VOLUME XV, NUMBER 9
September, 2003

INSURER CAN BE ESTOPPED TO DENY COVERAGE IF IT NEGLIGENTLY INVESTIGATES CLAIM PRIOR TO SUIT BEING FILED

The Fourth District Court of Appeal sided with Village of Golf, a municipal corporation, in its claim that Florida Municipal Insurance Trust, Village of Golf’s general liability insurer, can be estopped to deny coverage where the insurer negligently investigated a claim before suit was filed against its insured, despite the general rule that coverage cannot be created by estoppel. Florida Municipal Insurance Trust v. Village of Golf, 28 FLW D900 (Fla. 4th DCA April 9, 2003).

The claim involved a chlorine gas leak from the insured’s water treatment plant, which allegedly damaged a neighboring farmer's crops. Within days of the leak, the farmer notified the insured, who in turn notified the carrier. The insurer retained counsel and a field adjuster to investigate the claim. Within a few months the farmer notified the adjuster of crop damage, which he attributed to the leak. The adjuster, who was not experienced in evaluating crop damage, visited the farm and took photos. In the meantime, the insurer settled a number of other small claims (totaling about $20,000.00) arising from the leak. The claimant eventually filed suit claiming $1,600,000.00 in crop damage. However, when the suit was sent to the carrier, the carrier notified the insured that there was no coverage on the basis of the policy’s pollution exclusion. The insured retained its own counsel, settled with the claimant for $237,500.00, and filed suit against the insurer, claiming that the insurer was estopped from denying coverage because the insured was prejudiced by the insurer’s inadequate investigation of the claim.

The Fourth District acknowledged the general principle that coverage cannot be extended by waiver or estoppel, but in this case, the exception to the rule applied: 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. The court emphasized that the insured must demonstrate that the insurer's assumption of the defense has prejudiced the insured. It is the fact that the insured was prejudiced that estops the insurer from denying the indemnity obligation. In this case, the insured presented the testimony of an expert in support of its claim that it was prejudiced by the insurer's conduct. The expert admitted that the pollution exclusion would otherwise bar coverage, but noted that the insurer settled a number of smaller claims, did not issue a reservation of rights, and hired an adjuster to investigate the claim. This conduct gave the insured a false sense of security as to the existence of coverage and did nothing to protect itself.Thus, the insured did not hire its own attorneys, investigators or experts to evaluate the merits of the claim or its potential exposure. Unfortunately, the adjuster hired by the insurer was inexperienced and did not conduct a proper investigation or retain experts. The insured’s defense was prejudiced by the inadequate investigation by the inexperienced adjuster.

Significantly, the court rejected the insurer’s contention that the insured cannot rely upon conduct that occurs before suit is filed to claim estoppel. According to the court, “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 that occurs after suit is filed.”

Although the Fourth District sided with the insured on the estoppel issue, it reversed and remanded for a new trial because it found that the trial court erred in instructing the jury by giving a jury instruction on section 627.426(2)(a), Florida Statutes (1995) — which provides that a liability insurer shall not be permitted to deny coverage based on a coverage defense unless the insured is provided with a written reservation of rights within thirty days after the insurer knew or should have known of the coverage defense. The “coverage defense” contemplated by the statute is a defense to coverage that otherwise exists. The statute does not apply in cases where there is a complete lack of coverage for the loss sustained, but the insured argues that the carrier is estopped from denying coverage. The court noted that instructing the jury on this statute was “tantamount to telling the jury it had to return a verdict for the insured.” Thus, giving the instruction was error.

The pro-insured result in this case is particularly interesting because, as noted by Judge Farmer’s dissent, the insured was not an unsophisticated consumer, but a municipal corporation that employs or has access to insurance experts, and there was a long affiliation with this particular insurance carrier, the corporation having purchased liability policies for many years. It was clear that the insured had elected not to purchase pollution coverage. The court’s “largesse in giving coverage to an insured,” again as described by the dissent, was misplaced because the carrier “was being a good citizen” in attempting to assist its insured in adjusting prospective claims and in dealing with residents and citizens whose property or persons had been exposed to the chlorine gas emission. Once again we are reminded of the principle that “no good deed ever goes unpunished.”

Anna D. Torres

PHYSICAL SIDE EFFECTS FROM MEDICATION NOT FOUND TO CONSTITUTE “IMPACT” SUFFICIENT TO SUPPORT CLAIM FOR NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS

The recent decision in Rivers v. Grimsley Oil Company, Inc., 28 FLW D 931 (Fla. 2d DCA April 11, 2003), addresses the impact doctrine and the issue of whether physical side effects from medication prescribed to treat post-traumatic stress disorder constitute physical impact sufficient to sustain a cause of action for negligence.

In Rivers, a convenience store employee was robbed but was not shot or otherwise physically harmed by the robber. The employee brought suit against her employer under a theory of negligent security, claiming that the robbery had emotionally traumatized her and caused her to suffer severe psychological injury. More specifically, she alleged that the robbery caused her to suffer post-traumatic stress disorder for which she was treated with medication that caused side effects including nausea, cramps and confusion. The employee’s claim was not based solely on her employee status, but rather asserted that any person in the store at the time of the robbery who suffered similar “injuries” should be entitled to recover from the store owner based upon his negligence in providing security.

The employer initially sought dismissal of the employee’s claim on the basis that it was barred by worker's compensation immunity. The motion was denied, however, because the court, citing to § 440.02(1), Fla. Stat. (Supp. 1998) found that the statutory definition of “an accident” for purposes of worker's compensation, did not permit a claim for “a mental or nervous injury due to stress, fright or excitement only.” The employer then moved for and was granted summary judgment on the basis that Florida does not recognize a cause of action for negligent infliction of emotional distress in the absence of physical impact or injury. The District Court agreed, holding that the facts of this case did not fall within one of the “limited and specific exceptions” to Florida's impact doctrine, which requires that a plaintiff sustain some kind of physical impact in conjunction with a defendant's negligence in order to maintain a cause of action for negligence. The recognized exceptions to the impact doctrine noted by the court are 1) psychological injury resulting in significant discernible physical injury after witnessing an accident in which a friend or relative is physically harmed; 2) breach of duty of confidentiality by a professional owing a fiduciary duty to a plaintiff; and 3) misdiagnosis which causes a plaintiff to undergo invasive medical treatment or suffer physical side effects of caustic medication. Plaintiff contended that her claim fell within the third exception, which was created by the Florida Supreme Court in R.J. v. Humana of Fla. Inc., 652 So.2d 360 (Fla. 1995).

The court rejected plaintiff’s contention based on its conclusion that the Supreme Court in R.J. “did not intend to open the courts to all claims involving side effects from medications properly prescribed for correctly diagnosed psychological conditions.” Rivers, 28 FLW D at 932. In short, the Rivers court refused to create a new exception to the impact doctrine where the plaintiff suffers no direct physical injury, but is treated for a psychological condition and suffers side effects from properly prescribed medication used to treat such condition.

Allison S. Moore

CONTINGENT ECONOMIC INTEREST INSUFFICIENT FOR INTERVENTION

Intervention is a proceeding that allows a party to enter into a lawsuit already in progress. However, Florida courts have held that a party must have more than “a mere contingent economic interest” in the matter in which they wish to intervene.

In Ace American Insurance Co. v. Paradise Divers, Inc . , 216 F.R.D. 537, 16 FLW Fed. D458 (S. D. Fla., June 6, 2003), the District Court set forth the Eleventh Circuit's four-part test for intervention, which is drawn directly from the Federal Rules of Civil Procedure, Rule 24(a). A party can intervene as of right if he establishes that:

1. his application is timely;
2. he has an interest relating to the property or transaction that is the subject of the action;
3. he is so situated that disposition of the action, as a practical matter, may impede or impair his ability to protect that interest; and
4. his interest is represented inadequately by the existing parties to the suit.

See Loyd v. Ala. Dep’t Of Corrections , 176 F.3d 1336 (11th Cir. 1999). If a party establishes all of the prerequisites to intervention, the district court has no discretion to deny the intervention motion. See United States v. Georgia , 19 F.3d 1388 (11th Cir. 1994).

An intervenor must have a direct, substantial and legally protectable interest in the outcome of the litigation. For example, until a tort claimant has a judgment in a tort suit, the claimant's interest remains contingent. Therefore, the claimant's interest is insufficient to intervene in a separate coverage lawsuit between two insurers because he does not yet have a stake in the action. See Indep. Petrochemical Corp. v. Aetna Cas. Sur. Co., 105 F.R.D 106 (D.D.C. 1985).

In Ace American , there was a declaratory judgment action involving a coverage dispute as to whether a marine insurance policy issued by Ace American to Paradise Divers provided coverage to Paradise Divers for liability related to injuries sustained by an employee while “free diving.” The employee filed a Motion to Intervene in that action. The court held that although the employee’s interests were important, they were affected only speculatively, and at that, only economically, by the coverage action. His stake in the coverage action was contingent upon first obtaining a judgment against Paradise Divers and was not based on legally protected ground

A court may permit permissive intervention under the Federal Rules when a movant’s claim or defense and the main action have a question of law or fact in common. Permissive intervention is at the discretion of the court and the court shall consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties. Since the facts and law in the Ace American action involved coverage issues while the facts and law of the employee's claim took root in the incident involving his injury, the court reasoned that allowing an intervention would cloud the court’s interpretation of the original claims and add irrelevant collateral issues to the coverage dispute.

The employee in Ace American also argued that intervention was necessary to prevent the declaratory judgment action from getting dismissed due to failure to join an indispensable party, namely himself. The court further reasoned that Paradise Divers and the employee did share the same ultimate objective of obtaining a declaration of coverage under the insurance policy. However, the court held that based upon Paradise Divers’ strenuous opposition to Ace American’s position of lack of liability coverage, the employee's interests were adequately represented by Paradise Divers and was not an indispensable party to the action.

Stephanie H. Luongo