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. 17, #6, p. 21 (July 16, 2003). © Copyright Butler 2003.
Sometimes several people sustain injuries in an accident. This article addresses a recent decision of Florida’s Fourth District Court of Appeal, Farinas v. Florida Farm Bureau General Insurance Company,(1) that discusses what liability insurers should do when several people sustain injuries in an accident caused by the insured and the value of most, if not all, of each individual claim exceeds policy limits. This article discusses the basis for the Farinas holding and identifies some questions raised by Farinas.
Florida does not permit interpleader of policy proceeds in multiple claimant situations.(2) Until Farinas, very few Florida cases had analyzed a liability insurer’s duties regarding settlement of multiple claims. In the first case to do so in some detail, Harmon v. State Farm Mutual Automobile Insurance Company,(3) Florida’s Second District Court of Appeal suggested that an insurer was free to settle claims in a multiple claim scenario on a first-come, first-served basis as long as the carrier settled each claim in good faith.
In Harmon, State Farm Mutual Automobile Insurance Company (“State Farm”) insured a car owned by Spencer Bokor. Bokor’s minor son, Michael, and David Harmon’s minor son, Mylo, were involved in a collision with another car, driven by Ralph Martin. Michael Bokor was driving his father’s car. Mylo Harmon was a passenger. Mylo died in the accident.
David Harmon’s insurer paid the full uninsured/underinsured (“UIM”) motorist limits of its policy for Mylo’s claim. Harmon then sought UIM benefits for Mylo under Mr. Bokor’s State Farm policy. Mylo was entitled to UIM benefits under the State Farm policy. State Farm advised Harmon that it had already paid the policy’s $20,000 limit and denied his claim. Harmon sued State Farm and the trial court dismissed the complaint. The Second District Court of Appeal found no error in the trial court’s decision. The court advised:
It is generally held that where multiple claims arise out of one accident, the liability insurer has the right to enter reasonable settlements with some of those claimants, regardless of whether the settlements deplete or even exhaust the policy limits to the extent that one or more claimants are left without recourse against the insurance company.(4)
While Harmon quoted from language from another jurisdiction that gave carriers the sole discretion to evaluate claims one at a time or collectively, Harmon did not expressly adopt that position. Farinas makes it clear that carriers do not have such discretion.
Farinas considered these facts: on February 23, 1996, a horrible car accident in Palm Beach County, Florida took five lives and left seven people severely injured, including a young girl rendered a quadriplegic. Nicholas T. Copertino caused the accident when he drove his car across a median and collided head-on with another car. Only one liability policy responded to this accident; Farm Bureau General Insurance Company (“Farm Bureau”) had issued that automobile policy to Copertino’s father, Nicholas Frank Copertino. The policy provided coverage limits of $100,000 per claim and $300,000 per accident.
Approximately two weeks after the accident, March 8, 1996, Farm Bureau reached settlements with the driver of the other car and two of the estates. These settlements for $100,000 each exhausted the policy’s $300,000 per accident limit. Farinas doesn’t say how or why Farm Bureau decided to settle these three particular claims, or even whether the settlement arose out of articulated claims.
In July 1996, Farm Bureau filed a declaratory judgment action seeking an adjudication that its payment of policy limits extinguished its duty to continue defending the Copertinos against the lawsuits stemming from the accident. Four of the five uncompensated survivors, including the named plaintiffs, Maribel Farinas and Margarita Farinas (the “Farinases”), and each of the three uncompensated estates intervened in the declaratory judgment action, eventually filing bad faith counterclaims against Farm Bureau. The bad faith plaintiffs alleged that “Farm Bureau entered into settlements without due regard to the interests of the insured.”(5)
Farm Bureau moved for summary judgment against the bad faith plaintiffs. The Farinases also moved for summary judgment. The trial court granted Farm Bureau’s motion as to all bad faith plaintiffs and denied the Farinases’ motion. The bad faith plaintiffs appealed the court’s grant of Farm Bureau’s motion and the Farinases appealed the denial of their motion. The Fourth District Court of Appeal reversed the granting of Farm Bureau’s motion, but affirmed the denial of the Farinases’ motion.(6)
In its reasoning, the court first cited the decision of the Supreme Court of Florida in Boston Old Colony Ins. Co. v. Gutierrez(7) as establishing that, “[t]he general standard of care that the insurer must exercise when handling claims against the insured is ‘the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.’”(8) The Farinas court then quoted Boston Old Colony’s definition of good faith claim handling:
This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid the same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.(9)
The Farinas court noted that the standard of good faith articulated in Boston Old Colony is reflected in FLA. STAT. ANN. § 624.155(b)(1) (West 2002).(10) Farinas also pointed out the Supreme Court of Florida briefly touched upon an insurer’s duty regarding settlement of multiple claims in Shuster v. South Broward Hospital District Physicians Professional Liability Insurance Trust(11) and that the United States Court of Appeals had addressed this issue in Liberty Mutual Insurance Company v. Davis.(12)
The Farinas court noted Shuster’s observation that “an insurer’s good faith discretion is broader when deciding to settle a claim within the policy limits than when refusing to settle or defend a claim.”(13) The Farinas court concluded that “[a]lthough Shuster approves of an insurance company settling claims within policy limits, there is nothing in Shuster that states the insurer is not subject to a good faith duty to the insured.”(14) While Shuster was not a “multiple claimant” case, the Shuster court pronounced in dictum, “when there are multiple parties to a suit, we do not believe a ‘deems expedient’(15) clause will protect an insurer who, in bad faith, indiscriminately settles with one or more of the parties for the full policy limits, thus exposing the insured to an excess judgment from the remaining parties.”(16) The Farinas court adopted this dictum in support of its holding.
The Farinas court next addressed Farm Bureau’s assertion that, under Harmon, an insurer faced with multiple claims may settle less than all of the claims, even when the settlements exhaust the policy’s liability limit. Farinas concluded that “the Boston Old Colony standard applies to all Florida cases alleging insurer bad faith, and Harmon applies to the subset of those cases involving multiple competing claims. Under this rationale, the present case is subject to both standards.”(17)
So far, so good. Unexpectedly, the court then asserted, “Boston Old Colony provides that an insurer must conduct a full investigation of all competing claims arising out of an accident before endeavoring to settle any one individual claim, while keeping the insured informed at all junctures of the process.”(18) This was unexpected because that is not what Boston Old Colony says. Boston Old Colony did not address competing claims rather, Boston Old Colony observed, among other things, that an insurer “must investigate the facts.”(19)
The Farinas court then fashioned its version of Florida law regarding an insurer’s duty to its insured in multiple claims situations:
Farm Bureau was required by Boston Old Colony to fully investigate all the claims at hand to determine how to best limit the insured’s liability. Additionally, based on Davis, Farm Bureau should have sought to settle as many claims as possible within the policy limits. Finally, based on Shuster, Farm Bureau had the duty to avoid indiscriminately settling selected claims and leaving the insured at risk of excess judgments that could have been minimized by wiser settlement practice. Whether Farm Bureau satisfied each of these requirements, are questions for the jury to decide.(20)
Farinas went on to state that “based on Harmon, Farm Bureau could have entered into reasonable settlements with some claimants to the exclusion of others based on an exercise of its discretion. However, Farm Bureau, and the trial court, are not free to overlook the fact that Harmon requires these settlements to be ‘reasonable,’ as part of the insurer’s fiduciary duty to the insured.”(21) The court then identified Boston Old Colony and FLA. STAT. ANN. § 624.155(b)(1) (West 2002) as the appropriate guidance for determining whether an insurer’s settlement of multiple claims will be deemed reasonable or not.(22) The court opined that, “[a]fter full investigation and communication with the insured, Farm Bureau could have elected to follow a strategy of settlement with selected claimants, if that strategy was reasonable.” Farinas held that “[b]ecause the necessary determinations of reasonableness were dispensed with by the trial court due to its reliance on Harmon, factual issues remain to be resolved.”(23)
Farinas does not address the circumstances, if any, under which a carrier’s “full investigation” requires a carrier to initiate settlement negotiations rather than respond to claims asserted. In Powell v. Prudential Property and Casualty Insurance Company,(24) the only Florida case discussing this issue, the Third District Court of Appeal held that an insurer had a duty to initiate settlement negotiations where liability is clear and injuries so serious that a judgment in excess of the policy limits is likely. Presumably, the catastrophic circumstances similar to Farinas would trigger the insurer’s duty to initiate settlement negotiations with each and every potential claimant.
Farinas ostensibly clarifies a liability insurer’s duty with respect to multiple claims, telling insurers to act “reasonably,” yet doesn’t discuss any standards which might affect that determination, such as the presence of time limit demands or communication from claimants that failure to tender all available policy limits to that claimant would result in litigation against the insured. Farinas also does not discuss what methods an insurer might employ to discharge its duty of reasonableness. For example, if the claims were all similarly valued, Farm Bureau could have offered each claimant an equal share of the $300,000. With five deaths and six injury claims to settle, an equal division would have provided each claimant just over $27,000. The facts of Farinas strongly suggest that all actual and potential claimants would not agree to such a division (indeed, some of the claimants expressly told Farm Bureau that failure to tender policy limits would result in suit against the insured). Farm Bureau could also have attempted to value each claim and offer each claimant a prorated share of the policy limits. Both methods could be deemed reasonable. Reading Farinas, however, would provide Farm Bureau no way to know this in advance.
The consequence of leaving the determination of “reasonableness” of settlements to juries, without providing insurers any further guidance, may have the unfortunate consequence of encouraging bad faith litigation at the expense of Florida’s long-standing public policy of encouraging settlement. This risk seems exceptionally acute in cases that combine catastrophic injuries and very low policy limits. Farinas may also discourage individuals from purchasing sufficient coverage because the risk of paying claims beyond those limits will almost always fall to the insurer in a multiple claimant situation.
It is, of course, possible that jurors would see that an insurer’s decision to settle multiple claims for a fraction of their value is not bad faith, but rather an unavoidable consequence of the insured’s failure to carry adequate coverage. Nonetheless, by placing the determination of an insurer’s reasonableness in settling multiple claims within the exclusive province of the jury, the court presents insurers with the proverbial Hobson’s Choice.(25) Presumably, to prove that its acted reasonably, the insurer will have to explain to a jury how it arrived at the relative value of the injuries. The difficulty of doing so even in ideal circumstances will undoubtedly create problems for insurers.
The Farinas court has certified the following question to the Supreme Court of Florida:
In an automobile accident scenario involving clear liability, multiple claims, and inadequate policy limits, does insurance good faith law require that an insurer reasonably investigate all claims prior to payment of any claim, keep the insured informed of the claims resolution process, and attempt to minimize the magnitude of possible excess judgments against the insured?
Farinas entreats insurers to “be reasonable.” Unfortunately, it discourages settlements and virtually mandates only jury consideration of what is “reasonable” by not permitting carriers to satisfy their obligations of good faith through reasonable settlement of individual claims. Practitioners can hope that the Supreme Court of Florida provides further guidance.