Citizens Immune from Bad Faith, Not Liable for Non-Contractual Damages: Court

The Florida Supreme Court has resolved A 14-year-old lawsuit against Citizens Property Insurance Corp. in favor of the insurer in a ruling that was expected but still has far-reaching effects on the state’s property market.

The court issued the unanimous ruling last week in Citizens Property Insurance Corp. vs Manor House, LLC.

The case involved a first-party breach of contract claim where the insured, Manor House, sought to recover extra-contractual, consequential damages for lost rental income totaling approximately $2.5 million from Citizens.

At issue in the case, which originated back in 2007, was if Florida law allows insureds to recover extra-contractual consequential damages in a first-party breach of insurance contract action by an insured against its insurer.

Citizens called the ruling “significant” and said it will protect policyholders.

“Citizens welcomes this much-anticipated Florida Supreme Court ruling,” said Michael Peltier, Citizens spokesman. “The unanimous opinion benefits policyholders who would have been on the hook for higher premiums had the high court not reviewed this case and issued this decision.”

Case Background

Manor House filed a claim with Citizens for nine apartment buildings damaged by Hurricane Frances in 2004 that Citizens later paid more than $1.9 million after inspection. Two years later, Manor House’s public adjuster asked Citizens to reopen the claim and then filed another claim for $10 million.

Citizens made additional payments in September 2006 totaling $345,192 and later informally estimated the actual cash value of the loss at nearly $5.5 million and the replacement cost value of the loss at $6.4 million. Meanwhile, Manor House’s public adjuster estimated the replacement cost value at just over $10 million.

In March 2007, Manor House’s new owner and litigation agent made an effort to resolve the suit costs by requesting Citizens pay the “undisputed” amount of $6.4 million – the field adjustor’s informal estimate of replacement costs – and demanded an appraisal.

Manor House filed suit later that year for prompt payment of what it claimed was an undisputed amount of $6.4 million and asked the court to compel Citizens to engage in appraisal procedures stipulated under the policy. In 2009, the trial court demanded the parties go forward with the appraisal process through which the appraisal panel awarded Manor House nearly $8.7 million in replacement cost value and more than $8.3 million in actual cash value. Citizens later paid an additional $5.5 million to Manor House in 2010.

Manor House later sued Citizens for breach of contract and fraud, saying that Citizens failed to property adjust the loss, pay the undisputed amount after estimates, honor its demand for appraisal, failed to provide documents needed to adjust the loss, and to timely pay the appraisal award.

Manor House sought extra-contractual damages related to rental income that it said it lost because of the delays in repairing the complex caused by “Citizens procrastination in adjusting and paying the Manor House claims,” the court documents said.

The trial court then granted Citizens’ motion for partial summary judgment regarding the breach of contract claim for rental income, saying “nothing in the insurance contract provides coverage for lost rents,” and “there is no coverage as a matter of law” for the damages Manor House sought.

Fifth District Ruling

Manor House appealed the trial court’s motion that kept it from pursuing a claim for extra-contractual consequential damages and the Fifth District reversed the trial court’s decision. The Fifth District claims the trial court had ignored a general proposition that an injured party is entitled to monetary damages that would put it in the same position it would have been if the contract had not been breached by another party.

“In granting summary judgment, the trial court denied Manor House the opportunity to prove whether the parties contemplated that Manor House, an apartment complex, would suffer consequential damages in the form of lost rental income if Citizens breached its contractual duties to timely adjust and pay covered damages, which in this case allegedly resulted in a significant delay in completing repairs so that units could once again be rented,” the Fifth District opinion said.

It further noted that while Citizens is immune from bad faith claims because it is a government entity the “consequential damages Manor House seeks are based squarely on breach of contract claims requiring no allegation or proof that Citizens acted in bad faith.” It concluded Citizens was not in fact statutorily immune from that aspect of Manor House’s claim.

Florida Supreme Court Weighs In

The Florida Supreme Court quashed the Fifth District’s finding, saying extra-contractual, consequential damages are not available in a first-party breach of insurance contract action because “the contractual amount due to the insured is the amount owed pursuant to the express terms and conditions of the policy.”

While extra-contractual damages are available in a separate bad faith action, they are not recoverable in this action against Citizens because the insurer is statutorily immune from first-party bad faith claims, the court said.

The high court said the trial court and the Fifth District had acknowledged that the policy did not include coverage for lost rental income, but the Fifth District ruled the trial court had denied Manor House its opportunity to prove it would suffer consequential damages from lost rental income if Citizens breached its contractual duties to timely adjust and pay covered damages. The Fifth District’s conclusion, the court said, is based on the premise that parties can “contemplate” remedies outside the insurance policy’s express terms.

“However, as the trial court properly concluded, the parties must rely on what they actually have pursuant to the express terms and conditions of the insurance policy,” the court stated.

The court ultimately concluded that extra-consequential damages are not available in a first-party breach of insurance contract action because the contractual amount due to the insured is the amount owed per the terms and conditions of the insurance policy.

Additionally, “Extra-contractual damages are available in a separate bad faith action … but are not recoverable in this action against Citizens because Citizens is statutorily immune from first-party bad faith claims,” the opinion states.

Impact on Industry

Florida attorney Derek Goldsmith of firm Kelley Kronenberg in Fort Lauderdale said the ruling was not a surprise, but was still important because the Florida Supreme Court’s holding that the consequential damages Manor House sought are not permitted in a breach of contract first party action was so broad that it also applies to private carriers in these circumstances.

Goldsmith said the plaintiffs tried to allege they were entitled to the consequential damages but in a breach of contract action for first party claims trial courts only have to determine if there is coverage under the policy and the extent of the coverage.

“The allegations that Manor House set forth are reserved solely for actions related to bad faith, which are prescribed by Florida Statutes,” he said. “They were trying to put the cart before the horse because bad faith is not ripe until full liability is found against a carrier.”

But since Citizens is immune from bad faith suits, it was not liable here.

Goldsmith had the Florida Supreme Court ruled differently, “the flood gates would have been open” for homeowners lawsuits seeking an array extra contractual damages that are prescribed solely for bad faith suits, not contractual damages.

“It really is a decision that should be of no surprise because the framework has already been laid for what’s appropriate in a breach of contract for first party property action, and what’s appropriate in a bad faith action,” he said. “And if you’re seeking consequential damages because the insurance company failed to adjust the claim in an appropriate way, those are reserved solely for bad faith and not for the underlying breach of contract.”