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. 

Traditionally, property insurance policies only offered ACV calculations to settle the amount of the loss. In the early 1990s, however, insurers began to offer Replacement Cost Coverage (RCV) as alternative products or endorsements that would require the insurance carrier to pay the full replacement value of the insured property without reservation or holdback of any depreciation in value and irrespective of whether or not the insured repairs or replaces the damaged property.

Of course, the math behind RCV is not as simple as it sounds. Generally, RCV will be calculated based on whether the policy limits are lesser or greater than 80% of the full replacement cost immediately before the loss. Arriving at these numbers is no easy feat, but with the help of computer systems and insurance valuation professionals, the insured will generally be able retain the right to collect the greater between ACV or RCV, subject to the limits of the policy.

In Florida, if an insured has elected RCV coverage, the carrier has to pay the replacement cost for a dwelling or personal property without withholding any depreciation in value, whether or not the insured replaces or repairs the dwelling property. See, Fla. Stat. 627.7011(3) (2009). According to this definition and following the example above, you should receive $1,000.00 for the widget whether you replace it or not.

In practice, however, the difference between ACV and RCV has become somewhat of a gray area, particularly in cases where the insurance carrier has paid some money to repair the damages. In State Farm Fire and Cas. Co. v. Patrick, 647 So.2d 983 (Fla. 3rd DCA 1994), the insurance company wrote a damage estimate under the policy’s RCV coverage and issued a partial payment. Mr. Patrick fully repaired his damages with the partial payment and sued to recover the amount that was withheld. The court held that under RCV coverage the insured was not entitled to recover the difference between the estimated replacement cost and the amount actually spent to repair or replace the damaged property.

More recently, in Vantage View, Inc. v. QBE Insurance, 2009 WL 536546 (S.D. Fla. 2009), a Federal Judge ruled that even when a policy provides that RCV will not be paid unless the repairs are made, if the carrier does not pay a penny on the RCV damages, the carrier cannot require repair or replacement before issuing the RCV payment. The judge noted that it is the advanced funds that generally enable repairs to occur.

In sum, under both ACV and RCV, an insured will never collect more money than what it actually costs to repair or replace the damaged property to its pre-loss condition. However, RCV will afford additional assurance and value protection that will preclude a depreciation holdback, irrespective or whether replacement or repairs occur, if the carrier does not pay any money to repair the damaged property. I will leave it at that for now. Join me next week to discuss more RCV issues, particularly in cases where the insurance claim is wholly denied. Stay tuned.

In New York Central Mutual Fire Ins. Co. v. Dikis, Fla. 69 So.2d 786 (Fla. 1954), the Supreme Court of Florida adopted the broad evidence rule and established that in determining the ACV of a damaged or destroyed property at the time of the loss, courts should consider any evidence that logically tends to establish a correct estimate of the value of the property. Therefore, under the broad evidence rule, valuation will go beyond mere price points and recovery will not be barred because the damages are difficult to ascertain. Of course, mere speculation or conjectures will not suffice, but evidence that logically tends to establish the correct valuation of a damaged property will be admitted.

A few examples are of rigor. In attempting to determine the ACV of stolen goods from an antique dealer, the insurer argued that the ACV was the equivalent to the price at which the insured could have sold the property at the time of the loss. Under the broad evidence rule, however, consideration may be given to the original cost, the cost of replacement and expert opinions on the value and gainful uses of the property to determine the ACV. Mew v. J&C Galleries, Inc., 554 S.W. 2d 249 (Tex Civ App. 1977). In a claim to recover the value of a herd of pedigreed and registered chinchillas the insured’s contract to sell and deliver 12 pairs of chinchillas was admissible even though the demand for chinchillas at the time was falling and the contract was solicited by an inexperienced buyer. Pinet v. New Hampshire Fire Ins. Co., 100 N.E. 346 (1956).

In Florida, Courts have held that under the broad evidence rule, replacement value and wholesale value are factors, not shackles, by which to determine ACV. J&H Auto Trim Co., Inc. v. Bellefonte Ins. Co., 677 F.d 1365 (11th Cir. 1982). Courts in Florida have also held that a sworn statement in proof of loss and a contractor’s estimate can constitute probative evidence from which a jury can make an ACV determination. Barret v. Prudential Prop. Casualty Ins. Co., 790 F.2d 842 (11th Cir, 1986).

While the broad evidence rule applies to any claim, its use and practice is particularly crucial in business interruption claims since courts will admit any evidence that tends to shed any light to the actual value of the insured property at the time of the loss, including self-serving testimony and opinions as to any gainful uses to which the property may have been put, but not otherwise incurred. However, like any other evidence rule, the opponent will be free to offer rebuttal evidence to challenge the weight and credibility of the conflicting evidence before a jury. Join me next week to discuss Replacement Cost Coverage and more valuation topics.

Florida’s first VPL was enacted in 1899. The Legislature never defined the term “total loss” and to date, it has been left up to the courts to interpret these elusive words. One can imagine the defense attorneys of the time arguing that if a fire left at least one wall standing, it was to be considered a partial loss and not a total loss for VPL purposes. The Florida Supreme Court has since adopted the “identity test” where a structure is considered a total loss if the building has lost its identity and specific character and it has become so far disintegrated that it cannot be possibly designated as a building, although some part of it may remain standing or be valuable for some purpose. Lafayette Fire Ins. Co., v. Camnitz, 111 Fla. 556 (Fla. 1933). Other courts have narrowed the test to require a total loss of the building, but not necessarily the absolute extinction of all its materials, or even that no part of it is left standing. See, Greer v. Owners, 434 F.Supp.2d 1267 (N.D. Fla. 2006). In a nutshell, we’ll know when we see it.

A building may also be deemed a total loss, for VPL purposes, if it is rendered a “constructive total loss.” A constructive total loss occurs when a building, although still standing, is damaged to the extent that ordinances or regulations actually prohibit or prevent the building’s repair. Netherlands Ins. Co. v. Fowler, 181 So.2d 692 (Fla. 2d DCA 1966). In practice, a constructive total loss finding will greatly depend on opinions from local authorities on the extent of the damage and reparability of the structure.

Today’s VPL requires the total loss be caused by a covered peril for which a premium has been charged and paid. This means that if the total loss was caused by both covered and excluded perils, the VPL will not apply, and the insurer will only be required pay the percentage of the damages attributed to covered perils.

The statute, however, provides that if the covered perils alone could have caused the total loss in a multiple causation scenario, then the VPL will apply and the carrier may not apportion the loss. See, Fla. Stat. §627.702(1)(b). Unfortunately, these modern nuances frequently force both sides to retain experts in a VPL scenario to prove or dispute the total loss and to find that the covered peril could have caused the loss in its entirety, even in the presence of a concurrent and excluded force.

Much has changed since 1899 and some may say that today’s VPL is akin to Mary Shelly’s monster, only endearing once fully understood. Tune in next week where I will examine more valuation issues in property insurance claims.

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.

A valued policy is traditionally defined as “one in which the value of the property insured is agreed upon by the parties so that in the case of a total loss, it is not necessary to prove the actual value to recover under the policy.” 44 Am. Jur. 2d Insurance §1500 (2009). Valued policy laws, or the so-called “total loss” statutes, were first enacted in the United States in the late 1800s, principally as protective measures for insureds. According to the annals of insurance history, the first VPL emerged in Wisconsin in response to a business practice of some fire insurance companies which, acting through their agents, bound policies in excess the value of the property at higher premiums, but when a loss occurred, the carriers would scale down the loss payment to the point of actuarial health and safety, thus over-collecting premiums and underpaying losses.

The Wisconsin farmers of the time were not happy. They were promised more insurable value for their farms and crops and gladly paid the higher premiums to protect their investments, only to be surprised by savings and short-changing clauses and hard fights over the actual value of their properties. Underwriters could not have lived in better times, but the farmers rose up in the name of indemnity, and the Wisconsin legislature adopted a law where, absent proof of crime and in the case of a total loss, a carrier would be forced to pay the bargained face-value of the policy. Many states followed Wisconsin’s grassroots movement. The underwriters panicked. Carriers soon fine-tuned their appraisal and property valuation formulas to protect themselves from the not-so-scrupulous farmers who were waging war on their over-insured policies and intentionally causing their losses. If you are reading this, you probably know that in this business both sides are equally intolerant of windfalls.

Today, over a third of the States have VPLs in place. While the nuances may vary from state to state, their historical purpose -- to liquidate the measure of the damages in the case of a total loss and protect the policyholder from protracted valuation disputes -- remains unchanged. In its pure form, VPLs force carriers to adequately pre-determine the value of the insured property at the time the policy is issued. The stated value becomes non-negotiable in the event of a loss, and the carrier cannot dispute the bargained value. The protections of a VPL are generally triggered in the event of: 1) a total loss 2) caused by a covered peril. However, if it were that simple, I would probably be more interested in football.

Modern concerns such as uncontrolled urban sprawling, drastic property value fluctuations, and the impact of unprecedented natural catastrophes have complicated VPLs. This is not to say that VPLs are toothless tigers in today’s loss adjustment environment. In the case of a total loss caused by a single peril, the application should be fairly simple. The Wisconsin farmers, however, would cringe over the complexities of modern claims disputes in the event of losses caused by multiple perils. A policyholder can recover pursuant to a VPL depending if he or she lives in a jurisdiction that favors the indemnity (insured recovers the full value of the policy even though the risk is worth less than the face value) or an “insurable interest value” jurisdiction (insured recovers the value of the risk at the time of the loss, not to exceed the amount stated on the policy), if his contract is not plagued with anti-concurrent causation (damage excluded regardless of its concurrent causation with a covered loss) and pro-rata liability clauses (computes percentage of liability among co-insurers), and whether the stars are all aligned the right way.

Join me next week as I attempt to demystify Florida’s current Valued Policy Law. In the meantime, enjoy the game.

The Federal District Court for the Eastern District of Louisiana granted Allstate’s motion for partial summary judgment, but not based on Allstate’s arguments. Instead, the Court concluded that partial summary judgment was appropriate because it believed Louisiana’s Valued Policy Law applies only to fire insurance policies.

In reaching this decision, the Court looked to Louisiana’s Valued Policy Law:

A. Under any fire insurance policy insuring inanimate, immovable property in this state, if the insurer places a valuation upon the covered property and uses such valuation for purposes of determining the premium charge to be made under the policy, in the case of a total loss the insurer shall compute and indemnify or compensate any covered loss of, or damage to, such property which occurs during the term of the policy at such valuation without deduction or offset, unless a different method is to be used in the computation of loss, in which latter case, the policy, and any application therefor, shall set forth in type of equal size, the actual method of such loss computation by the insurer. Coverage may be voided under said contract in the event of criminal fault on the part of the insured or the assigns of the insured.

La.Rev.Stat. § 22:1318. (Emphasis added)

The Court also relied on dicta in the Louisiana Supreme Court’s opinion in Landry v. Louisiana Citizens Property Insurance Co., 983 So. 2d 66 (La. 2008). In a footnote in Landry, the Louisiana Supreme Court noted that the legislative history of the Valued Policy Law and the definitions in the statute, when contrasted with the language in related statutes, reveals “that the statute is intended to apply only to fire insurance policies, which may include coverage against other perils as allowed by La. R.S. 22:691 and is distinct from homeowners' policies.” Id. at 76 n. 10.

Noting that there was not a final decision from the Louisiana Supreme Court on the issue, the Court made “an Erie guess” and determined that the Louisiana Supreme Court would reach the same conclusion:

“the VPL only applies to fire insurance policies. Because the Plaintiff in the present case was issued a homeowners policy, which is distinguishable from a fire insurance policy, the VPL is not applicable to her claim.”

You can read the Court’s order in full by clicking here.

Unfortunately, the legislation passed without further changes to the wording and now will be sent to Governor Crist, who will sign or veto the bill.

The bill is sweeping in its scope, excluding surplus lines carriers from all of Chapter 627 of the Insurance Code. Items in Chapter 627 which will not apply to surplus lines carriers include:
 

• The Valued Policy Law
• Required availability of Replacement Cost and Law and Ordinance Coverage
• Florida’s prompt payment statute -- 627.70131(5)(a)
• Sinkhole coverage

An attorney in our office, Amy Boggs, noticed a sentence in the bill which is of immediate concern to anybody who has a claim pending with a surplus lines carrier:

“The amendments to s. 626.913, Florida Statutes, in this act….operate retroactively…except with respect to lawsuits that are filed on or before May 15, 2009.”

If you have a Florida claim pending that involves any coverage issues contained in Chapter 627, you should consult legal counsel to discuss whether filing suit no later than May 15th is appropriate in your case.