Vindication: Federal Court Protects Florida Policyholders’ Vested Contractual Rights

In my November 4, 2011, post titled “Trying to Change the Past: Are the New Sinkhole Laws Retroactive?” I mentioned the sinkhole insurance changes that took affect on May 17, 2011. One of the most detrimental changes made by the Legislature was changing the definition of “structural damage.”

Prior to May 17, 2011, courts applied the ordinary and plain meaning of the term “structural damage,” because the term was usually not specifically defined within policies of insurance. Post May 17, 2011, the Legislature’s five highly technical definitions of the terms “structural damage” adversely affect all policyholders’ sinkhole claims.

After the law went into effect, insurance companies began arguing the definitional change should apply retroactively to all sinkhole claims, not just to those claims occurring after May 17, 2011.

On December 7, 2011, the Middle District Court of Florida issued a significant opinion regarding the retroactivity of the phrase “structural damage.”

In Bay Farms Corporation v. Great American Alliance Insurance Company, the issue before the Court was “whether a 2011 Amendment to the Florida statutory scheme governing sinkhole insurance that for the first time added a statutory definition of “structural damage” should be applied retroactively to the insurance policy at issue or, in the alternative, whether the term “structural damage” in the policy should be treated as an undefined term.”

Specifically, the Court stated,

Bay Farms’ [the insured] vested contractual right to coverage under the Policy would be substantially impaired by a retroactive application of the 2011 Amendment. That is, if applied retroactively, the 2011 Amendment would severely restrict the degree of sinkhole coverage that Bay Farms contemplated and contracted for in 2008 when it purchased the Policy. In addition, Great American’s [insurer] contention that this Court should apply the 2011 Amendment to preclude Bay Farms from recovering on a claim (and potential cause of action) that accrued prior to the effective date of the 2011 Amendment is contrary to the general rule that once a cause of action has accrued, the right to pursue that cause of action is generally considered a vested right.

The Middle District concluded that because the insured had a vested contractual right to coverage for “sinkhole loss” as that term was understood when the policy was issued and any retroactive application of the 2011 Amendment would impair this right, the Amendment could not be applied retroactively.