[S]everal of Florida's district courts of appeal have concluded that the failure of an insured to appear for an EUO prior to filing suit to recover an unpaid claim is a material breach of contract, requiring forfeiture of coverage. These decisions have led to a cottage industry of EUO litigation. If an insurer can procure a failure to comply—or, even better, a refusal to comply—with the EUO requirement, they have a perfect defense to payment. Similarly, if counsel for insureds can bait the insurer into refusing payment without adequate justification, this may trigger a bad faith claim. The actual, if unglamorous, true purpose of the EUO—verification of the insured's loss—has been lost in this larger battle. No doubt there can be genuine instances of insurance fraud, but the recent and ever—escalating number of EUO cases that have arisen all over the state appear to be more about strategy than truth.

Whistler’s Park, Inc. v. The Florida Insurance Guaranty Association, No. 5D10–2410 (Fla. 5th DCA May 18, 2012).

The case stemmed from an August 2004 Hurricane Charley claim. Whistler’s Park is currently a condominium association, but at the time of the loss was an apartment complex named Banana Cay Apartments, Inc., and doing business as Bristol Bay Apartments. The loss was reported to Southern Family Insurance, and after inspecting the property, the insurer issued a $363,000.00 payment to the insured for damages. The policyholder filed a Civil Remedy Notice of Insurer Violation with the Florida Department of Financial Services due to what it considered to be a grossly underestimated value of the loss. Southern Family requested an examination under oath of the policyholder’s representative, as well as voluminous documents. The policyholder’s attorney listed the corporate representative of the policyholder and informed Southern Family that it was now a condominium association operating under a new name.

In December 2005, the policyholder attorney’s letter to Southern Family stated that the insured is “assembling appropriate documents in response to your request. These documents will be made available for inspection and copying at my client's headquarters []. Given the holidays and related travel absences, I anticipate that the assembled documents will be ready for examination by mid to late January. As I mentioned yesterday, my client's corporate representative is Kenneth G. Dixon.”

On December 20, 2005, Whistler’s Park filed suit against Southern Family for breach of the insurance contract and violations of chapter 624, Florida Statutes. Southern Family moved for summary judgment, asserting that the policyholder materially breached the policy by filing the lawsuit before complying with the EUO request. The Florida Insurance Guaranty Association (“FIGA”), became the successor to Southern Family, and was eventually named and involved in the lawsuit.

On January 15, 2007, the policyholder’s attorney requested that FIGA withdraw its motion for summary judgment because an EUO was never actually scheduled and there had been no refusal to attend one. The letter also reiterated a willingness to appear for an EUO or deposition. FIGA did not respond, and refused to withdraw its motion for summary judgment. It argued to the trial court that the policyholder failed to comply with the EUO request before filing the lawsuit, material breach by the policyholder that relieved the insurer from coverage. The trial court granted FIGA’s summary judgment and entered a final judgment in FIGA’s favor in June 2010, holding that the policyholder recover nothing due to the breach. This appeal followed.

The appellate court noted Southern Family requested an EUO, but never set a time or place for it. The policyholder’s attorney provided the name of the corporate representative, and when FIGA raised the failure to submit to an EUO as a defense, the offer to submit was renewed. Instead of taking the EUO, FIGA asserted that nothing could revive the claim.

The Fifth District held that in light of their recent decision in State Farm Mutual Automobile Insurance Company v. Curran, 83 So. 3d 793 (Fla. 5th DCA 2011), FIGA carried the burden of pleading and proving a breach that caused prejudice. FIGA did not plead or assert prejudice. The Court concluded its opinion with the statement:

The record evidence in this case indicates that the delay in obtaining Banana Cay's EUO caused by Banana Cay's failure to comply with Southern Family's request to schedule an EUO prior to filing suit did not prejudice FIGA.

The Court reversed the trial court’s order and sent the case back to the trial court, where the policyholder will be able to continue to pursue the claim.

The downside to all of this and the “cottage industry of EUO litigation” is that, judicial resources, attorney’s fees and costs spent on a case like this are wasted. Not to mention the several years. In this light, the appellate court’s comment that cases litigated in this way appear to be “more about strategy than truth” seems an accurate observation.

The insured sued Universal, seeking declaratory relief on whether the structure was a total loss, whether Universal could withhold overhead and profit, whether the dismissal of the umpire was proper, whether the loss payable under the ordinance or law provision was ripe for appraisal, and damages. Count II of the Complaint sought the appointment of a new umpire.

As an affirmative defense, Universal asserted that the insured obstructed and failed to complete the appraisal process by terminating the umpire without just cause. Universal also counterclaimed for breach of contract. The insured denied terminating the umpire without just cause. He argued that he tried to comply with the appraisal provision but that, after he moved to replace the umpire, Universal raised coverage issues not subject to appraisal. The insured filed an amended complaint seeking damages for breach of contract.

After some discovery in the case, the trial court granted summary judgment for Universal, ruling that the insured breached the policy by unilaterally terminating the umpire and failing to complete the appraisal before filing suit. The insured appealed that adverse ruling.

The Second District Court of Appeal stated that the insured cooperated in the appraisal process from May 2008 until December 2008 and noted that he did not end the appraisal process; he just wanted a new umpire. The Court held that the whether the insured willfully and materially breached the policy by firing the umpire was a question to be decided by a jury, and reversed the trial court’s summary judgment for Universal:

The sole basis for the summary judgment was the purported termination of the umpire and the filing of a declaratory judgment action. The issue of whether this constituted a material breach, if at all, of the policy is a question for resolution by the fact finder. Summary judgment was improper. [emphasis added]

The Court noted that if the insured’s appraiser was dissatisfied with the pace of the umpire’s efforts, the law provides alternatives to unilaterally firing the umpire. The Court cited cases where various emergency motions seeking to replace the umpires had been filed.

An insurance company adjuster determined that the association property suffered $46,414.37 in covered building damage, including $2,324.04 in damage to the plaintiff's unit. It was discovered that there was a clerical error and, although the condominium was valued at $2,471,000, it obtained only $247,100 in building coverage. Because Casa Grande had underinsured the property, the flood insurer imposed an eighty-six percent co-insurance penalty and issued payment for $5,498.01 of the $46,414.37 in damages. The condominium association gave the plaintiff $275.29, representing the unit owner's share of the damages.

The plaintiff filed the lawsuit against the association and there was a bench trial, in which plaintiff alleged the association acted negligently in failing to obtain adequate insurance for the property, accruing a co-insurance penalty that reduced the recovery for damage to the unit, and for failing to pursue additional damages from the association’s flood insurer and its insurance agent on the plaintiff's behalf. The district court found for the plaintiff.

On appeal, the association argued the plaintiff's unit was subject to the policy limitation for basement property. The flood policy limits coverage for basement property to clean-up costs and to certain enumerated items such as drywall and central air conditioners. Accordingly, the association claimed the district court erred in holding it liable for the full measure of the plaintiff's flood-related repair costs.

The appellate court looked to the definition of basement within the Standard Flood Insurance Policy (“SFIP”). “Basement” was defined as “[a]ny area of the building, including any sunken room or sunken portion of a room, having its floor below ground level (subgrade) on all sides.” The court noted the evidence suggested that the plaintiff's unit is subgrade, and therefore in a basement for the purposes of the SFIP. An elevation certificate of the unit was introduced as an exhibit at trial indicating its elevation is 2.6 feet, while the lowest adjacent grade is 4.4 feet. The court reversed the district court and remanded the case to determine the damages subject to the basement limitation.

In law almost anything is possible, as long as it is defined in a contract. The ultimate conclusion in this case was that the condominium unit is a basement, even though its floor is just 1.8 feet below the ground level in a city where many areas are below sea level.

We will not pay for loss or damage caused by or resulting from ... Faulty, inadequate or defective ... Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; or Maintenance.

We will not pay for loss or damage to property ... caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not, unless: (1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters; or (2) the loss or damage is caused by or results from thawing of snow, sleet or ice on the building or structure.

In support of its motion, Nationwide filed affidavits of its independent adjuster and engineer who inspected the roof. They stated that the loss was not caused by a covered event or was caused by plaintiff’s failure to properly maintain the building. The court called some of their findings “conclusory.” For example, the court noted that Nationwide’s independent adjuster conducted inspections ten and seventeen days after the storm and saw extensive debris on the roof. Nationwide cited this fact to establish poor maintenance of the roof. The court pointed out that, to the contrary, a jury could reasonably conclude that the debris was caused by the storm and not by plaintiff’s inaction.

The trial court found that the policyholder demonstrated issues of material fact regarding the cause of damages. Among other things, the policyholder proffered climactic data which indicated the heightened wind gusts on the date of loss. Also, the policyholder submitted evidence that the air conditioning ducts on the roof were damaged and could have allowed water to enter the building during the storm.
The court held:

[a] trier of fact could reasonably conclude that a covered event damaged the roof and rain water subsequently entered the building through the previously-damaged areas of the roof, and that, therefore, defendant should have provided insurance benefits to plaintiff for the subject loss.

In this dispute, the defendant carrier, based on opinions of its adjuster and engineer, reach conclusions about the storm, the roof and the water damage that differ from the conclusions reached by plaintiff. However, since credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge ... on a motion for summary judgment, this court cannot find that either set of conclusions about the damaged roof and rain water are correct as a matter of law. The instant summary judgment motion must be denied.

In reaching its ruling, the court recognized that a summary judgment is not the place for a judge to substitute his or her view of the facts for that of the jury. There were differing interpretations of the facts reflected in the record, and the court made the interesting point that if it ruled in the insurer’s favor, it would deny the policyholder’s right to a trial by jury.
 

On April 1, 2010, Greater Trueway wrote the insurer to dispute the amount of the loss as paid by Church Mutual and requested appraisal of the loss under the appraisal provision of the policy. The insurer refused appraisal because it was requested nearly five years after the date of loss, and over three years following the last payment of the claim. The lawsuit was filed October 3, 2011.

In Mississippi, the statute of limitations for bringing suit for breach of an insurance contract is three years. Mississippi courts have held that the statute of limitations begins to run from the date of the refusal of payment.

The Court analyzed whether the statute of limitations barred the action to enforce the appraisal provision of the policy. The Court noted that the Complaint was filed over six years after the date of loss, and nearly five years after the last payment on the claim. The policyholder argued that the appraisal provision of the policy allows it to demand an appraisal of the damages indefinitely, even if after the statute of limitations had passed. The question in the case became whether a request for an appraisal can resurrect the ability to file suit after the statute of limitations has expired.

The Court stated:

The appraisal provision provides a contractual avenue in which the parties to the insurance contract can resolve their differences short of litigation. The appraisal provision was not intended to extend, and does not extend, the time an insured could bring suit over such claims. Indeed, any such provision would be unenforceable, as Mississippi law prevents any attempts to lengthen or shorten a statute of limitations by contract.

The Court granted summary judgment in favor of the insurer and held:

The statute of limitations for Greater Trueway's claim against Church Mutual is three years, and began to run, at the latest, on the date of last payment by Church Mutual on December 20, 2006. Greater Trueway's request for appraisal—made after the statute of limitations had run—was not timely made and cannot circumvent the running of the statute of limitations on the otherwise time-barred claim.

Once a statute of limitations runs, the party may lose the ability to file an action to enforce its rights related to that action. Policyholders should consult with experienced insurance claims representatives/attorneys as soon as possible when wondering whether an insurer has fully evaluated and paid all damages sustained in a loss.

Ordinarily, a party may not, by interrogatories or deposition, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or to prepare for trial and who is not expected to be called as a witness at trial . . .  [Fed.R.Civ.P. 26(b)(4)(D)]

Under this Rule, the work and opinions of a non-testifying, consulting expert is usually protected and usually not discoverable. On the other hand, the protections are specifically limited to consulting experts. It does not really address the situation where an expert was an actor or viewer with respect to occurrences that are the subject of the lawsuit.

It is possible for a witness to wear two hats: one as a specially employed expert in anticipation of litigation and one as an ordinary witness. When that happens, some of the information the expert holds may be protected, while other information may be subject to disclosure.

For example, in Caribbean Owners' Ass'n, Inc. v. Great American Insurance Co. of New York, 2009 WL 499500 (S.D.Ala.2009), the plaintiff hired Mr. Smith to inspect its building to determine why it was leaking and to develop a solution to the building's problems. The inspection occurred before Hurricane Ivan affected the plaintiff’s property. In the litigation, the plaintiff did not disclose Smith as a testifying expert.

The court determined that “extraordinary circumstances” required the expert’s deposition. Specifically, the court noted that the condition of the building before and after the hurricane was central in the case, and Smith had information about the pre-hurricane condition that could not be replicated.

Consulting experts who also wear a hat as a material witness may have to discuss their observations in deposition or trial, particularly if there are no other witnesses in a position observe what they did. Under those “extraordinary circumstances,” their observations could be critically important.

The policyholder entered a settlement agreement with the insurer in the mass joinder suit. He received $59,903.99 and executed a contract which released the insurer from:

... all claims and demands for loss and damage to property located at 2816–18 Banks Street, New Orleans, Louisiana 70119, and all other losses and damages covered under Louisiana Citizens Property Insurance Corporation, claim number 2006WI007405, policy number FZD 0152329 08....

The policyholder then left the mass joinder litigation and filed a separate lawsuit against the insurer for damages to the second property insured under the policy. In response, the insurer’s attorney sent a letter to advising that the claims had already been settled. Litigation ensued over whether the release encompassed both properties or only the one specified. The policyholder argued that the release only referenced one property and it applied only to that property. He asserted that he was free to pursue the claim for the second property. The insurer countered that the release specifically covered “all other losses and damages covered under the policy,” and the encompassing language included the second property.

The trial court vacated the release, so the policyholder could pursue both claims against the insurer. The court also ordered the policyholder to return the $59,903.99 payment to the insurer. He did not return the proceeds, even after additional warning by the court that it might dismiss his case. The court then dismissed the case with prejudice for failing to return the proceeds in violation of the court order. The policyholder appears to have won the battle, but lost the war.

While the outcome of the case was somewhat unusual, Galacia demonstrates the importance of clarity in negotiations. Taking care to review settlement terms can avoid litigation later. The disagreement in Galacia could have been avoided by clear communication between the parties at the time the release was negotiated. Policyholders should always use caution in signing any document, like a release, that may have legal implications. The devil is often in the details.

Mr. Concepcion’s property was damaged by Hurricane Wilma. United acknowledged coverage for the loss and paid approximately $7,000 in 2005 for damages. In March 2009, Mr. Concepcion requested the claim to be reopened and produced an estimate of damages for $122,769.40. The policyholder requested an appraisal for the amount of loss. The insurer refused, and the policyholder later filed a breach of contract complaint against United. United responded that the policy duties after loss included the obligation to provide United with records and documents pertaining to the loss; submit to an examination under oath and sign it; and provide a sworn proof of loss within sixty days after United requested it. United alleged that Mr. Concepcion failed to comply with these post-loss obligations.

The policyholder filed a motion to compel appraisal. At the hearing, United contended that appraisal was premature, as Mr. Concepcion still had not provided United with the information it needed to evaluate his claim. Mr. Concepcion contended that he went to an examination under oath and that he did repairs with a neighbor, but he did not have any receipts. The trial court granted the motion to compel appraisal and stated in its order: “The Court has reviewed the motion to compel appraisal, any and all documents filed in support thereof and opposition thereto and the complete court file.”

United appealed. The Third District Court of Appeal noted that the policyholder’s attorney explained that the examination under oath transcript was not filed in the court docket prior to the hearing on the motion to compel appraisal. Importantly, the Court stated that the “EUO may have been a significant piece of evidence, among others, from which the trial court could have concluded that the insured complied with his post-loss obligations.” The Court overturned the trial court order and remanded the case for an evidentiary hearing on compliance with the policy duties after loss.

The Court explained that a trial court resolving a dispute over whether there has been compliance with policy duties after loss must conduct “an examination of the evidence.”

The transcript of the hearing on the motion to compel appraisal reflects that the trial court never reviewed any evidence on whether Concepcion complied with his post-loss obligations under the policy. The argument of counsel on this issue does not constitute evidence.

• De Novo. The court gives no deference to the lower court’s legal decisions and considers the legal decisions independently;

• Clearly Erroneous. Review under the clearly erroneous standard is significantly deferential. The appellate court must accept the trial court’s findings of fact unless it is left with the “definite and firm conviction that a mistake has been committed.” Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 855 (1982);

• Substantial Evidence. Review under this standard means a decision will be upheld as long as there is competent and substantial evidence that a reasonable mind might accept as adequate to support a verdict. Richardson v. Perales, 402 U.S. 389, 401 (1971);

• Abuse of Discretion. Under this standard, the appellate court will affirm unless it determines that the trial court has made a clear error of judgment or has applied an incorrect legal standard.

Generally speaking, appellate courts draw an important distinction between the review of factual issues and the review of legal issues. Conclusions of law receive de novo review, while findings of fact are typically reviewed under the more deferential standards. In Hudson Pulp & Paper Corporation v. Butler & Company, a Florida appellate court explained how it reviews a jury verdict.

In our review of the record we have given due consideration to the applicable appellate principle that a judgment of the trial court reaches the appellate court clothed with a presumption of correctness. Our review of the record reveals that although the testimony is conflicting, there is substantial evidence to support the jury’s verdict and judgment thereon. It is not the province of this court to substitute its judgment for that of the trier of the facts. These findings will not be disturbed in the absence of a clear showing that the trial court committed error or that the evidence demonstrates that the conclusions reached are erroneous.

In Workmen's Mut. Ins. Co. v. Bella Vista Hotel Apartments, Inc., 399 F.2d 693 (11th Cir. 1968), a claim for damages caused by Hurricane Betsy went to trial before a jury, and the jury returned a verdict in favor of the policyholder. The insurer appealed, arguing that the loss was excluded by the policy terms. The jury was instructed to consider the policy exclusions the insurer cited the denial. The appellate court held:

It was not unreasonable for the jury to find that the damages suffered were caused by wind and not by the excluded causes. There was evidence from which the jury could make this finding.

A party has a difficult standard to meet on appeal if the sole basis for appellate review is that the jury verdict and final judgment entered were in error, as jury verdicts are usually given great deference. A different standard of review should apply if a party argues on appeal that the jury instructions were inappropriate or that there were other legal errors before, during or after a trial. Issues of law are more open for review and interpretation.

Because today is Presidents' Day, it seems fitting to end with a quote from Thomas Jefferson regarding the importance of trial by jury:

I consider trial by jury as the only anchor yet imagined by man, by which a government can be held to the principles of its constitution.

[T]he existing damages of the roof and, in turn, the interior leaks, are likely due to high winds activity in recent years. Hurricane Wilma likely caused the existing roof damages and interior leaks at the Property. The effect of such winds on the parapet wall, flashing and edge roof membrane and also on the air plenums and air condensing units created the proper conditions for water and air intrusion under the roof membrane. Continuous water and air infiltration has been undermining the membrane, metal deck and overall roof structure.

His report contained a comparison between Hurricane Wilma and previous storm activity in South Florida. In his deposition testimony, the policyholder’s engineer explained his conclusion that Hurricane Wilma, not Hurricane Frances, inflicted the damage also stemmed from his reasoning that if the cracking and holes in the roof membrane had existed when Hurricane Frances occurred, the roof membrane would have been peeled off by Hurricane Wilma.

The insurer focused its attacks on the expert’s qualifications. The insurer also argued that the methodology the expert used was neither reliable nor helpful and urged the Court to preclude him from rendering that opinion. The insurer also challenged the expert’s opinion regarding the cost of repairing the damaged property.

To resolve the challenge to the expert’s opinion testimony, the Court explained it conducts a “rigorous” three-part inquiry into whether: (1) the expert is qualified to testify competently regarding the matters he intends to address; (2) the methodology by which the expert reaches his conclusions is sufficiently reliable; and (3) the testimony assists the trier of fact, through the application of scientific, technical, or specialized expertise, to understand the evidence or to determine a fact in issue.

When conducting this analysis, federal courts have a fine line to walk to ensure they are not making ultimate conclusions that are reserved for the trier of fact. In reaching its decision, the Court analyzed the factors above. The Court denied the insurer’s motion to the extent that it sought to strike the expert’s opinion that Hurricane Wilma most likely inflicted the damage to the property, finding the expert’s experience and training made him competent to testify to that conclusion.

It can be devastating when an expert is not allowed to testify or when expert testimony is limited. In many cases, a substantive amount of time and money is spent long before the expert will be challenged in court. Avoiding subjective or speculative leaps in the methodology or basis for conclusions will help to withstand the inevitable attack.

FIGA argued on appeal that §627.428 was not applicable since the association did not deny by affirmative action any portion of the insured's covered claim. The Second District Court of Appeal noted that for a claim to be a covered claim, it must: (1) arise out of the insurance policy; and (2) be within the coverage of the insurance policy. The Court noted that the parties did not point to any language in the policy that provided coverage for attorney’s fees. The Second District Court reversed the attorney’s fee award.

The Second District Court opinion conflicted with the Third District Court of Appeals ruling in Soto, which recognized that §627.428 is an implicit part of all insurance policies and held that an attorney’s fee judgment is a covered claim under the FIGA Act. The Florida Supreme Court reviewed both decisions.

The Florida Supreme Court noted that the FIGA Act, Florida Statute §631.57(1)(a), provides that FIGA shall “be obligated to the extent of the covered claims existing prior to an insurer’s adjudication of insolvency.” The Act, at §631.54(3), defines a covered claim as:

[A]n unpaid claim, including one of unearned premiums, which arises out of, and is within the coverage, and not in excess of, the applicable limits of an insurance policy to which this part applies, issued by an insurer, if such insurer becomes an insolvent insurer and the claimant or insured is a resident of this state at the time of the insured event or the property from which the claim arises is permanently located in this state.

The Florida Supreme Court noted that to be a covered claim, it must: (1) arise out of the insurance policy; and (2) be within the coverage of the insurance policy. The parties agreed that the fee claim arose from the policy of insurance. However, the Court noted that to recover fees from FIGA, the claim for fees must be within the insurance policy’s coverage provisions.

While the attorney's fee statute is an implicit part of an insurance policy in Florida, the Florida Supreme Court held that this does not mean that the insured’s claim against FIGA for fees is part of the policy’s coverage. In reaching its conclusion, the Court held:

There is a clear difference between an obligation to pay fees that is imposed by operation of law upon a party due to its behavior under the insurance contract and an obligation imposed upon a party by an express provision for which the party contracted. Section 627.428(1) imposes the obligation to pay a fee award upon an insurer that has wrongfully contested an insured’s valid claim. It does not alter the coverage provisions of the insurance contract itself.

Since Petty's insurance policy did not expressly provide coverage for a section 627.428 fee award, the Court held it is not a covered claim that FIGA must pay. The Court approved the Second District Court’s ruling, and specifically disapproved the third District Court of Appeals’ ruling in Florida Insurance Guaranty Association v. Soto.

This case holding may not apply to a scenario where FIGA actually denies an insured’s claim. FIGA’s denial of coverage of an insured’s claim opens the door to its responsibility for fees under a separate and distinct provision of the FIGA Act.

There is some interesting analysis in the order regarding appraisal claims “ripening.” QBE asserted that the appraisal claim in this case is premature since there was no disagreement between the parties, and the association had not satisfied all contractual prerequisites to appraisal by the time it filed the lawsuit. According to QBE, once an appraisal claim is premature, it is always premature--it essentially dies on the vine and never ripens. The association presented Florida case law to the Court and argued that Florida courts would permit the once premature appraisal claim to “ripen.”

The Court agreed with the association that Florida cases “allow appraisal claims to ripen subsequent to the Complaint’s initial filing.” The Court found that in one of the cases cited by QBE, U.S. Fid. & Guar. Co. v. Romay,

[T]he seminal contractual precondition case, actually allowed for the ripening of the claim. . . . if the allegations of the proposed Second Amended Complaint prove true, Plaintiff has shown that its appraisal claim is not premature.

In the conclusion of the order, the Court cautioned that,

Though leave to file amended pleadings should be granted generously, in light of the number of attempts that Plaintiff has had to set its claims before the Court, the Court is unlikely to grant any further amendments.

This case is now in its preliminary stages, so check back for periodic updates, as we will continue to monitor it as it progresses.

The purpose of discovery in litigation is generally to exchange information each party claims supports its case. Professional conduct and courtesy are a couple of underlying themes in the procedural rules in guiding the discovery process. Discovery disputes do occur in cases, and the procedural rules provide a mechanism for the parties to deal with disputes that might arise over incomplete answers, objections and refusals to provide information and responses. The insurer asked the Court dismiss the case.

The case involved an insurance coverage dispute arising out of damages to the condominium association’s property caused by Hurricane Wilma. Discovery closed as of October 14, 2011, and one week later, the insurer filed the motion asking the Court to dismiss the case as a result of the policyholder’s alleged discovery violations. Before filing that motion seeking the harshest of sanctions, the insurer never sought Court intervention in the discovery process. The insurer did not file a motion to compel or otherwise bring the alleged discovery failures to the Court’s attention before filing the motion to dismiss. The Court called this an “unusual strategy” to first bring the alleged discovery violation to “by requesting the most extreme sanction available.” The Court noted that such practice “may run afoul of the Local Rules” in the Southern District, and stated that “[a]s a matter of general practice, [ ] it is generally inadvisable to request the most extreme relief available even if it is technically permitted by the governing procedural rules.”

According to the Court, when the parties follow the established avenues for obtaining discovery relief, it often prevents the need to later file a sanctions motion. Under the Rules, the parties are required to confer in good faith about any disputes in the discovery process. If they cannot agree after their conference, then a court may intervene and enter an order resolving the dispute. If the offending party still refuses to comply, then a court can determine whether the party has acted in bad faith and whether more severe sanctions are necessary.

Since the insurer in this case did not follow this approach, in the Court’s view, the defense strategy behind this motion to dismiss “put the cart before the horse and short-circuited the discovery and sanctions process.” All in all, the Court described the dispute between the parties a “comparatively modest discovery failure.”

Parties and their counsel will not always agree on every point, but it is clear using the facts of this case as an example, that simple communication before seeking judicial involvement in discovery disputes is encouraged and may prevent the need for judicial involvement in those tangential issues. While I enjoyed reading such a creatively written discovery order, it may not have been necessary had counsel for the parties followed the procedural approach in the Rules. The order nonetheless is inspiring, and it also reveals that there is a place for creative writing in the law, even in discussion of civil procedural rules.

Heaven blesses those who wait, patience is a virtue, son
Keep your toe on the line, keep your foot on the brake
No sense jumpin’ the gun

$22,499.95 under Coverage “A” Building and $107,311.58 under Coverage “C” Personal Property.

The appraisal award did not include an itemization of the personal property and the corresponding values. It contained the following provision:

This award does not include nor does this award account for or deduct the insured's deductible and/or any prior or advance payments that were made to the insured by this insurer or any other insurer if any. Additionally, this award does not consider any limitations or exclusions which may or may not exist under the terms of the contract of insurance.

The insurer deducted prior payments and the policy deductible from the amount of the award and also applied policy limitations for jewelry, cash and other property when calculating the net payment. The insurer’s letter sent to the policyholder with the check listed the following deductions to the personal property award of $107,311.58:

• $41,805.00 - the amount awarded in excess of the $1,000.00 Jewelry Limit;
• $6,086.00 - the amount awarded in excess of the $200.00 Cash Limit;
• $2,192.00 - the amount awarded in excess of $2,500.00 Business Property Limit;
• $3,320.40 - the tax awarded for the amounts in excess of the policy limits;
• $28,053.88 - prior payments for loss of personal property; and
• $1,000.00- the applicable deductible.

After those deductions, the insurer paid Hess $28,994.36 for personal property. Hess filed a complaint requesting the trial court to confirm the original appraisal award. The trial court found in favor of Hess, explaining:

Items such as the deductible and prior payments may be excluded from the amount owed without the Court having to hear extrinsic evidence from the appraisers as to the basis for the award and the reasons for the amounts awarded. The same is not true for deductions based upon special limits of liability. In those cases, the Court would, by necessity, be required to hear testimony from the members of the appraisal panel (and perhaps others who participated in the appraisal process) as to the basis for the award to make these deductions. The Court agrees with Plaintiff that this sort of inquiry behind the appraisal award is not contemplated by the policy, nor permitted by Florida law.

The insurer appealed the trial court ruling. Florida’s First District Court of Appeal affirmed the trial court’s ruling, and stated that “[a]ppraisal clauses are preferred, as they provide a mechanism for prompt resolution of claims and discourage the filing of needless lawsuits.” The Court refused to allow an evidentiary hearing to discern the value of each item to which a policy limitation might be applied. Such a hearing would undermine the purpose of the appraisal, in which appraisers are charged with determining the value of the lost property.

This opinion is important because it recognizes the significance and independence of appraisal as an alternative dispute resolution process. After the fact inquiry into the appraisal award would defeat the goal of appraisal, which is to resolve disputes and avoid litigation.

c. Flood—waves, tides, surface water, overflow of any body of water, or their spray, all whether driven by wind or not, including any earth movement or mudslide caused by or resulting from the accumulation of water on or under the surface of the ground.

On December 17, 2009, a heavy rainfall caused storm water drainage systems next to Prestige’s dealership to overflow. A large volume of water flowed onto Prestige’s property and approximately thirty-one vehicles were immersed in the water. Prestige made a claim under the insurance policy, and Intrepid denied the claim based on the flood exclusion. Prestige filed a lawsuit against Intrepid to challenge its denial.

Prestige filed a motion asking the court to enter judgment in its favor finding coverage for the claim. Prestige argued that the damage was a result of storm drain back-up, which the policy neither excluded nor included in its definition of “flood.” According to Intrepid, falling rain pooled in areas adjacent to Prestige’s property and then flowed into Prestige’s property.

The trial court entered judgment in favor of Prestige, finding coverage for the claim. Intrepid appealed that ruling to the Third District Court of Appeal, asserting that any of the damage claimed was caused by surface water, which is excluded under the policy.

The Third District found that there was a disputed issue of fact regarding where the water originated which prevented the entry of judgment in favor of Prestige. By the Third District’s reasoning, if the water originated by drain back-up, the policy did not specifically exclude the damages and there could be coverage. But if the water originated by ponding surface water, the Court stated that would be an excluded cause. So the case was sent back to the trial court level for the determination of where the water originated.

There was an interesting dissent written by Senior Judge Schwartz. A dissenting opinion occurs from time to time and means that particular Judge does not agree with the majority’s opinion. Dissenting opinions are not binding authority. They show law is full of gray areas that do not contain bright line definitive answers. Senior Judge Schwartz wrote that he would have not only reversed the trial court order from the case, but would have essentially issued a judgment in favor of Intrepid that the loss was excluded from the policy.

Although I agree with reversal, I do not agree that determination of the coverage issue requires the resolution of any issue of fact. In my opinion, it is clear that the flood which damaged [Prestige’s] property was caused by the inability of the drainage-storm sewer system to cope with the unprecedented downpour in the area. This conclusion requires a finding of no coverage as a matter of law.

The majority responded in a footnote which states:

In response to the dissent, counsel for [Intrepid] was specifically asked at oral argument if Intrepid Insurance had also moved for summary judgment and he responded that it had not. Although Judge Schwartz’s point is logically attractive, it would in effect have us grant a motion that was never filed at the trial level.

What is important to take away from the case, is the importance of having flood insurance in addition to hurricane and standard fire and theft policies. Flood insurance allows policyholders to minimize the risk of being left with no coverage for a claim when damage occurs to property because of surface water.

Gassman filed a lawsuit against State Farm for damages sustained to her property as a result of Hurricane Wilma. They could not agree on the extent of damage and cost of repairs. State Farm demanded appraisal and filed a motion to stay the lawsuit pending the completion of the appraisal process, which the trial court granted. The question on appeal was whether State Farm complied with Florida Statute §627.7015 by notifying Mrs. Gassman of her right to participate in the alternative mediation program when she filed the claim with State Farm. State Farm did not provide its policyholder with the notice of the mediation program. State Farm argued that it did not violate §627.7015 because there was never a “dispute between an insurer and an insured relating to a material issue of fact.” §627 .7015(9).

State Farm argued that because there was no “dispute” between it and the policyholder, it did not have to give the notice of mediation. The question for the Fourth District was whether one of the exceptions to the requirement of notice applied. Section 627.7015(9) lists the exceptions:

(9) For purposes of this section, the term “claim” refers to any dispute between an insurer and an insured relating to a material issue of fact other than a dispute:

(a) With respect to which the insurer has a reasonable basis to suspect fraud;

(b) Where, based on agreed-upon facts as to the cause of loss, there is no coverage under the policy;

(c) With respect to which the insurer has a reasonable basis to believe that the claimant has intentionally made a material misrepresentation of fact which is relevant to the claim, and the entire request for payment of a loss has been denied on the basis of the material misrepresentation; or

(d) With respect to which the amount in controversy is less than $500, unless the parties agree to mediate a dispute involving a lesser amount.

The Court held that the claim did not fit any of the exceptions. As a result, the policyholder was not required to submit to the appraisal process, and the Court overturned the trial court order granting State Farm’s motion to stay litigation and complete the appraisal process.

Our society is based on a principle that rules and laws guide us in establishing norms and minimum standards to be followed. Failure to follow those rules and laws has, and must have, consequences. Albert Einstein once said:

You have to learn the rules of the game. And then you have to play better than anyone else.

In 2006, the policyholders sold the property to a buyer in an “as-is” condition without making any repairs. Later in 2006, the policyholders filed a lawsuit against State Farm, asserting that State Farm’s payment of about $41,000 was insufficient to pay for all of their damages. They provided State Farm with their own contractor’s estimate of $111,000 for replacement costs associated with the wind damage. After a re-inspection, State Farm paid the policyholders some additional funds. The policyholders then filed suit, seeking replacement cost benefits for their dwelling.

State Farm filed a motion for summary judgment, arguing that the policyholders were not entitled to replacement cost under the terms of the policy since they sold the property in “as-is” condition in 2006 and they had never performed any repairs or replacement of the property before the sale. State Farm argued that the policyholders were only entitled to the actual cash value as of August 28, 2005.

The trial court granted State Farm’s motion and the appellate court affirmed the ruling. The appellate court analyzed the language of the policy and held that the following language supported the decision limiting the policyholders to actual cash value because of the sale:

SECTION I – LOSS SETTLEMENT

We will settle covered property losses according to the following:

COVERAGE A – DWELLING

1. Replacement Cost Loss Settlement – Similar Construction

a. We will pay the cost to repair or replace with similar construction and for the same use on the premises shown in the Declarations, the damaged part of the property covered in Section I – Coverages, subject to the following:

(1) until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, up to the applicable limit of liability shown in the Declarations, not to exceed the cost to repair or replace the damaged part of the property;
(2) when the repair or replacement is actually completed, we will pay the covered additional amount you actually and necessarily spend to repair or replace the damaged part of the property, or an amount up to the applicable limit of liability shown in the Declarations, whichever is less;

The court held that the policy clearly states that the policyholders were limited to the actual cash value of the damaged property because they did not repair or replace the damaged property before the sale. This case does however stand for the proposition that a policyholder may still claim damages sustained from a loss despite a later sale of the insured property. The policyholder has an insurable interest if there was no assignment of the claim negotiated as part of the sale transaction. Keep in mind that this court applied Louisiana law in reaching its decision, and the law may differ in other jurisdictions.

In Ehrlich, the Court appeared rely on the fact that the trial court compelled FIGA to answer the complaint. At the time of the May 9th post, it was unclear whether the Fourth District Court would have upheld the attorney’s fee award and found that FIGA denied the policyholder’s claim by affirmative action if FIGA had filed affirmative defenses challenging coverage for the claim on its own.

The recent Rahabi case presented a different factual scenario to the Fourth District Court of Appeal. That is, if FIGA raises affirmative defenses on its own, and not pursuant to a court order to answer a complaint, would FIGA be responsible for attorney’s fees for denying the policyholder’s claim by affirmative action?

In Rahabi, the policyholder filed a two count complaint against FIGA for declaratory relief and breach of contract. FIGA did not seek a stay of litigation to complete its investigation into the claim for damages. FIGA filed a motion to dismiss, claiming that the policyholder’s count for declaratory relief failed to state a cause of action and because they “fail[ed] to comply with all post-loss obligations.” FIGA moved to compel the insureds to answer its discovery requests. Without obtaining a ruling on that motion, FIGA filed its answer to the count for breach of contract. In the answer, FIGA asserted eight affirmative defenses, seven of which alleged that the insureds' damages “were not caused by a covered loss.”

The Fourth District Court of Appeals determined:

We interpret that action, in the context of FIGA’s overall course of conduct, as ‘deni[al] by affirmative action’.

FIGA argued it was compelled to allege those affirmative defenses because the “failure to ... assert affirmative defenses [ ] would result in a waiver.” The Court disagreed and held:

[I]f FIGA believed, as it did in Ehrlich, that it had insufficient time to investigate the claim, then it should have sought a motion for extension of time to respond to the complaint for that reason. If the circuit court denied that motion, then FIGA, as it did in Ehrlich, should have crafted its answer to avoid any allegation constituting a denial of the claim by affirmative action. Because FIGA did not do so here, but instead alleged in seven affirmative defenses that the insureds' damages “[were] not caused by a covered loss,” we must conclude that the insureds are entitled to recover their attorney's fees pursuant to sections 627.428(1) and 631.70.

Law is a fluid concept, different results occur with only minor factual variations. In the comparison of these two cases, it appears that if FIGA voluntarily asserts affirmative defenses that can be construed as denying all or a portion of the claim, then it will be responsible for policyholders’ attorney’s fees

In August 2009, the policyholder sent State Farm a July 20, 2009, report by Charles Norman related to damages caused by Hurricane Ike. The report included an estimate of wind damages totaling over $120,000. In September 2009, State Farm’s adjuster and the policyholder’s representatives met at the property for another inspection. State Farm determined that none of the items claimed as damages were the result of an “accidental direct physical loss,” as required by the insurance policy, and no evidence supported any payment due by State Farm. After the inspection, State Farm adjusted its estimate to account for one additional item of damage to a window that was not previously accounted for, but still determined that the damages did not exceed the hurricane deductible.

State Farm attempted to discredit the insured’s expert opinion by asserting that at the time of the re-inspection in 2009 with the policyholder’s representatives and expert, all of the repairs to the property had been completed. Of particular issue in the damages to the residence, was cracking of the sheetrock and the need for re-leveling the floor under the master bedroom.

The Court stated that it “finds no merit to State Farm’s arguments that [the policyholder’s expert’s] testimony and affidavit should be excluded because the inspection was performed after the repairs were completed, or that [his] opinion was unreliable or untimely.” The court denied State Farm’s motion to strike that affidavit and motion to exclude testimony.

In this case, the Court refused to exclude the expert testimony and allowed the case to proceed to trial for determination of whether the additional damage claims can be attributable to wind from Hurricane Ike. It nonetheless reveals the aggressive strategy employed by State Farm to attempt to attack the policyholder’s expert’s credibility and keep him from testifying in support of the damages claimed.

Sun Tzu was an ancient Chinese military general, strategist and philosopher who said “Invincibility lies in the defense; the possibility of victory in the attack."

We will not pay for loss or damage to the interior of any building or structure, or the property inside the building or structure, caused by rain, snow, sleet, sand or dust whether driven by windstorm or not, unless the direct force of Hurricane, other Wind, or Hail damages the building or structure causing an opening in the roof or wall and the rain, snow, sleet, sand or dust enters through this opening.

Courts across the United States have given the limitation/exclusion various interpretations. In Florida Windstorm Underwriting v. Gajwani, the Florida trial court entered judgment in favor of the insureds for coverage. The insurer appealed and argued there was no evidence that a windstorm damaged the exterior of the building allowing the water to enter. In Gajwani, the parties basically agreed that the water entered by seeping through existing openings to reach the interior of the building. The Florida Third District Court of Appeal upheld the policy limitation/exclusion and rejected the insured’s argument that it was against public policy to allow the Florida Underwriting Association (Citizens’ predecessor) to exclude such damage.

This policy limitation/exclusion is not only asserted in hurricane claims, it arises in different loss situations across the country. The question often arises whether a windstorm was the direct cause of loss. For example, in Granchelli v. Travelers Insurance Company, the Appellate Court in New York State interpreted whether a windstorm was the direct cause of damage to the interior of The Palace Theater in Lockport, New York. (I recall attending movies at The Palace Theater as a kid; Lockport, N.Y. is my hometown). The policy in the Granchelli case insured against direct loss “by windstorm or hail.” In February 1985, the theater sustained water damage to the interior of the property causing approximately $116,000, in damages. A windstorm had blown open a door on the roof, and subzero air entered the building, causing a pipe to freeze and burst, resulting in the water damage. The insurer denied coverage on the ground that the theater’s loss was not a direct loss caused by the windstorm within the meaning of its policy. Burst water pipes was an excluded cause under the policy.

The trial court granted the insurer’s motion for summary judgment and found that, while the windstorm was a link in the chain of events leading up to the loss, it was too remote to be the direct cause of the loss. The appellate court disagreed, holding that direct loss is equivalent to proximate cause. The court concluded that the burst water pipe could have been proximately caused by the windstorm. The court overturned the judgment for the insurer and remanded the case to the trial court.

Unrepresented policyholders may often think that their property insurance policies should be commonsense. If the interior of their insured building is damaged, it should be covered. As this brief explanation of the wind-driven rain exclusion and direct windstorm damage requirement reveals, it is not always that easy. If insureds discuss their claims with insurers before having the claims reviewed by their own professionals, the insurers’ one-sided conclusions can have detrimental consequences on the coverage case. The term “opening” is not often defined in policies, and there can be situations where water enters through an “opening” that may not even be visible to the untrained eye.

As discussed many times in the Property Insurance Coverage Law Blog and the Condominium Insurance Law Blog, property insurance policies contain a maze of detailed exclusionary and limiting provisions. Policies of insurance are filled with legal buzz words that present a gauntlet of challenges for the policyholder to navigate through in a coverage case. Being aware of this fact and using the appropriate damage consultants is often critical for policyholders to put together the damage claim in support of coverage.