A Bad Faith Action is Not Ripe Until Liability and Damages are Established

One area of insurance coverage that we receive questions about is the issue of when a bad faith action can be filed.  The Florida Supreme Court has held  that a bad faith lawsuit is not ripe until there has been a determination that the insured is liable and the extent of the plaintiff’s damages.  In Blanchard v. State Farm Mut. Auto Ins. Co., 575 So.2d 1289, 1291 (Fla. 1991) the Court held:

If an uninsured motorist is not liable to the insured for damages arising from an accident, then the insurer has not acted in bad faith in refusing to settle the claim. Thus, an insured’s underlying first-party action for insurance benefits against the insurer necessarily must be resolved favorably to the insured before the cause of action for bad faith in settlement negotiations can accrue. It follows that an insured’s claim against an uninsured motorist carrier for failing to settle the claim in good faith does not accrue before the conclusion of the underlying litigation for the contractual uninsured motorist insurance benefits. Absent a determination of the existence of liability on the part of the uninsured tortfeasor and the extent of the plaintiff’s damages, a cause of action cannot exist for a bad faith failure to settle.

The takeaway is the following rule: “Absent a determination of the existence of liability … and the extent of the plaintiff’s damages, a cause of action cannot exist for a bad faith failure to settle.”  The Florida Supreme Court later clarified:

Blanchard is properly read to mean that the “determination of the existence of liability on the part of the uninsured tortfeasor and the extent of the [insured’s] damages” are elements of a cause of action for bad faith. Once those elements exist, there is no impediment as a matter of law to a recovery of damages for violation of section 624.155(1)(b)1 dating from the date of a proven violation

Vest v. Travelers Ins. Co., 753 So. 2d 1270, 1275 (Fla. 2000).  This rule has been dubbed the “Favorable Resolution Requirement.”

This rule undoubtedly makes sense.  An insurance company cannot be found to act in bad faith to settle on behalf of its insured until the insured is found liable.  For this reason, the Florida Supreme Court has made liability and damages an element of bad faith.  See Vest, 753 So. 2d at 1275.

Since Blanchard, other cases have debated what constitutes this “Favorable Resolution Requirement” and, for example, have found that resolutions such as a settlement, see Brookins v. Goodson, 640 So. 2d 110 (Fla. 4th DCA 1994), and appraisal awards in uninsured motorist cases (UM), see Hunt v. State Farm Fla. Ins. Co., Case No. 2D11-6484 (Fla. 2d DCA April 5, 2013), suffice.

Court Reverses Estate’s Award of $850,000 For Insurance Broker’s Creation of “Gap” in Coverage

Brown & Brown, Inc. v. Estate of Edenfield, (Fla. 1st DCA 2010)

An insurance broker appealed a judgment of $850,000 for negligently creating a “gap” in coverage under a $1M professional liability policy issued to a nursing home. A patient at the nursing home died from injuries sustained on the premises in June 2001. The home’s non-renewing, “claims-made” policy expired on September 15, 2001, the home purportedly made a claim on September 17, 2001, and the new policy secured by the home’s broker did not take effect until November 1, 2001. The insurer did not defend the nursing home in the action by the estate and the home eventually settled with the estate for $1M and assignment of any claims against the insurer and insurance broker. It was noted that the insurer did not give the 45 days advance written notice of nonrenewal as required by Fla. Stat. § 626.9201.

The insurer settled with the estate for $150,000. In pursuing its claims against the broker, the trial court awarded the estate the remaining $850,000 of the policy because the broker created a “gap” in coverage during which the claim was made. On appeal, the court held that under Fla. Stat. § 626.9201, the failure of the insurer to provide the 45 days nonrenewal notice resulted in coverage being extended for an additional 45 days. As such, the court reversed because the broker’s failure to procure subsequent coverage until November 1, 2001 did not create a gap in coverage.

Additional Insured May Be Entitled to Separate, Independent Counsel When There is a Conflict With a Co-Insured

Recently, I wrote a synopsis of Univ. of Miami v. Great Am. Ins. Co., Case No. 3D09-2010 (Fla. 3d DCA Feb. 20, 2013), which was published on Hinshaw & Culbertson’s website.  In essence, the holding of the case is beneficial for policyholders and may create a duty for an insurer to provide separate counsel (i.e., another attorney), to an additional insured in situations where the named insured and additional insured have a conflict.  For more details, check out the article in its entirety, which can be found here, and is reproduced below as well.

On July 18, 2000, a young child drowned and nearly died while at a summer swim camp held on a university’s campus. The child’s parents sued both the camp and the university for negligent supervision. The lawsuit also included allegations that the university was vicariously liable for the camp’s negligence.

The university was an additional insured under a commercial general liability policy issued to the camp. The policy contained a separation of insureds provision.

In response to the lawsuit, the insurer retained the same defense counsel to represent both the university and the camp. Shortly after suit was filed, the university advised the insurer that there was a conflict of interest in the single representation of itself and the camp, and demanded independent counsel of its own choice. The insurer refused, and the university retained counsel at its own expense.

After the negligence case settled, the university filed a declaratory judgment action against the insurer, arguing that the insurer breached the policy by failing to provide it with separate counsel from the camp. The university sought reimbursement of its defense costs and attorneys’ fees.

The insurer moved for summary judgment, arguing that there could be no conflict of interest in its representation by a single counsel because the camp was contractually bound to indemnify and hold harmless the university for any liability arising out of the camp’s use of its facilities. The trial court agreed and held that the insurer had no obligation to reimburse the university for its fees and costs.

In a case of first impression, Univ. of Miami v. Great Am. Ins. Co., Case No. 3D09-2010 (Fla. 3d DCA Feb. 20, 2013), Florida’s Third District Court of Appeal reversed the trial court’s holding. On appeal, the university argued that there was an obvious conflict of interest with the camp, as evidenced by the pleadings which contained direct allegations of negligence on the part of both defendants as well as vicarious liability. The defendants also each alleged that they were relieved of liability based on the negligence of the other in their answers to the complaint.

The court agreed with the university, concluding that it was entitled to its own independent counsel based on the allegations and record evidence which established “inherently adverse” legal defenses between the university and camp. To defend both co-defendants, the court observed that “counsel would have had to argue conflicting legal positions, that each of its clients was not at fault, and the other was, even to the extent of claiming indemnification and contribution for the other’s fault. In so doing, legal counsel would have had to necessarily imply blame to one co-defendant to the detriment of the other.” According to the court, “[o]n these facts, we believe this legal dilemma clearly created a conflict of interest between the legal defenses of the common insureds sufficient to qualify for indemnification for attorney’s fees and costs for independent counsel.”

While the holding of this case is noteworthy, the dissent is also significant. In a lengthy and well-reasoned dissent, Judge Frank A. Shepherd noted that there was no actual conflict of interest or even a “‘substantial risk’ of conflict” between the insureds. Judge Shepherd observed that the majority’s decision to afford the university and camp separate counsel on the basis of mere finger pointing created by their own pleadings was nothing more than a “paper conflict.” According to the dissent, the majority would afford insureds “separate counsel any time an insured articulates a conflict in a pleading, whether or not real.”

Judge Shepherd further noted that the “flaw in the majority opinion is that it confuses and conflates insurer obligations in three unrelated circumstances: (1) the duty to defend; (2) conflicts between an insured and insurer; and (3) conflicts between insureds.” In a statement based on the majority’s citation of cases from all three circumstances, Judge Shepherd observed that this case involved only the third circumstance and that “the majority makes no effort to distinguish among them in its resolution of this case.”

Practice Note

This case expands an insured’s right to independent defense counsel where there is a perceived conflict of interest with a co-insured. Although the dissent argued that this case expands the requirement to provide separate defense counsel to insureds anytime an insured “articulates a conflict in a pleading,” the majority also relied upon “record evidence” submitted on summary judgment. From a practical standpoint for insurers, where an insured seeks separate, independent counsel from a co-insured and there are allegations of a conflict of interest between them, separate counsel may need to be provided.

The actual case opinion is also available on the link above.

Insureds and Insurers Behaving Badly – Insured Who Left During EUO Given a Second Chance

First Home Ins. Co. v. Fleurimond, (Fla. 1st DCA 2010)

Upon written request for an EUO relating to a claim for damage to a home under a homeowners policy, an insured appeared without counsel, but left in the middle of the EUO after, he claimed, the examiner badgered and yelled at him. Upon retaining counsel, the insured offered to resume the EUO, but the insurer refused, stating that it was too late. Upon the insured’s filing suit demanding an appraisal, the insurer opposed the demand citing breach of policy obligations for failure to comply with the cooperation provisions. The 1st DCA affirmed the lower court’s ruling in favor of the insured, partly because the insured partially attended the first EUO and offered to resume the EUO before the suit was filed.

Bad Faith Discovery of Claims and Underwriting Files is Generally Irrelevant in a Coverage Action

Florida courts have consistently ruled that bad-faith discovery of an insurer’s business policies and claims handling procedures is premature until the insurer’s obligation to provide coverage has been established.  Florida’s Third DCA reiterated this rule in XL Specialty Ins. Co. v. Skystream, Inc., 988 So.2d 96, 98 (Fla. 3d DCA 2008).

In Skystream, the insurer initiated a declaratory judgment action to determine that it owed no duty to defend and indemnify against claims brought by the estates of passengers killed in an airplane crash. After the insurer’s duty to defend was determined on cross-motions for summary judgment, the insureds moved to amend to assert bad faith and also propounded bad faith discovery. In response, the insurer moved to dismiss and opposed the discovery with a motion for protective order, which the lower court denied. On certiorari review, the court held that the bad faith discovery was premature, even though there was a determination of coverage, because there still was not a ruling regarding damages. Id. at 98 (citing Imhof v. Nationwide Mut. Ins. Co., 643 So.2d 617, 619 (Fla. 1994)).

Insurance Agents Are Not Liable for Attorney’s Fees Under Florida Statute Sec. 627.428

Underwood Anderson & Assoc., Inc. v. Lillo’s Italian Rest., Inc., (Fla. 1st DCA 2010)

An insurance agent appealed the trial court’s award of $100,000 in attorney’s fees to the insured under Fla. Stat. § 627.428(1) after a judgment for negligence procurement of a flood insurance policy in the insured’s favor, because, the agent claimed, he did not qualify as an insurer under the terms of the statute. The court agreed and held that the agent did not constitute an insurer under § 627.428(1) because he merely facilitated the insurance contract to which he was not a party.

Appraisal is Only Covered Under Ordinance and Law Coverage if Loss Actually Occurs During Policy Period

Jossfolk v. United Prop. & Cas. Ins. Co. (Fla. 4th DCA 2013)

The roof of an insured structure was damaged and submitted for appraisal. A neutral appraisal entered an award on damages, but stated that Ordinance and Law coverage (which represents the cost of bringing any structure into compliance with applicable ordinances or laws) had not been appraised. The insurer made payment to the insured based upon the award and the insured then applied for a roofing repair permit from the City of Weston, claiming that 34% of the roof area needed repair. The City of Weston rejected the permit since the repair exceeded the area allowed by the building code to be repaired without requiring replacement of the entire roof system. The insured then asked the insurer to pay for the entire roof repair under Ordinance and Law Coverage, but the insurer declined to increase payment.

As a result, the insured filed a declaratory judgment action, seeking a ruling that the insurer must participate in an appraisal for Ordinance and Law coverage. A trial court entered final summary judgment in favor of the insured, noting the insurer’s argument that the appraiser had denied Ordinance and Law coverage. On appeal, the fourth district disagreed, concluding that Ordinance and Law coverage is not recoverable until it is incurred. Stated differently, the fourth district ruled that because no Ordinance and Law Coverage was incurred at the time of the original appraisal, the appraisal never appraised Ordinance and Law Coverage.

Property Insurer Was Not Permitted to Limit Sinkhole Coverage to Less Than Dwelling Coverage Limit

Fla. Farm Bureau Cas. Ins. Co. v. State of Fla., Office of Ins. Regulation (1st DCA 2013)

At issue in this case is the proper interpretation of Florida Statute § 627.706(1), which provides that:

Every insurer authorized to transact property insurance in this state must provide coverage for a catastrophic ground cover collapse. The insurer shall make available, for an appropriate additional premium, coverage for sinkhole losses on any structure … to the extent provided in the form to which the coverage attaches…. A policy for residential property insurance may include a deductible amount applicable to sinkhole losses equal to 1 percent, 2 percent, 5 percent, or 10 percent of the policy dwelling limits, with appropriate premium discounts offered with each deductible amount.

Relying on this statute, the Office disapproved of a property insurer’s proposed amendment to its endorsement form limiting sinkhole coverage to 25% of the overall coverage amount for the insured dwelling. The Office’s reasoning was that the statutory phrase “to the extent provided in the form to which the coverage attaches” refers to the base property insurance property and, consequently, requires insurers to offer sinkhole loss coverage in an amount equal to the dwelling coverage limit.

The property insurer appealed, arguing that this interpretation was clearly erroneous and that the form to which sinkhole loss coverage attaches is really the policy endorsement setting out the extent (limit) of such coverage, which lies solely with the discretion of the insurer. The first district affirmed, concluding that the defining the term “form” to mean the base policy is within the permissible range of interpretations and thus not clearly erroneous: “Because the deductibles are tied to casualty coverage limits in the base policy, it is reasonable to conclude that the amount of sinkhole loss coverage is intended to be the same as the amount of casualty coverage provided for in the base policy.”

Action for Bad Faith Was Ordered to Arbitration Based on Insurance Policy’s Arbitration Provision

Truck Ins. Exchange v. Pediatrix Med. Grp., Inc. (4th DCA 2013)

In this very brief opinion concerning an insurance bad faith action, the court entered a stay of the proceedings and reversed a trial court’s order denying a motion to compel arbitration. The court explained that because the insurance policy in question contained an arbitration provision and because the issues raised in the bad faith action were “inextricably intertwined with arbitrable issues,” the “trial court should have granted the motion to compel arbitration of the underlying issues and stayed the present case until those issues are decided” in arbitration.

An Insurance Carrier’s Duty to Defend Under Florida Law

The duty to defend based on an insurance policy under Florida law is very straightforward.  Florida applies a test that the duty to defend is determined strictly by the allegations in the complaint as compared to the insurance policy. See Higgins v. State Farm Fire & Cas. Co., 894 So.2d 5, 9-10 (Fla. 2004). An insurer must defend only when the complaint includes allegations that “fairly and potentially” bring the transaction within the coverage provisions of the policy. Trizec Properties, Inc. v. Biltmore Constr. Co., 767 F.2d 810, 811 (11th Cir. 1985). When an exclusion in the policy applies, there is no duty to defend.  Acceptance Ins. Co. v. Bates, Dunning & Assocs., Inc., 858 So.2d 1068, 1069 (Fla. 3d DCA 2003). 

What does the “duty to defend” mean?  Essentially, it means that if an insured party is sued, the insurance carrier will “defend” it against the lawsuit.  In other words, they will hire and pay for an attorney to defend the insured.  When an insurance company hires an attorney to defend the insured party, the hired attorney finds himself in sort of a dual role.  On the one hand, the attorney represents the insured party as that is his client.  On the other hand, the insurance company is paying the attorney’s fees.  So, although the attorney must zealously represent the interest of his client (the insured party), he must also report to the insurance carrier and let them know how the case is going.

This dual role is usually not a cause for concern because both the insured party and the insurance company want the same thing: for the insured party to get out of the lawsuit with as little damage as possible.  If there are coverage issues, this may become a little more complicated.   But still, even with coverage issues the insurance carrier and the insured both still have aligned interest when it comes to getting the insured out of the lawsuit unscathed.  For more on the role of the attorney when an insurance company is defending under a reservation of rights, check out The Dance of the Porcupines, by Andy Grigsby.  (It’s linked at the bottom under “Download PDF.”)