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Seville Place Permitted to Add a Bad Faith and Punitive Damage Claim against State Farm after Umpire Signed Appraisal, but before Final Judgment.

On October 14, 2009, the Third District Court of Appeal ruled that an insured could proceed with a bad faith and punitive damage claim against State Farm in its initial lawsuit against the insurer for damages from Hurricane Wilma. 

The association made a claim under the policy for hurricane-related losses.  State Farm inspected the property and estimated the total amount of loss was $324,017.00 for repairs to the roofs.    In January 2006, it made two payments on the claim which totaled $90,564.62, reducing the amount payable by the deductible and depreciation.  On the other side of the spectrum, Seville Place’s estimate of the damage exceeded $4.6 million.

In October 2006 (a year after the loss), Seville Place made a written demand for appraisal. The policy contained a typical appraisal clause that said:

If we [State Farm] and you [the Association] disagree on the value of the property or the amount of loss, either may make written demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser. Each party will notify the other of the selected appraiser's identity within 20 days after receipt of the written demand for an appraisal. The two appraisers will select an umpire. If the appraisers cannot agree upon an umpire within 15 days, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. . . . If we submit to an appraisal, we will still retain our right to deny the claim.

The association filed suit after State Farm would only agree to appraisal under certain conditions. The appraiser and the umpire signed a final appraisal award, fixing the insured loss at $2,960,405.   The Association then filed a Motion asking to amend its complaint to include bad faith and punitive damage claims.  State Farm objected, indicating that Seville Place must obtain a final judgment from a jury before it may proceed with its bad faith and punitive damages claim. The Court disagreed.  It said:

State Farm originally estimated the Association's covered loss at $324,017. This is less than eleven percent of the amount determined by the appraisal process. State Farm will have an opportunity to explain this fact, to explain the extraordinary length of time it has taken to resolve the Association's claim, and to defend State Farm's aggressive legal tactics (including the unfounded imposition of conditions on the contractually-stipulated appraisal provision and the last-minute attempt to remove the neutral umpire). For now, however, we find no basis in this record to quash the orders below as requested by State Farm.

 The Court also rejected State Farm’s argument that a bad faith claim is premature until the insurer exhausts all appellate remedies regarding liability and loss amount, noting no “decision by this Court or the Florida Supreme Court has held that liability and the extent of damages must also be “finally final,” surviving any appellate remedies sought by an insurer, before the insured's bad faith claim is ripe.”

Of course the decision is not final until all post-trial motions have been resolved.  However, it does give hope to the thousands of community associations that are still struggling to obtain insurance proceeds for losses sustained from Hurricane Wilma and other storms.

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Citizens' Property Insurance Corporation announced it intends to increase premiums by approximately 20% for buildings with a replacement value over $10 million. 

Citizens' Property Insurance is the state-run, not-for-profit insurer of 'last resort' in Florida, created in 1992 and operating pursuant to Section 627.351, Florida Statutes.  It insures over 23,000 commercial residential properties in Florida and recently issued an Agent Technical Bulletin notifying the public of its intent to increase premiums for policies affording coverage to properties valued in excess of $10 million.  Many policyholders will see rates increase by 20%.  Insurance premiums are often the most significant line item in a community association budget.  Communities already struggling with shortfalls and bad debt need to take the increases into account when preparing budgets for the upcoming year.

This news comes at a time where two insurance companies were recently forced into receivership to be liquidated.  The Florida Department of Financial Services has been appointed as receiver for American Keystone Insurance Co., a company that entered the Florida market in 2007 and wrote policies covering homeowners, condominium owners and condominium associations.  According to the Department's website "in accordance with the terms of the liquidation order, all policies are canceled at 11:59 p.m. on November 8, 2009, unless otherwise canceled earlier in the normal course of business." 

The Department of Financial Services has been appointed and currently serves as receiver for 50 insurance companies.  Florida Insurance Guaranty Association ("FIGA") will adjust and pay claims associated with the American Keystone policies, subject to its limitations and the claims filing deadline. 

FIGA protection is only available for admitted carriers.  If you are not aware of the differences between admitted and non-admitted (surplus lines) carriers, please contact your community association attorney or insurance professional.

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What does an Association do if it has an unexpected repair or improvement and does not have sufficient money in its budget to fund the work? What if the Association had the money to fund the repairs through its reserves but now needs to replenish the account.

There are two options available to the Association. The first option is a straight forward special assessment. The problem is there may be limitations in the governing documents as to the extent of a special assessment which can be approved by the Board versus one which must be placed before the membership for approval. Also, in this economy passing a special assessment does not necessarily mean the Association will receive those funds. Additionally, efforts to foreclose to recover the special assessments result in Associations taking title to properties which have no equity and are subject to a first mortgagee. This leads the Association to its second option, borrowing the money.

If the Association is successful in negotiating its loan, it would permit ready access to the funds needed. More importantly it could result in only a minimal increase to the regular assessments making the payments easier for owners to make. The key to ensuring a loan offers these benefits is to have the Association’s counsel involved in the process from the start.

Basic Steps to Obtaining a Loan
1. Confirm the Association has the authority to borrow money. This requires an analysis of both Florida Statutes and the governing documents of the Association.

2. During duly noticed Board meetings the Board must decide to borrow money, approve the loan terms and approve the loan documents.

Loan Types
There are three primary types of loans an Association can obtain:
1. Line of Credit - The Association borrows a specific amount of money but only draws on the funds as needed. As such, the Association only has to repay the amount used and interest is only determined based on the outstanding balance.

2. Term Loan - The entire loan amount is funded to the Association at the time of the loan closing. The Association is then required to pay the loan back over a specific period of time (a/k/a term).

3. Combination (line of credit + term loan)

Upcoming Post Preview
My next post will briefly discuss things to avoid and the types of documentation involved in a loan.

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In these troubling economic times we see more and more owners abandoning units or failing to attend to the maintenance and repair needs of the unit. Owners are obligated to maintain the unit in a manner that does not cause or contribute to damages to other portions of the condominium property.  Mold damages often result from slow and ongoing water leaks and are therefore not necessarily characterized as casualty damages for insurance coverage to apply.  Even if there is a casualty, most policies severely limit or exclude mold-related costs. 

The Board of Directors should consider creating standards, rules or criteria to hopefully prevent, or at least minimize, any mold-related problems.  Please consider the following suggestions: 

1. Inspect all appliances within the Unit and all related hoses and connections for condensation and leaks at least monthly;
2. Inspect units to determine whether heating, ventilation, or air-conditioning ducts, vents, and intakes are covered or blocked;
3. Inspect major appliances, including, but not limited to, hot water heaters, refrigerators, dishwashers, heat pumps, air conditioners, ventilation systems, humidifiers and dehumidifiers and require these components to be serviced, cleaned and maintained by a licensed professional at least annually;
4. Recommendations to empty, clean and dry refrigerator, air conditioner, dehumidifier and all other drip pans and filters on a continuous and regular basis and to de-ice and defrost all freezers and ice making devices at least annually;
5. Monthly inspections to determine whether all balcony weep holes are clear/clean to ensure proper drainage;
6. Require the owners to have the air conditioning and humidistat operating at all times;
7. Require the Unit Owner to do the following when a Unit is expected to be or is actually vacant or unoccupied for a period of seven (7) consecutive days or more:

• Turn off the main water supply to the Unit, and the individual water supply to the refrigerator, dishwasher and hot water heater, as well as any other device in the Unit utilizing the water supply, except emergency or life-saving devices such as fire sprinklers;
• Turn off the electric power to the water heater, being careful not to turn off power to the air conditioning, humidistat, smoke detectors, carbon monoxide detectors, emergency lighting or other emergency or life-saving devices; and
• Arrange to have someone routinely and periodically inspect the Unit, in order to maintain a continuous and meaningful presence in the Unit, to determine whether any mold, moisture, water leaks, or damage has occurred and notify the Association immediately.

The most proactive communities will devote staff or hire outside vendors to conduct inspections.  Some communities have amended their governing documents to authorize the Board of Directors to enter into maintenance contracts (for appliances and other facilities in the units) as a common expense to avoid the situation explained in the recent article written by Fallan Patterson.  While everyone knows that money is tight, Ben Franklin was right when he said "an ounce of prevention is worth a pound of cure" when it comes to these types of issues.

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The Department of Business and Professional Regulation (DBPR) issued its Report to the Governor, President of the Florida Senate and Speaker of the Florida House of Representatives Regarding Costs Associated with Fire Sprinkler Retrofits and the Impact of Retrofitting on Insurance Premiums.

When Florida first adopted the Uniform Fire Code, the administrative code required all high-rise buildings to be protected throughout by an approved, supervised automatic sprinkler system or an engineered life safety system approved by the local Fire Marshall within 12 years of January 1, 2002.  The 2003 Florida legislature modified this requirement for high-rise condominiums by adopting SB 592 (now modified further and set forth in Section 718.112(2)(l), Florida Statutes).  It allows two-thirds of the unit owners in a condominium to vote for a partial retrofit, rather than a full retrofit of the buildings.  The deadline for completion was extended to the end of 2014.

Last year the Florida legislature adopted SB 714, a bill primarily devoted to insurance issues.   If the bill would have become law the deadline for condominium associations to retrofit the buildings (or retrofit the common areas with owner approval or implement improvements set forth in an approved Engineered Life Safety System "ELSS") would have been further extended to 2025.

Governor Crist vetoed SB 714 citing safety reasons.  He directed the DBPR to study retrofit costs and any impact on insurance premiums.  The report contains the following conclusions and recommendations:

• Community association leaders are taxed with immediate needs -  "most notably collecting regular assessments and addressing a significant wave of foreclosures".  Unit Owners are likely to reject any attempts to impose the costs associated with retrofits. 
• Efforts on the part of the Division are necessary to increase awareness of the sprinkler retrofit requirements.
• Insurance discounts resulting from retrofits are insignificant because the discount (if available) does not apply to the windstorm portion of the policy.  Moreover, no credits or discounts are required for a partial (common area) sprinkler system.  The Division recommended legislative action to provide for insurance discounts.

The report contains several exhibits, including a copy of the results of the CALL survey and a report issued by the Space Coast Communities Association.

Whether your association opt-out, retrofits, implements an ELSS or otherwise, community leaders need to have a plan in place.  Please answer the following questions for yourself and for the benefit of the residents of the community:

1. Do you have a fire emergency plan?
2. Have residents and employees been given full instructions on the details of the plan?
3. Can the buildings be evacuated to the street without interfering with emergency personnel?
4. How will you handle physically challenged residents evacuation?
5. Are all exit doors and exitways clear?  Are emergency facilities in place and functional?

Please contact us if your association needs help complying with life safety requirements or developing (and implementing) life and fire safety plans for the community.

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You Tell Us !

As seen today on the Sun-Sentinel Condo Blog, legislators and government officials need to know exactly how community associations are struggling in order to promote meaningful change.

Take the Survey Issued by the Community Association Leadership Lobby (CALL) to demonstrate the magnitude of the financial crisis on Associations and to influence the decisions made by legislative, regulatory, business and community leaders across Florida. 

Please spend a few minutes taking the Survey.  The responses are completely confidential - neither you nor your community’s name will be identified in the aggregate responses reported.

The deadline for completing the CALL Survey on Community Association Financial Stability is October 25th, so please take a few minutes now to provide your responses and help us achieve a deeper and more accurate understanding of the financial impact that the mortgage foreclosure crisis and economic downturn has had on your community.

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