Florida’s New Good Faith Duty on an Insurer Not to Settle
W hat does a liability insurance company do when faced with multiple, competing claims, any one of which would exhaust the limits of its insured’s policy? Can the insurer settle the first few of those claims that clearly appear to be legitimate and reasonable, exhausting coverage? Must the insurer wait for all potential claims to be made before it is permitted to resolve any of them? Must the insurer actively solicit all potential claims, and attempt to coordinate a global settlement, in order to minimize exposure of its insured from unsatisfied claims? If the insurer decides to make prompt payment of reasonable claims based simply on priority, which has the effect of exhausting the policy limits, can the insurer be liable for bad faith in settling too quickly?
The Fourth District Court of Appeal recently addressed this last question in Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So. 2d 555 (Fla. 4th DCA 2003), rev. denied, (Fla. Mar. 17, 2004), and determined that an insurer can be liable for prematurely settling some claims, leaving others with no coverage. This article addresses the implications of the duty imposed by this decision and whether there is anything an insurer can do to avoid liability in such a scenario.1
The Farinas Decision
Over eight years ago, an insured driver, Nicholas Copertino, caused a horrific automobile accident, killing five young people and injuring six others besides himself. One of the victims (14-year-old Farinas) was rendered a quadriplegic. The insured’s automobile policy had limits of $100,000 per claim and $300,000 per accident. As the Fourth District observed, the policy limits were “plainly inadequate.” Id. at 557. Liability was clear. The insurer (Florida Farm Bureau) promptly settled for the limits with the badly injured driver of the other car and the estates of two individuals who were killed in the accident. The value of each of these settled claims unquestionably exceeded the policy limits of $100,000 per claim.
The insurer then filed a declaratory judgment to determine whether it had any further duty to defend its insured after the exhaustion of the policy limits. Accident victims, or their survivors, intervened and filed a third-party bad faith action alleging that the insurer’s hasty settlement of the three claims was without regard for its insured’s interests, exposing Copertino to multiple multimillion dollar judgments, which several victims had obtained.2
The trial court entered summary judgment in favor of the insurer based on established Florida law allowing an insurer to choose how to settle multiple claims. On appeal, the Fourth District addressed three questions: 1) What did the insurer’s duty of good faith require in this scenario? 2) Did the insurer meet that duty? 3) Were there any issues of fact that remained to be litigated?
The court determined that the insurer has three specific duties. First, the insurer is required to “fully investigate all the claims at hand to determine how to best limit the insured’s liability.” Id. at 560. The court noted, however, that an insurer does have some “discretion in how it elects to settle claims, and may even choose to settle certain claims to the exclusion of others, provided this decision is reasonable and in keeping with its good faith duty.” Id. at 561. Second, the insurer should seek “to settle as many claims as possible within the policy limits.” Id. at 560. Finally, the insurer has a “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.” Id. Whether these duties have been breached are jury questions. Id. The court held that jury questions remained as to whether the insurer’s failure to pursue global and other settlement options was in the insured’s best interests, whether the insurer’s quick settlement with the three claimants was reasonable, and whether the insurer investigated the facts of all the claims. Id. at 561.
Harmon Decision and Policy Reasons Supporting it
The trial court in Farinas entered summary judgment relying on the decades-old, established rule, first adopted in Florida by Harmon v. State Farm Mut. Auto. Ins. Co., 232 So. 2d 206 (Fla. 2d DCA 1970).3 There, the Second District held that an insurer can settle some claims, even where such a settlement exhausts policy limits and leaves the insured and other claimants without further coverage under the policy. Id. at 207. The Harmon court further held that an insurer has the right to determine what claims will be settled from the policy limits so long as the settlements in themselves are reasonable:
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…. The court in Liquori v. Allstate Ins. Co., 76 N.J.Super. 204, 184 A.2d 12 (1962) stated: “Whether multiple claims are to be treated one at a time or collected and evaluated together, is a choice solely within the discretion of the insurer.” (184 A.2d at 17).
Id. at 208.
Harmon also articulated an important public policy that this rule promotes: encouraging settlement. The court realized that any rule requiring insurers to evaluate all claims before settling would force insurers to settle at their own peril, thereby discouraging compromises and speedy settlements. Id. As a result, an insurer would be less likely to accept a reasonable offer at an early stage, thereby avoiding litigation with that injured party.4 This public policy rationale has caused most courts to afford wide discretion to the settling insurer.5
This is not to suggest that the plaintiffs seeking compensation in the Farinas case were without legal authorities that supported their position that an insurance company has a duty not to settle claims too quickly, and to maximize a potential global settlement for the benefit of its insured. For example, in Liberty Mut. Ins. Co. v. Davis, 412 F. 2d 475 (5th Cir. 1969), cited by the Florida Supreme Court in Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980), the Fifth Circuit in applying Florida law noted:
When several claimants are involved, and liability is evident, rejection of a single offer to compromise within policy limits does not necessarily conflict with the interest of the insured. He hopes to see the insurance fund used to compromise as much of his potential liability as possible. Of course, if the fund is needlessly exhausted on one claim, when it might cancel out others as well, the insured suffers from the company’s readiness to settle. To put the point another way, even if liability be conceded, plaintiffs will usually settle for less than they would ultimately recover after trial, if only to save time and attorney’s fees. Each settlement dollar will thus cancel out more than a dollar’s worth of potential liability. Insured defendants will want their policy funds to blot out as large a share of the potential claim against them as possible. It follows that, insofar as the insureds’ interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible.
Id. at 480-81 (footnote omitted).
Thus, while facing the weight of authority in Harmon and the law in other states, based on cases such as Liberty Mutual, the plaintiffs in the Farinas case effectively argued that a duty not to settle too quickly exists, and that an insurer has a duty to attempt a global settlement effort to “blot out” as much liability of its insured as possible. They also emphasized the short comings of the insurer’s actions in depleting the limited fund in this particular case by “dumping its limits.”6
It should be noted that abandoning the Harmon rule based on the harsh facts of the Farinas case creates a whole new set of problems. For example, it is common for settlement demands to have time deadlines for their acceptance. A claimant could be willing to take less at an early stage—in order, for example, to obtain monies for medical treatment—but not be willing to make that offer open-ended in time. Yet, under Farinas, it may now be the case that an insurer cannot “promptly” settle even a completely valid claim. This, of course, creates a dilemma for the insurer who has a countervailing duty to promptly settle reasonable claims.7
Further, if the insurer waits for all the injured parties to agree on how to split a limited insurance fund, it runs the risk that its insured could be exposed to excess judgments from all of the claimants if no global agreement is ultimately reached. The insurer could be liable then for bad faith damages for not settling a claim that could have been settled within policy limits. See F.S. §624.155(1)(b) (2001).8
In its decision, the Harmon court recognized a fundamental legal principle: the separation of powers. The Harmon court concluded that any other rule would impose a new legal duty upon insurers to assess all claims before settling, and require the insurer to make a subjective evaluation of each claim’s respective worth. 232 So. 2d at 208. Farinas appears to have imposed exactly such a duty. In the contrary view of the Second District, “[i]f such a duty is to be imposed … it must be done by the Legislature.” Id.
Abandoning the Harmon rule also creates a tension with statutory duties imposed on insurers. The legislature has adopted a comprehensive scheme detailing the insurer’s duties of good faith and settlement. See F.S. §624.155 (2001) (providing a civil remedy for an insurer’s bad faith). Despite the legislature being on notice of Harmon, it has not imposed the duty created by the Fourth District. Quite to the contrary, insurers are specifically required to settle claims when they “could and should have done so. . . . ” F.S. §624.155(1)(b) (2001). They are not statutorily required to ascertain the existence of all possible claims, evaluate the seriousness of each claim before settling any claim, or attempt to orchestrate global settlements. See id. requiring the insurer to first obtain demands and information from all claimants, evaluate their comparative seriousness, and then attempt to settle all claims on a global basis, and (failing that) to settle the most serious claims first, the new Farinas rule apparently prevents an insurer from accepting individual valid settlement offers, however reasonable they might be on their own individual merits. This same duty to resolve all claims would also prevent mediation of individual claims.
From the insurance company’s viewpoint, Farinas has the further unfortunate effect of rewriting the insurance policy to provide for more coverage simply due to the very serious nature and large number of the injuries involved in that case. There is, of course, no provision in most insurance policies imposing a duty on an insurer to wait for all claims to be filed and then make a global settlement, as the Fourth District holds. See Farinas, 850 So. 2d at 561. The catastrophic losses in a specific case well in excess of the policy limits should not, as a legal norm, result in the rewriting of the insurance contract to add new duties regarding settlement.9
The legislature allows Florida citizens to carry insurance with limits woefully inadequate to compensate a catastrophically injured claimant. Many citizens make the economic decision to purchase a policy with the minimum limits. Farinas attempts to cope with this problem by placing insurers in a position where one or more multiple claimants will frequently have a claim for bad faith damages that will exceed the policy limit, if prompt settlements were made that a jury later finds failed to protect the insured’s interests. In a sense, “minimum limits” policies are, in effect, converted into multimillion-dollar policies through this new rule. The tensions created by Farinas may well need to be addressed by the legislature.
So What’s an Insurer to Do?
The question that remains is what can an insurer now do to avoid liability when settling some of multiple claims that will exhaust insurance policy limits. The answer may be found in Gen. Sec. Nat’l Ins. Co. v. Marsh, 303 F. Supp. 2d 1321 (M.D. Fla. 2004). There, an automobile accident resulted in the death of one individual and the injury of another. The wrongful death claim alone would have exhausted the policy limits. The insurer offered the policy limits to both claimants if the claimants would agree to divide the benefits. They would not.10 The insurer then tendered the full policy limits amount to the wrongful death claimant. The injured claimant continued with her lawsuit, which resulted in a $485,000 verdict, plus costs and fees. The insurer paid only the amount of costs for that judgment. The insurer then filed a declaratory action seeking a declaration that it had no duty to indemnify the insured because it had exhausted its policy limits.
The federal district court cited the Farinas decision and held as a matter of law that the insurer had met the duties set forth in Farinas.11 The insurer had “requested and received specific information from each claimant,” then “tendered its policy limits to both claimants on a ‘global basis,’” allowed the claimants several months to negotiate an agreement as to how to divide the benefits, and settled only after those negotiations had failed. Id. at 1326. The insurer ultimately determined that the wrongful death claim “posed the greater risk for an excess judgment against its insured” and therefore minimized the magnitude of possible excess judgments against its insured by settling that claim. Id. There was also no dispute that the insurer had kept its insured informed throughout the claims resolution process. Id. Accordingly, the federal district court entered summary judgment in favor of the insurer.
Given that Marsh was decided as a matter of law, it does seem to provide an insurer with an outline of what it must now undertake in multiple-claims cases. However, the assessment of the “relative seriousness” of competing claims may not always be so straightforward, because the full extent of damages may be unknown or may be hidden. An insurer who makes an error in assessing the most serious claims could face potential liability. Also, the very existence of some claims may be unknown to the insurer. Plus, if one victim makes a reasonable demand that is not settled promptly, a potential bad faith case arises as to that victim. All of this creates a far riskier field for insurers in multiple-claims cases.
1 The Fourth District reversed the trial court, finding that jury issues existed as to whether the insurer, Florida Farm Bureau, had acted reasonably in investigating the claims and not attempting to globally settle the claims. Recognizing that this was a significant issue, the court certified the following question as being of great public importance to the Florida Supreme Court: “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?” See Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So. 2d 555, 562 (Fla. 4th D.C.A. 2003). After briefing, however, the Supreme Court declined (4-3) to review the petition seeking resolution of the certified question, without further comment. See id., rev. denied (Fla. Mar. 17, 2004). The authors submitted an amicus brief on behalf of Florida Defense Lawyers’ Association, in support of the insurer.
2 For example, Farinas eventually obtained a $29.2 million judgment against Copertino in October 2000.
3 The Harmon rule follows the great weight of authority in other states. See Bartlett v. Travelers’ Ins. Co., 167 A. 180, 182 (Conn. 1933); Miller v. Ga. Interlocal Risk Mgmt. Agency, 501 S.E. 2d 273, 274 (Ga. App. 1991); Walston v. Holloway, 416 S.E. 2d 109, 110 (Ga. App. 1992); Haas v. Mid Am. Fire & Marine Ins. Co., 343 N.E. 2d 36, 38–39 (Ill. App. 1976); State Farm Mut. Auto. Ins. Co., v. Murphy, 348 N.E. 2d 491, 494 (Ill. App. 1976); Bennett v. Conrady, 305 P.2d 823, 827–28 (Kan. 1957); Richard v. Southern Farm Bureau Cas. Ins. Co., 223 So. 2d 858, 861 (La. l969); Pieno v. Bailey, 815 So. 2d 188, 190 (La. App. 2002); Bruyette v. Sandini, 197 N.E. 29, 32 (Mass. 1935); Millers Mut. Ins. Ass’n of Ill. v. Shell Oil Co., 959 S.W. 2d 864, 870–81 (Mo. App. 1997); Ligouri v. Allstate Ins. Co., 184 A.2d 12, 17 (N.J. Super. Ct. Ch. Div. 1962); Duprey v. Sec. Mut. Cas. Co., 256 N.Y.S.2d 987, 989 (N.Y. App. Div. 1965); STV Group, Inc. v. Am. Cont’l Props., Inc., 650 N.Y.S.2d 204, 205 (N.Y. App. Div. 1996); Alford v. Textile Ins. Co., 103 S.E.2d 8, 12–13 (N.C. 1958); Scharnitzki v. Bienenfeld, 534 A.2d 825, 827–29 (Pa. Super. Ct. 1987); Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 315–16 & n.2 (Tex. 1994); Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 764–65 (5th Cir. 1999); Hartford Cas. Ins. Co. v. Dodd, 416 F. Supp. 1216, 1219–20 (D. Md. 1976); State Farm Mut. Auto. Ins. Co. v. Hamilton, 326 F. Supp. 931, 934 (D.S.C. 1971).
4 See Richard v. Southern Farm Bureau Cas. Ins. Co., 212 So. 2d 471, 479 (La. Ct. App. 1968), aff’d, 223 So. 2d 858 (La. 1969) (a contrary rule would “have the effect of discouraging, rather than encouraging, the settlement of cases, because each compromise settlement effected by the insurer would subject it to the risk of liability in excess of the policy limits”).
5 See supra note 3.
6 The Farinas plaintiffs successfully argued that the insurance company did not keep its own insured (Copertino) informed of its settlement efforts, failed to investigate all claims (including Farinas’), never attempted a global settlement (which was achieved by the other drivers’ insurer), ignored efforts of a seriously injured victim to participate in payment, and did not follow a rationale priority scheme in paying claims. See generally Brown v. USF&G, 314 F.2d 675 (2d Cir. 1963) (suggesting that insurer’s good faith in settling multiple claims is an issue of fact for jury).
7 Under cases such as Powell v. Prudential Prop. & Cas. Ins. Co., 584 So. 2d 12, 14 (Fla. 3d D.C.A. 1991), and Hartford Accident & Indem. Co. v. Mathis, 511 So. 2d 601, 602 (Fla. 4th D.C.A. 1987), Florida law requires that an insurance company must promptly initiate settlement negotiations and settle reasonable claims, even where no demand is made. This good faith duty to promptly settle reasonable claims derives from Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980).
8 See also Fidelity & Cas. Co. v. Cope, 444 So. 2d 1041, 1045–46 (Fla. 2d D.C.A. 1984), quashed on other grounds by, 462 So. 2d 459 (Fla. 1985) (insurer could be liable for bad faith and could not rely on a second potential claim as an excuse for failing to settle with first claimant). Under the Harmon rule, the insurer is protected when it settles valid or reasonable claims as they are presented, even if that exhausts coverage.
9 See Home Dev. Co. of St. Petersburg v. Bursani, 178 So. 2d 113, 117 (Fla. 1965) (“[C]ourts may not rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.”) (quotation omitted); AAA Life Ins. Co. v. Nicolas, 603 So. 2d 622, 623 (Fla. 3d D.C.A. 1992) (“It is a well settled rule that a court shall not rewrite a contract of insurance extending the coverage afforded beyond that plainly set forth in the insurance contract”).
10 The insurer cannot interplead its policy limits to determine distribution in Florida. See Hernandez v. Travelers Ins. Co., 356 So. 2d 1342, 1343–44 (Fla. 3d D.C.A. 1978) (interpleader not available to an insurance company to adjudicate competing claims). An insurer may be able to file a declaratory judgment action, but runs a risk of delaying payment of reasonable claims while such an action is pending.
11 The federal court’s decision in Marsh creates an interesting dichotomy between it and the Farinas court’s decision. Farinas held that these issues, such as whether the insurer conducted a sufficient investigation, whether it acted appropriately in settling the claims, and whether it sufficiently attempted a global settlement, were all issues of fact for the jury. Thus, in state court, an insurer would face a jury trial on these issues, and in catastrophic loss cases could often expect an unsatisfactory result. This may be a hint that an insurer facing this issue, if diversity exists, would prefer federal court.
Frederick T. Hawkes is a shareholder in the Tallahassee office of Carlton Fields, P.A., concentrating in insurance (particularly coverage) and appellate practices. He received his law degree from Cornell Law School, his undergraduate degree from Harvard College, and has practiced for 22 years.
Alfred J. Saikali is an associate in the Miami office of Carlton Fields, P.A., concentrating in civil appeals, products liability, and insurance law. He received his J.D. from Boston University School of Law in 1999 and his B.A. from the University of Florida in 1996.
This column is submitted on behalf of the Trial Lawyers Section, Thomas D. Masterson, chair, and Thomas P. Barber, editor.