DOES THE ECONOMIC LOSS RULE BAR AN INSURED’S SUIT AGAINST AN INSURANCE BROKER WHERE THE PARTIES ARE IN CONTRACTUAL PRIVITY WITH ONE ANOTHER AND THE DAMAGES SOUGHT ARE SOLELY FOR ECONOMIC LOSSES?

The economic loss rule is a legal doctrine that’s interpretation and application causes confusion to even the most experienced attorneys. Anyone wishing to read more into the matter can see the detailed history and analysis provided in the Court’s opinion. Let’s just say that if the rule had applied, there would have been no cause of action that could have been asserted by a policyholder.

In deciding the case, the Florida Supreme Court noted the application of the economic loss rule had been impermissibly expanded far beyond its original intent. The Court receded from its prior rulings and held that the rule was only applicable in the products liability context. So actions brought by policyholders against insurance agents for negligently procuring coverage can and will continue.

Numerous federal judges in Florida have rejected this argument, however until this week there were no Florida state court appellate opinions directly on point.

The facts are relatively simple. Trafalgar’s property was damaged by Hurricane Wilma and a claim for the damage was submitted to Zurich. When Zurich only paid a portion of what Trafalgar demanded, the policyholder filed suit for breach of contract.

Shortly thereafter, Zurich tendered additional monies and invoked the appraisal process afforded to it by the policy. The appraisal award was entered for approximately $1.5 million and Zurich paid these amounts in accordance with the terms and conditions of the policy. The trial court then granted summary judgment in favor of Zurich finding that it had not breached the insurance contract but allowed Trafalgar to amend its complaint to assert a statutory bad faith action.

Later the Court dismissed Trafalgar’s bad faith claim finding that it had not received a determination that Zurich had breached the contract and therefore that Trafalgar had not satisfied its requirements for bringing such an action.

The Appellate Court reversed this finding, however, specifically rejecting the argument that a finding that an insurer breached the insurance contract precludes a policyholder from bringing a bad faith action. Instead, the Court found that the appraisal award constituted a “favorable resolution” of an action for insurance benefits and that the conditions precedent to bringing a statutory bad faith action had been satisfied.

This opinion will likely be cited throughout the state in the upcoming months and appeals in other districts will certainly follow. Depending on decisions in other district courts, this issue may have a final determination by the Florida Supreme Court in the not so distant future.

To read the full appellate opinion, click here.

A public adjuster may not directly or indirectly through any other person or entity initiate contact or engage in face-to-face or telephonic solicitation or enter into a contract with any insured or claimant under an insurance policy until at least 48 hours after the occurrence of an event that may be the subject of a claim under the insurance policy unless contact is initiated b the insured or claimant.

Ultimately the Florida Association of Public Insurance Adjusters (FAPIA) and various other policyholder advocate groups began to fight back against the restriction which they believed to be unconstitutional. In October 2009, Frederick W. Kortum filed suit asking the court to declare the restriction unconstitutional as violating his constitutional right to free speech, equal protection, and to be rewarded for his industry.

After suffering defeat at the trial court level, the First District Court of Appeals reversed the ruling finding that the statute prohibited all public adjuster initiated contact and thus improperly restricted commercial speech.

On July 5, 2012, the Florida Supreme Court agreed that the 48 hour ban on public adjusters was a restriction on constitutionally protected commercial speech and that the restriction was more extensive than necessary to serve the legitimate interests of the State. Thus, the ban has been held unconstitutional and has been struck down as invalid.

Public insurance adjusters play an important role in the claim process and can help policyholders navigate complicated, and often confusing, insurance policies and adjustments. Allowing public adjusters to immediately offer their services to insureds is important and can reduce the risks of a claimant making mistakes that could cause delay or detriment to that person’s ability to recover. While we often take issue with the Florida Supreme Court’s rulings, this decision upholds the rights of the public adjusters and protects the best interests of the general, premium paying, public. As such, it should be applauded.

Realizing that this would be inequitable, not to mention next to impossible for many policyholders, most policies allow the policyholder to settle their claim on an Actual Cash Value basis (the full cost of repairing and/or replacing damaged property with deduction for depreciation). Unlike Replacement Cost amounts, the Actual Cash Value of damaged property is generally due immediately regardless of whether the work has been, or ever is, completed.

Electing to settle the loss on an Actual Cash Value basis does not preclude a policyholder from ever recovering the Replacement Cost Value. Most policies provide that even if the policyholder elects to have the claim settled on an Actual Cash Value basis, it can still recover the withheld depreciation at a later time, after the work has been completed. To do so, however, the policyholder must notify the carrier of its intent to do so.

While these provisions have been contained in policies for many years, there was little litigation about them until recently when a handful of insurers began attempting to avoid payment by claiming that policyholders had not elected to make an Actual Cash Value claim or had not notified the carrier of an intent to make a Replacement Cost Value claim within the time frame prescribed by the policy (typically 180 days from the date of loss). To avoid any of these arguments one should confirm in writing that the claim is being made on an Actual Cash Value basis for items not repaired or replaced, and that after the work is completed the insured intends to make a claim for any depreciation withheld.

Any policy that contains a separate hurricane deductible must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A SEPARATE DEDUCTIBLE FOR HURRICANE LOSSES, WHICH MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU." A policy containing a coinsurance provision applicable to hurricane losses must on its face include in boldfaced type no smaller than 18 points the following statement: "THIS POLICY CONTAINS A CO-PAY PROVISION THAT MAY RESULT IN HIGH OUT-OF-POCKET EXPENSES TO YOU.

Despite this requirement, it became apparent after Hurricane Wilma that many insurers failed to comply. Many lawsuits and large class actions were filed against carriers like Citizens, Arch Specialty, and QBE, arguing that the failure to comply with the statute makes the deductible void and unenforceable.

The Chalfonte case, which has been pending since 2009, finally addressed this issue on May 31, finding against the policyholder's argument. After a detailed analysis of the legislative history, intent, and drafting of 627.701, the Court found that the statutes do not contain a penalty for non-compliance, so the courts were not at liberty to provide one. Further, the Court found that QBE had “substantially complied” with the requirements and there was no allegation that Chalfonte did not receive notice of the deductible provision as the statute intended. Finally, the Court determined that voiding the deductible, regardless of compliance with the statutory requirements of 627.701, would impermissibly alter the terms of the contract “because the insurance contract bargained for by the parties and the lower premiums paid by Chalfonte included this hurricane deductible.”

The Chalfonte decision concludes six years of uncertainty in Florida insurance law and the decision will be studied and discussed for years to come. Unfortunately for associations and policyholders in general, the Supreme Court has set a precedent that there is no consequence for noncompliance with this statutory requirement. Consumer protection is an important role of both the legislature and the judicial system. This decision does not further that role in any way.

The NFIP has low limits on coverage, generally $250,000 for homeowners and $500,000 for commercial property owners. This is inadequate for most associations.

Recently, Zurich announced that it would begin offering excess flood insurance to residential and commercial policyholders in all 50 states. According to the carrier, coverage will be offered for property damage, additional living expenses, and business interruption.

With hurricane season beginning shortly, associations should speak with their brokers and consider supplementing existing coverage if necessary. Property damage, loss of use, and business interruption can be costly but, with the appropriate coverages, reimbursable.

QBE’s attorney, however, refused to allow the Corporate Representative to answer the questions posed claiming that they were not relevant in a breach of contract action and therefore not discoverable.

After the deposition, Summit Towers asked the appointed Magistrate Judge to compel QBE’s Corporate Representative to continue the deposition and answer the questions posed. Summit Towers contended, among other things, that because QBE had alleged that the claim was fraudulently inflated, a wider discovery should be allowed to allow Summit Towers to rebut the accusations.

Magistrate Judge Simonton overruled the objections and ordered QBE to produce its Corporate Representative again to answer the questions posed. In doing so, Magistrate Simonton succinctly stated:

I am going to tell you right now I am ordering those questions to be answered at a deposition. I am going to follow the same logic that was filed I believe by Judge Torres [Buckley Towers Condominium, Inc. v. QBE Insurance Corp., 2008 WL 2645680 (S.D. Fla. June 26, 2008)], and the relevancy objection is overruled at a deposition. If it is not privileged, then the witness needs to answer the question[.]

Despite the Magistrate’s ruling, however, QBE continued its attempt to protect evidence of its claims handling procedures, general business practices, and financial incentives by appealing the Magistrate’s Order to the District Court Judge. This effort again fell flat when the Honorable Patricia Seitz issued an Order denying QBE’s objections to the Magistrate Judges rulings.

Regarding the portion of the Order compelling QBE to answer questions relating “financial incentives, general business practices and bad faith or good faith and fair dealing”, Judge Seitz stated:

Magistrate Judge Simonton’s ruling is neither clearly erroneous nor contrary to law. Consistent with Buckley Towers and QBE’s affirmative defense of fraud, inquiry into the investigation process and analysis of an insured’s claim is relevant in this breach of contract action. The questions at the deposition are relevant to whether QBE’s initial determination that damages did not exceed the deductible was reasonable and also to rebut the claims of fraud alleged by QBE.

In relation to QBE’s argument that the questions were, in essence, premature bad faith discovery, the Judge Seitz stated:

That there is some overlap with this evidence and evidence that is relevant to a bad faith claim is of no consequence where, as here, the probative value of that evidence to the breach of contract claim outweighs any prejudice to QBE.

Fraud defenses are becoming all too common in first party property insurance claims. Some carriers, such as QBE allege fraud in almost every case that there is a disagreement regarding the amount of loss and causation of damages, even if there is no evidence to support such an accusation.

Orders like the one mentioned above show that courts are taking notice of these patterns and practices and are no longer allowing insurers to “hide the ball” in discovery by claiming that information that will rebut the alleged fraud defense is not relevant and is not discoverable.

Just as an association has a contract with its insurance carrier, an insurance carrier has a contract with the applicable reinsurers. These agreements generally provide the terms and conditions of the reinsurance relationship and can spell out the rights and obligations of the insurance carrier and the reinsurer. While reinsurers are almost always involved in the claim or litigation filed by a policyholder, often reinsurers have the ability to join in the investigation or defense of the litigation and have the ability to participate in the decisions on coverage and amounts paid.

While many insurers will argue that their reinsurance agreements are not discoverable by a policyholder during coverage litigation, the vast majority of courts have disagreed. Federal Rule of Civil Procedure 26(a)(1)(D) requires the production of:

Any insurance agreement under which any person carrying on an insurance business may be liable to satisfy part or all of a judgment which may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment.

Because reinsurance agreements undoubtedly fall into these categories, Rule 26 requires them to be disclosed. The rule is absolute and does not require any showing of relevance. See, e.g., National Union Fire Ins. Co. of Pittsburgh, Pa. v. Continental Illinois Corp., 116 F.R.D. 78, 83-84 (N.D.Ill.1987).

Aside from the agreements, communications between an insurer and any applicable reinsurer can play an important role in a number of ways. Numerous courts have allowed these communications to be discovered by policyholders in litigation with their insurers for a variety of purposes including as extrinsic evidence of the meaning of an ambiguous policy provision, to defend against allegations of a material misrepresentation in the insurance application, to rebut a late notice or fraud allegation, and to reconstruct a lost policy. Medmarc Cas. Ins. Co. v. Arrow Int'l, Inc., 2002 WL 1870452, at *3-4 (E.D.Pa. July 29, 2002).

With the current financial climate, reinsurance is playing a large role in the United States as well as foreign markets. When dealing with large losses, it is important to understand the role reinsurers play and the potential impacts that these entities can have on the claim and any subsequent litigation.

The scenario above was common to a large number of condominium associations over the past few years. This has led insurance carriers and their attorneys to come up with ways to attempt to avoid payment, many of which have relied on so called “late notice” defenses to fight coverage.

Recently, in Ocean View Towers Association, Inc. v. QBE Insurance Corporation, a federal trial court in the Southern District of Florida heard argument on competing motions for summary judgment. One of the main issues was whether the association was barred from recovery because it had not notified QBE of the additional damages and instead filed suit for breach of contract.

The court rejected QBE’s “late notice” arguments, finding that the clear and unambiguous language of the policy controlled the obligations of the policyholder. The policy, like most policies, required Ocean View to “[g]ive [QBE] prompt notice of the loss or damage” and “[i]nclude a description of the property involved.” Based on this requirement, the court determined that since Ocean View undisputedly provided prompt notice that Hurricane Wilma had damaged the property and had included a description of the damages known at that time, Ocean View had fulfilled its requirements under the policy and was not required to do more. As the court noted, QBE had ample opportunity to inspect and adjust the loss after the Hurricane and simply chose not to utilize all the means at its discretion.

This is an important case that all adjusters, attorneys, and insurance professionals should read carefully. Numerous other issues are addressed in the opinion, aside from the notice issue, however, those are highly technical and do not lend themselves to a single post. This decision will undoubtedly be cited by both sides in legal briefs for a long time.

If you or your association see a rate increase, I suggest you contact your state representative or senator. With re-elections looming, your input may have more of an impact than ever before.

Luckily for directors and associations alike, Florida law strictly limits the situations in which a director can be held personally liable for actions taken in furtherance of their position on the board. The longstanding precedent discussed in Munder v. Circle One Condominium, Inc., 596 So.2d 144 (Fla. 4th DCA 1992), provides that directors are immune from individual liability unless a crime or fraud has been committed or there has been self-dealing or unjust enrichment. Thus, negligent actions are not individually actionable, even if such actions are clearly wrong.

This rule has been applied in numerous situations. Personal actions for failing to correct construction defects, failing to provide workers compensation insurance, and failing to properly administer insurance proceeds have all been rejected by various courts.

While boards of directors have a fiduciary duty to the association, mistakes will happen. Luckily, the law protects the individuals involved in most situations and unit owners can run for office without fear of personal liability. All boards should check their Errors and Omissions policies and ensure that it is effective and adequate to cover any situation that may arise. Boards should also ensure that they have coverage to defend any individuals who may be wrongly sued for actions taken in furtherance of their positions.

All repairs to be specified per estimate and scope as furnished by the insurance co., or furnished by the company and approved by the insurance co. No changes may be made by either party without written approval by both parties.

After payment was tendered by the carrier, a dispute arose between the association and Sunmark Restoration regarding the scope of the contract. The association argued that the contract only covered Sunmark’s authority to negotiate the scope of the loss with the insurance carrier, while Sunmark Restoration argued that the contract allowed them to negotiate a final settlement and then perform the work. When an impasse was reached, Sunmark Restoration sued the association for breach of contract.

The Third District Court of Appeals found the contract was indefinite and could not be enforced. Because the proposal/contract allowed Sunmark Restoration and a non-party to the contract (the insurance carrier) to determine the price terms, the court found there was no “meeting of the minds” and thus no contract. The court advised that in the absence of a definite price or definite method of determining the price not left solely to Sunmark Restoration’s discretion, the contract was not binding.

Associations should always read contracts carefully and make sure that both parties have a clear understanding of what is contained therein. The repercussions of not doing so can be harsh and could lead to needless litigation that will further delay the repair process.

While state law generally dictates the amount of time after a loss before a suit is barred, some states allow the statute of limitations to be contractually altered by the policy. In Georgia, for instance, an insurance contract may shorten the statute of limitations “provided the period fixed be not so unreasonable as to raise a presumption of imposition or undue advantage, in some way.” Darnell v. Fireman’s Fund Ins. Co., 154 S.E. 2d 741 (GA Ct. App. 1967). In Georgia, it is important for a policyholder to read the “Suit Against Us” provision of the policy carefully to determine whether the statute of limitations period has been shortened.

There are other states that do not allow the period to be shortened by an insurance contract. Some states rely on case law to prohibit such an occurrence and others have statutory provisions which expressly forbid it. For instance, Florida Statute § 95.03 provides:

Any provision in a contract fixing the period of time within which an action arising out of the contract may be begun at a time less than that provided by the applicable statute of limitations is void.

With the large area of potential damages, many professionals will be working in more than one state for the foreseeable future. Associations should be aware that the adjuster assigned to their claim may be working in their state one day and in another state the next. With differing laws in each jurisdiction, it is important for insureds and claims professionals to make sure that an otherwise valid claim is not barred.

The design defect exclusion clause in the Swire-Zurich Builder's Risk Policy is not ambiguous. “Loss or damage” as used in the first prong of the clause clearly means loss caused directly by the design defect. This type of loss is not covered under the policy. Further, the only reasonable definition for the term “physical loss or damage” as used in the ensuing loss provision of the clause is damage that occurs subsequent to, and as a result of, a design defect. This type of loss is covered under the policy.

Plainly stated, an ensuing loss is a covered damage that results from an excluded peril. This means that if there are two different losses, the first excluded by the policy and the second covered, the second loss will be covered if it results from the first.

For instance, if a pipe inside a wall breaks because it is old and deteriorated, the damages to the pipe would not be covered if there is an exclusion for deterioration and/or wear and tear. However if water is discharged from the broken pipe and results in significant water damage to the drywall, floors, or other covered property, these water losses may be covered if the appropriate ensuing loss provision is contained in the policy.

Another example is if an association’s roof is damaged by wear and tear and subsequently begins to leak into the building. Assuming that the damages to the roof (wear and tear) are excluded, the subsequent water damages could still be covered if such a provision applies.

Ensuing loss clauses are important for associations and unit owners alike. Both should read their policies carefully and understand how ensuing loss clauses affect the coverage they purchase.

Valuation

We will determine the value of Covered Property in the event of loss or damage as follows:

a. At actual cash value as of the time of loss or damage, except as provided in b., c., and d. below.

The policy expressly provides that actual cash value is determined as of the date of loss, not as of the date the estimate is written or the claim is submitted or re-opened. In many situations, this may seem trivial because price lists used in estimating do not generally change drastically from year to year. However, in some instances such as Hurricane Wilma claims, this could mean that the policyholder receives a lesser amount than is actually owed.

Consider the following example:

During a hurricane, an association’s roof is damaged. At that time, the price for replacement of the roof was $100,000.00.

After the storm, the association’s insurer determines that the roof is not significantly damaged and can be repaired for less than the deductible.

A year later, the association is continuing to suffer leaks despite the fact that the repairs suggested by the insurer have been performed. So the association asks for the claim to be re-opened.

After re-evaluating the roof, the insurer’s engineer agrees that the roof should have been replaced due to the storm and the insurer, using current price lists, estimates replacing the roof at $80,000.00.

Taking 20% depreciation, the insurer tenders a check to the association for the actual cash value of the roof in the amount of $64,000.00.

In the above situation, the amounts paid by the insurer for the actual cash value are incorrect because the express terms of the policy state that the actual cash value is calculated as of the time of the loss. Had the insurer calculated the actual cash value in accordance with the valuation provision, the amount owed would be the full $80,000.00 (representing 80% of the $100,000.00 it would have cost to replace the roof at the time of the storm).

Calculating the amount owed in accordance with the policy provisions is an important part of indemnifying an insured. Policyholders and professionals on both sides should read the policy carefully to determine whether amounts paid are sufficient and in accordance with the provisions of the policy.

Like many associations, Devon Neighborhood Association suffered hurricane damage to its property in 2004. Unfortunately, Devon’s insurer at the time, Southern Family Insurance, became insolvent and the policy and claim were taken over by the Florida Insurance Guarantee Association (FIGA).

Unsatisfied with the amounts paid, Devon filed suit and FIGA responded by asking the court to stay the action and compel appraisal. Relying on a 2005 amendment to the Florida Statute § 627.7015, Devon’s attorneys successfully fought the appraisal process because Southern Home failed to provide notice that the statutory mediation process was available for disputed property insurance claims.

Despite the fact that the amendment allowing an insured to avoid appraisal if a carrier does not provide the statutorily required notice was passed after the policy was issued, the trial court and Fourth District Court of Appeals found that the statute was retroactive and held Devon did not have to participate in the appraisal process.

Reversing these decisions, the Supreme Court re-affirmed its previous determinations regarding what law applies to an insurance policy. As the Court noted:

We also made clear in Menendez that “[i]n our analysis, we look at the date the insurance policy was issued and not the date that the suit was filed or the accident occurred, because the “statute in effect at the time an insurance contract is executed governs substantive issues arising in connection with that contract.

Based on this reasoning, any changes to the Florida Statutes made after a policy is first issued would not generally be applicable to a claim made on a policy. While this is the general rule, the Court also addressed instances where a statute may be retroactive and could apply to previously issued policies. The Court reaffirmed its two-pronged test to determine whether a statute may apply retroactively:

[I]n determining if a statute is retroactive, two factors are to be considered. The first factor is whether the statute itself expresses an intent that it apply retroactively, and if so, the second factor is whether retroactive application is constitutional. . . .[I]f the plain language of the statute does not evince an intent that the statute apply retroactively, the Court ―need not address the second prong. (citations omitted)

Determining whether retroactive application of a law is constitutional will require a more stringent analysis, and it is important for associations, managers, and practitioners to understand generally what laws may affect any given claim. Failing to do so could result in an outcome less favorable than it should be.