The land in Florida is prone to sinking and insurance companies must often scramble for solid footing on which to anchor the scope of coverage for sinkhole losses.  In Hegel v. First Liberty Insurance Corporation (11th Cir. Feb. 27, 2015), the Eleventh Circuit provided some much needed guidance when it held that the plain meaning of “structural damage” in a homeowners policy cannot be simply “damage to the structure” in the context of determining coverage for a sinkhole loss.

Unsolid Footing

In March 2011, the Hegels alleged that they “discovered damage to their home, including, but not limited to, progressive physical damage to the walls and floors of the residence,” and they submitted a claim to their homeowners insurer, First Liberty.  The policy issued by First Liberty provided coverage for “Sinkhole Loss” which was defined as “structural damage to the building, including the foundation, caused by sinkhole activity.”  The policy, however, did not define structural damage.

Sinkhole coverage in Florida is governed by statute.  The statute in effect at the time the policy was issued contained the same definition of “sinkhole loss” as the policy, but also did not define “structural damage.”  The Eleventh Circuit noted, however, that prior to the 2005 amendment to the statute, “sinkhole loss” had been defined as “actual physical damage to the property covered arising out of or caused by sudden settlement or collapse of the earth supporting such property.”  Fla. Stats. § 627.706(3) (1981) (emphasis added).  The Court also noted that the 2004 Florida Building Code defined “structural” as it relates to a building:

For purposes of this code, “structural” shall mean any part, material or assembly of a building or structure which affects the safety of such building or structure and/or which supports any dead or designed live load and the removal of which part, material or assembly could cause, or be expected to cause, all or any portion to collapse or fail.

Moreover, in May 2011, the Florida Statute was amended to provide a detailed, technical definition of “structural damage,” which references the Florida Building Code.

The engineering company retained by First Liberty to investigate the Hegels’ claim found some cracking and other issues, but determined that the damage to their residence did not meet the criteria for “structural damage” in the 2011 version of the statute.  In addition, the engineer listed several other possible causes of the observed damage, including differential settlement and ordinary concrete shrinkage.  Accordingly, First Liberty denied the claim, stating the residence “ha[d] not sustained structural damage to the building or foundation” and that the damage was “related to normal concrete shrinkage, differential settlement, and improper embedment of [the] foundation.”

The Hegels then requested a neutral evaluation.  Before the neutral evaluator issued his report, the Hegels also filed suit.  The neutral evaluator concluded that because the sinkhole claim was made under a policy with an effective date before the 2011 amendment took effect, the 2011 definition of “structural damage” did not apply.  He concluded that the damage to the home was “the result of a combination of factors, including sinkhole activity,” but that “the observed distresses to the house can primarily be attributed to minor differential settlement of the structure and normal shrinkage/drying characteristics of the masonry materials.”  The neutral evaluator did not apply a particular definition of “structural damage,” but his evaluation found that “[t]here was physical damage that resulted from settlement.”  In addition, a consultant hired by the Hegels determined that sinkhole activity was a contributing cause of the damage to the residence.

Sinking Ground

Following the neutral evaluation, both parties moved for summary judgment.  In order to expedite appellate review, First Liberty stipulated that if the district court concluded that “structural damage” means any “damage to the structure,” it would accept the claimed monetary damage estimates submitted by the Hegels.  First Liberty argued that the 2011 amendment to “structural damage” in Florida Statutes § 627.706 should be incorporated into the contractual definition of the term and that “structural damage” could not mean any “damage to the structure.”

The Federal District Court for the Middle District of Florida disagreed with First Liberty.  It followed prior, unpublished decisions from the district to hold that “structural damage” should be interpreted to mean any “damage to the structure.”  Though, as the Eleventh Circuit noted, there are later decisions from the same court that have defined “structural damage” more narrowly.  See Gonzalez v. Liberty Mut. Fire Ins. Co., 981 F. Supp.2d 1219, 1231 (M.D. Fla. 2013) (holding that “structural damage” means “damage that impairs the structural integrity of the building”); Franqui v. Liberty Mut. Fire Ins. Co., No. 8:12-cv-01257-T-27MAP, 2013 WL 1092405, at *7 (M.D. Fla. Mar. 18, 2014) (unpublished) (holding that “structural damage” means “damage to the structural components of the building, excluding damage that is cosmetic in nature”).

Firming Up the Foundation

On appeal, First Liberty argued that the district court’s decision was erroneous because (1) the plain meaning of “structural damage” cannot be any “damage to the structure” in the contractual phrase “structural damage to the building”; and (2) the insurance policy incorporates the definitions of “structural” from the Florida Building Code and, thus, the definition of “structural damage” as “clarified” in the 2011 amendment to the Florida Statute.  The Eleventh Circuit agreed with First Liberty’s first argument, but disagreed with the second because courts cannot rewrite contracts to add meaning that is not present based on their plain language.

In reaching the conclusion that “structural damage” must mean more than just “damage to the structure,” the Eleventh Circuit analyzed the language of the policy, noting that “[t]erms and phrases cannot be viewed in isolation; ‘courts must construe an insurance policy in its entirety, striving to give every provision meaning and effect.'” (quoting Dahl-Eimers v. Mutual of Omaha Life Ins. Co., 986 F.2d 1379, 1381 (11th Cir. 1993)).

Here, no genuine ambiguity exists because construing ‘structural damage’ to mean simply any ‘damage to the structure’ in the context of the insurance policy is facially unreasonable.  Defining ‘structural damage’ as such merely begs the question of what is ‘structural’ or ‘structure,’ and what does either mean within the phrase ‘structural damage to the building’?

The district court awarded damages to the insureds based on the parties’ stipulation that there was “physical damage to Plaintiffs’ home.”  To reach this result, the Eleventh Circuit surmised that the court must have equated “physical damage to Plaintiffs’ home” with “structural damage to the building.”  However, doing so “essentially defines ‘structural damage’ as ‘physical damage’ – an untenable result.”  Such a meaning would render the word “structural” meaningless, which is inconsistent with the requirement of giving every word in an insurance policy meaning and effect.

The Eleventh Circuit determined that the key issue was the confusion between the word “structural” and “structure,” so it turned to the dictionary to provide guidance on the plain meaning of these words.  “‘Structural‘ is an adjective, defined in the Oxford English Dictionary as ‘[f]orming a necessary part of the structure of a building or other construction, as distinct from its decoration and fittings.'” “The noun ‘structure,’ on the other hand is simply a synonym for a building.”

Based on these definitions, “damage to the structure” would encompass any physical damage to a building, even if only cosmetic, whereas “structural damage” would exclude damage to a building’s “decoration or fittings.” Any structural damage would necessarily encompass damage to the building, but the opposite is not necessarily true; i.e., many types of lesser damage to a building would not be structural damage. To equate “structural damage” with any “damage to the structure,” as the district court did, is thus untenable.

In conclusion, the Eleventh Circuit agreed with the reasoning in the district court’s decision in Gonzalez v. Liberty Mutual Fire Insurance Co., 981 F. Supp.2d 1219, 1231 (M.D. Fla. 2013) (which the district court had not followed in ruling in favor of the Hegels), and construed “the phrase ‘structural damage to the building’ to mean ‘damage that impairs the structural integrity of the building.'”

The court noted that its decision was consistent with the statutory meaning of “structural damage.”  Although the 2005 version of Florida Statute § 627.706 did not define “structural damage,” the legislative history suggests that the phrase must mean more than just damage to the structure.  The Court explained that when the Florida legislature changed the definition of “sinkhole loss” from “actual physical damage to the property covered” to “structural damage to the building,” its intention was “generally to reduce the number of sinkhole claims and related disputes arising under the prior law.”  (quoting Ch. 2005-111, § 17, Laws of Fla.; Ch. 2011-39, § 21, Laws of Fla.).  “This statement strongly implies that ‘structural damage’ is different from – and more restrictive than – ‘actual physical damage.'”

The case was remanded for a finding of how much, if any, structural damage – meaning damage impairing the physical integrity of the home – was due to sinkhole activity.  This holding – together with the amendment enacted in 2011 that provides a detailed, technical definition of “structural damage” – should help reduce the number of sinkhole disputes, requiring more than superficial cracking of exterior finishes to support a sinkhole claim under property insurance policies.