Insurance Co. of North America v. Lexow

Citation937 F.2d 569
Decision Date01 August 1991
Docket NumberNo. 90-3331,90-3331
PartiesINSURANCE COMPANY OF NORTH AMERICA, Plaintiff, Counterdefendant-Appellant, Cross Appellee, v. Clausson P. LEXOW, United Storage Systems, Inc. d/b/a The Extra Closet of Ocala, Ltd., Defendants, Counterclaim-Appellees, Cross Appellants.
CourtU.S. Court of Appeals — Eleventh Circuit

Carol A. Falvey, Ocala, Fla., and Robert Paul Keeley, Ellis, Spencer, Butler & Kisslan, Hollywood, Fla., for appellant.

Charles M. Johnston, Taylor, Day & Rio, Jacksonville, Fla., for appellees.

Appeals from the United States District Court for the Middle District of Florida.

Before KRAVITCH and BIRCH, Circuit Judges, and DYER, Senior Circuit Judge.

BIRCH, Circuit Judge:

This case presents the issues under Florida law of whether an insured is entitled to prejudgment interest at the statutory rate for recovery on a loss and whether the insured is entitled to attorney's fees upon determination that the insured, rather than the insurer, is entitled to funds recovered from the tortfeasor responsible for the insured's loss. The district court awarded prejudgment interest at the statutory rate and denied the insured's request for attorney's fees. Upon review of the record and applicable law, we affirm the award of prejudgment interest at the statutory rate and certify to the Supreme Court of Florida the attorney's fee question.

I. BACKGROUND

In 1981, Clausson Lexow and other family members organized United Storage Systems, Inc. (collectively, Lexow) to operate as a mini-warehouse or consumer storage facility in Ocala, Florida. Known as The Extra Closet of Ocala, Ltd., the business opened to the public in January, 1982. The business prospered, and renovation of the building commenced. When the work was near completion, an electrical fire occurred and totally destroyed the building and its contents on August 1, 1983. The damage to stored property generated customers' lawsuits and such unfavorable publicity that Lexow decided not to rebuild and to start the business anew.

Pursuant to Lexow's claim submitted to its insurer, Insurance Company of North America (INA), Lexow received $430,571.26 for which a subrogation receipt was executed. INA and Lexow jointly sued in state court the two tortfeasors deemed to be responsible for the fire. Each of the tortfeasors had insurance with policy limits of $100,000. During the litigation, one of the tortfeasors was placed in receivership. While Florida law precluded INA from recovery against an insolvent insurer, Lexow obtained $99,900 from the receivership. Thereby, Lexow increased the funds that it had recovered for the loss to $530,471.26. The insurance carrier for the other tortfeasor paid its policy limits of $100,000, which amount INA placed in an interest bearing account.

Based on diversity jurisdiction, INA subsequently instigated an action in federal court in the Middle District of Florida for a declaratory judgment regarding the rights and obligations of INA and Lexow with respect to the $100,000. 1 Lexow filed a counterclaim requesting attorney's fees and costs if the court entered judgment in its favor. INA asserted its right to the $100,000 under the subrogation receipt. Lexow claimed the proceeds because the funds that it had received were insufficient to recompense its total loss. Consequently, Lexow has contended throughout this litigation that INA's subrogation right cannot be activated until Lexow has been reimbursed completely.

Following a nonjury trial, the district court determined that Lexow was entitled to the $100,000 because Lexow had sustained total damages in excess of $630,471.26, or the $530,471.26 already received plus the $100,000 in dispute. Using the common law subrogation principle, endorsed by Florida courts, the district court reasoned that the insured was entitled to be made whole before the subrogated insurer could participate in the recovery from a tortfeasor. The district court concluded that the subrogation receipt did not function as an assignment of Lexow's claim against the tortfeasors, but was an acknowledgment of INA's common law right of subrogation. Judgment was entered for Lexow, and Lexow's entitlement to the $100,000 is not an issue in this case.

Subsequently, Lexow filed a motion, requesting the district court to determine prejudgment interest as well as to award costs and attorney's fees. Under Florida law, the district court awarded Lexow prejudgment interest at the annual rate of 12% from February 23, 1988, the date that INA obtained the disputed $100,000, until July 12, 1989, the date that judgment was entered in Lexow's favor. The district court, however, denied Lexow's motion for attorney's fees. The parties appeal these district court rulings, which we address. 2

II. DISCUSSION
A. Standard of Review

In a diversity case, a federal court applies the substantive law of the forum state, unless federal constitutional or statutory law is contrary. Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 1218, 113 L.Ed.2d 190 (1991). While "we generally accord deference in diversity cases to a district court's interpretation of the law of the state in which it sits," the Supreme Court has "conclude[d] that a court of appeals should review de novo a district court's determination of state law." Abbott v. Williams, 888 F.2d 1550, 1552 (11th Cir.1989); Salve Regina College, --- U.S. at ----, 111 S.Ct. at 1221. "It is well settled that federal courts are bound by the interpretation of a state statute by state courts." Silverstein v. Gwinnett Hosp. Auth., 861 F.2d 1560, 1569 (11th Cir.1988). In applying state law, a federal court must "adhere to decisions of the state's intermediate appellate courts absent some persuasive indication that the state's highest court would decide the issue otherwise." Silverberg v. Paine, Webber, Jackson & Curtis, Inc., 710 F.2d 678, 690 (11th Cir.1983).

B. Prejudgment Interest

In Florida, prejudgment interest is an element of compensatory damages and, "when a verdict liquidates damages on a plaintiff's out-of-pocket, pecuniary losses, plaintiff is entitled, as a matter of law, to prejudgment interest at the statutory rate from the date of that loss." Argonaut Ins. Co. v. May Plumbing Co., 474 So.2d 212, 215 (Fla.1985); Air Prods. & Chemicals, Inc. v. Louisiana Land & Exploration Co., 867 F.2d 1376, 1380 (11th Cir.1989) (per curiam). In Argonaut, Florida adopted a "loss theory" of prejudgment interest, defining the loss as the wrongful deprivation of property. Argonaut, 474 So.2d at 215; Crockett v. State Farm Fire & Casualty Co., 849 F.2d 1369, 1372 (11th Cir.1988). After determination of the amount of damages and defendant's liability, the plaintiff is to be made whole by an award of prejudgment interest from the date of the loss. Argonaut, 474 So.2d at 215.

The Florida Supreme Court also has emphasized that the judiciary is without discretion to set an interest rate, and is obligated to follow Florida Statutes, Sec. 687.01:

Furthermore, just as the loss theory forecloses discretion in the award of prejudgment interest, there is no discretion in the rate of that interest. The legislature has established a statutory interest rate which controls prejudgment interest. Sec. 687.01, Fla.Stat. (1983).

....

The amount of interest to be paid, absent a controlling contractual provision, is a matter of policy to be determined by the legislature. The judiciary does not have discretion in this matter but must apply the statutory interest rate in effect at the time the interest accrues.

Id. The applicable statutory interest rate was 12% per annum, and the parties had no written agreement for a lower rate of interest. 3

Lexow had to litigate its entitlement to the $100,000 settlement proceeds, while INA earned interest on these funds. Nevertheless, INA contends that Lexow should accept the presumptively lower interest rate earned on the escrowed funds. In the absence of a written agreement between the parties for a different interest rate, the statutory interest rate must be used. The district court correctly awarded Lexow prejudgment interest at the statutory interest rate of 12%. 4

C. Attorney's Fees

Florida Statutes, Sec. 627.428 provides attorney's fees to an insured that obtains a judgment against an insurer. The Florida Supreme Court, quoting the appellate court in the case, has explained that " '[t]he purpose of the statute is to discourage contesting of valid claims of insureds against insurance companies.... and to reimburse successful insureds reasonably for their outlays for attorney's fees when they are compelled to defend or to sue to enforce their contracts....' " Wilder v. Wright 278 So.2d 1, 3 (Fla.1973). Clarifying the applicability of the statute, the Florida Supreme Court also stated that "[t]he statute is unambiguous in its terms and clearly applies to all insureds under an insurance contract." Industrial Fire & Casualty Ins. Co. v. Prygocki, 422 So.2d 314, 316 (Fla.1982). In pertinent part, the statute provides as follows:

Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of any named or omnibus insured or the named beneficiary under a policy or contract executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured's or beneficiary's attorney prosecuting the suit in which the recovery is had.

Fla.Stat. Sec. 627.428(1) (1987) (emphasis added).

"The fundamental rule in Florida has been that an 'award of attorneys' fees is in derogation of the common law and that statutes allowing for the award of such fees should be strictly construed.' " Roberts v. Carter, 350 So.2d 78, 78-79 (Fla.1977) (quoting Sunbeam Enters., Inc. v. Upthegrove, 316 So.2d 34, 37 (Fla.1975...

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