It is not unheard of for a building in South Florida to sustain water damage from a leaking pipe in the wall.  It can be quite costly to repair the damage because not only do you have to rip open the wall but then the pipe will have to be fixed.  Will your insurer pay for these costs?  Maybe yes, maybe no.

 Recently, a Florida appellate court ruled that an insurance company was liable for the costs of tearing out parts of a home to access the leaking pipe even though the insured’s repair contract could be cancelled by the insured at any time.  The facts in State Farm Florida Insurance Company v. James, 48 Fla. L. Weekly D 2268 (Fla. 5th DCA, December 1, 2023) indicate that after the insured’s home sustained water damage from a leaking pipe, the insured submitted a claim for the cost to tear out and replace those parts of the home needed to access the failed pipe.

The insured’s insurance policy contained the following provision:

Tear Out. If a Loss insured to Coverage A property is caused by water or steam escaping from a system or appliance, we will also pay the reasonable cost you incur to tear out and replace only that particular part of the building or condominium unit owned by you necessary to gain access to the specific point of that system or appliance from which the water or steam escaped.

The insured and insurer both agreed that the tear out costs amounted to $38,834.28.  The insured signed a contract for repairs which contained a provision allowing for cancellation of the contract if the insurer failed to pay the claim.  Because of this provision, the insurer denied the claim on the grounds that the contract for repairs was “illusory.”  The insurer maintained that the insured did not “incur” the tear out costs.

The trial court granted summary judgment for the insured, rejecting the insurer’s argument that the insured did not “incur” the tear out costs where the insured entered into a repair contract that the insured could void at any time.

The Florida appellate court agreed with the trial court’s decision in favor of the insured.  “[T]he plain meaning of ‘incur’ as used in State Farm’s policy does not contain even a hint that an insured’s contract must be non-voidable before payment will be allowed,” the court stated.  “State Farm’s interpretation simply adds an undisclosed requirement that the policy language does not support.”  The court concluded that the insured did not have to actually expend funds on a loss to be entitled to insurance proceeds.  As the court asks, why would an insured commit to a costly non-voidable contract if the insured is on the hook entirely if the insurer fails to pay for losses?

Of course, if an association sustains damage to its property, the association not only needs a written repair contract but the insured should be able to cancel the contract at any time if the insurer fails to pay a claim for damages.  It is important to read and understand what is in your insurance policies.