On numerous occasions, we have discussed the importance of obtaining insurance from a financially secure insurance company. Though there are already many reasons to avoid doing business with financially unstable insurance companies, the Florida Supreme Court recently provided another.
In Petty v. FIGA, the insured had to sue her insurance company to collect payment on a valid hurricane claim. During the lawsuit, the insurance company became insolvent, and the Florida Insurance Guaranty Association, or FIGA, became responsible for handling her claim pursuant to the Florida Insurance Guaranty Association Act.
The FIGA Act was enacted to protect claimants and policyholders from the financial loss and excessive delays that result when an insurance company becomes insolvent. Subject to the FIGA Act’s provisions and limitations, once an insurance company becomes insolvent, FIGA becomes obligated to the extent of an insured’s “covered claim.”
In this case, the Court had to determine whether the insured’s statutory claim for attorney’s fees qualifies as a covered claim that FIGA was obligated to pay. The insured’s claim for attorney’s fees was based on a provision of the Florida Insurance Code providing that an insured will be entitled to an attorney’s fee award when coverage is disputed by the insurance company and the insured ultimately prevails in court.
The purpose of this statute is to discourage insurance companies from contesting valid claims, and to reimburse insureds for their attorney’s fees when they must enforce their contract with their insurance company in court. Since the plaintiff successfully sued her insurance company to get her claim paid, she was entitled to her attorney’s fees under this statute.
However, once FIGA stepped in for the insolvent insurance company, the insured’s entitlement to her attorney’s fees was jeopardized. If her claim fails to qualify as a “covered claim” under the FIGA Act, then the insured will not be able to collect her attorney’s fees.
To determine the insured’s entitlement to her attorney’s fees, the Court focused on the meaning of “covered claim.” The FIGA Act defines a covered claim as “an unpaid claim…which arises out of, and is within the coverage, and not in excess of, the applicable limits of an insurance policy to which this part applies….”
From this definition, the Court concluded that a covered claim must possess two distinct characteristics: 1) it must arise, or originate, from an insurance policy; and 2) it must be within the coverage of, or be included within the risks taken on and losses protected against in, an insurance policy.
The parties conceded that the first characteristic existed since the insured’s claim clearly arose from her underlying insurance policy. However, to recover her attorney’s fees, the insured’s claim for fees must also be within the coverage of her underlying insurance policy.
Since the insured’s underlying insurance policy did not expressly give her the right to collect attorney’s fees through the relevant statute, the Court held that her claim for attorney’s fees was not a covered claim under the FIGA Act.
The Court rejected the insured’s argument that the statutory provision authorizing the award of attorney’s fees is implicitly covered by her insurance policy, noting that, “there is a clear difference between an obligation to pay fees that are imposed by operation of law upon a party due to its behavior under the insurance contract and an obligation imposed upon a party by an express provision for which the party contracted.”
Accordingly, the Court held that because the insured’s otherwise valid entitlement to attorney’s fees does not qualify as a “covered claim,” FIGA is not obligated to pay the insured’s attorney’s fees.
The insured in this case is one of the (too) many who have had the misfortune of suffering the consequences of doing business with financially weak or unstable insurance companies. Rather than consider the financial strength of a prospective insurance company, many insureds focus solely on the premium. However, when an insurance company becomes insolvent, the significance of premiums, deductibles, coverage limits, policy terms, and exclusions virtually vanish.
Suffering a loss is a headache enough, and electing to insure with a financially weak or unstable insurance company can only make matters worse. Though the cost of insurance is often the primary factor in selecting an insurance company, the financial strength of the insurance company should not be too far down on the list of things to consider.
If you would like more information about the financial strength of your current or prospective insurance company, or if you would like to explore the possibility of insuring with a financially secure insurer, please contact us.