In Johnson v. Omega Insurance Co., 200 So. 3d 1207 (Fla. 2016), the Florida Supreme Court held that an insured was entitled to an award of attorneys’ fees under section 627.428, Florida Statutes and the confession of judgment doctrine based on an insurer’s post-suit tender of policy benefits for a sinkhole claim after the insurer initially denied the claim. To view the Court’s slip opinion click here; to view the Court’s docket click here.
Omega Insurance Co. issued to Kathy Johnson a homeowner’s policy that included coverage for sinkhole damage. When Johnson noticed structural damage to her home, she filed an insurance claim with Omega, asserting that the damage was caused by sinkhole activity on her property. Omega investigated the claim pursuant to chapter 627 by retaining a professional engineering and geology firm to conduct testing. The firm’s report concluded that, while the property was damaged, there was no sinkhole activity on the property. Based on the report, which is presumed correct by statute, Omega denied Johnson’s claim. In turn, Johnson, at her expense, retained a civil engineering firm to evaluate the cause of the damage to her home. Johnson’s firm found that sinkhole activity did cause the structural damage.
Johnson then filed suit against Omega for failing to pay her sinkhole benefits. Upon motion by Omega, the trial court stayed the litigation to allow a neutral evaluation to take place. The neutral evaluation agreed with the report issued by Johnson’s firm. Upon receipt of the report, Omega paid the policy benefits. Johnson then moved for an award of attorneys’ fees under § 627.428 which provides that “[u]pon the rendition of a judgment or decree . . . against an insurer and in favor of any named . . . insured . . . under a policy or contract executed by the insurer, the trial court . . . shall” award the insured its reasonable attorneys’ fees. Based upon the confession of judgment doctrine, which equates an insurer’s tender of policy benefits or a settlement agreement with a “judgment” under § 627.428, the trial court granted the motion.
Omega appealed to the Fifth District which reversed, finding that Omega’s initial denial was not wrongful or unreasonable. The district court equated “wrongful” with an insurer’s bad faith denial of a claim. The Court’s conclusion was buttressed by several facts: (1) Omega complied with its statutory obligations under chapter 627 by retaining an engineer to identify the cause of loss and issue a report; (2) The report, which is presumed correct by statute, found that sinkhole activity was not the cause of the damage; (3) Before filing suit, Johnson failed to present her countervailing report to Omega, failed to at least notify Omega that she disagreed with its report or failed to further attempt to discuss her claim with Omega.
The Florida Supreme Court quashed the Fifth District’s decision, finding that it misapplied both the statutory presumption of correctness found in the sinkhole statutes and § 627.428. The Court addressed two main issues: (1) whether the statutory presumption of correctness for an insurer’s internal report during the investigation process in the sinkhole statutes extends to later proceedings; and (2) whether an insured’s recovery of attorneys’ fees under § 627.428 requires an insurer’s bad faith in denying a valid claim, or simply an incorrect denial of benefits.
The Court—based on prior precedent—concluded that the statutory presumption of correctness in the sinkhole statutes only applies to the sinkhole “initial claims process” and not to litigation instituted by an insured to recover policy benefits. Johnson therefore did not have the burden of separately rebutting that initial presumption to recover attorneys’ fees under § 627.428.
The Court also concluded that “in the context of section 627.428, a denial of benefits simply means an incorrect denial.” An insured does not need to prove that the insurer engaged in bad faith or malicious conduct in denying a claim. Instead, if there is dispute between the insurer and the insured over policy benefits and there is a judgment in favor of the insured or the insurer pays without a judgment, then the insured is entitled to fees under § 627.428.
In its opinion, the Court rejected the insurer’s reliance on State Farm Florida Insurance Co. v. Colella, 95 So. 3d 891 (Fla. 2d DCA 2012), because it found the case to be distinguishable. The Court’s discussion of the case, however, demonstrates that in determining whether an insured is entitled to fees under § 627.428 the insured’s conduct may also be considered. In Colella, the Second District found that there was no breach of contract by an insurer—and hence no entitlement to fees under § 627.428—when the insured litigated “in bad faith to profit from a technicality” and engaged in “manipulation and foul play.”
The upshot of this decision is that once an insurer denies benefits and the insured files suit to dispute the denial, the insurer cannot then abandon its position “without repercussion.” In other words, an insurer cannot “backtrack after the legal action has been filed” by paying the claim to avoid an insured’s fee entitlement under § 627.428. In short, insurers should be absolutely positive of their denial of benefits before informing the insured. If an insured files suit and the denial is proven “incorrect,” then an insured is entitled to fees. Most importantly, it is irrelevant to the insured’s fee entitlement whether the insured fails to challenge the insurer’s denial before filing suit.