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February 15, 2000

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. 13, #20, p. 25 (February 15, 2000). © Copyright Butler 2000. 

per-func-to-ry   per-fúngk’te­re   adj.   Done or acting routinely andwith little interest or care. The American Heritage Dictionary, NewSecond College Edition (1983).

The Scenario

Consider a common scenario. An insurance company issues a liability policy. The policyholder does something, or fails to do something, as a result of which a partyis injured. The injured party becomes the plaintiff, and the policyholder the defendant,in a tort action. The insurance company reviews the tort action and sees right awaythat probably it is not covered. It retains a defense attorney to handle the tort action butsends a reservation of rights letter to the policyholder and files a separate declaratoryaction to determine coverage. So far so good. See, e.g., Insurance Co. of the West v.Haralambos Beverage Co., 195 Cal. App. 3d 1308, 1319 (1987).

Now consider this. Both actions proceed for a year. During that year, theinsurance company pushes the declaratory action aggressively. Meanwhile, forwhatever reason, the defense attorney’s handling of the tort action is, or appears to be,perfunctory. At the end of the year the insurance company gets a summary judgment -no coverage – in the declaratory action. It withdraws the defense of the tort action andsays bon voyage to the policyholder.

The policyholder might ask: “What about my summary judgment? Why wasn’tthis or that done in the past year which would have advanced my case? Why should Ihave to pay a lawyer to do what should have been done on my insurance company’snickel?”

Good questions, but is it bad faith? Breach of contract? Legal malpractice? And what is the measure of damages? This article will examine some cases ofperfunctory defense (or inadequate defense, as the courts seem to prefer) withcomments.

Bad Faith

A clever plaintiff attorney could make the above scenario into a dark tale. Sometimes that plaintiff attorney would be right. The case closest to being on point is Harvey v. Allstate Insurance Co., No. 92—3311, 1993 U.S. App. LEXIS 33865 (10th Cir.Dec. 21, 1993) (applying the law of Kansas). There, Harvey sued her employer forsexual harassment. The employer counterclaimed for libel and slander. Both partieshad liability umbrella policies issued by Allstate. That particular policy gives coverageexpressly for libel and slander. Unfortunately Harvey’s insurance agent told her,incorrectly, there was no coverage. So she hired her own attorney to defend againstthe counterclaim, ultimately incurring almost $170,000 in fees.

Eight months later, when Harvey learned there may be coverage, she tenderedthe defense to the insurance company. Allstate accepted the defense under areservation of rights, but declined to hire the same lawyer who had been involved thusfar. Instead it brought in one of its regular defense attorneys, but one who had”negative attitudes about sexual harassment cases.” Id. at *3. The defense attorney’sattitudes were illuminated by his later testimony that sexual harassment was not new. “The only thing that was new was that the ladies had learned they could profit by it now,which was another form of the oldest profession in the world.” Id. at *3 n.2.

Attitudes notwithstanding, this attorney was tardy in entering an appearance. Moreover he never met Harvey or attended any of the twenty seven depositions heldafter his involvement began. Later Allstate was to deny it had told the attorney not toattend the depositions, but acknowledged it was “responsible for supervising hisdefense.” Id. at *3—*4.

Meanwhile, Allstate filed a declaratory action disputing coverage. Astonishingly,the defense attorney representing Harvey in the libel and slander counterclaim was “extensively involved” in the coverage case. Id. at *4. Indeed his bills showed he spentmore time talking to the lawyer handling the declaratory judgment action than talking tohis own client, Harvey. Id. at *4 n.3.

After the sexual harassment suit ultimately was settled (with both partiesreceiving money from Allstate) Harvey counterclaimed in the declaratory action for,among other things, damages caused by Allstate’s provision of a “sham defense.” Ajury awarded damages to Harvey against Allstate which the trial court remitted in part. The trial court entered also a JNOV on the “sham defense” count.

On appeal, the United States Court of Appeals for the Tenth Circuit reversed theJNOV.

There was ample evidence to support a finding that Allstateacted in bad faith in defending Harvey . . . Evidencepresented at trial showed that Allstate hired an attorney whohad no intention of jeopardizing his continuing employmentwith Allstate. Moreover, this lawyer while he wassupposedly defending Harvey, did not even enter anappearance for two months after he was retained, never methis client and did not attend any depositions despiteHarvey’s lawyer’s requests for help. The jury could wellhave concluded that Allstate acted in bad faith in hiring anattorney who would help them avoid liability rather than alawyer who would provide an adequate defense, andbreached its fiduciary duty to defend Harvey by enlisting thislawyer’s help in contesting coverage.

Id. at *12—*13.

The only difference between the Harvey case and the above scenario is that, inHarvey, the declaratory action did not yield a judgment in favor of the insurancecompany on coverage. The underlying case was settled first and the declaratory actionappears to have been merit less anyhow. So, in a way, the Harvey case appears toexemplify bungling rather than craft. Still it is hard to imagine better facts for a bad faithcase of perfunctory defense.

Breach of Contract

Another interesting case, with less egregious facts, is Carrousel Concessions,Inc. v. Florida Insurance Guaranty Association, 483 So. 2d 513 (Fla. 3rd DCA 1986). Inthat perfunctory defense case, the Florida District Court of Appeals reversed asummary judgment in favor of the insurance company on breach of contract.

The Carrousel Concessions case arose out of a personal injury action. Apparently, the first two lawyers retained to defend the policyholder withdrew from thecase. A third lawyer took over the defense and began discovery two weeks before trial. As the policyholder later complained, the defense attorney “continued to neglect thedefense of the case, making little or no effort to prepare. . . .” 483 So. 2d at 515. So thepolicyholder retained its own attorneys, for whom the insurance company refused topay. After the policyholder lost at trial, the insurance company paid policy limits toplaintiff. But it would not pay for an appeal of the verdict or the cost of a supersedeasbond.

The policyholder sued the insurance company for, among other things, “failing . . . to provide an adequate defense up to and including the time of trial” andfailing “to prosecute a completely meritorious appeal . . .” As damages, the policyholdersought the costs of conducting its own defense. 483 So. 2d at 515. The trial courtentered a summary judgment in favor of the insurance company on the grounds that, bypaying the policy limits, it had discharged fully its contractual obligation. The appellatecourt was not of the same mind.

An insurer’s duty to defend arises solely from the languageof the insurance contract. [citation omitted]. To satisfy itsobligation to defend, an insurer . . . must provide anadequate defense. [citations omitted]. Where the insureracts negligently in performing its duty to defend on behalf ofthe insured, its conduct constitutes a breach of contract.[citations omitted].

Carrousel Concessions, 483 So. 2d at 516. And the measure of damages?

If the insurer breaches its duty to defend, it – – like any otherparty who fails to perform its contractual obligations – -becomes liable for all damages naturally flowing from thebreach.

. . .

If [the policyholder] is able to establish that the defensesupplied by [the insurance company] was inadequate andthat it was reasonable . . . to engage the services of its ownattorneys, [it] will be entitled to recover all reasonable costsand attorney fees incurred at the trial level.

Id. at 516-517. The reported decision did not discuss liability for the judgment in excessof the policy limits.

A Tort, But Not Legal Malpractice

Another interesting case, which seems to contradict Carrousel Concessions, was Mickler v. Allstate Insurance Co., 559 So. 2d 275 (Fla 4th DCA 1990). In that case, Mickler was injured while a passenger in a Ford Bronco, which was hit head-on. Mickler sued Ford, the other driver (Aaron) and Aaron’s insurance company, Allstate.(1) At trial, Ford settled with Mickler. The attorney provided by Allstate to defend Aaron allegedly was not prepared to continue the defense effectively alone. A large, excess judgment was entered against Aaron. Allstate declined to appeal.

Mickler then sued Allstate, under an assignment from Aaron, alleging bad faith, fraud, negligence and breach of contract, for causing the excess judgment by an “improper or inadequate defense.” 559 So. 2d at 276. The trial court dismissed the complaint on the premise that Aaron’s true claim (assigned to Mickler) was for legalmalpractice and, thus, not assignable under Florida law. Id.

The appellate court disagreed, citing precedent upholding the assignability of non-personal torts, such as a claim for failure to settle within policy limits. Thus the Mickler court accepted, implicitly, that a cause of action for perfunctory defense sounds in tort, not contract, as was the case in Carrousel Concessions. Clearly a breach of contract claim would have been assignable. Perhaps the Mickler court ruled as it did so as not to limit Mickler’s potential recovery to contract damages. Or perhaps it was just a result of different theories selected by different plaintiffs.


To this writer, it seems fair that an insurance company be accountable for the quality of the defense provided – if it can be shown the company’s involvement in controlling that defense caused perfunctoriness that injured the policyholder. It seems also that contract damages are adequate to compensate the policyholder/plaintiff including, in the proper case, the amount of any excess judgment resulting directly from a perfunctory defense. Accordingly, it would behoove any liability insurance company to encourage defense counsel aggressively to pursue the interest of the policyholder, particularly during the pendency of a separate coverage dispute.



  1. It is unclear from the opinion why the action against Allstate was not barred by the Florida “non-joinder” law. Section 627.4136 Florida Statutes.