Texas Public Adjusters: A breakdown of Senate Bill 1060


TEXAS LEGISLATURE REINS IN PUBLIC ADJUSTER CONDUCT

Obvious to anyone in the insurance industry, Texas courts are experiencing an explosion of first-party property insurance lawsuits arising from wind and hail related insurance claims. Dozens of lawsuits are filed every day in courts all across Texas. Some insurers are reporting that in one Texas county, upwards of 40 percent of all hail damage claims result in litigation, with a significant percentage of those lawsuits arising from claims that were believed to have been amicably resolved during the adjustment process.

This disturbing trend has not gone unnoticed. In recent months the Texas legislature debated significant reform measures directed at addressing the underlying conduct giving rise to these lawsuits.[1] While the most significant of these reform measures failed to pass the Texas House of Representatives prior to the end of the session, legislation concerning the conduct of public adjusters received unanimous support from the insurance industry, the Texas Trial Lawyers Association and most importantly the Texas Association of Public Insurance Adjusters. This legislation, Senate Bill 1060, was passed by the legislature and recently signed into law by Governor Abbott. It will be effective on Sept. 1, 2015.

Senate Bill 1060 amends the Texas Public Insurance Adjuster Licensing Statute to address specific abuses being perpetrated by a small number of Texas public adjusters. Left unchecked, this conduct risked turning the legitimate public adjusting industry into nothing more than a vehicle for unscrupulous newcomers to the industry to act as either salesmen for construction companies or case runners for attorneys. Senate Bill 1060 brings an end to this conduct with several narrowly crafted statutory changes, ensuring that all Texas public adjusters actually provide the services contemplated by their industry and the Texas public adjuster licensing statute — legitimately acting on behalf of policyholders in negotiating for or effecting the settlement of a claim under a property insurance policy.

The significant provisions in Texas Senate Bill 1060 are as follows:

1) Repeal of the Public Adjuster Trainee License

Under Senate Bill 1060, Texas will no longer offer a trainee license for those attempting to enter the business.[2] While the trainee license started as an apprenticeship-like program for the new public adjuster, the license was exploited by individuals seeking a fast track entry into the insurance claims world. Formerly, under Section 4102.069, licensed public adjusters could hire employees to act as “trainees” for up to 360 days without their obtaining an actual public adjuster license. Individuals with little to no experience in the insurance industry or any knowledge of the adjustment of insurance claims — and with no intent to become a legitimate license holder — would abuse this loophole for quick financial gain. SB 1060 now requires all public adjusters to obtain the necessary experience and education prior to obtaining a license and performing services as a public adjuster.

2) Prohibition of Referral Payments

The addition of Tex. Ins. Code § 4102.164 now expressly prohibits the acceptance of referral payments to a public adjuster from any third-party “individual or firm, including an attorney, appraiser, umpire, construction company, contractor or salvage company.”[3] This new section addresses the all-too-common issue of a public adjuster referring work to others — such as construction companies, appraisers and lawyers — in exchange for payments to the public adjuster. The Texas licensing statute is clear that public adjusters can receive compensation only from their policyholder clients. This ensures that the interests of the public adjuster are aligned solely with its policyholder client.

3) Prohibition Against Public Adjusters Entering Into Contracts Without the Intent to Actually Adjust the Claim

Section 4102.103 now includes subsection (d) which prohibits a public adjuster from “enter[ing] into a contract with an insured and collect[ing] a commission as provided by Section 4102.104 without the intent to actually perform the services customarily provided by a licensed public insurance adjuster for the insured.”[4] The obvious intent of this provision is that public adjusters enter into contracts with policyholders with the intent to actually assist the property owner with its insurance claim — the very clear role of the public adjuster. This seems simple enough. Unfortunately, however, certain public adjusters were not signing up clients with this intent, but instead appeared to sign up clients for the sole purpose of immediately referring the policyholder to an attorney. In turn, the attorney would handle the claim on a “reduced” 30 percent contingency fee and the public adjuster would receive a 10 percent contingency fee. Obviously, this far-too-common process subverted the role to be played by the legitimate public adjuster. Indeed, it sounded more like illegal barratry. By ensuring that public adjusters enter into contracts with the intent to actually perform public adjusting services, Senate Bill 1060 helps ensure legitimacy in the public adjuster profession.

4) Prohibition Against Public Adjusters Entering Into Contracts Solely for Referrals to Attorneys

Expanding on the issue above, Section 4102.158 underwent substantial changes to preclude public adjusters and/or their agents from illegal case-running on behalf of policyholder attorneys in violation of Texas barratry laws. Citing the Texas Penal Code provisions addressing barratry, Section 4102.158(d) states that “[a] license holder may not directly or indirectly solicit, as described by Chapter 38, Penal Code, employment for an attorney or enter into a contract with an insured for the primary purpose of referring an insured to an attorney and without the intent to actually perform the services customarily provided by a licensed public insurance adjuster.”[5] Section (d), however, goes on to note that the industry has a legitimate need for the recommendation of an attorney and this prohibition should not be “construed to prohibit a license holder from recommending a particular attorney to an insured.”[6]

Having lucrative referral agreements with policyholder attorneys is now expressly prohibited under this statute. Some public adjusters were in the practice of affixing attorney representation agreements to their contracts to be executed simultaneously with the public adjuster contract. Policyholders in many instances simply signed what was placed in front of them, not realizing they were not only hiring a public adjuster but also an attorney to file a lawsuit against their insurance company. Section 4102.158(e) addresses this issue head on, stating that “[a] license holder may not act on behalf of an attorney in having an insured sign an attorney representation agreement.”[7] This practice should now come to an end.

Section 4102.158 further addresses these barratry issues with the addition of subsection (f), requiring all public adjusters to conform to the Texas barratry laws. “A license holder must become familiar with and at all times act in conformance with the criminal barratry statute set forth in Section 38.12, Penal Code.”[8] While legislative intent indicates that SB 1060 does not intend to create a criminal offense against the public adjuster or preclude a public adjuster from legitimate business development practices, the addition of subsection (f) should ensure that public adjusters do not fall victim themselves as participants in illegal barratry schemes conducted by attorneys.

5) Prohibition Against Payments by a Public Adjuster

While this prohibition is not new, Senate Bill 1060 expands on the existing law. Under the prior version of Tex. Ins. Code § 4102.160, a public adjuster was permitted to pay up to a $100 fee to nonpublic adjusters for the referral of an insured to the public adjuster. SB 1060 strikes this exception to the prohibition of referral payments by a public adjuster.[9] The significance of this change is far reaching and eliminates (or at least removes the financial incentive) for unlicensed individuals to go door-to-door following a storm and receive $100 for each contract they are able to sign on behalf of a public adjuster (who likely had no intent to actually adjust the claim and instead would then simply refer the client to an attorney). With the repeal of Section 4102.160(3), this improper solicitation conduct should be eliminated.

6) Prohibition Against Insurance Adjusters Having Any Ownership in Construction Companies Involved in Claim Repair Work

The Texas public adjuster licensing statute has always contained a prohibition against a public adjuster also having a role in the repair work to be performed for a claim. The intent of this prohibition is also clear — to avoid the obvious conflict of interest that arises when a public adjuster has incentive to receive additional profits as the contractor performing the repair work. Unfortunately, a few public adjusters sought to circumvent this prohibition by forming construction companies owned by family members, but were actually operated by the public adjusters. In these situations, the public adjuster/contractor was effectively serving both roles in violation of the statute’s clear intent. Senate Bill 1060 eliminates any uncertainty as to the legality of this conduct by making it clear that a public adjuster may not “deriv[e] any direct or indirect financial benefit from” a construction, repair, salvage or other firm involved in the claim. This clarification ensures that a public adjuster cannot play a dual role in a claim. An individual can be a licensed public adjuster and can also be a contractor. The individual simply cannot do both for the same claim.

In summary, effective Sept. 1, 2015, Senate Bill 1060 will bring about important changes to the practice of public adjusting in Texas. Certain policyholder lawyers and public adjusters have exploited the public adjusting industry for personal financial gain apart from the intended role of a public adjuster and to circumvent Texas barratry laws. Senate Bill 1060 takes significant strides in dismantling this emerging trend of illegal solicitation and improper conduct by this small group of abusers. Its unanimous and bipartisan support by industry groups who are typically adverse to each other speaks volumes as to the need for this welcome change. Senate Bill 1060 will help ensure the legitimacy of the public adjusting industry in Texas and the role to be played by the qualified Texas public adjuster.

—By Brett Wallingford and John Maniscalco, Zelle Hofmann LLP

Brett Wallingford is a partner and John Maniscalco is an associate in Zelle Hofmann’s Dallas office.

[1] Senate Bill 1628 contained the majority of the proposed changes, which as stated in Sen. Larry Taylor, R-Galveston’s, bill analysis, was intended to establish a clear deadline for an initial claim to be filed, prohibit certain public adjuster activity, require notice of policyholder suit and proof of loss, create a practical standard for bona fide disputes, define actual damages, address liability for a person working on the adjustment of a claim on behalf of the insurer, clarify illegal insurance practices and estimate practices, eliminate improper solicitation by public adjusters and others including, but not limited to, the purpose of an attorney referral and enforce the current policy appraisal process.

  • [2] Tex. Ins. Code § 4102.069, repealed by S.B. 1060, 84th Leg. (Tex. 2015)
  • [3] Tex. Ins. Code § 4102.164
  • [4] Tex. Ins. Code § 4102.103(d)
  • [5] Id.
  • [6] Id.
  • [7] Tex. Ins. Code § 4102.158(e)
  • [8] Tex. Ins. Code § 4102.158(f)
  • [9] Tex. Ins. Code § 4102.160(3), repealed by S.B. 1060, 84th Leg. (Tex. 2015)

Determination of Percentage Increase Tool


Often after an Appraisal award has been handed down, the first thing many Appraiser’s do is to compare the Carrier’s original offer to the amount of the Award, to determine how much the Appraiser effected the net settlement.
While dollar amounts are usually used, I find that percentages and fractions often demonstrate these values better, and work very well if you are calculating an average increase, etc.

The tool below allows you to quickly determine percentage or fractions based upon inputted data. All you need to do is fill in two fields and the third one will be calculated for you.

Powered by the Percentage Calculator.

Insurance Appraisal & Causation


Property Insurance Appraisal: Is Determining Causation Essential to Evaluating the Amount of Loss

This paper, which can be found by clicking the image below, references important aspects of causation and Insurance Appraisal.

Appraisal-Johnson

“The appraisal procedure has been utilized in property insurance cases for decades. The issue of whether or not to allow the determination of causation in the appraisal process is a relatively recent dispute in the property insurance context.

Allowing the determination of causation in the appraisal process has significant effects on the resolution of property insurance disputes and can conserve both judicial resources and costs to the insured and insurance company.

Only twenty-eight states currently have case law addressing the issue of determining causation in a property appraisal. Of the states that have considered the matter, the states are slightly in favor of the determination of causation.

Analyzing the justifications for and against allowing the appraisal panel to determine causation will assist other courts in addressing this issue.”

Insurance Appraisal Appendix

This paper also includes an Appendix of Causation laws on a State by State basis, as seen below.

Insurance-appraisal

Appraisal-clause-causation

Appraisal-causation3

Quick Guidance on Preparing for a Forensic Recreation for a Personal Property Claim


For Commercial losses, the business should appoint one primary contact for the contents list Business Personal Propertysubmission. Please complete the Contact Information; name, phone, and email. The cost value will populate for you as you complete the form.

For Residential losses, the family should appoint one primary contact for the contents list submission. Please complete the Contact Information; name, phone, and email. The cost value will populate for you as you complete the form.

*We recommend that you request each office/room occupant to provide you a list of items in the space, with as much detail as recollection allows.

Example: item 1 – wood desk, approx. 5 foot long, 2 drawers on each side and keyboard tray in the middle/ replaced with wood desk…

  • Floor: Please complete the Floor Level. This can be copied down for other items as well.
  • Room: Please specify which office/room/space the items are from.
  • Description: Describe the item in the following format

“What is the item”, “The Brand”, “The Model/Make”, “Material/Type”, “Dimensions”

  • Compile original purchase supporting documentation that shows what was purchased, when it was purchased, and the cost of the items. Please label each invoice or supporting documentation with a number to correlate with the line item number.
  • Quantity relates to the number related to the claim and should be less than or equal to the quantity on the supporting documentation.
  • Compile repair documentation and label as exhibits to correlate with the Excel spreadsheet as well.
  • Replacement information: This includes the item and description, quantity and supporting documentation. Receipts, invoices, vouchers, purchase confirmations or other supporting documentation that indicates what was purchased, when it was purchased and the cost of item must be included in the submission.

Digitory Personal Property Inventory

  • Exhibits: Please label all supporting documentation in the upper right hand corner to correlate with the spreadsheet for original, repair and replacement of each item. Multiple items on one supporting document is fine, just refer to the item on each row that it applies. Example, row 5, 6 and 7 were all purchased together and are on the same invoice labeled Exhibit 5; type in 5 in each row. For replacement items, you can list the voucher number associated.
  • Before Submitting, please remember to:
    • Verify each row is complete and has supporting documentation.
    • Please upload updated spreadsheet and exhibits to the Box.net site. If you cannot add supporting documents electronically please send a paper copy in numerical order to Remote Forensic Department, Digitory Solutions, Inc. 2118 Sawmill River Road Yorktown Heights NY 10598.
    • Please keep a copy for your records.
    • There is a glossary within the spreadsheet to explain the context of the information being asked for in the form for your reference.

Damage Support Documentation

Super Storm Sandy claim, not yet resolved, finally received some resolution on 11/24; An Umpire was Appointed by the Court, and the Carrier’s refusal to submit to Appraisal was rejected.


Summary: November 24th 2014: In Simat v. Tower Insurance Co. of New York, No. 8969/2014 (N.Y. Sup. Ct., Nassau Cty.), Nassau County Supreme Court Rejects Carrier’s attempt to block Policyholder’s demand for Appraisal in Super Storm Sandy Claim; Judge appoints Umpire to allow Appraisal proceedings to continue. Court Appoints ROBERT J. NORTON as Umpire, explains that “proximity” to the loss site as the driving factor in choosing Umpire Norton.

Background: Stemming from a Superstorm Sandy claim dispute, a policyholder decided to utilize APPRAISAL to resolve their disputes with their Carrier, Tower Insurance Co. As alleged by Tower, the policyholder requested Appraisal, appointed an Appraiser, but failed to “follow policy requirements for seeking an Appraisal”. It seems that the policyholder did not invoke appraisal “in writing”, however, although the Carrier attempted to deny the Appraisal request, they appointed their own Appraiser. This appointment of an Appraiser, by the Carrier, was the basis for the Court’s rejection of the Carrier’s contention that the policyholder “failed” in invoking Appraisal.

Notation: This Court ruled that the the lack of a written “demand for Appraisal” did not atomically cancel the Appraisal, which is noteworthy in it’s own regard. Based on court filings from November 24th, Justice James P. McCormack stated that Tower effectively waived its right to block/deny Appraisal when they had retained their own Appraiser after receiving notification of the policyholder’s demand and appointment of the policyholder’s Appraiser.

So, despite the policyholder’s “written request” for Appraisal, the Court has confirmed the Appraisal, and has now appointed an Umpire to reside over the proceedings.

Court Appointed Umpire: In further review of available documents, the Court Appointed Umpire is ROBERT J. NORTON. This writer is aware that Mr. Norton is a very knowledgeable Umpire, and know this Umpire to be very fair. However, when reviewing the Court documents, there seemed to be some debate regarding the respondent’s Umpire recommendations (which is of course very typical in Court appointments). It seems that the petitioning party provided several Umpire candidates, and there was one whom the Court was originally considering, however after the Court conducted conflict testing, it was noted that this candidate held a local governmental position in the same district.

Proximity:  What interested me was the fact that the Court referenced Umpire Norton’s “proximity” (to the loss site) as being the main reason of appointing him. Based upon, at least, Umpire Norton’s public CV, as well as various business listings on line that state that Umpire Norton is based out of Plant City FLORIDA. The Judge stated that his decision to appoint Norton was “largely” based on his “proximity” to the loss site.

However, the loss occurred in Long Island New York.

Assumptions: Based upon the order issued by Justice McCormack on November 25th 2014, it would indicate that Umpire Norton has moved his place of business to the New York region, especially considering that it is obvious that the locality issue was referenced by both the petitioning and respondent parties.

Contradictory Information: Umpire Robert Norton owns the corporation “General Adjusting Services, Inc”, with principle home office located at: 1808 James L Redman Pkwy Suite 391 Plant City, Florida.

WITH RELIANCE ON JUSTICE MCCORMACK’S ORDER: Based upon the order issued by Justice McCormack on November 25th 2014, it would indicate that Umpire Norton has moved his place of business to the New York region, especially considering that it is obvious that the locality issue was referenced by both the petitioning and respondent parties. Review the actual Court Order below:

The Honorable Jame P. McCormack on the basis for his choice:

Continue reading

Overhead & Profit: A Florida Perspective


Case law on overhead and profit for Florida

Supreme Court of Florida.

Amado TRINIDAD, Petitioner,

v.

FLORIDA PENINSULA INSURANCE COMPANY, Respondent.

No. SC11–1643.

July 3, 2013.

Background: Insured, whose home was damaged by fire, but who did not repair or contract to repair such damage, brought action against insurer, alleging breach of contract based on insurer’s failure to pay costs for a general contractor’s overhead and profit under replacement cost homeowner’s insurance policy. The Circuit Court, Miami-Dade County, Barbara Areces, J., entered summary judgment for insurer, and insured appealed. The District Court of Appeal, 99 So.3d 502, affirmed and certified conflict.

Holdings: The Supreme Court, Pariente, J., held that:

1 overhead and profit are included in the replacement cost of a covered loss when the insured is reasonably likely to need a general contractor for the repairs;

2 insurers are not statutorily permitted to hold back any portion of the replacement cost payment, including costs for overhead and profit, contingent on the insured’s actually repairing or replacing the property; and

3 policy did not require insured to actually incur expenses for the repairs in order to be entitled to payment for costs of overhead and profit.

Quashed and remanded.

Polston, C.J., dissented and filed opinion, in which Canady, J., concurred.

*435 Raymond T. Elligett, Jr., and Amy S. Farrior of Buell & Elligett, P.A., Tampa, FL; Kelly L. Kubiak of the Merlin Law Group, P.A., Tampa, FL, for Petitioner.

Scott A. Cole and Kristen A. Tajak of Cole Scott & Kissane, P.A., Miami, FL, for Respondent.

Adrian Neiman Arkin and Timothy H. Crutchfield of North Miami, FL, for Amicus Curiae United Policyholders.

Opinion

PARIENTE, J.

The issue in this case concerns the scope of replacement cost insurance coverage under the applicable provisions of the 2008 Florida Statutes. In Trinidad v. Florida Peninsula Insurance Co., 99 So.3d 502, 504 (Fla. 3d DCA 2011), the Third District Court of Appeal concluded that Florida Peninsula Insurance Company was not required by either its replacement cost homeowner’s insurance policy or the applicable provisions of section 627.7011, Florida Statutes (2008), to pay Amado Trinidad, its insured, costs for a general contractor’s overhead and profit because Trinidad did not repair or contract to repair the damage to his home.1 We accepted jurisdiction on the basis that the Third District’s decision in Trinidad expressly and directly conflicts with the Second District Court of Appeal’s decision in Goff v. State Farm Florida Insurance Co., 999 So.2d 684 (Fla. 2d DCA 2008). See art. V, § 3(b)(3), Fla. Const.2

For the reasons more fully explained below, we hold that an insurer’s required *436 payment under a replacement cost policy includes overhead and profit, where the insured is reasonably likely to need a general contractor for the repairs, because the insured would be required to pay costs for a general contractor’s overhead and profit for the completion of repairs in the same way the insured would have to pay other replacement costs he or she is reasonably likely to incur in repairing the property. Because section 627.7011, Florida Statutes (2008), and the replacement cost policy in this case, did not require the insured to actually repair the property as a condition precedent to the insurer’s obligation to make payment, the insurer was not authorized to withhold, pending actual repair, its payment for replacement costs, which is measured by what it would cost the insured to repair or replace the damaged structure on the same premises if the insured were to do so. Accordingly, we quash the Third District’s decision below, which impermissibly allowed Florida Peninsula to single out overhead and profit from other replacement costs and withhold payment for only those costs, and direct that this case be remanded to the trial court to determine whether Trinidad is reasonably likely to need a general contractor for the repairs that encompass his covered loss.

FACTS AND PROCEDURAL HISTORY

Trinidad filed a claim with his homeowner’s insurance company, Florida Peninsula, for fire damage that occurred to his Miami home on February 11, 2008. Florida Peninsula admitted coverage pursuant to Trinidad’s replacement cost policy and made a payment on the claim for completion of the repairs, even though Trinidad did not make repairs to the home or hire a general contractor to undertake the repairs. Florida Peninsula’s payment, while including other costs that would be necessary to make the repairs, did not, however, include an amount for a general contractor’s overhead and profit. Florida Peninsula asserted that it was entitled to withhold payment of overhead and profit until Trinidad actually incurred those particular expenses in repairing or contracting to repair the home.

Overhead and profit are costs included in repair estimates and paid to contractors pursuant to contracts for repairs. Specifically, overhead includes “fixed costs to run the contractor’s business, such as salaries, rent, utilities, and licenses,” and profit “is the amount the contractor expects to earn for his services.” Trinidad, 99 So.3d at 502–03.

Trinidad’s insurance contract with Florida Peninsula is a replacement cost policy. The relevant policy language provides that Florida Peninsula will pay for covered losses as follows:

[A]t replacement cost without deduction for depreciation, subject to the following:

(1) If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:

(a) The limit of liability under this policy that applies to the building;

(b) The replacement cost of that part of the building damaged for like construction and use on the same premises; or

(c) The necessary amount actually spent to repair or replace the damaged building.

*437 Trinidad filed a breach of contract lawsuit against Florida Peninsula, alleging that, like the other costs of repair Florida Peninsula paid despite Trinidad not completing any repairs to the home, Florida Peninsula was required to pay Trinidad costs for overhead and profit. In essence, Trinidad argued that Florida Peninsula could not single out overhead and profit from all other costs of the repair and withhold payment of just those portions of the loss until Trinidad actually incurred expenses for overhead and profit. Florida Peninsula responded by contending that it was not required by the policy or by the applicable provisions of the 2008 Florida Statutes to pay overhead and profit until Trinidad actually incurred those particular costs. The trial court granted summary judgment in favor of Florida Peninsula, finding that the policy language was unambiguous and that Florida Peninsula was not required to pay overhead and profit because those costs had not been “actually spent” in accordance with the terms of subsection (1)(c) of the policy.

Trinidad appealed to the Third District, which affirmed the trial court’s summary judgment in favor of Florida Peninsula and held that “[t]he policy’s unambiguous terms require Trinidad to either hire a contractor who charges for overhead and profit or to incur expenses for overhead and profit before Florida Peninsula is required to pay for such costs.” Trinidad, 99 So.3d at 505. Since Trinidad “did neither,” the Third District stated, “Florida Peninsula was not obligated under the policy to pay Trinidad for overhead and profit.” Id.

The Third District reasoned that the policy “unambiguously provides that Florida Peninsula pay replacement costs or the costs Trinidad actually incurs or which he demonstrates he is likely to incur.” Id. at 503–04. Explaining that “[n]ot all repairs require the services of a general contractor,” the Third District concluded that under the terms of the policy, Florida Peninsula was required to pay only costs actually spent or costs Trinidad became contractually obligated to spend to repair the damage to his home. Id. at 504.

In addition, the Third District rejected Trinidad’s assertion that section 627.7011(3), Florida Statutes (2008), which required the insurer to pay “replacement costs without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling,” altered its analysis. Trinidad, 99 So.3d at 505 (quoting § 627.7011(3), Fla. Stat. (2008)). In determining that the statute did not mention payment for overhead and profit, but “only require[d] that replacement costs be paid without a holdback for depreciation,” and did not “require payment of profit and overhead which have not been incurred nor are likely to be incurred,” the Third District stated that “the statute’s plain language precludes Trinidad’s interpretation” because the court could not read any additional language or terms into the statute. Id.

ANALYSIS

This case presents a question of insurance policy interpretation and statutory construction. Because these are pure questions of law, this Court’s review is de novo. See Auto–Owners Ins. Co. v. Pozzi Window Co., 984 So.2d 1241, 1246 (Fla.2008); Daniels v. Fla. Dep’t of Health, 898 So.2d 61, 64 (Fla.2005). In addition, de novo review is the appropriate standard governing this Court’s analysis because the question presented for review was resolved on summary judgment. See Fayad v. Clarendon Nat’l Ins. Co., 899 So.2d 1082, 1085 (Fla.2005).

*438 In its decision below, the Third District held that Florida Peninsula was not required to include overhead and profit costs in its loss settlement payment to Trinidad pursuant to a replacement cost insurance policy because Trinidad had not actually incurred those costs. Trinidad, 99 So.3d at 505. Trinidad contends that the Third District’s conclusion was erroneous for two principal reasons. First, he asserts that the Third District erred in its interpretation of section 627.7011, which requires payment of replacement costs without holdback of depreciation, whether or not the insured replaces or repairs the damaged property. Second, he argues that the Third District misconstrued his insurance policy with Florida Peninsula and that the policy requires Florida Peninsula to pay overhead and profit irrespective of whether those costs are actually incurred. We agree in both respects and conclude that the Third District erred by holding that overhead and profit are not included within the scope of replacement cost insurance until those costs are actually incurred.

We turn first to a discussion of replacement cost insurance and explain why we conclude that overhead and profit are considered replacement costs. We then address the effect of the applicable statute and the applicable policy language.

I. Replacement Cost Insurance

12 “Replacement cost insurance is designed to cover the difference between what property is actually worth and what it would cost to rebuild or repair that property.” State Farm Fire & Cas. Co. v. Patrick, 647 So.2d 983, 983 (Fla. 3d DCA 1994). Replacement cost “is measured by what it would cost to replace the damaged structure on the same premises.” Davis v. Allstate Ins. Co., 781 So.2d 1143, 1144 (Fla. 3d DCA 2001) (quoting Kumar v. Travelers Ins. Co., 211 A.D.2d 128, 627 N.Y.S.2d 185, 187 (1995)).

3 In contrast to a replacement cost policy, actual cash value is generally defined as “fair market value” or “[r]eplacement cost minus normal depreciation,” where depreciation is defined as a “decline in an asset’s value because of use, wear, obsolescence, or age.” Black’s Law Dictionary 506, 1690 (9th ed. 2009); see also Goff, 999 So.2d at 689. In other words, replacement cost policies provide greater coverage than actual cash value policies because depreciation is not excluded from replacement cost coverage, whereas it generally is excluded from actual cash value. See Goff, 999 So.2d at 689.

4 In Goff, the Second District concluded that overhead and profit are included in the scope of an actual cash value policy “where the insured is reasonably likely to need a general contractor for repairs.” Id. The Second District correctly determined, in essence, that overhead and profit are like all other costs of a repair, such as labor and materials, the insured is reasonably likely to incur. See id. at 689–90 (citing Branch v. Farmers Ins. Co., 55 P.3d 1023, 1027 (Okla.2002)). The Second District therefore held that a portion of overhead and profit, like a portion of all other costs, was included but could be depreciated in an actual cash value policy. Id. at 690.

5 In contrast, in a replacement cost policy, an insurer’s ability to depreciate is not relevant because replacement cost insurance is insurance on a property’s depreciation. See Patrick, 647 So.2d at 983. However, under the view of replacement cost insurance advanced by Florida Peninsula, despite the fact that an insurer may be able to depreciate a portion of overhead and profit in an actual cash value policy (just as the insurer can depreciate a portion of other costs), an insurer would not be required to pay any overhead and profit *439 in a replacement cost policy. This result, in which the insurer is required to provide less coverage in a replacement cost policy than in an actual cash value policy, would be anomalous because replacement cost insurance is specifically designed to provide greater coverage.

Because replacement cost insurance provides coverage based on the cost to repair or replace the damaged structure on the same premises, we conclude that overhead and profit necessarily must be included within the scope of a replacement cost policy where it is reasonably likely a general contractor would be needed for the repairs. Accordingly, overhead and profit are a necessary component of replacement costs, just as they are for actual cash value, because replacement cost insurance is intended to compensate the insured for what it would cost to repair or replace the damaged property.

Thus, we conclude that overhead and profit are included in the replacement cost of a covered loss when the insured is reasonably likely to need a general contractor for the repairs. We now determine if the applicable statute or policy permitted Florida Peninsula to withhold payment of those particular replacement costs until Trinidad actually incurred them. To answer this question, we first consider whether section 627.7011 provides authority to an insurer for not requiring payment of overhead and profit because those costs were not actually incurred.

II. Section 627.7011

678 When construing a statute, this Court attempts to give effect to the Legislature’s intent, looking first to the actual language used in the statute and its plain meaning. See Daniels, 898 So.2d at 64. “Where the statute’s language is clear or unambiguous, courts need not employ principles of statutory construction to determine and effectuate legislative intent.” Fla. Dep’t of Children & Family Servs. v. P.E., 14 So.3d 228, 234 (Fla.2009). “When considering the meaning of terms used in a statute, this Court looks first to the terms’ ordinary definitions[, which] … may be derived from dictionaries.” Metro. Cas. Ins. Co. v. Tepper, 2 So.3d 209, 214 (Fla.2009).

9 The 2008 version of section 627.7011, the applicable statutory provision for the period of time during which Trinidad incurred his loss, provided in relevant part as follows:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.

….

(6) This section does not prohibit an insurer from limiting its liability under a policy or endorsement providing that loss will be adjusted on the basis of replacement costs to the lesser of:

(a) The limit of liability shown on the policy declarations page;

(b) The reasonable and necessary cost to repair the damaged, destroyed, or stolen covered property; or

(c) The reasonable and necessary cost to replace the damaged, destroyed, or stolen covered property.

§ 627.7011, Fla. Stat. (2008) (emphasis added).3

*440 Both Trinidad and Florida Peninsula assert that the plain language of section 627.7011, as it existed in 2008 at the time of Trinidad’s covered loss, is clear, but they disagree about the effect of the statute on the issue in this case. Trinidad argues that, because section 627.7011(3) states that replacement costs must be paid regardless of whether the insured actually replaces or repairs the damaged property, insurers are not permitted to hold back any portion of the replacement cost payment contingent on the insured actually incurring a particular cost. Florida Peninsula contends, on the other hand, that the statute merely requires payment of replacement costs to be made without depreciation, and because it does not mention payment of overhead and profit that have not been incurred, the insurer is not obligated to pay those costs. The Third District accepted Florida Peninsula’s interpretation of the statute. See Trinidad, 99 So.3d at 505 (“The statute only requires that replacement costs be paid without a holdback for depreciation. The statute does not require payment of profit and overhead which have not been incurred nor are likely to be incurred.”).

We conclude that the Third District’s statutory construction analysis was flawed. For property “insured on the basis of replacement costs,” section 627.7011(3) has two primary objectives. First, the statute requires insurers to pay the replacement cost of a covered loss irrespective of whether the insured actually repairs or replaces the damaged property. Second, the statute requires that depreciation not be withheld pending the actual repair. In other words, pursuant to section 627.7011(3), it is immaterial in a replacement cost policy whether the damaged structure is replaced or repaired; that factor simply does not affect the statutory mandate as it would if payments were being made on an actual cash value basis.

Instead, the statute requires the insurer in all cases to pay the replacement costs of the covered loss, which, as we have explained, means what it would cost the insured to rebuild or repair the property if the insured decides to do so. Because we have concluded that overhead and profit are replacement costs where the insured is reasonably likely to need a general contractor for the repairs, it is clear that, as with other replacement costs, section 627.7011(3) does not permit an insurer to withhold overhead and profit pending actual repair.

10 Requiring the insurer to pay overhead and profit regardless of whether the insured actually repairs the property is also consistent with section 627.7011(6), which provides that the insurer may limit its liability to the “reasonable and necessary cost” to repair or replace the damaged property. It is generally accepted that courts are required to “give full effect to all statutory provisions and construe related statutory provisions in harmony with one another.” Heart of Adoptions, Inc. v. J.A., 963 So.2d 189, 199 (Fla.2007) (quoting Woodham v. Blue Cross & Blue Shield of Fla., Inc., 829 So.2d 891, 898 (Fla.2002)). Although section 627.7011(3) provides that an insurer must pay replacement costs, section 627.7011(6) provides that the insurer can limit its liability to those costs “reasonable and necessary” to the replacement or repair. Therefore, *441 reading these two sections together provides that costs “reasonable and necessary” to the repair are included in the replacement costs the insurer is statutorily required to pay, regardless of whether the property is repaired.

Accordingly, if the insured is unlikely to incur overhead and profit, section 627.7011(6) would allow the insurer to withhold payment of those costs consistent with section 627.7011(3) because they are not “reasonable and necessary” to the repair. See § 627.7011(6), Fla. Stat. (2008). This logically follows because, if the insured is not reasonably likely to incur overhead and profit in repairing the damaged property, then overhead and profit are not replacement costs of the insured’s covered loss. On the other hand, if overhead and profit are going to be “reasonable and necessary” to the repair, section 627.7011(3) would mandate their payment as replacement costs.

Further, if overhead and profit were not included in the scope of replacement cost insurance where it is reasonably likely the insured will incur those costs, then no other repair costs, such as labor and materials, would be considered replacement costs. Simply put, overhead and profit are no different than any other costs of a repair that the insured is reasonably likely to incur, all of which are considered replacement costs and are not actually incurred until the repair is made—a requirement not imposed by section 627.7011. Such an interpretation of replacement cost insurance—that is, excluding all costs until they are actually incurred—would in actuality render the coverage meaningless.

We therefore hold that the Third District erred in concluding that section 627.7011 does not require the insurer to include overhead and profit in a payment based on replacement costs simply because overhead and profit have not been incurred. We turn next to a discussion of the applicable insurance policy and the Third District’s construction of that policy, which is the second argument advanced by Trinidad in support of his position on appeal.

III. The Policy

111213 “In interpreting an insurance contract, we are bound by the plain meaning of the contract’s text.” State Farm Mut. Auto. Ins. Co. v. Menendez, 70 So.3d 566, 569 (Fla.2011). “If the language used in an insurance policy is plain and unambiguous, a court must interpret the policy in accordance with the plain meaning of the language used so as to give effect to the policy as it was written.” Id. at 569–70 (quoting Travelers Indem. Co. v. PCR, Inc., 889 So.2d 779, 785 (Fla.2004)). Further, provisions in an insurance policy must be construed and applied to be in full compliance with the Florida Statutes. See, e.g., Allstate Ins. Co. v. Kaklamanos, 843 So.2d 885, 896 (Fla.2003).

14 Trinidad’s homeowner’s insurance policy with Florida Peninsula provides that Florida Peninsula will pay for covered losses, such as the loss at issue in this case, as follows:

[A]t replacement cost without deduction for depreciation, subject to the following:

(1) If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full replacement cost of the building immediately before the loss, we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:

(a) The limit of liability under this policy that applies to the building;

*442 (b) The replacement cost of that part of the building damaged for like construction and use on the same premises; or

(c) The necessary amount actually spent to repair or replace the damaged building.

In its decision, the Third District held that the policy, which “governs the outcome of this case,” was unambiguous and excluded payment for overhead and profit unless those expenses were either incurred by the insured or reflected in a contract that binds the insured. Trinidad, 99 So.3d at 503. In support of this conclusion, the Third District explained that the policy language “specifically uses the words ‘replacement cost’ to cover situations where the insured does not hire a contractor and does not spend money to repair or replace the loss, and in the alternative, it provides for payment of money ‘actually spent’ when the property is actually repaired or replaced.” Id. at 504. We conclude that the Third District erred in its interpretation of the policy language because it relied on the wrong subsection of the policy.

Despite the Third District’s reliance on the “actually spent” language in subsection (1)(c) of the loss settlement provision in Trinidad’s policy, Florida Peninsula’s payment in this case was made pursuant to subsection (1)(b) of the policy—rather than subsection (1)(c)—because Trinidad did not actually spend any money to repair or replace the damaged property. Florida Peninsula has itself acknowledged that its payment to Trinidad was made pursuant to this provision, stating in its brief filed in this Court that subsection (1)(b) of the policy, which governs payment of replacement costs when no repairs have been made, is the determinative policy provision, whereas subsection (1)(c) is an alternative method of calculating the payment amount when the insured has actually undertaken repairs.

In fact, Florida Peninsula paid Trinidad other costs for the repair even though, as with overhead and profit, Trinidad also did not actually spend any money for those costs. Indeed, if subsection (1)(c) of the policy, which requires payment only for the “necessary amount actually spent” on the repairs, was the applicable provision, Florida Peninsula would not have been required to pay Trinidad anything because Trinidad did not actually spend anything on repairs. An interpretation of the policy that permitted such an outcome would be contrary to section 627.7011, which requires payment of replacement costs regardless of whether the insured replaces or repairs the property, and would therefore be unenforceable. See Kaklamanos, 843 So.2d at 896.

Subsection (1)(b) of the policy is thus the relevant provision, and it requires Florida Peninsula to pay “[t]he replacement cost of that part of the building damaged for like construction and use on the same premises.” Accordingly, the unambiguous terms of the policy state that Florida Peninsula will pay the replacement costs of the damaged property. Because the replacement costs of the covered loss include overhead and profit where the insured is reasonably likely to need a general contractor for repairs, the plain language of the policy clearly requires Florida Peninsula to pay overhead and profit if the insured is reasonably likely to need a general contractor. Neither the policy nor the 2008 version of the applicable Florida statute, as we have explained, permitted withholding any component of the replacement costs until the insured actually incurred expenses for the repairs.

Finally, we address and reject the Third District’s reliance on Goff to determine that overhead and profit were not necessary *443 elements of replacement cost coverage unless those costs were actually incurred. In fact, Goff supports the opposite conclusion.

In Goff, 999 So.2d at 689, the Second District concluded that overhead and profit are included in the definition of actual cash value where the insured is reasonably likely to need a general contractor for repairs. Consistent with the Second District’s conclusion, the Third District in Trinidad recognized that, if Trinidad’s policy provided for payment of his covered loss on an actual cash value basis, rather than based on replacement costs, Florida Peninsula would have been required to include overhead and profit when making actual cash value payments where it is reasonably likely that a general contractor would be needed for the repairs. Trinidad, 99 So.3d at 504.

15 The result approved by the Third District—where overhead and profit are included in actual cash value but not in replacement cost insurance—is contrary to the coverage each type of insurance is designed to provide. As we have explained, actual cash value is defined as replacement cost minus depreciation. If overhead and profit are part of actual cash value, then those costs necessarily must be part of replacement cost insurance because replacement cost insurance encompasses actual cash value. While overhead and profit may, like other costs, be depreciable, as the Second District concluded in Goff, 999 So.2d at 689–90, depending on the applicable policy and statute, an insurer’s ability to depreciate is irrelevant in a replacement cost policy like Trinidad’s, which provides for payment “at replacement cost without deduction for depreciation.”

Because the insurance policy in this case provides that Florida Peninsula will pay “[t]he replacement cost of that part of the building damaged for like construction and use on the same premises,” Florida Peninsula was required by the policy’s unambiguous terms to include overhead and profit in its payment for Trinidad’s covered loss, assuming Trinidad establishes that he is reasonably likely to need a general contractor for the repairs. Accordingly, we hold that the Third District erred in concluding, based on the policy, that Florida Peninsula was not required to pay Trinidad overhead and profit because Trinidad had not actually incurred those costs.

CONCLUSION

For the reasons set forth above, we hold that replacement cost insurance includes overhead and profit where the insured is reasonably likely to need a general contractor for repairs. We therefore conclude that the Third District erred in determining both that the 2008 version of section 627.7011 and the insurance policy itself permitted Florida Peninsula to withhold payment of overhead and profit because Trinidad had not actually incurred those costs. Accordingly, we quash the Third District’s decision and direct that this case be remanded to the trial court to determine, consistent with this opinion, whether Trinidad is reasonably likely to need a general contractor for the repairs that encompass his covered loss.

It is so ordered.

LEWIS, QUINCE, LABARGA, and PERRY, JJ., concur.

POLSTON, C.J., dissents with an opinion, in which CANADY, J., concurs.

POLSTON, C.J., dissenting.

Because Trinidad v. Florida Peninsula Insurance Co., 99 So.3d 502 (Fla. 3d DCA 2011), does not expressly and directly conflict with Goff v. State Farm Florida Insurance *444 Co., 999 So.2d 684 (Fla. 2d DCA 2008), I would discharge this case for lack of jurisdiction. See art. V, § 3(b)(3), Fla. Const.

The express and direct conflict our constitution requires does not exist here. Here, the alleged conflict case, Goff, involves different facts and answers a different legal question than the decision on review. In Goff, the Second District examined an insurance policy that required the insurer to pay its insured “actual cash value at the time of loss.” 999 So.2d at 686. The question of law before the court was “whether overhead and profit is depreciable in determining [the amount of the] actual cash value” payment owed. Id. at 689. After recognizing that “[a]ctual cash value includes overhead and profit where the insured is reasonably likely to need a general contractor for repairs,” the Second District in Goff held that a portion of the overhead and profit could be withheld from the payment as depreciation. Id. at 689, 690.

In contrast, the decision on review, Trinidad, involves neither an actual cash value policy nor the depreciability of overhead and profit. Instead, in Trinidad, the Third District examined a replacement cost policy that allowed the insurer to pay the lesser of several costs following a loss, including “[t]he necessary amount actually spent to repair or replace the damaged building.” 99 So.3d at 503. Specifically, the Third District considered whether the policy required the insured to incur or contract to incur expenses for overhead and profit before the insurer was obligated to pay for them and whether the insurance code permitted such a requirement. Id. at 503, 505. Based on the policy’s “unambiguous terms,” the Third District in Trinidad held that the insurer’s obligation to pay overhead and profit was contingent upon the insured satisfying one of the contractual conditions and that the “plain language” of the insurance code did “not require payment of profit and overhead which have not been incurred nor are likely to be incurred.” Id. at 505.

Instead of recognizing the differences in the decisions, the majority appears to extrapolate conflict between them based on how it would interpret Goff in light of the different set of facts in Trinidad. Specifically, relying on Black’s Law Dictionary’s definition of “actual cash value,” the majority notes that a replacement cost policy—generally—is a superior product designed to provide greater benefits to the insured than an actual cash value policy. Majority op. at 438. Since the actual cash value payment in Goff included overhead and profit, the majority concludes that Goff also requires payment made under a replacement cost policy (like the policy in Trinidad ) to include overhead and profit if the insured is reasonably likely to need a general contractor for the repairs. Majority op. at 438, 442–43. However, as explained above, this is not what Goff held. Goff held that a portion of the paid overhead and profit could be withheld as depreciation in making the actual cash value payment required by the specific insurance policy in that case. 999 So.2d at 690.

Simply put, express and direct conflict is a consequence of plain language, not judicial construction. Because the Third District said nothing in Trinidad that expressly and directly conflicts with the Second District’s legally and factually distinguishable decision in Goff, I would find that review was improvidently granted and discharge this case for lack of jurisdiction. Therefore, I respectfully dissent.

CANADY, J., concurs.

Parallel Citations

38 Fla. L. Weekly S507

Footnotes

1. The 2008 version of section 627.7011 is the applicable version in this case because that is the version of the statute that was in effect when Trinidad incurred his loss. Section 627.7011, however, has since been amended, most recently in 2011. See ch.2011–39, § 19, Laws of Fla. Our analysis in this case therefore applies only to the version of the statute in effect in 2008.

2. United Policyholders, a nonprofit organization that provides information and advocates for insurance consumers, filed an amicus curiae brief in support of Trinidad.

3. Although the 2008 version of the statute is the relevant version governing our analysis in this case, section 627.7011 has since been amended to provide that the insurer must pay “at least the actual cash value of the insured loss, less any applicable deductible,” except in the case of a “total loss of a dwelling,” in which case “the insurer shall pay the replacement cost coverage without reservation or holdback of any depreciation in value.” § 627.7011(3)(a), Fla. Stat. (2012). In the absence of a total loss, therefore, the insurer is no longer required, as it was under the terms of the 2008 version of the statute, to pay replacement costs without a holdback of any depreciation in value.

Pennsylvania Court Addresses What Is a Coverage Dispute for Appraisal Purposes | Cozen O’Connor’s Property Insurance Law Observer


Pennsylvania: Insurance Appraisal and Scope

By Dick Bennett, posted on
Cozen O’Connor’s Property Insurance Law Observer Blog

Last month, a Pennsylvania federal court rejected the notion that a dispute over whether an admittedly covered occurrence necessitated repair of certain discrete portions of the damaged structure was a coverage dispute, characterizing it instead as merely a dispute over the extent of loss.  As a result, Currie v. State Farm Fire & Cas. Co., 2014 WL 4081051, 2014 U.S. Dist. LEXIS 117970 (E.D.Pa., Aug. 19, 2014) held that the insurer could not refuse appraisal and stated that it was being “disingenuous” in arguing otherwise.

The Curries were the owners of a home in Langhorne, Pennsylvania.  When Superstorm Sandy struck on October 29, 2012, the structure took a direct hit from a tree on the property.  The insurer, State Farm Fire & Casualty Company, conducted an inspection and then tendered its repair estimate to the policyholders together with a check for $56,940.54 – the actual cash value of the estimate less the policy’s deductible.  The Curries responded by submitting their own repair estimate in the amount of $363,804.98.  State Farm then conducted a new inspection and made a supplemental payment of $9,502.09.

The insureds asserted that State Farm’s payments were insufficient, and they made a written demand for appraisal.  The carrier rejected that, stating:

This claim involves certain items for which State Farm has not admitted liability.  These items include, but are not necessarily limited to, sanding and refinishing of the wood floors.  Since the dispute goes beyond the amount of loss, appraisal is not an appropriate method of resolution.

A lawsuit for both breach of contract and bad faith followed.  State Farm moved for summary judgment on the extra-contractual count, arguing that the Curries had failed to produce evidence that it had acted in bad faith in denying their request for appraisal “when there was a clear coverage dispute.”

The court disagreed, and the motion was denied.  As Senior District Judge Robert F. Kelly explained:

A condition precedent to appraisal is that there be an admission of liability and a dispute only as to the dollar value of the loss. . . .  A dispute of coverage, improper for appraisal, occurs when an insurance company claims an exclusion of a loss under the terms of the insurance policy.  See Banks v. Allstate, No 91-6982, 1992 WL 102885, at *1 [1992 U.S. Dist. LEXIS 7385] (E.D.Pa. May 7, 1992)[.] . . .  However, when the parties merely disagree over the extent of damage or whether a covered peril is the cause of certain damage, that is a dispute regarding the amount of loss and is proper for appraisal.

Judge Kelly cited Williamson v. Chubb Indem. Ins. Co., No. 11-6476, 2012 WL 760838 [2012 U.S. Dist. LEXIS 31648] (E.D.Pa. 2012) for the proposition that

“[e]stimating the dollar value of a loss presupposes a judgment of what repairs are necessary to recoup from the loss [and appraisers] could not perform their duties if they were prohibited from opining on these matters.” 

Indeed, the court was “of the opinion that State Farm’s interpretation of the appraisal clause in the Policy would render the appraisal process useless.” 

As Judge Kelly explained, “it was disingenuous of State Farm to characterize this disagreement as a coverage issue in order to avoid appraisal, especially in light of the fact that Pennsylvania law encourages the settlement of disputes regarding the amount of loss by appraisal.”

“Final Construction Lien Release” Really Final?


Insurance claims and liens for services.

The following essay was written by Larry R. Leiby in the January, 2012 Volume 86, No. 1 Florida Bar publication.

We know that prudent practice dictates that when payment is made for construction work and/or materials, the party making payment1 (payor) should obtain a release of payment claims for the work and/or materials being paid.2 In addition, if payment is made to a contractor, subcontractor, or sub-subcontractor, releases from people furnishing labor or materials under the payee should also furnish releases to the extent of the payment being made, particularly if those people have served a notice to owner. Lienors are statutorily obliged to execute partial releases when receiving money.3 The form of the release and the timing of when the release is given relative to payment can lead to adventure, if not litigation. To no one’s great surprise, it has been held that a release of lien is generally enforceable.4

The key for the lienor getting paid is to release payment rights/claims only to the extent that payment is made and not more. The key for the party making payment is to obtain a release for everything for which the payor understands is being paid, not less. It has been stated by the Third District Court of Appeal that a homeowner is required to meet the same strict requirements of the (then) mechanics’ lien law as one engaged in a commercial business.5

There are several issues that arise under F.S. §713.20 with the payment/release scenario in addition to the concepts of “not releasing more” or “not obtaining a release for everything” than that for which payment is made.

Release Through Date Hereof
One issue relates to F.S. §713.20(2), which was changed in 1988 to effectively say that lien rights of any lienor may not be waived in advance of doing the work.6 This legislation was enacted as a result of what was seen as abuse by owners and contractors of requiring lien waivers in contracts and subcontracts so that the lienors signing these contracts and subcontracts had no lien rights for the work that they were going to do. Competition in the construction industry was and is so fierce that owners and contractors were often able to get these contracts signed with waiver of lien rights when the contractors, subcontractors, and sub-subcontractors really did not wish to waive their lien rights, but felt compelled to do so in the competitive environment to get the work. Prior to 1988, courts held that a waiver of prospective lien rights was enforceable and not against public policy.7 The lack of bargaining position forced the construction industry to go to Tallahassee to outlaw the ability to waive lien rights in advance of doing the work so as to not be forced to accept such waivers. Thus, F.S. §713.20(2) has effectively rendered waiver of lien clauses in contracts and subcontracts unenforceable (as to work not yet performed).

Understanding the anti-waiver provision is important. There is nothing in F.S. §713.20(2) that says a lienor may not waive lien rights in advance of being paid for the work. The statutory prohibition relates only to not waiving lien rights prior to performing the work. Thus, assume that a subcontractor in the same year performed work through April 30 and sought payment for that work. The payment process took longer than the subcontractor would have liked, but the contractor calls the subcontractor on June 15 and tells the subcontractor, “Your check is ready. You just need to sign a release.”

The amount being paid includes all regular contract billing from the subcontractor for work through April 30, but does not include: 1) change order for work done under a change directive prior to April 30, but not billed; 2) additional job site supervisory costs done as a result of delay for which claims and billing will be made, but have not yet been made; 3) retainage; 4) unbilled materials stored on site; 5) work done that is not billed because the contract requires certain stages to be complete before billing. The subcontractor looks at the release, which recites, “Subcontractor hereby releases all of its rights to claim payment and construction lien rights for all work performed through the date hereof.” The release is signed and dated by the subcontractor on the date that the check was picked up, June 15. Unless the subcontractor can convince a court in an action to reform the release that there was a mutual mistake or a unilateral mistake and misconduct by the payor so that the release could be reformed, the subcontractor just gave away lien rights and its rights to claim payment for work done between April 30 and June 15 and unbilled work performed prior to April 30, while not being paid for that work. Lien rights may be waived prior to receipt of payment, just not prior to performing work.

The proper way for the subcontractor to have dealt with that scenario was to modify the release. The release should have been modified to exclude retainage and the claims for work outside of the regular contract billing (e.g., the construction change directive work, the additional costs due to delay, work partially performed that is not ripe for billing pursuant to the contract, etc.). Whether the payment would have been made in exchange for the modified release is an open question, but the proper thing to do would have been to bring the discrepancy to the attention of the payor. Alternatively, the release could have been backdated to April 30 with an exception for retainage and any work done, but not billed (which the payor would have typically described specifically instead of the general statement “unbilled work”). Unless the payor is trying to pull a fast one, the payor should agree to one of the two suggested modifications.

In 1996, the Florida Legislature provided two forms for use with construction liens in F.S. §713.20(4): A “waiver and release of lien upon progress payment” and a “waiver and release of lien upon final payment.” There appear to be both good news and bad news about the forms.

In the good news column is the fact that statutory forms can be found, along with an admonition in F.S. §713.20(6) that a lienor may not be required to “furnish a lien waiver or release of lien that is different from the (statutory forms).” Also in the good news column is that the form for the release upon progress payment expressly excepts retainage and work done after the date specified in the release from being covered by the release. Finally, in the good news column is that F.S. §713.20(7) gives express authority for a conditional release8 in exchange for a check.

In the bad news column go the following items:

1) The statutory forms are in a statute that creates a remedy, which by definition is a cumulative remedy to all other remedies of the lienor to obtain payment.9 You might ask, “Is it prudent for me to obtain a release of lien and lien rights (only) from a contractor or other lienor that I am paying when that lienor has other rights to payment (e.g., breach of contract, open account, account stated, and equitable claims if supported)?” While the lien law says that a lien release may not be required other than in the statutory form, the prudent payor will want a release of all claims for payment in one document, or if the lienor insists that only the statutory form lien release can be required to be given (for lien rights), then the payor will want a statutory lien release properly filled out and a release of contract and other claims in another form.

2) The release upon progress payment form has a space to fill in the amount of the consideration. It could be filled in with “10 dollars,” “10 dollars and other valuable consideration,” the actual amount of the payment, or something else. It does not say that lien rights are released in the amount of the consideration. It says that lien rights are released through the (date) to be filled in. A release for lien rights through time, rather than for a specified amount, works to the advantage of the payor, unless the lienor takes the time to modify the release to fill in the appropriate other exceptions, such as unbilled claim or extra work.

3) How final is final? The form release upon final payment in F.S. §713.20(4) has never been in sync with the prohibition against liens for work not performed found in F.S. §713.20(2), which says that the right to waive a lien may not be waived in advance. There is no exception stated for the giving of a “final release upon final payment.” If the exception were put in the statute, then the unscrupulous owner or contractor would simply require a “final release upon final payment” much earlier than the last payment and, thus, eviscerate the inability to waive lien rights in advance of doing the work. Thus, if a contractor gives an owner a waiver and release of lien upon final payment dated June 15, but does more billable work as of June 18, then the lien rights for the work done after June 15 are not waived. A partial release of lien given where no further work is performed after the date of the partial release turns out to be a final release and a final release given when further work is performed thereafter may not be a final release. Taking comfort in the title “Final Release” or “Waiver and Release of Lien upon Final Payment” is not a safe harbor.

Given this conundrum, this author has added some language to the release upon final payment and titled it a “Final Release.” This final release is intended to resolve the issue of not being able to waive lien rights in advance, yet to get some certainty that the final payment is truly final.

The final release is a combination final release, warranty that no further work will be performed for which charges will be sought, an assignment of the lienor’s claims10 (noting that an assignment of prospective lien rights may be “at any time before its discharge”), and an indemnification from any future lien of the lienor.

Waiver and Release of Lien Upon Final Payment

The undersigned lienor, in consideration of the final payment in the amount of $________, hereby waives and releases its lien, right to claim a lien, bond claims, and right to claim payment under any legal or equitable theory, for labor, services, or materials furnished to ___________on the project known as ___________ being further described as: (project description).

The undersigned hereby assigns its rights to payment for work/materials furnished and to be furnished, if any, at subject project to ___________.

The undersigned affirmatively warrants and represents that it has been paid in full and will not perform further labor, materials, or services at subject project for which charge will be made (other than corrective or warranty work for which no charge will be made).

The undersigned agrees to indemnify and defend ___________ from any claims of lien recorded by the undersigned and/or claims against payment bond made by the undersigned, for work performed before or after the date hereof.
___________ (Lienor)

By:___________ Dated: _______, 20__

If the statute were amended to recite that a right to waive a lien may not be waived in advance unless a waiver and release upon final payment is given, then we would likely see those performing work asked to furnish such a waiver and release upon final payment prior to doing work. We would be back to square one; there is no true panacea.

One consequence of giving a statutory waiver and release of lien upon final payment is that the owner is not obliged to serve a notice of termination of notice of commencement on the lienor who has given the waiver and release of lien upon final payment.11 One could argue that this provision in pari materia supports the position that there are no lien rights once the statutory waiver and release of lien upon final payment is given. However, it has been held that the right to a (mechanics’) construction lien may be waived expressly or by implication, but before such right is deemed to have been waived by implication of one’s conduct, the implication should be clear and unambiguous.12 Here the implication of waiver of claims for work performed after the giving of a waiver and release of lien upon final payment is not by conduct, but by two statutory interpretations that conflict about whether a statutory waiver and release of lien upon final payment waives lien rights for work done thereafter. Since there is a statutory conflict, it could hardly be said that a waiver by giving the statutory waiver and release of lien upon final payment would be “clear and unambiguous” waiver of lien rights for work not yet performed.

1 This could be an owner, contractor, subcontractor, or sub-subcontractor as to materialmen furnishing to the sub-subcontractor.

2 It is common practice for the payor not to obtain a release from every laborer working on the site based on the practical facts that laborer liens are 1) infrequent (i.e., if they don’t get paid, they don’t keep working for months) and 2) comparatively small to other liens. A very prudent payor will require an affidavit from the payee that all lienors working under the payee (which would include laborers) are paid in full to the extent of the payment made. In some cases, the payor will seek such an affidavit only as to prior payments assuming that the payee is not going to pay those under him or her until the payee receives payment from the payor. This is a matter of practice, not a matter of law.

3 Fla. Stat. §713.06(3)(c)2 (2004).

4 In re Construction Contractors of Ocala, Inc., 196 B.R. 188 (M.D. Fla. 1996).

5 Climatrol Corp. v. Kent, 370 So. 2d 394 at 396 (Fla. 3d D.C.A. 1979).

6 Prior to 1988, only laborers were given the protection to not waive lien rights in advance.

7 See, e.g., Orlando Central Park, Inc. v. Master Door Co. of Orlando, Inc., 303 So. 2d 685 (Fla. 4th D.C.A. 1974).

8 However, this may be negated by the language of the lienor’s contract that says an unconditional release must be furnished prior to payment. See Team Land Dev., Inc. v. Anzac Contractors, Inc., 811 So. 2d 698 (Fla. 3rd D.C.A. 2002).

9 See Fla. Stat. §713.30 (1997); Mack Industries Div. of Hollywood Land Co., Inc. v. Frank J. Baker Gen. Contractor, Inc., 456 So. 2d 1326 (Fla. 4th D.C.A. 1984).

10 See Spectrum Interiors, Inc. v. Exterior Walls, Inc., 2 So. 3d 1093 (Fla. 5th D.C.A. 2009).

11 Fla. Stat. §713.132(1)(f) (1998).

12 Mills v. Robert W. Gottfried, Inc., 272 So. 2d 837 (Fla. 4th D.C.A. 1973).

ENGINEERING REPORTS: Altered maliciously by Insurance Carriers to financially damage Super Storm Sandy Victims


NEW YORK – A federal judge ripped a potentially “widespread” and “highly improper” practice where engineering reports — the backbone for flood insurance claims — fundamentally were changed without basis and with serious financial harm to homeowners in the wake of superstorm Sandy.

In this particular case, a couple who were homeowners in Long Beach, New York, were challenging their insurer’s decision to not pay for any structural damage that arose after Sandy made landfall on Oct. 29, 2012. That refusal was supported by an engineer’s report that determined the home was not damaged by the floodwaters but rather by the slowly manifested effects of their house settling.

IN-DEPTH: Two years after Sandy
However, by sheer happenstance, the homeowners themselves — it was not voluntarily divulged by the insurance company’s attorneys as is customary during a lawsuit — stumbled upon an earlier draft of that report from the same engineer that reached a different conclusion. That original version of the report indicated the damage was a result of the storm surge from Sandy.
An October hearing in U.S. District Court in New York City revealed that the original report was rewritten by another engineer, who never visited the home and never discussed the case with anyone who had. The altered report served as the basis to avoid a payout that would have reflected the actual damage suffered.

Carrie Berry, of Keansburg, who was denied a flood insurance claim because the more

“Worse yet, evidence suggests that these unprincipled practices may be widespread,”

Magistrate Judge Gary R. Brown wrote in a court order released on Friday.
Some New Jerseyans, including Carrie Berry of Keansburg, have reported an unwillingness by their flood insurer to pay any or all of their claims arising from Sandy.

Berry, her husband Tristan and their 4-year-old daughter Quinn returned after the storm to a home that hadn’t flooded, at least not that they could tell. However, as time passed, the family started to notice the floor bowing and a mold smell in the house. It turns out the entire foundation had been soaked through and would need to be replaced.
Flood insurance nightmares still haunt Sandy families

Her flood insurance company, which was Travelers Insurance at the time, chalked it up to a pre-existing condition that might sound familiar — their house had settled.

“They said that earth movement wasn’t covered in the policy,”

she said.

“There wasn’t enough proof that we had damage from the hydrostatic pressure — the waves hitting our house.”

Berry hired a Toms River engineering firm to do their own review and they reported back that the force of the storm surge, which was measured at higher than 5 feet in Keansburg, did play a role in the damage.

The Federal Emergency Management Agency, which pays for the National Flood Insurance Program but allows private insurers to administer the policies, denied the family’s appeal. The Berrys declined to pursue a lawsuit, electing to put their energy toward securing grant funding — which Berry says came with its own set of problems — to help rebuild their home.
Highlands woman gets flood insurance shocker
“After writing that letter of appeal to FEMA, it kind of sucked the life out of me to be honest,” she said. “I’ve had screaming matches with flood insurance people and it’s gotten me nowhere.”

In response to the “starting findings” turned up in the Oct. 16 hearing, Brown ordered insurers to turn over all reports, including any “drafts” or written communications from engineers, adjustors, agents or contractors, to the homeowner’s counsel in all Sandy cases in their New York jurisdiction. The decision could have far-reaching effects.

Chip Merlin, a Florida attorney who specializes in post-hurricane flood-insurance law, suspects that this practice of changing the report to fit the desired results will be exposed as “ongoing problem with the insurance industry.” He authored a letter on Monday to the U.S. District Court of New Jersey, asking them to adopt the same policy.

“It’s a big win for the consumers of New York and hopefully for the consumers of New Jersey, too,” said Merlin, who is working out of a Red Bank office while his firm represents more than 400 Sandy-impacted clients in the region.
Merlin says the tightfisted approach stems from a fear by insurers that FEMA could compel them to come up with the difference if a federal audit shows they overpaid a policyholder. To avoid that scenario, flood-insurance carriers are simply not paying in many instances. U.S. Sen. Robert Menendez has made similar allegations.
“If you have no incentives to get it right,” Merlin said, “but you have disincentives if you overpay, then the only thing that’s going to happen is people are going to get underpaid.”

The Property Casualty Insurers Association of America, which represents the interest of 1,000 insurance companies, and the American Society of Civil Engineers, a nonprofit that helps set guidelines on professional standards in engineering, declined to comment. U.S. Forensic, the company that was hired to perform the engineering review on the home in Long Beach, could not be immediately reached for comment.

Article written by Russ Zimmer, @RussZimmer

Insurers Obligation with Depreciation in NY


In Goorland v. New York Property Ins. Underwriting Ass’n 175 the court examined the

depreciation issues cited as follows:

In Lazaroff v Northwestern National Insurance Company of Milwaukee, Wis., (121 N.Y.S.2d 122 [Sup Ct, New York County], affd 281 App Div 672, 117 N.Y.S.2d 690 [1st Dept 1952]) the court found that the insurer’s obligation was to

“reimburse the plaintiff for the cost of repairs with materials of the kind and quality damaged without deduction for depreciation.”

Id. at 123, 117 N.Y.S.2d 690; Eshan Realty Corporation v Stuyvesant Insurance Company (25 Misc.2d 828, 202 N.Y.S.2d 899, supra)(same); see also Boskowitz v. Continental Insurance Company, 175 App Div 18, 161 N.Y.S. 680 (1st Dept 1916)(court called for insurer to pay cost to repair or replace with materials of like like kind and quality, and did not require consideration of depreciation).