Florida’s Approach to the Assignability of Post-Loss Benefits

Background

In Bioscience West, Inc. v. Gulfstream Prop. & Cas. Ins. Co., No. 2D14-3946, 2016 WL 455723 (Fla. 2d DCA Feb. 5, 2016), the Second District Court of Appeal affirmed the rule in Florida that insureds may, without the insurer’s consent, assign post-loss benefits of an insurance policy to a third party, whether or not the insurance policy contractually prohibits assignment of the policy.

The facts are simple enough: The insured, Elaine Gattus, purchased homeowner’s insurance from Gulfstream Property and Casualty Insurance Company. After executing the policy, Gattus’ property suffered water damage. She then engaged plaintiff Bioscience West to perform “emergency water and removal construction services.” Rather than directly compensating Bioscience West for its services, Gattus assigned the contractor her benefits due under the policy without Gulfstream’s knowledge or consent.

Gulfstream denied coverage, leading Bioscience West to file suit for breach of contract. Gulfstream successfully moved for summary judgment. The circuit court noted the policy’s express language prohibiting the insured from transferring “this policy” to a third party without Gulfstream’s written consent. Bioscience West appealed to the Second District Court of Appeal.

On appeal, Bioscience West’s principle contention was that although the entire policy cannot be assigned absent Gulfstream’s consent, there is no such prohibition for the assignment of a “benefit derived from the policy” once it has accrued. The appellate court agreed with Bioscience West’s position that notwithstanding the policy’s valid prohibition on assignment of the entire policy, the policy as written did not have the effect of prohibiting the post-loss assignment of the right to receive benefits under the policy. In so doing, the court drew the distinction between assignment of the entire policy versus a right thereunder.

It was on these grounds that the Court was able to dispose of the primary issue on appeal, but it nonetheless went on to explain that even if there was language in the policy restricting such an assignment, such language would be of no moment because “Florida case law yields deep rooted support for the conclusion that post-loss assignments do not require an insurer’s consent.”

Other Districts

Relying on the 1918 Florida Supreme Court case W. Fla. Grocery Co. v. Teutona Fire Ins. Co., 77 So. 209 (1918),the First, Second, Third, Fourth, and Fifth districts all follow the rule forwarded by Bioscience West that, although an insurance provider may contractually prohibit or limit outright assignment of an entire insurance policy, post-loss insurance claims are freely assignable, whether or not the insurer consents. Federal courts in Florida have also adopted without exception and alteration the Florida Supreme Court and the five districts’ approach to post-loss assignments of benefits derived from an insurance policy.

Analysis & Implications

At first blush, the assignment of post-loss rights may seem as though it is all pain and no gain for insurers, when there may, in fact, be some benefit. For example, in a case where a plumbing leak, if not swiftly repaired, would lead to substantial damage, the ability to assign a claim could encourage insureds to take prompt action to repair, thereby mitigating damages. In this regard, the Second District concluded that “it is imprudent to place insured parties of the untenable position of waiting for the insurance company to assess damages any time a loss occurs” and that the exigencies of the situation typically render the “unexpected loss event [ ] a time-sensitive procedure” aided by the flexibility afforded under post-loss assignments.

There is, however, a caveat to such post-loss assignments in cases where coverage for a particular incident is disputed. When coverage is disputed, such assignments are inherently prone to the risk that insurers may be sued by assignees of post-loss benefits for breaching the insurance policy when, in reality, there may be no coverage for the loss in the first place. As was the case in Bioscience, the assignor-insured and assignee-contractor executed a general release, thereby precluding an action by the assignee against the assignor for the fees of its work, and will likely contain a waiver of the assignee-contractor’s right to pursue payment via a mechanic’s lien on the repaired property. Thus, even if a claim is clearly beyond the scope of a policy’s coverage, such assignees have an incentive to institute litigation to collect under the policy, even in doubtful circumstances. Meanwhile, the insured is provided with the potential windfall of cost-free repairs for property damage that otherwise would have not been covered under the policy. Rather than venture into a thicket of weighing competing interests, the court in conclusion explained that it is “mindful that there are competing policy considerations here” but declined to address them as such “considerations are for the legislature to decide, not our court.”

Florida District Court Finds That Settlement Can Trigger Bad-Faith Claim

Florida’s Fourth District Court of Appeal recently ruled that an insured need only establish an insurer’s coverage obligation and the extent of damages, and not the insurer’s liability for breach of contract, to be permitted to proceed with a bad-faith claim under Section 624.155(1)(b)1 of the Florida Statutes.

INS BLOG_hurricaneIn Cammarata v. State Farm Florida Insurance Co., 2014 Fla. App. Lexis 13672 (September 3, 2014), the insureds (homeowners) were two of many South Florida residents who sustained damages as a result of Hurricane Wilma, which hit the coast on October 24, 2005.  Nearly two years later, the insureds filed a claim with their homeowners’ insurer.  The insurer inspected the home and, having estimated the amount of damages to be lower than the policy deductible, advised that the policy had not been triggered.  The parties then participated in an appraisal process, with the insureds’ appraiser submitting an estimate higher than the policy deductible and the insurer’s appraiser submitting an estimate lower than the policy deductible. Pursuant to the policy, the insureds filed a petition requesting that the circuit court appoint a neutral umpire.  The umpire issued an estimate higher than the policy deductible (although lower than the insureds’ appraiser’s estimate), and the insurer paid the amount, minus the deductible.  The insureds then filed a bad-faith action against the insurer under Section 624.155(1)(b)1 of the Florida Statutes.

The parties filed cross-motions for summary judgment.  In its motion, the insurer argued that because its liability for breach of contract had not been determined the insureds’ bad-faith action was not ripe.  In response, the insureds argued that only an insurer’s liability for coverage and the extent of the damages covered must be determined for a bad-faith claim to mature.  The trial court granted the insurer’s motion.

The Fourth District Court of Appeal reversed, holding that the determination of the existence of liability and the extent of an insured’s damages are the conditions precedent to a bad-faith action, and that those conditions may be established by a settlement paid by the insurer.  In so holding, the Fourth District receded from its prior decision in Lime Bay Condominium, Inc. v. State Farm Florida Insurance Co., 94 So.3d 698 (Fla. 4th DCA 2012), relied upon by the insurer, in which the Fourth District held that an insurer’s liability for breach of contract must be determined before a bad-faith action becomes ripe, harmonizing that decision with its decision in Trafalgar at Greenacres, Ltd. v. Zurich American Insurance Co., 100 So.3d 1155 (Fla. 4th DCA 2012), in which the Fourth District ruled that an appraisal award issued after an insured filed a breach of contact claim satisfied the necessary prerequisite of obtaining a “favorable resolution” prior to filing a bad-faith claim.

In Cammarata, the Fourth District relied upon the Florida Supreme Court’s decisions in: 1) Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So.2d 1289 (Fla. 1991), addressing an insurer’s claim that an insured must bring a bad-faith claim together with an underlying breach of contract claim, in which the court held that “[a]bsent a determination of the existence of liability . . . and the extent of the [insured’s] damages, a cause of action cannot exist for bad faith”; and 2) Vest v. Travelers Insurance Co., 753 So.2d 1270 (Fla. 2000), addressing a claim for bad faith based upon an insurer’s payment of policy limits after the filing of a bad-faith action, in which the court held that the existence of liability and the extent of an insured’s damages can be established based “upon a settlement,” thereby ripening a bad-faith claim.

The Fourth District Court of Appeal reversed and remanded for reinstatement of the insureds’ bad-faith action, noting that it was not taking any position on whether that action has any merit.

Image courtesy of Flickr by NASA Goddard Space Flight Center.

Property Damage in a Digital Age: Florida District Court Confirms That Coverage for “Property Damage” Excludes Electronic Data

In Carolina Casualty Insurance Co. v. Red Coats, Inc. d/b/a Admiral Security Services, Inc., the U.S. District Court for the Northern District of Florida ruled that the cost to provide free credit protection services to individuals whose confidential medical information was contained on stolen laptop computers did not constitute “property damage” under two commercial general liability insurance policies.

The insured (Red Coats, Inc.), a full-service contract management company that provides security, janitorial and alarm services, entered into a contract with AvMed, Inc., a provider of health coverage plans to members and subscribers throughout Florida, to provide security services at AvMed’s Gainesville, Florida, facility.  Shortly thereafter, two of AvMed’s laptop computers were stolen from its Gainesville facility.  As HIPAA-protected information was contained on at least one of the stolen laptops, AvMed notified the affected subscribers/members and provided each of them with two years of free credit protection services.

AvMed thereafter filed suit against Red Coats, alleging that one of Red Coats’ security guards committed the subject theft (alleging claims against Red Coats for breach of contract, fraud, negligent hiring, retention and supervision, and vicarious liability).  Red Coats then made claims against each of its five insurers (including two commercial general liability carriers, an employment practices liability carrier, and two crime carriers), all of which denied coverage.  After Red Coats and AvMed settled their dispute, Red Coats’ employment practices liability carrier filed a declaratory judgment action, seeking a decree of no coverage.  In response, Red Coats counterclaimed against each of its insurers.  The parties filed cross-motions for summary judgment, which were decided by the court on April 22, 2014 (the crime carriers resolved prior to the disposition of summary judgment).

The commercial general liability policies defined “property damage,” in pertinent part, as “loss of use of tangible property that is not physically injured.” Notably, those policies specifically excluded from the definition of tangible property “electronic data,” defined as “information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.”

The U.S. District Court for the Northern District of Florida ruled that, with regard to Red Coats’ commercial general liability policies, “the loss of use of the laptops was not the problem – AvMed has a lot of other laptops – the problem was that others could access the HIPAA data.  At best, the only coverage would be [the] cost of getting new laptops; there would be no coverage for the HIPAA information and any other data or programs on them, since they would represent electronic data, which is expressly excluded from coverage.  Simply put, this is not property damage in any ‘man on the street’ definition of the term. . . . [I]t is an economic loss claim which is not covered by the [commercial general liability policies].”  The court also rejected Red Coats’ argument that coverage existed under its employment practices liability policy.

Red Coats has appealed the Northern District’s decision to the Eleventh U.S. Circuit Court of Appeals (with briefing to be completed by November 14, 2014).