulted in a jury verdict of $173,097.07.

The insurer was sued for bad faith, and moved for summary judgment, arguing that it could not have acted in bad faith, since it tendered the policy limit before the suit had been filed, and before the claimant’s attorney had made a policy limits demand.  The court denied summary judgment, holding that a reasonable jury could find that the insurer knew a judgment in excess of the policy limits was likely, and that the injuries were so serious that the insurer had an affirmative duty to initiate settlement negotiations.

The Kropilak decision demonstrates once again how difficult it is for an insurer to win summary judgment on a third-party bad faith claim, given the highly-factual nature of the inquiry.  In many instances, plaintiffs’ lawyers try to avoid giving an insurer the opportunity to make a policy-limits offer, where the damages are far in excess of policy limits.  This was not such a case.  Rather, it involved a complacent adjuster who did not aggressively attempt to resolve the case against her insured.  Insurers that lose summary judgment on bad faith claims typically lose those claims in front of a jury, so I would expect this case to settle soon (if it has not settled already).

Another significant summertime insurance decision came out of the Second District Court of Appeals in the case of Axis Surplus Ins. Co. v. Caribbean Beach Club Assoc., Inc., No. 2D13-1057 (2d DCA June 27, 2014).  This was a first-party property case, and involved another fairly common factual scenario.  The policyholder was a condominium building that suffered extensive damage from a fire.  Since the building was more than 50% damaged, Lee County building codes required the building to be rebuilt according to current building codes.  That meant a lot of expensive construction upgrades that are typically covered under the Ordinance or Law coverage section.  The problem in this particular policy was that the Ordinance or Law endorsement stated that the increased cost of construction due to code compliance would not be covered unless the repairs were made within two years.

Apparently nobody bothered to read the policy, and so neither the policyholder nor the insurance adjuster was aware of the two-year time limit.  The insurer never raised this limitation in its reservation of rights letter.  The repairs went forward over the next two years with the insurer funding the cost.  At some point the adjuster woke up and wrote a letter stating that the insurer would not provide Ordinance or Law coverage due to the two-year limitation.  The policyholder filed suit and then moved for summary judgment on the basis that the insurer had waived the coverage limitation or was estopped from relying on it because it waited over two years to raise the defense.

The trial court agreed with the policyholder and entered summary judgment in its favor.  The appellate court affirmed.  The key question was whether the two-year limitation was part of a coverage grant or a limitation on coverage.  Under Florida law, waiver or estoppel cannot create coverage.  So if the provision involved a coverage grant then the policyholder was out of luck.  However, since the provision did not deal with the scope of coverage or limits, the court held that it was a limitation provision rather than a coverage grant provision.  Since “Florida law abhors forfeitures,” the court held that, before an insurer can rely on a forfeiture provision to deny coverage, it must bring the provision to the policyholder’s attention.  Due to the lack of notice, the defense was waived.

There are a few lessons here.  The obvious one is that the policyholder needs to read the policy and make sure it is strictly complying with the policy terms.  While the policyholder was lucky that the adjuster did not read the policy either, a simple reference to this clause in the reservation of rights letter would have doomed the policyholder’s case.  It is better to strictly comply with the policy than to rely on a waiver or estoppel argument to bail you out after the fact.

It is also critical for policyholders to distinguish between policy limitations and coverage grants.  Judges hate to see policyholders forfeit coverage due to technical non-compliance with policy provisions, such as notice and cooperation clauses.  But waiver cannot create coverage, so it is important to know when the “two-wrongs-make-it-right” rule will excuse a policyholder’s non-compliance, and when a waiver or estoppel argument is doomed to fail.

Let’s move on to an Eleventh Circuit Court of Appeals decision from July that dealt with another common insurance coverage fact-pattern.  J.B.D. Construction, Inc. v. Mid-Continent Casualty Company, Inc., No. 13-10138, 2014 U.S. App. LEXIS 13358, 2014 WL 3377690 (11th Cir. July 11, 2014) involved claims related to construction defects, and the application of the “Your Work” exclusion.  I have discussed this exclusion several times, including here and here.

There are a lot of interesting issues discussed in this case, and any lawyer who deals regularly with Florida insurance law or construction law should read the opinion.  I did not find the “Your Work” discussion to be particularly noteworthy simply because the policy at issue did not contain a subcontractor exception to the “Your Work” exclusion.  Therefore, the issue came down to whether policyholder could prove that there was damage to something other than its own work.  Ultimately, the policyholder was unable to prove damage to third-party property, and so the Eleventh Circuit held that there was no duty to indemnify.

What I find noteworthy about this decision is the court’s discussion of the differences between the duty to defend and the duty to indemnify.  Although the court held that there was no duty to indemnify, it also held that the insurer breached its duty to defend.  While this may seem contradictory, it actually occurs quite often, since the duty to defend is broader than the duty to indemnify, and is based on the allegations of the complaint rather than the actual facts.  The duty-to-defend test is often referred to as an “eight corners” test, since it relies solely on the allegations contained within the four corners of the underlying complaint and the four corners of the policy.  (The rule is also sometimes referred to as the “four corners” rule, but that is a misnomer, since it takes reference to both sets of four corners, or eight corners, to make the determination).  Since the underlying complaint alleged damage to the policyholder’s work as well as to “other property”, this was enough to trigger the duty to defend, despite the fact that no damage to “other property” was ultimately proven.

So the lesson here is two-fold.  First, it is important to distinguish the duty to defend from the duty to indemnify.  If there is no duty to defend then there can be no duty to indemnify.  But the reverse is not necessarily true.  The second lesson for policyholders and their counsel is to know what triggers the duty to indemnify, and to develop an appropriate record.  It is the policyholder’s burden to prove that the duty to indemnify has been triggered, and developing that proof starts early in the underlying action.  By the time the coverage action rolls around, it is often too late to impact the facts establishing the duty to indemnify, so coverage counsel should be retained before the underlying case is completed to ensure that coverage rights are adequately preserved and the proper record has been created.

Finally, we’ll end our 2014 second-half review with another bad faith decision, this time out of the Fourth District Court of Appeals.  Cammarata v. State Farm Florida Ins. Co., No. 4D13–185 (4th DCA Sept. 3, 2014) involved a first-party property claim related to damage caused by Hurricane Wilma.  The insurer determined that the damage fell below the policy deductible, and refused to make a claim payment.  The policyholder demanded appraisal.  The appraiser determined that the claim amount was above the deductible, but below the amount the policyholder was seeking.  The insurer paid the appraisal award and the policyholder sued for bad faith.

The insurer moved for summary judgment on the basis that the bad faith claim was not ripe because the policyholder did not obtain a judicial determination that the insurer breached the contract.  The trial court sided with the insurer and entered summary judgment.  The Fourth DCA reversed.  The appellate court determined that, while a bad faith claim does require a determination of the insurer’s liability, such a determination need not be in the form of a judgment or arbitration award determining that the insurer breached the contract.  Rather, any favorable determination obtained by the policyholder regarding coverage and damages, even a favorable settlement of a claim, is sufficient to trigger an insurer’s bad faith liability.

The Cammarata decision will have important implications for Florida bad faith insurance claims.  I discussed many of these implications in this Insurance Law360 article back in October.  The main point is that the decision makes it easier for policyholders who have overcome low-ball insurer offers to seek damages in a bad faith claim without litigating the coverage case to conclusion.  The decision hopefully will reduce insurer gamesmanship and low-balling tactics in the claims adjustment process.  Ultimately, I expect the ruling will lead to fewer first-party coverage disputes because more claims will be adjusted fairly without the need for appraisal or litigation.

So there’s your second-half of 2014 Florida insurance law recap, just in time to ring in 2015.  I wish everyone a healthy and happy 2015.  I hope to be able to provide more regular caselaw updates and analysis in the new year.