Today I want to discuss two important recent Florida appellate decisions addressing insurance law topics. The first decision, Mora v. Tower Hill Prime Ins. Co., Case No. 2D13-4125 (Fla. 2d DCA Jan. 23, 2015), involved a common underhanded insurer tactic: try to avoid paying a valid claim by searching for errors in the application. In Mora, the policyholder’s home was damaged by a sinkhole. There was no dispute that the sinkhole damaged the home, and Tower Hill agreed that the claim was covered. But the parties disputed the amount of damages and the homeowner was forced to file suit.
During discovery, Tower Hill asked for documents related to the policyholder’s purchase of the home five years earlier. Among the documents was a pre-closing inspection report for the model home that noted drywall and stucco cracking. Tower Hill pointed out that the application for insurance did not disclose these cracks, and therefore the policyholder had misrepresented the condition of the home on the application. Tower Hill had an underwriter prepare an affidavit stating that Tower Hill would not have sold the policy had it known about the cracking, and asserted that it was entitled to rescind the policy under Fla. Stat. § 627.409 due to the material misrepresentation. Section 627.409 allows an insurer to rescind a policy when a misrepresentation on the application is “material to the acceptance of the risk” or “if the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith would not have issued the policy or contract.”
The trial court granted the insurer summary judgment on the basis of the conclusory affidavit stating that Tower Hill would not have issued the policy if it had been aware of the cracks in the house. The appellate court reversed. It reasoned that cracking in drywall and stucco was a common occurrence as a result of settling in newly-constructed homes, and there was no evidence that such cracking was structural or had anything to do with the sinkhole damage. Second, the court held that the insurer’s conclusory affidavit that it would not have issued the policy – without any explanation as to how the pre-existing cracks would have impacted its decision – was insufficient to establish that summary judgment should be granted in the insurer’s favor.
The Mora decision was the proper decision because the insurer had made no factual showing that the existing cracking was material to the risk insured, or that the cracks had any connection with the sinkhole claim. It was a simple case of post-claim underwriting, an underhanded tactic in which the insurer seeks to avoid paying a valid claim by finding some technical deficiency in the application. It is unfortunate that the trial court decided to blindly follow the conclusions of a self-serving affidavit in granting summary judgment. Too many judges seem willing to take an insurer’s word as gospel when it comes to the more technical aspects of underwriting, claims adjusting, and policy interpretation. But I suppose that is one of the many reasons why appellate courts exits.
A week after the Mora decision, the Fifth DCA issued its opinion in GEICO General Ins. Co. v. Hollingsworth, Case No. 5D14-1437 (Fla. 5th DCA Jan. 30, 2015). The Hollingsworth case involved a third-party insurance claim arising out of an automobile accident. The injured party, Hollingsworth, offered to settle the personal injury action in a Proposal for Settlement pursuant to Fla. Stat. § 768.79 during the pendancy of the underlying action.
Under Florida’s Proposal for Settlement law, if a party offers to settle a case, and the offer is rejected, the offering party can force the rejecting party to pay its attorneys’ fees if it obtains a judgment of at least 125% of the offer amount (or, if the offeror is the defendant, if the judgment is less than 75% of what the defendant offered). In this situation, the injured party obtained a judgment of more than 125% of its rejected offer, which entitled it to recover its attorneys’ fees.
GEICO, the insurance company for the defendant, argued that it was not obligated to pay the claimant’s attorneys’ fees because its policy did not cover prevailing party fees. The trial court held that GEICO had to pay the attorneys’ fees, and the appellate court affirmed. The appellate court held that the “Additional Payments” section of the GEICO policy, which provided coverage for “[a]ll court costs charged to an insured in a covered lawsuit,” provided coverage for the attorneys’ fees portion of the judgment.
The appellate court rejected GEICO’s argument that it should not have to pay the claimant’s attorneys’ fees because the claimant did not serve its offer on GEICO. Rather, the court held that the policy terms required GEICO to cover “court costs” and the prevailing party attorneys’ fees were considered “court costs”. The court noted that in the recent case of GEICO General Ins. Co. v. Rodriguez, Case Nos. 3D11-2905 & 3D12-506 (Fla. 3rd DCA Sept. 10, 2014) (discussed previously here), the Third DCA had ordered an insurer to pay an award of attorneys’ fees granted to the other side as a sanction for its client’s misrepresentations during the case. The Fifth DCA found no distinction between an insurer paying fees as sanction costs as opposed to Proposal for Settlement costs.
The Hollingsworth decision is an important decision because parties have increasingly made use of Proposals for Settlement to try to shift attorneys’ fees to the other side during litigation, which historically has not been allowed in the U.S. under the “American Rule” that requires litigants to pay their own attorneys’ fees whether they win or lose. It is also important because of the increasing use of fee-shifting provisions in statutory causes of action. Florida policyholders should take comfort in knowing that these costs, which can be significant, are covered by insurance.
It makes sense that insurers should pick up the cost of prevailing party attorneys’ fees for a claim that is otherwise covered. Most policies give insurers control over defense and settlement decisions. If the insurer decides to reject a settlement demand and roll the dice on a verdict, it should be prepared to pay the full price of that gamble, which includes the possible award of prevailing party fees.
Although the Hollingsworth decision was based solely on the policy language, if the GEICO policy at issue did not contain an “Additional Payments” clause, GEICO still should have been responsible to pay the additional damages as bad faith damages for its failure to settle the case in good faith. A plaintiff’s recovery of more than 125% of its settlement demand should create a presumption that the insurer failed to properly settle the case. But pursuing a bad faith claim would have required a second lawsuit, given Florida’s bifurcation rule on bad faith claims, so the Fifth DCA achieved the same result without the need for yet another unnecessary coverage lawsuit.