Florida Court Reassess Insured's Right to Reject Insurer's Defense
Taking the brave step of deciding an insurance case on its own without certifying questions to the Florida Supreme Court, the Eleventh Circuit has ruled in Mid-Continent Cas. Co. v. American Pride Building Co., No. 09-11238 (11th Cir. March 29, 2010) that a Florida district court erred in granting summary judgment to a liability insurer in a copyright infringement case where the insurer was defending under a reservation of rights but ignores the view of defense counsel in assessing whether to settle. Without reaching the issue of whether American Pride had breached the duty to cooperate, the Eleventh Circuit found disputed issues of fact with respect to whether Mid-Continent had changed the terms pursuant to which its defense was being provided when it added a later condition that it be entitled to recoup its defense costs if coverage was held not to apply. If such facts were found to exist, the Eleventh Circuit ruled that Mid-Continent would have been entitled to withdraw its assent to the defense being provided and would therefore have been free to enter into a settlement of its own volition without breaching the duty to cooperate.
American Pride, a
Prior to trial, defense counsel advised Mid-Continent that liability was certain and the damages could exceed $10 million. Nevertheless, counsel opined that the case could probably settle within policy limits and recommended an offer of $550,000. In response, Mid-Continent declined to offer more than $75,000.
Following the collapse of mediation talks, the insured engaged independent counsel who insisted that Mid-Continent either withdraw the reservation of rights or permit the insured to take over its own defense. In response, Mid-Continent took the position that under
Despite these strains in their relationship, Mid-Continent and American Pride continued to cooperate towards a settlement. Mid-Continent raised its offer to $100,000 at which point the plaintiff’s demand was reduced to $250,000. Defense counsel warned Mid-Continent at that point that if it did not accept the reduced demand, American Pride would “fire” him and settle on its own. Mid-Continent ignored this warning and stated that its coverage concerns precluded it from offering more than $100,000. As a result, American Pride filed a coverage suit against Mid-Continent and advised Mid-Continent that it was “respectfully rejecting any continued defense under a reservation of rights.” A week later, the insured entered into a $1.7 million stipulated judgment and assigned its coverage rights against Mid-Continent to the plaintiff.
In the ensuing coverage litigation, the District Court granted summary judgment to Mid-Continent, holding that American Pride’s settlement in a case where it was already being defended by its insured violated the duty to cooperate. These findings were reversed on appeal to the Eleventh Circuit.
As a preliminary matter, the Eleventh Circuit ruled that a policyholder was not obliged to accept a defense under a reservation of rights. Citing the Florida District Court of Appeals decision in Taylor v. Safeco Ins. Co., 361 So.2d 743 (Fla. 1st DCA 1978), the court opined that, “If the insurer offers to defend under a reservation of rights, the insured has the right to reject the defense and hire its own attorneys and control the defense.” In this case, the court questioned whether Mid-Continent had acted in good faith in the manner in which it conducted the insured’s defense. Nevertheless, as the insured had accepted a defense under a reservation of rights, the court found that American Pride was required to cooperate with Mid-Continent so long as it was being defended.
Without reaching the issue of whether American Pride had breached the duty to cooperate, the Eleventh Circuit found disputed issues of fact with respect to whether Mid-Continent had changed the terms pursuant to which its defense was being provided when it added a later condition that it be entitled to recoup its defense costs if coverage was held not to apply. If such facts were found to exist, the Eleventh Circuit ruled that Mid-Continent would have been entitled to withdraw its assent to the defense being provided and would therefore have been free to enter into a settlement of its own volition without breaching the duty to cooperate. The court ruled that American Pride would only have violated the policy’s cooperation clause if it had secretly negotiated a settlement prior to rejecting Mid-Continent’s defense. In this case, the court found that the district court had erroneously granted summary judgment to Mid-Continent based upon its conclusion that the settlement had been negotiated in secrecy, citing contrary facts to the effect that Mid-Continent’s appointed defense counsel had been aware of these ongoing discussions and had reported that information to the insurer.
