Is Recovery for Breach of an Insurance Policy Limited to Only Damages That Would Have Been Covered by the Policy?

In Florida, the short answer is “no.” Here, as in most states, traditional rules governing breach of contract apply to insurance policies, and in a proper case consequential damages may be awarded.¹ Defense lawyers in first party insurance cases always dispute this argument.

The defense bar attempts to persuade courts that policy coverages and limits determine the amounts that can be recovered by a policyholder, even after the policy has been breached. And since judges generally rely heavily on the lawyers advocating for the parties to bring any specialized legal knowledge to the court, policyholder advocates are tasked to supply the courts with the caselaw clarifying this misconception. Certainly, there are some specialized rules of policy interpretation that apply because insurance policies are generally adhesion contracts, rather than ones negotiated at arms-length between parties with equal bargaining power.² Yet insurance policies are still contracts and general contract interpretation principles provide additional ways to remedy the harm our policyholder clients suffer when an insured catastrophe happens.

Florida courts consistently apply the traditional standards to recover consequential damages in first party insurance cases. For example, in Travelers Insurance Company v. Wells,³ the Fifth District Court of Appeal held that the insureds could recover consequential damages against its carrier on a breach of insurance contract claim provided the insured proves the consequential damages were contemplated at the time the policy was issued. The Fifth DCA held:

Although that [the stated policy benefit] is normally the measure of damages for breach of an insurance contract, it is not exclusive. Consequential or resulting collateral damage may also be recovered if it can be sufficiently proved. It is possible to recover damages sustained by the wronged (uninsured) party, not because of the occurrence of the contingency which should have been insured against, but because of the breached contract, such as lost profits. Glades Oil Co. v. R.A.I. Management, Inc., 510 So.2d 1193 (Fla. 4th DCA 1987).⁴

Similarly, in Life Investors Ins. Co. of America v. Johnson,⁵ the Fourth District considered whether an insured could recover consequential damages from her disability carrier. The insured had purchased the disability policy in conjunction with a car purchase. Thereafter, the insured sustained a disabling injury. The carrier did not pay the claim in accordance with the policy, and the insured’s car was repossessed.

The insured filed suit for breach of contract. As damages, the insured sought to recover: (1) the loss of value to her car, (2) loss of use of her car, (3) transportation expenses related to the loss of use, and (4) long distance telephone calls, none of which were specifically covered by the policy. The carrier argued those categories of damage were improper and that the jury should only be permitted “to consider the amount due on the policy….” The trial court disagreed with the carrier and allowed the insured to seek recovery of these damages, and the jury returned a verdict in the insured’s favor for $3,500.

The carrier appealed. The Fourth District Court of Appeal started its analysis with a review of Hadley v. Baxendale,⁶ the common law case from England traditionally cited to express the standard for whether consequential damages are recoverable. This case held that damages for breach of contract “are those that arise naturally from the breach, or those that were in the contemplation of the parties at the time the contract was made.”⁷ Based on this rule, the court concluded that if the insured proved the carrier breached the policy, the insured was “entitled to recover more than the pecuniary loss involved in the balance of payments under the policy.”⁸ The Fourth District held that the appropriate measure of damages for a breach of insurance contract claim was “the value of the auto or balance of payments under the policy, whichever is greater, together with the loss of use of the car from the date of repossession until the jury verdict is rendered, and interest thereon.”

Federal courts interpret Florida law the same way. In T.D.S. Inc. v. Shelby Mutual Insurance Company,⁹ the Eleventh Circuit considered a jury’s award of consequential damages because of a carrier’s breach of a multi-peril insurance policy. The trial court had instructed the jury “that an award could be returned for [consequential damages] if T.D.S. had shown that ‘special circumstances’ allowing for these damages had been in the contemplation of the parties at the time the insurance policy was entered into.”¹⁰

The Eleventh Circuit Court of Appeals approved of the instruction and stated, “[a]lthough generally an insurer’s liability under an insurance contract will not exceed the contractual limits of liability, the Florida courts have extended the Hadley special damages rule to allow recovery of these damages if they were in the contemplation of the parties at the time of the creation of the insurance contract.”¹¹ The court then clarified that Florida did not predicate the recovery of consequential damages on an extra-contractual claim.

These cases involved first-party breach of contract claims where the insured requested consequential damages. In analyzing the insured’s consequential damages claim, each case differentiated between damages concerning policy benefits and consequential damages. None of these cases made an insured’s recovery of consequential damages dependent on the consequential damage being a covered policy benefit. Instead, the cases focus on whether the parties contemplated the damage to flow from the breach at the time the policy was created.

Consequential Damages are not “Bad Faith Damages.” As a final argument, the defense bar frequently attempts to characterize consequential damages as “bad faith damages.” Prior to enactment of Fla. Stat. § 624.155 in 1982 creating a “Civil Remedy” for bad faith claim handling, Florida did not recognize first-party bad faith claims.¹² Therefore, if consequential damages were “bad faith damages” then the plaintiffs in Johnson and T.D.S. cases – decided before § 624.155 went into effect – would not have been able to recover consequential damages for their breach of contract claims. Consequential damages which are recoverable for a breach of contract claim focus on whether such damages were within the “mutual contemplation of the parties,” while statutory bad faith damages must be “foreseeable,” the traditional tort standard.¹³ This differentiation undermines the position that the consequential damages sought for breach of contract constitute bad faith damages.

This argument is straightforward, though it is unpopular with insurance carriers who want to contend that even when they breach their contractual obligations to their insureds, they still get the benefit of the limitation provisions of the policy that would apply if it had been honored. But Florida courts accept the basic proposition that once the policy has been breached by the carrier, those contractual limitations do not apply.
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¹ Florida applies the general contract rules governing consequential damages in the context of breaches of insurance contracts, as well. See, e.g., Travelers Ins. Co. v. Wells, 633 So.2d 457 (Fla. 5th DCA 1993); Travelers Indemnity Co. v. Parkman, 300 So.2d 284 (Fla. 4th DCA 1974); St. Paul Fire & Marine Ins. Co. v. Thomas, 273 So.2d 117 (Fla. 4th DCA 1973); T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1531-32 (11th Cir. 1985) (Florida follows the general rule that to be recoverable, damages for breach of an insurance contract “must arise naturally from the breach, or have been in the contemplation of both parties at the time they made the contract, as the probable result of a breach.” Hobbley v. Sears, Roebuck and Co., 450 So.2d 332, 333 (Fla. 1st DCA 1984) (citing Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854)); Martin v. Monarch Life Ins. Co., 1995 WL 127157 (M.D. Fla. 1995).
² See, e.g., Fayad v. Clarendon National Ins. Co., 899 So.2d 1082 (Fla. 2005).
³ Travelers Ins. Co. v. Wells, 633 So. 2d 457 (Fla. 5th DCA 1993).
⁴ Id. at 461.
⁵ Life Investors Ins. Co. of America v. Johnson, 422 So. 2d 32 (Fla. 4th DCA 1982).
⁶ Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854).
⁷ Johnson, 422 So. 2d at 33-34.
⁸ Id. at 34.
⁹ T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1531-32 (11th Cir. 1985).
¹⁰ Id. at 1531.
¹¹ Id. at 1531 n.11.
¹² Fridman v. Safeco Ins. of Illinois, 185 So. 3d 1214, 1220 (Fla. 2016); McLeod v. Continental Ins. Co., 591 So. 2d 621, 623 (Fla. 1992).
¹³ T.D.S., 760 F. 2d at 1531 n.11; Johnson, 422 So. 2d at 33-34; B-K Cypress Log Homes Inc. v. Auto-Owners Ins. Co., 2012 WL 13018751, *3-4 (N.D. Fla. 2012). Indeed, “the fact that the legislature has specifically authorized first parties to recover damages in bad faith actions suggests that it may have contemplated more than the recovery of the same damages already available for breach of an insurance contract claim.” Marracini v. Clarendon Nat’l Ins. Co., 2003 WL 22668842, *2 (S.D. Fla. Oct. 1, 2003) (citation omitted). Under Section 624.155, Florida Statutes, insureds can recover all “damages which are a foreseeable result of a violation of [section 624.155(8)]….” The statute does not examine the “mutual contemplation of the parties” standard for consequential damages resulting from breach of an insurance contract.