The insurance company appointed the same defense counsel to defend the camp, its named insured, and the university, its additional insured.  But after the camp asserted that it was entitled to indemnification and contribution from the university, the university demanded that the insurer pay for separate counsel.  The insurer refused, and the university hired and paid its own defense counsel, and then sued the insurer for reimbursement.

The trial court held that the university had no right to independent counsel, and granted summary judgment in favor of the insurer.  The appellate court reversed, and granted summary judgment in favor of the university.  The appellate court agreed with the university that, due to the camp’s indemnification and contribution claims, there was a conflict between the two insureds that required the insurer to pay for separate defense counsel.

In dissent, Judge Shepherd called the conflict a “paper conflict” and warned that the court’s decision “opens a new frontier in insurance litigation of benefit only to the legal profession.”  Judge Shepherd wrote that the insurer’s right to control the defense “is indispensable to the protection of its financial interest in the litigation and thus the product [of liability insurance] itself.”  In Judge Shepherd’s view, the court should have deferred to the opinion of insurance defense counsel as to whether it could continue to represent both insureds fairly given the conflict.  Judge Shepherd stated that he was “persuaded the rules governing the Florida Bar and the attendant threat of malpractice liability provide sufficient assurance that counsel appointed by an insurer will not continue to represent an insured in the event a conflict of interest interferes with counsel’s ability to make independent professional judgments on behalf of the client.”

The University of Miami decision will not open a “new frontier” as predicted by the dissent, but it is an important decision in the area of independent defense counsel in Florida.  The most immediate impact of the decision will be on situations involving co-insureds who are co-defendants in a case.  This situation arises most frequently in the construction context, where subcontractors are required to indemnify and provide additional insured coverage to owners and general contractors, as well as in the manufacturer-supplier-retailer context, in which indemnification and additional insured coverage typically flows downstream.  In both contexts, a plaintiff is likely to sue multiple parties to the relationship, and additional insured and indemnification claims are likely to arise between co-defendants.  Unless the downstream parties and their insurers are willing to provide defense and indemnity coverage without reservations, additional insureds are going to assert their right to independent counsel more often in Florida.

Hopefully, the decision also will have a positive impact of the development of law recognizing a policyholder’s right to independent defense counsel when counsel is conflicted between its allegiances to the insurer and insured.  There is very little Florida law that addresses a policyholder’s right to independent defense counsel when an insurer defends under reservation of rights.  Many other states, like California with its Cumis counsel decisions, have extensive judicial discussions of the conflicts inherent in the tripartite relationship between the insurer, policyholder, and defense counsel, and the rights policyholders have to choose their own defense counsel.  The maneuvering of parties to the tripartite relationship was aptly called the “Dance of the Porcupines” by Andrew Grigsby of Hinshaw & Culbertson, LLP in his excellent 2009 Florida Bar Journal article exploring this topic, which is definitely worth a read.

Florida’s Claims Administration Statute, Fla. Stat. 627.426, which is sometimes referred to as an “independent counsel statute,” requires an insurer defending under reservation of rights to appoint defense counsel that is “mutually agreeable” to the policyholder.  But there is scant caselaw in Florida explaining what “mutually agreeable” means.  The caselaw generally states that a reservation of rights by itself does not give rise to the right to independent counsel, but provides little guidance as to when policyholders can demand independent counsel.

Most individual policyholders are happy to have their insurance company pay for their defense counsel, and neither have a preferred counsel nor care who their counsel is so long as they do not see an invoice.  Corporate policyholders, on the other hand, usually have preferred defense counsel, and they want to make sure they have counsel who is looking out for their interests and not the interests of the insurance company that is paying the bill.  When an insurer defends under reservation of rights to later deny indemnity coverage, the allegiance of defense counsel can be critical to the development of the pleadings and the later coverage dispute that is largely dependent on those pleadings.

One of the dirtiest secrets of the insurance industry is that the insurance companies’ “preferred” defense counsel are frequently at the same law firms as the insurers’ coverage counsel.  That’s right: the lawyers who promise to be independent and fairly represent policyholders – the same lawyers Judge Shepherd is so confident will maintain their independence despite a conflict between co-insureds – are the ones whose partners are arguing that indemnity coverage is excluded.  This problem has only gotten worse since 2003, when Florida Rule of Professional Conduct 4-7.9 (then Rule 4-7.10) was revised to prohibit insurance defense lawyers employed by insurance companies from pretending to have their own independent law firms.  Now, these “captive” law firms are not owned by the insurance companies, but they remain firmly in their pocket.

Another problem in Florida is that the Florida Bar has not been willing to stand up to the insurance industry and make it clear under the Rules of Professional Conduct that an insurance defense attorney’s sole allegiance is to his or her client, the policyholder.  Instead, we have spineless Ethics Opinion 97-1, which states that “An attorney who has been hired by an insurance company to represent an insured owes his primary duty to the insured” (emphasis added).  This rule is broken more often than just about any other Rule of Professional Conduct, and the Bar, and most judges, turn a blind eye.

To the insurance industry, any missed opportunity to save a buck on defense costs is a apocalyptic event.  But, contrary to Judge Shepherd’s Chicken Little-esqe dissent, the sky is not falling.  The Third DCA’s opinion in University of Miami merely reinforces what we already knew but often goes ignored: insurance defense counsel are ethically bound to do what is best for their policyholder clients, not the insurers paying the bill, and policyholders have the right to independent defense counsel where a conflict arises.

(For a further discussion of the University of Miami case, with analysis from myself on the policyholder side and Randy Maniloff at White and Williams LLP and Charlie Lemley at Wiley Rein LLP on the insurer side, see Insurers May Have To Pay More Defense Attys After Fla. Ruling,” Insurance Law360, February 28, 2013.  Subscription required.)

The Tiara decision is also groundbreaking in what it did not do.  If the Court had bought into Marsh’s legal theories, insurance brokers in the state of Florida would have operated with near impunity.  According to Marsh’s lawyers, all a broker had to do was get its clients to sign a contract stating that, if the broker procured the wrong insurance, the only damage the client could recover was a return of the broker’s fee.  Marsh’s counsel also argued that an insurance broker is not a professional who clients rely on to procure the proper insurance, but rather a simple order taker, like a teenager staffing the drive through at McDonald’s.

Thankfully, the Supreme Court rejected Marsh’s position and went even further than the Eleventh Circuit asked it to in its certified question.  Rather than address the question of whether insurance brokers are professionals, which would have exempted them from the protections of the economic loss rule, the Supreme Court eliminated the economic loss rule altogether in all cases but product liability cases.  It was a bold move by the Court, and unquestionably the correct one.

The decision is somewhat disappointing from an insurance perspective because the Court punted on the question of whether insurance brokers are professionals in Florida.  The Court had previously ruled in Pierce v. AALL Insurance Inc., 531 So.2d 84 (Fla. 1988) that insurance brokers are not professionals for purposes of the application of the professional malpractice statute of limitations (which is two years rather than the typical four-year statute of limitations for tort claims).  As Justice Polston correctly points out in footnote 11 to his otherwise misguided dissent, a professional is a person who gives advice “using superior knowledge and training of a technical nature.”  That sure sounds like an insurance broker to me.  Not that it mattered to the ultimate decision after the Court threw the economic loss rule out the window, but Justice Polston was trying to tell the majority that it ought to reverse Pierce as well.  And it should.

As anyone who follows this blog knows, I believe a good insurance broker is worth his or her weight in gold.  A good broker has superior knowledge of the insurance market, and also has a deep understanding of her client’s business and the emerging risks that the client faces.  A good broker advises a client on what insurance the client needs.  A good broker asks questions that elicit information so that the broker can advise the client on risk and insurance issues that the client may not have even thought about.  A good broker gives careful consideration to his client’s needs, and does not simply go thorough the motions of placing the “usual insurance” or renewing the current package without a second thought.  A good broker makes the difference between a client who is insured and a client who is truly protected.

So I take no delight in seeing a broker on the other end of a malpractice lawsuit, particularly an excellent broker like Marsh.  All this decision does is send the case back for further litigation on whether Marsh was negligent in the procurement of Tiara’s insurance.  But what is critical is that the Supreme Court preserved the rights of policyholders to hold their brokers accountable for misplaced insurance.

I think it is an insult to all of the good insurance brokers out there to say that they are not professionals.  To tell policyholders that they are out of luck when their insurance broker gives them bad advice would have just added injury to that insult.

In the recent case of Indiana Lumbermens Mut. Ins. Co. v. Pennsylvania Lumbermens Mut. Ins. Co., No. 4D11-3722 (4th DCA Mar. 6, 2013) (you can call it Lumbermens v. Lumbermens for short), Florida’s Fourth District Court of Appeals held than a defending and settling insurer could recover Fla. Stat. 627.428 fees after successfully forcing another insurer to pick up the tab.  The reason that the insurer was able to obtain Fla. Stat. 627.428 fees was because, after it had settled the underlying case, it obtained an assignment of rights from its own insured to go after the non-defending insurer.  Since Fla. Stat. 627.428 allows any assignee to obtain Fla. Stat. 627.428 fees when it steps into the shoes of a policyholder, the Fourth DCA reasoned that an insurer as assignee should be no different.

It will be interesting to see whether this decision opens up new opportunities for defending insurers to seek contribution from non-defending insurers in Florida.  Florida law is somewhat unusual in that it does not allow a defending insurer to bring a contribution action against a non-defending insurer to force the non-defending insurer to pay its fair share of the defense costs.  The justification for this rule is that, since the duty of each insurer to defend its insured is personal, contribution is not allowed between insurers for expenses incurred in defense of a mutual insured.  See, e.g., Argonaut Ins. Co. v. Md. Cas. Co., 372 So. 2d 960, 963 (Fla. 3d DCA 1979).  The problem with this rule is that, where there are multiple policies triggered by a particular claim (such as when there is a long-tail claim that triggers successive policy years with different insurers, or when additional insured coverage triggers another party’s policy as well as the policyholder’s policy), each triggered insurer is incentivized to refuse to defend and “free ride” on the defense offered by the other insurer.  Since the defending insurer cannot later seek contribution from the non-defending insurer, the non-defending insurer’s bad deed goes unpunished.  This can be a problem for policyholders, since this rule encourages insurers to point the finger at each other and hope the other insurer steps up and defends.

If an insurer can defend and settle the claim, and then seek back-door contribution via an assignment of rights from its own insured, this might help alleviate the free-rider problem.  But it is unclear from the 4th DCA’s opinion on what basis the defending Lumbermens obtained a judgment against the non-defending Lumbermens.  It appears from the decision that the defending Lumbermens was denied the ability to recoup its defense costs, under the rule stated in Argonaut cited above, but it was able to recover the amount it paid in settlement of the underlying case.  But if the Argonaut rule is limited to defense and not indemnity payments, then the defending Lumbermens should have recovered on its contribution claim, which does not bring with it a right to recover Fla. Stat. 627.428 fees.  If Lumbermens paid the full amount to settle the underlying case, then it is unclear what damages the policyholder could have assigned, since the policyholder would have been made whole by the defending Lumbermen’s.

If anyone has any insight on this case that they would like to share, please feel free to drop me a line and I will write a follow-up post.  It seems to be that there is more to the story that is not included in the 4th DCA opinion.  Or perhaps the lesson is simply that when the battle of Lumbermens v. Lumbermens breaks out, it is best to just get out of the way.

AIG maintained the bottom spot despite undertaking a massive rebranding effort over the last three years.  AIG renamed its property and casualty insurance arm Chartis in 2009 in an attempt to escape AIG’s negative image.  In late 2012, AIG decided that people hated Chartis, anyway, so it returned to the AIG name.

It has certainly been a difficult time for AIG and its member companies (American Home, Granite State, Illinois National, Lexington, and National Union, to name a few) to defend insurance coverage litigation.  But it is not just AIG that jurors hate.  Juries have an increasingly negative view of the insurance industry as a whole, as evidenced by a recent DRI poll.  The DRI survey found that 59% of jurors are inclined to favor the policyholder in insurance coverage litigation.  Only 10% were favorably inclined towards insurers.

Despite the billions of dollars the insurance industry spends on lobbyists and slick advertising campaigns promising policyholders they are “like a good neighbor” or are “in good hands”, too many people have seen the real side of their insurance companies and know better.  It is no surprise that many insurers, and AIG in particular, will do anything to avoid a jury trial.

The insurance industry has not always been held in such low regard.  But the public’s current cynicism towards insurers is well deserved.   If the industry spent a fraction of its marketing or lobbying budget on training claims adjusters how to treat policyholders fairly, and not as adversaries on every significant claim, perhaps the industry’s image would not be at such a low point.

It shall be a condition precedent to the accrual or maintenance of a cause of action against a liability insurer by a person not an insured under the terms of the liability insurance contract that such person shall first obtain a settlement or verdict against a person who is an insured under the terms of such policy for a cause of action which is covered by such policy.

Fla. Stat. § 627.4136 prohibits a plaintiff from joining the defendant’s insurer to the underlying tort action for purposes of asserting a direct action against the insurer.  The rationale of this non-joinder rule is to avoid prejudicing the jury with the presence of the defendant’s insurer.  The non-joinder limitation is lifted once a plaintiff obtains a verdict, to allow the plaintiff to add the insurer to the judgment for collection purposes, and to avoid the need for the plaintiff to file another action.

Specifically, Fla. Stat. § 627.4136(4) provides:

At the time a judgment is entered or a settlement is reached during the pendency of litigation, a liability insurer may be joined as a party defendant for the purposes of entering final judgment or enforcing the settlement by the motion of any party, unless the insurer denied coverage under the provisions of s. 627.426(2) or defended under a reservation of rights pursuant to s. 627.426(2).

In Harvey, after the plaintiff estate properly brought the insurer into the case for purposes of entry of judgment, the defendant policyholder asserted a cross-claim against the insurer for bad faith failure to settle the claim within policy limits under Fla. Stat. § 624.155.  The problem with the cross-claim was that it ran afoul of Florida’s rule regarding bifurcation of bad faith insurance claims.  In Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So.2d 1289 (Fla. 1991), the Florida Supreme Court held that a policyholder cannot pursue a Fla. Stat. § 624.155 bad faith claim against its insurer unless and until it successfully establishes that coverage exists under the policy.  This bifurcation rule, which departs from the law in most jurisdictions, results in an abatement or dismissal of the bad faith case until the conclusion of the breach of contract or declaratory judgment action.  Most jurisdictions allow the bad faith claim to proceed with the main coverage action because the claims are closely related, and, although the bad faith claim necessarily flows from success in the main coverage action, judicial economy is served by trying the claims together, much like liability and damages are typically tried together in a tort claim.

The end result of the Fourth District’s decision in Harvey is more of the same duplicative litigation.  The coverage action against GEICO will proceed – likely by the plaintiff estate after entering into a Coblentz agreement with the defendant – and the bad faith claim will inevitably follow the determination of coverage.  Given that the coverage dispute is all about the insurer’s extracontractual liability (i.e., whether GEICO must pay the plaintiff $100,000 or $8 million), this unnecessary additional litigation epitomizes the waste of judicial resources inherent in the current system.

For the insurance industry, which has lobbied hard to keep bad faith claims bifurcated from breach of contract coverage actions, this is all about delaying payment.  The biggest loser here is the estate of the deceased motorcyclist.  Also losers are the taxpayers, who have to pay for two more litigations for no practical purpose other than to allow GEICO to drag out the claims payment for as long as possible.

We will discuss various doctrines of insurance policy construction, including contra proferentem, reasonable expectations, unconscionability, regulatory estoppel, and illusory coverage.  We will discuss how courts use these doctrines to decide insurance coverage disputes, and provide perspectives on each of these doctrines from the insurer and policyholder perspective (you can guess which perspective I will be presenting).

For complete details on the program and to register with a 50% discount courtesy of Insurance Law Florida, click the following link:

http://www.straffordpub.com/products/tlxiva1nna?trk=ZDFCT

I hope you will join us.

Yesterday, the Eleventh Circuit affirmed Judge Bucklew.  The panel of judges, including retired Supreme Court Justice Sandra Day O’Connor sitting by designation, held that the Total Pollution Exclusion removed coverage regardless of whether Massachusetts or Florida law applied.  You can read the complete opinion here.

The Eleventh Circuit’s conclusion was a fairly easy one under Florida law, given the unfavorable Florida precedent on pollution exclusion cases, and more recently, Chinese drywall cases.  The fact that Florida applies a strict, textual construction of policy terms, and interprets pollution exclusions broadly, meant that the policyholder was doomed to fail under Florida law on a policy with the dreaded Total Pollution Exclusion.

The Eleventh Circuit’s discussion of Massachusetts law was surprisingly bereft of any analysis.  Unlike Florida, Massachusetts applies the reasonable expectations doctrine, which looks beyond the terms of the policy to determine whether an “objectively reasonable insured, reading the relevant policy language, would expect to be covered.”  This is a much more favorable standard of policy interpretation, and one that would seem to have greatly benefited the policyholder in this case.  As explained by the court, in the pollution exclusion context, Massachusetts courts apply the pollution exclusion only to harm “caused by the kind of release that an ordinary insured would understand as pollution.”

I have previously stated my opinion that an ordinary person would not consider a homeowner with Chinese drywall in her house to be a “polluter”.  The Eleventh Circuit apparently disagrees.

The panel noted that courts have refused to apply the pollution exclusion to situations involving fumes released by carpet adhesive, fumes released from muriatic acid used to etch a floor surface, and fumes emanating from cement used to install a plywood floor.  In none of these cases was the release of fumes considered to be a “pollution” event.

In Justice O’Connor and the Eleventh Circuit’s view, an objectively reasonable insured should view the release of gasses from Chinese drywall to be pollution, and “more analogous to an oil spill” than a release of fumes from carpet or cement.  I feel the need to state that another way, to highlight the absurdity of this statement: according to the Eleventh Circuit, a homeowner with Chinese drywall in her home is a polluter on par with Captain Hazelwood crashing the Exxon Valdez in Prince William Sound.

As a policyholder attorney who has fought many pollution exclusion cases, my opinion is obviously biased.  Despite my inherent bias, I try in this blog to maintain at least some level of objectivity.  But the Eleventh Circuit’s reasoning in this opinion with respect to Massachusetts law is among the worst I have seen in any coverage opinion.  It is hard to believe that the opinion was released by the Eleventh Circuit, let alone by a panel including Justice O’Connor, one of the great jurists of our time.

I would not blame policyholder lawyers in Massachusetts if they decided to protest the ineptitude of the Eleventh Circuit by dumping Tropicana in Boston Harbor.  As a member of the Florida bar I feel the need to apologize for the rest of the panel, but wish to point out that complaints to Justice O’Connor should be directed to Arizona.

Recently, I represented a sporting goods company that paid millions of dollars to purchase wholesale inventories of high-end firearms that never made their way from Wales to Palm Beach.  It was a particularly difficult claim that involved the U.S. Bureau of Alcohol, Tobacco and Firearms, the U.K. Serious Fraud Office, conspiracy theories, and international intrigue.  The case was settled short of trial, in part because nobody seem to know what some of the key witnesses were going to say if they testified at trial.  Lawyers hate that.

It is typically the policyholder, as the plaintiff (or at least the claimant in the situation where the insurer files a declaratory judgment action), who wants to get its case in front of a jury.  A big reason is that juries do not like insurance companies.  Another reason is that juries are sympathetic to a policyholder that has suffered a great loss, or faces liability that threatens to force it into bankruptcy.

Insurance companies want coverage cases decided by judges.  A motion for summary judgment is the insurer’s big weapon.  It is usually the insurer’s last and best chance of keeping the case from going to a jury.  One of the reasons why insurers will almost always remove a coverage case from state to federal court if diversity jurisdiction exists is that federal judges are more likely to grant summary judgment than state court judges.

This all brings me to burdens of proof, and the Fourth District Court of Appeals’ recent decision in Voort v. Universal Prop. & Cas. Ins. Co., No. 4D11-3361 (Fla. 4th DCA Oct. 31, 2012).  It is black letter insurance law that policyholders have the burden of proving that a claim triggers the insurance policy – i.e., the claim falls within one of the coverage parts of the policy, and the claim occurred within the relevant policy period.  The burden then shifts to the insurer to prove that that the claim is not covered.

In “mysterious disappearance” claims, the burden of proof is critical, since typically the “real truth” is unknown, and the parties must rely on circumstantial evidence to prove their case.  If both the policyholder and insurer can present sufficient circumstantial (or sometimes expert) evidence to support their side of the case, then the dispute should be put to a jury to weigh credibility and determine whose story is more plausible.

The Voort case involved a homeowners’ insurance claim in which the Voorts reported missing and damaged several pieces of furniture that were moved into their new home.  They purchased insurance on their new home from Universal beginning on March 15, 2010.  Their furniture was moved into their new home on April 10, 2010.  The problem was that the movers had picked up the furniture and stored it for almost a year, well before the Universal coverage incepted.  So Universal claimed that the furniture must have been damaged and/or lost prior to coverage inception.

The evidence developed in the case was inconclusive.  The movers stated that, to the best of their knowledge, the furniture was all accounted for and undamaged up to the day of the move.  But nobody seemed to know exactly when the furniture was damaged or went missing.

Universal moved for summary judgment, arguing that the policyholder had the initial burden of proving that the claim arose within the policy period.  Since the policyholder could not conclusively prove when the loss occurred, Universal argued that judgment should be entered in its favor.  Judge John J. Murphy, III of the Seventeenth Judicial Circuit (Broward County) agreed with Universal, and granted summary judgment in the insurer’s favor.

On appeal, the Fourth DCA reversed.  The decision, authored by Judge Martha C. Warner, correctly noted that, although at trial the Voorts had the burden of proving that the loss occurred within the policy period, on summary judgment the insurer had the “burden to conclusively prove that the loss did not occur during the policy period.”  Since the Voorts had presented circumstantial evidence supporting their position, the court was required to make all reasonable inferences in the policyholder’s favor, and Universal failed to carry its burden to prove that no reasonable jury could side with the Voorts.  In reversing summary judgment, the Fourth DCA reaffirmed that the policyholder gets to present its case to a jury on a “mysterious disappearance” claim even when doubts exist as to when the loss occurred.

The result is that this case will now proceed to trial, where the Voorts will have the burden of proving that the loss occurred within the policy period.  In my opinion, the odds are high that the jury will side with the Voorts, and award the Voorts the full value of their claim.  If that happens, Universal will also be ordered to pay the Voorts’ attorneys fees under Fla. Stat. § 627.428, which fees must be substantial given that the case went to the 4^th DCA and back again.

This leads me to another truism of insurance coverage litigation: when the insurer loses on summary judgment, it almost always settles the case rather than face a jury.  I expect the Voorts soon will be able to replace their furniture with much nicer accoutrements, with a new flat screen TV on which they can enjoy the genius of Drew Carey syndicated in high definition.

Many jurisdictions have created exceptions to the eight corners rule, to allow certain extrinsic facts to be considered for duty to defend purposes.  These jurisdictions allow a policyholder to introduce evidence to demonstrate that, even if the facts and allegations in the complaint do not trigger coverage, evidence from outside of the complaint demonstrates the possibility of coverage.  New York, for example, has long followed the rule that a policyholder can introduce extrinsic evidence on a duty-to-defend determination to establish the possibility of coverage, but an insurer cannot use extrinsic evidence to contradict the allegations as pled.  See, e.g., Fitzpatrick v. American Honda Motor Co., Inc., 78 NY2d 61, 571 N.Y.S.2d 672 (1991).

Allowing a policyholder, but not an insurer, to rely on material outside the four corners of the complaint, is consistent with basic insurance principles.  The duty to defend is broader than the duty to indemnify.  Thus, it would make no sense to allow the insurer to deny a defense based on the allegations in the complaint, but then indemnify the loss when the “true facts” demonstrate that the claims are within coverage.  Such a result would make the duty to defend narrower than the duty to indemnify.

That brings me to the recent decision of the Middle District of Florida in Composite Structures, Inc. v. Continental Ins. Co., Case No. 8:12-cv-173-JDW-TGW (M.D. Fla. Oct. 12, 2012).  In Composite Structures, a boat manufacturer was sued by workers who claimed to have suffered bodily injury as a result of exposure to carbon monoxide fumes while working on a boat.  The boat manufacturer’s general liability policy contained a pollution exclusion, but the policy also had a pollution buy back clause that reinstated pollution coverage when the policyholder became aware of the occurrence within 72 hours of its commencement.

The underlying complaint did not specify when the boat manufacturer became aware of the exposure.  There was no reason for the complaint to address this issue, since it was not relevant to the personal injury suit.  It was critical to the issue of coverage, however.  During the course of the underlying litigation, the claimants asserted that the policyholder learned of the exposure more than 72 hours after the occurrence.  Upon learning of this evidence, the insurer promptly disclaimed coverage obligations under the pollution exclusion.

In the ensuing declaratory judgment action, Judge James Whittemore started his analysis by noting that Florida generally follows a strict eight corners rule.  Judge Whittemore proceeded to cite dicta contained in a footnote in the Florida Supreme Court decision of Higgins v. State Farm Fire & Cas. Co., 894 So.2d 5, 10, n.2 (Fla. 2004) to support the view that there are some “natural exceptions” to the eight corners rule where there are factual issues that “would not normally be alleged in the underlying complaint.”  Judge Whittemore then took the unprecedented approach of invoking a “natural exception” to the eight corners rule to allow the insurer to avoid its duty to defend based on evidence developed in the underlying action.

Florida courts have joined many other jurisdictions that have loosened the strict eight corners rule to allow a policyholder to introduce extrinsic facts to demonstrate a duty to defend.  See, e.g., Victoria Select Ins. Co. v. Vrchota Corp., 805 F.Supp.2d 1337, 1343 (S.D. Fla. 2011); Broward Marine, Inc. v. Aetna Ins. Co., 459 So.2d 330, 331 (Fla. 4th DCA 1984).  As Judge Kenneth Marra correctly noted in Victoria Select, where a policyholder notifies its insurer of facts that would potentially place the claim within the policy coverages, the insurer has an obligation to consider the insured’s factual contentions, conduct a reasonable investigation into those facts, and base its duty-to-defend decision on “true facts.” 

No other Florida court has taken the extraordinary step of allowing an insurer to use evidence developed in an underlying action to disprove coverage for a complaint that triggers the duty to defend.  The only Florida cases in which insurers have been allowed to introduce extrinsic evidence on a duty-to-defend determination have involved one of two threshold coverage issues: (a) whether the defendant is actually an insured; and (b) whether the claim arose within the policy period.  In both of these situations, courts have allowed extrinsic evidence to avoid a situation where an insurer must defend a case filed against a party who is a stranger to the policy.

Further, and perhaps most importantly, Florida courts have only allowed insurers to develop such extrinsic evidence in a subsequent declaratory judgment action.  That is, the insurer always has the obligation to initially defend its policyholder, and then must prove in the declaratory judgment action that there is no possibility of indemnity coverage in the underlying action.  Then, and only then, may an insurer be relieved of its duty to defend.

On Wednesday, Composite Structures filed its notice of appeal.  Hopefully the Eleventh Circuit will recognize the flaws in Judge Whittemore’s reasoning, and will reject the notion that an insurer can work against its own policyholder in an underlying case to avoid having to defend.  The Eleventh Circuit should follow other jurisdictions that have rejected insurers’ attempts to go outside the eight corners to avoid their duty to defend, and heed the advice of the venerable Dick Van Patten, who knew that eight is enough.

Sandy literally hit home for me.  My hometown of Staten Island, NY suffered nearly half of the fatalities from the tri-state area.  The coastal New Jersey towns of Atlantic City and Seaside Heights – where I spent time during the summers as a child – suffered extensive property damage and severe business losses.  And, of course, lower Manhattan – where I worked as a federal law clerk and then volunteered as a pro bono lawyer helping victims and small businesses after the 9/11 attacks – once again faces a challenging repair and rebuilding effort.

Fortunately for businesses that are properly insured, the damage and lost business income caused by Sandy should be covered by insurance.  First-party property policies will cover property damage not caused by flooding, which damage will be covered by the federal flood program.  Other specialized policies, such as event cancellation, multi-peril, and inland marine policies, may provide additional coverage.  Companies should consult with their insurance brokers to collect copies of all potentially applicable policies.

Businesses need to make sure to put all of their property insurers on notice immediately, to avoid forfeiting coverage rights.  Not long ago, New York had the strictest insurance notice law in the country.  The New York legislature has loosened notice requirements in recent years, but delaying even a few weeks in providing notice to insurers could put a claim in jeopardy.

It is important to check the specific notice requirements in the policy to make sure notice is given in the right way (i.e., written as opposed to over the phone) and to the right mailing or e-mail address.  Insurance companies have different claims departments for different types of losses, and some policies require a property loss to be reported differently than a liability loss.  It is critical to follow the exact notice instructions in the policy.

After notice is provided, most first-party property policies require the policyholder to timely submit a proof of loss that contains a sworn statement as to the amount of the loss.  The proof of loss deadline typically is short – some as short as 60 days after the loss – so policyholders who need more time to prepare the proof of loss should obtain an extension in writing from their insurers.  Like a failure to provide timely notice, failure to submit the proof of loss within the prescribed deadline can result in forfeiture of coverage.

Property policies also require companies to cooperate with their insurers in the investigation and assessment of the claim.  Companies need to provide their insurers access to property and information so that the insurer can determine the cause and extent of the loss.  But companies also need to be cautious in communicating with insurance adjusters.  Although part of an adjuster’s job is to collect information to enable the insurer to promptly pay the claim, it is also part of the adjuster’s job to look for ways to deny coverage for the claim (such as developing evidence of pre-existing damage), minimize the scope of repair work (such as by obtaining admissions from the company regarding what does and does not need to be repaired or replaced), and deflect responsibility to other parties (either by blaming the company by failing to mitigate damages, or by seeking to shift responsibility to the federal flood program).  Anything you say to an adjuster can and will be used against you if the claim becomes disputed, so be careful about what is communicated, and make sure the information is controlled and coordinated through a point-person assigned to deal with the insurer.

Companies should understand the different types of insurance coverage that are available within their property insurance programs, so that the claim can be presented in a manner that will maximize coverage.  Although many businesses, particularly those along the coast, suffered extensive property damage, the bulk of the insured losses stemming from Sandy will be lost income claims, referred to in insurance policies as “business interruption” losses.  Over the coming months, companies will need to determine the extent of their income lost due to Sandy.

Companies also will need to determine the availability and extent of coverage for “contingent business interruption” claims, which cover income losses caused not due to direct damage to the business but rather due to indirect harm caused by damage to a key supplier or other business partner.  Other coverages that will come into play include “civil authority” coverage, which pays for business losses caused by a restriction to access to premises due to evacuation orders or mass transit closures, and “extra expense” coverage, which covers reasonable and necessary increased costs of operating the business post-loss (such as use of temporary space or back-up power generators).

There is no doubt that the “wind v. water” issue that has been litigated for years in the Katrina cases will once again be a battleground for Sandy claims.  Insurers will argue that some or all of the Sandy losses are due to flood, and thus uncovered by private insurance.  One thing we learned from Katrina is that private insurers love to stick the federal flood program with the repair bill, even when a combination of wind and water caused the damage.  Not only is this causation issue critically important for businesses that lack flood coverage, or that have lower limits on their flood policies, but the determination as to the cause of loss can also impact a policyholder’s ability to collect on its business interruption claim.

Companies should also be aware of how their policy limits and deductibles will apply to Sandy-related losses.  Many policies contain sublimits for certain types of coverage that are lower than the full replacement cost limit for property damage claims.  Policies also differ as to the minimum waiting period before business interruption coverage starts, and the maximum period of coverage (called the “period of restoration”) during which lost or reduced business income is covered.  It is important to keep in mind that business income losses occur not only when the business is completely closed, but when it is hobbled by restricted access or diminished operational capacity.  The time at which the company is determined to be fully recovered (or when the insurer believes that the business should have fully recovered) often is an area of dispute.

Finally, many policies contain hurricane or windstorm deductibles – some as high as five percent of insured values – that may apply to this loss.  Large hurricane deductibles have been standard in Florida for many years, but are relatively new and untested in the northeast.  Hurricane deductibles should not apply to Sandy losses, since Sandy was not a hurricane when it made landfall in New Jersey.  The insurance departments in New York and New Jersey have warned insurers not to apply hurricane deductibles, but some may try anyway, and some policies contain windstorm deductibles that insurers may argue apply even in the absence of a hurricane.

Companies need to be safe and smart in how they go about their recovery from Sandy.  This includes their insurance recovery, which can make the difference between a company that rebuilds and emerges stronger than before, and a business that is damaged beyond repair.