Insurance policies contain what are referred to as “forfeiture” provisions. These are provisions where an insured through its actions / conduct can arguably forfeit coverage under the policy for a peril or claim that would otherwise be covered under the policy. Typical examples of forfeiture provisions are post-loss obligations contained within the policy such as submitting timely notice, submitting a proof of loss, or complying with an examination under oath provision in a policy. As it pertains to these post-loss obligations (submitting timely notice, submitting a proof of loss, or agreeing to submit to an examination under oath), an insured should comply with them in order to remove any argument from the insurer that the insured forfeited coverage through non-compliance.
The recent case of Axis Surplus Ins. Co. v. Caribbean Beach Club Association, Inc., 39 Fla. L. Weekly D1350c (2d DCA 2014), demonstrates how an insurer can waive a forfeiture provision in a policy. In this case, the insured condominium had a property insurance policy. Fire was a covered peril under the policy. The policy also contained additional coverage (at an additional insurance premium) through an Ordinance or Law Coverage endorsement. This endorsement stated:
“b. With respect to the Increased Cost of Construction:
(1) We will not pay for the increased cost of construction:
(a) Until the property is actually repaired or replaced, at the same or another premises; and
(b) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.”
A fire damaged the property in April 2003. After the governing authority inspected the damage, in late 2004, it implemented the 50% rule that provided “if a building is more than 50% damaged, any reconstruction or repair must comply with current building codes.” This is the reason the insured condominium paid the additional premium for the Ordinance or Law Coverage endorsement. The implementation of this rule resulted in a huge increase to required construction costs because this meant that the condominium would need to replace the damaged building to comply with current flood elevation codes.
Initially, the insurer was cooperating with the insured condominium and was prepared to pay for the replacement work for the fire damage since fire damage was a covered peril. It engaged a contractor that prepared a replacement estimate and intended to pay the full replacement cost. However, in late June 2005, more than two years after the fire damage, the insurer told its insured condominium that it will not pay the increased costs of construction pursuant to the endorsement as it would rely on the two-year clause contained in the endorsement that provided: “Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage, not to exceed two years. We may extend this period in writing during the two years.” In other words, since the repairs were not made within two years from the loss or damage and never extended by the insurer, the insurer was denying the increased construction costs as a consequence of the governing authority requiring the repairs to comply with current code requirements.
The insured filed a lawsuit against the property insurer arguing that the insurer waived the right to rely on the two-year repair period in the endorsement. The insured argued that the two-year provision was essentially a forfeiture provision that an insurer can waive. The Second District agreed that the two-year provision was a forfeiture provision and, relying on Florida law, explained:
“Florida law abhors forfeitures. As a result, [i]f an insurer intends to stand on any forfeiture reservation, it should inform the insured as soon as practicable after it has ascertained facts upon which it bases its forfeiture. It is equally well established that when an insurer has knowledge of the existence of facts justifying a forfeiture of the policy, any unequivocal act which recognizes the continued existence of the policy or which is wholly inconsistent with a forfeiture, will constitute a waiver.”
Caribbean Beach Club Association, supra (internal citations and quotations omitted).
Based on this law, the Second District held that the insurer waived its right to rely on this two-year forfeiture provision. The insurer knew about the two-year provision to complete repairs from the date of loss and never brought it to its insured’s attention knowing full well that its insured expected that the insurer was going to pay the claim including the increased costs of construction as the result of the local governing authority implementing the 50% rule. And, the insurer continued to adjust the claim even after the two-year window actually expired. Since the insurer was not substantially prejudiced by the insured’s noncompliance with the two-year provision, and the insurer could not support that it was prejudiced, the Second District found that the two-year window did not apply and the insured was entitled to the increased costs of construction per the endorsement. To that end, the Court further held:
“The trial court correctly found as a matter of law that the two-year clause was a forfeiture provision waived by Axis [insurer]. When an insurer acquiesces to an insured’s failure to strictly adhere to a timetable of payment or performance, courts are inhospitable to the insurer’s sudden invocation of strict enforcement of forfeiture provisions.”
Caribbean Beach Club Association, supra.
For more information on forfeiture provisions, such as complying with post-loss obligations in a policy, please see: https://floridaconstru.wpengine.com/complying-with-post-loss-policy-conditions-under-an-insurance-policy/.
Please contact David Adelstein at email@example.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.