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Florida's "valued policy law": clarifying some recent misconceptions.

As an attorney who was personally affected by the hurricanes that ravaged Florida in 2004, the article, "Florida's Valued Policy' Law--The Eye of the Storm," in the April 2005 issue of The Florida Bar Journal troubled me. It is my opinion that numerous issues that are raised by the author, John Garaffa, appear to be aimed at distorting Florida's valued policy law to the disadvantage of policyholders.

First, the assertion that the valued policy law was not written to apply to a policy where covered (wind) and noncovered (flood) perils combine to create a total loss is inconsistent with Florida law. For that reason, the author is incorrect in stating that the Fourth District Court of Appeal decision in Mierzwa v. Florida Windstorm Underwriting Ass'n, 877 So.2d 774 (Fla. 4th DCA 2004), was wrongly decided. Likewise, Florida courts have for years upheld an insurers' right to recover under two separate policies in the event of a total loss under the valued policy law (VPL).

Florida's VPL

As a preliminary observation, it should be emphasized that if insurers wanted to reduce their potential liability under the VPL, they should have sought legislative amendment or repeal long ago. Instead, they waited until one of the worst, and most expensive, hurricane seasons in Florida's history to "cry foul."

The VPL has been a part of this state's law in one form or another for more than a century. (1) Although there have been several legislative amendments since then, the provision relating to "total losses" has not changed for decades. The total loss provision of the VPL that has sparked so much debate provides: "In the event of the total loss of any building ... located in this state and insured by any insurer as to a covered peril ... the insurer's liability, if any, under the policy for such total loss shall be in the amount of money for which the property was so insured...." (2)

As stated in Mierzwa, this statute is "simple and straightforward." (3) It plainly requires insurers to pay the full policy limit if a structure is deemed a total loss and damage was caused by a peril covered in the policy. And, when the language of a statute is clear, Florida courts must give effect to it. (4)

The Mierzwa Case

In Mierzwa, the policyholder's residence was damaged during a hurricane by two causes--wind and flood--only one of which was insured under his homeowner's policy. The windstorm carrier assessed the percentage amount of damage caused by wind (the covered peril) and tendered its pro rata share to the policyholder. The flood carrier likewise apportioned its liability. A local ordinance stated that when repairs and alterations amounting to more than 50 percent of the building's value were made in any one year, the building had to conform to current codes. The city determined that the insured's damage exceeded 50 percent of the value of the building and ordered it condemned. This condemnation meant that the insured's residence was deemed to be a "constructive total loss," which, in turn, resulted in the application of the VPL. (5)

The insured argued that because wind damage was "a covered peril" and because the building was a "total loss," the wind carrier should be required to pay policy limits under the VPL. Relying on plain language of the VPL, the court agreed and held that "[i]f [the wind carrier] has any liability at all, even a fractional share of the total damage, under the VPL it is liable for the face amount [of the policy]." (6)

History and Public Policy

Even though Mierzwa remains true to the plain meaning of the VPL, the April article cites the "historical and public policy context" of the statute for the proposition that the decision was wrongly decided. However, these factors mandate the exact opposite conclusion.

First, this argument flies in the face of the very definition of the term "valued policy." A valued policy is "one in which the value of the thing insured, and also the amount to be paid thereon in the event of loss, is settled by agreement between the parties and inserted in the policy." (7) Because the VPL fixes the amount payable when there is a total loss resulting from a covered peril, the insurer's liability is set at the inception of the policy, and the fixed portion of the loss cannot be affected, either to increase or decrease the amounts due, regardless of the actual cause(s) of the total loss. As recognized in Springfield Fire & Marine Ins. Co. v. Boswell, 167 So.2d 780 (Fla. 1st DCA 1964), "[t]his is not an unfair scheme, as the insured is stating the limits of his recovery and at the same time the insurer is basing his premium charges on the extent of his maximum exposure." (8) Thus, insurers, like insureds, are presumed to know of the VPL and factor this "face value rule" risk into the premiums charged to policyholders.

Accordingly, the argument that, under Mierzwa, insurers are "suddenly compelled to pay policy limits ... for which premiums were never collected" is simply false. Furthermore, from a practical standpoint, this fixed value approach makes sense in light of the uncertainties as to determining causation following a total loss to a structure. (9) Indeed, any division in most cases would simply be a mere guess.

Second, while it is true that the VPL may have initially been applied to total and partial losses caused by single perils, that limited liability was extinguished following the amendment to the total loss provision of the VPL, [section]627.702(1), which extends liability for total losses to all covered perils regardless of the cause(s) of the loss. Even under the old version of the VPL, which limited an insurer's liability to total losses in cases of the specified perils of fire or lightening, Florida courts still only inquired into whether the insurer was liable for any of the damage.

In Smith v. Nationwide Mut. Fire Ins. Co., 564 F. Supp. 350 (N.D. Fla. 1983), for instance, the insured's structure was totally destroyed by fire. The plaintiff asserted she should recover the entire amount of the policy under Florida's VPL. The insurer maintained that the insured should only recover her insurable interest under the policy, which did not equal policy limits. Finding that there was no Florida case on point, the court set out "to give effect to the theories behind the valued policy law ...." (10) The court framed the issue as follows: "The purpose of the lawsuit filed in this court is to determine if the insurer is liable at all." (11) In deciding this issue, the court distinguished those cases involving dwellings that were "severely damaged" from those "totally destroyed." (12) "Persuaded by the very words of the valued policy law," the court held that "[i] f the insurer is liable, the wording of the valued policy law makes that liability for the face amount of the policy." (13)

Furthermore, Florida case law is clear that, in cases of total loss, policy exclusions which directly or indirectly attempt to limit the liability of an insurer to less than face value of the policy are contrary to the VPL and, thus, void. (14) In Millers' Mutual Insurance Association v. La Pota, 197 So.2d 21, 24 (Fla. 2d DCA 1967), the plaintiff had two separate insurance policies on a residential building. The policy with Millers' Mutual was for $5,000 and the second policy with a different insurance company was for $6,500. Millers' Mutual claimed that a "pro rata liability" clause in its policy limited its share of the loss to $2,473.91, significantly less than its policy limits. (15) The court, however, invalidated the pro rata clause and held that the VPL was fully applicable to an insured with two policies covering his interests. Thus, based upon precedent stretching back three decades, it can hardly be said that Mierzwa's voiding of the wind carrier's flood exclusion somehow imposes new and unforeseen obligations on insurers.

VPL as a "Calculated Risk"

While acknowledging that the VPL does not provide for pro-rating liability where there are multiple policies insuring the same structure, Mr. Garaffa nevertheless argues that Mierzwa's holding violates the basic rules of indemnity inasmuch as it allows for insureds to obtain a "double recovery." But that is not the law in this state.

Florida courts have uniformly held that "the Valued policy law is founded upon the theory of 'calculated risk,' while the pro rata insurance clauses are based upon the theory of "indemnity." (16) For this reason, the statute operates like a liquidated damages clause rather than as an indemnity contract. (17) What the insured receives, by law, when he purchases an insurance policy in this state is the right to recover the policy limits if the insured property is totally destroyed, whether in whole or in part, by a covered peril. In other words, the wind carrier need not be concerned about the contractual relationship between the insured and his other peril carrier. This concept was illustrated in Cooper v. Alford, 446 So.2d 1093 (Fla. 1st DCA 1984). There, the court held that a mortgagee was entitled to receive proceeds under his homeowner's policy in the event of a total loss notwithstanding that he had already recovered under a separate policy on the same property. In this case, the court stated:

We acknowledge that the mortgagee will receive more in cumulative insurance proceeds than was owed by the mortgagor at the time of the loss. But a contrary result would mean that the mortgagor would receive a windfall simply because the mortgagee had previously obtained a separate policy in which the mortgagor was neither a named insured nor a loss-payee. Hardly an equitable result. (18)

Simply put, it is not the provision of the courts to find "unjust" something that the statute specifically permits. (19) Laws could be enacted to prevent the overvaluation in insurance coverage, but again, that is the purview of the legislature and not the courts. (20) Likewise, insurers themselves have the right to prohibit or limit additional insurance on the same structure when allowed by law. (21) But when an insurer fails to take such action, it does so at its own risk, and the company cannot then take the position that there should be a narrow, restrictive interpretation of the coverage to avoid its contractual (and statutory) duties. It has long been the policy of this state that "ambiguities in an insurance policy must be strictly construed against the insurer and in favor of coverage." (22)

Conclusion

Insurance companies are quick to advocate for the "plain meaning" of a statute as soon as it serves their interest to do so. (23) As we have seen, however, these same companies are just as quick to seek protection from such an interpretation when faced with the possibility of actually paying legitimate claims for which they have taken a "calculated risk," and lost. Suffice it to say that "when, as here, the statute [is] straightforward and clear, legislative history and policy arguments are at best interesting, at worst distracting and misleading, and in neither case authoritative." (24) Thus, any complaints as to Mierzwa's interpretation of the valued policy law should be directed at the legislature, not the courts. (25)

(1) Millers' Mutual Insurance Association v. La Pota, 197 So.2d 21, 24 (Fla. 2d D.C.A. 1967).

(2) FLA. SWAT. [section]627.702(1) (2004).

(3) Mierzwa v. Florida Windstorm Underwriting Ass'n, 877 So.2d 774, 775 (Fla. 4th D.C.A. 2004).

(4) As the Florida Supreme Court stated long ago in Osborne v. Simpson, 114 So. 543,544 (Fla. 1927): "It is not allowable to bend the terms of an act of the Legislature to confirm to our view as to the purpose of the act where its terms are expressed in language that is clear and definite in meaning."

(5) Mierzwa, 877 So.2d at 781; Netherlands Ins. Co. v. Fowler, 181 So.2d 692 (Fla. 2d D.C.A. 1966). (6) Id. at 778.

(7) Continental Cas. Co. v. Curl, 721 So.2d 431, 433 (Fla. 3d D.C.A. 1998) (quoting BLACK'S LAW DICTIONARY 1158 (6th ed. 1990).

(8) Springfield Fire & Marine Ins. Co. v. Boswell, 167 So.2d 780, 782 (Fla. 1st D.C.A. 1964).

(9) This dilemma was recognized in Boswell, 167 So.2d 780, 784 (Fla. App. 1964), where the court noted that "[u]ndoubtedly an important object of the statute is also to simplify and facilitate prompt settlement of insurance claims when a total loss occurs."

(10) Smith v. Nationwide Mut. Fire Ins. Co., 564 F.Supp. 350, 351 (N.D. Fla. 1983).

(11) Id. at 352.

(12) Id. at 351.

(13) Id. at 352.

(14) Millers' Mutual Insurance Association v. La Pota, 197 So.2d 21, 24 (Fla. 2d D.C.A. 1967); Springfield, 167 So.2d at 783-84.

(15) La Pota, 197 So.2d at 25.

(16) Id.

(17) See Smith, 564 F.Supp. at 351. ("Logic dictates that the 'face value rule' is consistent with treating an insurance policy as a contract for liquidated damages rather than as an indemnity contract.").

(18) Cooper v. Alford, 446 So.2d 1093,1095 (Fla. 1st D.C.A. 1984). See also Martin v. Sun Ins. Office of London, 91 So.2d 363, 330 (Fla. 1922) (noting that '"where several concurrent policies are written upon real estate the aggregate amount of all such policies is the value of the property insured, notwithstanding clauses in such policies inconsistent with the provisions of the [VPL] statute."); St. Paul Reinsurance Co., Inc. v. Irons, 45 S.W.3d 366 (Ark. 2001) (holding that, as matter of first impression, property insurer was required to pay the full face value of an insurance policy, as provided under valued-policy statute, where the insured had obtained two separate insurance policies for one insurable interest).

(19) Smigiel v. Aetna Cas. & Sur. Co., 785 F.2d 922, 925 (11th Cir. 1986) (Interpreting Florida's valued policy law, the court held that an insured cannot be held to have been unjustly enriched merely because they pursue their contractual rights which are independent of their statutory rights.).

(20) Springfield, 167 So.2d at 785.

(21) Id.; Mierzwa, 877 So.2d at 779.

(22) Time Ins. Co. v. Neumann, 634 So.2d 726, 729 (Fla. 4th D.C.A. 1994); Rowland v. National States Ins. Co., 295 So.2d 335,337 (Fla. 1st D.C.A. 1974).

(23) See, e.g., Stewart v. Allstate Ins. Co., 618 So.2d 771 (Fla. 5th D.C.A. 1993) (illustrating case where Allstate Insurance Company advocated for court to enforce the plain meaning of Florida's no fault law).

(24) Northern States Power Co. v. U.S., 73 F.3d 764, 766 (5th Cir. 1996).

(25) In June 2005, the Florida Legislature amended FLA. SWAT. [section]627.702 to remove the words "if any" from the statute. With this recognition, it is very difficult to read the VPL in any way other than that which the Fourth District Court of Appeal interpreted it in the Mierzwa case.

R. Jason Richards is an associate in the Pensacola office of Aylstock, Witkin & Sasser, PLC. He graduated from the University of Alabama at Birmingham with B.A. degrees in political science and economics, received his J.D. from the John Marshall Law School, and obtained his LL.M. from DePaul University.
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Title Annotation:response to John Garaffa, Florida Bar Journal, vol. 79, p. 8, April 2005
Author:Richards, Jason R.
Publication:Florida Bar Journal
Date:Dec 1, 2005
Words:2585
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