VOLUME XVIII, NUMBER 7
June, 2006

INSURER ACTS AT ITS PERIL IN REFUSING TO DEFEND

The danger of failing to defend an insured was the focus of the court's decision in the recent case of Tom Gallagher, as Insurance Commissioner & State Treasurer & Risk Management Trust Fund v. Dupont , 30 FLW D2776 (Fla. 5 th DCA December 9, 2005). As discussed below, an insurer acts at its peril in refusing to defend its insured and will be held responsible for its consequences.

Dupont arises from a civil rights lawsuit filed by Michael Dupont against Sebastian Tangusso ("Tangusso"), the head of the Department of Business and Professional Regulation ("DBPR") after Dupont was purportedly wrongfully arrested during the course of a reverse sting operation conducted jointly by the DBPR & the State Attorney's Office.

The State Risk Management Trust Fund ("Fund") provides federal civil rights liability insurance for employees under FS 284.30 and owed a duty to defend its insured. The Fund retained the services of the Attorney General to defend Tangusso in the civil rights lawsuit. While the civil rights lawsuit was pending, Tangusso died. Thereafter, an issue arose as to whether the Fund should provide a defense to the Tangusso Estate.

While the Attorney General was determining its duty to defend the Estate, Dupont obtained a clerk's default against the Tangusso Estate. The Attorney General refused to defend the Tangusso Estate, but remained the attorney of record for the Estate. At the hearing to determine the amount of damages and for entry of a default judgment, the Assistant Attorney General requested to be relieved from any appearance asserting that its representation did not extend to estates of deceased employees. The court requested counsel to provide a memoranda court outlining their position regarding representation of the Estate.

During the delay in ruling on Dupont's Motion for Final Default Judgment, counsel for Dupont and the Estate began discussing the option of a Coblentz agreement and consent judgment. The district court subsequently granted the Attorney General's motion to withdraw as counsel for the Tangusso Estate and also denied without prejudice Dupont's Motion for Default Judgment.

Dupont and the personal representative of the Estate executed a written settlement agreement which was approved by the Probate Court. The district court granted Dupont's Motion for Entry of Final Order based on the settlement agreement and entered judgment for Dupont in the amount of $527,670.70. The Estate agreed to the entry of judgment against it and assigned to Dupont any and all judgments, settlements, proceeds that it may obtain against the Fund, thereby assigning any bad faith claim it may have against the Fund to Dupont.

After the settlement and approval by the court, Dupont's counsel served a demand letter on the Department of Insurance, providing a copy of the final judgment and advising of the assignment of rights. The Department objected to the settlement agreement and assignment in the probate court and did not pay the demand.

Dupont sought to enforce the judgment obtained by the Coblentz agreement against the Department of Insurance. The circuit court granted final summary judgment in favor of Tom Gallagher, in his capacity as Insurance commissioner and State Treasurer, etc., finding that events or procedures set forth in the settlement agreement operated as conditions precedent to recovery under the final judgment.

However, on appeal, the Fifth District Court of Appeal reversed the final summary judgment, holding that while an insurance company is within its rights in a thorough investigation to determine whether the incident comes within coverage of its policy, the company acts at its peril in refusing to defend its insured and will be held responsible for its consequences. When an insurer has denied coverage that actually exists, the insurer has breached the contract and therefore cannot rely on a contractual provision prohibiting the insured from settlement of a claim with a responsible party in order to relieve itself from liability.

The court held that the Fund, as the insurer, was not entitled to raise any defense to the Plaintiff's claim that it could have raised in the civil action, and could not collaterally attack the terms of the consent agreement between Dupont and the Estate. The Fund lost the chance to litigate the factual issues surrounding the civil rights lawsuit by its refusal to represent the Estate, losing its right to claim a defense that it otherwise could have raised in federal court, and the settlement served to establish its liability, subject to a hearing on the reasonableness and amount of the consent judgment.

Accordingly, in light of the dangers of refusing to defend a loss arguably not subject to coverage under a policy, consideration should be given to filing a declaratory action to determine whether coverage exists while providing a defense under a reservation of rights.

Robin B. Rothman  

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FLORIDA APPELLATE COURT DETERMINES DISCOVERY REQUEST FOR INSURER'S BUSINESS-RELATED MATERIALS UNNECESSARY TO COVERAGE DETERMINATION IN A DECLATORY JUDGEMENT ACTION

In the case of Allstate Insurance Company v. Swain , (31 FLW D479), the Third District Court of Appeal found that a discovery order compelling an insurer to produce documents and information relating to the drafting, marketing, and interpretation of umbrella policies and other business-related materials was not necessary to a coverage determination in a declaratory judgment action which sought a declaration as to whether an umbrella policy covered the insured's obligation to pay attorney's fees and costs.

Judy Swain was employed by Allstate as an insurance agent, and along with others, filed an Employee Retirement Income Security Act (ERISA) action against Allstate in federal court alleging mismanagement of their pension fund. The federal court ruled against the employees, determining that the action had been litigated in bad faith, which resulted in the entry of an order awarding Allstate $300,167.50 in attorney's fees and $2,782.05 in costs.

Allstate, in addition to being Swain's employer, was also her insurer under a personal umbrella policy which afforded liability coverage in the amount of $1,000,000. Swain requested coverage under this policy for the judgment for fees and costs. Allstate responded by filing a declaratory judgment action in state court, asking the court to determine whether the fee/cost judgment constituted damages based on personal injury under the terms of the umbrella policy. Swain then served Allstate with interrogatories and production requests to which Allstate objected. The court sustained some of these objections, but overruled others. Allstate was ordered to provide information and documents regarding the drafting, marketing and interpretation of its umbrella policies, training of agents and employees as to said policies, and any claims made under the policies on which fees and/or costs were paid.

The trial court subsequently entered discovery orders compelling Allstate to produce documentation and information relative to the drafting, marketing, and interpretation of umbrella policies, the training of agents, and any claims made under such policies in cases where attorneys' fees and costs were paid. Allstate responded by filing a petition for writ of certiorari to the Third District, which held that Allstate should not be required to comply with these discovery orders because this information was completely unnecessary to the determination as to whether a personal umbrella policy covered the insured's obligation to pay fees and costs to the insurer. Thus, the discovery orders compelling Allstate to answer the subject interrogatories and request for production propounded by Swain were quashed.

Kathleen M. Bonczyk  

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INSURANCE COMPANY CANNOT SHIELD CLAIM FILE FROM INSURED WHERE IT WAS VOLUNTARILY PROVIDED TO DEFENSE COUNSEL IN UNDERLYING ACTION

A recent case out of the Second District Court of Appeal recently held that the trial court overstepped its boundaries in precluding a client, an insured from inspecting all materials held by its attorney that were provided by third parties, i.e. the insurance company, in a subsequent declaratory judgment action suit. Allied Asphalt Paving, Inc. v. Auto Owners Insurance Company 31 FLW D703

Factually, in the Allied case, the appellant, Allied Asphalt, was an insured under a policy issued by Auto Owners. Auto Owners had hired an attorney to defend Allied in a negligence suit and at that time produced its claim file to the attorney in connection with the defense. Subsequently, Auto Owners instituted a declaratory judgment action to resolve a coverage issue and the trial court issued a Protective Order

precluding the attorney that had the claim file from disclosing the contents of the file to the insured. The court held that, "stripped to its essentials" the situation is that Auto Owners, a party outside the negligence suit, had convinced the trial court in the declaratory action, which is a separate action from the negligence suit, that the negligence suit defendant, Allied Asphalt, may not inspect materials in its own attorney's possession and may not have another of its attorneys inspect those materials.

In reversing the trial court's order, the appellate court held that the materials were voluntarily provided by Auto Owners to the attorney defending Allied Asphalt in a negligence suit. They noted that at the time its attorney received the materials, he was the attorney for Allied Asphalt alone, despite the fact that his representation was paid for by Auto Owners. Auto Owners was aware of this fact at the time it provided the claim file to him. The attorney maintained, properly so, that his client was Allied Asphalt and not Auto Owners. The court further noted how Auto Owners had the opportunity and power to review and select documents it chose to provide to the attorney for its insured. The court focused on the fact that the transfer was voluntary and, therefore, precluding a client from inspecting all the materials held by its attorneys interfered with the relationship between the attorney and the client to an unacceptable degree.

Based on the foregoing, insurance companies may wish to be mindful of materials that it provides to defense counsel if there are coverage issues that may ultimately be the subject of a declaratory action. Based upon the Allied decision, a court may permit an insured to review the contents of a claim file that was voluntarily produced by the company in the underlying suit. Accordingly, if there are coverage issues, an insurance company may wish to conduct a more thoughtful analysis of the documents provided to defense counsel and may wish to withhold certain documents that it ultimately intends to shield from the insureds inspection.

Nancy I. Stein-McCarthy