Every state maintains insurance requirements, usually governed by the state’s department of insurance. These insurance departments are empowered to review, approve and oversee insurance products. Individual states often maintain their own records of those insurance products that are approved for use, as well as those insurance carriers that are admitted and permitted to issue insurance within the state. Surplus lines and other non-admitted carriers may also be permitted to conduct business within the state, but are usually subject to different oversight, reporting and financial requirements. These surplus lines or non-admitted carriers often fill vital gaps in coverage that might not otherwise be available for certain risks. State insurance departments may also be responsible for other vital tasks, such as overseeing or gathering data regarding insurance litigation, assisting in dispute resolution processes, or otherwise providing guidance for the insurance industry and consumers.
Florida’s Insurance Code, outlined in Florida Statutes Section 624.01, together with Chapters 624–632, 634, 635, 641, 642, 648 and 651 of the Florida Statutes (“Insurance Code”) regulate Florida’s insurance industry and serve as the primary source of insurance and reinsurance law in the state.
Authorised and Unauthorised Insurers
In Florida, insurance companies are distinguished based on whether the insurer holds a valid certificate of authority, and insurers are identified as either “authorised” or “unauthorised”. An “authorised” insurer is duly authorised by a certificate of authority issued by the Office of Insurance Regulation of the Financial Services Commission to transact insurance in the state. By contrast, an “unauthorised” insurer does not have such a certificate (Florida Statutes Section 624.09). Although a certificate of authority is required to transact business in Florida, the Insurance Code sets forth various activities for which a certificate of authority is not required. These activities include, but are not limited to, the investigation, settlement, or litigation of claims under its policies lawfully written in this state, or liquidation of assets and liabilities of the insurer (other than a collection of new premiums) and reinsurance, when transacted as authorised (Florida Statutes Section 624.402).
Surplus lines insurers
A certificate of authority is also not required to conduct transactions as an eligible surplus lines insurer for coverage lawfully written under the Insurance Code. An eligible surplus lines insurer is an unauthorised insurer made eligible to issue insurance coverage under the Surplus Lines Law outlined in Florida Statute Sections 626.913–626.937 (Florida Statutes Section 626.914(2)).
Most notably, and critical to the analysis of a surplus lines insurance policy is that, except as may be expressly stated to apply to surplus lines insurers, the provisions of Florida Statutes Chapter 627, Insurance Rates and Contracts, do not apply to surplus lines insurance authorised under the Surplus Lines Law (Florida Statutes Section 626.913(4)).
The policyholder typically initiates litigation related to insurance contracts as a breach of contract action. Generally, if the insurance company institutes the litigation, it is in the form of an action seeking declaratory relief to determine the party’s rights and obligations under the insurance contract.
In an effort to curb insurance litigation, in Florida, effective from 1 July 2021, Florida Statute Section 627.70152 requires a policyholder, insured under a residential or commercial property insurance policy, to provide the insurance company with written notice of intent to initiate litigation on a form provided by Florida’s Department of Financial Services. Such information must be given at least ten business days before filing suit under the policy. It may not, however, be given before the insurance company has determined coverage. An insurance company must then respond in writing within ten business days after receiving the notice.
Each licensed insurer in Florida appoints the chief financial officer as its agent to receive service of all legal actions. As the insurer’s attorney, service of process upon Florida’s Chief Financial Officer is the sole method of service of process on any authorised domestic, foreign, or alien insurer in the state (Florida Statutes Section 624.422(3)).
Many state departments of insurance are responsible for providing assistance to consumers and insurance carriers engaged in policy or claim disputes. Often the departments will provide assistance with complaints or notices of disputes. Some states, including Florida, may also assist with other dispute resolution processes such as mediation. No matter the mechanism, the goal of all of these programmes is to minimise costs for the parties involved and avoid litigation.
For example, Florida Statutes Section 627.7015 sets forth an alternative procedure for the resolution of disputed residential property claims. The statute was enacted to encourage the effective, fair and timely handling of property insurance claims without the necessity of a formal proceeding. Under the terms of the statute, an insurance company is required, at the time of issuance and renewal of a policy or at the time a first-party claim is filed by a policyholder, to notify the policyholder of the right to participate in the mediation process implemented by the Department of Financial Services.
If an insurance company that is required to comply with Florida Statutes Section 627.7015, fails to provide notice to a policyholder of its right to participate in mediation or if the insurer requests the mediation, and the mediation results are rejected by either party, the insurance company cannot compel the insured to submit to an appraisal of the claim.
Although not a statutory creation, appraisal is another form of alternative dispute resolution included in some policies and often used to resolve claims. Appraisal is available where coverage was acknowledged by the insurer but a dispute over the damages remains. The scope of appraisal may vary from state to state. Some states may allow issues of causation to be addressed by the appraisers, while other states may limit appraisal to issues over pricing of agreed upon covered damages. In appraisal, each side will choose its own appraiser. If the appraisers fail to reach an agreement, they submit the disagreement to an umpire. The appraisal panel is then tasked with determining the amount of loss. A decision agreed to by any two will set the amount of loss and is binding on the parties with very limited exceptions. Because the appraisal panel may be imbued with significant discretion to evaluate the loss, disputes over the selection of appraisers and umpires can be contentious.
In Florida, appraisal is interpreted broadly and the process “necessarily includes determinations as to the cost of repair or replacement and whether or not the requirement for a repair or replacement was caused by a covered peril or a cause not covered, such as normal wear and tear, dry rot, or various other designated, excluded causes”, see State Farm Fire and Cas. Co v Licea, 685 So. 2d 1285, 1288 (Fla. 1996). The appraisers are therefore equipped to make determinations as to whether certain damage was caused by the claimed loss.
Insurance policies are contracts, and therefore, ordinary contract principles govern their interpretation and construction. Whether a forum selection clause or choice of law provision is mandatory or permissive can depend on the language of the policy. Unless a party can show the forum that the selection clause is unreasonable or unjust, the provision is likely enforceable. Courts will generally enforce choice-of-law provisions unless the law of the chosen forum contravenes public policy.
Recognition and enforcement of foreign judgments in the US is typically regulated on a state-by-state basis. Although the approaches of each state may be similar or based upon a common model, some states may have significant differences in their requirements.
The requirements to enforce a foreign judgment in Florida are found in Florida Statutes Sections 55.501–55.509, commonly referred to as the “Florida Enforcement of Foreign Judgments Act”. The statute outlines the necessary recording and notice prerequisites to enforcement. A foreign judgment properly recorded will have the same effect and be subject to the same rules of civil procedure, legal and equitable defences, and proceedings for reopening, vacating, or staying judgments, and it may be enforced, released, or satisfied, as a judgment of a circuit or county court of Florida.
Setting itself apart from most other jurisdictions, effective from 1 July 2021, Florida Statute Section 627.70152 requires a policyholder, insured under a residential or commercial property insurance policy, to provide the insurance company with written notice of intent to initiate litigation on a form provided by Florida’s Department of Financial Services. For more on this, see 1.2 Litigation Process and Rules on Limitation.
Recovery of Fees
Recognising the imbalance of power between policyholders and insurers, the majority of states permit the recovery, in some fashion, of attorney's fees by a prevailing policyholder in a coverage dispute. The intent of these fee-shifting provisions is to assist in levelling the playing field between the parties. Entitlement to fees may be derived from difference sources in statutory law, and may be subject to different triggering events. Indeed, even in those states that allow for recovery of attorney's fees, some states recognise a broad approach to entitlement, while others limit entitlement to only the narrowest of circumstances. Furthermore, establishing an entitlement to attorney's fees may require establishing elements of bad faith, rather than mere mistake or underpayment.
Florida allows for the recovery of attorney's fees by a prevailing party in property insurance litigation under Florida Statutes Section 627.7015. This section supplants Florida Statutes Sections 627.428 and 626.9373, which previously entitled a prevailing policyholder to attorney's fees and costs. Under Florida Statutes Section 627.70152, the amount of attorney's fees awarded to a prevailing party is determined by the difference between the pre-suit notice and the results obtained in litigation. If the difference between the amount obtained by the claimant and the pre-suit settlement offer, excluding reasonable attorney's fees and costs, is less than 20% of the disputed amount, each party pays its own attorney's fees and costs and a claimant may not be awarded attorney's fees. If the difference between the amount obtained by the claimant and the pre-suit settlement offer, excluding reasonable attorney's fees and costs, is at least 20% but less than 50% of the disputed amount, the insurance company pays the claimant's attorney's fees and costs equal to the percentage of the disputed amount obtained times the total attorney's fees and costs. If the difference between the amount obtained by the claimant and the pre-suit settlement offer, excluding reasonable attorney's fees and costs, is at least 50% of the disputed amount, the insurance company pays the claimant's full attorney's fees and costs.
In contrast to most other jurisdictions, in Florida, an insured’s counsel is also permitted to seek the application of a contingency fee multiplier which may be awarded upon the satisfaction of certain criteria outlined by the Florida Supreme Court. See Florida Patient's Comp. Fund v Rowe, 472 So. 2d 1145 (Fla. 1985) and Standard Guar. Ins. Co v Quanstrom, 555 So. 2d 828 (Fla. 1990).
Statutory First-Party Bad-Faith Cause of Action
The availability of a bad-faith cause of action varies from state to state. While some states have recognised a common law basis for bad faith, many other states have enacted statutory requirements for first-party bad-faith actions. In addition, the pleading requirements and damages available vary significantly from state to state.
For example, there is no common law first-party bad-faith action against insurance companies in Florida. However, Florida Statutes Section 624.155 creates a statutory first-party bad-faith cause of action. A statutory first-party bad-faith action is premature until two conditions have been satisfied:
Additionally, as a condition precedent to filing a civil action under Section 624.155, the policyholder must give 60 days’ written notice of the alleged violations to the Florida Department of Financial Services and the authorised insurance company.
Courts regularly enforce arbitration provisions in commercial contracts of insurance and reinsurance. There is a strong presumption in favour of enforcement of international arbitration provisions in accord with well-established precedents in both federal and state courts, as well as the underlying public policy served by arbitration as an alternative dispute resolution process that can be speedier and less costly than litigation.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "Convention") applies to the enforcement of international arbitral awards. A party seeking to enforce an international arbitral award should file a petition to confirm the award. A court will confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the Convention. Under the Convention, challenges to an award are limited to the seven grounds listed in Article V of the Convention, which are incorporated into the Federal Arbitration Act at Section 207. The party opposing confirmation or enforcement of an arbitral award bears the burden of proving the existence of one of these enumerated grounds.
Although arbitration is often used in disputes relating to commercial surplus lines property insurance, it is much more common for property insurance disputes to be resolved via appraisal provisions. An arbitration action, unlike one in litigation, does not create a public record. As a result, some entities may prefer arbitration for privacy reasons as well as a perception that it reduces the costs of the dispute and allows for a more manageable result. The rules governing the parameters of arbitration can be set forth in the insurance policy or otherwise agreed to by the parties. In addition, the administrator of the arbitration (eg, AAA, JAMS, etc) sets forth its own practices and procedures governing the conduct of the arbitration. These rules can also be supplemented by the arbitration panel, which is often imbued with wide latitude on the conduct, process and timing of the arbitration proceeding.
Arbitration is binding on the parties. Arbitration rulings are difficult to appeal. Under the Florida Arbitration Code, an appeal may only be taken from an order granting or denying a motion to compel arbitration, an order conforming, denying, modifying or vacating (without directing a rehearing) an award, or a judgment or decree entered. Appellate review may be available if there was no arbitration agreement or the arbitration was conducted without proper notice. Appellate review of an award is limited to procurement by fraud, corruption or other undue means, partiality or bias, corruption or prejudicial misconduct by an arbitrator, abuse of discretion in conducting the hearing, or exceeding the scope of the arbitration. Critically, appellate review is not available on the basis of mistake or misapprehension of the law or facts.
Most states recognise the implied covenant of good faith and fair dealing in contracts, including insurance contracts. Some states have also codified the implied covenant of good faith. Under Florida law, the implied covenant of good faith and fair dealing is a part of every contract and exists in virtually all contractual relationships. In the context of first-party insurance contracts, Chapter 624 has codified the common law cause of action for breach of the implied covenant of good faith and fair dealing, and created the exclusive remedy for an insurer’s bad-faith refusal to pay a first-party claim.
Generally, an insurance company has the right to rely on the accuracy of an insured’s representations made in an insurance application and in the adjustment of a claim.
While underwriting guidelines, application questions and claim adjustment processes will vary by carrier, a misrepresentation, omission, concealment of fact, or incorrect statement may prevent recovery under a policy in certain circumstances. Whether actual reliance on the statement or intent is required will vary from state to state. In Florida, for example, if the misrepresentation, omission, concealment or statement is fraudulent or material to the acceptance of the risk or hazard assumed by the insurance company, the carrier can seek to avoid coverage on these grounds (Florida Statutes, Section 627.409).
Additionally, an insurer can seek to avoid coverage if an insured conceals a material fact and, had the true facts been known to the insurer, the insurer in good faith:
Unintentional misrepresentations or omissions in an application for insurance may prevent recovery on the policy if the insurer can prove that the misrepresentations or omissions are material to the risk taken, or that the insurer would have altered the policy or would not have issued the policy had the true facts been revealed.
Recent notable trends in commercial coverage disputes include:
Insurance coverage disputes are questions of law and are generally subject to judicial determination.
The policyholder typically initiates litigation related to the insurance contracts as a breach of contract action. Generally, the insurance company initiates litigation, and it is in the form of an action seeking declaratory relief to determine the party’s rights and obligations under the insurance contract.
Reinsurance is a contractual arrangement by which an insurance carrier purchases insurance from another carrier who then assumes a portion of the original carrier’s risks, thereby ceding some of that risk along with a share of the associated premiums. The general rule applicable to reinsurance agreements is that, in the absence of provisions to the contrary, an ordinary reinsurance agreement operates solely between the reinsurer and the reinsured, and it creates no privity between the original insured and the reinsurer. However, where the terms of a reinsurance agreement create third-party rights, an original insured may assert claims directly against a reinsurer of the underlying coverage (McDonough Const. Corp v Pan Am. Sur. Co, 190 So. 2d 617 (Fla. 1st DCA 1996)).
Many states' consumer protection statutes provide a cause of action for claims arising from unfair practices in insurance transactions. Under these provisions, a person may bring a civil action against an insurer when that person suffers damage from the insurer’s violation of the applicable consumer protection statutes. For example, in Florida, an insurer may violate the Unfair Insurance Trade Practices Act by engaging in unfair claim settlement practices, illegal dealings in premiums or excess or reduced charges for insurance, the refusal to insure or continue to insure on a prohibited basis, illegal dealings in life or disability insurance to one with a severe disability, discrimination on the basis of sickle-cell trait, or the failure to return motor vehicle policy premiums upon cancellation in accordance with statutory requirements.
Generally, an individual or entity must be listed as an insured in the insurance policy to enforce the insurance policy against the insurer. A notable exception to this privity requirement is the enforcement of an insurance policy through an assignment of benefits conveyed to a third party. An assignment of benefits gives a third party authority to file a claim, make decisions, and collect insurance payments without the involvement of the insured. Several states have experienced an influx of contractors and vendors utilising assignments of benefits. However, no state has been more inundated with assignment-of-benefits suits than Florida. In 2019, Florida amended Florida Statutes (Sec. 627.422, 627.7152 and 627.7153) regarding the use and litigation of assignments of benefits. The law sets forth stringent parameters for assignments and prohibits various activities, including the retention of any rights to payment against the insured. If the dispute ultimately proceeds to litigation and the difference between the judgment obtained by the assignee and the statutorily required pre-suit settlement offer is less than a certain percentage of the disputed amount, the insurer can seek to recover attorney's fees. This legislation eliminated the application of the one-way attorney's fee statute created under Florida Statutes Sections 627.428 and 626.9373, such that claimants who initiate cases brought under an assignment of benefits may also be exposed to attorneys’ fees.
The concept of bad faith varies from state to state, with some states interpreting common law to derive a particular understanding of bad-faith conduct, and other states adopting statutory schemes with detailed listings of proscribed conduct. Practitioners should be well versed in the nuances of their state’s bad faith jurisprudence before pursuing any such actions.
For example, Florida does not recognise common law first-party actions against insurance companies for bad-faith claims practices. In Florida, these actions are controlled by statute. To initiate an action against an insurance company for such conduct in Florida and seek punitive damages, an insured must first file a Civil Remedy Notice of Insurer Violation (CRN). The CRN arises from the statutorily created cause of action against first-party insurers for bad-faith actions. See Talat Enterprises, Inc v Aetna Cas. & Sur. Co, 753 So. 2d 1278 (Fla. 2000).
The CRN should include the statutory provision, including the specific language of the statute which the insurance company violated, the facts and circumstances giving rise to the violation, individuals with knowledge of the violation, the policy language at issue and a statement that the CRN is filed to perfect the right to pursue a statutory civil remedy (Florida Statutes Section 624.155). By paying the damages or correcting the circumstances giving rise to the violation, an insurance company can cure the violation identified in the CRN, which forecloses the potential statutory violations claim.
In addition to the CRN, the determination of the existence of liability and the extent of damages are conditions precedent to a bad-faith action (Florida Statutes Section 624.155(3)(a)). See Blanchard v State Farm Mut. Auto. Ins. Co, 575 So. 2d 1289, 1291 (Fla. 1991).
Insurers must often abide by claim payment deadlines imposed by the applicable state law. Claim payment deadlines can range from 15 to 90 days. In other instances, insurers may only be required to respond within a “reasonable amount of time”. Furthermore, in some instances an insurer may not be bound by any time limitations beyond the requirements contained within the policy or otherwise understood to comply with the duty to deal in good faith. Where an insurer fails to issue timely claim payment, the penalties imposed will depend on the substantive law of each state.
Penalties in Florida
Florida sets forth various penalties against insurance companies for late payment of claims. Under certain circumstances, an insurance carrier is required to issue payment within 90 days after an insurer receives notice of an initial, reopened, or supplemental property insurance claim from a policyholder, unless the failure to pay is caused by factors beyond the control of the insurer which reasonably prevent such payment (Florida Statutes Section 627.70131(5)(a)). Any payment of an initial or supplemental claim or portion of the claim made 90 days after the insurer receives notice of the claim, or made more than 15 days after there are no longer factors beyond the control of the insurer which reasonably prevent payment, whichever is later, bears interest at the current statutory rate. The interest begins to accrue from the date the insurer received notice of the claim.
If the parties resolve a claim through a voluntary settlement, the insurer must issue payment within 20 days after the settlement is reached or such other date as agreed by the parties. Failure to issue payment of a settlement within the allotted time will result in the accrual of interest at the annual rate of 12% (Florida Statutes Section 627.4265). If the settlement is conditional on the execution of a release, interest will not begin to accrue until the release is provided to the insurance company.
A judgment or decree against an authorised insurer must be fully satisfied within 60 days (Florida Statutes Section 627.427(1)). If the judgment or decree is not satisfied within 60 days and proof of the failure is properly filed with the clerk, the insurance company’s certificate of authority may be revoked (Florida Statutes Section 627.427(2)). If the certificate is revoked, a new certificate will not be issued until the judgment or decree is paid in full and proof of payment is filed with the court. The insurer may also be responsible for the fees and costs incurred for seeking payment.
An insurance company can also be subject to punitive damages under Florida’s Civil Remedy Statute outlined in Florida Statutes Section 624.155 for acts, such as an improper claim and settlement delays, where those acts occur with such frequency as to indicate general business practice.
A representative of an insured who procures insurance is known as an “insurance broker”. A broker represents the insured by acting as a middleman between the insured and the insurer to obtain insurance, and is not employed by a specific company. The distinction between an agent and a broker is important because the acts of an agent can be imputed to the insurer, while the acts of a broker may be imputed to the insured. See Essex Ins. Co v Zota, 985 So. 2d 1036, 1046 (Fla. 2008).
As claim volumes increase and insurers continue to expand their footprints, insurers are increasingly delegating authority to receive and adjust claims to designated third-party administrators. The use of third-party administrators is especially common in commercial and surplus lines insurance where dedicated in-house claims adjusters would be prohibitively expensive or inefficient. The scope of authority granted to third-party administrators varies from insurer to insurer.
An insurer’s obligation to provide an insured with a defence arises under the context of a liability policy. Generally, for the duty to defend to apply, an insured need only show potential coverage under the policy. The duty to defend is broader than an insurer’s duty to indemnify.
These issues often come up in the context of a claim for property damage or bodily injury made against an insured by a third party. Concerning directors and officers and employment practices' liability, the duty to defend would arise when a claim is made against an insured for decisions or actions related to an insured entity's management and business operations.
The principle of the duty to defend and indemnify an insured is long established in the law. While it is not expected this general premise will change, insurers are attempting to shift more of the defence costs to the insured. "Self-retention", "sub-limit" and "eroding limits" are examples of policy terms that could impact the overall costs allocated to the defence of a claim and may also impact the indemnity amounts available to an insured.
There is always a level tension in a tripartite relationship when an insurer retains counsel to represent the insured in the defence of a claim. While the parties are to work together for the best interest of the insured and an ultimate resolution of the issue, sometimes coverage issues arise which place the insured and the insurer in an adversarial relationship. As insurers continue to place restrictions and exclusions on coverage, it is expected these coverage conflicts will continue.
Litigation financing is available in certain situations to provide some protection against adverse financial consequences.
Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right. In the context of property insurance, a subrogation action occurs when the property insurance company pays out a claim to an insured, then initiates its own cause of action against the entity responsible for the damage. After payment of a loss to its insured, an insurer may be subrogated to any right of action that the insured may have against the third party whose negligence or wrongful act caused the loss. An insurer’s subrogation right may also be expressly provided for by the terms of the insurance policy or in a settlement agreement with an insured. Furthermore, many insurance policies explicitly require the insured to co-operate with the insurer in any efforts it undertakes to subrogate against third parties.
Jurisdictions may recognise two categories of subrogation: equitable or legal subrogation and conventional subrogation. Equitable subrogation arises when the person discharging the obligation is under a legal duty to do so or when the person discharges the obligation to protect an interest in, or a right to, the property. Conventional subrogation, on the other hand, is a right flowing from a contract. It is based on an agreement between the parties that the party paying the debt will be subrogated to the rights and remedies of the original creditor.
When an insurer pays the claim of its insured, the insurer stands in the shoes of its insured, and the insurer may bring a subrogation action against the third party to recover the amounts paid under the insurance policy. Every action may be prosecuted in the name of the real party in interest (eg, Fla. R. Civ. P. 1.210). A subrogate has the right as real party in interest to prosecute the action in its name or in the name of its insured, for the insurer’s use and benefit (eg, Holyoke Mut. Ins. Co v Concrete Equipment, Inc, 394 So.2d 193 (Fla. 3d DCA 1981)).
In general, the pandemic has not adversely impacted policyholders’ and insurance companies’ abilities to litigate coverage claims. It has, however, impacted the manner and conduct of litigation in the same way that all litigation has been affected, meaning that nearly all aspects of litigation (hearings, discovery, mediations, and even trials) have been conducted on a virtual platform. It has also impacted the cost of claims in terms of supply chain issues as to the availability of supplies, materials and resources, which have driven up the cost of remediation, repairs and replacements. In many instances, the pandemic has impaired the adjustment process in terms of both access to inspect and adjust losses, as well as the resources to do so.
As to claims predicated on some type of COVID-19-related cause of loss, there have been a substantial number of claims and litigation throughout the country. The overwhelming majority of these claims have asserted some type of time element or business interruption loss. Undoubtedly, businesses of all types have suffered billions of dollars of damage in economic losses stemming from the pandemic. Not surprisingly, a great many of these businesses have looked to find coverage for these losses (in part or in whole) from their insurance policies by making claims. For the most part, insurance companies have not accepted coverage and thus, there has been a flood of COVID-19-related, business interruption lawsuits filed throughout the country.
It is not expected that the number of new filings will increase on average over the next 12 months from the levels experienced since March 2021. The primary reason for this forecast is that, in general, the claims have not been successful. There have been some notable exceptions where there was no virus exclusion, the policies had broad coverage provisions which were not constrained by direct physical loss limitations, and where there have been unique facts in terms of government actions, which the courts have opined triggered coverage. There has also been a growing trend to focus on the presence of the virus on the surfaces of the covered property such that its presence caused the insured’s premises to become unusable. But by and large, the courts thus far have been fairly circumscribed in terms of determining the existence of coverage with respect to business interruption claims, due to the inability to establish direct physical loss or damage to property. This lack of success will likely temper the great majority of policyholders who have not asserted claims and/or instituted lawsuits from doing so, based on their expectation of the likelihood of success. This forecast, however, could be greatly altered depending on successes in current litigation based on existing theories and arguments and new developments, and mounting business losses in which frustrated policyholders perceive the courts as a place of last resort.
To date, there is still a paucity of state or federal appellate decisions providing any controlling guidance as to coverage for COVID-19-related claims.There have been a couple of trial court decisions in which the courts have determined that the lawsuits may proceed based on allegations that the virus is a physical substance that is active on tangible surfaces and renders property unsafe and unusable.This allegation and analysis in a very limited minority of decisions has circumvented the direct and physical loss requirement and left open the possibility of coverage. See, eg, Studio 417, Inc v Cincinnati Ins. Co, No 20-cv-03127-SRB, 2020 WL 4692385 (W.D. Mo. Sept. 12, 2020).
The pandemic has resulted in an increase in policies with strengthened virus exclusions expressly excluding, by definition, COVID-19 or other SARS-related viruses. It is anticipated these provisions will continue to evolve in further attempts by insurers to limit coverage.
Climate-related issues are now recognised as a significant long-term risk by stakeholders and risk managers. The severity and frequency of hurricanes, fires, floods and other extreme weather events across the globe are things insurers can no longer ignore as the financial impact of these events can be catastrophic. With increased regulation, it is expected that insurers will be required to address these risks and provide transparency as to their ability to withstand extreme weather events, mitigate insolvencies and keep premiums fair and competitive in the face of climate change. It is anticipated that climate change will further impact the insurance landscape in the coming years and lead to the creation of additional policy provisions addressing these changes.
With the rising costs associated with the increased frequency and intensity of casualty events, such as hurricanes and flooding, insurers and consumers can expect increased premiums, more stringent underwriting guidelines, and increased litigation over claim payments, particularly where insurers continue to tighten up on claim payments and pre-suit settlements. States faced with increasing rates of litigation will need to continue to oversee matters and regulate the industry to ensure the continued health of the insurance market.
Drastic Action Taken in Florida
Florida is one state that has taken drastic action in response to the increased rates of litigation and claim-related costs. Florida Statutes Section 624.424 was amended to require insurers to file specified data on residential and commercial property insurance closed claims annually with the Florida Office of Insurance Regulation (OIR). The report must be on a form prescribed by the commission and must include information as specified in the statute. When the OIR examines an insurance company that is part of an insurance holding company, the insurance company must pay the expense of the examination and the OIR may retain, at the insurer's expense, attorneys, actuaries, accountants and other experts reasonably necessary to assist in the examination. The OIR may require such insurers to produce records, books and other information in the possession of the insurer or its affiliates as are reasonably necessary.
Florida Statutes Section 627.70132 was amended to require policyholders to provide notice of a claim or reopened claim under a property insurance policy within two years after the date of loss. A supplemental claim is barred unless notice of the supplemental claim is given to the insurance company in accordance with the terms of the policy within three years after the date of loss.
Insurance Litigation Trends: Policyholders Continue to Be Tested
An insurance policy is a contract that sets forth the parties' obligations; new trends have begun to loom as insurance companies have broken the mould and continue to press more obligations onto policyholders post-event of a loss. While the insurance company is expected to issue payment for covered losses, the policyholder is expected to comply with specific conditions under the policy. Policies will almost certainly contain a specific conditions section that outlines the policyholder's obligations when a loss occurs. Commonly, a policyholder is required to provide prompt notice of a loss to an insurance company. Additionally, most policies contain a section that requires policyholders to produce reasonably requested documents. The type of policy purchased will dictate the specific kinds of obligations required.
While a policyholder should reasonably expect to produce records supporting the claimed damages, policyholders are experiencing a trend where insurance companies stretch the limits of these compliance obligations. Increasingly, insurance companies are sending extensive requests to policyholders for records several months into the adjustment process and only after a policyholder has invoked alternative dispute resolution procedures.
Appraisal and avoidance of appraisal
A common form of alternative dispute resolution is the appraisal. This is commonly found in policies and it allows both sides to choose an appraiser. The two appraisers then select an umpire. A decision by any two will be binding as to the scope and amount of the loss. Before a claim is ripe for appraisal, the policyholder must comply with the policy's post-loss obligations. With this understanding, insurance companies are increasingly requiring additional policy compliance after receiving an appraisal demand, knowing it will delay the appraisal of the loss.
A recent example of an insurance company utilising post-loss compliance requests to avoid appraisal can be found in an opinion from Florida's Third District Court of Appeal. In Heritage Property & Casualty Insurance Company v Condominium Association of Gateway House Apts., Inc, 2021 WL 3640520 (Fla. 3d D.C.A. 2021), the court rejected the insurance company's attempts to extend the policy's compliance obligations to incorporate obligations under Florida's condominium statute. In that case, the insurance company argued that Florida's condominium statute required the insured to maintain books and records that contained the minutes of the association's meetings. Because the insured did not keep the minutes of its meetings, the insurance company argued that the policyholder failed to comply with the policy's conditions, and appraisal was not available. While the insured was obliged to allow the inspection and copying of existing books and records, the policy was silent about the obligation to maintain meeting minutes. The Third District Court of Appeal upheld the lower court's order compelling appraisal and rejected the insurance company's attempt to stretch the limit of the obligation to produce records.
Repeat inspections and destructive testing
The duty to show the damaged property is another common post-loss obligation that insurance companies are testing. Policyholders are receiving requests for an increasing number of inspections, along with requests for destructive testing of the property.
An insurance company has the right to inspect damaged property to adjust a loss. It is also reasonable to assume an insurance company may need more than one inspection to complete its coverage determination. However, the number of inspections that are reasonably required in order to conduct an investigation is an issue of contention between insurance companies and policyholders. While state laws do not prescribe the specific number of permitted inspections under a policy, most courts will adopt a “reasonableness” approach tempered by the parties' obligations to deal in good faith. When evaluating an insurance company's right to investigate a claim, the insurance company's rights tend to be measured by reasonableness, with the courts attempting to balance the insurance company's legitimate interest in ascertaining the validity and extent of the claim against the policyholder's rights to both privacy and prompt payment of sums due under the terms of the contract – see Fla. Gaming Corp v Affiliated FM Ins.Co, 502 F. Supp. 2d 1257, 1258 (S.D. Fla. 2007).
Regarding destructive testing, the courts have identified specific factors to consider in balancing the costs of altering the object against the benefits of obtaining the evidence sought. The court is to consider whether the proposed testing is reasonable, necessary and relevant to proving the movant's case; whether the non-movant's ability to present evidence at trial will be hindered, or whether the non-movant will be prejudiced in some other way; whether there are any less prejudicial alternative methods of obtaining the evidence sought; and whether there are adequate safeguards to minimise prejudice to the non-movant, particularly the non-movant's ability to present evidence at trial – see Komar Investments, Inc v Zurich Am. Ins. Co, 331 F.R.D. 181,183 (S.D. Fla. 2019).
Following a catastrophe, a policyholder expects the insurance company to adjust and issue payment for covered losses diligently and without delay. The reality for policyholders is that the post-loss compliance stage of a claim can last several months and be very intrusive.
Inclusion of arbitration provisions
As litigation and the costs associated with litigation continue to increase for the reasons discussed above, another clear trend has emerged in the industry. More and more surplus lines insurance carriers are opting to include arbitration provisions in their insurance policies. Arbitration panels are generally known to issue more conservative awards than juries. As a result, arbitration can provide insurance carriers with a built-in buffer against excessive judgments. It is also notable that although arbitration can be less expensive than litigation, arbitration costs can quickly add up, sometimes even exceeding costs involved in similar litigation. Specifically, parties must pay for the arbitrators' time, as well as the attorneys' time. Another critical issue to consider is that arbitration clauses may require arbitration to be seated in locations other than the location of the insured property. Indeed, we have encountered arbitration clauses requiring arbitration in New York, the Bahamas and Tennessee. This means that the parties may also be responsible for significant costs associated with travel for the parties, their attorneys and witnesses to attend arbitration, as well as possible hiring of local counsel. As a result, arbitration clauses can become a deterrent to insureds, such as condominium associations, who may wish to pursue their claims, but are more sensitive to costs.
In the same vein, many insurance carriers have also opted to include choice-of-law provisions within their policies. These provisions can also serve insurance carriers' goals to limit their exposure. In particular, insurance carriers often select the state law to be applied in any dispute. The selection of law (and sometimes venue) can significantly impact the substantive and procedural rules applicable to an insurance dispute, including length of statutes of limitation, entitlement to attorneys' fees and costs, and availability of extra-contractual or other bad-faith damages. For example, many surplus lines insurance carriers have inserted choice-of-law provisions, selecting New York law and a reduced statute of limitations. This is because New York law is generally much friendlier to carriers than other state laws are. For example, an insured will face a much more difficult battle asserting a bad-faith claim in New York than in Florida. An insured forced to litigate an insurance dispute under New York law will also have much more difficulty in establishing entitlement to fees and costs than they would if they were litigating under Florida's statutory scheme. As such, insureds and their representatives need to be aware of and understand the terms of their policies governing the procedures and law applicable in the event of a dispute, particularly in light of the shifting trends in the industry.
Enforcement of arbitration clauses
Insureds should also be cognisant of the strong presumption in favour of enforcement of arbitration clauses. Insureds who turn to the courts in an attempt to avoid arbitration are unlikely to prevail. The Ninth Circuit's recent decision in CLMS Management Services v Amwins Brokerage of Georgia LLC, et al, No 20-35428 (9th Circuit Aug. 12, 2021), is instructive. The Ninth Circuit affirmed the district court's order compelling arbitration in an insurance dispute involving US insureds and a UK insurance carrier. The court found that a Washington state law that prohibited the enforcement of arbitration clauses in insurance contracts did not prohibit enforcement of the New York Convention because the Convention is self-executing and therefore not reverse-pre-empted by the Washington law. Accordingly, even insureds in states with putative prohibitions on arbitration of insurance disputes may not be able to rely on state law to avoid arbitration.
In conclusion, policyholders should fully understand all the obligations listed in their respective insurance policy when it is acquired. Although it is not the most pleasant of tasks, insureds must recognise their insurance limits and confirm their fundamental rights in the event of a loss. Whether it's how many times the insurance company can request an inspection, documents, destructive testing or other compliance post-loss, or its choice-of-law provision, policyholders should fully grasp their rights and obligations.