VOLUME XXI, NUMBER 7
July, 2009

FROM THE CORNER OFFICE

Anna D. Torres will be presenter at the South Florida Claims Association 2009 Continuing Education Seminar to be held on July 17th at the Lighthouse Point Yacht and Racquet Club on the subject of "Insured's Breach of Contract

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ATTORNEY-CLIENT PRIVILEGE SURVIVES CRUTINY IN FIRST-PARTY INSURANCE ACTIONS FOR STATUTORY BAD FAITH

In West Bend Mutual Insurance Company v. Higgins, 34 Fla. L. Weekly D653 (Fla. 5th DCA 2009), the Fifth District Court of Appeal considered the issue of whether or not attorney-client privilege protects an insurance company from disclosure of certain documents sought in discovery in a first-party bad faith lawsuit brought under Florida Statute section 624.155. The plaintiff sought discovery of three documents, all of which were generated after entry of the underlying "excess" judgment against the insurer. The first two documents wee memoranda, which the court held were not discoverable. The third document was an invoice for legal services containing a description of billed-for activities of the insurer's counsel for work performed prior to the underlying "excess" judgment. In affirming the trial court's order, the Fifth District held that the invoice was discoverable given that it contained no substantive, privileged communications. This holding was made under the assumption that invoices for legal services are subject to discovery pursuant to the discretion of the trial court.

In making its holding, the Court briefly examined the Florida Supreme Court's opinion in Allstate Indemnity Co. v. Ruiz, 899 So. 2d 1121 (Fla. 2005). In Ruiz, the insureds sued their automobile insurer and insurance agent for bad faith denial of a claim as a result of the insureds' agent mistakenly deleting their vehicle from the policy. The disputed issue in Ruiz was whether the insureds were entitled to discovery of the carrier's claim and investigative file and materials, internal manuals, and the agent's file in the bad faith action. The Florida Supreme Court held in Ruiz that not only were the underlying claim and related litigation and file materials created up to to and including the date of resolution of the underlying claim discoverable, but also the documents prepared after the determination of the underlying disputed claim in favor of the insureds and initiation of bad faith action against the carrier may be discoverable upon showing of good cause or in accordance with a court order following an in-camera inspection.

While the Ruiz decision did not expressly discuss the application of the attorney-client privilege in the context of bad faith insurance litigation, the Court noted in footnote: In contrast from the familiar "bad faith" failure to settle or defend a third-party's action against a liability carrier's insureds. In those cases like this one, the pertinent issue is the manner in which the company has handled the suit including its consideration of the advice of counsel so as to discharge its mandated duty of faith. Virtually the only source of information on these questions is the claim file itself.

While noting that the meaning of this language was not entirely clear, and that it dealt with work product immunity rather than attorney-client privilege, in West Bend the Fifth District concluded that the Florida Supreme Court in Ruiz did not abrogate attorney-client privilege in first-party statutory bad faith actions brought by the insureds against their insurance carrier.

The Fifth District went on to describe the nature and purpose of the attorney-client privilege. The attorney-client is the oldest confidential communication privilege and it is given maximum legal protection. It is codified in statute and contained in the Evidence Code, section 90.502, Florida Statutes (2007). The rationale behind this privilege is the "encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice. Unlike the work product immunity, attorney-client privilege communications remain protected from disclosure even when the opposing party is able to show substantial need and relevance of the materials sought. The Court stated that even though the Florida Supreme Court has previously concluded that immunity from disclosure does not protect the insurer's claim file in first-party and third party actions brought against the insurer under section 624.155, this does not mean that "the attorney-client privilege available to any contracting party, including insurers, somehow evaporates uniquely for insureds upon the filing of a bad faith claim."

The court further stated that proof of the bad faith claim does not depend upon disclosure of attorney-client privileged communications and even if it did, that is not a sufficient basis for defeating the privilege. The court cautioned that aside from a small number of limited exceptions to attorney-client privilege, such as commission of a crime or implied waivers, eliminating the attorney-client privilege in bad faith insurance disputes would preclude the insurer from engaging in meaningful discussions with its attorney about the legal justification for its actions.

 Stephanie H. Luongo
Anna Garber

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BAD FAITH ACTION AGAINST INSURER IS PREMATURE SUBJECT TO DISMISSAL WHERE THE TIME TO APPEAL THE JUDGMENT IN UNDERLYING THE CASE HAS NOT EXPIRED

While the Florida Supreme Court has not definitively addressed whether the appellate process must be complete in order for a bad faith claim to mature, Florida appellate courts, and most recently the U.S. District Court of the Southern District of Florida, have answered this question in the affirmative. Leitstein v. QBE Insurance Corporation, 21 Fla. L. Weekly Fed. D611 (S.D. Fla. 2009); Page v. QBE Insurance Corporation, 21 Fla. L. Weekly Fed. D612 (S.D. Fla. 2009). In April 2009, the U.S. District Court of Southern District of Florida found the two related bad faith actions to be premature where the time to appeal the judgment in underlying case had not yet expired and accordingly granted the Defendant’s Motions to Dismiss without prejudice in each of the cases. The two actions were both filed by the same Plaintiffs’ attorney, against the same Defendant, arising out of the same underlying claim. The Defendant filed identical Motions to Dismiss in each case, and the motions were granted on the same grounds.

The actions arose out of a jury award of damages for the Defendant’s breach of contract, based on the Defendant’s alleged failure to attempt in good faith to settle the Plaintiff’s claims in the underlying action. Prior to the Plaintiffs’ filing of the actions for statutory bad faith, not only had the time to appeal the judgment in the underlying claim not expired, but the judge in the underlying case had granted the Defendant’s motion for an evidentiary hearing on the issue of juror concealment. In addition, the Defendant filed a renewed motion for judgment as a matter of law, a motion for new trial, and a motion to alter or amend the judgment pending in the underlying case.

As the Defendant had not exhausted its appellate remedies in the underlying case, the Court found that the determination of liability in the underlying case could not be considered final for purposes of a bad faith action and thus the actions were premature. As bad faith was the only claim alleged in the Plaintiffs’ Complaints, the Court rejected the Plaintiffs’ request to abate the actions and granted the Defendant’s Motions to Dismiss without prejudice. The Court noted that there was a distinct possibility that the Plaintiffs’ bad faith claims may never mature if judgment in the underlying action is vacated or reversed on appeal.

Morgan A. Fairthorne

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THE SOUTHERN DISTRICT OF FLORIDA CRACKS DOWN ON INSUFFICIENT PLEADING

In Amica Mutual Insurance Co. v. Morowitz and Gutierrez, 21 Fla. L. Weekly Fed. D651 (S.D. Fla. 2009), the District Court for the Southern District of Florida determined that for there to be a valid cause of action for breach of the implied covenant of good faith and fair dealing, the pleading must cite to the specific language of the insurance contract, and can not use the implied covenant of good faith and fair dealing to change the terms of the existing contract. Furthermore, where the alleged conduct does not differ from a general allegation of breach of contract, a cause of action for a breach of the implied covenant of good faith and fair dealing is duplicative and may be dismissed.

The claim in Amica arose from a boating accident on or about April 17, 2009. Morowitz was injured by a boat propeller after he fell overboard and sought benefits pursuant to a “Boat Policy,” “Uninsured Boaters Insurance Endorsement” and the “Personal Umbrella Liability Policy.” Amica filed a declaratory action against Morowitz and Gutierrez seeking a judgment declaring that the boat did not qualify as an “uninsured watercraft” as defined by the Uninsured Boaters Insurance Endorsement, and therefore was not covered; the identity of the person operating the boat at the time of the accident; and that under both the terms of the Boat Policy and the Personal Umbrella Liability Policy, it had no obligation to defend or indemnify Gutierrez for any claims or damages sought by Morowitz for bodily injury arising from the accident.

Morowitz filed his Answer, Crossclaim, and Counterclaim. Count II of the Counterclaim was for breach of contract for “failing to pay for the loss or damages to Morowitz, and otherwise failing to provide coverage for Morowitz’s claims.” Count III of the Counterclaim alleged that Amica had a duty to provide the insurance described in the subject policy and to properly and promptly investigate, adjust and/or settle Morowitz’s claims, as well as that Amica owed a duty of good faith and fair dealing in carrying out such responsibilities. Morowitz then cited provisions from the policies that allegedly spelled out the “duty to properly and promptly investigate, adjust and/or settle” Morotwitz’s claims.

The District Court for the Southern District of Florida granted Amica’s Motion to Dismiss Count III, the breach of the implied covenant of good faith and fair dealing, holding that Morowitz failed to state a cause of action for breach of the implied covenant of good faith and fair dealing for three (3) reasons: (1) failure to sufficiently allege a breach of an express contractual provision that may form the basis of the claim; (2) Count III varied the express terms of the policy that imposed the duty; and (3) Count III was redundant with regard to Count II, breach of contract.

With regard to reason one, the Court stated that in the insurance context, simply citing that a specific provision has been breached is insufficient for the purpose of stating a cause of action for breach of the implied covenant of good faith and fair dealing. In order to be considered sufficient, the count must additionally state policy language reflecting the mechanism by which the insurer must adjust, investigate, settle, or pay the claim. In this case, Morowitz specifically alleged that Amica breached the policy language that Amica will “settle or defend, as [it] see[s] fit, any claim or suit asking for these damages.” However, because the provision allegedly breached did not provide the mechanism by which the insurer was to adjust, investigate, settle or pay the claim, the bare allegations were deemed insufficient. Therefore, according to this case, without listing a mechanism for the insurer to fulfill the “duty to defend or settle” expressly provided in the policy, the insured cannot rely this policy language to support a claim for breach of the implied covenant of good faith and fair dealing. In this case, because the policy merely stated that the insurer had a “duty to defend or settle,” there was not an express provision on which a claim for a breach of the implied covenant of good faith and fair dealing may be based. Had that policy provided a mechanism by which the insured must fulfill this duty, but was silent as to some implied terms concerning the mechanism, Morowitz would have had a proper basis to assert the claim.

With regard to reason two, the Court stated that the allegations supporting a cause of action for breach of the implied covenant of good faith and fair dealing cannot result in varying the express terms of the contract. While the implied covenant of good faith and fair dealing may be used to “fill the gaps” if one party has the authority to make discretionary decisions when the contract does not defined the standards, it cannot be used to block the use of terms that expressly appear in the contract. Accordingly, if the policy provides absolute discretion to one party concerning the decision to settle, as the Amica contract did, the implied warranty of good faith and fair dealing does not apply.

Finally, with regard to reason three, where the allegations asserted to support a claim for breach of the implied covenant of good faith and fair dealing are redundant or repetitive of that conduct alleged in the claim for the general breach of contract, they are duplicative and should, therefore, be dismissed. In this case, the Court found that Count II, the general breach of contract claim, and Count III, the alleged breach of the implied covenant of good faith and fair dealing were based on the same conduct and were therefore duplicative.

or these reasons, the Court granted Amica’s Motion to Dismiss Count III of Morowitz’s Amended Counterclaim alleging that Amica breached the implied covenant of good faith and fair dealing.

Mathew I. Bernstein