Insurance contracts are subject to numerous statutes and regulations specifying whether and how certain facts must be disclosed, certain coverages must be offered and certain coverage options must be accepted or declined.  These rules often contain gaps or ambiguities, which frequently give rise to class actions. In Allen v. USAA Casualty Insurance Co., No. 14-13478 (11th Cir. June 25, 2015), the Florida statute in question required insurers to use a state-approved form for policyholders who wished to reject building ordinance or law (BOL) coverage in their homeowner’s policies. Dismissing a class action, the U.S. Court of Appeals for the Eleventh Circuit ruled that the statute did not apply to policyholders who accepted BOL coverage at a greater-than-minimum level.  As an alternative basis for dismissal, the court construed a separate statute to mean that technical defects in insurance policies do not entitle policyholders to avoid the policies’ terms.  The ruling has the potential to calm the class action waters.

Building Is Hard

Local building regulations generally do not apply to homes that were erected before they were enacted—except when those homes are remodeled or extensively repaired. That case can present a problem for property owners with homeowner’s insurance, even when they obtain coverage that offers replacement costs, rather than actual cash value.  Replacement coverage typically promises to “restore” homes to their original condition, and building to code can be significantly more expensive than simply “restoring.” Consequently, policyholders with older homes need the additional protection of BOL coverage, which pays the additional costs associated with making repairs compliant with building and zoning ordinances. BOL coverage is sold as a percentage of the general coverage. Thus, 25% BOL coverage on a $100,000 policy covers compliance-related costs up to $25,000.

A Florida statute provides that every prospective purchaser of a homeowner’s policy must be offered a choice of coverages that includes both (i) a replacement cost policy or endorsement without BOL coverage and (ii) a replacement cost policy or endorsement that includes BOL coverage. Fla. Stat. § 627.7011.  In the latter case, the BOL coverage “may be limited to 25 percent or 50 percent of the dwelling limit, as selected by the policyholder.”  Id.

Subsection (2) of the statute goes on to state:

Unless the insurer obtains the policyholder’s written refusal of the policies or endorsements specified in subsection (1), any policy covering the dwelling is deemed to include the law and ordinance coverage limited to 25 percent of the dwelling limit. The rejection or selection of alternative coverage shall be made on a form approved by the [Florida Office of Insurance Regulation (“FOIR”)].

Too Much Insurance

The plaintiffs in Allen were a Pensacola couple who insured their home with USAA from 2002 until 2013.  Until 2006, their policies included 25% BOL coverage.  But the Allens’ policies from 2006 through 2013 each contained a page with the heading, “Building Ordinance or Law Coverage – Florida,” specifying that the policy provided 50% coverage.

That page, however, was not a “form approved by the [FOIR].”  The Allens asserted, therefore, that their “selection” of 50% coverage had not been made in the manner specified by Section 627.7011.  On behalf of a putative class, they sought to recover all premiums paid for the increased BOL coverage.

Floor vs. Default

The plaintiffs’ case was simple:  under the plain language of the statute, the “selection” of “alternative coverage” to the 25% provided by their prior policies could not be made on a non-approved form.  The court of appeals summarized it this way:

“Considered in isolation, the Allens’ interpretation of this sentence [from Subsection (2)] is persuasive.  … The word ‘alternative’ is … not limited to a downward departure.  If a policyholder selects 50% BOL coverage, she has chosen that amount and rejected the 25% BOL coverage.

But the court also found the argument to be “severely undermined” when the language of Subsection (2) was “considered within the entire context of § 627.7011.”  Specifically, it found the argument to be inconsistent with the language of the preceding term:

“Although subsection (2) requires the written rejection or selection of alternative coverage on an approved form, subsection (1) contains no such requirement and simply provides a BOL policy ‘may be limited to 25 percent or 50 percent of the dwelling limit, as selected by the policyholder.’  From this discrepancy, one can infer that when a policyholder chooses 50% coverage, or any other level … above 25%, writing on an approved form is not required.  Had the Legislature intended to require a policyholder’s written consent on an approved form to select BOD coverage above 25%, it presumably would have written subsection (2)’s requirement into subsection (1).

On the basis of this reasoning, the court found that the word “selection,” as used in Subsection (2) of the statute, referred only to the selection of BOL coverage at a level between 1% and 24%.  “These percentages are lower than the 25% default coverage level, but would still have to be ‘selected’ on an approved form.”  While expressing itself in this way, the court rejected plaintiffs’ view that 25% was a “default” level of BOL coverage and found that the Legislature had intended it only as a “floor.”

Get Real

As an alternative basis for affirming the dismissal of the Allens’ case, the court interpreted a second statute, Fla. Stat. § 627.418(1), which states:

“Any insurance policy, rider, or endorsement otherwise valid which contains any condition or provision not in compliance with the requirements of this code shall not be thereby rendered invalid …, but shall be construed and applied in accordance with such conditions and provisions as would have applied had such policy, rider, or endorsement been in full compliance with this code.  In the event an insurer issues or delivers any policy for an amount which exceeds any limitations otherwise provided in this code, such insurer shall be liable to the insured or his or her beneficiary for the full amount stated in the policy in addition to any other penalties that may be imposed under this code.

The Eleventh Circuit read this language to mean that a non-conforming policy purporting to offer BOL coverage at less than 25% would have to be construed to provide the 25% “floor.”  However, where, as in Allen, the policy allegedly provided too much coverage, the plaintiffs had no remedy for the alleged violation (beyond the increased coverage),except to the extent that the insurance code “expressly authorizes other penalties.”  The court rejected the plaintiffs’ argument that they could receive both 50% coverage and a refund of their additional premiums.

In effect, the court construed Section 627.418 to mean that technical violations of regulations governing the form of insurance contracts should not, by themselves, create windfalls for class action plaintiffs.  That reading should resonate beyond the realm of BOL coverage.