Administrative regulations enacted pursuant to a state statute often impose strict deadlines by which insurers are required to perform a variety of tasks, including the prompt issuance of a reservations of rights, notification of coverage determinations, and advising of an insured’s right to file a complaint with the state’s insurance department.  Often overlooked is the fundamental premise that an administrative agency’s rule-making authority only extends as far as is permitted by the legislature’s express authority.  Last week, Florida’s Third District Court of Appeal reminded us of this limitation when it invalidated an administrative rule requiring insurers to notify their insureds within five days of receiving a claim that the insured has the right to participate in a state-sponsored mediation program.

Section 627.7015 of Florida’s Insurance Code authorizes Florida’s “alternative procedure for resolution of disputed property insurance claims.”  The purpose of the state-sponsored mediation  program is to provide a “non-adversarial alternative dispute resolution procedure for mediation of insurance claims” prior to the “more adversarial appraisal process.”  Section 627.7015 authorizes the Financial Services Department (the “Department”) to adopt rules in furtherance of such a program, specifically providing:

 (4)       The department shall adopt by rule a property insurance mediation program to be administered by the department or its designee.  The department may also adopt special rules which are applicable in cases of an emergency within the state.  The rules shall be modeled after practices and procedures set forth in mediation rules of procedure adopted by the Supreme Court.  The rules shall provide for:

(a)        Reasonable requirement for processing and scheduling of requests for mediation.

(b)        Qualifications of mediators….

(c)        Provisions governing who may attend mediation conferences.

(d)       Selection of mediators.

(e)        Criteria for the conduct of mediation conferences.

(f)        Right to legal counsel.

Further, Section 627.7015 specifically requires that insurers notify their insureds of the right to participate in such a program:

(2)        At the time a first-party claim within the scope of this section is filed, the insurer shall notify all first-party claimants of their right to participate in the mediation program under this section….

As part of its purported rule-making authority, the Department adopted Fla. Admin. R. 69J-166.031(4)(a)(1), which provides that “[w]ithin five days of the insured filing a first-party claim which falls within the scope of this rule, the insurer shall notify the insured of their right to participate in this program.” Importantly, the statute provides that failure to give notice excuses an insured from participating in any contractual loss appraisal process.  § 627.7015(7), Fla. Stat. (2005).

In Subirats v. Fidelity National Prop., 2013 Fla. App. LEXIS 2620 (Fla. 3d Dist. Ct. App. Feb. 20, 2013), the insurer notified the plaintiffs of their right to the mediation program approximately 14 days after plaintiffs filed their claim.  Plaintiffs claimed that the insurer waived its right to enforce the policy’s appraisal provision due to its violation of the administrative notification deadline.  The court disagreed, ruling that the Department exceeded its rule-making authority when it imposed the five-day rule.  The court noted that “[t]he most casual perusal of section 627.7015(4) reveals the Department was not granted the authority to promulgate a deadline for notifying an insured of the right to mediation.”  Noting that the statute already required notification by the insurer, the court concluded that “[w]e presume the failure of the legislature to authorize the adoption of the rather draconian five-day deadline was intentional.”

The court was careful to note that while the five-day rule was invalid, the statute remained clear that an insurer would still waive appraisal when it fails to provide any notification to the claimant of their right to participate in mediation.  Moreover, the court noted that in this case the purpose of the notice provision was achieved when the insureds were made aware of their right to mediation prior to electing appraisal:

It bears mentioning that the purpose of the notice provision in section 627.7015 was not thwarted. That purpose is to prevent an insurer from withholding notification and thereby trapping “an uninformed insured into the very same potentially lengthy and costly appraisal process the statute was meant to guard against.” Colosimo, 61 So. 3d at 1245. Fidelity did not withhold notification or “trap” the Subiratses into a lengthy and costly appraisal process. To the contrary, the insurer in this case did notify the Subiratses of their right to avail themselves of the statutory mediation program. The Subiratses elected to proceed directly to appraisal. In accordance with the Subiratses’ election, Fidelity’s appraiser promptly met with the insureds’ appraiser and the two actually agreed to the amount of the loss. All that remained was to formally complete the appraisal process. We affirm the trial court’s order staying litigation of the breach of contract claim until the parties complete the appraisal process.

The court’s decision in Subirats highlights that practitioners may wish to take the time to explore the statutory authority under which an administrative rule was promulgated, especially when the rule appears to stretch into territory not otherwise contemplated by the legislature.  In addition, while this result is favorable to insurers, insurers are reminded that they are still required to ensure that their insureds are notified of the opportunity to mediate claims before an appraisal takes place.