VOLUME XXI, NUMBER 12
December, 2009

INSURED ENTITLED TO FILE BAD FAITH CLAIM AFTER FINAL APPRAISAL AWARD

In State Farm Florida Insurance Company v. Seville Place Condominium Association, Inc., 42 Fla. L. Weekly D2119, the Third District Court of Appeal considered the issue of whether a bad faith claim could be added to a complaint after an appraisal award had been entered but before the insurance carrier had exhausted all appellate remedies.

On October 24, 2005, Hurricane Wilma caused substantial wind damage to the roofs of Seville Place Condominium. As a result, the condominium filed a claim with State Farm and presented a damage estimate of more than $4.6 million. Although State Farm determined that its policy afforded coverage, it estimated damages to be much lower and paid the insured a total of $90,564.62. Unsatisfied with the amount of this payment, Seville demanded appraisal pursuant to the terms of the insurance policy. In response, State Farm argued that appraisal was premature because “no clear disagreement” existed between the parties until State Farm was afforded the opportunity to inspect the damages alleged on the property. As such, State Farm agreed to participate in the appraisal process after the satisfaction of two conditions. First, State Farm required the appraisal award to be in the form of “a line item document, broken down by building and unit number, including the pricing that establishes the award of that item.” Second, State Farm required that the condominium association submit a Sworn Statement in Proof of Loss detailing specific aspects of their claimed loss.

Unwilling to submit to State Farm’s appraisal conditions, Seville filed suit in circuit court for breach of contract seeking declaratory judgment as to the validity of State Farm’s appraisal conditions. In addition, Seville sought declaratory judgment regarding the issue of whether or not State Farm had waived the right to contest coverage liability or assert potential policy defenses.

The circuit court ordered both parties to appraisal without requiring the conditions sought by State Farm, and provided sixty days to complete the appraisal process. State Farm requested, and was granted, an additional sixty days to complete its investigation of the claim. In addition, the condominium association filed a motion to add both statutory bad faith and punitive damages claims to its original complaint.

A day before the appraisal hearing was set to begin, State Farm filed an emergency motion seeking removal of the neutral umpire appointed by the court and describing the appraisal process thus far as a “highly problematic an invalid appraisal gone wrong.” Subsequently, the neutral umpire signed and filed the final appraisal award, fixing the insured loss at $2,960,405.

The court denied State Farm’s emergency motion, confirmed the appraisal award, and granted Seville Place’s motion to add bad faith and punitive damages claims to its original complaint. Disagreeing with this decision, State Farm filed a petition of certiorari with the Third District, seeking a determination of whether or not the trial court’s review of the bad faith claim was premature. More specifically, State Farm argued that the issues of liability and damages were not sufficiently resolved by the appraisal award alone. Rather, State Farm argued, a party should be afforded the resolution of all appellate remedies and the final judgment award of a jury before a claim for bad faith and punitive damages may be entertained by the court.

The Third District acknowledged that the issues relating to loss amount and coverage were not yet “finally final.” However, the court also rejected State Farm’s position that the condominium’s claims of bad faith and punitive damages were not yet ripe. The court concluded that an appraisal process that establishes both a party’s liability and the extent of damages, sufficiently meets the prerequisites to the proper filing of a bad faith and punitive damages claim. In other words, the insurer is not entitled to resolution of all its appellate options before an appraisal award determining liability and the extent of damages is considered sufficient justification for a bad faith claim.

Matthew T. Wright

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CLAIM FOR BREACH OF IMPLIED WARRANTY OF GOOD FAITH AND FAIR DEALING SAME AS CLAIM FOR BAD FAITH AND IS NOT PERMITTED IN BREACH OF FIRST-PARTY INSURANCE CONTRACT CASE  

In a first-party breach of insurance contract case, the United States District Court for the Southern District of Florida recently dismissed a claim for breach of an implied warranty of good faith and fair dealing and held that such a claim was the equivalent of an action for bad faith and therefore not permitted until after the underlying breach of contract action had been resolved.

In Portofino South Condominium Assoc. of West Palm Beach v QBE Insurance Corp., 22 Fla. L. Weekly Fed. D66a (S.D. Fla. 2009), the insured, Portofino South Condominium Association (“Portofino”), brought a first-party breach of contract action against its insurer, QBE Insurance Corp. (“QBE”) for damages allegedly suffered as a result of Hurricane Wilma. Portofino also sought to bring a claim for breach of the implied warranty of good faith and fair dealing based upon QBE’s purported “delay and failure to reasonably value the damage, to reasonably determine the cost to repair or replace Portofino's property, to make reasonable efforts to agree with Portofino as to the value of the lost or damaged property or the cost of its repair or replacement, and to value and/or adjust the loss with Portofino promptly and reasonably…”

QBE moved to dismiss this Count of the Complaint on the grounds that it was an improper and premature attempt to bring a bad faith claim. The Court agreed. The Court found that because the claim was based upon QBE’s alleged failure to “reasonably” and “promptly” investigate and pay Portofino’s claim, it was the equivalent of a claim for the wrongful handling of Portofino’s claim and would therefore be controlled by the Florida statute governing claims for bad faith (§624.155, Florida Statutes). In making its decision, the Court relied upon two other recent cases from the Southern District which dealt with the same issue, Quadomain Condo. Ass'n, Inc. v. QBE Ins. Corp., 2007 WL 1424596 (S.D. Fla. 2009) and Isola Condo. Ass'n, Inc. v. QBE Ins. Corp., 2008 WL 5169458 (S.D. Fla. 2008). In both of those cases, the insureds had attempted to bring claims for a breach of the implied warranty of good faith and fair dealing and in both cases such claims were denied.

In Quadomain, the Court dismissed the claim and held that the claim was “one for bad faith dressed in breach-of-implied-warranty clothing.” In Isola, the Court relied upon the decision in Quadomain and held that “because the factual allegations underlying [the plaintiff's] claim are based upon [the defendant's] failure to fairly and promptly perform under its obligations in the contract, that contractual claim can only be asserted, if at all, together with the extra-contractual bad faith claim under section 624.155.” The Court acknowledged the two cases relied upon by Portofino wherein the Southern District had held that such a claim was separate and distinct from a first party bad faith cause of action, but determined that those cases had “incorrectly applied Florida law.” The Court further noted that these issues have been certified to the Florida Supreme Court for review, but found that the current controlling Florida law relating to such a claim in the first party insurance context holds that “a cause of action for breach of implied warranty of good faith and fair dealing is subsumed in a bad faith action pursuant to Florida Statute § 624.155.” Accordingly, the Court found that the claim in this case was premature because it was brought before the underlying coverage dispute had been decided.

Karen J. Jerome Smith

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ARBITRATORS CANNOT ORDER A NON-PARTY TO PRODUCE PRE-HEARING DISCOVERY UNDER FEDERAL ARBITRATION ACT

  In Nallyve Kennedy v. American Express Travel Related Services, 22 Fla. L. Weekly Fed. D21 (S.D. Fla. 2009), the Court denied American Express’ Petition to Enforce the Subpoena Duces Tecum issued by the arbitrator to Ms. Kennedy’s treating mental health professional, a non-party to the arbitration. The court held that the Federal Arbitration Act does not vest the arbitrator with the power to issue a summons to a non-party for the production of pre-hearing discovery.

In the first section of the order, the Court explained its reasoning. Since arbitration is a creature of contract, voluntarily entered into and bargained for by the parties, an arbitrator’s power is limited by the parties’ agreement and those contained in the Act. However, an Arbitrator’s power over a non-party to the litigation is limited to that provided by the statute pursuant to the provision for Witnesses before Arbitrators; fees; compelling attendance. Thus, the issue for the Court was whether the statute provided an arbitrator with the power to order pre-hearing discovery.

The relevant portion of the statute provides, “[t]he arbitrators selected…may summon in writing, any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or proper which may be deemed material as evidence in this case.”

The language of the statute is clear. The statue grants the arbitrator the power to summon any person including non-parties before him/her with requested documentation. However, the summons power is explicitly limited to bringing the party or non-party with the requested documentation before the arbitrator. The statute does not permit a party to call a non-party for proceedings without the arbitrator being present, such as a deposition. Thus an arbitrator may order a non-party’s appearance at a hearing with requested documents, but an arbitrator may not order a non-party to produce those requested documents prior to the hearing.

In the second section of the order, the Court explained why the plain language of the statute had to be followed. It is well accepted that the plain language of a statute is to be followed unless it will lead to an absurd interpretation. The Court found it reasonable that Congress withheld certain powers from arbitrators. While denying the arbitrators the power to order pre-hearing discovery may be inconvenient to the parties, inconvenience does not create an absurd interpretation of the statute.

Furthermore, the scope of discovery in arbitration is more limited than that of a case in federal court. Discovery in arbitration is limited by the statute to documents, “which may be deemed material as evidence in the case.” However the Federal Rules of Civil Procedure authorize a much broader scope of discovery. According to Fed. R. Civ. P. 26(b)(1), “parties may obtain discovery regarding any, nonprivileged matter that is relevant to any party’s claim….Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” When comparing the language of the statute and the rule, it is clear that the use of the terms “material” and “evidence” in the statute were intended to limit the scope of discovery when compared to the much broader language used in the rule which permits discovery of “relevant information” that does not need to be “admissible at trial”. Thus, parties participating in arbitration were not intended to have the “same expansive breadth of discovery that parties in federal court enjoy.”

Therefore, a strict reading of the statute is appropriate. The petition was denied and the case was dismissed.

Joshua S. LeRoy