As policyholder attorneys, we frequently hear concerns from public adjusters that at the conclusion of a difficult adjusting process with an insurance carrier, a release was demanded in exchange for some agreed payment for the loss.1 Public adjusters cannot advise their clients whether the release is appropriate since that advice would constitute the practice of law, and the policyholder is then presented with a dilemma: sign the release to receive the insurance check – and give up the right to seek supplemental benefits under the policy – or refuse and challenge the insurance company’s release requirement.
So, what’s wrong with demanding a release in exchange for a policy payment? Would it matter whether the adjusting process was complex and disputed?
What’s wrong. First, policies do not require that the insured give a release to receive policy benefits. Therefore, there is no legal basis in the insurance contract for an insurance carrier to demand a release. Among other rights, policyholders have the right to reopen and supplement a claim in proper circumstances, and signing a release gives up those valuable rights – in exchange for nothing.
That’s the problem – since the policy does not require that the policyholder sign a release in any form in order to receive benefits, the insurance carrier is providing no consideration in exchange for the release of valuable rights to supplement claims and gain other benefits promised by the policy. The legal rule used to describe the situation is the “preexisting duty rule.”2
Under Florida law, as in all jurisdictions, a release must be supported by consideration.3 Performance of a pre-existing obligation, such as payment of a claim according to the terms of an insurance policy, does not constitute consideration.4 This means that where an insurer is contractually obligated to adjust a loss and pay what it determines is owed to the insured, that existing payment obligation cannot constitute consideration for a release.
What if the claim adjustment is controversial? Adjusting is likely to be disputed – the parties may disagree on scope, the nature of repairs or replacements required, and pricing. All those “disputes” are contemplated by the policy and therefore resolution of those disputes should not be deemed outside the scope of performance of the existing obligations of the carrier to settle the claim. A true coverage dispute, such as whether a premium had been timely paid, may take the parties outside the obligations of the contract, and a payment under such circumstances might be considered a compromise sufficient to support a release of rights. Arguments like this will be heavily fact dependent, and frankly are not common.
Insurers have been found by the Florida Department of Insurance to have abused releases in the course of adjusting catastrophe claims. Following Hurricane Andrew, then-Commissioner Tom Gallagher issued Informational Bulletin 93-005 providing:
It has been brought to the attention of the Florida Department of Insurance that some insureds are being required to sign full releases in order to receive claims disbursement in settlement of claims relating to Hurricane Andrew.
The Department interprets Florida Statutes 626.9541(1)(i), 626.9641(1)(b), 626.9702, 627.4265, 627.702 and Emergency Rule Subsections 4ER92-26(4)(g), 4ER92-27(4) and other emergency rule subsections on similar topics, to mean:
1. No check or draft issued in settlement of an insurance claim shall contain a provision which makes negotiation of the instrument an acceptance of the amount payable thereon as full and final settlement of the underlying insurance claim, except those that are for full policy limits.
2. To eliminate misunderstanding or confusion and possible violation of Florida Statute 626.9541 and Rule 4-166.023, Florida Administrative Code, the Department is requesting that insurers limit the use of general releases to those settlements for which they are appropriate, and insert in said releases language to the effect that the release shall not constitute a final waiver of claims which are reasonably unforeseen on the date of the release.
The statutes cited in this Informational Bulletin are among the statutes prohibiting Unfair Claim Settlement Practices in Florida, indicating that the Department considered the practice of requiring releases and placing restrictive endorsements on payment checks and drafts to constitute evidence of bad faith claim handling.
Following the 2004 and 2005 hurricanes, we represented quite a few policyholders—generally community associations—that had signed releases under circumstances where the carrier had adjusted the loss and finally agreed to a payment or supplement payment. Frequently, those policyholders had been represented by legal counsel, but not counsel emphasizing first-party property insurance claims. Still, in each case, the carrier abandoned the release once challenged, allowing the policyholder to recover additional policy benefits.
Claims from Hurricanes Irma, Maria, and Harvey are now finding their way into court, with Michael soon to follow, and public adjusters should be alert to the potential that releases may again be demanded. In most instances, a release now will be equally suspect as in the prior catastrophes, and policyholders should be counseled to consult experienced first party property insurance attorneys for advice. And merely because certain carriers routinely use restrictive endorsements on their drafts does not make them acceptable or enforceable.5 The issues always require careful analysis, and in proper circumstances Civil Remedy Notices should be considered to preserve rights. Policyholders should be cautioned about the risk of accepting the bargain offered in exchange for terminating further rights under the policy.
1 Other comparable means of extracting a release include restrictive endorsements on the reverse of checks issued in payment of a loss, stating, in effect, that by negotiating the check the policyholder relinquishes all rights to any further payment under the policy. Certain insurance carriers routinely include such a restrictive endorsement on every check issued, even where that check is acknowledged to be an advance or partial payment.
2 This rule is primarily known for its application in other contexts, such as where a construction contractor tries to raise the price for services already agreed in a contract, simply refusing to perform unless the other party improves the price to be paid. See Brody, Performance of Preexisting Contractual Duty as Consideration: The Actual Criteria for the Efficacy of an Agreement Altering Contractual Obligation, 52 Den. L. J. 433 (Vol. 2, 1975). However, the rule applies in any contractual context, since every concession from the terms of a contract requires consideration.
3 E.g., Southern Pan Services Co. v. S.B. Ballard Canst. Co., No. 3:07-cv-902, 2008 WL 3200236, *9 (M.D. Fla. 2008).
4 E.g., Air Products & Chemicals, Inc. v. La. Land & Exploration Co., 806 F.2d 1524, 1529 (11th Cir. 1986) (applying Florida law to the validity of the Release Agreement, finding release voidable for lack of consideration); City of Miami Beach v. Fryd Construction Co., 264 So.2d 13, 15 (Fla. 3d DCA 1972)(holding that where a contractor agrees to perform for specific consideration, performance of that obligation will not constitute consideration for additional compensation not contemplated in the contract); see generally Couch on Insurance 3d, Ch. 215 and 216 (2018).
5 We are aware that one specific insurance carrier in Florida still routinely includes a restrictive endorsement on the back of every draft. Our practice in protecting our clients’ interests has been to negotiate side letters on each payment to avoid that language, and the carrier’s counsel has acknowledged each time that the language should not have been included – but that his client would not agree to change its practice. In appropriate circumstances, this long-standing practice is ripe for challenge under Florida’s Civil Remedy statute, Fla. Stat. 624.155.