Court Denies Recovery of Public Adjuster Fees in Breach of Contract Action

Ashley Harris | Property Insurance Coverage Law Blog | December 16, 2018

In Kingshill Hospitality, Inc. v. American Economy Insurance Company,1 the policyholder’s hotel was damaged by a fire. Three days later the policyholder hired a public adjuster to assist in submitting its insurance claim. A dispute arose regarding the amount of loss and the policyholder filed suit for breach of contract.

As part of the damages claimed, the policyholder sought recovery of the public adjuster fee as consequential damages. The insurance carrier moved the court to strike the claim for consequential damages, which the court granted.

The policyholder argued that “it had to retain the services of an insurance claims professional (Public Adjuster) to pursue its claim.” The court disagreed, reasoning that consequential damages are “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act,” and here, the policyholder hired the public adjuster only three days after the fire occurred and before the insurance carrier made a coverage determination. The court concluded:

Because these costs were incurred in May – before the alleged breach occurred when American Economy partially denied coverage on June 1 – Kingshill’s public adjuster expenses cannot be categorized as consequential damages.

While not relevant under the facts of this case, the court noted:

If an insured believes that its insurer is not attempting to settle a claim in good faith and hires a public adjuster to refute the damage estimate or coverage determination proferred by an insurer, such expenses could be considered consequential damages. And under those facts, the consequential damages would be extracontractual damages that could only be recovered in a bad faith action, pursuant to QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541 (Fla. 2012).

It should be noted that courts in Florida have found that consequential damages can be recovered in a breach of contract action.2 Here, however, where the public adjuster was hired before a dispute arose regarding the loss or coverage, the public adjuster fees were not recoverable.
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1 Kingshill Hospitality, Inc. v. American Economy Ins. Co., No: 5:18-cv-520, 2018 WL 6427681 (M.D. Fla. Dec. 5, 2018).
2 See e.g.Trident Hospitality Florida, Inc. v. American Economy Ins. Co., No.: 6:08-cv-289, 2008 WL 11334515 *2 (M.D. Fla. May 30, 2008) (“Plaintiff is entitled to consequential damages if it can prove that damages ‘were within contemplation of the parties when the contract was formed.’” Citing Martin v. Monarch Life Ins. Co., No. 94-1182, 1995 WL 127157, at *1 (M.D. Fla. Mar. 21, 1995)).

The Trouble with Releases of Claims in Exchange for Policy Benefits

Christopher Mammel and Tamara Chen-See | Property Insurance Coverage Law Blog | December 6, 2018

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.3Performance 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.
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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.

Florida Supreme Court Invited to Resolve Assignment-Of-Benefits Controversy

Michael Morehead | Property Insurance Law Observer | December 5, 2018

Introduction

At least two Florida appellate courts have directly contradicted each other on an increasingly-important question facing Floridians and the insurance industry. The question is as follows: “Are insurance provisions valid which condition the validity of third-party benefits assignments upon the written consent of all insureds and named property mortgagees?” The answer to this question is important because Floridian policyholders often assign their insurance rights to construction companies post-loss to receive services without up-front payment. The Florida Supreme Court was recently asked to answer this important question, and it is likely to weigh in, although it has not yet formally decided to do so.

Public Policy

Public policy concerns animate assignment-of-benefits (“AOB”) legal disputes in Florida. Florida construction companies and policy-holder attorneys argue that AOB is good for policy-holders because it allows them to immediately repair damaged property. However, insurance advocates contend that certain AOB limitations are necessary to mitigate abuse, fraud, needless litigation, and ultimately to minimize insurance premiums to policyholders.

A 2016 Insurance Journal article explained that unscrupulous contractors often obtain AOBs, submit inflated repair-cost claims to insurers, and then work closely with “highly litigious” trial groups to sue the insurers for denying these claims, whether in whole or in part. Amy O’Connor, Florida Fights Back Against Assignment of Benefits Abuse, Insurance Journal (Feb. 8, 2016). A 2018 article indicates that as a result, the number of AOB lawsuits in Florida has been “spiraling out of control,” from 405 lawsuits in 2007 to 28,000 lawsuits in 2016—a “68-fold increase.” Liam Sigaud, Florida Insurance Abuse Spiraling Out of Control, Pensacola News Journal (March 14, 2018).

Thus, the legal AOB controversy currently taking place in Florida is the tip of a much larger public policy iceberg. Because of the breadth and depth of the public policy considerations at play, even those Florida courts which have taken a side have done so on purely legal grounds, recognizing that the complex policy considerations are best addressed by the Florida Legislature. Unfortunately, the Florida Legislature has repeatedly tried yet been unable to resolve the present dispute.

Florida Appellate Courts are Split

Three of the five Florida District Courts of Appeal have weighed in on the validity of AOB conditions requiring the written consent of all insureds and named property mortgagees. The Second Florida District Court of Appeal (“Second District”) upheld the enforcement of such conditions without comment. See Biologic, Inc. a/a/0 Elizabeth Morgan v. ASI Preferred Ins. Corp., 238 So. 3d 769 (Fla. Dist. Ct. App. 2017). The Fourth Florida District Court of Appeal (“Fourth District”) upheld the validity of such conditions with detailed analysis. See Restoration 1 of Port St. Lucie v. Ark Royal Ins. Co., 2018 WL 4211750, at *1 (Fla. Dist. Ct. App. 2018). Finally, the Fifth Florida District Court of Appeal (“Fifth District”) has twice held such conditions to be invalid under age-old Florida common law. Sec. First Ins. Co. v. Florida Office of Ins. Regulation, 232 So. 3d 1157, 1160 (Fla. Dist. Ct. App. 2017); Restoration 1 CFL, LLC v. ASI Preferred Ins. Corp., 239 So. 3d 747 (Fla. Dist. Ct. App. 2018).

In invalidating the aforementioned AOB consent requirements, the Fifth District cited a 1917 Florida Supreme Court decision for the very general proposition that “it is a well-settled rule that [anti-assignment provisions do] not apply to an assignment after loss.” Sec. First Ins. Co., 232 So. 3d at 1158 (quoting from W. Florida Grocery Co. v. Teutonia Fire Ins. Co., 77 So. 209, 210–11 (1917)). However, the Fourth District subsequently disagreed, holding that the Fifth District overgeneralized the Teutonia Fire rule, which invalided a clause requiring the insurer to consent to third-party benefits assignments, not other insureds and property mortgagees. Ark Royal Ins. Co., 2018 WL 4211750, at *3.

AOB consent from an insurer constituted a needless restraint on the insured’s right to assign benefits because the insurer had no interest in the assignment. Id. Thus, the insurer-consent requirement was “superfluous.” Id. In contrast, says the Fourth District, requiring the consent of other insureds and named mortgagees is not superfluous because they have a “a vested interest that a reputable, legitimate third-party contractor perform repairs on the home.” Id. The Fourth District recognized that freedom of contract may be limited where it would impose “great prejudice to the dominant public interest,” but declined to find any such prejudice because “[t]he contract here does not prohibit assignment—it imposes a condition, requiring the approval of all insureds and the mortgagee.” Id. at 4.

In sum, the Fourth and Fifth Circuit’s disagreement stems from differing opinions about the scope of the Teutonia Fire rule. Noting this conflict, the Fourth Circuit “certify[ied] conflict” for purposes of appeal to the Florida Supreme Court. Id.

The Issue Has Been Appealed to the Florida Supreme Court

Interestingly, the Fourth District’s opinion was appealed by the underlying winner—Ark Royal Insurance Company. In mid-October 2018, the loser, Restoration 1 agreed with Ark Royal that the Florida Supreme Court should take up the case to provide unity in Florida on the issue. The Florida Supreme Court has not yet determined whether to take up the appeal, although the circumstances suggest that it is likely to do so. Indeed, a former Associate Justice—Ken Bell—recently authored an article indicating that the Florida Supreme Court should and will take up the appeal and side with the Fourth District. Ken Bell, AOB Issue Finally Headed to Florida’s Supreme Court, Insurance Business America (Oct. 11, 2018).

Importantly, the seven-member Florida Supreme Court is about to change significantly. Justices Barbara Pariente, Fred Lewis and Peggy Quince will be leaving the court in January 2019, having reached the applicable state judicial age limit. Lloyd Dunkelberger, Florida Supreme Court direction hinges on governor’s race, Orlando Weekly (October 23, 2018). These justices are considered to be policy-holder friendly. Newly-appointed Republican Governor Rick Scott, who will take office in January 2019, has the power to make new appointments. Id. The AOB appeal, which was filed in late September 2018, will likely be decided after this seismic judicial shift takes place. These changes are likely to work in favor of insurers with regard to the AOB appeal.

Takeaway

Until the Florida Supreme Court resolves the present AOB debacle, the law is likely to be treated in a piecemeal fashion across the state, depending upon where suit is filed. Cases filed in the Fifth District are subject to binding Fifth District precedent, and insurer/mortgagee-consent requirements will likely be found invalid. Insurers in these jurisdictions cannot rely upon insurer/mortgagee-consent failures to function as a proper basis for denial and to shield them from liability. The relevant counties in which this is the case are as follows: Citrus, Hernando, Lake, Marion, Sumter, Flagler, Putnam, St. Johns, Volusia, Orange, Osceola, Brevard and Seminole.

The opposite is true in the Fourth District. Insurers can rely upon insurer/mortgagee-consent failures to function as a proper basis for denial of a claim by the assignee, as well as to shield them from liability that would otherwise flow from such a denial. The counties in which this is the case are as follows: Palm Beach, Broward, Indian River, Martin, Okeechobee and St. Lucie. In this regard, the Fourth District’s approach is arguably more important than the Fifth District’s approach, as the majority of AOB abuse is concentrated in Southern Florida.

Insurer’s should tread carefully in the Second District, including the following counties: Pasco, Pinellas, Hardee, Highlands, Polk, DeSoto, Manatee, Sarasota, Hillsborough, Charlotte, Collier, Glades, Hendry and Lee. Although one Second District opinion enforced an insurer/mortgagee-consent requirement, it did so without comment. Because it did not reason out its judgment, it is very difficult to gauge the Second District’s commitment to the position it has so far taken. Nevertheless, applicable case law favors the validity of insurer/mortgagee-consent requirements in Second District counties.

Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

Brian Margolies | Traub Lieberman Straus & Shrewsberry LLP | November 20, 2018

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Construction Contractors Should Promptly Notify Insurers of a Potentially Covered Claim

Patrick Johnson | Construction Industry Counselor | November 15, 2018

Contractors always should put their insurers on notice of a potentially covered claim as soon as possible.  In many states, an insured typically will not be denied coverage for the late notice of a claim if there is no prejudice to the insurer, however, there are circumstances under which late notice alone can bar coverage.  A recent case before a New York appellate court demonstrates the importance of being aware that liability insurance policies subject to New York Insurance Law § 3420 law which were issued before January 17, 2009 are not subject to a requirement that an insurer may deny coverage for late notice of a claim only if the insurer was prejudiced by the late notice.   In  Lafarge Bldg. Materials Inc. v. Harleysville Ins. Co. of New York, 2018 WL 5659750 (N.Y. App. Div. Nov. 1, 2018), the New York appellate court rejected a construction contractor’s claim for coverage under an insurance policy due to late notice to its insurer.

This case followed the injury of a subcontractor’s employee at a construction site.  The commercial general liability policy issued to the subcontractor required the subcontractor to name the general contractor as an additional insured.  Subsequently, a personal injury action was commenced in March 2008.  Nine months later, the general contractor   tendered to the defendant insurer a letter requesting coverage.  The insurer declined to provide coverage on the grounds that the general contractor failed to provide notice “as soon as practicable” as required by the policy.  The general contractor filed suit against the insurer to challenge the declination of coverage.  The defendant insurer moved for summary judgment on the grounds that the notice was deficient and the New York Supreme Court, New York’s trial level court, agreed.

In the appeal that followed, the question before the New York appellate court was whether the general contractor’s notice to its insurer was timely based on the policy language that notice be given “as soon as practicable.”  The general contractor argued that it lacked knowledge as to whether it was covered under the policy, thus causing  the delay.  The appellate court disagreed, based on the fact that shortly after being served with the underlying personal injury complaint the plaintiff became aware of the occurrence and had in its possession the certificate of insurance outlining its status as an additional insured and identifying the insurer. The appellate court held that although the reasonableness of delay ordinarily presents questions of fact, the facts presented by the general contractor in support of the nine month delay were unreasonable as a matter of law as the insured failed to demonstrate that it lacked knowledge of the identity of the insurer and its additional insured status for over 8 months.

The policy in this case was issued prior to the amendment of N.Y. Ins. Law § 3420, effective January 19, 2009. Most notably, the amendment requires that an insurer show that it was prejudiced by a failure to provide notice in order to successfully disclaim coverage.  The appellate court held that the insurer was not required to show that it had been prejudiced by the untimely notice because the policy had been issued prior to the statutory amendment. Both construction companies and insurers are often faced with claims under policies that pre-date the amendment.  Prejudice requirements vary by state. In some states whether prejudice is required can depend on the type of policy and when it was issued. As demonstrated in the Lafarge case, it is important, particularly with older policies, that construction companies promptly place their insurer on notice of potentially covered claims to avoid any coverage disputes based on late notice.