Supreme Court Shocker

Mierzwa overturned, Ceballo upheld, sanity restored!

September 20, 2007 will prove to be a memorable day for Florida insurers. In what can only be described as a stunning series of developments, the Florida Supreme Court today reversed the decision of the First District Court of Appeal in Florida Farm Bureau v. Cox and in the process overturned the dreaded Mierzwa decision of the Fourth District Court of Appeal. Not content with this earth-shaking bit of news, the Court went on to uphold the Citizens v. Ceballo decision of the Third District Court of Appeal, restoring a sense of sanity in the insurance law field which has been missing since the Mierzwa decision was rendered over three years ago.

Cox is the big news. The Mierzwa rule construing the Valued Policy Law to require insurers to pay policy limits whenever a total loss or “constructive” total loss occurs, regardless of the fact a significant part of the loss resulted from an excluded peril, had rocked the Florida insurance market. This ruling caused insurers to pay billions in additional damages for losses resulting from flooding and storm surge during the infamous 2004 hurricane season under windstorm policies which clearly and unequivocally excluded flood loss and storm surge, the major causes of damage from the 2004 hurricanes which hit coastal Florida. In a gross misconstruction and over-simplification of the Valued Policy Law, the Mierzwa court had held that once a total loss was found to have occurred, the insurer was obligated to pay the policy limits despite the fact the damages from a covered peril (windstorm) may have been virtually inconsequential in the context of the overall damages. Although the legislature amended the VPL in 2005 to address this issue, it was made strictly prospective in application and provided no relief for the industry still facing hundreds (if not thousands) of lawsuits seeking the full policy limits under the old VPL as construed by the Mierzwa court. When things seemed they couldn’t get any worse, the First District added to the mayhem with its decision in the Ondis v. State Farm case which extended the interpretation of a total loss from the traditional measure of an “actual” total loss under the “identity test” and the determination of a “constructive” total loss where local building authorities prohibited repair or reconstruction, to a new “economic test” based upon the relationship of the damages to the pre-loss value of the structure.

With the decision in Cox, a sense of normalcy has returned. In a unanimous decision the Court held that the VPL was intended to address only matters of valuation and not causation. In a concisely written opinion the Court left no doubt that the Mierzwa rule was officially dead. Not once, but twice in the opinion it was stated that the Mierzwa holding was expressly disapproved by the Court in reaching its decision. It was a complete victory for the industry in every respect. Even the most optimistic spectator felt the Court could well overturn Mierzwa, but would probably make some concession or carve out some exception to appease the plaintiffs’ bar and the consumer activists who had championed the Mierzwa cause. No such concession was made and no exceptions were carved out. The Court simply overturned Mierzwa and left no doubt of its conviction in doing so. For the remaining “Mierzwa cases” and the many cases now on appeal across the state, it is a new day.

The Ceballo case seems in some respects almost an afterthought in light of the monumental Cox ruling, but it is no less important. The Ceballo decision upheld the Third District in finding that Ordinance or Law coverage must be paid only when the insured has actually incurred the additional damages and only in the amount of those additional damages incurred, not the full amount of coverage as an automatic recovery in the event of a total loss under the VPL. Indeed, the Supreme Court went on to suggest this would apply to all “additional coverages” offered under policies, such as the “Additional Cost of Construction” coverage found in many residential policies in Florida. The Mierzwa decision had held those coverages were recoverable in full in the event of a total loss under the VPL, regardless of the actual amount of such damages or even where there were no such damages ever incurred. In yet another unanimous decision of the Supreme Court, the Ceballo case put this to rest in no uncertain terms.

It was a stunning turn of events, to say the least. For insurers still facing claims from the 2004 hurricane season, those claims may now be handled appropriately and effectively under the Cox ruling and it can be anticipated that many of those cases will quickly settle in light of the Supreme Court’s decision.

While the focus of these issues has been directed at the storm claims from 2004, the full significance of the Supreme Court’s rulings in Cox and Ceballo will be felt in many other areas of claim disputes. The application of the Mierzwa rule has already found its way to other types of losses (in fact, the Ceballo case was a fire loss claim) and threatened to adversely impact virtually all property losses. With these rulings, the Supreme Court has stemmed the tide of those claims and will put them to an end in short order.

So it is time to raise our glasses and toast the Supreme Court. And while we do so, we should offer a special toast to Florida Farm Bureau and Mark Upton, the trial attorney on the Cox case, for their commitment to pursuing this result at great effort and expense. While there remains much work to do to bring these storm claims to an end, the process will now be a fair and efficient one which ultimately will work to the benefit of insurers and policyholders alike.

As always, should you have any questions about these or any other claim-related issues, we invite you to contact our office for any support or assistance we can provide.