VOLUME XVII, NUMBER 6
June, 2005

GOVERNOR BUSH SIGNS INTO LAW COMPREHENSIVE AMENDMENTS TO FLORIDA’S INSURANCE STATUTES

Following the unprecedented 2004 Hurricane Season, the Senate President and House Speaker on January 5, 2005 appointed the Joint Selection Committee on Hurricane Insurance, which was directed to study all facets of the Florida property insurance market. Additionally, bills were proposed in the Legislature proposing changes to statutes dealing with property insurance and hurricane related matters. Ultimately, SB1486 was sent to Governor Bush, who signed it into law effective June 1, 2005. Twenty-three (23) statutes were amended or created by this law. These amendments and newly enacted sections become applicable following the effective date of the statute. The following is an overview of some of these statutory changes:

The Valued Policy Law

Following last year’s infamous Mierzwa decision, one of the most highly anticipated amendments involved the Valued Policy Law. Under the Mierzwa interpretation of the Valued Policy Law, if there is coverage for any portion of the loss by a covered peril, and the property is determined to be a total loss, the insurer becomes obligated to pay the full face amount of the policy. This interpretation created a potential windfall situation where a non-covered peril contributed to the loss. The new version of the statute attempts to correct this potential unjust result. The amendment clarifies the insurer’s liability in such an event.  Thus, in the event of a total loss resulting from concurrent causes, the insurer’s liability “shall be limited to the amount of the loss caused by the covered peril.” However, if the total loss would have been caused by a covered peril, then the insurer must still pay its policy limits.

Sinkhole Losses

Three new statutes dealing with sinkhole losses have been created and two others have been amended.

“Sinkhole” is now defined to include “a landform created by subsidence of soil, sediment, or rock as underlying strata are dissolved by ground water.” “Sinkhole loss” now includes structural damage to the foundation in addition to the building, when caused by defined sinkhole activity. The words “sudden” and “collapse” have been deleted from the definition of “Sinkhole Activity.” Rather, the definition now states only “settlement and systematic weakening of the earth supporting [the] property only when such settlement or systematic weakening results from movement or raveling of soils, sediments, or rock materials into subterranean voids created by the effect of water on a limestone or similar rock formation.” The statute also sets forth specific qualifications for “engineer” or “professional geologist.” Particular care must be exercised that experts retained with regard to sinkhole claims meet these qualifications.

The Legislature has also re-visited the standard for investigation of sinkhole claims. Rather than the “minimum” standards enunciated in former Section 627.707, the amended statute sets forth specific standards. The amended statute requires the insurer shall engage an “engineer” or a “professional geologist” if following the insurer’s initial inspection, the insurer is unable to identify a valid cause of damage or if the damage is consistent with sinkhole loss. The insurer is also required to retain an expert to conduct testing if the policyholder demands it. Also following the initial inspection, the insurer is required to disclose in writing its determination of the cause of the damage, if any, along with notice of the circumstances giving rise to the policyholder’s right to demand and the insurer’s duty to conduct testing. The statute provides that one of the circumstances giving rise to the policyholder’s right to demand testing is a denial of the claim without having performed testing. Specific standards for testing and the reports generated by experts in connection with sinkhole claims have been added to the statutory scheme.  Moreover, the statute now provides that expert fees and costs shall be paid by the insurer even where the testing is requested by the insured.

If a sinkhole loss is verified, the statute requires the insurer to pay to stabilize the land and building and repair the foundation pursuant to the expert report and in consultation with the policyholder, subject to the coverage and terms of the policy. Underpinning, grouting or other repair technique costs must be paid on a replacement cost basis. Replacement cost for other loss items shall be paid once the policyholder signs a contract for building stabilization or foundation repairs.  Where the repairs have begun and the engineer selected or approved by the insurer finds that the repairs cannot be completed within policy limits, the insurer must either complete the engineer’s recommended repairs or tender policy limits to the insured, without a reduction for the repair expenses that have been incurred.

The statute retains the previously existing penalty provisions where insured has made a sinkhole claim without a good faith basis for submitting such claim.

Also of interest, the Legislature has expressed a need to track current and past sinkhole activity and to make the information available for prevention and remediation activities through a database. The Department of Financial Services may require insurers to report present and past sinkhole claims data.

Claims Handling

Response to claims communications: A significant new time requirement has been imposed upon residential property insurers who are now required to review and acknowledge any and every communication with respect to a claim within fourteen (14) calendar days of receiving the communication with respect to a claim unless (a) the claim is paid within the fourteen (14) days following the communication or (b) if the reasonable failure to acknowledge the communication was prevented by factors beyond the control of the insurer. The acknowledgement must be responsive to the communication. The acknowledgment need not be in writing, but if not in writing, the claim file must be noted to reflect the date and the fact of the acknowledgment. Where the acknowledgement is not in writing, notification indicating acknowledgement must be made and dated in the insurer’s claim file. If the claimant is represented by counsel, the acknowledgement requirement only applies to communications necessary to provide forms and instructions.  If the communication is a notice of claim, the acknowledgment must also include necessary claim forms, instructions, and an appropriate telephone number, unless the acknowledgement reasonably advises that the claim appears not to be covered.

Investigation: Residential property insurers are now required to begin such investigation as is reasonably necessary within ten (10) days of receipt of a proof of loss unless the failure to commence the investigation is caused by factors beyond the control of the insurer.

Mediation/Appraisal

Florida Statute 627.7015, which requires homeowner insurers to notify all first party claimants of their right to participate in mediation, has been amended such that it now also applies to commercial residential insurers. Significantly, the statute now also penalizes insurers if they fail to comply with the notice provision. Thus, if the insurer fails to notify the first party claimant of his/her right to participate in mediation, the insured will not be required to submit or participate in any appraisal process as a precondition to a breach of contract action.

Replacement Cost Coverage

Where a dwelling or personal property is insured on the basis of replacement costs, payment on a covered loss must be made on replacement cost basis without holdback of depreciation, whether or not the insured replaces or repairs the property.

Outline of Coverage

Amendments to the Florida statutes now require homeowners, mobile homeowners, dwelling, and condominium unit owner insurers to provide to the insured prior to or at the same time the policy is issued a comprehensive checklist of coverage on a form adopted by the commission and an appropriate outline of coverage.  The checklist must list standard provisions that may typically be included in the policies, whether or not the particular policy being issued contains the provision. The statute sets forth items which must be included in the checklist, such as mold, sinkhole loss, collapse, etc. The statute also sets forth the items which must be included in the outline of coverage, such as a description of the principal coverages, summary of principal exclusions, additional coverages, etc.

Law and Ordinance Coverage

Homeowner’s policies must now include bold language advising the insured about the availability of Law and Ordinance and Flood insurance. The specific language and font requirements are set forth in the statute. Interestingly, the Legislature notes that this subsection is intended to encourage policyholders to purchase sufficient coverage to protect them in case excluded events combine with covered events to produce damage or loss to the insured property and to encourage discussion of these issues with their insurance agents.

Hurricane Deductibles

The legislature has eliminated wind losses, distinct from hurricane losses, from the hurricane deductible scheme. The statutory language now requires that the deductible applicable to hurricane losses covered by residential property policies be no less than $500 and no higher than 2% of the dwelling limits and no higher than 3% on commercial-residential insurance policies. A policy covering a residential property valued at less than $50,000 may include a deductible no lower than $250. Significantly, a personal lines residential policy covering a risk valued at $100,000 or more may now include a deductible attributable to hurricane losses no higher than 10% of the dwelling limits, increased from 5%. There still remains no maximum deductible with respect to a personal lines residential risk valued at $500,000 or more. Prior to an insurer issuing or renewing a personal lines residential property policy effective on or after January 1, 2006, the insurer must offer alternative deductible amounts for hurricane losses equal to $500, 2%, 5% and 10% of the policy dwelling limits unless the specific percentage deductible is less than $500. Requirements of the written notice of the offer are that it be in approved form and that it specify the amount of the hurricane deductible to be applied in the event the applicant/policyholder fails to make a choice. If an insurer fails to provide notice as required by the statute it will be construed as a violation of the statute but will not affect the coverage provided by the policy. Beginning October 1, 2005, for personal lines residential property policies, where there is a separate hurricane deductible, an insurer must compute and prominently display the actual dollar value of the deductible on the declarations page. Additionally, if the policy has an inflation guard rider, the insurer must inform the policyholder that the hurricane deductible may be higher due to application of the inflation guard rider to a hurricane loss. The distinction between condominium and cooperative association hurricane deductibles has also been eliminated with respect to commercial-residential policies. For all commercial-residential policies, the hurricane deductible offer should not exceed 10% of the insured value if, at the time of the offer and at each renewal, the insurer also offers a 3% deductible. For commercial-residential property policies issued on or after January 1, 2006, the insurer must offer the policyholder alternative hurricane deductibles including an annual hurricane deductible or a deductible that applies to each hurricane.

The contents of this Briefly Speaking issue include a general overview of the recent statutory changes.  Please refer to the specific statutory sections for the complete text.