(Note: This Guest Blog is by Ruck DeMinico, Knowledge Manager with Merlin Law Group).  

In State Farm Florida Ins. Co. v. Seville Place Condominium Ass’n, Inc., No. 3D08-2538, ___ So. 3d ___ (Fla. 3rd DCA, October 14, 2009) Florida’s Third District Court of Appeal held that an insured could amend their complaint to add a bad faith claim after coverage was admitted by the insurer and an appraisal award had been entered, but before final judgment. 

The issue on certiorari was whether a bad faith claim was ripe, not whether bad faith existed, therefore, the facts giving rise to the bad faith claim were not necessary to the opinion. In this case though, the majority opinion detailed the facts, noting “extraordinary length of time it has taken to resolve the Association’s claim,” and describing State Farm’s actions as “aggressive legal tactics” and “unfounded imposition of conditions.” As the facts giving rise to the potential bad faith claim may well have been crucial to the two justice majority’s decision, they are detailed below.

The Facts

On October 24, 2005, Hurricane Wilma caused substantial damage to the forty five roofs covering the Seville Place residential condominiums. Seville Place filed a claim with State Farm under its condominium association insurance policy, which specifically covered direct physical loss or damage to property caused by a hurricane. The policy specified that any dispute between the insurer and insured regarding the loss amount would be resolved by appraisal:

If we [State Farm] and you [the Association] disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. Each party will notify the other of the selected appraiser’s identity within 20 days after receipt of the written demand for an appraisal. The two appraisers will select an umpire. If the appraisers cannot agree upon an umpire within 15 days, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. . . . If we submit to an appraisal, we will still retain our right to deny the claim.

In January 2006, State Farm made two payments on the claim which totaled $90,564.62. Seville Place’s estimate of the damage exceeded $4.6 million. By October 2006 (a year after the loss), Seville Place concluded that further negotiation would be fruitless and made a written demand for appraisal.

State Farm claimed there was “no clear disagreement” between the parties because it had not yet been allowed access to all the damaged condominium units and declared it would agree to appraisal only if Seville Place agreed to two conditions: 1) any appraisal award “must be a line item document, broken down by building and unit number, including the pricing that establishes the award of that item;” and 2) State Farm required a sworn “proof of loss” form.

In February 2007, Seville Place filed suit against State Farm for breach of the insurance contract and sought declaratory relief regarding coverage and State Farm’s waiver of policy defenses. Seville Place also asked the court to enforce the appraisal provision without State Farm’s required conditions. State Farm claimed that it agreed to appraisal, but renewed its request for the special conditions.

The trial court granted Seville Place’s motion for partial summary judgment on the policy condition defenses, based on the facts that State Farm acknowledged the loss was covered by making the January 2006 payments and then denied the balance of Seville Place’s claim. The circuit court also ordered appraisal, without the conditions sought by State Farm, and allowed sixty days for the completion of the process. State Farm moved for an additional sixty days in order to inspect the interior of several of the condominium units. The trial court granted the extension, directed Seville Place to assist State Farm in accessing the units, and set a final appraisal hearing for June 28, 2008.

Seville Place’s appraiser and the umpire signed a final appraisal award, fixing the insured loss at $2,960,405. The award excluded any interest, costs, and attorney’s fees that might be determined by the court, and noted it should be reduced by amounts State Farm previously paid and any applicable deductible.

The day before that hearing, State Farm filed an emergency motion and affidavit seeking removal of the neutral umpire appointed by the court. State Farm later supplemented this motion with a request for an “entirely new panel to conduct a new appraisal,” asserting that otherwise it would “require many weeks, months, and possibly even years to sort through the multiple issues related only to this highly problematic and invalid appraisal gone wrong.”

The trial court confirmed the award, denied State Farm’s emergency motion for removal of the neutral umpire, and granted the Seville Place’s motions to amend the complaint to add a statutory bad faith claim and a demand for punitive damages. The court also reaffirmed that State Farm’s affirmative defenses had been subsumed in the confirmation order “and/or such defenses were waived by State Farm.” State Farm then filed the petition for certiorari at issue, arguing that the trial court erred in allowing the complaint to be amended with the bad faith claim.

Whether the bad faith claim was ripe

The Third District explained that two conditions must be met before a statutory first-party bad faith action is ripe. First, the insurer raises no defense which would defeat coverage, or any such defense has been adjudicated adversely to the insurer. Second, the actual extent of the insured’s loss must have been determined.

The Court rejected State Farm’s argument that a trial was required on certain affirmative defenses it believed were still pending and all appellate remedies regarding that judgment must be exhausted before a bad faith claim may proceed. No affirmative defenses remained pending; State Farm waived most or all defenses to coverage by acknowledging and paying Seville Place for the loss after the claim was made. In dismissing State Farm’s argument, the Court explained:

 [T]he procedural trenches and hurdles proposed by State Farm would contravene the express objectives of the bad faith statute and the Florida Insurance Code: the fair and prompt investigation and adjustment of claims by insurers.

The Court found no authority to support State Farm’s contention that Seville Place must obtain a final judgment from a jury before it may proceed with its bad faith and punitive damages claim. To the contrary, the Florida Supreme Court has held that an arbitration award determining liability and extent of loss is sufficient for a bad faith claim. The Court further noted that State Farm bargained for the binding nature of the appraisal award in the policy it drafted. The Third District held the remaining calculations to the award, including subtraction of the three percent hurricane deductible and prior payments and the computation of prejudgment interest, were ministerial acts which did not affect the final nature of the award. The Court further held that Seville Place’s reserved motion for attorney’s fees and costs allowed that issue to be determined at the conclusion of the entire case.

The Court also rejected State Farm’s argument that a bad faith claim is premature until the insurer exhausts all appellate remedies regarding liability and loss amount, noting no “decision by this Court or the Florida Supreme Court has held that liability and the extent of damages must also be “finally final,” surviving any appellate remedies sought by an insurer, before the insured’s bad faith claim is ripe.”

The Court concluded with the following observation regarding State Farm’s conduct:

State Farm originally estimated the Association’s covered loss at $324,017. This is less than eleven percent of the amount determined by the appraisal process. State Farm will have an opportunity to explain this fact, to explain the extraordinary length of time it has taken to resolve the Association’s claim, and to defend State Farm’s aggressive legal tactics (including the unfounded imposition of conditions on the contractually-stipulated appraisal provision and the last-minute attempt to remove the neutral umpire). For now, however, we find no basis in this record to quash the orders below as requested by State Farm.

Justice Shepherd dissented, writing that the majority’s decision to deny State Farm’s petition for certiorari conflicted with North Pointe Ins. Co. v. Tomas, 999 So. 2d 728 (Fla. 3d DCA 2008), and XL Specialty Ins. Co. v. Skystream, Inc., 988 So. 2d 96 (Fla. 3d DCA 2008). Shepherd took issue with the fact that no judgment had been entered in the case. According to Shepherd, it is prejudicial to allow issues of bad faith into a coverage case, with expanded bad faith discovery, before the underlying claim for damages has been determined.

As noted above, State Farm’s seemingly bad faith conduct in handling the claim was not relevant to the sole issue before the court-whether, by law, the bad faith action was ripe. Yet Justice Salter took care to detail the abusive tactics and even commented upon them in concluding his opinion. In this case, bad facts made good law.