Florida's "valued policy" law: the eye of the storm.

• Author: Garaffa, John V.

Hurricanes Charley, Frances, Ivan, and Jeanne have once again brought Florida insurance law under the microscope. In the midst of this examination is Florida's valued policy law. For most insureds and their attorneys, there is an expectation that insurance will be available to return the insured's property to its pre-storm condition. Unfortunately, even for professionals, there are common misconceptions about the interplay of contract and law in this area. One such common misconception is the proper application of Florida's valued policy law.

Florida's valued policy law, F.S. [section] 627.702, (1) was first enacted in 1899. Since then, the statute has undergone a number of legislative revisions. Subsection (1) provides that in the event of a total loss by a covered peril, the carrier must pay "the amount of money for which such property was so insured as specified in the policy and for which a premium has been charged and paid." The valued policy law is part of every real property casualty insurance policy written on property in Florida. (2)

As noted by a Florida appellate court in the case of Springfield Fire and Marine Ins. Co. v. Boswell, 167 So. 2d 780 (Fla. 1st DCA 1964), the principal object and purpose of Florida's valued policy law is to fix the measure of damages in case of total loss. (3) To accomplish that goal the statute requires the insurer to ascertain the insurable value at the time of writing the policy. The statute serves to "remove what would otherwise be a very troublesome and difficult issue to resolve either between the parties by negotiation or by the courts in litigation." (4)

There are two essentials of the statute. The first is that the building be "insured by [an] insurer as to a [e.s.] covered peril." (5) The second is that the building be a total loss. If these two facts exist, the valued policy law mandates that the carrier who chooses not to elect to repair (6) is liable to the owner for the face amount of the policy, no matter what other facts are involved as to the cost of repairs or replacement. In other words, if the carrier has liability to the owner for a building damaged by a covered peril and that building is deemed a total loss, that liability under the valued policy law must be for the face amount of the policy. (7)

Originally, the valued policy statute applied to both total and partial losses caused by fire or lightning. In 1939, the Supreme Court of Florida decided American Ins. Co. v. Robinson, 163 So. 17 (Fla. 1939), in which the insurer withheld payment of policy limits for a total loss by fire on the basis that the insured dwelling was infested with termites and damaged by dry rot during the policy period. The insurer stated the infestation diminished the value of the structure and thus the amount that was due under the policy. The Supreme Court of Florida rejected the insurer's position and did not permit depreciation in the face of a covered total loss by fire. The Robinson court stated its ruling was dictated by the valued policy statute. In 1969, the Florida Legislature amended the valued policy law so that the provision referring to total losses applied to all covered perils. Inexplicably, no change was made to the provision of the valued policy law concerning partial losses, which still only applies to losses caused by fire or lightning.

In light of the language of the statute and the opinions interpreting and applying that language, a total loss to insured property caused by windstorm is subject to the valued policy law for total losses but not partial losses. In subsection (2) the law provides that, in the event of a partial loss caused by the perils of fire or lightning only, the insurer must pay "the actual amount of such loss." However, as noted in State Farm Fire and Casualty Co. v. Patrick, 647 So. 2d 983 (Fla. 3d DCA 1994), reh. denied, a partial loss due to windstorm is not subject to the statute.

In Patrick, the insurer paid the insured actual cash value for damages from windstorm and held back depreciation until the insured completed the repairs. On appeal, the insured argued that the withholding of depreciation until the insured completed the repair work was prohibited by the valued policy law. (8) The Florida Third District Court of Appeal held that "section 627.702(2) is not applicable because it covers only partial loss from fire or lightning; this case deals with wind damage." (9) The court further held that "[i]n the absence of a specific prohibition to the contrary, the language of the contract is controlling," thus relying on the policy language to determine whether the insurer could retain hold-back depreciation until repairs were completed. (10)

American Reliance Insurance Co. v. Perez, 689 So. 2d 290 (Fla. 3d DCA 1997), also concerned a partial wind loss. The insureds decided not to repair the property after the loss. Given the insureds' intent not to repair, the insurer paid the insureds actual cash value for the loss. The insureds then sued the insurer for the difference between actual cash value and replacement cost. The trial court awarded summary judgment in favor of the insureds. On appeal, the Florida appellate court first determined that under the policy language, the insureds were entitled to only actual cash value for the loss until they actually repaired or replaced the property. (11) Additionally, the court determined that depreciation was properly considered in determining "actual cash value," (12) reversed the summary judgment in the insureds' favor, and remanded the case. The valued policy law was not even mentioned, presumably because the case involved only a partial loss caused by windstorm, not fire or lightning.

Blanket Coverage--The Exception

Section 627.702 (3)(b) of Florida's valued policy law limits the application of the first two paragraphs of the statute. It provides "The provisions of subsections (1) and (2) do not apply when: (b) Two or more buildings, structures, mobile homes, or manufactured buildings are insured under a blanket form for a single amount of insurance."

While there are no reported cases interpreting [section] 627.702 (3)(b), the practical reason for the limitation is that the "total loss" of any one structure would not implicate the policy limit. Thus, the goal of the valued policy law, speedy payment of the amount the parties have fixed for the property, would not be advanced by applying it where two or more structures are insured under a blanket form for a single amount of insurance.

Definition of "Total Loss"

Florida's valued policy law is implicated when the insured structure is deemed to be a "total loss." Unfortunately, the statute does not define the term "total loss." Complicating perceptions of what constitutes a "total loss" are the impact of FEMA regulations for homes within designated flood plains (13) and the requirements of the Florida Building Code. (14) While both sets of rules may impact the rebuilding process, they do not, by their terms, determine when a property is or is not a total loss for the purposes of Florida's valued policy law.

In cases in which a structure is involved, the courts have applied two tests to determine what constitutes a "total loss": the "identity" test and the "restoration" test. Under the "identity test," a structure is a total loss if the damage to the structure is so severe that it has lost its identity and character as a building, even though a portion of the building's components remain and could be utilized for some useful purpose. (15) Under the "restoration test," a structure is a total loss if a reasonably prudent owner would not use the remains of the structure after the loss as a basis for restoring the building to its pre-loss condition. (16)

In Lafayette Fire Ins. Co. v. Camnitz, 503 So. 2d 1321 (Fla. 1st DCA 1987), (17) the Florida Supreme Court adopted the "identity test," upholding the trial court's use of a jury instruction using that test. The trial court advised the jury:

That in construing a fire insurance policy, by a total loss, is meant that the building has lost its identity and specific character as a building, and becomes so far disintegrated, it cannot be possibly designated as a building, although some part of it may remain standing. It matters not that some debris remains which may be useful or valuable for some purposes. A policy of insurance upon a building is an insurance upon the building as such, and not upon the material of which it is composed. The Court further charges you that if the identity and specific character of the insured building was destroyed by fire, although there was not an absolute extinction of all the parts thereof, it would still be a total loss within the policy of insurance herein.

In light of the Florida Supreme Court's holding, the critical issue is not the limits of the contract between insured and insurer. While the parties agreement may set limits on benefits under the policy, damage which reaches those limits will not implicate the provisions of the valued policy law. Instead, the insurer and insured will need to determine whether the "identity and specific character of the insured building was destroyed."

"Constructive Total Loss"

In addition to the definition of "total loss" under the "identity" test, when an insured building or structure is damaged by a covered peril and an ordinance or regulation prevents repair, it may be deemed to be a "constructive total loss." (18) Such a designation will also result in an application of Florida's valued policy law. The following Florida cases are instructive.

In Netherlands Ins. Co. v. Fowler, 181 So. 2d 692 (Fla. 2d DCA 1966), the policy provided $10,000 in dwelling coverage to the extent of the actual cash value at the time of loss, but not exceeding the amount it would cost to repair or replace the property and without any allowance for increased costs of repair or reconstruction by reason of any ordinance or law regulating...