The District Court of Appeal of Florida, First District recently heard the case ofFlorida Farm Bureau Casualty Insurance Company v. State of Florida, Office of Insurance Regulation. This case centered on a dispute between an insurance company (“Company”) and the state regulatory agency responsible for insurance regulation (“Office”) over the precise meaning of some of Florida’s sinkhole laws.
Background of the Case
As previously mentioned in another article, sinkhole-related loss insurance policy coverage is regulated by the state in 627.706, F.S. In it, an insurance company may offer optional sinkhole loss coverage in addition to the mandated “Catastrophic collapse” coverage.
The Company sought to cap or limit the sinkhole related damages that it had to pay under its policy. It inserted language to the effect that the maximum they would pay would be 25% of the total value of the insurance coverage limit for the property. The Office, disagreed and said that the law required The Company to pay up to 100% of the value of the insurance coverage limit. The Office refused to approve The Company’s change to the policy, and this lawsuit ensued. The lower court sided with the Office, and an appeal to the District Court of Appeals followed.
This is another bald-faced attempt by an insurance company to test the limits of the law! Normally when insurance is obtained, one expects to get the full value of the coverage up to the coverage limit. Coverage limits are an important factor in the decision to purchase insurance in the first place, as they allow the purchaser to make an informed decision about the type and cost of insurance that best suits their need.
The uncertain nature of sinkhole damage, considering that sinkholes only tend to get worse over time and repair measures may not always work, mean that insurance purchasers definitely want the full insurance coverage limit (typically a large number) to be in play! Any form of cap on coverage is a twisted joke played on the consumer – especially if such language is snuck into the so-called fine print. The whole field of sinkhole loss is difficult enough to understand as it is – now insurance companies would make it even more fraught with danger as insurance purchasers would have to read the policies with the proverbial magnifying glass to find caps on coverage.
The technical legal reasoning by the court highlighted the difficulty inherent in understanding Florida’s sinkhole laws. The relevant text of the Florida Statutes read:
“The insurer shall make available, for an appropriate additional premium, coverage for sinkhole losses on any structure… to the extent provided in the form to which the coverage attaches …. A policy for residential property insurance may include a deductible amount applicable to sinkhole losses equal to 1 percent, 2 percent, 5 percent, or 10 percent of the policy dwelling limits, with appropriate premium discounts offered with each deductible amount.” (Emphasis added)
The argument hinged on the interpretation of the bold text “[I]n the form.” The Company argued that the form in which coverage attaches is totally at the discretion of the insurance company – if the insurance company says it is 25% of the limit, then that’s just what it is. The Office interpreted the phrase “In the form” as meaning the original insurance policy. This common sense interpretation suggests that insurance coverage attaches via the insurance policy. The sinkhole coverage is thus limited to the overall insurance policy limit.
The Court basically said that The Office’s interpretation must be given a great deal of leeway. Because of deference to other branches of government, the court would only change an interpretation of a law if that interpretation were clearly wrong. Here, the interpretation did not seem clearly wrong, so The Company lost.
Why did The Company go through the expense and trouble of litigation with the State over an issue that the court seemed to regard as common-sense and easily disposable? Why did The Company go through the additional expense of an appeal? Simple – winning this case would have meant a huge decrease in the future payout of sinkhole claims. And in this convoluted chain of reasoning lies the inherent problem with the insurance industry. The industry is a boom and bust industry (as anyone who has lived in Florida for some decades could tell you.) In good times, they make record profits, because they are not spending nearly as much as they take in. In bad times, in theory, they have enough money to cover payments because of all the good times in the past. In economic terms, the surplus in good times should exactly equal the deficit in times bad. In reality, nothing could be further from the truth. The entire industry can be thought of as a ripe breeding ground for complicated schemes and scams in legal grey areas. There’s always the temptation to make money with the surplus money – by say investing it. However, some investments go bust. There’s also the temptation not to save the surplus, but spend it, in the form of bonuses to executives, higher salaries, national advertising campaigns, and good old fashioned parties.
There’s a perverse power dynamic here between the hypothetical insurance company and the people holding the policies. The insurance company has their money on an up-front basis, since people often pay for years before ever filing a claim. And it can use their own money to figure out ways to screw them out of the benefits of their policy. It can be as simple as the highly illegal scheme in John Grisham’s The Rainmaker to simply deny insurance coverage to 100% of claimants, or as devious as the use of money to buy political capital to change laws to favor insurance companies! Remember, the standard the Court used in the above case was deference unless clearly wrong. This means that if the law were changed to allow damage caps, the courts would go along with it.