Opinion ID: 1577073
Heading Depth: 1
Heading Rank: 3

Heading: Review of Relevant Case Law

Text: We start with the basic proposition that when an insurer is handling claims against its insured, it has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. Berges v. Infinity Ins. Co., 896 So.2d 665, 668 (Fla.2004) (quoting Boston Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783, 785 (Fla.1980)). This duty includes an obligation to settle where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Boston Old Colony Ins. Co., 386 So.2d at 785. Breach of this duty may give rise to a cause of action for bad faith against the insurer. Although this case involves an indemnity policy, which requires the insured to undertake the defense of a claim, [8] the law imposes the same obligations regarding settlement as set forth in Boston Old Colony. It was the emergence of standard form liability policies that gave rise to the common law cause of action for bad faith, see Laforet, 658 So.2d at 58; however, the duty of good faith in all respects, other than the duty to defend, also exists when the insurance policy is an indemnity policy. Thus, while an indemnity policy insurer's duty of good faith does not encompass a duty to defend, it does include a duty of good faith when evaluating any settlement offers. That basic duty is not contested. We now turn to an examination of the recognized circumstances under Florida case law that may be relevant to this case, in which an insured or the third-party claimant, either on its own behalf or as the insured's assignee, may bring a common law third-party bad-faith claim against an insurer for damages sustained as a result of the insurer's bad faith. [9] Unless otherwise indicated, these circumstances apply regardless of whether the insurance policy at issue is an indemnity policy or a liability policy. The first widely recognized circumstance is the classic bad-faith situation where an excess judgment is entered against the insured. Under Florida law, it is clear that an insured or a third-party claimant may bring a third-party bad-faith cause of action when an insurer has breached its duty of good faith and that breach results in an excess judgment being entered against its insured. Berges, 896 So.2d at 668. An excess judgment, however, is not always a prerequisite to a bad-faith action. The second recognized circumstance involves stipulations known as Cunningham [10] agreements under Florida law. These agreements involve the situation where there is not a previous excess judgment but an insurer and a third-party claimant enter into an agreement and stipulate to try the bad-faith issues first. The parties further stipulate that if no bad faith is found, the third-party claimant will settle for the policy limits, thus protecting the insured from exposure to an excess judgment. Cunningham agreements have been held by this Court to be the functional equivalent of an excess judgment. Cunningham, 630 So.2d at 182. This Court has explained: In Cunningham, we simply approved a procedure in which the parties could avoid the time and expense of going through a trial to obtain a final judgment. In following that procedure, the parties agree and the courts recognize that a stipulated final judgment has the same force and effect as a final judgment reached through the usual judicial labor of a trial when the parties agree that it shall. United Servs. Auto. Ass'n v. Jennings, 731 So.2d 1258, 1260 (Fla. 1999). Under a Cunningham agreement, the insurer's actions protect the insured against an excess judgment. A third recognized circumstance also involves a settlement agreement but one that is entered into between the insured and the third-party claimant. The opportunity for a settlement without the agreement of the insurer traditionally has occurred where an insurer breaches its duty to defend, leaving the insured to its own devices to settle the case or proceed to trial. In those circumstances, the insured is left unprotected and may enter into a reasonable settlement agreement with the third-party claimant and consent to an adverse judgment for the policy limits that is collectable only against the insurer. Coblentz v. Am. Surety Co. of N.Y., 416 F.2d 1059, 1063 (5th Cir.1969); Steil v. Fla. Physicians' Ins. Reciprocal, 448 So.2d 589, 591 (Fla. 2d DCA 1984) (By refusing to defend Steil's claim, the carrier left Walker to his own devices to protect himself in the best way possible.); see also Chomat v. N. Ins. Co. of N.Y., 919 So.2d 535, 537 (Fla. 3d DCA 2006); Gallagher v. Dupont, 918 So.2d 342, 348 (Fla. 5th DCA 2005). These agreements are known as Coblentz agreements, based on the United States Fifth Circuit Court of Appeals case. Florida courts have also extended the reasoning of Coblentz to allow agreements by the insured to a judgment in excess of the policy limits against an insurer who wrongfully refuses to defend and acts in bad faith. See Shook v. Allstate Ins. Co., 498 So.2d 498 (Fla. 4th DCA 1986). No Florida case, however, has reached the issue of whether and under what circumstances a Coblentz agreement is valid and enforceable when an indemnity policy that does not include the duty to defend is involved. Cf. U.S. Fire Ins. Co. v. Hayden Bonded Storage Co., 930 So.2d 686, 690 (Fla. 4th DCA 2006) (recognizing an issue of whether a Coblentz agreement may be enforced when there is no duty to defend but deciding that the issue was moot because the insurer did not breach its duty to indemnify). Implicit in these decisions is a recognition that the insured would not have entered into the consent judgment but for the bad faith of the insurer and that the insured would otherwise have been exposed to personal liability as a result of the insured being left to its own devices. A fourth recognized circumstance involves a claim not of the insured or the third-party claimant, but of the excess carrier, which may bring a bad-faith claim against a primary insurer by virtue of equitable subrogation under certain circumstances where the primary insurer has not acted in good faith. Under the doctrine of equitable subrogation, an excess insurer has the right to maintain a cause of action ... for damages resulting from the primary carrier's bad faith refusal to settle the claim against their common insured. U.S. Fire Ins. Co. v. Morrison Assurance Co., 600 So.2d 1147, 1151 (Fla. 1st DCA 1992) (citing Ranger Ins. Co. v. Traveler's Indem. Co., 389 So.2d 272 (Fla. 1st DCA 1980)). The reasoning of the equitable subrogation cases is that the primary insurer is held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved. Id. In other words, the excess insurer stands in the shoes of the insured, to whom the primary insurer directly owes a duty to act in good faith. U.S. Fire Ins. Co., 600 So.2d at 1151. Accordingly, when the primary insurer's bad-faith refusal to settle causes the excess insurer to pay an amount greater than it would have had to pay if the primary insurer had acted in good faith, the excess insurer is entitled to maintain a common law bad-faith claim against the primary insurer. See Ranger, 389 So.2d at 277. In this circumstance, there is an explicit requirement of a causal connection between the primary insurer's bad-faith actions and the loss or damage suffered by the excess insurer. See id. at 276-77; see also Vigilant Ins. Co. v. Cont'l Cas. Co., 33 So.3d 734, 738 (Fla. 4th DCA 2010) ([T]he insured, or the excess insurer standing in the shoes of the insured, is damaged because it has paid the judgment. It has paid money that it should not have been required to pay, absent the primary insurer's bad faith.  (emphasis added)). Although an excess judgment is not always a prerequisite to bringing a bad-faith claim, the existence of a causal connection is a prerequisite-in other words, the claimed damages must be caused by the bad faith. These principles are further illustrated by the case of North American Van Lines v. Lexington Insurance Co., 678 So.2d 1325 (Fla. 4th DCA 1996), which involved indemnity policies. In North American, according to the allegations in the complaint, [11] the insured claimed that both the primary insurer and the excess insurer failed to act in good faith in attempting to settle the claim against the insured. The insured was covered by two insurance policies, one primary and one excess. Id. at 1327. Both policies were indemnity policies, which obligated the insured to handle all claims. Id. After an injured third party brought suit against the insured, the primary insurer repeatedly refused to tender its policy limits and the excess insurer also refused, claiming that exhaustion of the primary insurer's limits was a condition precedent to its liability. Id. at 1328. The primary insurer eventually tendered its policy limits, provided that the insured advance $1 million. Id. On the eve of trial, the injured third party made a settlement demand exceeding the primary insurer's limits but within the excess insurer's limits; however, the excess insurer still refused to authorize settlement. Id. The insured was faced with near certainty of a large judgment against it, exceeding all available coverage and was forced to contribute the balance of the funds necessary to settle the litigation, subject to a reservation of its rights against its insurersthe total cost to the insured was $7 million. Id. The insured then brought suit against its insurers for claims of breach of contract, bad faith, and other claims. Id. The trial court held that an excess judgment was a requirement for any action against an insurer arising from a refusal to settle and dismissed the lawsuit in its entirety, including the breach of contract claims. Id. On appeal, the Fourth District Court of Appeal reversed and reinstated all counts of the complaint, holding that under the facts of the case an excess judgment was not necessary to assert the causes of action alleged. Id. at 1327. The Fourth District reasoned that neither insurer could arbitrarily reject a reasonable settlement.... If they arbitrarily rejected a reasonable settlement, they breached their policy provisions, entitling [the insured] to settle the case and to seek reimbursement. Id. at 1332-33. The Fourth District concluded that under the facts of this case an excess judgment is not necessary to assert the causes of action alleged, id. at 1327, because the insured has paid an obligation for which the insurers should have been liable, had they not breached the contract. Id. at 1333. [12] Accordingly, the circumstances in North American involve a situation where the insured alleged that both the primary and the excess insurer repeatedly failed to tender their limits, the settlement demand exceeded the primary insurer's limits, and the insured was faced with near certainty of a large judgment against it, exceeding all available coverage. Id. at 1328. Further, the insured alleged it had paid funds to settle the case under an indemnity policy that it would not otherwise have had to expend because the insurer acted in bad faith by refusing to settle. In focusing on the insurer's bad-faith failure to settle, forcing a payment of funds that would not otherwise have been expended had the insurers acted in good faith, the reasoning of North American is analogous to an equitable subrogation claim brought by an excess insurer. However, in North American, as in the equitable subrogation cases, there must be a causal connection between the damages claimed and the insurer's bad faith. As can be seen under Florida law, an excess judgment is not always a prerequisite before a bad-faith case can be brought against the insurer. However, the damages claimed by the insured or its assignee must be caused by the insurer's bad faith.