Florida Sinkhole Homeowners Insurance Update re Eleventh Circuit Rules that 2011 Structural Damage Statutory Definition Applies to Policies Issued After Senate Bill 408’s Effective Date

Florida Homeowners Insurance Claims and Litigation Handbook

Overview

Another hundred million dollar sinkhole insurance question has finally been answered: to deny a sinkhole claim, homeowners insurers can apply the 2011 statutory definition of “structural damage” to a policy issued after May 17, 2011 even if the insurance policy did not include the statutory definition.


(For a full copy of the order, scroll to the end of this post.)

In Shelton v. Liberty Mutual, the Eleventh Circuit issued a ruling that is extremely important for sinkhole claims reported for insurance policies that were issued after May 17, 2011, the effective date of Senate Bill 408.  Although Liberty Mutual’s policy did not have the statutory definition for “structural damage” written in the policy, the Eleventh Circuit held that Liberty Mutual properly denied a sinkhole claim by relying on the “structural damage” definition in the statute – Fla. Stat. 627.706(2)(k).

Liberty Mutual’s Arguments

Liberty Mutual argued that the statutory definition controlled, even though it was not in their policy.  Liberty Mutual argued that the statutory definition is incorporated into the insurance policy, regardless of whether it is an extreme departure from the simple definition in its policy.  As you know, this is the 2011 statutory definition of “structural damage;”

(k) “Structural damage” means a covered building, regardless of the date of its construction, has experienced the following:

1. Interior floor displacement or deflection in excess of acceptable variances as defined in ACI 117-90 or the Florida Building Code, which results in settlement-related damage to the interior such that the interior building structure or members become unfit for service or represents a safety hazard as defined within the Florida Building Code;

2. Foundation displacement or deflection in excess of acceptable variances as defined in ACI 318-95 or the Florida Building Code, which results in settlement-related damage to the primary structural members or primary structural systems that prevents those members or systems from supporting the loads and forces they were designed to support to the extent that stresses in those primary structural members or primary structural systems exceeds one and one-third the nominal strength allowed under the Florida Building Code for new buildings of similar structure, purpose, or location;

3. Damage that results in listing, leaning, or buckling of the exterior load-bearing walls or other vertical primary structural members to such an extent that a plumb line passing through the center of gravity does not fall inside the middle one-third of the base as defined within the Florida Building Code;

4. Damage that results in the building, or any portion of the building containing primary structural members or primary structural systems, being significantly likely to imminently collapse because of the movement or instability of the ground within the influence zone of the supporting ground within the sheer plane necessary for the purpose of supporting such building as defined within the Florida Building Code; or

5. Damage occurring on or after October 15, 2005, that qualifies as “substantial structural damage” as defined in the Florida Building Code.

The Homeowner’s Counterarguments

The homeowner made at least two arguments:

  • because Liberty Mutual’s policy did not include the statutory definition, Liberty Mutual could not rely on the statutory definition and, therefore, had to cover sinkhole claims if there was any damage to the structure.
  • this change in the “structural definition” was a change that required heightened notice to the policyholder.

The Eleventh Circuit’s Opinion

The Eleventh Circuit rejected both arguments.

The Definition is Incorporated

The court held that the statute is a part of the insurance policy and Liberty Mutual’s policy and should be read as if it were part of it. Unfortunately for the homeowner, the court does not go into great detail regarding why this can’t be considered a situation where the insurer offers more coverage than the statute allows. This argument – that the statute provides a baseline for the coverage required but not necessarily all of it – is usually homeowners’ attorneys’ favorite argument in situations like these. Interestingly, although the Court rejected the argument, the court did not go into great detail regarding why this did not apply here.

This Change in Policy Terms Did Not Require Heightened Notice

Second, there is an entire body of case law that can make insurers’ new policy provisions invalid if they failed to provide proper notice of material changes to the policy.  In other words, if an insurer drastically changes an insurance policy, it can’t call it a renewal because the homeowner might not ever notice the change.  Usually, if that happens, the insurer will be forced to apply the old parts of the policy if it failed to provide notice of the new terms.

  • Here, in Shelton, we had what most could consider to be a material change – a change in coverage from all sinkhole damage to only the worst forms of sinkhole damage.
  • However, the court used Fla. Stat. 627.43121 to state that this was a change in policy terms that was mandated by the legislature; therefore, it was not a “change in policy terms” as defined by the law, and it did not require heightened notice procedures.

Conclusion

So … all of those sinkhole claims may not be covered … and we are just finding this out now?

Of course, the Eleventh Circuit does not bind Florida state courts, and Florida’s appellate courts could take a completely different position. However, like yesterday’s post about the contract for repairs ruling, we are finding out this information a little late.

Unlike with the contract for repairs decision we discussed yesterday, this delay was outside of everyone’s control.  The statutory definition came into effect in 2011, yet the contract for repairs requirement arose years and years before that. For homeowners insurers to get a ruling on the statutory definition issue, they had to wait this long for it to go up the ladder to the Eleventh Circuit.

The vast majority of these claims – hundreds of millions of dollars worth of claims – are resolved. Thus, the impact is very limited.

Nevertheless, thousands of claims and lawsuits remain pending, and this case should give homeowners insurers and their attorneys a big boost in their arguments to resolve these cases.

Takeaway

Like the opinion in yesterday’s post, homeowners insurers would have been much better served if they had this opinion a couple of years ago. Unfortunately, homeowners insurers and attorneys had no choice but to let this issue linger in the federal system until now.

It will be interesting to see if Florida courts side with the Eleventh Circuit, or if they focus more on the argument that insurers are free to provide more coverage than the statutes.  For the good of the industry, hopefully that Florida appellate opinion comes out soon.


For More Information on Sinkhole Claims Updates …

For more information on some of the extremely important sinkhole claim updates, please read these articles:


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And here is the complete copy of the order:

Download (PDF, 56KB)