Insurers and their policyholders are more frequently clashing over sinkhole claims, and the Florida Legislature seems to be weighing in on the insurers’ side. In this case, the policyholder won; his insurer paid the policy limits after a Civil Remedy Notice, and his claim for damages caused by the insurer’s lack of good faith in handling the total loss claim has survived the first gauntlet: the insurer’s motion to dismiss.

In Canales v. American Security Insurance Company, the insured discovered sinkhole damage to his property and filed a claim with his insurer, American Security Insurance Company ("ASIC"). When the claim was not resolved, the insured filed a Civil Remedy Notice ("CRN") with Florida’s Department of Financial Services ("DFS") and later sued ASIC, including a claim for bad faith. ASIC filed a motion, asking the Court to dismiss the various allegations that Mr. Canales asserted against ASIC, including the count for bad faith.

Regarding the bad faith claim, the insured alleged that ASIC inspected his property, investigated the claim, and was aware that the cost of repair exceeded the policy limits, but:

ASIC pursued dilatory litigation tactics in order to delay proper payment and subject its policyholder to ongoing and potentially dangerous property damage. In short, ASIC acted in bad faith.

The United District Court for the Middle District of Florida began its analysis with this principle:

In order to successfully plead a cause of action pursuant to Fla. Stat. Sec. 624.155(1)(b), an insured must: (1) file a written Civil Remedy Notice; (2) obtain the favorable resolution of an underlying civil action for insurance benefits against the insurer; and (3) allege both that there has been a determination of the existence of liability on the part of the insurer and the extent of plaintiff’s damages.

In its motion to dismiss the insured’s complaint, ASIC argued that the complaint didn’t identify the basis of the bad faith claim. Because the bad faith claim did not satisfy the pleading requirements set forth in the applicable Federal Rules of Civil Procedure, ASIC argued that it should be dismissed. In response, the insured argued that between his Amended Complaint and the CRN, there were sufficient factual allegations that established ASIC’s bad faith.

With regard to the CRN, the Court explained the following: 

The Florida DFS’ acceptance of a CRN serves as evidence that the CRN has sufficient specificity to provide the insurer with notice of the violation and start the 60-day clock…Because the DFS accepted Canales’ CRN, the Court finds that the CRN provides a factual basis for the claims against ASIC sufficient to survive the Motion to Dismiss.

Based on this evaluation, the United States District Court for the Middle District of Florida denied ASIC’s motion to dismiss the bad faith claim on these grounds.

ASIC also argued the CRN undermined and contradicted the allegations underlying the bad faith claim. In his Complaint, the insured alleged that ASIC failed to pay the claim in good faith in a timely fashion after investigating the claim and determining that the cost to repair exceeded the policy limits. The Court determined that these allegations were sufficient under Florida law to support the bad faith claim.

ASIC’s last argument in support of its position that the bad faith claim should be dismissed was the following:

Canales’s bad faith claim must fail because it is predicated on the Policy’s Loss Settlement provision, which is superseded by the Loss Settlement provision of the Sinkhole Endorsement …The Sinkhole Endorsement states that ASIC will settle a sinkhole loss once the insured enters into a contract for repairs …ASIC argues that it was not required to pay Canales the policy limits because he did not execute a contract for the repair work.

The Court evaluated the insured’s argument that portions of the Loss Settlement provision in the Sinkhole Endorsement not quoted by ASIC suggest circumstances in which ASIC might pay claims if ASIC’s own estimates suggested that payment above policy limits is necessary to restore the premises to its pre-loss condition. The Court also considered the insured’s assertion that he had a contract for the repair work and that ASIC ultimately paid policy limits after the CRN expired. Although the insured apparently referred to the wrong policy language, the Court decided that this did not void the bad faith claim:

[A]n action for bad faith is extra contractual in nature and relates to the duties of an insurer as defined by statute, not the express terms of the contract…Furthermore, the statute specifies that CRNs ‘shall [refer] to specific policy language that is relevant to the violation, if any’ …Thus, Canales was not required to reference specific, relevant language from the Policy. ..It therefore makes little sense to dismiss Canales’s claim simply because he refers to the wrong policy language.

For these reasons, the Court denied ASIC’s motion to dismiss the bad faith claim pursuant to Florida Statute 624.155(b)(1).

Please consider that this is an unreported federal trial court decision. Both unreported and reported decisions in other jurisdictions may rule differently on these same issues.