This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 20, #22, p. 32 (March 20, 2007).
[Editor’s Note: Julius F. “Rick” Parker III is an associate with the law firm of Butler Weihmuller Katz Craig LLP, in the firm’s Liability, Coverage and Extra-Contractual Departments. This commentary, other than the quoted material, is the author’s opinion; not his law firm’s, and not Mealey’s Publications’. Copyright © 2007 by the author. Responses are welcome.]
On December 21, 2006, the Florida Supreme Court released its opinion in Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co.[FN1] In Dadeland, a bare majority of the high Court, led by Justice Lewis, held that an obligee under a performance bond qualifies as an “insured” within the meaning of section 624.155, Florida Statutes (1999). The Court’s decision resulted from the following question certified to it by the Eleventh Circuit Court of Appeals:
IS THE OBLIGEE OF A SURETY CONTRACT CONSIDERED AN “INSURED” SUCH THAT THE OBLIGEE HAS THE RIGHT TO SUE THE SURETY FOR BAD-FAITH REFUSAL TO SETTLE CLAIMS UNDER § 624.155(1)(b)(1)?[FN2]
The Court answered the question in the affirmative despite the fact that after the question was certified, the Legislature answered it in the negative. See S.B. 652 (2005). The precedential value of the opinion is therefore extremely limited. Nevertheless, the opinion serves as a powerful indication of the future of insurance law in this state. Caveat Insuror.
Dadeland involved a prototypical performance bond. Dadeland Station Associates, Inc. entered into a contract with Walbridge Contracting, Inc. for the construction of a commercial shopping center in Miami. The total amount of the contract was $26,500,000. Accordingly, Walbridge was contractually obligated to post a performance bond in the penal sum of $26,500,000. It obtained a bond from St. Paul Fire & Marine Insurance Company, which obligated St. Paul to Dadeland to complete construction of the shopping center in compliance with the construction contract, plans and specifications in the event Walbridge defaulted on its obligations.
The shopping center project was completed in late 1996 at which time Walbridge and Dadeland entered into a settlement agreement acknowledging that the project was complete, and releasing each other and St. Paul from further obligation, with the exception of certain enumerated items which remained to be completed. Ultimately, it was determined that the project contained numerous defects based upon Walbridge’s alleged failure to comply with relevant provisions of the building code. Dadeland declared a default under the contract and filed a demand for arbitration against Walbridge and St. Paul, seeking damages of $4.4 million.[FN3]
The arbitration proceedings resulted in a finding by the arbitration panel that Walbridge owed Dadeland $1,417,842 for defective work and that Dadeland owed Walbridge $261,036 for work performed under the contract. Walbridge immediately satisfied the arbitration award with interest. Dadeland then filed a complaint against St. Paul in circuit court claiming St. Paul had violated section 624.155 by not paying its damages as soon as Dadeland declared a default. St. Paul removed the case to the Southern District of Florida, which ultimately granted summary judgment in its favor, holding that Dadeland could not maintain a bad faith claim as it could not show that St. Paul’s liability to Dadeland had been finally determined before the alleged bad faith occurred, a condition precedent to St. Paul’s liability under the bond. On appeal, the Eleventh Circuit certified the question to the Supreme Court.
The bare majority of the Court concluded that the district court erred and that Dadeland could maintain a cause of action under section 624.155. The court began its analysis with a consideration of the relevant statutory language:
(1) Any person may bring a civil action against an insurer when such person is damaged:
(b) By the commission of any of the following acts by the insurer:
1. Not attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests;….[FN4]
Determination of the certified question obviously turned upon the question of whether a surety under a performance bond is an “insurer” as that term is used in the statute.
The court first examined other provisions of the Florida insurance code to determine that a surety meets the definition of an insurer under the statute. Section 624.03, Florida Statutes, defines an insurer as “every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance or annuity.” The court also noted that surety contracts are considered insurance contracts under other provisions of the code.[FN5] The term “insured,” however, is not defined under any provisions of the code. Thus, the court considered section 627.756, Florida Statutes, which provides for prevailing party attorney’s fees in favor of an “insured or beneficiary” in litigation against a surety as an indication that obligees are considered insureds for all portions of the code.
Finding section 627.756’s inclusion of obligees as only persuasive on the question, the court then considered other authority on the question. Most notably, the Court looked to a decision of the Southern District, which held that the principal under a performance bond was not an “insured” for purposes of section 624.155. See Shannon R. Ginn Const. Co. v. Reliance Ins. Co.[FN6] While that decision refused to apply section 624.155 to a surety in favor of its principal, it stated in dicta that if any party to the surety contract were entitled to sue the surety for bad faith, it would be the obligee. The Court then briefly discussed decisions of other states in the common law context as support for finding that a surety owes a good faith obligation to the obligee. Recognizing the distinction, the court then gave short shrift to much more recent decisions holding that an obligee cannot sue a surety for bad faith at common law, concluding those decisions were off point because they concerned the common law context.
Finally, the Court considered an amendment to section 624.155, which was passed by the Legislature after the Eleventh Circuit certified the question to it. During the 2005 regular session, the Legislature appeared to put the question to rest with the passage of Senate Bill 652. The bill added sub-section (9) to section 624.155, and reads:
A surety issuing a payment or performance bond on the construction or maintenance of a building or roadway project is not an insurer for purposes of subsection (1).
§ 624.155(9), Fla. Stat. (2005). The Court recognized that the new law “removes all uncertainty for the future as to whether certain specified surety bonds are subject to its provisions,” yet then took the extraordinary step of holding that the Legislature only meant to carve out an exception for two types of surety contracts by passage of the bill. Rather than seeing the bill as an obvious answer to the certified question, the Court chose to interpret it as a reversal of existing law. Accordingly, the Court held Dadeland was entitled to sue St. Paul for bad faith.
The Dadeland opinion is fraught with implications for the future. On the one hand, as the majority recognized, its applicability will be extremely limited given the Legislature’s addition of sub-section (9) to the statute. The opinion will likely be relegated to the status of a historical footnote. While the Court described sub-section (9) as applying only to “certain limited types of bonds,” its attempt to minimize the scope of the new provision rings hollow. Experienced practitioners certainly must wonder what other types of performance bonds will become the subject of future litigation.
On the other hand, the opinion again demonstrates the lengths to which a majority of the Florida Supreme Court will go in order to expand bad faith law. It has long been considered a bedrock principle of statutory construction that legislative amendments to a statute passed after a controversy concerning its interpretation has arisen are to be given great weight in discerning the Legislature’s intent. See Parole Comm’n v. Cooper.[FN7] Moreover, it is an equally fundamental principle of appellate law that an appellate court is to apply the law in effect at the time of its decision, not the law in effect at the time judgment was rendered. See Hendeles v. Sanford Auto Auction, Inc.[FN8] The Court ignored both of these principles, citing to its recent decision in Knowles v. Beverly Enterprises-Florida, Inc.,[FN9] as justification for exercising its “discretion” to ignore the Legislature’s obvious statement of intent.
It is this aspect of the decision which is the most disturbing. The amendment at issue in Beverly was an obvious change to an existing statute. At the time the personal representative of the decedent’s estate filed suit in Beverly, section 400.023, Florida Statutes stated:
The action may be brought by the resident or his or her guardian, by a person or organization acting on behalf of a resident with the consent of the resident or his or her guardian, or by the personal representative of the estate of the deceased resident when the cause of death resulted from the deprivation or infringement of the decedent’s rights.
After the judgment was rendered and the case was on appeal, the Legislature amended section 400.023 to provide that the cause of action could be brought by the personal representative, “regardless of the cause of death.” That is a wholesale change in the law. By contrast, the passage of section 624.155(9) was clearly an interpretation of the prior law, which did not address whether an obligee under a performance bond could be considered an insured. The difference between the two is obvious.
One is of course left to wonder what “extra-contractual” damages Dadeland may ultimately recover. Dadeland seeks consequential damages for St. Paul’s alleged bad faith, stated to be, “having to present their claims to arbitration.” Justice Wells’ dissent aptly explains the flaw in this theory of recovery:
To subject a surety to bad-faith damages in a situation in which a solvent contractor-principal pays to an owner-obligee what is fully owed within a reasonable time after the amount owed by the principal is determined in an agreed-to arbitration does not stand the test of either law or logic. The majority’s result ignores how practically construction contract surety works. Importantly, a surety has a right to subrogation against the contractor’s principal, making it necessary in the workings of the surety-principal-obligee relationship to have determined what the principal owes before the surety makes payment.[FN10]
Upon remand, then, what damages will Dadeland prove for having had to arbitrate the claim, other than attorney’s fees, to which it would be entitled anyway by virtue of section 627.756.
Finally, on February 26, 2007, the Eleventh Circuit issued its opinion based upon the supreme court’s answers to the certified questions. See Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co.[FN11] While the opinion generally makes a mechanical application of the court’s answers to the certified questions in order to reverse the district court’s grant of summary judgment, the opinion also undertakes to articulate remaining factual issues which preclude summary judgment.
The curious aspect of this part of the opinion is that it finds the possibility of bad faith in St. Paul’s reliance on its principal, Walbridge, to conclude that it was not responsible for the construction defects.[FN12] This portion of the Eleventh Circuit’s opinion points out the inherent flaw in analogizing an obligee to an insured. Section 624.155 imposes liability for the insurer’s failure to act, “fairly and honestly toward its insured and with due regard for her or his interests.” Fla. Stat. § 624.155(1)(b)1. (1999). If St. Paul had simply blindly accepted Dadeland’s contention that Walbridge was responsible for the construction defects, it would be utterly disregarding the interests of its principal who will bear the ultimate responsibility for the loss. If Walbridge was not at fault, St. Paul would lose its right of subrogation (being a mere volunteer). Or worse, Walbridge could claim that its payment without regard to Walbridge’s position was an act of bad faith. Either way the “insurer” loses.
Because the Legislature has already spoken, the Dadeland decision will have little practical impact. Historically, it may be considered nothing more than a curious anomaly. However, the tortured logic used by the majority to justify its decision may have much more sinister ramifications for the insurance industry as a whole. Insurance companies make easy scapegoats. But when the insurance company pays, we all pay. The message for the future is clear: Insurers beware.