I was recently asked whether an insurer’s exercising a contractual option to repair divests an insured of a contractual right to mediate or appraise? The answer could vary, of course, depending on the facts and policy language at play. But my answer was a resounding “no” based on these facts and policy language:
- The insurance company opined that the peril insured against damaged less than 25% of the roof and that repair was appropriate.
- The public adjuster and policyholder’s contractor opined that the peril insured against damaged more than 25% of the roof and that replacement was appropriate.
- The policy contained an “ordinance or law” provision,1 a “mediation or appraisal” provision,2 and an “our option” provision.3
- Due to the parties’ disagreement on the extent of damage, the public adjuster sought to invoke the policy’s “mediation or appraisal” provision. The carrier refused to participate in mediation or appraisal, however, contending that its invoking the “our option” provision divested the insured of his right to alternative dispute resolution under the “mediation or appraisal” provision.
The heart of the aforementioned dispute was clearly the extent of damage, with related issues being whether building codes like Section 611.1.1 of Florida Building Code4 and cases like Northbrook Property & Casualty v. R & J Crane Services5 would apply. The purpose of mediation is to resolve disputes pertaining to claims made under the policy and the purpose of appraisal is to resolve disputes pertaining to the amount of loss. Two plus two equals four last time I checked, so the carrier erred in refusing to resolve the heart of the dispute (i.e., extent of damage) via mediation or appraisal and to let the other related chips (i.e., the applicability of a replacement ordinance or inapplicability of the “our option” provision) fall as they may.
1 “Ordinance or Law. a. You may use up to 25% of the limit of liability that applies to Coverage A for the increased costs you incur due to the enforcement of any ordinance or law, which require or regulates: (1) The construction, demolition, remodeling, renovation or repair of that part of a covered building or other structure damaged by a Peril Insured Against … .”
2 “Mediation or Appraisal. a. Mediation. If there is a dispute with respect to a claim under this policy, you or we may demand a mediation of the loss in accordance with the rules established by the Florida Department of Financial Services. (1) The loss amount must be $500 or more, prior to application of the deductible; or there must be a difference of $500 or more between the loss settlement amount we offer and the loss settlement amount that you request. … b. Appraisal. If you and we fail to agree on the amount of loss, either may request an appraisal of the loss by presenting the other party with a written request for appraisal of the amount of loss. If the other party agrees in writing to participate in appraisal, then appraisal shall proceed pursuant to the terms of a written agreement between the parties.”
3 “Our Option. If at the time of loss: a. We give or mail you written notice within 30 days after we receive your signed, sworn proof of loss; and (1) The damaged property under Coverage A – Dwelling in Section I – PROPERTY COVERAGES is insured for Replacement Cost loss settlement as described in your Loss Settlement conditions: (a) We may, at our option, repair any part or item of the damaged Coverage A property with material or property of like kind and quality. (b) If an identical replacement is part of the repair and is not available, we may, at our option, substitute replacement of equal or greater features, functions or capacities of the damaged property.”
4 “Not more than 25 percent of the total area or roof section of any existing building or structure shall be repaired, replaced or recovered in any 12 month period unless the entire roof system or roof section conforms to requirements of this code.”
5 Northbrook Prop. & Cas. Ins. Co. v. R & J Crane Serv., Inc., 765 So. 2d 836 (Fla. 4th DCA 2000)(The R & J Crane court affirmed the trial court’s determination that an insurer could not enforce a policy repair option where an applicable ordinance required replacement. The R & J Crane court cited Citizens Ins. Co. v. Barnes, 124 So. 722 (Fla. 1929) for the proposition that “where parties contract upon a subject which is surrounded by statutory limitations and requirements, they are presumed to have entered into their engagements with reference to such statute, and the same enters into and becomes a part of the contract.”).