Two Wrongs Can Make It Right

There are few things I hate more than seeing a policyholder forfeit coverage.  Most of my claims involve close calls, or unsettled or novel areas of the law.  Sometimes the claim is the type that is clearly covered, but the insurer refuses to provide coverage because it asserts the policyholder forfeited the coverage due to some misstep.

Insurance policies are full of ‘gotchas’.  Even a claim that should be covered may not be covered if the policyholder does not follow the correct procedures.  The most common policyholder misstep is failing to provide timely notice.  With occurrence-based coverage, such as general liability coverage, a late notice mistake usually is not fatal, since in most jurisdictions, including Florida, the insurance company must be prejudiced by the late notice before coverage is forfeited.  Insurers always claim prejudice but rarely can demonstrate actual, tangible prejudice.  When pushed, the insurance company prejudice defense typically falls like a house of cards.  However, even if an insurer cannot demonstrate prejudice, a policyholder still may not be able to recover pre-tender defense costs incurred prior to providing notice (see my discussion of pre-tender defense costs here).

Claims made and reported policies, like Directors & Officers insurance, are different.  These types of policies have stricter notice requirements that most courts have upheld even in the absence of prejudice.  I have written before about the particular problems that arise with providing notice of claims and notice of circumstances under claims-made and reported policies (see here).  Policyholders need to be especially careful when dealing with claims-made and reported policies.

Insurance policies contain many other types of requirements that policyholders must fulfill or risk forfeiting coverage.  Most of these provisions are found in the conditions precedent section of the policy.  Examples include completing and submitting a timely Proof of Loss for property claims, sitting for an Examination Under Oath (“EUO”), cooperating with the insurer’s investigation of the claim, refraining from making admissions that would prejudice the defense of a claim, and settling claims or making payments on claims without the insurer’s permission.  These are some examples of the many things a policyholder may do in response to a loss that could lead to forfeiture of coverage.

As alarming as these ‘gotchas’ are, it is important to remember that insurance companies make mistakes, too, and these mistakes can be a lifeline to a policyholder that unwittingly violates a condition precedent.  Two recent Florida appellate court decisions should serve as reminders of how an insurer’s missteps can help correct a policyholder’s transgression.

The first is the Second District Court of Appeal’s decision in Castro v. Homeowners Choice Property & Cas. Ins. Co., Case No. 2D15-5456 (2d DCA Aug. 23, 2017).  The Castro case involved a homeowners’ insurance sinkhole claim in Pinellas County.  After the policyholder notified the insurer of the loss, the insurer investigated and determined that a sinkhole did not cause the damage.  The insurer therefore denied the claim.  The policyholder subsequently hired an engineering firm to conduct an analysis.  The engineering firm concluded that the loss was due to sinkhole activity.  The policyholder provided a copy of the engineer’s report to the insurer and the insurer agreed to investigate further.  As part of the investigation the insurer demanded an EUO from the policyholder, as is its right under the policy.  The policyholder refused to schedule the EUO and instead filed suit.

Before continuing the discussion of the case, I should point out that it is generally a bad idea for a policyholder to refuse to sit for an EUO.  Most policies require a policyholder to submit to an EUO, and the policyholder’s refusal to do so can constitute a breach of the conditions section of the insurance policy.  It is far better for a policyholder to be prepared, and be represented by counsel if necessary, to ensure that the EUO process proceeds fairly.  Sometimes an EUO can help the policyholder convince the insurer to pay the claim, although typically the process is used by insurers to intimidate policyholders and obtain admissions to use later in litigation.

In the Castro case, the insurer argued that the policyholder’s declaratory judgment action should be dismissed for failure to comply with the EUO requirement in the policy.  The trial court agreed and granted summary judgment for the insurer.  The Second DCA reversed.  While the appellate court recognized that the EUO requirement was a condition precedent to recovery under the policy, since the insurer denied the claim, the denial freed the policyholder from compliance with the policy’s conditions, and excused the policyholder’s violation of the EUO condition.

On the same day, Florida’s Third District Court of Appeal decided the case of GEICO General Insurance Company v. Mukamal, Case No. 3D15-2750 (3d DCA Aug. 23, 2017).  In the Mukamal case, the policyholder was at fault in an automobile accident that killed another driver.  The policyholder skipped town and the insurer was unable to find him.  The insurer nonetheless defended the case, which resulted in a $15 million judgment.  The insurer then refused to pay the judgment on the basis that the policyholder forfeited coverage by violating the cooperation clause in the policy.

The trial court rejected the insurer’s cooperation defense and the appellate court affirmed.  Although the policyholder clearly violated the cooperation clause, the insurer itself was at fault for failing to follow Fla. Stat § 627.426.  I previously discussed 627.426 here.  The statute, generally referred to as the Florida Claims Administration Statute, sets forth certain procedures that an insurer needs to follow in order to preserve policy defenses such as a cooperation defense.  The Florida Claims Administration Statute essentially requires an insurer to state its policy defenses within 30 days, and also requires an insurer to respond to notice of a claim in one of three ways: (1) refuse to defend; (2) obtain a non-waiver agreement; or (3) retain mutually agreeable defense counsel.  An insurer that violates any part of this statute forfeits the right to later complain about the policyholder’s violations of policy conditions such as notice and cooperation.

In the Mukamal case, although the insurance company defended its AWOL policyholder, it did not obtain a non-waiver agreement or retain mutually agreeable counsel.  Neither of these options were available, since the policyholder was nowhere to be found.  Rather than disclaim coverage obligations, the insurer decided to defend the case and lost.  Having done so, it could not later complain that its policyholder forfeited coverage rights.

Many policyholders make mistakes early in the claim process, either by failing to provide prompt notice or by violating conditions precedent to coverage.  Getting coverage counsel involved early in the claim process can help avoid missteps.  But it is important to know that some missteps can be corrected, and some can be forgiven by the insurer’s own missteps.  Two wrongs may not make a right, but somewhere I read on a bumper sticker that three lefts make a right, and we all know bumper stickers don’t lie.