Case Name: FLORIDA MUNICIPAL INSURANCE TRUST, Appellant, v. VILLAGE OF GOLF, a municipal corporation, Appellee
Court: Florida District Court of Appeal
Jurisdiction: Florida
Decision Date: 2003-04-09
Citations: 850 So. 2d 544
Docket Number: No. 4D01-4892
Parties: FLORIDA MUNICIPAL INSURANCE TRUST, Appellant, v. VILLAGE OF GOLF, a municipal corporation, Appellee.
Judges: LEVIN, STEVEN J., Associate Judge, concur.
Reporter: Southern Reporter, Second Series
Volume: 850
Pages: 544–555

Head Matter:
FLORIDA MUNICIPAL INSURANCE TRUST, Appellant, v. VILLAGE OF GOLF, a municipal corporation, Appellee.
No. 4D01-4892.
District Court of Appeal of Florida, Fourth District.
April 9, 2003.
Order Denying Rehearing and Certifying Question Aug. 6, 2003.
Michael T. Burke of Johnson, Anselmo, Murdoch, Burke & George, Fort Lauder-dale, for appellant.
Kenneth G. Spillias, Kevin S. Hennessy and Eric Ash of Lewis Longman & Walker, PA., West Palm Beach, for appellee.

Opinion:
KLEIN, J.
The primary issue we address in this appeal is whether an insurer, when the policy excludes coverage, can be estopped to deny coverage if it negligently investigates a claim before suit is filed, and the insured is prejudiced. The jury found appellant insurer was estopped from denying coverage, but the insurer argues that a verdict should have been directed in its favor. We conclude that estoppel can apply here, but reverse for a new trial because of an erroneous jury instruction.
The claim against the insured was that chlorine gas leaking from its water treatment plant damaged claimant's pepper crop. The claimant, a neighboring farmer, notified the insured of the claim six days after the gas leak, and the insured immediately informed the insurer. Within a few days the insurer retained counsel and a field adjuster to investigate. The insurers settled several small claims of parties other than this claimant.
Three months later the claimant notified the adjuster of crop damage which he attributed to the chlorine, and the adjuster, who was not experienced in evaluating crop damage, visited the farm and took photographs.
About ten months after the leak the claimant's attorney sent a letter claiming $1,600,000 in crop damage and, three months after that, filed suit. The insured promptly forwarded the letter as well as the complaint to the insurer. Two weeks later, the insurer notified the insured that there was no coverage because of the pollution exclusion contained in the comprehensive general liability policy. The insured then retained its own counsel and ultimately settled with the claimant for $237,500.
The insured then brought this suit against the insurer, claiming coverage, or in the alternative that it was prejudiced by the insurer's inadequate investigation, which estopped the insurer from denying coverage. The jury found no coverage under the policy, but did find estoppel, awarding the insured the amount of the settlement, as well as attorney's fees and litigation costs incurred in defending the claim.
The insured relies on the theory of es-toppel which this court first recognized in Florida in Cigarette Racing Team, Inc. v. Parliament Insurance Co., 395 So.2d 1238, 1239-40 (Fla. 4th DCA 1981), in which we explained:
The issue on appeal is whether this case is controlled by the general rule that insurance coverage cannot be extended by waiver or estoppel or the exception to the rule that, when an insurance company assumes the defense of an action with knowledge of the lack of coverage, it may be estopped to raise the coverage defense. Admittedly, the general rule is that the doctrines of waiver and estoppel will not operate to create coverage in an insurance policy where none originally existed. Six L's Packing v. Florida Farm Bureau Mutual Insurance Co., 268 So.2d 560 (Fla. 4th DCA 1972), cert. discharged, 276 So.2d 37 (Fla.1973). There is an exception to the rule, however, which provides that "when an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage." City of Carter Lake v. Aetna Casualty and Surety Co., 604 F.2d 1052, 1059 (8th Cir.1979). Accord, Pacific Indemnity Co. v. Acel Delivery Service, Inc., 485 F.2d 1169 (5th Cir.1973), cert. denied, 415 U.S. 921, 94 S.Ct. 1422, 39 L.Ed.2d 476 (1974); Fidelity and Casualty Company of New York v. Riley, 380 F.2d 153 (5th Cir.1967); Insurance Company of North America v. National Steel Service Center, Inc., 391 F.Supp. 512 (N.D.W.Va.1975), aff'd, 529 F.2d 515 (4th Cir.1976). See also: 7C J. Appleman, Insurance Law and Practice, s 4692 (1979).
Cigarette Racing Team was approved by our supreme court in Doe for Doe v. Allstate Ins. Co., 653 So.2d 371 (Fla.1995). The court observed in Doe:
[T]he holding in Cigarette Racing Team properly takes into account the import of an insurer's obligation to defend within a policy of liability insurance. This obligation has long been recognized by this Court. In fulfilling its promissory obligation to defend, the insurer employs counsel for the insured, performs the pretrial investigation, and controls the insured's defense after a suit is filed on a claim. The insurer also makes decisions as to when and when not to offer or accept settlement of the claim.... This obligation amounts to a fiduciary duty requiring the exercise of good faith....
Thus, when the insurer undertakes the defense of a claim on behalf of one claiming to be an insured, we have recognized substantial duties on the part of both the insurer and the insured. If an insurer erroneously begins to carry out these duties, and the insured, as required, relies upon the insurer to the insured's detriment, then the insurer should not be able to deny the coverage which it earlier acknowledged. However, we clearly state that the insured must demonstrate that the insurer's assumption of the insured's defense has prejudiced the insured. It is the fact that the insured has been prejudiced which estops the insurer from denying the indemnity obligation of the insurance policy, (citations omitted).
Doe, 653 So.2d at 373-74.
In the present case the insured, in order to demonstrate estoppel, presented the testimony of Richard Batterson, an expert in the handling and adjusting of claims. Batterson reviewed the pleadings in the claimant's lawsuit, depositions, the insurer's claims manual, various correspondence and the code' of ethics for adjusters. Bat-terson opined that the insurer did not properly handle the claim against the insured. He testified that insurer investigated and settled several small claims arising from the chlorine gas leak without issuing a reservation of rights letter which, he added, is the first thing the insurer should have done. Batterson further stated that without a reservation of rights the insured receives a false sense of security: the insured infers that coverage exists, that someone is settling its claims, and that it has protection. A reservation of rights also informs the insured of a potential disclaimer of coverage, affording it the opportunity to investigate the case on its own, hire its own lawyers, and obtain its own experts. Here, Batterson contended, insured did nothing because it felt it was protected under the insurance policy.
Batterson also stated that the adjuster should not have merely relied on the claimant's representations, but should instead have investigated, taken recorded statements, and called in experts if needed, particularly where the adjuster is uncertain of damage causation. Here, the adjuster lacked experience with the type of claim at issue and should have retained an expert to analyze the crop.
Although Batterson admitted that no coverage existed under the policy because of the pollution exclusion, he gave the opinion that without a reservation of rights, carrier relinquished its right to exclude coverage.
The insurer argues that estoppel under Doe can apply only to conduct occurring after the insurer undertakes the defense of a lawsuit and that in this case all of the conduct alleged to constitute estoppel occurred prior to suit having been filed. We do not agree because we find nothing in Doe, or any other cases cited, which limits estoppel to conduct occurring after suit is filed.
As our supreme court explained in Shuster v. South Broward Hospital District Physicians' Professional Liability Insurance Trust, 591 So.2d 174 (Fla.1992):
[W]hen an insured has surrendered all control over the handling of a claim to the insurer, the insurer assumes "a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured." The insurer has the duty to investigate the facts and give fair consideration to the claims pending.
Id. at 176 (quoting Boston Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783, 785 (Fla.1980)).
The undertaking of a defense includes both investigating the accident as well as defending the lawsuit. An investigation which negligently fails to preserve crucial evidence can be far more damaging to the ability of an insured to defend a claim than anything which occurs after suit is filed.
In the present case the insured presented evidence showing that when the insurer investigated, it was negligent in failing to determine if the crops were damaged by the chlorine leak. When, thirteen months later, the insurer first denied coverage, it was too late for the insured to do a proper investigation which could have put it in a stronger position to demonstrate that there was no causal relationship. The court did not, accordingly, err in submitting estoppel to the jury.
We do agree with the insurer, however, that the trial court erred in instructing the jury on section 627.426(2)(a), Florida Statutes (1995) which provides:
A liability insurer shall not be permitted to deny coverage based on a particular coverage defense unless within thirty days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery.
The "coverage defense" contemplated by this statute "means a defense to coverage that otherwise exists." AIU Ins. Co. v. Block Marina Inv., Inc., 544 So.2d 998, 1000 (Fla.1989). This statute does not, as AIU makes clear, apply where, as in this case, there is "a complete lack of coverage for the loss sustained." Id. State Farm Mut. Auto. Ins. Co. v. Hinestrosa, 614 So.2d 633 (Fla. 4th DCA 1993)(section 627.426(2)(a) does not apply where there is no coverage under policy).
Instructing the jury on this statute was tantamount to telling the jury it had to return a verdict for the insured, because it was undisputed that the insurer had not complied with the statute. Accordingly, we cannot agree with the insured that the instruction was harmless.
The insurer also argues that it could be liable for a settlement of the claim only up to the $100,000 limit provided in our waiver of sovereign immunity statute, section 768.28. The insurer recognizes, however, that the claimant could receive compensation in excess of $100,000 through a claims bill. If the claimant were successful in having the legislature pass a claims bill, it would be paid with funds of the insured, not general revenue. See e.g., Bonvento v. Bd. of Pub. Instruction, 194 So.2d 605 (Fla.1967). We do not accordingly agree with the insurer's argument that the insured's liability for this claim was as a matter of law limited to $100,000.
We have considered the other issues raised by the insurer and find them to be without merit. We therefore reverse and remand for a new trial on count III of the complaint, which alleged estoppel.
LEVIN, STEVEN J., Associate Judge, concur.
FARMER, J., dissents with opinion.