Perera v. USF&G, ___ So. 3d ___,
2010 WL 1791151 (Fla. 2010)
This opinion has not been released for publication. Until released it is subject to revision or withdrawal.
In a decision that some may use to attempt to broaden the landscape for third-party bad faith actions, the Florida Supreme Court in Perera v. United Stated Fidelity & Guaranty Co., ___ So. 3d ___, 2010 WL 1791151 (Fla. 2010), held that an excess judgment is not necessarily required in order for a third-party bad faith action to be maintained against an insurer. A third-party bad faith action may in fact be permitted by the courts if the insurer’s actions cause damages to the insured or result in exposure to the insured in excess of its policy limits.
Perera, an employee of the insured, Estes, was crushed to death by a piece of equipment during the course of his employment. Estes had three indemnity insurance policies: a commercial liability policy issued by Cigna with limits of $1 million, subject to a $500,000 deductible; an excess worker’s compensation employer’s liability policy issued by USF&G with limits of $1 million after Estes’ self-insured retention of $350,000; and an umbrella excess liability policy (insuring both Estes and its employees) issued by Chubb with limits of $25 million. All three policies were indemnity policies, requiring Estes to provide its own defense. The case was eventually mediated. USF&G was asked to leave the mediation when it stood firm on its denial of coverage on the basis of the intentional acts exclusion and would only offer $100,000 of its $1 million limit. At the conclusion of the mediation, the demand was $8 million. Cigna offered its $500,000 remaining limits after the $500,000 deductible, while Chubb offered $1.25 million and Estes offered $750,000. In the months that followed, negotiations continued and the demand was reduced to $7 million with Chubb offering $4.25 million and USF&G offering only $100,000.
Thereafter, Perera, Estes, and its employees entered into a stipulation to settle for $10 million. Of this amount, $5 million was to be paid as follows: $750,000 from Estes, $500,000 from Cigna, and $3.75 million from Chubb. The remaining $5 million was to be sought in a lawsuit against USF&G that would either be brought by Estes or assigned to Perera. At the conclusion of the lawsuit, a satisfaction of judgment would be entered in favor of Estes.
In March 2002, Perera, as Estes’ assignee, brought suit in the state trial court against USF&G for the remaining $5 million of the consent judgment, asserting two causes of action: breach of contract (seeking recovery of the $1 million policy limits) and bad faith (seeking recovery of the remaining $4 million balance). After removal, the district court granted summary judgment in favor of Perera on the breach of contract claim, requiring USF&G to pay its policy limit of $1 million. USF&G did not challenge the decision regarding coverage and paid the $1 million.
Thereafter, the district court entered summary judgment in favor of USF&G on the bad faith claim simply finding that without an excess judgment (as there was over $21 million in coverage from Chubb) there could be no action for bad faith. After Perera appealed, the Eleventh Circuit remanded the case back to the district court to have the jury consider the limited issue of whether USF&G acted in bad faith as this had the potential to moot the case. After the jury found bad faith, the case returned to the Eleventh Circuit which found no bad faith because there was no excess judgment. In its decision, the Eleventh Circuit stated that it was not clear under Florida law whether an excess judgment was a necessary part of a claim for bad faith and certified the issue to the Florida Supreme Court.
The court also considered USF&G’s alternative argument that even if an excess judgment was not required, the insured was never exposed to liability in excess of the limits of the policies. Perera countered this argument by pointing out that Estes was required to advance sums for which it would not otherwise be liable (i.e. the limits of USF&G’s policy) in order to persuade Chubb to contribute to the settlement. The Eleventh Circuit rejected this argument noting that Perera was not seeking any of these sums advanced by Estes but was instead seeking the balance of the judgment of $4 million (the court noted that Perera waived any argument that it was entitled to assert rights of Chubb via subrogation as such was not argued). It also pointed out that Chubb was committed to settling and did not refuse to do so before USF&G’s $1 million was paid.
The Florida Supreme Court undertook a comprehensive review under Florida law of the recognized circumstances under which a claimant or claimant’s assignee may bring a common law third-party bad faith claim (though the Court wrote in a footnote that it did not mean to limit the types of bad faith claims to only those discussed). Bad faith claims can arise when: 1) the insurer’s breach of the duty of good faith results in an excess judgment against the insured; 2) the insurer and the third-party claimant stipulate to try the bad faith issues prior to the tort action so that an excess judgment is not a prerequisite (Cunningham agreement);1 3) the insurer breaches its duty to defend thus leaving the insured to “its own devices” (Coblentz);2 and, 4) a claim by an excess carrier against the primary carrier for bad faith.
The Court analyzed the issue of causation as discussed in North American Van Lines v. Lexington Ins. Co., 678 So. 2d 1325 (Fla. 4th DCA 1967). Two important distinctions were discerned: 1) Estes was not facing the certainty of an excess judgment; and 2) Estes was not claiming damages related to USF&G’s alleged bad faith. Perera attempted to establish a causal connection by arguing that Estes and Chubb intended to reduce Chubb’s coverage in exchange for a waiver of the $1 million attachment point. Perera argued that USF&G’s refusal to tender its $1 million policy limits created a hole in Estes’ coverage, forcing it to pay the amount under USF&G’s policy or proceed to a trial in a deteriorating case. The Court rejected this argument because it found that Chubb was ready to settle even if the $1 million attachment point was not waived. None of Chubb’s offers were contingent upon USF&G’s limits being exhausted. Therefore, the Court found that there was no causal connection between USF&G’s bad faith and the damages claimed (the remaining $4 million of the settlement agreement).
The Perera may be important to insurers in several respects. First, it enunciates the proposition that an excess judgment may not necessarily be required to support a third-party bad faith claim. (The Court provides in detail the circumstances under which a third-party bad faith claim may be pursued in Florida.) Second, the Court did not automatically reject the insured’s entitlement to enter a Coblentz agreement under these facts, even when the policy was an indemnity policy requiring no duty to defend. Finally, the Court examined very closely the actions of the excess carrier, Chubb, in its settlement negotiations to determine whether USF&G’s actions caused any damage as a result of its bad faith. Critical to this analysis was that Chubb did not require exhaustion of USF&G’s policy when it offered to settle.
Clearly, Estes did not face exposure to liability in excess of the combined policies. However, assuming that Chubb had required exhaustion of the primary carrier’s limits, or the insured faced exposure beyond the limits of the policies, the decision in Perera may have been different. For a primary carrier, the lesson is that it should very carefully consider the excess carrier’s negotiating posture with respect to whether it will require exhaustion of its limits before it will offer to settle. The question of exhaustion presents itself frequently with high exposure claims where the primary carrier denies coverage.
Any of our partners experienced in third-party bad faith claims in Florida are available to answer questions regarding this decision and related matters. Please feel free to contact Kathy Maus, John Weihmuller, Steve Rawls or Lewis Collins at your convenience.