For an insurer, numerous obligations are triggered upon notification of the existence of a claim. One of these is when a coverage defense can be asserted. The United States Court of Appeals for the Eleventh Circuit recently clarified that in order to raise valid coverage defenses and steer clear of preventable pitfalls, insurers must be cognizant of the timing provisions required under Florida Statute 627.426, also known as the Florida Claims Administration Statute (FCAS). The Eleventh Circuit has jurisdiction over federal cases originating in the States of Alabama, Georgia, and Florida. Under the FCAS, the term “coverage defense” means “a defense to coverage that otherwise exists.” In other words, even though the insured’s loss does not fall outside the scope of its coverage, other factors justify relieving the insurer of its obligation to cover a particular loss.
The FCAS places two clearly-defined time requirements upon an insurer and the failure to strictly comply with those requirements can result in the failure of an otherwise valid coverage defense. The operative portion of the FCAS states that a liability insurer may not deny coverage based on a coverage defense unless:
(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and
(b) Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:
(1) gives written notice to the named insured by registered or certified mail of its refusal to defend the insured;
(2) obtains from the insured a non-waiver agreement following full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation; or
(3) retains independent counsel which is mutually agreeable to the parties.
Fla. Stat. § 627.426(2).
In Mid-Continent Cas. Co. v. Basdeo, 11-12938, 2012 WL 2094376 (11th Cir. June 12, 2012), the U.S. Court of Appeals for the Eleventh Circuit held that “failure to comply with both requirements [of 627.426(2)] results in waiver of the coverage defense.” That case involved Hurricane Wilma-related property damage in 2005. The owner of the property, Southgate, hired First State, a contractor insured by Mid-Continent, to perform roof replacements. During the repair work, tarps that First State installed were poorly secured and caused water damage to one of the resident’s units. On September 11, 2006, the unit owner made a claim for damages stemming from First State’s work to its insurer, Mid-Continent. On July 18, 2007, Basdeo and other residents filed suit against First State, but First State never notified Mid-Continent of the lawsuit, did not request that Mid-Continent provide a defense, and was uncooperative and generally unresponsive to Mid-Continent’s attempts to contact First State.
On or about August 8, 2007, Mid-Continent requested that First State provide further information and reiterated that First State was contractually obligated to cooperate. On September 19, 2007, the Association also filed suit against First State. On October 3, 2007, Mid-Continent received a copy of the Basdeo lawsuit from Basdeo’s attorney. By April 2008, a default had been entered against First State in both lawsuits. It was not until April 17, 2008, that Mid-Continent formally denied coverage to First State.
The Court addressed two issues that are important to the construction industry. The first issue was whether coverage could be denied due to the insured’s failure to request a defense. The Court held that Mid-Continent was estopped from asserting this coverage defense because it failed to comply with the FCAS. The Court stated that “having received no response to its August 8, 2007 letter and having learned that a motion for default had already been granted against First State, Mid–Continent ‘should have known’ of its coverage defense relating to First State’s failure to request a defense on or shortly after October 3, 2007. At that point, Mid-Continent was obligated to comply with both conditions.”
The Court then addressed a second issue – whether Mid-Continent could deny coverage based on First State’s failure to cooperate pursuant to the terms of the insuring agreement. The Court reached the same conclusion that it reached in relation to First State’s failure to request a defense: that the failure to cooperate is also a coverage defense and that Mid-Continent “should have known” of that defense by or shortly after October 3, 2007 when it first received a copy of the subject lawsuit. That, in turn, triggered its obligation under the FCAS to notify First State within thirty days of its reservation of rights to assert the failure-to-cooperate coverage defense.
In other words, the time requirements under the FCAS begin to run as soon as the insurer knew or should have known of any potential coverage defense and it cannot raise a coverage defense, such as the failure to request a defense or the failure to cooperate, if it does not strictly comply with the FCAS. Insurers should take note of this decision and be mindful of the strict time requirements the FCAS imposes so that all available coverage defenses are preserved.