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

The usual coverage question in this type of situation is whether the insurance carrier satisfies its replacement cost obligation by replacing the one tile, or does it have an obligation to replace the entire floor to achieve uniformity. “Matching” coverage disputes are highly contentious and controversial. Most insurance carriers will likely insist that they do not have an obligation to replace the undamaged property in a partial loss or that replacement can be achieved by harvesting a tile from an inconspicuous location at the property. However, policyholders are promised “new for old” benefits when they purchase the pricier replacement cost provision and most would shudder at the thought having to look at their patchy homes or businesses if the replacement is not uniform in appearance or quality.

The bottom line is that “patchy” properties lose value. Most replacement cost provisions should provide for full replacement of the undamaged property in those cases considering the valuation impact of a partial repair.

Luckily in Florida, the Legislature addressed this concern.

§ 626.9744. Claim settlement practices relating to property insurance

Unless otherwise provided by the policy, when a homeowner's insurance policy provides for the adjustment and settlement of first-party losses based on repair or replacement cost, the following requirements apply:

(1) When a loss requires repair or replacement of an item or part, any physical damage incurred in making such repair or replacement which is covered and not otherwise excluded by the policy shall be included in the loss to the extent of any applicable limits. The insured may not be required to pay for betterment required by ordinance or code except for the applicable deductible, unless specifically excluded or limited by the policy.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color, or size, the insurer shall make reasonable repairs or replacement of items in adjoining areas. In determining the extent of the repairs or replacement of items in adjoining areas, the insurer may consider the cost of repairing or replacing the undamaged portions of the property, the degree of uniformity that can be achieved without such cost, the remaining useful life of the undamaged portion, and other relevant factors.

(3) This section shall not be construed to make the insurer a warrantor of the repairs made pursuant to this section.

(4) Nothing in this section shall be construed to authorize or preclude enforcement of policy provisions relating to settlement disputes.

For Florida policyholders, if the policy calls for replacement cost and the loss occurred after October 1, 2005, it is important to know that Florida Statute § 627.7011 prevents an insurer from attempting to depreciate the undamaged portion of the structure that needs to be replaced due to matching:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.

According to the above, there is no reason why a policyholder should accept less than full replacement of his tile floor and not be afraid of moving appliances or furniture around their homes to avoid showing a harvested or patchy tile repair. According to the clear language of the law, there is also no reason why an insurance carrier should depreciate the value of the undamaged portion when considering the cost of repair or replacement. 

Most policies exclude coverage for the costs of complying with building laws. Typical exclusion language reads as follows:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:

a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure, unless specifically provided under this policy.

This type of exclusionary provision can be devastating. In State Farm Fire and Cas. Co. v. Metropolitan Dade County, 639 So.2d 63 (Fla. 3rd DCA 1994), the local government required homeowners to bring their properties into full compliance with the South Florida Building Code after Hurricane Andrew. Dade County sued State Farm for a declaration that such upgrades were covered losses.

State Farm argued that it was only liable for hurricane damage, and not the "increased costs" from the enforcement of local codes. The lower court found the exclusionary language ambiguous, and found coverage for the homeowners. The appellate court reversed, upholding that ordinance and law exclusion specifically stated that the losses occurred only because of the enforcement of the code - the "ordinance and law" - and that the exclusion clearly and unambiguously prohibited payment under those circumstances.

Today, insurers are forced to offer law and ordinance coverage by law. If the insured does not obtain a policyholder’s written refusal of law and ordinance coverage, any policy covering the dwelling is deemed to include the law and ordinance coverage--limited to 25% of the dwelling limit. See, Fla. Stat.§627.7011

Please note that despite the language in Florida Statute §627.7011, an insured is also permitted to reject any such coverage, and instead receive compensation based on the value of the repairs (ie. replacement cost coverage), without the need for additional code upgrade compliance.

In any given case, however, code upgrade coverage will greatly depend on the language of the policy in question and the type of coverage that the policyholder has elected to purchase. As with any other insurance provision, any ambiguity should be resolved in favor of the insured.

Many courts have interpreted the often contradicting code upgrade exclusions. While the case law is certainly conflicting on this issue, many courts have ruled that code upgrade losses are covered, despite the exclusionary language, if they are an efficient proximate cause of a covered peril, but not on their own. Garnett v. Transamerica Insurance Services, 800 P.2d 656 (Idaho, 1990) is illustrative of these cases. There, a fire damaged a commercial building owned by the Garnetts and insured by Transamerica. Local building codes required various upgrades to the building, and Transamerica denied coverage for those costs based on the policy's code upgrade exclusion. The court narrowly read the exclusion, which was preceded by anti-concurrent language [loss occasioned directly or indirectly] to apply only where the loss itself is caused by a law or ordinance, not where a law or ordinance required upgrades after a loss:

As we read this provision, it does not limit Transamerica's obligation for the cost of repair or replacement of the building when a loss has occurred that is covered by the policy, but merely states that if the loss itself is caused by an ordinance or law, there is no coverage. For instance, if some safety improvement of a building to which no other loss had occurred were required by an ordinance or law, Transamerica would not be liable. However, when the cost of repairing or replacing a building that had been damaged by fire is increased by the requirements of an ordinance or law, Transamerica is not relieved of that cost.

If specifically purchased, code upgrade coverage will generally provide coverage for the increased cost of complying with building codes governing the repair, reconstruction, or demolition of the damaged property. Some of the most contested issues in code upgrade coverage cases is whether there is coverage for the costs of complying with preexisting code violations and whether the insurance company is liable to pay for the cost incurred as a result of a law or ordinance that took effect after the date of loss. Of course, the answer to these questions will greatly depend on the language of the policy and the jurisdiction where the coverage dispute arises.

For an insightful discussion of how code upgrade coverage can also provide coverage for the cost required to correct pre-existing code violations and grandfathered-in code provisions, please refer to Chip’s blog entry, Increased Cost of Compliance to Code and Ordinance of Law Coverage for a Typical Loss Situation.

On the other hand, the insurer’s liability for post-loss enacted codes likely will turn on the policy’s language. If the policy specifically limits the insurer's liability to those increased costs necessitated by laws and ordinances “in force at the time of loss,” that limitation should be upheld because courts will enforce policy language that is plain and unambiguous as written. A more difficult question arises in cases where the in force type of language is not present. However, insurers could reasonably argue that there is no coverage under the endorsement for the increased cost of construction due to building laws and ordinances that took effect after the date of loss. Then, a policyholder may argue that there is coverage for the costs of complying with post-loss enacted laws and ordinances in the absence of any explicit language limiting the coverage. He may also argue that it is reasonable to expect such coverage under the replacement cost provision, absent any language to the contrary.

At least one federal district court has rejected similar policyholder arguments and held that an insurer was not liable for the cost of complying with post-loss enacted building codes. See B A Properties, Inc. v. Aetna Casualty & Surety Co., 273 F.Supp. 2d 673 (D.V.I. 2003). In BA Properties, the policy did not include any “in force at the time of the loss” language. However, the court rejected the insured’s argument because the replacement cost provision determined the value at the time of the loss and interpreting the law and ordinance provision otherwise would alter its interpretation of the clear and unambiguous replacement cost provision.

In my opinion, B.A. Properties is a well reasoned decision and other courts will likely follow it, despite a policy’s silence with respect to post-loss code enactment.

Under most policies, an insurance company’s obligation to pay replacement cost value (RCV) does not arise until the repair or replacement has been completed, and the insurance company will never be responsible for any amount in excess of what it actually costs to repair or replace. However, if an insurance company denies a claim and fails to pay any benefits under the policy, it could be argued that an insurer cannot require compliance with the replacement cost provision or any other condition precedent, as a matter of contract law.

In Florida, it is well-established that a party who prevents or renders impossible the performance or occurrence of a condition precedent, upon which his liability is contingent, cannot avail himself of his own wrong, and be relieved of his responsibility to perform under the contract. See, North American Van Lines v. Collyer, 616 So.2d 177 (Fla. 5th DCA 1993). By the same token, it can be argued that by denying liability and refusing payment under a policy, an insurer prevents the insured from complying with the policy’s replacement cost provision and cannot require specific performance after the claim denial.

In Bailey v. Farmer’s Union Cooperative Ins. Co. of Nebraska, 498 N.W.2d 591 (Neb. Ct. App. 1992), the insured’s home collapsed during an excavation to perform renovations—which was a covered peril under the policy. The policy provided coverage for the least expensive of the three, 1) policy limits, 2) RCV of the home for like construction and use on the same premises, or 3) the necessary amount actually spent to repair or replace the home. As in most policies, Bailey’s replacement cost provision obligated the insured to pay no more than the actual cash value (ACV) until the actual repair or replacement was complete. Without extending coverage for the loss, Bailey’s insurer tendered a settlement offer of $11,900 as ACV to bring the “doubtful and disputed claim to a close” Bailey rejected the offer and demanded her ACV option with an opportunity to claim RCV after incurring in the expenses. Still refusing to extend coverage, Bailey’s insurer rejected her demand and offered to buy her a dwelling of like kind and quality in the same neighborhood, but Bailey insisted on rebuilding on the same site and a lawsuit ensued. The Bailey court held that:

Bailey was prevented from satisfying the condition of rebuilding […] by Farmers Union's refusal to assure Bailey that, in addition to the actual cash value figure, the cost of rebuilding her home would be covered up to the policy limit. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987). Though in Nebraska this general principle of contract law has not yet been applied specifically to a set of facts analogous to those of the case at bar, we are persuaded by the reasoning of the Michigan Court of Appeals in Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), that an insured should not be barred from recovery for failure to rebuild within the time constraints of the policy when the conduct of the insurer prevented the insured from rebuilding.

Likewise, in Vantage View v. QBE Ins. Corp., 2009 WL 536546 (S.D. Fla. March 3, 2009), the insurer denied the claim. The court, relying on Bailey, held that it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer and that the insured was therefore relieved from its obligation of repairing or replacing the damaged property before demanding replacement cost value.

It is important to note that both Bailey and Vantage View are cases where the insureds were denied any benefits prior to filing suit and the insureds were unable to repair or replace the damaged property out of their own pocket. It therefore follows that, if there are no other provisions or exclusions that prevent coverage, an insured may be entitled to receive RCV benefits without having first repaired or replaced the damaged property, as required under a particular policy.

It is not surprising that in the aftermath of the 2004-2005 hurricane seasons, Florida’s VPL became the subject of heated litigation, academic discussions and legislative debate. The application of Florida’s VPL in cases where the total loss is caused by a covered peril(s) is fairly simple. The plot thickens in multiple causation losses and a solid understanding of the current applicability of Florida’s VPL is an essential requirement for insurance claim professionals.

Florida’s Valued Policy Law is codified under §627.702 of the Florida Statutes. The statute was significantly amended after the controversial decision in Mierzwa v. Florida Windstorm Underwriting Ass’n, 877 So.2d 774 (Fla. 4th DCA 2004). In Mierzwa, the insured’s home was damaged in part by hurricane winds, a covered peril under the policy, and partly by flood waters, an excluded peril. The Court held that pursuant to Florida’s VPL, an insurer was required to pay policy limits even if the total loss was caused in part by an excluded peril. The decision was based on a reading of the Florida’s 2004 VPL. If anyone had a problem with the ruling, they were to take it up with their favorite legislator in Tallahassee, and they did. A litigation frenzy ensued. Eventually, Mierzwa was disapproved by the Florida Supreme Court.

In Florida Farm Bureau Casualty Ins. Co. v. Cox, 967 So.2d 815 (Fla. 2007), the Supreme Court held that pursuant to Florida’s VPL, if a covered peril did not cause a total loss or a constructive total loss, an insurer will only be responsible for the percentage attributable to the covered peril.

In essence, today’s VPL, as amended, requires a causation analysis. Percentages will be allocated among perils, and the policy will govern the coverage and causation questions. However, it may still be argued under Cox, that if a covered peril causes a “constructive total loss” where demolition of the property is required by law, or the cost of repairs exceed more than 50% of the existing value of the building, a policyholder is entitled policy limits and should not be limited to the percentage attributed to the covered peril. This, of course, is the subject of heated litigation and coverage disputes. Luckily, I enjoy these tiffs.

Tune in next week when I will discuss “constructive total losses” under Florida’s VPL and more.