VOLUME XVIII, NUMBER 4
April, 2006

FROM THE CORNER OFFICE  

Stephanie Luongo and Frank Ingrassia presented " Preserving Your Right to Appeal: Essential Trial and Post-Trial Motions in Florida Civil Practice ," a continuing legal education program by NBI on April 26, 2006 in West Palm Beach .  

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FLORIDA 'S THIRD DISTRICT COURT OF APPEAL CERTIFIES DIRECT CONFLICT WITH THE FOURTH DISTRICT COURT OF APPEAL IN THE LANDMARK MIERZWA CASE

As we go to press, Florida's Third District Court of Appeal, in a first party property case styled Citizens Property Insurance Corp. v. Ceballo , 2006 WL 1331504 ( Fla. 3d DCA May 10, 2006), held as follows: "Because this holding conflicts with that of the Fourth District Court of Appeal in Mierzwa , we certify direct conflict with that decision."

The issue before the Third District was an insured's claim for payment under an additional coverage provision of a homeowner's insurance policy issued by Citizens Property Insurance Corporation ("Citizens"). Citizens filed its appeal from the trial court's order in favor of the insured homeowners.

After Ceballo's home was damaged in a fire, Citizens declared that the home was a total loss, admitted coverage, and paid the face value of the policy on coverage "A-Dwelling" in the amount of $125,000. Subsequently, Ceballo filed suit in the Circuit Court for Miami-Dade County (J. Gisela Cardone Ely) to recover amounts for additional coverage provided under both the coverage "A" section, and in the special provision-Florida endorsement section.

The complaint sought damages for breach of contract, alleging that while Citizens paid the $125,000 policy limits for dwelling coverage, it failed to make full payment for the additional coverage for law and ordinance of 25% and debris removal of 5% of the policy limits. Citizens denied that it breached the insurance contract on the grounds that it was not obligated to make these payments under the policy as the losses covered in those provisions were actually incurred .

Citing both Florida Statute § 627.702(1), Florida 's Valued Policy Law, and the precedent-setting case of Mierzwa v. Florida Windstorm Underwriting Assn ., 877 So.2d 774 ( Fla. 4 th DCA 2004), Ceballo moved for partial summary judgment, arguing that because the property was a total loss resulting from fire, a covered peril, the insured was entitled to the additional coverage payments in full. The trial court, relying on the Mierzwa ruling, granted partial final judgment in favor of Ceballo on the additional coverage issue as it related to the law and ordinance provision only. Citizens appealed the trial court's ruling to the Third District.

On review, the per curiam panel consisting of Justices Levy, Ramirez, and Suarez, the Ceballo Court held that the trial court erred in granting partial final judgment on Ceballo's law and ordinance claim. In doing so, the Court stated that while the homeowners were correct in their assertion that they were entitled to the additional coverage for which they were charged and paid a premium, the Citizens-issued policy provided that they may receive a maximum of 25% of the limits of liability only if they actually incurred the covered losses . Then the Ceballo Court determined that Florida 's valued policy law, did not alter this conclusion. The Court also stated that to hold otherwise and provide for damages in the absence of a loss would result in a "windfall" to the insured.

The Ceballo Court then reversed and remanded to the trial court to allow the Ceballos to present proof of incurred expenses consistent with the language of the subject Citizens policy. The Court also certified direct conflict with the Fourth District Court of Appeal in the Mierzwa decision.

Another Mierzwa related case is the class-action Scylla Properties v. Citizens Property Insurance Corp. now pending in the First District Court of Appeal. That case involves an appeal of an order of the trial court for Leon County awarding summary final judgment in favor of the plaintiffs and declaring that the valued policy law required Citizens to pay policy limits, less deductibles to the class members where Citizens-insured structures were damaged in the 2004 hurricanes by a combination of wind and flood in an amount giving rise to an actual or constructive total loss. The trial court found that, under the reasoning in Mierzwa , so long as Citizens had any liability for wind damage, its liability was in the amount of its policy limits. The trial further declared that Citizens was not entitled to a setoff of any amounts paid by a flood carrier for damages to the insured properties. The opinion of the First District remains pending.

We will continue to keep readers of Briefly Speaking updated on developments in future editions of this newsletter.

Kathleen M. Bonczyk

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ATTORNEY-CLIENT PRIVLEGE AND THE CRIME-FRAUD EXCEPTION

The Third District Court of Appeal recently addressed the applicability of the crime-fraud exception to the attorney-client privilege in a discovery dispute related to a property insurance claim in Butler, Pappas, et al. vs. Coral Reef of Key Biscayne Developers Incorporated , 30 FLW D2450a. The insured sought production documents which would have been otherwise protected by the attorney-client privilege claiming that the privilege did not apply because documents would prove that the insurer used its counsel to perpetrate a fraud upon the insured.

Respondent Coral Reef of Key Biscayne Developers Incorporated owned a rental apartment in Key Biscayne, Florida , for which Lloyd's provided property insurance. In the fall of 1999, Coral Reef and its principal, Homero Meruelo, Jr., who had a prior conviction for insurance fraud, submitted two claims to Lloyd's in the total of $1.45 million for property damage allegedly caused by hidden decay and collapse. Coral Reef retained Frank Inguanzo of Epic Group as its public adjuster, while Lloyd's retained John Stettin of Concorde Adjusting, Inc. as its independent adjuster.

Stettin and Lloyd's estimated Coral Reef's covered damages at approximately $500,000, and the claim was settled for $551,021.80 in December 1999. Lloyd's paid Coral Reef $440,817.44 while holding back the additional $110,204.36 pending commencement of the repair work. In May 2001, prior to the commencement of the repair work, Coral Reef and its principal, Meruelo, Jr., submitted three additional claims of loss for $4.76 million. The $4.76 million was based upon an estimate for the repairs provided by Coastal Insurance Repair Incorporated, an agency under investigation by the Department of Insurance for improper inflation of insurance claims.

On January 11, 2001, Lloyd's denied Coral Reef's claims through Stettin , citing as the reasons for the denial: failure to cooperate, failure to produce books and records, failure to submit to an examination under oath, and intentional misrepresentation and concealment of material facts. Furthermore, Lloyd's, in its denial letter to Coral Reef, stated that Coral Reef "attempted to commit insurance fraud." Coral Reef sued Lloyd's underwriters for breach of contract and declaratory judgment on the $4.7 million insurance claim and later amended the complaint to include a count of defamation against Lloyd's.

In response to some of Coral Reef's discovery requests, Lloyd's and Concorde filed objections and privilege logs stating that certain documents were covered by an attorney-client privilege. Coral Reef then petitioned the court to force Lloyd's and Concorde to produce these documents, alleging that these documents would explain the motive for the statements in the denial letter and would form the heart of the evidence for the defamation count. Following an extensive evidentiary hearing the trial court determined that Lloyd's had waived its attorney-client privilege based upon the crime-fraud exception. An appeal followed.

The attorney-client privilege is widely recognized and liberally applied to include all confidential communications between a client and its attorney "made in the rendition of legal services." There are several exceptions to the attorney-client privilege, the crime-fraud exception being one. Under Florida Statute 90.502(4)(a), there is no attorney-client privilege when "the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit what the client knew was a crime or fraud." The question of whether an attorney-client communication falls within the statutory exception is determined by the trial court. The party seeking disclosure of the privileged communications must first allege that the communication sought was made in an effort to perpetuate a crime or fraud. Then the party seeking disclosure must establish a prima facia case that the party asserting privilege sought the attorney's advice in an attempt to commit the crime or fraud. In order to determine the veracity of the crime-fraud allegations, the court may call for an evidentiary hearing, including an in camera inspection of the communication sought to be discovered. Upon review of this evidence, if the trial court determines that the crime-fraud exception applies, the client being accused of the crime-fraud is entitled to provide a reasonable explanation for the communication in an attempt to thwart the crime-fraud exception.

In the instant case, Coral Reef was essentially alleging that by use of the phrase "attempted to commit insurance fraud" in its denial letter, Lloyd's had accused Coral Reef of fraud with the intent to injure, defraud, or deceive Lloyds with regard to its claim. As a result, Coral Reef had the burden to produce a prima facia case to determine the applicability of the crime-fraud exception, whereas Lloyd's, in turn, carried the burden to provide the court with a reasonable explanation for its conduct or communication.

The court determined that Lloyd's had a reasonable belief that the second claim of loss was grossly inflated, as it was more than triple the amount of the initial claim of loss. Further, Lloyd's understood that Coral Reef had not undertaken any of the repairs to the property prior to the submission of the second claim, and Lloyd's also knew of Meruelo, Jr.'s conviction for insurance fraud, as well as Coastal Insurance Repair being investigated by the Department of Insurance for inflation of insurance estimates. Thus, the court determined that Lloyd's had a reasonable belief that Coral Reef had attempted to commit insurance fraud, and that the trial court had abused its discretion in determining that the crime-fraud exception applied to Lloyd's privileged communications. Ultimately, the contentious dispute resulted in a vindication of the insurers and their counsel as the trial court's order requiring production of the attorney-client communications was quashed and the confidentiality of the relationship was maintained.