Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

The Condominium Insurance Law Blog will have Corey Harris as its "editor in chief." As noted:

Corey Harris has a special affinity for condominium insurance law. Much of his legal experience has been working with condominium management associations and boards of directors regarding issues they may have as to insurance policies and other liability policies and claims.

Corey started working with us before he went to law school and continued during each summer break while attending the University of Florida Levin School of Law. He is currently working on numerous insurance claims as policyholder counsel for condominiums. After reading his weekly posts on our main blog, I felt he could have a more prominent voice writing on the insurance issues faced by condominiums.

Boards, unit owners, condominium general counsel, and agents selling association insurance should find the posts and community discussion to be a source of learning and information. I hope to learn from them as well. Certainly, I will be a "guest" on occasion and write comments, as I encourage all to do.

It is within the board of directors’ power to determine whether to proceed with a claim for insurance proceeds, and the board members should collectively ensure that they avoid any potential allegations that they failed to act once the statute passes. Homeowners’ and condominium associations exist primarily to protect the owners’ fiduciary interests in the common areas of the community. Simply put, the association bears the duty to protect, maintain and repair the property commonly shared by the owners. Generally speaking, the condominium/homeowners association’s declaration documents speak to these duties. A breach of this fiduciary duty could likely result in property damage to the common areas or even the unit owners’ specific property. Particularly once the limitations period passes, associations could potentially face actions brought against them by unit owners for failure to effectuate repairs or failure to appropriately investigate and pursue avenues of recovery with the associations’ property insurance carriers. The unit owners could potentially do so under a breach of fiduciary duty theory of recovery.

So, the simple question from the board members’ perspective becomes, “what can I do to ensure that I can demonstrate that I have done a reasonable investigation of the association’s insurance claim (or potential insurance claim) before the statutes of limitation pass?” The short answer to that question is to make sure the boards have conducted a reasonable investigation into their insurance claim (or potential insurance claim) and have some reliable opinion from an experienced professional on the matter. This can involve counsel and experienced public adjusting professionals with requisite experience in evaluating insurance claim damage, particularly as that damage concerns condominium and homeowners’ associations.

The situation may present itself with an all too familiar initial scenario: A unit owner writes the board on numerous occasions to express his or her concern for a leaky roof or other problem with a common element. That unit owner feels like his or her concerns are ignored. Then the situation takes a turn toward an unfamiliar problem as it relates to condominium/homeowner association and first-party property insurance law when the statute of limitations to file or proceed with a claim passes. That unit owner may then file a lawsuit against the association and its board of directors for breach of fiduciary duty. See Allstate Insurance Co. v. Cambron, 936 So.2d 1210 (Fla. 5th DCA 2006).

This is why it behooves the condominium and homeowner associations’ boards of directors to ensure that they have taken adequate steps to investigate their claim (or potential claim) with the right team of experienced professionals with sufficient time before the limitations period approaches. The board of directors should have a good faith, independent and reasonable basis for a business judgment of whether to proceed with potential recovery under the association’s insurance policy well before the statutes of limitation pass.

Once the statute of limitations passes, any cause of action by unit owners for breach of fiduciary duty may be defended under an errors and omissions policy for at least some portion of the recovery that would have been available under the association’s property insurance policy. Owners’ associations often times maintain insurance against such breaches of fiduciary duty so the property value will not diminish because of the association’s or board’s wrongdoings. This is referred to as errors and omissions coverage.

In Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners’ Association, Inc., 2007 WL 2979828 (S.D. Fla. 2007), the homeowners sued the association for breach of fiduciary duty. . To defend, the association looked to Lumbermens Mutual Casualty Company, the insurer for the association’s directors and officers policy, which provided errors and omissions coverage. Lumbermens provided a defense to the association for several years, but then refused coverage and asked for its money back based on an exclusion for “loss arising from any claim for … loss of use, destruction of or damage to any tangible property, except for claims which involve construction defects…” Id. The association was forced to litigate the issue and argue that the errors and omissions policy covers the breach of fiduciary duty lawsuit at hand.

The Southern District Court held that:

Lumbermens misses the mark in relying upon exclusion N [listed above] because it is irrelevant to the situation at hand. The provision only excludes coverage for ‘loss arising from any claim which is for loss of use, destruction of or damage to any tangible property’—in other words, for the damage that should be covered by general liability insurance, such as damage by a fire. Lumbermens’ interpretation puts the cart before the horse because the origin of the claim here is the breach of fiduciary duty, not the property damage. This is not a case where the ‘loss arises from a claim for tangible property damage.’ Rather, the loss here is the property damage that arises from a claim for breach of fiduciary duty—the exact scenario the Policy covers… Any other result would render coverage so limited that it could not reasonably have been intended by the parties. Id.

The Southern District Court of Florida granted the association’s summary judgment motion as to coverage under the errors and omissions policy. Lumbermens appealed that decision to the United States Court of Appeals for the Eleventh Circuit, which ultimately affirmed the District Court’s finding of coverage. Lumbermens Mutual Casualty Co. v. Dadeland Cove Section One Homeowners’ Association, Inc., 2008 WL 4483419 (11th Cir. 2008).

There are two points of concern then for those involved in advising, working with, or serving on boards of directors of condominium and homeowners’ associations as the statutes of limitation for Hurricanes Katrina and Wilma approach. First, to meet the fiduciary duty to repair the property commonly shared by the owners, ensure that appropriate action is taken to reach a business judgment regarding whether to proceed with a claim (or potential claim) for damages to common property. This must be done with sufficient time before the limitations period pass. Hiring the right team of experienced professionals can establish the board’s good faith, independent and reasonable basis for a business judgment of whether to proceed with potential recovery under the association’s insurance policy. Second, while the association may have an errors and omissions policy that potentially provides coverage for any property damage resulting from any lack of action by the board of directors, as the Dadeland Cove case above reveals, such litigation involving the errors and omissions carrier may be a long and drawn out battle. This is often a concern for board members faced with a decision whether to proceed with a claim within the statute of limitations period. Better to face it head on initially, rather than under an errors and omissions theory later.
 

This area of Florida is extremely vulnerable to natural disasters like hurricanes and the current oil spill. In areas like Destin, Fort Walton Beach, and Panama City, economies are largely based on tourism. Because of the oil spill, the phones at local hotels have been ringing off the hook with tourists cancelling reservations for the upcoming months due to the uncertainty that looms. While sitting in one office this morning, I heard more than five calls from concerned renters requesting that their reservations be cancelled and their deposits be refunded.

The consequences of the current oil spill will continue long after the spill is stopped or contained and will affect almost every aspect of life in this area. It seems inevitable that the oil slick will reach this area at some point, and the timing could not be worse. A decline in tourism during the summer months will almost surely cripple the condominiums, hotels, restaurants, beach services, retail shops, and many others who depend on the influx of vacationers during this time of year to make a living.

The question I have been asked most often during the numerous phone calls and meetings today is “what can we do to protect our business and our employees?” First, it is important to realize that even though the oil has not made landfall, its effects are far from small. From day one, the spill has created documented damages to businesses and homeowners, and these losses will grow exponentially.

Second, it is crucial that condominiums and other business diligently document the losses that are incurred. If a renter calls to cancel a reservation, the reservationist should specifically ask whether the cancellation is due to the oil spill. If so, the potential renter’s information should recorded and saved in order to document the lost income.

Also, everyone should be proactive in protecting the financial security of the association and the other businesses that are being adversely affected by this disaster. Many condominium associations and other businesses have already contacted the Merlin Law Group and we are in the process of filing a class action lawsuit in order to protect the livelihoods of the hundreds of thousands of people in this part of the country who depend on tourism to survive.

This Tuesday, May 4, 2010, we will be hosting an informational seminar at the San Destin Hilton in Destin, Florida. Beginning at 1:00 pm, a select group of attorneys, accountants, and other professionals will be on hand to answer questions about the steps that are being taken to protect this fragile economy and environment. So far, we have had over 100 businesses, associations, and individuals express interest in this event and we hope that you will be able to join us as well.

In order to deal with the current crisis, we have started a new website to keep the public informed. If you have any questions or wishes to speak to us about representation, you can contact us at the number listed on the website, or you can contact me directly at 813-373-9598.

Unfortunately for the policyholder, no such privilege exists for their documents. Unlike an insurer, a condominium association cannot make broad claims that everything created as a result of a claim is protected. As I mentioned last week in The Cooperation Clause and Document Production: A Condominium Association's Difficult Task, document production is a very intensive process, especially for an association with hundreds of thousands of pages of information to sort through. Even a small and innocent mistake could lead to an insurer screaming from the rooftops and attempting to void an otherwise valid claim.

For condominium associations in particular, many times attorneys become involved in an insurance claim from the very beginning. In many instances, the independent or insurance adjuster is moved to the side early in the process and replaced by the insurer’s attorney, who ends up directing the adjustment and making the final determination of coverage.

For many years, insurers have claimed that all of the work that these attorneys performed in the adjustment of the claim was privileged because of the work product and attorney-client privilege. When insurers acted in bad faith by denying valid claims, the insurer could refuse to produce relevant documents which reflected this improper behavior during the bad faith litigation.

Fortunately, Florida courts caught on to this tactic and have stopped the insurer’s attempts to improperly hide its bad faith conduct by invoking attorney-client and work product privilege on materials in the claim file.

The Florida Supreme Court’s ruling in Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005) set the precedent in preventing insurer’s from concealing bad faith activities with claims of privilege. Specifically, Ruiz overruled previous case law and found that work product documents created in the breach of contract action were part of the claim file and must be turned over in subsequent bad faith litigation.

There has been some debate over whether the Court’s ruling in Ruiz prevented insurers from relying on attorney-client privilege to keep from producing documents related to the underlying breach of contract action or adjustment process.

This was the exact question which Sandalwood Estates Homeowner’s Association recently faced in the Southern District Court of Florida. After Hurricanes Frances and Wilma, Sandalwood suffered significant damages. When the insurer did not promptly pay the full amounts due under the policy, the parties proceeded to appraisal. The result of the appraisal was an award of around $5,000,000 more than was originally offered by the insurer.

Sandalwood filed suit alleging that the insurer had acted in bad faith in handling the insurance claims. During the discovery phase of the lawsuit, the insurer claimed that many of the documents requested did not have to be produced because they were protected by the attorney-client privilege.

The District Court disagreed, holding that while the documents may have privileges attached to them in a breach of contract action, documents dealing with the handling of the claim were part of the claim file and discoverable in a bad faith action. As the court stated, “…courts in Florida have consistently held that the Florida Supreme Court intended Ruiz to extend to claim file materials that would otherwise be protected by attorney-client privilege.” Sandalwood Estates Homeowner’s Assn’s Inc. v. Empire Indemnity Insurance Company, No. 09-80787, 2010 WL 411088 (S.D. Fla. January 28, 2010)

With the complexity and amount of money involved in condominium claims, there is a growing trend of insurers bringing in attorneys very early in the process. When acting in this capacity, the materials in the claims file should not be privileged simply because the attorney is involved. While this is obviously not the first time a court has found that these documents should be produced, the Sandalwood case is an important victory for condominium associations and other policyholders who are at the mercy of the insurer after a devastating loss.

Insurers typically request these inspections, and in some cases, spend countless hours sifting through all sorts of documents. This is especially true with condominium associations. In fact, if an association files an insurance claim they should expect such a request.

An insurer has numerous motives for reviewing an association’s documents. Often, the insurer is looking for evidence of pre-existing damages. One large condominium insurer in Florida, for instance, has made a practice of conducting exhaustive document inspections. When a loss is reported, the insurer’s legal team rolls into the condominium association with much the same velocity as the windstorm that caused the damage in the first place. Every document available is copied and combed through line by line. This particular insurer even has its own portable copy machines to make the process more efficient.

Condominium associations are a different animal when it comes to documents. Typical associations have a high turn over rate with employees, managers, and even board members. Many times, one hand does not know what the other is doing, and new managers may completely change the filing system. Thus, keeping track of all of the documents can be a consuming process.

Part of cooperating with an insurer in adjusting the loss involves making requested documentation available for inspection and failing to do so may give an insurer a chance to deny the entire claim. In Florida Gaming Corp. v. Affiliated FM Ins. Co., for instance, the insurer argued that Florida Gaming Corp. was not entitled to insurance proceeds for damages resulting from Hurricane Wilma because it had allegedly failed to produce some documentation requested. The policyholder responded that it had made available all documentation in its possession and that it had complied with all of its post loss obligations under the policy. Fortunately for the policyholder, the court agreed that the hundreds of pages of documents produced were sufficient, and the insurer’s motion for summary judgment was denied. Florida Gaming Corp. v. Affiliated FM Ins. Co., 502 F.Supp.2d 1257, 1264 (S.D. Fla. 2007).

While the policyholder in this instance was benefited by a favorable ruling, there was a substantial risk to the solvency of the company if the court had found differently. The claim at issue was in excess of $17,000,000, a substantial potential blow to any organization.

While the revolving door is constantly in motion when it comes to condominium association employees, owners, and directors, it is important to have a plan in place to maintain appropriate records. Some associations believe that they have great insurance and will have no problem if they submit a claim, and in some instances, this may be true. But, as we have seen with the results of the active 2004 and 2005 hurricane season, condominium associations are at great risk of large scale damage.

Having a consistent plan in place to maintain and preserve documents over the years will save a great deal of time. After a loss, the documents will be readily accessible and can be sorted through and produced when necessary to support a claim. This can help large claims be paid more quickly and can help an association get back on its feet faster after a devastating loss.

One of my personal yearly goals has been to get some laws or regulations passed which favor policyholder interests. I have made this a "must do" goal for five years now. I would like to share with you how this started, how I have done, and my current thoughts on the matter.

Suzanne Harris is a client of mine, and she started this legislative effort along with pushing from attorney Larry Keefe in 2005. I first met Ms. Harris following Hurricane Opal. An associate attorney did something that made her forcefull Alabama voice rain down upon me. When things go well, Ms. Harris is the type of client that will do anything for you. If not, well....you just never want the "if not" to occur.

Ms. Harris is the President of the Edgewater Beach Owners Association in Destin, Florida, and is very active in the leadership of the Condominium Association Institute. Larry Keefe is her General Counsel. Three days before Hurricane Ike struck her Condominium in 2004, she had retained me based on our Hurricane Opal experience. She had her construction crew stationed and ready to go as soon as they could get to her Condominium following the hurricane. She was prepared and worked hard to recover after the disaster.

She still had some delays from Citizens Property Insurance and made the remark that I should do something about it in the legislature. Larry Keefe overheard this comment. The next thing I know, I am talking to Larry's good friend, Jon Moyle, about his retention as a lobbyist to help me "do something" about getting laws passed to help policyholders get paid promptly and fully.

My skills as an advocate preparing cases for presentation at trial and using legal logic to win battles do not work for me in the political debates and "winning" with politicians. Frankly, I am not good enough at this very different game of politics, although I am learning.

"Lead, follow or get out of the way" is a leadership slogan that was applicable yesterday in Tallahassee. I felt like our legislative efforts to get something "consumer friendly" passed in Tallahassee needed a champion other than myself and the two lobbying firms I hired to help. I called Ms. Harris and explained how difficult it was becoming to get any legislator to listen to the problems of policyholders who have claim problems. I asked for her help.

Many of my CEO, CFO and President type clients will be contacted and asked to participate as public citizens in the future. If they are anything like Suzanne Harris, they will get their point across and talk with elected officials in a manner that evokes a sense of urgency to get laws passed that protect them from wrongful treatment by insurance companies.

For whatever reason, I learned yesterday to simply follow by supporting Ms. Harris and get out of her way. She literally got to the leaders that make laws for everybody's benefit in a much more effective manner than I have for five years. It was the most productive day I have had in Tallahassee.

There is nothing wrong with admitting that you are not good at something and need improvement. Talking one on one with politicians is something I wish I could be better at---but for my policyholder clients whom I am trying to take a leadership position for, the best thing is to merely get them in front of their elected officials and let them speak. I can never get close to such bonding because they have lived through the misery of delayed and underpaid insurance claims. Their stories are real and so is their concern for change.

Sometimes, the best advocacy is to say nothing and the best leading is done by following. It can be humbling, but the result is what matters.

This is not the first time that Berk's firm has obtained a zero verdict for QBE. Yesterday, I noted a number of case decisions involving QBE in my post, QBE Lawsuits are Unilaterally Redefining Property Insurance Law Coverage Cases in Florida. Berk also noted that QBE may have not obtained zero verdicts in other lawsuits but still offered more than what was obtained through trial. Sometimes, newspapers only report that a party won a civil lawsuit without reporting that the winner may have lost because it turned down a better pre-trial settlement.

Being Fair And Balanced, I am reporting this result because it represents a significant win for QBE against a trial attorney for whom I have a great deal of respect. As I learn more about this case, I will report on it.

My suggested thought for those not certain if a settlement offer is fair:

PIGS GET FAT, HOGS GET SLAUGHTERED!

I received an email from an insurance agent and appraiser, John Nixon, that warns of many condominiums "shopping" for cheap appraisals and low estimates for the full replacement value be insured. He wrote:

"Lately, I’ve seen some "professional appraisers" advertising that independent appraisals can help reduce homeowners or commercial property insurance premiums. These ads are suggesting that the insurance carriers are cheating the consumer by inflating estimated replacement costs.

Indeed, some ignorant legislator is accusing Citizens of wrongdoing because he can get an independent appraisal 30-50% lower. These appraisers are using tools and methods inappropriate for insurance purposes: new construction vs. reconstruction, inappropriate deductions for covered property, shorting measurements, and/or failure to include building features.

Sadly, many good independent appraisers were driven out of the insurance to value business by a generation of appraisers willing to work for low fees. Many of these new appraisers unethically do their job and "hit" the number their client wants. This same type of unethical behavior by real estate appraisers generated over-valuation and fueled mortgage fraud. In part, these activities helped lead to the collapse of the lending market.

Now, these same appraisers are trying to appease client demands and "hit" a low number for insurance premium purposes. The insurance consumer doesn’t know any better. However, they will get a hard lesson when the carrier uses different tools and methods when it comes time to calculate coinsurance requirements after a loss. Neither the clever agent nor unethical appraiser will help their client recover from inadequate limits and resulting coinsurance penalties.

I have tried to get Citizens Property Insurance Corporation to clarify their advice for consumers on getting replacement cost estimates for insurance to value purposes, but they declined. They have left the responsibility with the uneducated policyholder to determine appropriate valuation methods. They also declined to disclose what standards they would use post-loss.

Does an underwriter’s acceptance of an independent appraisal on the front-end for underwriting purposes obligate them to use the method/calculations on the back-end for coinsurance calculations? If the coinsurance penalty holds up, have you ever tried to go after appraisers E&O coverage?

In most cases they will have used M&S cost guides and software which have a license restriction prohibiting their use for insurance purposes. I think the agents are more careful to cover their malpractice exposure with signed waivers.

John Nixon
President
Asperta, Ltd."

There is no definitive answer, as each case depends on the facts. I deal with the ramifications of coinsurance penalties all the time. The worst offenders are usually commercial businesses and condominiums. There are various methods we use to avoid coinsurance penalties when the issue arises.

However, I urge all policyholders to get a professional replacement value estimate if feasible. To be safe, over-insure rather than underinsure. Most of the time, many who believe they over-insured are still underinsured.

Agents have to be careful as well. We currently have an eight-figure errors and omission case against an agent. The case involves a co-insurance penalty, and the agent helped make the determination as to the amount of required insurance.

Following up on my post this morning, I told one property management owner at breakfast that his business could be financially destroyed if, due to a natural disaster, the significant properties they manage could not be rented. His firm receives a percentage of rental revenues as a management fee. When I explained that Consequential or Dependent Business Interruption Coverage could help insure his loss of income if that happened, he seemed amazed that such coverage existed.

Chances are a loss will not happen. Chances are that if a loss does happen, it will be minor. But, I have found that Fate is kinder to those that have anticipated life's financial disasters and make preparation through insurance.

Tip One--Every business owner and property owner should have a discussion with their agent about their property and business with "what if" scenarios at least once a year to make certain they are fully covered.

Later in the morning, I flew with a client to Destin, Florida. We represented a number of Condominium Associations in Destin with their insurance claims or insurance litigation following Hurricane Opal and more recently Hurricane Ivan in 2004. Every year we provide a disaster preparedness seminar for them. As we took off from the airport and I viewed the clear blue waters and the prettiest white sandy beaches anywhere, I thought about how all that serenity changes in an instant when a hurricane strikes.

Tip Two--Take action today for the steps you need to harden your structures.

While an article in this morning's Insurance Journal mentions that Mississippi is starting a research project on wind damage mitigation steps, you do not have to be an engineer to figure out some basic things to do:

1. Inspect and, if needed, repair or replace your roof. This is the number one cause of failure in a hurricane.
2. Inspect and repair windows with caulking and glazing. Some old windows may simply have to be replaced.
3. Make a plan for what you are going to do for evacuation and then list disaster activities down to the smallest of steps. For example, what will you do with pets in case of an evacuation? If you are a business owner, what are your employees’ duties after a loss if they have personal tragedies which need attending?

Late April and the entire month of May are usually beautiful throughout this country. These are the months in the South and along the Eastern Seaboard to take actions which will provide you the peace of mind knowing you are as ready as you can be for the upcoming hurricane season. Do yourself a favor and don't just agree with me if you have read this far---pick up the phone and call your agent. Write out a plan and encourage others to do the same.

First, INSURE TO REPLACEMENT COST. Please call your agent. Have enough insurance. Many of our cases come about because this has not happened.

Second, INSURE TO THE RIGHT AND FULL AMOUNT OF COVERAGE WHICH HAS TO INCLUDE REPLACEMENT COST AND CODE UPGRADE COVERAGE.

Third, HIRE AN ATTORNEY OR A PUBLIC ADJUSTER. If your insurance company has not paid fully and promptly, an EXPERIENCED attorney in this field can help you more than anybody--including public adjusters, who cannot press your state’s consumer protection statutes or argue case law for you.

Fourth, STATUTORY NOTICES FOR EXTRA-CONTRACTUAL DAMAGES. Most states allow and provide extra remedies for filing such notices and may even prompt insurance investigations on claims similar to yours. File the notice. There is no downside to doing so if the insurer is not acting fairly and there is a legitimate reason for the damages.

These four tips might help keep you out of the insurance dispute muck..

Most condominium associations will be underinsured unless they retain a professional and thorough firm to make an insurance to value analysis. Many condominium association policies carry co-insurance clauses which penalize condominiums for not carrying enough insurance to cover full replacement cost. Our clients and public adjusters have told us that some insurers are specifically asking their field adjusters to question the accuracy of the amount insured and make a determination as to whether a co-insurance penalty should applied.

When co-insurance penalties are applied, most policyholders tell us that they relied on their insurance agent to help determine the amount to be insured. We are currently in litigation in the Lakeshore of Polk County Condominium Association case where we won the underlying case against the carrier, but a co-insurance penalty was applied. The current litigation, lead by Donna DeVaney, involves the insurance agent's neglect in estimating accurate replacement cost. The controversy amounts to millions of dollars because of the size of the losses.

Insurance is a very important financial product, one I truly appreciate as a consumer and a litigator--I love this area of law. However, everybody, including the buyer of property insurance and middleman arranging for the sale, should be careful to obtain the correct coverage. The ramifications caused by co-insurance penalties can be devastating.