(Note: This Guest Blog is by Mary Fortson, Managing Attorney at Merlin Law Group.)

Since Chip is on vacation, I figured it’s time to take the plunge and write on his blog. My initial concern had been whether I’d be able to come up with a topic. Chip is always so creative in his ideas and extremely thorough in his explanations that I imagined I would never be able to follow in his footsteps. However, when I read the blogs Chip had authored recently on TWIA and the concept of “direct physical loss”, ("Physical Direct Loss" Caselaw and TWIA’s Roofing MemoRoof Repair Methods Prove TWIA is Wrongly Denying Roof ClaimsThe TWIA Roof Damage Memo: Checking Basic References to Resolve Adjustment QuestionsInternal Texas Windstorm Roofing Claims Memo Explains Damage is Not Covered), I realized that was a great topic and that I’d like to comment on that concept as well.

Chip’s blogs made me recall a very interesting case that he and I had worked on in Florida several years ago where another well-known insurer, State Farm, had tried to avoid paying on a part of a claim by denying that a “direct physical loss” could be claimed. It’s interesting how creative insurance companies can be when it comes to arguing about whether they should be paying on a loss.

The case was Three Palms Pointe, Inc. v. State Farm Fire & Cas. Co., 250 F. Supp. 2d 1357 (M.D. Fla. 2003), aff’d 362 F.3d 1317 (11th Cir. 2004). In our case, a condominium association had sued State Farm when that insurer had refused to pay the relocation expenses of the condominium residents, even though the process that was necessary to repair the damaged building was so extensive that the residents absolutely needed to move out of their units. In fact, there were life/safety reasons requiring the relocation of the residents that everyone agreed existed. The argument to the federal district court involved several issues, which included the question of whether the concept of a “direct physical loss” had been implicated when considering the resident relocation expenses. State Farm conceded that construction expenses and expenses to move personal property were covered under the condominium association’s property insurance policy, but argued that the relocation of the residents was a “personal and collateral” expense that was not related to a “direct physical loss”.

In analyzing the situation, the district court judge cited Florida case law that recognizes a “direct physical loss” includes losses that are necessarily more extensive than just the damage to the structure or membrane of the building, and can include other, somewhat intangible things. In fact, as recognized by Judge Moody, the concept of a “direct physical loss” is not defined in the insurance policy, and it is necessary for a court, when interpreting what a policy provision means, to give the benefit of the doubt to the insured in such a situation. Ultimately this judge determined that the important question to consider was whether the reasonable and necessary repair costs included the cost to relocate the residents. The district judge answered that question as a definitive “yes”, and entered judgment in favor of the insured condominium association. State Farm was not willing to accept that decision, and ultimately appealed the ruling to the federal appellate court, which also found in favor of the policyholder.

I was very proud to have worked with Chip Merlin on the Three Palms Pointe case, and to have successfully advocated for our policyholder client. It is a shame that insurers still argue the concept of “direct physical loss” as a way to avoid paying the amount owed on a claim. But as the wealth of case law that Chip explained to his readers shows, this insurance policy provision does not offer insurers the “out” they may hope to find. 

-Mary Fortson