“Coverage” Case Law Update
February 17, 2017
This month we would like to share with you some recent opinions of the Florida District Courts of Appeal and Florida Supreme Court, which may be of interest to you.
In Wells Fargo v. Pruco Life Insurance, the Supreme Court of Florida found that under Florida Statute 627.455 a policy that has the required insurable interest at its inception, even where that interest is created as the result of a STOLI scheme, is uncontestable after two (2) years.
In Sebo v. American Home Assurance Co. Inc., the Supreme Court of Florida found that where a loss is caused by multiple perils and at least one of the perils is excluded from coverage, the proper theory of recovery is the concurring cause doctrine.
In Gamero v. Foremost Ins. Co., the Third District Court of Appeal found that coverage for cracking of tile floor in a home when a vase fell was excluded by the marring exclusion. Additionally, it held that the insurer did not waive its right to rely upon the marring exclusion by its pre-suit conduct in initially acknowledging coverage and paying a portion of the claim. Even if the insurer’s action amounted to a waiver, the insured failed to preserve the issue where the insurer asserted the exclusion as an affirmative defense and the insured failed to reply to, or avoid, the affirmative defense, instead raising the issue for the first time in opposition to insurer’s motion for summary judgment.
Wells Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So.3d 1202 (Fla. 2016)
Facts & Procedural History
Throughout 2005 and 2006 Arlene and Richard Berger attended financial planning seminars at which they were told they could obtain “free life insurance.” The Bergers talked with insurance salesman Stephen Brasner, who arranged for them to participate in his STOLI scheme by obtaining (1) financing for payment of premiums from a third-party lender and (2) a fraudulent financial report listing Arlene Berger’s net worth at $15.9 million and her annual income as $245,000. Brasner then applied to Pruco for a $10 million insurance policy on the life of Arlene Berger, naming her husband Richard as beneficiary. Pruco issued the policy on April 27, 2006.
Brasner established an irrevocable trust to hold the Berger policy. In conjunction with the financing agreement and the creation of the trust, Arlene Berger granted the third-party lender a power of attorney and the authority to obtain her medical records. Despite their signed authorizations, the Bergers claim to not have realized the implications of these actions. According to the Bergers, neither needed nor wanted life insurance when they joined Brasner’s STOLI scheme, did not intend to pay any of the premiums, never had any intention of controlling or keeping any insurance procured through Brasner, and only accepted the policy because it was free.
At some point ownership of the Berger policy was transferred to the trust. The Berger’s received $173,000 from Brasner for their participation in the insurance policy transaction. In September of 2008, Arlene Berger instructed Wilmington Trust to relinquish all her interests and rights under the policy to the third-party lender in satisfaction of the financing agreement. The policy was ultimately sold to Wells Fargo.
On July 9, 2010, approximately four years after it issued the Berger policy, Pruco filed suit against Wells Fargo asserting that the policy was void ab initio for lack of an insurable interest, as required by §627.404. The district court granted summary judgment to Pruco on its claim. Adopting its previous analysis of this issue in an order denying Wells Fargo’s motion to dismiss, the court held that there was no valid insurable interest in the life of the insured by the party procuring the insurance, meaning that the policy ran afoul of Florida Statute §627.404’s requirement of such an interest at the time an insurance policy is issued. From this conclusion, the court reasoned that the policy was void ab initio and therefore the incontestability provision §627.455 did not bar Pruco’s claim, asserted more than two years after issuance of the policy.
On appeal, the Supreme Court of Florida analyzed the following question:
Can a party challenge the validity of a life insurance policy after the two-year contestability period established by section 627.455 because of its creation through a STOLI scheme?
The Supreme Court based its analysis on the interplay between Florida Statutes 627.404 and 627.455. Florida Statute 627.404 provides than any individual of legal capacity may procure or effect an insurance contract on his or her own life. It follows to say that no individual may procure or cause to be procured an insurance contract on the life of another unless said individual has an insurable interest in the individual insured. It states that the insurable interest need not exist after the inception date of coverage under the contract. Furthermore, Florida Statute 627.455, Florida’s incontestability statute, provides that every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue, except for non-payment of premiums and other exceptions available at the insurer’s option.
The Berger policy at issue contained the statutorily-required incontestability clause. The Court reasoned that under the plain language of the insurable interest statute, section 627.404, the policy on the life of Ms. Berger, at its inception, benefitted an individual with an insurable interest. Specifically, Ms. Berger’s policy befitted her husband. While the Berger policy was procured in furtherance of a STOLI scheme, the incontestability statute, section 627.455, by its plain language does not authorize a belated challenge to a policy, which has the required insurable interest as the result of a STOLI scheme.
The Court points out the point of a STOLI scheme is for the insured to work with an investor to create an insurable interest necessary, hold the policy until the two-year contestability period expires, and then transfer the policy as permitted by section 627.422 to an investor who would not have had the insurable interest required to procure the policy in the first place. Thus, as a result of STOLI schemes, life insurance policies like the Berger policies, which at their inception name a member of the insureds’ immediate family as beneficiaries have the insurable interest required by 627.404. The Court held that under the plain language of section 627.455, a policy that has the required insurable interest at its inception, even where that interest is created as the result of a STOLI scheme, is incontestable after two years.
Real World Application
What does this mean for you as an insurer? First, as an insurer, any suspicion of a fraudulent application such as the one mentioned in this case should promptly be investigated, because, as noted in the Court’s decision the Incontestability Statute leaves very little room for an exception to the two year incontestability bar. After the two year deadline expires, it is not likely the insurer will have a valid defense or argument in contesting the policy. Second, keep in mind that the Supreme Court of Florida has found that as long as a policy based on a STOLI scheme was purchased with the proper insurable interest at its inception, absent a supervening statute, the defense that a policy is void for lack of an insurable interest is subject to the two year incontestability provision.
Sebo v. American Home Assurance Co. Inc., No. SC14-897, 2016 WL 7013859 (Fla. Dec. 1, 2016)
Facts & Procedural History
Sebo (the “Insured”) purchased a home in 2005, the home was four years old. American Home Assurance Company (“AHAC”) provided homeowners insurance as of the date of the purchase. The policy was an “all risks” policy. Shortly after purchasing the home, water began to intrude throughout the entire home during rainstorms. It became clear that the house suffered from major design and construction defects. In October 2005, Hurricane Wilma struck Naples and further damaged the Insured’s home. The Insured did not report the water intrusion and other damages to AHAC until December 30, 2005. AHAC investigated the claim, and in April 2006 it denied coverage for most of the claimed losses, however it did tender $50,000.00 for mold coverage. The Insured filed a declaratory action against AHAC, the jurors found in favor of the Insured and the court eventually entered judgment against AHAC. On appeal, the Second District found that “[t]here is no dispute in this case that there was more than once cause of the loss, including defective construction, rain and wind.” However, the court disagreed with the trial court’s application of Wallach, 527 So.2d 1386, and, in fact, disagreed with the Third District’s “determination that the concurrent causation doctrine should be applied in a case involving multiple perils and a first-party insurance policy.” Sebo, 141 So.3d at 198. The court reversed and remanded for a new trial, “in which the causation of Sebo’s loss is examined under the efficient proximate cause theory.”
On appeal, the Supreme Court of Florida was asked to determine whether coverage exists under the Insured’s all risk policy when multiple perils combined create a loss and at least one of the perils is excluded by the terms of the policy. The Court stated that in order to answer this question they would need to determine the proper theory of recovery to apply. Courts have developed competing theories on how to determine coverage: the efficient proximate cause and concurrent cause doctrines. The Efficient Proximate Cause (EPC): Where there is a concurrence of different perils, the efficient cause – the one that set the other in motion- is the cause to which the loss is attributable. Accordingly if a covered peril sets into motion an uncovered peril coverage exists, however if an uncovered peril sets into motion a covered peril, there is no coverage. The Concurrent Cause Doctrine (CCD): Coverage may exist where an insured risk constitutes a concurrent cause of the loss even when it is not the prime or efficient cause. In Wallach, the Third District held that “[w]here weather perils combine with human negligence to cause a loss, it seems logical and reasonable to find the loss covered by an all-risk policy even if one of the causes is excluded from coverage.” 527 So.2d 1386, 1388. The Court found that the rainwater and hurricane winds combined with the defective construction to cause the dame to Sebo’s property and there was no reasonable way to distinguish the proximate cause of Sebo’s property loss and therefore it was appropriate to apply the Concurrent Cause Doctrine. The Court concluded that when independent perils converge and no single cause can be considered the sole or proximate cause, it is appropriate to apply the concurring cause doctrine. Accordingly, the Court quashed the decision below.
Real World Application
This case is being widely discussed among both sides, it is significant to Insurers because the Supreme Court of Florida reversed the decision below which was previously a positive holding for Insurers. This new holding will make it difficult for Insurer’s to overcome unless they can clearly distinguish the proximate cause of the damages. That is why it will become important for Insurers to have the advice of an experienced attorney in addition to appropriate experts, e.g. meteorologist and engineers in the early stages of a claim that may be similar to the one in Sebo.
Gamero v. Foremost Ins. Co., No. 3D16-389, 2017 WL 104935 (Fla. Dist. Ct. App. Jan. 11, 2017)
Facts & Procedural History
Gamero (the “Insured”) sustained damage when a vase fell and cracked two floor tiles in the living room. The Insured filed a claim to recover for this damage under the policy and, in turn, Foremost initially accepted coverage and offered payment in the amount of $4,000.00. The Insured disagreed as to the amount of the loss and invoked the right to appraisal, the appraisal returned at $18,863.41. Foremost deducted the deductible, depreciation and the previous payment and made a payment of $3,801.59. Foremost asserted that the cost of replacing the tile ($10,082.14) was not covered under the policy. The Insured filed a breach of contract law suit. The complaint alleged that Foremost failed to provide coverage for their covered losses. Foremost filed an answer and asserted as an affirmative defense, that the policy’s marring exclusion applied and that there was no coverage for the claim. The Insured did not file a reply. Each party filed a motion for summary judgment. The trial court denied the Insured’s summary judgment and granted Foremost’s motion for summary judgment and entered a judgment thereon.
The Third District Court of Appeal found that coverage for cracking of tile floor in a home when a vase fell was excluded by the marring exclusion under the terms of the policy. The court stated that it agreed with the analysis and holding of Ergas v. Universal Property and Casualty Ins. Co., 114 So.3d 286 (Fla. 4th DCA 2013). Additionally, it held that the insurer did not waive its right to rely upon the marring exclusion by its pre-suit conduct in initially acknowledging coverage and paying a portion of the claim. Even if the insurer’s action amounted to a waiver, the insured failed to preserve the issue where the insurer asserted the exclusion as an affirmative defense and the insured failed to reply to, or avoid, the affirmative defense, instead raising the issue for the first time in opposition to insurer’s motion for summary judgment.
Real World Application
This case reaffirms the seminal case of Ergas, which holds that chipped tiles fall within the wear and tear and marring exclusion of a homeowner’s insurance policy. The case discussed here also highlights the importance of hiring counsel familiar with first party property claims who understands the rules of civil procedure and who can properly preserve all defenses and arguments as the case progresses. Leaving out essential defenses early on in the case can be detrimental and limit a party when it files its motions for summary judgment or if a case needs to be appealed.
We hope that you found the aforementioned cases both helpful and insightful. Thank you for the opportunity to share these recent case opinions with you.
Very Truly Yours,
JOHN BOND ATKINSON
LAURA P. GUZMÁN