This story is reprinted with permission from FC&S Legal, the industry's only comprehensive digital resource designed for insurance coverage law professionals. Visit the website to subscribe.

Policyholders expect prompt resolution of their claims by their insurance companies. When the claim is in dispute, the policyholder may believe that the company is acting in bad faith and file a lawsuit. Generally, policyholders have to follow specific procedures and may have to wait until appraisers or adjusters have completed their work before heading to court. But Florida insureds may no longer have to delay, according to a recent state appellate court case.

Proper sinkhole repairs

In 2009, Phillip Landers' home sustained a loss from suspected sinkhole activity. He submitted a claim to his insurer, State Farm Florida Insurance Company. State Farm hired SDII Global Corporation to conduct a subsidence investigation. SDII verified that sinkhole activity was the cause of the damage, and State Farm admitted coverage.

SDll initially concluded that 975 cubic yards of grout needed to be injected into 49 holes around the home's perimeter. SDII did not recommend underpinning. After considering the report of a neutral evaluator from the Florida Department of Financial Services as required by state law, SDII amended its report to require an additional 15 grout injection points. The cost of this remediation was estimated at approximately $350,000.

Landers obtained an independent opinion from Biller Reinhart Structural Group. In Reinhart's opinion, proper stabilization required underpinning. Reinhart's cost of remediation was close to $1 million.

State Farm provided Reinhart's report for review by the neutral evaluator. The neutral evaluator concluded that underpinning was unwarranted.

State Farm demanded appraisal under the policy to resolve the parties' disagreement over the amount of the loss. Landers agreed, pursuant to the terms of the State Farm policy, to proceed with SDll's recommended repair plan, despite his belief that the repairs were inadequate. State Farm placed its appraisal demand on hold while the stabilization repairs were made. After the repairs were completed in September 2011, State Farm requested appraisal of the cosmetic damage to the home.

Landers said that his home continued to experience damage after repairs were completed, and he hired Sonny Gulati, a geotechnical engineer, to examine the property. In January 2012, while Gulati's report was pending, Landers filed a civil remedy notice (CRN), alleging, among other things, claim delay, failure to promptly and properly investigate the claim, failure to adjust the loss and failure to tender policy limits.

Landers contended that although the repairs had been completed pursuant to State Farm's expert's recommendation, his home remained unlivable. He demanded the immediate tender of "the policy limits for dwelling … of $1,026,500.00 minus any prior payments that have been made to the insured … so that [Landers] may adequately complete the repairs [he] has started to [his] home."

In response, State Farm requested that all issues be submitted to appraisal.

Mandatory appraisal?

In March 2012, Landers sued State Farm for breach of contract. In that suit, State Farm sought to compel appraisal, which Landers opposed. The trial court did compel appraisal, Landers appealed, and on Jan. 21, 2014, an appellate court affirmed.

In July 2014, the appraisal panel determined that the amount of loss exceeded the policy limits. State Farm tendered the policy limits in August 2014, without any deduction for the amounts previously paid.

Landers then brought a first-party bad-faith suit against State Farm, alleging 10 purported violations of Florida state law, including allegations of claim delay and low-balling. Landers contended that his damages always exceeded the policy limits and that State Farm had acted in bad faith by delaying payment of the policy limits until after appraisal.

State Farm moved for summary judgment, asserting that when Landers filed the CRN, "there was no contractual amount due and no damages owed under the contract" because a condition precedent to payment — determining the amount of loss through appraisal — had not been fulfilled. Therefore, State Farm contended, the CRN was void because Landers' claim was not yet ripe.

The trial court granted summary judgment in favor of State Farm, and Landers appealed.

The State Farm policy stated:

If you and we fail to agree on the amount of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand for appraisal, each shall select a competent, disinterested appraiser. Each shall notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers shall then select a competent, impartial umpire. … The appraisers shall then set the amount of the loss. If the appraisers fail to agree within a reasonable time, they shall submit their differences to the umpire. Written agreement signed by any two of these three shall set the amount of the loss.

The appellate court's decision

The Florida appellate court reversed, holding that an insurer's demand for appraisal did not delay the time for filing a CRN until the amount of the appraisal was established. In its decision, the appellate court explained the three prerequisites to filing a statutory bad-faith claim:

Determination of the insurer's liability for coverage;
Determination of the extent of the insured's damages; and
The filing of a CRN notice.

The appellate court ruled that the settlement of a sinkhole claim via the appraisal process was sufficient to satisfy the first two requirements.

The CRN, the appellate court observed, provided Florida's Department of Financial Services and the insurer 60 days' written notice of the claim. During that period, the insurer had an opportunity to cure the alleged violation, and no suit could be brought if, within those 60 days, the damages were paid or the circumstances giving rise to the violation were corrected.

The appellate court then rejected State Farm's argument that a CRN was not effective until all of the contractual preconditions to suit were met and there was a final determination of coverage and the amount owed.

No final determination required

According to the appellate court, the "plain language" of the Florida law provided "no time limitation for when a CRN may be filed" and did "not require a final determination of coverage and damages" before it was filed.

The appellate court reasoned that the purpose of a CRN was "to facilitate and encourage good-faith efforts to timely settle claims before litigation, not to vindicate continuing efforts to delay." Filing a CRN before the appraisal process was complete and damages were determined did not render the CRN a legal nullity, precluding Landers' bad-faith claim, the appellate court ruled.

The appellate court declared that preventing an insured from filing a CRN before coverage and liability had been conclusively established "would frustrate the purpose of the statute by further delaying the time necessary to assess and pay out claims and discouraging insurers from taking timely, independent action on claims." Accordingly, it ruled, the fact that the appraisal process was ongoing did not render a CRN filed during that process a legal nullity. Once the appraisal process was complete, and a legally sufficient CRN had previously been provided, the conditions precedent to filing a statutory bad-faith claim were met.

The appellate court noted that Landers had filed his CRN before the appraisal process was complete, State Farm did not cure the alleged violation within the 60-day statutory window, and Landers' position was that had State Farm properly investigated his claim, it would have known that the subsurface repair plan was inadequate. Whether State Farm had actually acted in bad faith in resolving Landers' claim presented a question of fact that remained to be resolved, the appellate court said, but nothing in the statute or case law precluded the filing of a CRN while a demand for appraisal was outstanding, it concluded.

The case is Landers v. State Farm Florida Ins. Co.

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.

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