Insurance Information Institute President and Chief Economist Robert Hartwig told Congress earlier this year that such action on the part of regulators constitutes a real threat to the stability of the private market. Among other things, he said that carriers could no longer calculate with certainty their potential liabilities when it comes to purchasing reinsurance and determining the amount of premiums homeowners should pay.

“The court's reluctance to enforce regulator-approved contracts and the associated swarm of lawsuits have increased uncertainty to intolerable levels, effectively destroying insurers' abilities to price risk accurately and leaving them with few alternatives other than to reduce their exposures in a state,” said Hartwig.

Even before Katrina made large sections of New Orleans uninhabitable, Florida already faced this very issue, which goes straight to the heart of the state's value property law. The first case in question was Mierzwa v. Florida Windstorm Underwriting Association (877 So. 2d 744). In that case, a homeowner sustained both wind and flood damage, but was only covered by a wind policy issued by FWUA. Under a local ordinance, the house was deemed a total loss. The homeowner then sued FWUA, saying that it should be responsible for paying the full face value of the policy, which effectively ended the insurer's ability to apportion the damages. The Fourth District interpreted the state's value property law so that insurers were on the hook regardless of the specific perils and uncovered items listed in the policy.

As stated by the lower court: “The VPL mandates that the carrier is liable to the owner for the face amount of the policy, no matter what other facts are involved as to the cost of repairs or replacement. That is to say, if the insurance carrier has any liability at all to the owner for a building damaged by a covered peril and [the property is] deemed a total loss, that liability is for the face amount of the policy.”

The legislature stepped into the picture in 2005 by rewriting the value property law so that any state or local ordinance could not be a controlling factor in assessing an insurer's liability. It also required insurers to include in bold type that the insurers were not responsible for damages caused by floods or storm surges.

As stated in Section 627.7011, Florida Statutes, lawmakers noted that the provision was designed to “encourage policyholders to purchase sufficient coverage to protect them in case events excluded from the standard homeowner's policy, such as law ordinance enforcement and flood, combine with covered events to produce damage or loss to the insured property.”

While the legislature sought to correct the Fourth District's ruling, it still left open the question of just how the state's value property law should be interpreted.

Florida Farm Bureau v. Cox

The Supreme Court agreed to hear the issue after the First District Court of Appeals ruled in favor of a homeowner on the basis of the Mierzwa precedent. The case had its beginnings in September 2004, when Hurricane Ivan made landfall in the Florida Panhandle. In Florida Farm Bureau Casualty Ins. Co., v. Cox (943 2d. 823), the Cox's home was judged a total loss under a local ordinance after sustaining damages from both wind and flood.

The homeowner carried a $65,000 policy with Farm Bureau that covered wind damage, but excluded damage due to storm surge or floods. The Coxes filed a claim for $65,000, plus another $117,000 for personal property losses. The Farm Bureau claim adjuster calculated that the hurricane caused $11,590 in wind damage, an additional $3,200 for other structures, and $2,000 for living expenses. The Coxes then sued the insurer based on the findings in the Mierzwa case. The Farm Bureau lost on the trial court level and the appellate level, where the First District again upheld Mierzwa. The court, however, agreed to submit its ruling to the Supreme Court for a final review.

Florida Farm Bureau Vice President of Government Affairs Bert Gindy said that the insurer didn't dispute the policy's value. What they objected to was the ruling in Mierzwa where the court ruled on the issue of how the policy applied to a total loss. “The value policy law sets out the value of the policy,” he said. “But it doesn't address the terms of coverage.”

Unlike other courts that viewed the value policy law as setting out an insurer's obligation, the Supreme Court zeroed in on the issue of causation or the lack thereof. The court pointed to a black letter law review of the state's value policy law and found that under the law, there was no requirement that insurers must pay for non-perils expressly noted in a policy. Under Chapter 627.702, Florida Statutes, the law states, “in the event of a total loss of any home, mobile home, or any other structures…if caused by a covered peril, shall be the amount for which such property was so insured as specified in the policy and for which a premium has been charged and paid.”

The law also clearly states the limits on an insurer's exposure. “The intent of this subsection is not to deprive an insurer of any proper defense under the policy, to create new or additional coverage under the policy, or to require an insurer to pay for a loss caused by a peril other than the covered peril.” Further the law goes on to read, “when a loss was caused in part by a covered peril and in part by an uncovered peril, the insurer's liability under this section shall be limited to the amount of the loss by the covered peril.”

With those statements the Supreme Court reversed the Mierzwa decision and, in so doing, found that the courts had no jurisdiction to interpret the statute as written. Under Tillman v. State 934 So. 2d 1263, 1269, the court found, “when the language is unambiguous and conveys a clear and definite meaning, that meaning controls unless it leads to a result that is either unreasonable or clearly contrary to legislative intent.” The court further found that “based upon this plain language of the statute, we conclude that it intends that an insurer is liable for a loss by a peril covered under the policy for which a premium has been paid. The First District's majority opinion fails to give effect to this plain statutory language.”

Reaction

The industry was pleased with the Supreme Court's ruling for a number of reasons, but mostly because it once and for all resolved the application of the state's value policy law. Property Casualty Insurers' Association Vice President William Stander said the court's ruling would remove the possibility of insurers having to pay more than their share, which would bring a level of uncertainty to the market at a cost to consumers. He also said that it reinforces the legislature's ability to make public policy. “We are pleased that the Supreme Court upheld the clear reading of the law and contracts,” he said. “The legislature only fixed something that courts should have gotten right in the first place. Now the court has confirmed what we have known to be true from the beginning.”

Gindy also noted that the court's ruling would benefit consumers. “This is a big victory for the industry, which has been trying to resolve this issue for a number of years,” he said. “It also benefits consumers since it would take a lot more premium for insurers to cover flood damage as well.”