News Room

News Room

CASE UPDATE

 March 23, 2015

CASE LAW UPDATE

Dear Ladies and Gentlemen:

This correspondence is to advise you of a recent and important decision from the Eleventh Circuit United States Court of Appeals which reversed a decision from the United States District Court for the Middle District of Florida holding that the term “structural damage” as stated in the definition of “Sinkhole Loss” in a homeowners insurance policy should be interpreted to mean “any damage to the structure.”  In Hegel v. First Liberty Ins. Corp., 2015 WL 821146 (11th Cir. February 27, 2015), the Eleventh Circuit Court of Appeals relying on the Middle District of Florida’s analysis in Gonzalez v. Liberty Mut. Fire Ins. Co., construed the phrase “structural damage to the building” to mean “damage that impairs the structural integrity of the building.”  The Eleventh Circuit remanded the case in order for the District Court to determine whether a genuine issue of material fact existed regarding how much, if any, structural damage, to the insureds’ residence was due to sinkhole activity.

FACTS AND PROCEDURAL HISTORY

This matter involved a lawsuit filed by insureds, Seversin and Stephanie Hegel (the “Hegels”) over an insurance coverage dispute with their insurance carrier, First Liberty Insurance Corporation (“First Liberty”) who had issued the Hegels a homeowner’s insurance policy for their residence effective October 5, 2010.  The insurance policy insured against “Sinkhole Loss” as an exception to the policy’s exclusion for damage caused by earth movement.  Pursuant to the policy, “Sinkhole Loss” meant “structural damage to the building, including the foundation, caused by sinkhole activity.”  “Structural Damage” was not defined in the policy.  Florida Statute §627.706(2)(c)(2005), which was in effect at the time of the loss, contained the same definition of “Sinkhole Loss” as the Hegels’ insurance policy and also did not define the term “structural damage.”[1]  However, the May 17, 2011 amendment to Florida Statute §627.706, provided a detailed definition of “structural damage.”[2]

On March 1, 2011, the Hegels alleged that they discovered damage to their home, including but not limited to progressive physical damage to the walls and floors of the residence.  As a result, they submitted a claim for damages to First Liberty.  First Liberty retained Structural Engineering and Inspections (“SEI”) to investigate the claim in September 2011.  In their report, SEI concluded that the damages to the residence did not meet the criteria for structural damage as defined in Florida Statutes §627.706 (2011).   Further, SEI listed several possible causes for the damages that were unrelated to sinkholes.  Based on this report, First Liberty denied the Hegels’ claim for a “sinkhole loss” stating that their residence did not sustain structural damage to the building or foundation.  The Hegels requested a neutral evaluation by a public adjuster who issued a report stating that the 2011 definition of “structural damage” did not apply if the policy was effective before the May 17, 2011 amendment.  He also concluded that the damage to the Hegels’ residence was a combination of factors including “sinkhole activity.”  The public adjuster recommended subsurface grouting at an estimated cost of $105,075.00 to remediate the sinkhole activity.  Subsequently, the Hegels retained Central Florida Testing Laboratories, Inc. (“CFTL”) to review the findings and recommendations of SEI and the neutral evaluator and to conduct additional testing.  CFTL also determined that sinkhole activity, inter alia, was a contributing cause of the damage and recommended shallow chemical grouting in addition to the deep compaction grouting program proposed by the neural evaluator at an estimated cost of $145,775.00.

The Hegels filed suit against First Liberty for breach of contract in the Fifth Judicial Circuit Court in and for Hernando County, Florida.  First Liberty removed the case to the United States District Court for the Middle District of Florida based on diversity of citizenship. It also filed an unopposed motion to stay the litigation until the neutral evaluation was completed since the lawsuit had been filed before the evaluation was completed. The case was reopened in September 2012 and First Liberty filed a counterclaim for a declaratory judgment asserting that the Hegels’ damages fell outside the scope of the homeowner’s insurance policy.  Both parties filed motions for summary judgment.  In its motion, First Liberty argued that the May 17, 2011 amendment to Florida Statute §627.706 should be incorporated into the contractual definition of the term and “structural damage” did not mean “damage to the structure.”  First Liberty stipulated that if it was found that “structural damage” meant “damage to the structure,” it would admit that such damage existed and was caused by sinkhole activity, and would accept the Hegels’ damage estimates.

The District Court for the Middle District of Florida denied First Liberty’s summary judgment motion and held that the term “structural damage” should be interpreted to mean “any damage to the structure.”  Hegel, 2015 WL 821146 at *4.    Thereafter, the District Court granted the Hegels’ motion for summary judgment and awarded them $166,518.17 in damages.  Final Judgment was entered on February 5, 2014 and First Liberty appealed.

UNITED STATES DISTRICT COURT DECISION

The Eleventh Circuit United States Court of Appeals reversed and remanded the District Court’s decision and relying on Gonzalez v. Liberty Mut. Fire Ins. Co., 981 F. Supp.2d 1219 (M.D. Fla. 2013) found that the phrase “structural damage to the building” to mean “damage that impairs the structural integrity of the building.”  The Court agreed with First Liberty that the plain meaning of “structural damage” must mean more than any “damage to the structure.”  Hegel, 2015 WL 821146 at *5.  The Court remanded the case in order for the District Court to determine whether a genuine issue of material fact existed regarding how much, if any, structural damage, to the Hegels’ residence was due to sinkhole activity which would then require a new grant of summary judgment or would lead to a trial on the merits.

 

On appeal, First Liberty argued that the District Court’s interpretation of the term “structural damage” was erroneous based on two arguments: (1) the plain meaning of “structural damage” cannot mean any “damage to the structure” in the context of the phrase “structural damage to the building”; and (2) the insurance policy incorporated the definitions of “structural” under the Florida Building Code (2004) and “structural damage” as indicated in the 2011 amendment to Florida Statute §627.706, such that the term “structural damage” must mean more than any “damage to the structure.”

As noted above, the Court agreed that the plain meaning of “structural damage” must mean more than any “damage to the structure.”  The Court looked at the plain meaning of the words “structural” and “structure” in legal and non-legal dictionaries and found “structural” to be defined as: “[forming] a necessary part of a structure of a building or other construction, as distinct from its decoration or fittings.”  Hegel, 2015 WL 821146 at *6.  The term “structure” was found to be a synonym for a building.  Id.  The Court determined that based on the definitions, “damage to the structure” would encompass any physical damage to a building even if cosmetic while “structural damage” would exclude damage to a buildings “decorations or fittings.”  Thus, “to equate ‘structural damage’ with any ‘damage to the structure,’…[was] thus untenable.”  Hegel, 2015 WL 821146 at *7.  The Court agreed with the analysis in Gonzalez v. Liberty Mut. Fire Ins. Co., and construed the phrase “structural damage to the building” to mean “damage that impairs the structural integrity of the building.”[3]

Lastly, the Court disagreed with First Liberty’s contention that the definitions of “structural” and “structural damage” found in the Florida Building Code and Florida Statute §627.706 should be incorporated into the Hegels’ insurance policy finding that definitions from other sources were not relevant in determining the plain meaning of the term “structural damage” as used in the Hegels’ insurance policy.

We hope you find the above-referenced case helpful and insightful.  Should you have any questions with respect to the foregoing, please do not hesitate to contact the undersigned at your earliest convenience.

Very truly yours,

JOHN BOND ATKINSON

VERONICA RUBIO

[1] Florida Statute §627.706(2005) states as follows:

Sinkhole insurance; catastrophic ground cover collapse; definitions-

(2) As used in ss. 627.706627.7074, and as used in connection with any policy providing coverage for a catastrophic ground cover collapse or for sinkhole losses:

(c) “Sinkhole loss” means structural damage to the building, including the foundation, caused by sinkhole activity. Contents coverage shall apply only if there is structural damage to the building caused by sinkhole activity.

[2] Florida Statute §627.706(2)(k)(2011).

[3] In Gonzalez v. Liberty Mut. Fire Ins. Co., the United States District Court for the Middle District of Florida interpreted “structural damage” to mean “damage that impairs the structural integrity of the building.”