Flood vs. Wind Claims Following Hurricane Ian Webinar
January 25, 2023
This article was originally published in the ABA website, a publication by the American Bar Association, © Copyright 2017 by ABA. All rights reserved. Republished by Butler with permission from ABA.
Virtually every jurisdiction in the United States has a statute on the books that provides for prevailing-party attorney fees in favor of insureds when they are successful in coverage suits against insurers. These statutes generally require a judgment in favor of the insured and were intended to level the playing field such that insurers could not use their greater financial strength to avoid paying meritorious claims. That purpose is well served in the context of first-party claims. First-party insurance provides direct benefits to the insured, such as life insurance, homeowners insurance, or uninsured/underinsured motorist coverage. “Third-party” insurance, by contrast, protects the insured against liability to others, such as automobile or general liability insurance.
Over 30 years ago, Florida extended the reach of its insurer attorney fee statute to apply when the insurer settles a breach of contract lawsuit on the insurance policy, applying the so-called “confession of judgment doctrine.” The rationale of the doctrine is simple: Where the insured is forced to sue the insurer to obtain benefits it paid for, the insured cannot simply settle the suit in order to avoid paying prevailing-party attorney fees.
Three other states have also adopted a variant of the confession-of-judgment doctrine. However, only in Florida has the doctrine been extended to third-party suits. A close examination of the evolution of the doctrine demonstrates why it should not be applied in the third-party context.
In 1983, the Florida Supreme Court released its opinion in Wollard v. Lloyd’s & Companies of Lloyd’s, which adopted the “confession of judgment doctrine” into the common law of Florida. While the facts of the case were not laid out in any meaningful detail in either the supreme court’s or the district court’s opinion, it can easily be gleaned that the case was a first-party case by Wollard, the insured, against Lloyd’s, his insurer. The Florida Supreme Court simply stated:
Wollard suffered a loss and brought a claim against his insurer, Lloyd’s and Companies of Lloyd’s, which denied coverage. Wollard retained an attorney and filed suit. On the eve of trial, the parties agreed to a settlement of the claim but stipulated that the matter of any award of attorney’s fees would be submitted to the trial court.
The trial court refused to award attorney fees pursuant to section 627.428 of the Florida Statutes, which provides:
(1) Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of an insured or the named beneficiary under a policy or contract executed by the insurer, the trial court, or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court, shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured’s or beneficiary’s attorney prosecuting the suit in which the recovery is had.
The trial court interpreted the statute broadly, allowing Wollard fees under the rationale that Lloyd’s’ settlement was the functional equivalent of a confession of judgment. However, the district court reversed, interpreting the statute strictly, meaning that, because there was no judgment or decree against Lloyd’s, the statute was not implicated and Wollard was therefore not entitled to attorney fees. The district court cited American Home Assurance Co. v. Keller Industries and reversed with a single sentence: “A negotiated settlement between an insured and his insurer does not entitle the insured to attorney’s fees pursuant to Section 627.428, Florida Statutes (1979).”
So far, so good. Statutes that are in derogation of the common law are to be interpreted narrowly.In all United States jurisdictions, in the absence of a statute or contractual provision, parties to litigation must bear their own attorney fees. Therefore, the district court properly interpreted the statute strictly so as to require an actual judgment or decree against the insured. The Florida Supreme Court, however, decided otherwise, holding that the insurer’s settlement of the claim was the “functional equivalent of a confession or judgment or a verdict in favor of the insured.”Accordingly, the case was remanded to the trial court to award attorney fees in favor of Wollard. A lone justice dissented, noting, “As a matter of policy, I could agree with this result. I dissent because the express language of the statute appears to require a contrary result.”
For the following 13 years, the courts in Florida applied Wollard in the context in which it was decided—first-party actions filed by insureds against their insurers for breach of the insurance contract. However, in 1996, Florida’s Fourth District Court of Appeal extended the confession-of-judgment fiction to the third-party context.
In U.S. Fidelity & Guaranty Co. v. Murray, a company in New Jersey, C.J. Lombardo Co., purchased automobile liability insurance from U.S. Fidelity & Guaranty Co. (U.S.F. & G.). Lombardo was involved in an accident in Florida and sought a defense from U.S.F. & G. because the company was named as a defendant in the lawsuit. Several other insurers were involved, and U.S.F. & G. undertook the defense of the company under a reservation of rights. It then filed an action for declaratory relief to determine its coverage obligations.
While the declaratory action was pending, U.S.F. & G. reached an agreement with one of the other insurers to reimburse it $310,000 in damages that insurer paid to the underlying plaintiff. Upon payment of the underlying settlement, Lombardo and the company sought to recover prevailing-party attorney fees in the declaratory action pursuant to section 627.428 of the Florida Statutes. The trial court awarded fees, and the Fourth District affirmed, relying on Wollard. The court quoted from the Wollard opinion:
When the insurance company has agreed to settle a disputed case, it has, in effect, declined to defend its position in the pending suit. Thus, the payment of the claim is, indeed, the functional equivalent of a confession of judgment or a verdict in favor of the insured. Requiring the plaintiff to continue litigation in spite of an acceptable offer of settlement merely to avoid having to offset attorney’s fees against compensation for the loss puts an unnecessary burden on the judicial system, fails to protect any interest—the insured’s, the insurer’s or the public’s—and discourages any attempt at settlement. This literal requirement of the statute exalts form over substance to the detriment of public policy, and such a result is clearly absurd. It is a basic tenet of statutory construction that statutes will not be interpreted so as to yield an absurd result.
Despite obvious differences in the facts, the court simply applied Wollard. In Murray, the insurer initiated the declaratory action, so it could not possibly be declining to defend its position; rather, it could be said to have declined to prosecute its position. Furthermore, which suit is the “pending suit” when the doctrine is extended to the third-party realm? Is it the declaratory action, which was rendered moot by settlement of the underlying action, or the underlying action, in which the insurer defended the insured until obtaining its exoneration by a compromise settlement? The Murray court did not address those questions, choosing instead to simply extend the logic of Wollard well beyond its factual underpinnings.
Eight years later, the same court again extended Wollard in O’Malley v. Nationwide Mutual Fire Insurance Co. In O’Malley, the insurer defended its insured in a third-party action under a reservation of rights and filed an action for declaratory relief to determine whether the policy provided coverage. The insured obtained a favorable result in the underlying action and was released without liability. Because the underlying result mooted the declaratory action, the insurer filed a notice of voluntary dismissal of the declaratory action. The insured then sought prevailing-party fees under Wollard.
The trial court denied fees, but the Fourth District reversed, reasoning that the insured somehow prevailed because the insurer provided a defense:
The trial court’s denial of fees in the present case, grounded on the fact that the tort claimant was paid no money, does not take into account the benefit received by the insured. If Nationwide had obtained a judgment in the declaratory action, the insured would have been responsible for furnishing her own defense and resolving the tort claim. As it turned out, however, Nationwide furnished the insured a defense and settled the claim. Nationwide, in that action, provided the insured precisely what Nationwide was contending the insured was not entitled to in the declaratory action. When Nationwide dismissed the declaratory action, it was thus the “functional equivalent of a confession of judgment or a verdict in favor of the insured” in the declaratory action.
This reasoning is tautological. In any case in which an insurer defends its insured under a reservation of rights, the insured is getting at least some portion of what the insurer contends it is not entitled to—namely, a defense (most actions also seek a declaration that the insured is not entitled to indemnity for any liability that may be imposed against the insured). Therefore, the moment the insurer files an action for declaratory relief, it has subjected itself to prevailing-party fees automatically, regardless of the outcome of the underlying action. In that instance, the only choice the insurer has to avoid fee liability is to pursue the coverage action to conclusion. But Nationwide could not do that in O’Malley because the coverage issue was rendered moot, thereby depriving the court in the declaratory action of jurisdiction (yet somehow retaining jurisdiction to award attorney fees).
In Florida, the situation is rendered even more one-sided due to Florida’s claims administration statute, section 627.426 of the Florida Statutes. The statute provides in pertinent part:
(2) A liability insurer shall not be permitted to deny coverage based on a particular coverage defense unless:
(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and
(b) Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:
So, if an insurer identifies a coverage issue, it is nonetheless obligated to either obtain a nonwaiver agreement or provide independent, mutually agreeable counsel. If it seeks to obtain a judicial resolution of its coverage obligations, it is immediately subject to the payment of the insured’s attorney fees, unless it pursues the declaratory action to conclusion and wins. Settlement of the underlying case will in every instance immediately subject the insurer to payment of the insured’s attorney fees.
Contrast that catch-22 with the Florida Supreme Court’s espoused view on the use of declaratory judgment actions to resolve coverage issues:
Generally, an insurance carrier should be entitled to an expeditious resolution of coverage where there are no significant, countervailing considerations. A prompt determination of coverage potentially benefits the insured, the insurer and the injured party. If coverage is promptly determined, an insurance carrier is able to make an intelligent judgment on whether to settle the claim. If the insurer is precluded from having a good faith issue of coverage expeditiously determined, this interferes with early settlement of claims. The plaintiff certainly benefits from a resolution of coverage in favor of the insured. On the other hand, if coverage does not exist, the plaintiff may choose to cut losses by not continuing to litigate against a defendant who lacks insurance coverage.
The court is obviously in favor of judicial determination of coverage issues. Yet, the extension of the confession-of-judgment doctrine to third-party cases thwarts that very goal. Once the insurer seeks declaratory relief, it has two choices: litigate the coverage issue to conclusion or settle the underlying claim and face attorney fee liability to its insured.
To further complicate matters, the year after it decided O’Malley, the Fourth District Court of Appeal affirmed a trial court’s refusal to award fees in a third-party declaratory action that was initiated by the insured. In Basik Exports, the insured was sued and sought a defense under its general liability policy. The insurer provided a defense under a reservation of rights. The insured then initiated an action for declaratory relief. During the pendency of the declaratory action, the insurer settled the underlying action within policy limits. The insured sought fees, which the trial court denied.
The Fourth District affirmed on the sole distinction that the declaratory action was initiated by the insured, not the insurer:
O’Malley and Murray do bear some resemblance to this case. Both cases involved third-party claims and coverage disputes. This is where the resemblance ends. In O’Malley,the insurer defended the insured under a reservation of rights, but immediately initiated a declaratory judgment action against the insured. In Murray, the insurer denied coverage, refused to provide a defense, and filed a declaratory judgment action against its insured.
In both cases, the insurers, not the insureds, initiated the declaratory judgment actions. This forced the insureds to retain counsel and incur expense in defending these coverage disputes. It makes sense for the insurer to be responsible for fees when it voluntarily dismissed the declaratory judgment action in O’Malley. The same is true in Murray. In both cases, the insurer initiated the action for declaratory relief, caused the insured to incur attorney’s fees, and then tried to get “off-the-hook” for those fees by settling the underlying claims.
The court’s reference to the insurer attempting to get “off-the-hook” for fees by settling the underlying case is curious at best. Whether the insurer or the insured initiated the declaratory action, the insurer’s settlement of the underlying claim could be characterized as attempting to get “off the hook.” Of course, it could just as easily be characterized as fulfilling its good-faith duty to protect its insured. The fact that the action was initiated by the insured has no bearing on the insurer’s motive in settling the underlying case.
Basik Exports is even more curious given the ultimate decision on which it is predicated: Wollard. In Wollard, the insured initiated the breach of contract action. In O’Malley and Murray, however, the insurer initiated the declaratory action. If anything, Basik Exports is more factually analogous to Wollard than O’Malley or Murray.
Obviously, given the opinion in Basik Exports, insurers in Florida have no incentive to seek declaratory relief while defending under a reservation of rights. Rather, their incentive is to defend and either await the insured’s filing of suit or simply forgo declaratory relief entirely.
Florida’s confession-of-judgment doctrine also contains a logical inconsistency in the context of third-party actions. Once the insurer settles a third-party action against its insured, the controversy presented in the accompanying declaratory relief action is unquestionably moot. Therefore, the court in the declaratory action should lose jurisdiction. If the court is without jurisdiction, it would not have the power to award prevailing-party attorney fees.
However, the issue of whether the court has jurisdiction to award attorney fees depends on whether the declaratory action was filed by the insurer or the insured. If the insurer filed the action, then upon settlement of the underlying case, the insurer would be entitled to file a notice of voluntary dismissal of the declaratory action. Once an action is voluntarily dismissed, the court loses jurisdiction to award attorney fees. Therefore, where the insurer filed the declaratory action, the confession-of-judgment doctrine should not entitle the insured to attorney fees on jurisdictional grounds.
Where the insured initiated suit, however, the insured’s settlement of the underlying action, while clearly rendering the declaratory action moot, would nevertheless still allow the insured to collect fees. Florida law considers the entitlement of a party to attorney fees to be a separate and collateral matter over which the trial court may retain jurisdiction.
In federal court, the insurer’s resolution of the underlying claim should divest the court of jurisdiction without regard to who filed the action, as the “interest in attorney fees is, of course, insufficient to create an Article III case or controversy where none exists on the merits of the underlying claim[.]” Most federal courts in Florida have recognized that principle. However, two federal courts have refused to apply the mootness doctrine to deprive an insured of attorney fees.
The confession-of-judgment doctrine has not been embraced by other states. In fact, only five states—New Jersey, Oklahoma, South Carolina, Texas, and West Virginia—have even considered adopting it. Of those five, New Jersey, South Carolina, and West Virginia have adopted some variant of the doctrine. Both Oklahoma and Texas rejected it.
New Jersey. In New Jersey, the confession-of-judgment doctrine was adopted in 1978 in the context of personal injury protection coverage only. It has also been limited to application only where the insured obtains a settlement during suit that is higher than the insurer’s best offer pre-suit. The doctrine does not otherwise apply to other first- or third-party disputes.
West Virginia. In West Virginia, the doctrine is also limited in application to first-party property damage cases. In addition, similar to the rule adopted in New Jersey, the West Virginia rule allows fees when the insured “substantially prevails,” meaning, “when the action is settled for an amount equal to or approximating the amount claimed by the insured immediately prior to the commencement of the action, as well as when the action is concluded by a jury verdict for such an amount. . . .” The doctrine has not been extended to third-party claims.
South Carolina. Finally, in South Carolina, the doctrine was adopted in a first-party property damage case. The South Carolina Supreme Court did not cite any other confession-of-judgment cases; it simply affirmed the trial court’s award of fees where the insurer settled a property damage claim during suit. Again, the doctrine has not been extended to third-party claims.
Ultimately, in Florida, the rule remains that, in third-party suits, where the insurer initiates an action for declaratory relief, settlement of the underlying action constitutes a confession of judgment, thereby entitling the insured to attorney fees. Where the action is initiated by the insured, however, settlement of the underlying claim does not entitle the insured to fees. By contrast, in federal court, regardless of which party initiates the declaratory action, the court may or may not have the power to award prevailing-party attorney fees.
“The purpose behind section 627.428, Florida Statutes, ‘is to discourage insurers from contesting valid claims and to reimburse successful policyholders forced to sue to enforce their policies.’”Interpreting section 627.428 so as to award fees to insureds who do not sue but deny fees to those who do is directly contrary to that stated purpose.
Given the current quagmire, the Florida legislature should consider rewording the statute to make clear its intention with regard to when insureds are entitled to attorney fees under the statute. And more importantly, it should limit the reach of the doctrine to the first-party context in which it was originally intended.