Effective in 2005,
Florida statutes defined “sinkhole loss” to mean “structural damage to the
building, including the foundation, caused by sinkhole activity,” and they left
the all-important term “structural damage” undefined.
Homeowner’s
policies issued in the state employed that formulation until May 17, 2011, when
Florida adopted a much narrower five-part definition of structural damage that
applied to policies affording coverage for sinkhole loss, and many courts construing
the 2005 language held that the term “structural damage” meant nothing more
than “damage to the structure.” Several weeks ago in Hegel v. First Liberty Ins. Corp., 778 F.3d 1214 (11th Cir., Feb. 27, 2015), a
unanimous Eleventh Circuit panel held: (1) that defining structural damage to
mean any “damage to the structure” was “facially unreasonable” and “untenable;”
and (2) that the term was properly understood to mean “damage that impairs the
structural integrity of the building.” It also refused, however, to look
to the narrow 2011 formulation when dealing with a policy and a loss that
preceded its effective date.
The Hegels owned a
home in Spring Hills, Florida, and they made an insurance claim after
discovering damage to the walls and floors on March 1, 2011. Their
homeowner’s carrier, First Liberty, denied the claim after its engineering
expert concluded that the damage could be attributable to differential
settlement and ordinary concrete shrinkage as opposed to sinkhole activity and
that, in any case, it did not rise to the level of structural damage as defined
in the 2011 statute. The Hegels then secured several engineers of their
own, who concluded that the home had suffered “widespread minor cracking” as a
result of sinkholes and recommended $145,775 in subsurface grouting and
$20,743.17 in cosmetic damage repairs.
The contract of
insurance employed the 2005 formulation and left the term structural damage
undefined, and the Hegels filed suit. Cross-motions for summary judgment
followed. To obtain expedited review, First Liberty stipulated that
structural damage meant any damage to the structure, but it nonetheless argued
that it was entitled to summary judgment, contending that the 2011 definition
of structural damage governed. The Middle District of Florida granted the
policyholders’ motion, and an appeal followed.
On February 27th,
the Court of Appeals reversed. Judge Ronald Gilman’s opinion rejected the
broad interpretation of the term structural damage that both parties had agreed
to in the court below. As he explained:
[C]onstruing
“structural damage” to mean simply any “damage to the structure” in the context
of the insurance policy is facially unreasonable.
*
*
*
The district court
awarded the Hegels damages for all subsurface and cosmetic repairs based on the
parties’ stipulation that there was “physical damage to the Plaintiffs’
home.” Because “structural damage” is necessary for the Hegels to recover
under the policy, the court must have equated “physical damage to Plaintiffs’
home” with “structural damage to the building.” Equating the two, however,
essentially defines “structural damage” as “physical damage” – an untenable
result. Such a construction would render the word “structural”
meaningless because all property damage is physical, thereby violating a
foundational rule of contract interpretation that every word must be given
effect.
Instead, the panel
looked to what it dubbed the “excellent analysis” in Gonzalez v. Liberty
Mut. Fire Ins. Co., 981 F.Supp.2d 1219 (M.D.Fla. 2013), and it held that
the phrase “structural damage to the building” means “damage that impairs the
structural integrity of the building.”
The court explained
that this interpretation drew support from the fact that prior to 2005, the
Florida legislature had defined sinkhole loss to mean “actual physical damage
to the property covered.” In 2005, that was changed to “structural damage
to the building,” and the statute doing so recited that the legislature’s
intent was “generally to reduce the number of sinkhole claims.” In Judge
Gilman’s words, “[t]his statement strongly implies that ‘structural damage’ is
different from – and more restrictive than – ‘actual physical damage.’ “
As noted above,
however, the panel declined to incorporate the 2011 amendment’s definition of
structural damage into the Hegels’ insurance policy. For those reasons,
it remanded the case to the trial court for a determination of how much
structural damage was actually due to sinkhole activity when the term was
“properly defined.”