VOLUME XVII, NUMBER 5
May, 2005

SUPREME COURT DECISION MAY RAISE HAVOC IN BAD FAITH ACTIONS

The Florida Supreme Court in Allstate Indemnity Co. v. Joaquin Ruiz and Paulina Ruiz, 2005 WL 774838, 30 FLW S219 (Fla. April 7, 2005) receded from its decision in Kujawa v. Manhattan National Life Insurance Co., 541 So. 2d 1168 (Fla. 1989) and held that any distinction between first- party and third-party bad faith actions with regard to discovery purposes is not justified and without support under §624.155, Florida Statutes. Accordingly, “all materials, including documents, memoranda, and letter contained in the underlying claim and related litigation file material that was created up to and including the date of resolution of the underlying disputed matter and pertain in any way to coverage, benefits, liability, or damages, should also be produced in a first-party bad faith action.” Unfortunately, this case may have more far reaching effects as the court gratuitously went further, suggesting that courts need not dismiss a bad faith action pending a favorable resolution in the underlying matter.

In Kujawa, a first-party bad faith action brought against an insurer for failure to settle a claim under a life insurance policy, the Supreme Court previously recognized a distinction between first- and third-party actions and affirmed the appellate court’s holding in quashing a discovery order that compelled the production of all files pertaining to the handling of the claim. The Supreme Court held that an adversial, not a fiduciary relationship existed between the insured and the insurer and that the legislature in creating the bad faith cause of action did not intend to abolish the attorney-client privilege and work product immunity.

With regard to the Ruiz case, this action arises from the improper deletion of a covered vehicle from the Ruizes’ Allstate insurance policy by an Allstate agent. After purchasing a new vehicle (Cutlass) and instructing the Allstate agent to add that vehicle (Cutlass) to the policy, the agent incorrectly deleted another vehicle (Blazer) insured under the policy. Thereafter the insured was involved in an accident while driving the Blazer and after submitting a claim for collision coverage, Allstate initially denied the claim asserting that the Blazer was not covered under the policy. The Ruizes filed a legal action alleging bad faith pursuant to §624.155, Florida Statutes, and also one count of negligence against the Allstate agent and one count based upon vicarious liability for the agent’s negligence against Allstate. After the lawsuit was filed, Allstate admitted its obligation for collision coverage and to provide benefits to the Ruizes.

After the basic coverage issue was resolved, and in connection with the pending bad faith action, the Ruizes requested the court to compel production of certain documents, including Allstate’s claim and investigative file and materials, internal manuals and the agent’s file. After an in-camera inspection, the trial court ordered the documents produced, determining that the documents were relevant, reflected Allstate’s handling of the underlying claim and did not constitute work product or attorney-client privilege.

Allstate petitioned the Fourth District Court of Appeal for a writ of certiorari, seeking review of the trial court’s order compelling discovery and the district court granted relief in part. The district court allowed the production of some material, while prohibiting the production of other items, with the distinguishing factor being whether the items were prepared in anticipation of litigation and thus, were protected work product as opposed to material prepared during the normal course of evaluating a claim.

The Florida Supreme Court granted Allstate’s petition to review the district court’s determination which analyzed and addressed the asserted work product privilege. The court rejected any analysis as to whether the work product privilege attaches to materials created when litigation is “substantial and imminent” as held in Ruiz, as opposed to when legal action is “merely foreseeable” as held in the conflict cases. However, as discussed in more detail below, the court went beyond this initial issue and gratitutiously opened the door to lending support to parties litigating bad faith claims before resolution of the underlying claims.

In its analysis, the court reviewed and revisited previous decisions regarding discovery issues arising in bad faith actions. The court recognized that intrinsic in any bad faith action is an underlying claim for coverage or benefits or an action for damages which the insured alleges was handled in bad faith by the insurer. It is this two-tiered nature of bad faith actions which is at the heart of the discovery battles in bad faith litigation. Insurers and particularly Allstate asserts that work product protection should extend to the entire claim file and all files, in the underlying coverage or damage matter or dispute, including an extension into any bad faith litigation which may flow from the processing or litigating of the underlying claim. On the other hand, insureds and injured third-parties want access to the underlying file materials in order to determine whether the insurer has processed, analyzed or litigated a claim in a fair, forthright and good faith manner.

In Ruiz, the court acknowledged that that whether a bad faith action is brought pursuant to a first-party or third-party claim, the same obligation of good faith to process the claims are imposed on the insurance company. In order to determine whether an insured has acted in good or bad faith, the underlining claim file material is evidence as to how the matter was processed. Therefore, the court held there is no basis to distinguish between first- and third-party cases with regard to the discoverability of claim file type material.
Significantly, the court went beyond the issue presented to it and opened the door for courts to allow bad faith actions to proceed prior to the resolution of the underlying claim. Although the court recognized the danger of compelling production of the underlying claim material where the coverage and bad faith actions are initiated simultaneously, the court merely cautioned courts to employ existing tools, such as the abatement of action and in-camera inspections, to ensure full and fair discovery in both causes of action. The better practice, which is being utilized by the courts, is to either abate or, dismiss without prejudice, the bad faith action until there is a favorable ruling in the underlying claim. The ruling in Ruiz suggests that abatement or dismissal is discretionary and certainly bad faith attorneys will attempt to use this ruling in support of their attempts to proceed simultaneously with their bad faith and coverage actions. In that event, extreme caution must be taken to prevent the discovery of the underlying claims file. The court did acknowledge that certain documentation relevant to the bad faith action may not be available for discovery until after the resolution of the underlying matter. See Old Republic Nat’l Title Ins. Co. v. Homeamerican Credit, Inc., 844 So. 2d 818, 819 (Fla. 5th DCA 2003); Allstate Ins. Co. v. Shupack, 335 So.2d 620, 621 (Fla. 3d DCA 1976)

Pursuant to this decision, the court overstepped its bounds by apparently ruling on an issue not before the court. If the court felt compelled to comment on bad faith actions simultaneously filed with coverage actions, certainly the better approach would have been for the court to have taken the opportunity in this case to affirmatively hold that bad faith actions must be abated and/or dismissed before the resolution of the underlying claim, which would have assured that protected materials not be disclosed unless and until the underlying coverage dispute is resolved in favor of the insured.

We will wait and see the impact of the Ruiz holding and whether bad faith attorneys will attempt to use the “dicta” in this case as authority to proceed with their bad faith actions before resolution of the underlying claim.

Robin B. Rothman

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INSURED IS AWARDED ATTORNEYS’ FEES ON MOTION TO COMPEL APPRAISAL

In Travelers Indemnity Insurance Company of Illinois v. Meadows MRI, LLP, Inc., (Case No. 4D04-1702), the Fourth District Court of Appeals addressed the issue of an insured's entitlement to attorneys’ fees and costs pursuant to §627.428(1), Florida Statutes for having to retain an attorney and engaging in legal process to compel appraisal.

The underlying action arose out of a claim for damage to MRI equipment owned by Meadows MRI, LLP, and insured by Travelers. The MRI equipment was damaged by a sudden and accidental explosion in the magnet that resulted in a loss to the magnetic field in July 2001. After the insured reported its claim, Travelers conducted its loss investigation to determine whether, in fact, the damage resulted from a covered cause. The Travelers investigation took approximately four months. During this time, Meadows retained counsel to protect its rights and legal remedies.

In November 2001, Travelers acknowledged coverage and proceeded to further investigate the amount of the loss. In December 2001, Travelers issued payment to Meadows based upon Traveler’s estimate of the damages. Travelers demanded appraisal pursuant to the policy in May 2002, after the parties unsuccessfully attempted to resolve the dispute as to the significant disparity between the parties’ two estimates.

Prior to the commencement of the appraisal process, Meadows' counsel inquired with Travelers as to procedures for appraisal and entitlement to attorney’s fees for the prevailing party. Meadows also advised that absent a prompt response, Meadows would file suit for declaratory judgment. Travelers failed to respond to the inquiries.

The parties selected their respective appraisers and began the appraisal process. Meadows did indeed file a declaratory judgment action on November 20, 2002 on the following issues: 1) that the appraisal process would be governed by the Florida Arbitration Code; and 2) that attorney’s fees would be awarded to the prevailing party pursuant to §627.428(1), Florida Statutes. There was also a count for breach of contract which the trial court abated pending conclusion of the appraisal process.

Section 627.428(1), states as follows:

Upon the rendition of a judgment…by any of the courts of this state against an insurer and in favor of any named… insured… under a policy… executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured…a reasonable sum as fees or compensation for the insured’s… attorney prosecuting the suit in which recovery is had.

Potentially important to the ultimate ruling by the district court is that the Meadows appraisal process took approximately one year to complete.

Following completion of the appraisal process, Meadows filed a motion to confirm the appraisal award and entry of judgment. Argument was eventually heard subsequent to Traveler’s payment of the appraisal award. Anticipating a motion for attorneys’ fees if the insured’s motion to confirm the appraisal award was granted, Travelers argued, based on Allstate v. Suarez, 833 So.2d 762 (Fla. 2002), that even if the court was intent on confirming the appraisal award, Meadows should not be deemed a prevailing party. The trial court declined to address this issue and simply entered the judgment confirming the award.

In August 2003, Meadows filed its motion for attorney’s fees and costs pursuant to section §627.428(1), Florida Statutes. Travelers argued that the underlying lawsuit was simply a vehicle for generating attorney’s fees rather than for a valid purpose, relying heavily upon the case of Nationwide v. Bobinski, 776 So.2d 1047 (Fla.5th DCA 2001) (where the court held that “a suit which did not yield a final judgment pursuant to section §627.428(1), did not qualify for entitlement to fees under section 627.428(1).”

On appeal, the Meadows court distinguished the Meadows case from Nationwide. First, the court noted that in Nationwide, suit was filed after the appraisals were completed and payments were made. Whereas in Meadows, suit was filed long before completion of the appraisal process commenced. Second, the Meadows court noted that in Nationwide the insured never sought confirmation of the appraisal award. Finally, the court noted that Travelers did not appeal the trial court’s entry of judgment confirming the appraisal award.

The Fourth District also reasoned that Meadows’ involvement of the formal judicial process was not unnecessary, in that Meadows had to retain counsel to compel Travelers to accept coverage; and further employ counsel to protect its legal rights during the appraisal. The court considered that Travelers four month initial investigation to be too lengthy.

Ultimately the Meadows court held that the trial court’s award of attorney’s fees for the appraisal process was consistent with the court’s stated purpose for section 627.428(1) which is:

…plainly to place the insured or beneficiary in the place it would have been in if the carrier had seasonably paid the claims or benefits without causing the payee to engage counsel and incur obligations for attorney’s fees.

The court further cited to Wollard v. Lloyd’s & Cos. Of Lloyd’s, 439, So. 2d 217,218-19 (Fla. 1983), stating that payment of a settlement claim is the functional equivalent of a confession of judgment or a verdict in favor of the insured resulting in recovery of attorney’s fees incurred in reaching the settlement. The Meadows court thus extended this rationale to the goal of §627.428(1) to “cover an award of attorney’s fees associated with an expensive and drawn out appraisal due to Travelers’ disputed value estimation.” Accordingly, the Meadows court affirmed the trial court’s decision.

Stephanie H. Luongo
Donna M. Wilson-Sampson

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FLORIDA STATUTE SECTION 627.428 NOT APPLICABLE TO INSURANCE POLICY NOT ISSUED OR DELIVERED IN FLORIDA

In Travelers Indemnity Company vs. Royal Oak Enterprises, Inc., (Case No. 5:02-cv-58-Oc-10 GRJ), the U.S. District Court for the Middle District of Florida recently addressed the issue of an insured’s entitlement to recover attorneys’ fees pursuant to Section §627.428, Florida Statutes, where the policy sued under was not delivered in Florida or issued for delivery in Florida.

The issue arose on Royal Oak’s motion for attorneys’ fees pursuant to Section §627.428, Florida Statutes, after the parties entered into a stipulation where judgment was entered in Royal Oak’s favor on its claim for coverage under a liability insurance policy that was issued by Travelers. In opposition to Royal Oaks’ motion for the entitlement of attorneys’ fees pursuant to Section §627.428, Florida Statutes, Travelers argued that Royal Oaks was not entitled to recover attorney's fees, as Section §627.428, Florida Statutes, was not applicable because the policy of insurance under which Royal Oaks brought suit against Travelers was neither issued for delivery in Florida nor was it delivered in the State of Florida.

Specifically, it was undisputed that the policy was delivered by Travelers to Royal Oak’s insurance broker in Atlanta, Georgia; and that the broker in turn, delivered the policy to Royal Oak’s headquarters in Atlanta, Georgia, where it was executed. As such, Travelers argued that Royal Oaks was not entitled to recover attorneys’ fees pursuant to section §627.428, Florida Statutes. “[Florida Statute] section §627.401(2) states that the provisions of Part II of chapter 627, which includes Section 627.428(1), do not apply to “[p]olicies or contracts not issued for delivery in this state nor delivered in this state…” Accordingly, the court agreed with Travelers’ argument that Royal Oaks was not entitled to recover attorneys’ fees pursuant to Section 627.428(1), Florida Statutes, as the policy of insurance was not issued for delivery in the State of Florida.

The court also addressed the issue of the applicability of Section §627.428, Florida Statutes, where, as in the Travelers v. Royal Oaks case, although the policy was not issued for delivery in Florida or delivered in Florida, the policy expressly covered Royal Oaks’ facilities in Florida (and elsewhere). The court held that “the fact that the policy expressly covered Royal Oak’s facilities in Florida (and elsewhere) does not trigger entitlement to fees under the statute…[D]elivery or intended delivery is the key which opens the door to the recovery of attorney's fees under Section §627.428. Thus, the relevant inquiry is whether the parties intended the policy to be delivered in Florida and not whether they intended the policy to cover a risk in Florida.”

Donna M. Wilson-Sampson

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A LIABILITY INSURER MUST DEFEND OR INDEMNIFY EMPLOYER FOR CONDUCT THAT IS DEEMED “SUBSTANTIALLY CERTAIN TO RESULT IN SERIOUS INJURY OR DEATH

In the case of FCCI Insurance Company v. Jeanette A. Horne, 29 FLW D2767 (Fla. 5th DCA Dec. 3, 2004), Florida’s Fifth District Court of Appeals was called upon to determine whether a liability insurer must defend or indemnify an employer/insured where the insured engages in conduct that is “substantially certain to result in injury or death” to its employees. The Horne court concluded that, based on the facts of that case, that the insurer was required to do so.

FCCI provided liability and workers’ compensation insurance coverage to the employer/insured, Scarborough Civil Company. Both policies were in effect on July 25, 2000. On that day, two of the insured’s employees were killed when a trench that they were working in caved in and buried them alive. The families of the two deceased employees received workers’ compensation benefits from FCCI. Additionally, wrongful death actions were filed against Scarborough and other defendants. These complaints alleged that “Scarborough engaged in conduct which was ‘substantially certain to result in serious injury or death’.” This language was intended to avoid the employer’s immunity under Florida’s workers’ compensation laws.

FCCI responded by filing a declaratory judgment action in the Circuit Court of Hillsborough County seeking a declaration that the liability policy did not require it to defend or indemnify the employer. One of the arguments advanced by FCCI on summary judgment was that the two wrongful death actions did not involve an “accident’ as required by the policy and, instead, involved alleged non-covered intentional conduct. The trial court disagreed and entered summary judgment in favor of the insured. On those grounds, FCCI appealed to the Fifth District.

The Horne court’s analysis began with a series of well-settled principles of Florida law relative to the construction of insurance contracts. First, the court explained that insurance policies are interpreted in accordance with the plain language of the policy as bargained for by the parties. The Horne court expressed the fact that exclusionary clauses are strictly interpreted against the insurer because they are considered contrary to the fundamental protective purposes of insurance. Citing Prudential Property & Cas. Ins. Co. v. Swindal, 622 So.2d 467 (Fla. 1993), the court pointed out that tort law principles do not control judicial construction of insurance contracts in Florida. The court further explained that any ambiguities in an insurance contract are construed against the insurer.

Moreover, the court commented that Horne presented a unique set of circumstances as the wrongful death actions involved an allegation of “intentional tort” so as to avoid the employer’s workers’ compensation immunity. Although workers compensation constitutes the exclusive remedy for an employee’s work-related accident, an exception to an employer’s workers compensation immunity occurs when the injury is a result of the employer’s intentional tort. This “intentional tort” exception arises where (1) the employer exhibits a deliberate intent to injure the worker, which involves the application of a subjective test, or (2) the employer engages in conduct which is “substantially certain” to result in injury or death. The “substantially certain” alternative applies an objective test to ascertain whether a reasonable employer should have known that its intentional conduct, irrespective of its actual intent, was substantially certain to result in an injury to or death of the employee.

FCCI argued that because both wrongful death actions alleged that the employer engaged in conduct that was “substantially certain to result in serious injury or death,” i.e., one of the intentional torts exception, the complaints established that the incident could not be an “accident” and fell within the policy’s intentional act exclusion.

The FCCI liability policy, which insured “bodily injury by accident or bodily injury by disease.”(original emphasis) did not define the words “accident” or “intentionally.” While attempting to define the term “accident,” the court commented that that the word has been given various meanings with no uniform, singly-accepted definition. In fact, according to the Horne court “few insurance policy terms have provoked more controversy in litigation” than this word has.

The Horne court then cited the case of Grissom v. Commercial Union Ins. Co., 610 So.2d 1299 (Fla. 1st DCA 1992), which held that, in Florida, liability policies insuring “accidents” are applicable to injuries or damages caused by the insured’s intentional acts “so long as the insured did not intend to cause any harm.”

Because the complaints did not allege that Scarborough intended to harm the two deceased workers, and merely stated that injury or death was “substantially certain” to result from the employer’s conduct, the Horne court determined that the incident fell within the scope of an “accident” under the FCCI policy. The court also concluded that the intentional act exclusion did not apply as there were no allegations that Scarborough intended to harm its workers. In short, the “intentional tort” alleged was not “really” intentional, and thus, the liability insurer had an obligation to defend and indemnify the employer/insured.

Stephanie H. Luongo

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