VOLUME XV, NUMBER 3
March/April, 2003

FROM THE CORNER OFFICE

BRIAN C. POWERS & DANIEL M. McNALIS are proud to announce that ANNA D. TORRES has been made a partner. She will continue her practice in the areas of liability coverage, insurer bad faith, construction litigation, and all aspects of third party insurance defense litigation. The law firm will now be known as Powers, McNalis, Torres & Teebagy.

In addition, we have outgrown our Lake Worth office and happy to announce that we have relocated just a short distance up the road to our new offices at:
1601 Belvedere Road, Suite 500S, West Palm Beach, Florida 33406.

Our mailing address will be:
P.O. BOX 21289, West Palm Beach, Florida 33416-1289

Our phone and fax number will remain the same (561) 588-3000 and Fax (561) 588- 3705.

COLLAPSE: DRY ROT EXCLUSION DOES NOT APPLY

Insurers in Florida have been hit with a growing number of collapse claims. The increase may be, in part, the result of the decision in Auto Owners Ins. Co. v. Allen, 362 So.2d 176 (Fla. 2d DCA 1978), which held that “collapse” does not mean a falling down to rubble, but rather a “material and substantial impairment” to all or part of a building. This is a fairly vague term which is subject to multiple interpretations, thus resulting in a flurry of claims and lawsuits. A typical example is deteriorating condominium balconies due to water intrusion. Many times, the initial signs of a problem, such as cracking, concrete spalling, etc., are ignored by the condominium association. Over time, the damages worsen and become more expensive to fix. Eventually, the damages are no longer easily ignored, but may now exceed the ability of the insured to pay for the necessary work. Instead of addressing the root cause of the problem (delayed maintenance), a claim is filed with their insurance company for “collapse.”

As a defense, insurance companies have often attempted to invoke the standard exclusions found in many all-risk policies. These include exclusions for wet rot, dry rot, inadequate construction, etc. Courts have consistently rejected applicability of these exclusions. While the reasoning is not always clear, an emerging rule of thumb is that general exclusions found within the all risk portion of the policy will not apply to the additional coverage of collapse since that additional coverage specifically allows for damages due to “hidden decay” and “hidden vermin.” However, specific exclusions, such as for fraud, will apply.

This trend was followed in a recent California decision entitled Glaviano v. Allstate Ins. Co. 2002 U.S. App. Lexus 9324 (2002), PLRB Prop. Ins. L. Rev. 6289 (2002). That case concerned the applicability of Allstate’s dry rot exclusion to deny coverage for a homeowner’s floor collapse. Both sides agreed that the damage was due to a mold named “Poria,” which is commonly referred to as dry rot. Since dry rot was excluded under the policy, Allstate asserted the exclusion applied to bar coverage for the damages, which even its own adjuster agreed was a collapse.

The California court rejected this argument finding that, essentially, the carrier could not have it both ways. While damage due to dry rot that did not result in a collapse would be excluded, the collapse provision provided additional coverage for hidden decay, for which the Poria/dry rot certainly qualified, and therefore the collapse loss was covered under the policy.

This decision is in consistent with several other cases in various states which have refused to apply general exclusions to collapse claims. See for example, Siefferman v. USAA, 1996 Minn. App. Lexus 1151 (defective construction exclusion does not apply to collapse claim); West American Ins. Co. v. Chateau La Mer II Homeowners’ Ass’n, 622 So.2d 1105 (Fla. 1st DCA 1993) (faulty or inadequate construction and poor maintenance exclusions do not apply to collapse claims in Florida).

Mark A. Greenberg

3RD DCA UPHOLDS STATE FARM’S “EARTH MOVEMENT EXCLUSION”

For the last few years there has been a steady increase in claims for damages caused by blasting activities in the South Florida. Although most policies of insurance exclude the coverage for “earth movement.” The real question was AHow would the Florida courts interpret the ‘earth movement’ exclusion?” In State Farm Fire and Casualty Company v. Luis Castillo, 3rd DCA 27 FLW D1845, the Third District Court of Appeal answered that question and concluded that State Farm’s “earth movement” exclusion does exclude damages caused by blasting at a remote site from the insured property.

The Castillos filed a claim with State Farm for cracking damage to the walls and flooring in the house which they claim was caused by earth movement from blasting. When State Farm and the Castillos could not agree on the cause or amount of loss, the parties agreed to appraise the loss. The umpire concluded that the damage to the Castillos’ home was caused by earth movement from blasting and awarded damages in the amount of $35,638.09.

When the Castillos moved to confirm the appraisal award State Farm countered by asserting a defense that the policy of insurance excluded “earth movement.” State Farm’s “earth movement” exclusion provides the following:

SECTION I - LOSSES INSURED COVERAGE A - DWELLING

We insure for accidental direct physical loss to the property described in Coverage A [the residence premises] except as provided in SECTION I - LOSSES NOT INSURED.

SECTION I - LOSSES NOT INSURED

1. We do not insure for any loss to the property described in Coverage A [the residence premises] which consists of, or is directly and immediately caused by, one or more the perils listed in items a through m below, regardless of whether the loss occurs suddenly or gradually, involved isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:

1. Settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundation, walls, floors, roofs or ceilings[.]

2. We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these.

b. Earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, mudflow, sinkhole, subsidence and erosion. Earth movement also includes volcanic explosion or lava flow, except as specifically provided in SECTION I - ADDITIONAL COVERAGES,Volcanic Action.

We do insure for any direct loss by fire, explosion other than explosion of a volcano, theft, or breakage of glass or safety glazing materials which are part of the dwelling resulting from earth movement, provided the resulting loss is itself a Loss Insured.

The Castillos countered by claiming that the language of the policy’s “earth movement” exclusion and the lead-in clause were ambiguous in that it was susceptible to a reasonable interpretation that the policy excluded only natural, rather than man-made events such as construction blasting. The Third District rejected Castillos’ argument and held:

State Farm excludes coverage for losses caused by earth movement. The lead-in provision of this exclusion provides as follows:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded events or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these...

When construing this lead-in and provision with the earth movement exclusion, as we must, it becomes clear that State Farm’s policy excludes from coverage any loss resulting from earth movement, regardless of the cause of the earth movement. We thus cannot conclude that these provisions are ambiguous or reasonably susceptible to more than one interpretation.

A rehearing was requested of the ruling.

Daniel M. McNalis

FLORIDA LAW APPLIES TO ACTIONS FOR BAD FAITH FAILURES TO SETTLE WHERE COLLISION AND TORT SUIT OCCURRED IN FLORIDA

Teachers Ins. Co. v. Berry, 15 FLW D607 involved an insurer’s request for a determination that it did not act in bad faith and the insured’s counterclaim for bad faith. The insured, an automobile policyholder, entrusted his vehicle to a friend that was involved in a collision that caused the death of a pedestrian. The deceased’s representative, through counsel, contacted the insurer and offered to release the gentlemen of liability in exchange for the $25,000.00 policy limits. This offer was conditioned on the insurer’s proof of their lack of recoverable assets by means of furnishing financial affidavits by a certain deadline. The insurer furnished incomplete affidavits in an untimely fashion, and the deceased’s representative filed a wrongful death action against the insured and his friend. In accordance with the terms and conditions of the insurance policy, the insurer retained the services of an attorney to defend them in the wrongful death action. The parties eventually reached a settlement for the amount of $575,000.00, for which the insured and his friend were jointly and severally liable. A condition of the final consent judgment was that the estate would not execute upon their personal assets until after final disposition of a contemplated lawsuit by the insured and his friend against the insurer.

The insurer then filed a petition to the court for a determination that it did not act in bad faith in failing to settle the wrongful death action and that the consent final judgment could not form the basis of a bad faith action against it. In response, the gentlemen filed a bad faith counterclaim against the insurer alleging that it acted in bad faith in failing to reasonably settle the wrongful death action within policy limits. Since the insurance contract was executed in Pennsylvania, the insurer brought a motion to determine applicable law as to whether the substantive law of Florida or Pennsylvania applied with respect to the bad faith issue, arguing that the law of the jurisdiction where the contract was executed controls the litigation.

The district court held that the substantive law of Florida, not Pennsylvania, controlled the bad faith issue alleged. In Florida, the nature of a cause of action against an insurer for bad faith failure to settle is premised upon contract law because an insurer’s duty to an insured to act in good faith in settling a third party insurance claim is based on the insurance contract between the parties. The court held that the rule that provides that the law of the jurisdiction where the contract was executed controls the litigation did not apply because the underlying dispute between the parties did not concern a matter of insurance coverage, but rather involved conduct in handling the claims; i.e. performance under the policy. Under Florida law, matters concerning performance of an insurance policy are determined by the law of place of performance. In this case, the place of the insurer’s performance under the insurance policy was Florida.

Renee Jenkins