The Supreme Court of Florida just issued an important decision (Perera v. USF&G, which can be found here) which provides a comprehensive overview of insurer bad faith/failure to settle law in the state and imposes an important limit on bad faith recoveries to circumstances where the insured/claimant can demonstrate a causal link between the bad faith conduct and its damages. While the clarification and limitation are welcome, there are unanswered questions, and the practical reach of the decision may be overcome by better settlement drafting between the claimant, the insured and/or the settling insurers.
The case which reached the court based on certified questions from the 11th Circuit Court of Appeals, involves a wrongful death plaintiff whose husband was killed on the job and three liability insurers who insured either the employer or its employees, USF&G, a primary general liability insurer, CIGNA an excess workers compensation employer’s liability policy, and Chubb an excess liability. The policies were all indemnity type, without a duty to defend, and the first two insurers had limits of $1 million a piece, while the Chubb excess policy had limits of $25 million.
Following Perera’s suit against the insured and its employees, USF&G denied coverage. Plaintiff demanded $12 million prior to mediation. At the mediation Plaintiff’s demand was $8 million, while CIGNA offered $500,000 (its $1 million limits less the insureds $500k deductible) and Chubb offered $1.25 million.
After the unsuccessful mediation Chubb took an active role in the settlement negotiations, and at one point offered $3.5 million. Thereafter, plaintiff’s demand was $7 million and Chubb offered $4.25 million. Shortly thereafter plaintiff and the employer and employees entered a “Stipulation to Settle” for $10 million. The defendants would settle and waive the worker’s comp lien. Payment would be made by the insured, $750k, CIGNA, $500,000 and Chubb, $3.75 million with the remaining $5 million to come from a lawsuit against USF&G which would either be brought by the employer, or by the plaintiff pursuant to an assignment. The settlement would be reduced to a judgment but the judgment was not to be executed until the resolution of the suit against USF&G, and a satisfaction would thereafter be issued without regard to whether the suit was successful. The settlement was presented to the trial court which found it to be in good faith and reasonable in amount and thereafter the $10 million judgment was entered against the employer and its employees. The other insurers paid their agreed amounts and the plaintiff executed a release of claims against Chubb.
The employer assigned its rights against USF&G to the plaintiff who brought suit ins state court for the remaining $5 million asserting two causes of action, breach of contract for USF&G’s $1 million limit, and for bad faith for the remaining $4 million of the unpaid judgment. Following removal to Federal Court by USF&G, the District Court entered summary judgment in favor of the insurer because the judgment was within the total limits of insurance available to the insurer and that in the absence of an excess judgment, there can be no cause of action for bad faith. On appeal, the Eleventh Circuit held that whether USF&G had acted in bad faith was a threshold issue that could moot the case, and it remanded the case for determination of that issue. On remand, a jury trial, instructed that damages if any would be determined at a later date, found that USF&G had acted in bad faith. On a appeal back at the Eleventh Circuit, the court agreed with the original decision of the District Court, that in the absence of an excess judgment, there could be no bad faith claim, and that the employer was never exposed to excess of limits liability, however, finding that Florida law was unclear on whether an excess judgment was a necessary element of a bad faith claim, the Eleventh Circuit certified questions to the Supreme Court of Florida.
In its opinion, the Court recast the certified questions as follows:
May a cause of action for third-party bad faith against an indemnity insurer be maintained when the insurer’s actions were not a cause of the damages to the insured or when the insurer’s actions never resulted in exposure to liability in excess of the policy limits of the insured’s policies?
As recast, the court answered the question in the negative, thus, in the absence of damage to the insured or the insured’s exposure to excess of limits liability as a result of the insurer’s conduct, there is no cause of action for bad faith in such circumstances.
In reaching this conclusion the court detailed each of several recognized bases for bad faith liability under Florida law. The court began by noting that liability insurers in Florida have 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 its own business.” This duty includes a duty to settle “where a reasonably prudent person, face with the prospect of paying the total recovery, would do so.” The court noted further that under Florida law, these duties apply without regard to whether the policies include a duty to defend.
The first basis for such liability was described by the Court as the “classic bad-faith situation” where the breach of the duty of good faith results in an excess of limits judgment entered against the insured. The second involved so called “Cunningham agreements” (See Cunningham v. Standard Guar. Ins. Co., 630 So. 2d 179, 182 (Fla. 1994).) where the insurer and a third party claimant enter into a settlement agreement through which they agree to try bad-faith issues first, and to limit the settlement to policy limits if there is no finding of bad faith. The theory for allowing such agreements as a predicate to a bad faith claim is that stipulated judgment protects the insured from an excess of limits judgment while avoiding the costs and judicial resources attendant with a full trial of the underlying claim. The third basis is where the insured and the claimant reach an agreement having been “left to their own devices” by a recalcitrant insurer, described as a “Coblentz agreement” (See Coblentz v. Am. Surety Co. of N.Y., 416 F.2d 1059, 1063 (5th Cir. 1969).) The court noted that such agreements usually involve a breach of a defense obligation by the insurer, and that no Florida court had determined whether and to what extent a Coblentz agreement is valid and enforceable in the absence of the policy at issue containing a duty to defend. The fourth circumstance involved a claim of an excess carrier (which is assignable) for a primary carrier’s breach of its good faith settlement obligations which result in loss to the excess insurer.
According to the court, although each circumstance is different, the harmonizing principle among the various bad faith claims, and the minimum requirement for all such claims is that the bad faith conduct cause the claimed damages.
Applying these circumstances to the facts, the court found no “classic” bad faith because it was never exposed to an excess of limits judgment since the $10 million settlement (and all prior demands) were within the available limits. Moreover, there was no “Cunningham agreement” since there was no agreement to try bad faith issues first and stipulate to an amount of damages involving USF&G, and Chubb’s agreement to pay was not contingent on a finding of bad faith. While Coblentz agreements typically involve breaches of the duty to defend, the Court did not reject application of Coblentz agreements to indemnity policies. While the plaintiff could have entered into a settlement agreement that assigns plaintiffs rights against the insurer in exchange for a release from personal liability, where it is left to its own devices, that was not the case here because CIGNA and Chubb were willing to pay even without USF&G’s participation. Earlier in the opinion, the Court noted that the amount paid by the insured was within its deductible or SIR under both the USF&G and CIGNA policies. In addition, there was no equitable subrogation type claim because there was no assignment between Chubb and the plaintiff. Because there was no “near certainty of a large judgment against it exceeding all available coverage” and because of the excess insurer’s participation, there was no evidence that the insured was exposed to excess limits liability, and because there was no evidence that the insured had to pay moneys which should have been paid by CIGNA, the plaintiff was merely an assignee seeking recovery of an unpaid consent judgment as damages.
So where does this result leave us? On the one hand, the court has confirmed a substantive limitation under Florida’s otherwise expansive view of bad faith law on third party bad faith claims against insurers in the settlement context. On the other hand, with a slightly different agreement, such as an assignment of rights between Chubb and the plaintiff of Chubb’s rights to pursue CIGNA for equitable subrogation, or the payment by the employer of some amount in excess of its deductible and SIR under the policies, the plaintiff may well have perfected its bad faith claims against USF&G. Thus, whether the limitation is a substantive or can be overridden by clever drafting remains to be seen.