The Dance of the Porcupines: Defense Under a Reservation of Rights in Florida
F lorida courts have addressed the mutual rights and responsibilities of the insurer and the insured where the insurance company offers a defense under a reservation of the right to deny coverage. The courts have rules on issues regarding the control of the litigation, the effect of conflicts on the right to mutually agreeable counsel or co-counsel paid for by the carrier, recovery of defense costs by both the carrier and the insured, and the nature and effect of a rejection of a defense under a reservation of rights by the insured.
In addition to the broad common law rules regarding a defense under a reservation of rights, a statutory subcategory has developed under the provisions of F.S. §627.426, the Florida claims administration statute (CAS). Unlike a general defense under a reservation of rights, a reservation of rights and defense offered pursuant to the CAS applies only to a narrow category of cases, and has its own particular rules and regulations.
The Florida Claims Administration Statute
The seminal case regarding the interpretation of the CAS is AIU Insurance Co. v. Block Marina Investment, Inc., 544 So. 2d 998, 1000 (Fla. 1989). At issue was a comprehensive general liability insurance policy that had an express exclusion for bailment losses. Aware of the exclusion, the insured obtained a marine operator’s legal liability endorsement specifically covering bailed goods. However, this endorsement had lapsed, thus, leaving the insured unprotected for the loss later sustained. At issue was whether a failure to comply with the CAS could create or resurrect coverage. The Florida Supreme Court started from the premise that it was not the legislature’s intent to change the long-standing rule in Florida that the doctrine of estoppel may be used to prevent a forfeiture of insurance coverage, but the doctrine may not be used to create or extend coverage.1 The court held that the provisions of the statute only apply to a “coverage defense.” The court interpreted “coverage defense” to mean a defense to insurance coverage that otherwise exists and did not apply to circumstanceswhere there was nocoverage orwhere coverage was precluded by an express policy exclusion.2 In doing so, the court brought its interpretation of the statute in line with its view of legislative intent.
The statute applies to policies issued for delivery or delivered in Florida.3 Based on the AIU decision, the scope of the CAS has been limited to circumstances where a carrier asserts a coverage defense that would take away coverage that otherwise would exist under the policy terms and conditions. It focuses on the insured’s behavior, post-loss in particular. An example of a defense to coverage that otherwise exists is late notice.4
In order to preserve its rights under the CAS, within 30 days of when it knew or should have known of the particular coverage defense, the carrier is required to issue a reservation of rights by certified mail to the named insured. Once the insured is on notice the carrier is asserting a defense under a reservation of rights, the carrier may amend that reservation, provided the new defense is outside of the CAS and the insured has not been prejudiced in the interim by the failure to assert the defense.5 However, it is essential the carrier ensure that it issues the initial reservation of rights letter within the initial 30-day period. The statute considers what the carrier knew or should have known, thus, the carrier’s knowledge of the facts and circumstances of a particular coverage defense and when those facts should have been known to the carrier can be critical in terms of the deadline and whether the statutory requirement has been met.
Once the initial threshold requirement of the reservation of rights letter has been satisfied, the carrier then has an additional 60 days to either deny coverage; defend under a nonwaiver agreement executed by the insured after full disclosure to the insured of the rights and responsibilities of both parties; or to retain mutually agreeable counsel to defend the insured.6 The insured must be notified of their rights to participate in the selection.7 The critical aspect of each of these requirements, except for the denial, is that it places in the hands of the insured absolute control over the process since the carrier cannot obtain a nonwaiver agreement or mutually agreeable counsel without the cooperation and assent of the insured. Florida courts do not allow the insurer to simply apply to the court for the appointment of mutually agreeable counsel, but rather require strict compliance with one of the choices under the statute within the 60-day period.8 The only item that can be left open for resolution by the court is the reasonable attorneys’ fees for the mutually agreeable counsel. The statute requires mutually agreeable counsel, not independent counsel, as is required in many states where a conflict of interest exists.
Various practical considerations govern the application of the CAS. Most insurance carriers may hesitate to use a nonwaiver agreement because of the ambiguity of the informed consent provision. A term like “full disclosure” inevitably suggests a question of fact concerning whether there was adequate compliance with this provision. As a result, carriers almost always resort to the mutually agreeable defense counsel option.
The “mutually agreeable” requirement also has its drawbacks for the carrier. It opens up an avenue for the insured to attempt to have its coverage counsel handle the litigation so that it can manipulate the facts and circumstances of the underlying case adversely to the insurance carrier. The second problem that has arisen in complying with the statute is that counsel selected by the process often will report only to the insured and keep the insurance carrier completely in the dark. Since control of the litigation is not transferred to the insured under the CAS, this should be avoided so that the carrier can continue to do its duty. Thus, in the effort to obtain mutually agreeable counsel within the required timeframe, the carrier should focus its efforts on avoiding the selection of the insured’s coverage counsel to preclude an inherent conflict and reach agreement with the insured that the mutually agreeable counsel will keep both the insured and the carrier fully informed of all developments in the case. But the fact remains that the only option fully within the control of the insurer is to deny coverage.
Beyond this, it is usually recommended that the carrier notify the insured of its rights but, to expedite the process, initially make a recommendation concerning the appointment of counsel and place a reasonable time limit, say 10 to 15 days, for the insured to either consent or object to the appointment of that counsel as mutually agreeable counsel. If there is an objection to the counsel, try requesting the insured to name three counsel who would be agreeable to them with the carrier selecting one of the three to obtain the goal of mutually agreeable counsel.
Regarding attorneys’ fees, it is recommended there at least be a definitive effort made to try to reach agreement beforehand, either to a rate that the carrier is willing to pay in total, an agreed split between the carrier and the insured concerning the fee or, as a last resort, that the rate will be established by the court. If the carrier expects compliance with litigation guidelines for reporting, that should be part of the agreement as well. Litigation guidelines often set out requirements, pre-approval of experts, staffing, and other provisions that must either be followed or an exception obtained if the carrier is going to pay for it.
All of these concerns highlight the problems inherent in the statute that should make a carrier hesitant to assert a coverage defense unless the carrier believes there is a high probability the defense will, in fact, preclude coverage.
Common Law Under a Reservation of Rights
The vast majority of cases involve circumstances where the insurance carrier is asserting a coverage defense based on the scope of the policy’s insuring agreement, an express exclusion in the policy, or the violation of a condition precedent in the policy that would not come within the CAS. It is in this arena that it is important to know the case law regarding the respective rights and responsibilities of the two parties where the insured accepts the defense under a reservation of rights and where the insured rejects the defense under a reservation of rights.
Acceptance of a Defense Under a Reservation of Rights
The leading case in the development of the law regarding a defense under a reservation of rights is Taylor v. Safeco Insurance. Co., 361 So. 2d 743, 745 (Fla. 1st DCA 1978). Initially, Safeco notified the driver of the automobile in this accident, Earl Taylor, that it would offer a defense but under a reservation of rights. Apparently there was a question concerning whether Taylor was an insured under the policy. As noted by the court:
Safeco was entitled to take that position, for the law distinguishes between the insurer’s duties to defend and to pay (citation omitted) and does not forbid agreement between insurer and a putative insured which resolves the urgent question of who shall defend and postpones resolution of the contingent question of who shall pay any judgment.9
offering a defense under a reservation of rights, Safeco could avoid any implication that it acquiesced in the assertion that it should pay any resulting judgment and, thus, avoid any claim of estoppel. However, the court emphasized the agreement nature of the offer of a defense under a reservation of rights. It stated:
Similarly, Earl Taylor was not obligated to surrender control of his personal defense to an insurer which disclaimed responsibility for any judgment within policy limits that might result from the litigation. Without affecting the question of Safeco’s liability to pay any judgment within its limits, Earl was privileged at the outset to deny Safeco control of his defense, which is exemplified, by Safeco’s selection and payment of a lawyer to represent Earl.10
Thus, the court in its opinion had set into motion a “dance of the porcupines” over the terms and conditions of the agreement between the insurer and the putative insured concerning whether the carrier will defend it under a reservation of rights and any conditions to that defense or whether the insured will reject the defense under the reservation of rights and what effect that has on the insured’s rights under the policy. If the carrier goes too far, it will be stuck by the insured’s quills in the form of losing control over the defense. Similarly, if the insured goes too far, it will be stuck by the carrier’s quills in the form of losing a defense paid for by the carrier.
This problem was brought to the fore in the Taylor case when, on the eve of trial, the carrier first withdrew the defense under a reservation of rights that had been accepted by the insured, and then tried to reinstate it. This time, the putative insured refused the offer and undertook to conduct his own defense at trial, albeit without an attorney. Given the position of the two parties at that point, the court was of the view that Safeco had not wrongfully denied Taylor a defense, but by the same token Taylor had not violated the insured’s duty “to cooperate,” for that duty did not require surrendering control of his defense to an insurer which, although willing to defend, still disclaimed responsibility for any resulting judgment within the policy limits. Citing to a Massachusetts case, Three Sons, Inc. v. Phoenix Insurance Co., 257 N.E.2d 774, 777 (Mass. 1970), the court noted: “[T]he defendant [insurer] had a duty to defend the Plaintiff. . . without a reservation of rights or claim of nonwaiver, so long as it insisted on retaining control of the defense.”11 Then, the court poignantly commented: “The circumstances of this case vividly illustrate the tensions that afflict agreements between insurer and putative insured that the insurer shall provide a defense without conceding liability for any judgment.”12
This was especially so in Taylor because the defense in the case was particularly tricky. According to the court, it required the defense counsel to take the position that the plaintiff, the defendant’s brother, was intoxicated along with the defendant, the defendant knew it, knew the car was defective, and still insisted his brother drive.13
The principles enunciated in Taylor were picked up by the Fourth District Court of Appeal in Nationwide Mutual Fire Insurance. Co. v. Beville, 825 So. 2d 999 (Fla. 4th DCA 2002), and were reiterated in an even more forceful manner:
As Taylor v. Safeco makes clear, a carrier’s unilateral defense under a reservation of rights is similar to a refusal to provide any defense at all in its effect on the insured. In either case, the carrier has violated its duties under the policy unconditionally to defend and indemnify its insured within specified limits. The consequence of that violation is that the carrier has transferred to the insured the power to conduct the defense of the claim against its insured.14
This statement by the Beville court has been criticized in subsequent decisions,15 especially for suggesting an entitlement to defense costs under these circumstances, but has been followed by the Third District Court of Appeal.16 The reason for the criticism is clear, since the statement quoted above from Beville equating a reservation of rights to a breach of contract seems directly to contradict the statement in the Taylor decision that the carrier was acting within its rights in offering a defense under a reservation of rights. More importantly, the Taylor court limited any liability of the carrier to the policy limits, even under circumstances where the insured rejects the defense under a reservation of rights, where Beville implies this limitation may be gone.17
Acceptance of the Defense
As the cases above make clear, the acceptance of a defense under a reservation of rights is in the nature of an agreement between the carrier and the insured, and should be approached from that point of view.
The impact of the insured accepting a defense under a reservation of rights was extensively explored in Travelers Indemnity Company of Illinois v. Royal Oak Enterprises, Inc., 344 F. Supp. 2d 1358, 1371 (M.D. Fla. 2004) (where the author represented Travelers). One of the first propositions discussed was that the insured must actually reject the defense, otherwise, if it accepts the benefits of a defense under a reservation of rights, then it can no longer act like it rejected the defense.18 That court started out with the proposition that, it was “well settled that an insurer did not breach its duty to defend by offering to defend only under a reservation of rights.”19 While not rejecting the defense under a reservation of rights, the insured in Royal Oak sought to obtain recovery for its retention of co-counsel after the carrier refused to engage them as the primary defense counsel (they were the insured’s coverage counsel), and the insured, in turn, had rejected the offer by the carrier of three other law firms to handle their defense.
The insured set forth three theories on why they would be entitled to recover the cost of engaging personal counsel to protect their interests in the litigation. One was the existence of the reservation of rights, itself. Certainly under Florida law it is recognized that the insured is entitled to engage personal counsel at its own expense to protect its interests where the carrier is defending under a reservation of rights. However, the court held that, under Florida law, there was no entitlement to attorneys’ fees from the carrier for personal counsel. In doing so, it distinguished Beville’s implication that an insured could obtain defense costs without a rejection of a reservation of rights both as a deviation from Florida law, and at best, limited to the CAS.
The next theory advanced by the insured was that, because there were covered and noncovered counts, there was an inherent conflict of interest that entitled them to attorneys’ fees to protect their interests under the noncovered claims. In this regard, the court focused on the duty of assigned defense counsel. It noted: “[T]he primary duty of loyalty owed by appointed defense counsel is to the insured, not to the insurer, and ‘[t]o suggest that human nature prevents the harnessing of action motivated by self-interest is to contend that fiduciary relationships are unworkable.’”20
In its view, the rules of attorney conduct, coupled with the threat of malpractice liability, provided sufficient assurance that appointed counsel would continue to represent the insured, even where a conflict of interest could theoretically interfere with his ability to perform in conformance with the professional standards. The court noted that, not only did Travelers have a duty to defend, it had a right to control the defense, and the right to control the defense is a valuable one that reserves to the insurer the right to protect itself against unwarranted liability claims and is essential to protecting its financial interests in the outcome of the litigation.21 Therefore, it concluded that, absent some evidence to suggest that the potential conflict between the insurer and the insured actually affected counsel’s representation so it could be said that counsel elevated the interests of the insurer over the client, there would be no such presumption.22 The court stated its conclusion: “The [c]ourt is unwilling to ‘indulge the conclusive presumption that counsel is unable to fully represent its client, the insured, without consciously or unconsciously compromising the insured’s interests.’”23
The third ground the insured in Royal Oak argued for the right to recover attorneys’ fees was the inadequacy of the defense. Citing to Aetna Casualty and Surety Co. v. Protected National Insurance Co., 631 So. 2d 305 (Fla. 3d DCA 1993), and Carousel Concessions, Inc. v. Florida Insurance Guaranty Ass’n, 483 So. 2d 513, 516 (Fla. 3d DCA 1986), the court in Royal Oak noted that there was an apparent contradiction in Florida law concerning whether a carrier is responsible for the acts of the appointed defense counsel. However, it noted there simply was no evidence to support Royal Oak’s theory of an inadequate defense in the case, so it never reached the implications of such and whether it would entitle the insured to reimbursement of the costs and fees of their personally retained counsel.24
These conclusions were subsequently affirmed by the 11th Circuit Court of Appeal in Travelers Indemnity Co. of Ill. v. Royal Oak Enterprises, Inc., 171 F. App’x. 831, 832 (11th Cir. 2006), where the court quickly dismissed Royal Oak’s position: “We conclude that there is no merit to any of the arguments Royal Oak makes in these appeals.”25
The Travelers decision was cited by the court in Zurich American Insurance. Co. v. Frankel Enterprises, Inc., 509 F. Supp. 2d 1303, 1311 (S.D. Fla. 2007), again noting that an insurer does not breach its duty to defend by offering to defend only under a reservation of rights. Where the defense is accepted by the insured, the insurer’s right to control the defense, which is a valuable right, continues.
This concept was also discussed in Continental Casualty Co. v. City of Jacksonville, 2008 WL 1793259 (11th Cir. Apr. 22, 2008), where the court observed: “Because a defense subject to a reservation of rights does not constitute a wrongful refusal to defend, an insurer retains its right to control the defense.”26 In its Continental Casualty opinion, the 11th Circuit attacked the city’s behavior in accepting a defense under a reservation of rights and then acting with “duplicity” throughout the settlement process and failing to cooperate with the insurance carrier.27 The court concluded that, having accepted the defense under a reservation of rights, the city was bound by it.
Before accepting a defense under a reservation of rights, careful review of the reservation of rights letter is essential for counsel for the insured. In particular, an issue may arise concerning reimbursement for defense costs if the carrier ultimately establishes that there was no duty to defend. Florida courts have held that, where the carrier reserves the right to be reimbursed for the defense costs it incurs in defending the insured, if it ultimately establishes that there was no duty to defend, such provisions are enforceable.28 Again, as emphasized by the courts, the acceptance of a reservation of rights is a negotiation process and hence any terms or conditions in the reservation of rights that are of particular concern to the insured should be raised in an effort to negotiate them out prior to acceptance of the defense under a reservation of rights.
Rejection of the Defense
As the Taylor court made clear, the rejection of a defense under a reservation of rights by an insured does not violate the cooperation clause in the policy. Once the insured has rejected the defense under a reservation of rights, it is free to provide its own defense without affecting any liability the carrier might have for the ultimate judgment, subject to the policy limits. However, the insured must actually reject the defense under a reservation of rights.29 The question about whether the insured has rejected a reservation of rights can be a question of fact.
This scenario was presented in Aguero v. First American Insurance Co., 927 So. 2d 894, 898 (Fla. 3d DCA 2006). In Aguero, the insured had assumed control of the case and settled it without the consent of the carrier after there had been a unilateral offer of a defense under a reservation of rights. Citing to Beville, the insured took the position that it had an absolute right to do so. However, the Aguero court, in reliance upon the Royal Oak opinion, took the position the insured could only assume the defense of the case where there had been an actual rejection of the defense offered by the carrier. It remanded the case for a determination whether Ryder’s letter to the carrier actually constituted a rejection of the defense under a reservation of rights. If so, then it would be free to act on its own. “When insurer offers to defend under a reservation of rights, …the insured may…reject the defense and retain its own attorneys.”30 It is, therefore, not an insubstantial point that the insured, if it is going to elect this option, needs to clearly and expressly, preferably in writing, reject the defense under a reservation of rights. Otherwise, by assuming its own defense and control of the case after the carrier has offered a defense under a reservation of rights, the insured has breached its contract and right to indemnification.31
The Continental Casualty case also presents an interesting factual scenario that could have, but did not, address a question that appears still to be open under Florida law. That question is whether, just prior to the settlement, the insured could have rejected the defense under a reservation of rights, even at that late date, and then be able to unilaterally settle the case and obtain indemnification for the cost of the settlement. In Continental Casualty, the insured accepted the defense under a reservation of rights through mutually agreeable counsel and the carrier funded the litigation, the cost of which was in excess of a million dollars prior to the settlement. Because the carrier would not agree to a settlement as the insured wished, the insured proceeded to settle without the consent of the insurance carrier. The court clearly held the insured could not do this and still recover the amount of the settlement. Based on the Continental Casualty court’s discussion and the facts in that case, it appears unlikely that a court would have accepted a belated rejection of the defense under a reservation of rights after the carrier had already expended substantial sums of money toward that defense. Certainly, it is not recommended that an insured follow that procedure and assume they have protected their right to indemnification if there is coverage under the policy.
When an insured rejects a defense under a reservation of rights, it clearly has the right to control the litigation, appoint defense counsel, and settle the case. Where the insured has entered into a settlement agreement, after a proper rejection of the defense under a reservation of rights, to the extent the insured is correct about coverage, the insured would be entitled to indemnification, limited to the amount of a reasonable settlement and up to a maximum of the policy limits.32 Based on Beville and BellSouth Telecommunications, Inc. v. Church & Tower of Florida, Inc., 930 So. 2d 668 (Fla. 3d DCA 2006), defense costs and fees should be recoverable as well.
A defense under a reservation of rights should be approached as a dance of the porcupines under Florida law. Whether under the narrow statutory requirements of the CAS or more general common law requirements, there are rights and responsibilities imposed upon both the insurer and the insured. Each is well advised to be aware of and follow them strictly, or serious consequences may follow. Consequently, it is imperative when coverage issues are raised that may involve assertion of a reservation of rights that the carrier give consideration to the implications of doing so in terms of control of the litigation and exposure to costs in excess of what it might otherwise be exposed to. Similarly, the insured needs to consider carefully the terms of the reservation of rights before accepting it, as well as the implications and risks that it is running should it elect to reject the reservation of rights. Most importantly, each side needs to ensure that it acts in a manner consistent with the election it intends to make and takes the necessary steps to effectuate that election.
1 AIU Ins. Co. v. Block Marina Invest., Inc., 544 So. 2d 998, 1000 (Fla. 1989).
3 Zurich Am. Ins. Co. v. Frankel Enterp., Inc., 509 F. Supp. 2d 1303, 1314 (S.D. Fla. 2007).
4 Fla. Physicians Ins. Co. v. Stern, 563 So. 2d 156, 160 (Fla. 4th D.C.A. 1990) (In circumstances where a defense to coverage that otherwise exists applies, the carrier must comply with the terms and conditions of the CAS or it will be deemed to have waived the coverage defense.).
5 Florida Municipal Insurance Trust v. Village of Golf, 850 So. 2d 544, 548 (Fla. 4th D.C.A. 2003).
6 Auto Owners Ins. Co. v. Salvia, 472 So. 2d 486, 488 (Fla. 5th D.C.A. 1985).
7 Am. Empire Surplus Lines Ins. Co. v. Gold Coast Elevator, Inc., 701 So. 2d 904, 906 (Fla. 4th D.C.A. 1997).
8 Auto Owners Ins. Co. v. Salvia, 472 So. 2d 486, 488 (Fla. 5th D.C.A. 1985).
9 Taylor v. Safeco Ins. Co., 361 So. 2d 743, 745 (Fla. 1st D.C.A. 1978).
11 Taylor, 361 So. 2d at 746.
14 Nationwide Mut. Fire Ins. Co. v. Beville, 825 So. 2d 999, 1003 (Fla. 4th D.C.A. 2002).
15 Travelers Indem. Co. of Ill. v. Royal Oak Enterp., Inc., 344 F. Supp. 2d 1358, 1371 (M.D. Fla. 2004).
16 BellSouth Telecommunications, Inc. v. Church & Tower of Florida, Inc., 930 So. 2d 668, 671 (Fla. 3d D.C.A. 2006).
17 Nationwide Mut. Fire Ins. Co. v. Beville, 825 So. 2d 999, 1003 (Fla. 4th D.C.A. 2002).
18 Royal Oak, 344 F. Supp. 2d at 1371.
19 Id. at 1370.
20 Id. at 1373.
21 Id. at 1374.
23 Id. at 1375-76.
24 Id. at 1369.
25 Travelers Indemnity Co. of Ill. v. Royal Oak Enterp., Inc., 171 F. App’x. 831, 832 (11th Cir. 2006).
26 Continental Cas. Co. v. City of Jacksonville, 2008 WL 1793259, at * 3 (11th Cir. Apr. 22, 2008) (Hinshaw & Culbertson, L.L.P., represented Continental Cas.).
28 Jim Black & Assoc., Inc. v. Transcon. Ins. Co., 932 So. 2d 516, 518 (Fla. D.C.A. 2006); Colony Ins. Co. v. G & E Tires Serv., Inc., 777 So. 2d 1034 (Fla. 1st D.C.A. 2000).
29 Royal Oak, 344 F. Supp. 2d at 1371.
30 Aguero v. First American Ins. Co., 927 So. 2d 894, 898 (Fla. 3d D.C.A. 2006); See also Bellsouth Telecom., Inc. v. Church & Tower of Fl., Inc., 930 So. 2d 668, 671 (Fla. 3d D.C.A. 2006).
31 Zurich Amer. Ins. Co. v. Frankel Enterp., Inc., 509 F. Supp. 2d 1303, 1311 (S.D. Fla. 2007) (Hinshaw & Culbertson, LLP, represented Zurich); Continental Casualty, 2008 WL 1793259 at * 3.
32 Taylor v. Safeco Ins. Co., 361 So. 2d 743, 747 (Fla. 1st D.C.A. 1978); Zurich American, 509 F. Supp. 2d at 1310.
Andrew E. Grigsby, of Hinshaw & Culbertson, LLP, has a general civil trial practice which includes extensive experience in cases emphasizing insurance issues, and he is a frequent lecturer on insurance coverage and bad faith issues. He received his juris doctorate from the University of Michigan in 1981 and is board certified as a specialist in civil trial law by The Florida Bar Board of Legal Specialization. He is a commissioner and former chair of the Florida Supreme Court Judicial Nominating Commission, and he served on the Third District Court of Appeal Judicial Nominating Commission from 1999 to 2001. He is also a member of the International Association of Defense Counsel and the Federalist Society.