When It Comes to Sinkholes, Contracts, Statutes and Regulations Do Matter

September 26, 2014

On August 21, 2014, the United States Court of Appeals for the Eleventh Circuit vacated the decision of the U.S. District Court for the Middle District of Florida in Shelton v. Liberty Mutual, Case number 13-15371 / D.C. Docket No. 8:12-cv-02064-JSM-AEP. This decision confirms that the statutory definitions for structural damage under the May 17, 2011 amendments to the Florida sinkhole statutes apply to property policies issued after those amendments were enacted. The court’s order reversed the positions taken by the District Court that seemed bent on plotting a new course for Florida jurisprudence.

The case on appeal involved a homeowner’s policy issued in July of 2011. The policy provided coverage for “sinkhole loss” and defined sinkhole loss as “structural damage to the building, including the foundation, caused by sinkhole activity.” The policy did not define “structural damage,” but the Florida statute in force at the time the policy was issued did.

The Plaintiffs asserted that the “plain meaning” of the policy term “structural damage” was simply “damage to the structure.” They argued that the statutory definitions for structural damage enacted before the contract was issued did not apply as they had not been expressly incorporated by reference. As a back-up position, Plaintiff argued that, even if the law could be applied to the contract, the carrier was provided more coverage than that provided by the statutory definitions. Plaintiffs argued that the carrier had specifically intended to adopt the “plain meaning” urged by Plaintiffs, thereby granting additional coverage, when it had issued a policy that did not define the term “structural damage.”

The District Court adopted Plaintiffs’ arguments, finding “structural damage to the building” to mean “any damage to the structure” and also finding that statutory definitions in place when the policy was issued were inapplicable unless expressly incorporated by reference. In a footnote, the court also adopted Plaintiffs’ back-up argument, advising: “[N]otably, Liberty Mutual’s motion ignores bedrock Florida insurance law that an insurer may provide more coverage than is statutorily required.” In this footnote, the court appeared to find that:

1. The absence of a policy definition was sufficient to establish that the parties had specifically intended to reject the statutory definitions;
2. That the insurer intended to adopt the court’s own definition of “structural damage” when the policy was issued; and
3. That the insurer had done so in order to provide the greater coverage now argued by Plaintiffs.

Clearly, the lower court’s ruling seemed to mark a sharp departure from all previous decisions regarding the application of statues to contracts and the treatment of undefined terms in contracts.

The Eleventh Circuit, however, reversed that ruling. Consistent with its previous decisions and those of the Florida Supreme Court, it held that valid state statutes in place at the time a contract is made become a part of it and must be read into the contract as if the parties had expressly incorporated them by reference. The court agreed that there is an exception where the contract discloses a contrary intention. However, the court noted that the policy at issue in this case did not incorporate a different definition of “structural damage,” and there was simply no indication that the parties intended to affirmatively reject the statutory definitions. Under Florida law, the absence of an alternative definition meant that the statutory definitions filled the gap. The appellate court also found that the application of the 2011 statutory amendments was not a change in policy terms that would require written notice of a change in policy terms under Fla. Stat. § 627.43141(2) to be effective.

While it remains unclear what prompted the District Court to rule as it did, it seems clear from the Eleventh Circuit’s decision that established precedent regarding the application of statutes to contracts, as well as the treatment of undefined contact terms, remains in place. After a little rough water, the vessel that is Florida jurisprudence is back on its established course.

For any further questions, please contact John Garaffa.