RIGHTS AND RESPONSIBILITES OF AN INSURED

Introduction

 

Welcome to the Rights and Responsibilities of an Insured “Course Brief” continuing education course. The purpose of this course is to provide you with the tools to better understand how insurance policies impose certain duties on the insured. How state law the common law, state statutes and regulations, or both – supplement those duties. 

If you are a Claims Adjuster, this course will assist you in assessing how insurance companies conduct investigations, and we will be supported by well-decided cases. This course makes a few assumptions about you, the student:

  • You are a currently licensed Florida 2-20 General Lines Agent, 20-44 Personal Lines Agent, or 4-40 Customer Representative. 
  • You are a 6-20 General Lines Adjuster or 3-20 Public Adjuster. 
  • You are interested in additional information and processes in your presentation to and education of current and potential customers.
  • You are interested in additional information to train your office staff.

This course is meant to serve as a primer to bad faith in insurance claims law. Certain legal concepts regulating premises liability claims must be understood by those engaged in Liability Insurance sales and claims:-

 

  • What are the rights of an insured? 
  • What an insured presenting a claim for insurance coverage must satisfy
  • Duties of the insured
  • Insured notice to the Insurer and the consequences of late notice
  • Duties of the Insured created by liability policy terms
  • Rights and Responsibilities of an insured in Florida

 

This course analyses a vast corpus of law, which is mostly comprised of well-decided case law from superior courts that have become precedents on matters Insurance claims reservation of rights.

 

Course Content

 

  • Introduction
  • What are the rights of an insured? 
  • What an insured presenting a claim for insurance coverage must satisfy
  • Duties of the insured
  • Insured notice to the Insurer and the consequences of late notice
  • Duties of the Insured created by liability policy terms
  • Rights and Responsibilities of an insured in Florida
  • Case law

 

Legal Disclaimer 

The information provided on this course does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this course are for general informational purposes only.  Information in this course may not constitute the most up-to-date legal or other information. This course may contain links to other third-party websites.  Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites.

Students of this course should contact legal counsel to obtain advice with respect to any particular legal matter.  No student of this course should act or refrain from acting on the basis of information in this course without first seeking legal advice from counsel in the relevant jurisdiction.  The student’s legal counsel can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Use of, and access to, this course or any of the links or resources contained within the course do not create an attorney-client relationship between the student and the school as a continuing education provider. 

The views expressed at, or through, this course are those of the individual authors writing and the school in their individual capacities only. All liability with respect to actions taken or not taken based on the contents of this course is hereby expressly disclaimed.  The content on this posting is provided “as is;” no representations are made that the content is error-free.

 

RIGHTS AND RESPONSIBILITES OF AN INSURED.

INTRODUCTION

All insurance policies impose certain duties on the insured.  In some instances, state law – the common law, state statutes and regulations, or both – supplement those duties.  In order to perfect the claim and obtain insurance proceeds, the insured must comply with the various duties or establish that he or she was excused from compliance.  This course brief identifies and addresses the range of issues concerning the insured’s duties, including their source, how to comply with them, when compliance with certain duties may be excused, and the consequences of an unexcused breach.

An insured presenting a claim for insurance coverage must satisfy two types of requirements established by the subject insurance policy.  

First, the claim must satisfy the terms of coverage; that is, the claim must fall within the policy’s coverage grant and not within an exclusion.  Whether the claim satisfies such coverage terms is determined by the circumstances of the loss or underlying liability claim, and not by any action or inaction of the insured after the loss or claim.

Second, all insurance policies impose certain conditions on the parties.  In contrast to what might be termed the “substantive” coverage terms described above, policy conditions do not purport to define the scope of coverage afforded by the policy.  Instead, conditions impose “procedural” duties on the contracting parties.  Most of those duties, and those that are the subject of this course brief, require the insured to take certain steps after the insured event occurs to perfect the coverage claim. 

 A failure to comply with those duties may preclude the insured from receiving the benefits of coverage.  Policy conditions, and the duties they impose on the insured, are critically important to the attorney or insurance professional working on behalf of the insured, because a breach of such duties may deprive the insured of coverage benefits that would have been owed but for a post-loss misstep by the insured during the claim process.

The most important source of the insured’s duties is the policy itself.  Although the insurance industry makes extensive use of standardized forms, there remains substantial variation among the various coverage lines and policy forms in use.  Each of those coverage lines and forms may impose different duties on the insured.  Accordingly, a careful review of the governing policy language is a critical first step in evaluating the insured’s duties.

Duties of the Insured.

The two most important duties of the insured, measured by their universal presence and the volume of coverage disputes they generate, are:  

(1) The duty to notify the insurer of a loss or claim; and 

(2) The duty to cooperate with the insurer.  

 

Insured notice to the Insurer.

The insured should assume that the insurer must promptly be notified, in writing, of any casualty loss, third-party liability claim, or occurrence that could give rise to a liability claim.  The insured should operate under the assumption that the insurer must be timely notified of all material facts concerning the loss or underlying claim, and that the insured must respond fairly to all reasonable insurer requests for information and documentation.

Consequences of late notice.

The consequences of late notice and breach of the duty to cooperate vary with the type of policy at issue and the jurisdiction.  Under occurrence-based liability policies and first-party property policies, the majority rule is that the insurer will be excused from its coverage obligation only when the insurer proves that the delay in notice or failure to cooperate resulted in prejudice to the insurer.  Prejudice in this context means concrete harm to the insurer’s ability to investigate the loss, defend a liability claim, or develop a defense to coverage.  A minority of jurisdictions is less forgiving and require no showing of prejudice.  

When evaluating the insured’s notice obligations and the consequences of late notice, it is critically important to draw a distinction between occurrence-based liability policies and first-party property policies, on the one hand, and claims-made-and-reported liability policies, on the other.  

Under claims-made-and-reported liability policies, notice to the insurer of an underlying claim is not a condition (precedent) of coverage; i.e., it is not a “procedural” duty whose breach may be excused in the absence of prejudice to the insurer.  Instead, notice is a material term of coverage that is part of the insuring agreement or coverage grant under such policies; consequently, late notice is a material breach that discharges the insurer from any coverage obligation. 

An underappreciated duty of the insured under first-party policies is created by so-called “suit- limitation clauses,”  Such clauses, which are present in virtually all first-party policies (and are very rarely included in liability policies), provide that any lawsuit against the insurer must be brought within a specified period after the discovery of the loss.  

The time period for bringing suit under such clauses is typically either 12- or 24-months after the inception of the loss -invariably far shorter than the governing statute of limitations for disputes on written contracts.  Although a suit-limitation clause may be thought of essentially as a substitute statute of limitations created by contract, the accrual analysis is markedly different -statutory limitations periods generally commence upon the insurer’s denial of coverage, while suit-limitations periods almost universally run from the commencement of the loss itself, without regard to when the insurer allegedly breaches the insurance contract.  

Moreover, the overwhelming majority rule is that such suit limitations are enforceable and that the insurer need not show prejudice as a result of the failure to file suit within the prescribed period.  Accordingly, in the event of a coverage dispute under a property policy, an insured who fails to file suit against the insurer within the 12- or 24-month suit-limitation period likely will have forfeited his or her coverage rights. 

Duties of the Insured created by liability policy terms.

Another important category of duties of the insured:  those created by liability policy terms requiring the insurer’s consent to incurring defense costs and consent to settlement of an underlying claim.  An insured’s breach of such consent terms usually will not provide the insurer with a strong defense to coverage, as most jurisdictions require the insurer to prove it was prejudiced by the insured’s failure to obtain consent.  However, these duties underscore the importance of maintaining an appropriate level of communication with the insurer during the course of an underlying liability claim.  An insurer that refuses consent after having been provided with a compelling case for undertaking particular defense efforts, or for settling a case for a particular amount, will be hard pressed to mount an effective prejudice defense.

Consent-to-settle clauses implicate the broader topic of the liability insurer’s right to control settlement of underlying claims against the insured, and the limits of that right.  

All first-party property insurance policies contain a term requiring the insured to take all reasonable steps necessary to prevent further damage after a loss is suffered. A common example would be to effect temporary repairs to a roof following storm damage to prevent water intrusion in the period of time before permanent repairs can be made.  Most such policies impose that obligation by means of a variation on the ancient “sue-and-labor” clause, which is a separate grant of coverage under the policy that requires such loss-mitigating steps and also provides that the costs of those steps will be covered under the policy.  

 

The insurer’s right of subrogation.  

Under the equitable remedy of subrogation, a first-party insurer that pays its insured for a loss usually is entitled to recover against any tortfeasor that caused that loss.  Similarly, a liability insurer that pays a claim on behalf of its insured may be subrogated to the insured’s claims, for contribution or indemnity, against other liable parties.  Subrogation rights are significant because the insured has a duty not to impair the insurer’s subrogation rights.  

Whenever an insured is asked to do anything that would preclude its insurer from recovering against a tortfeasor – whether that request comes before a loss, in the form of a request that the insured agree to a limitation-of-liability or remedy term in a contract, or after the loss in the form of a release of claims against such a tortfeasor – the insured must carefully evaluate whether the requested act would constitute an impermissible impairment of the insurer’s subrogation rights and lead to a forfeiture of coverage.

The insured’s duty to pay the insurance premium.  It should come as no surprise that one of the insured’s duties is to pay for the service – risk transfer – that the insured purchases in the form of the insurance policy.  The obligation to pay the premium, although straightforward on its face, can give rise to complex issues.  

An insured whose coverage claim is met with the defense of nonpayment of premium, and resulting cancellation of the policy, should examine the policy, the governing state insurance statutes and regulations, and the substantial body of case law that establishes limitations on the insurer’s ability to reject a proffered late premium payment or to cancel a policy for nonpayment of premium.  In particular, many states require that insureds, including additional insureds, receive written notice of cancellation, and an opportunity to cure, before the policy may be cancelled.  In other cases, the insurer may be precluded from accepting a late payment by application of the estoppel doctrine.

 

INSURANCE IN FLORIDA

Additionally, as liability policies replaced indemnity policies, the insurer’s power over the insured’s situation became greater, requiring a remedy for when that power was abused.

Under a liability policy, the insured’s role is essentially limited to selecting the type and desired level of coverage and paying the corresponding premium. Insurance coverage, theoretically, offers security and peace of mind against unforeseeable losses. As part of the contract, the insured surrenders to the insurer all control over the negotiations and decision making as to claims. 

The insured’s role is relegated to the obligation to cooperate with the insurer’s efforts to adjust the loss. The insurer makes all the decisions with regard to claims handling and thereby has the power to settle and foreclose an insured’s exposure to liability, or to refuse to settle and leave the insured exposed to liability in excess of the policy limits. 

As a result, “the relationship between the parties arising from the bodily injury liability provisions of the policy is fiduciary in nature, much akin to that of attorney and client,” because the insurer owes a duty to refrain from acting solely on the basis of its own interests in the settlement of claims. Accordingly, and because of this relationship, the insurer owes a duty to the insured to “exercise the utmost good faith and reasonable discretion in evaluating the claim” and negotiating for a settlement within the policy limits. When the insurer fails to act in the best interests of the insured in settling a claim, an injured insured is entitled to hold the insurer accountable for its “bad faith.

Despite the absence of either empirical or precedential support for its contention that there is a crisis in bad faith litigation, they have been proposals to have a complete and dramatic overhaul of F.S. §624.155. This would drastically alter the law and contains glaring ambiguities that insurance companies will be able to exploit to minimize their duties to their insureds to properly engage in claims administration and good faith negotiations.

Essentially, the amendment places the entire burden upon an insured or a claimant to formulate the settlement demand and provide all information requested by the insurer, without imposing any duty on the insurer to investigate or to provide information regarding the insurance coverage provisions or policy limits.

This flies in the face of the duties imposed by Powell v. Prudential, 584 So. 2d 12 (Fla. 3d DCA 1991). The complexity of the conditions precedent imposed on insureds and claimants would effectively eliminate the ability of a businessman, professional, homeowner, or other individual to resolve any insurance claims without the participation of a bank of attorneys, with no assurance that would even be of benefit.

First of all, the proposed amendment ignores the statutory duty historically imposed by the legislature on insurers to provide, upon request, sworn affidavits and certified copies of insurance policies so that insureds and claimants can make appropriate settlement decisions.

That provision was specifically enacted based on the legislature’s recognition that such information was critical to a claimant’s ability to properly make a prudent settlement offer. Case law also shows that claimants have been materially prejudiced by the failure of insurance companies to timely and accurately provide that information.

Despite the unambiguous provisions of that statute, case law is replete with circumstances in which insurance companies failed to comply with its terms, thereby preventing reasonable settlement negotiations.

Nonetheless, the proposed amendment does not consider the insurer’s duty to provide that information, but places the entire duty upon the insureds and claimants to make a settlement offer and provide information to the insurer, as a prerequisite for any obligation on the part of the insurer to engage in negotiations.

The proposed amendment also places the burden on the insureds and claimants to cooperate fully and submit medical bills, accident reports, and “other information needed by the insurer to investigate the claim,” thereby essentially eliminating any duty to investigate on the part of the insurer. 

Additionally, that blatant ambiguity requiring insureds to provide “other information needed” is one which insurers can exploit to avoid or delay any obligation on their part to engage in good faith negotiations. The amendment also contains a provision that “the insurer shall be given 30 days to cure any deficiencies in its acceptance of a good faith settlement demand,” which does not appear to limit the insurer to only one 30-day period, but rather could extend the time seriatim, allowing an insurer to continue to retain its money and coerce the insured or claimant to compromise simply in an effort to obtain a resolution.

Therefore, there is absolutely no need for the proposed amendment to F.S. §624.155, which is designed to drastically and dramatically alter the balance of power of the parties in insurance negotiations. It essentially eliminates the obligation of an insurer to initiate settlement negotiations, eliminates the insurer’s duty to investigate on behalf of its insured, unreasonably shifts the burden to the insured and the claimant in the negotiations, and creates multiple possibilities for indeterminate delay in the insurance company’s duty to attempt a good faith settlement. In sum, the proposed amendment dispenses with the long-standing and honored fiduciary relationship.

To conclude, the duties of the insured include;-

  • Disclose material information,
  • Avoid concealment and misrepresentation,
  • Report loss or damage to the authorities,
  • Provide notice of claim to the insurer,
  • Prepare an inventory of the damaged or stolen property, and
  • Provide proof of loss to the insurer.

The inability of the insured to comply with their duties is a ground for breach of contract, cancellation of the policy, and forfeiture of the premiums paid.
627.7142 Homeowner Claims Bill of Rights.

An insurer issuing a personal lines residential property insurance policy in this state must provide a Homeowner Claims Bill of Rights to a policyholder within 14 days after receiving an initial communication with respect to a claim. 

The purpose of the bill of rights is to summarize, in simple, nontechnical terms, existing Florida law regarding the rights of a personal lines residential property insurance policyholder who files a claim of loss. The Homeowner Claims Bill of Rights is specific to the claims process and does not represent all of a policyholder’s rights under Florida law regarding the insurance policy. 

The Homeowner Claims Bill of Rights does not create a civil cause of action by any individual policyholder or class of policyholders against an insurer or insurers. The failure of an insurer to properly deliver the Homeowner Claims Bill of Rights is subject to administrative enforcement by the office but is not admissible as evidence in a civil action against an insurer. 

The Homeowner Claims Bill of Rights does not enlarge, modify, or contravene statutory requirements including, but not limited to, ss. 626.854, 626.9541, 627.70131, 627.7015, and 627.7074, and does not prohibit an insurer from exercising its right to repair damaged property in compliance with the terms of an applicable policy or ss. 627.7011(5)(e)  and 627.702(7). 

The Homeowner Claims Bill of Rights must state:

This Bill of Rights is specific to the claims process and does not represent all of the rights under Florida law regarding the insurance policy. There are also exceptions to the stated timelines when conditions are beyond your insurance company’s control. This document does not create a civil cause of action by an individual policyholder, or a class of policyholders, against an insurer or insurers and does not prohibit an insurer from exercising its right to repair damaged property in compliance with the terms of an applicable policy.

An insured has  the right to;-

  1. Receive from the insurance company an acknowledgment of the reported claim within 14 days after the time the insured communicated the claim.
  2. Upon written request, receive from the insurance company within 30 days after the insured has submitted a complete proof-of-loss statement to the insurance company, confirmation that their claim is covered in full, partially covered, or denied, or receive a written statement that the claim is being investigated.
  3. Within 90 days, subject to any dual interest noted in the policy, receive full settlement payment for the claim or payment of the undisputed portion of the claim, or the insurance company’s denial of the claim.
  4. Receive payment of interest, as provided in s. 627.70131, Florida Statutes, from the insurance company, which begins accruing from the date the claim is filed if the insurance company does not pay full settlement of the initial, reopened, or supplemental claim or the undisputed portion of the claim or does not deny the claim within 90 days after the claim is filed. The interest, if applicable, must be paid when the claim or the undisputed portion of the claim is paid.
  5. The Florida Department of Financial Services, Division of Consumer Services, provides free mediation of undisputed claims under most circumstances and subject to certain restrictions.
  6. Neutral evaluation of the disputed claim, if the claim is for damage caused by a sinkhole and is covered by the policy.

An insured is always advised to;-

  1. File all claims directly with your insurance company.
  2. Contact your insurance company before entering into any contract for repairs to confirm any managed repair policy provisions or optional preferred vendors.
  3. Make and document emergency repairs that are necessary to prevent further damage. Keep the damaged property, if feasible, keep all receipts, and take photographs or video of damage before and after any repairs to provide to your insurer.
  4. Carefully read any contract that requires you to pay out-of-pocket expenses or a fee that is based on a percentage of the insurance proceeds that you will receive for repairing or replacing your property.
  5. Confirm that the contractor you choose is licensed to do business in Florida. You can verify a contractor’s license and check to see if there are any complaints against him or her by calling the Florida Department of Business and Professional Regulation. You should also ask the contractor for references from previous work.
  6. Require all contractors to provide proof of insurance before beginning repairs.
  7. Take precautions if the damage requires you to leave your home, including securing your property and turning off your gas, water, and electricity, and contacting your insurance company and provide a phone number where you can be reached.

 

CASELAW

Mr. and Mrs. Comunale were struck in a marked pedestrian crosswalk by a truck driven by Percy Sloan. Mr. Comunale was seriously injured, and his wife suffered minor injuries. Sloan was insured by defendant Traders and General Insurance Company under a policy that contained limits of liability in the sum of $10,000 for each person injured and $20,000 for each accident. He notified Traders of the accident and was told that the policy did not provide coverage because he was driving a truck that did not belong to him. When the Comunales filed suit against Sloan, Traders refused to defend the action, and Sloan employed competent counsel to represent him. On the second day of the trial Sloan informed Traders that the Comunales would compromise the case for $4,000, that he did not have enough money to effect the settlement, and that it was highly probable the jury would return a verdict in excess of the policy limits. Traders was obligated to defend any personal injury suit covered by the policy, but it was given the right to make such settlement as it might deem expedient. Sloan demanded that Traders assume the defense and settlement of the case. Traders refused, and the trial proceeded to judgment in favor of Mr. Comunale for $25,000 and Mrs. Comunale for $1,250.

Sloan did not pay the judgment, and the Comunales sued Traders under a provision in the policy that permitted an injured party to maintain an action after obtaining judgment against the insured.) In that suit judgment was rendered in favor of Mr. Comunale for $10,000 and in favor of Mrs. Comunale for $1,250. This judgment was satisfied by Traders after it was affirmed in Comunale v. Traders & General Ins. Co., 116 Cal.App.2d 198 [253 P.2d 495].

Comunale obtained an assignment of all of Sloan’s rights against Traders and then commenced the present action to recover from Traders the portion of his judgment against Sloan which was in excess of the policy limits. The jury returned a verdict in Comunale’s favor, but the trial court entered a judgment for Traders notwithstanding the verdict.

The Supreme Court stated that there is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. This principle is applicable to policies of insurance. In the Hilker case it is pointed out that the rights of the insured “go deeper than the mere surface of the contract written for him by defendant” and that implied obligations are imposed “based upon those principles of fair dealing which enter into every contract.

 

The theory of recovery alleged was that the insurer engaged in bad faith conduct in failing to settle the personal injury claim of the claimant thereby exposing the insured to a judgment in excess of the policy limits. The Wisconsin Supreme Court concluded that a liability insurer would be held liable for bad faith for refusing to settle and adequately investigate such claims against its insureds. The Hilker court found that the duty of the insurer was analogous to that of a fiduciary. The court stated that the duty to act in good faith could not be predicated upon any express language contained in the insurance contract. Instead, the duty was to be “implied as a correlative duty growing out of certain rights and privileges which the contract confers upon the insurer.” In reaching the conclusion that the relationship between insured and insurer gives rise to a duty to act in good faith and to deal fairly, the court was persuaded by principles of agency law since the insurer had absolute control over the handling of the claim. 

  • Peter v. Travelers Insurance Company 375 F. Supp. 1347 – Dist. Court, CD California

Plaintiff Valentine is one of several underwriters at Lloyd’s of London who wrote a blanket liability insurance policy issued to Loffland Brothers Drilling Company (hereinafter Loffland) covering its legal liability in excess of $250,000. The other underwriters of this policy have agreed to Valentine’s representing their interests in this matter. Defendant Travelers Insurance Company was the primary liability insurer of Loffland, with policy limits of $250,000. Eldor D. Horning, an employee of Loffland, was injured while working at a drilling site in an oil field in Alaska operated by American Petroleum Corporation and American Richfield Corporation (hereinafter ARCO). Horning brought suit in the Central District of California against American Petroleum and ARCO. Travelers defended this suit with an agreement to indemnify American Petroleum and ARCO for any recovery by Horning subject to the terms and limitations of its policy. At trial the jury returned judgment in favor of Horning in the amount of $407,000. After judgment the plaintiff agreed to accept, in compromise settlement, the sum of $137,984.10 in excess of the primary limit of $250,000.

Plaintiff’s first cause of action is to recover the excess amount paid to Horning as a result of the above judgment and pursuant to the terms of the policy of excess insurance. Plaintiff contends that it was the breach of defendant’s duty to negotiate a settlement within its policy limits that necessitated plaintiff’s payment of the excess under its policy. In a second cause of action, plaintiff claims that defendant should have but did not attempt to impose a lien on workman’s compensation benefits paid to Horning by Travelers. Plaintiff alleges that such a lien would have reduced the judgment and thus the amount of plaintiff’s liability to Horning.

During the pendency of the Horning case, Travelers changed its settlement policy. The home office in Hartford, Connecticut, withdrew authority for its branch offices to make settlement offers in excess of $15,000 without first obtaining authorization from the Hartford office. In addition, there was considerable lack of communication between the Hartford office and the Los Angeles office that was processing the claim. The defendant’s agent in Los Angeles had written some letters to the home office indicating some chance of avoiding all liability, but also he suggested the value of the claim to be around $100,000. The Hartford office, without seeking further advice from the local attorneys, refused to authorize any offer to settle greater than $15,000. As a result of this confusion within the Travelers’ organization, Horning’s tendered offers to settle within the policy limits of $250,000 were refused. Meaningful settlement negotiations were never conducted between the parties because of the defendant’s refusal to give meaningful consideration to settlement. The breach of duty by the defendant consists of this failure to give any adequate consideration to the settlement prospect.

In this case, the Court stated that standards for determining whether an insurer would be liable in excess of its policy limits for failure to accept a settlement offer within those limits were considered. It was there reasoned that in every contract, there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement and, further, that this implied obligation requires an insurer to settle in an appropriate case, although the express terms of a particular policy do not impose this duty. When determining whether to settle a case, the interest of the insured must be given at least as much consideration as those of the insurer. In making this determination, the test is whether a prudent insurer without policy limits would have accepted the settlement offer. The Court need not find that the available offer should have been accepted. The finding is that no offer in excess of $15,000 was to be considered. This was arbitrary, capricious and unreasonable in the circumstances.

  • RANGER INSURANCE COMPANY vs. TRAVELERS INDEMNITY COMPANY

Ranger Insurance Company appeals the trial court’s order dismissing, with prejudice, its complaint against appellee-Travelers Indemnity Company. The two insurance carriers are, respectively, the excess automobile liability insurer and the primary automobile liability insurer for the City of Tallahassee. Ranger’s complaint sought to recover against Travelers based upon its contention that Travelers exercised bad faith in failing to settle a claim under Travelers’ primary policy insuring the City, as a consequence of which Ranger became liable for and paid funds in settlement of the claim over and above the amount it otherwise would have been required to pay in discharge of its excess liability. The questions presented on appeal are 

(1) whether an excess carrier has the right, in the absence of a contract or assignment from its insured, to maintain a cause of action against the primary carrier for damages resulting from the primary carrier’s bad faith refusal to settle a claim against their common insured; and 

(2) if such a cause of action is maintainable in Florida, whether the complaint in this instance was sufficient to state a cause of action for bad faith refusal to settle. We have determined that the excess carrier has a cause of action against the primary carrier under the doctrine of “equitable subrogation”, and that although the complaint was deficient, it was error to dismiss it with prejudice. We therefore reverse the order of the trial court.

The complaint alleges that Mr. and Mrs. Raker were injured in an automobile accident with a vehicle owned by the City of Tallahassee and driven by one of its employees. Travelers provided primary liability coverage up to $100,000 for one injury. Ranger provided liability coverage for injuries in excess of $100,000. About a month before the scheduled trial of the Rakers’ law suit against the City, Mrs. Raker offered to settle for $125,000, and Mr. Raker offered to settle his claim for $75,000. Travelers counter-offered the sum of $30,000 in settlement of the claims of both Mr. and Mrs. Raker.

The complaint alleges further that Travelers failed to make any effort to pursue further negotiations with the Rakers even though Ranger advised Travelers that Ranger would contribute toward a settlement over Travelers $100,000, policy limit. Upon trial of the case Mrs. Raker was awarded damages of $170,000, and Mr. Raker was awarded $37,500, with an additional $1,492.50 court costs. Travelers paid the sum of $100,000 under its policy for Mrs. Raker’s damages, and the sum of $38,992.50 for Mr. Raker’s damages and costs. Ranger, as it was obligated to do under its insurance policy with the City, paid the excess of $70,000 for Mrs. Raker, together with interest accrued on the judgment.

The allegations of bad faith are that Travelers failed to actively negotiate for settlement with the Rakers until approximately one week prior to trial; its offer of $30,000 for both claims was unreasonable in the light of the Rakers’ demand, the liability of the City, the lack of any comparative negligence on the part of Mrs. Raker, and the severity of the damages. The complaint also alleged Travelers’ wrongful refusal to accept its own attorney’s settlement advice and evaluation of the value of the claims, and possible jury verdict.

We further find no merit in appellee’s contention that equitable subrogation is not available because, by application of Section 768.28(5), Florida Statutes (1975), the sovereign immunity statute, the City is liable for damages only up to the amount of $100,000. Appellee argues that since Ranger’s rights can be no greater than the City’s, the City actually has no excess exposure upon which to base a right of action for bad faith to which Ranger can be subrogated. We observe, first, that if we accepted appellee’s argument that the City has no excess exposure, then of course it could have no excess insurance. Secondly, appellee’s contention in this respect overlooks Section 768.28(10), Florida Statutes (1975), which provides for waiver of sovereign immunity to the extent that the City has purchased excess coverage. 

Finally, as to appellee’s contention that the complaint fails to state a cause of action for bad faith against the insurer, we conclude that the allegations are sufficient  to show a disregard of the City’s interests, and a causal connection between Traveler’s actions and loss or damage allegedly suffered by Ranger. We do not agree with appellee that the complaint is deficient because it fails to allege the existence of an offer by the person claiming against the insured to settle within the policy limits. 

As stated in Thomas v. Western World Insurance Co., 343 So.2d 1298, 1302 (Fla. 3rd DCA 1977), under some circumstances the offer of settlement is not a prerequisite to excess liability. In Thomas, an insurer wrongfully refused to defend the insured, so that there was no offer within the policy limits, yet suit was allowed. 

In Davis v. Nationwide Mutual Fire Insurance Co., 370 So.2d 1162 (Fla. 1st DCA 1977), no offer was made because an insurance attorney misrepresented the policy limits to the injured party, negligent driver, and car owner.

 In Valentine v. Aetna Ins. Co., the trial court found that the personal injury litigation could have been settled for $500,000, even though the last demand before negotiations broke off was for $750,000, where the circumstances indicated that the personal injury plaintiff would have been willing to take less. Since the jury verdict in Valentine was $700,000, there was found to be damages of $200,000 because of the insurer’s breach of its duty to negotiate and settle in good faith.

The complaint here alleges the existence of an offer of settlement by the injured parties, and Ranger’s offer to contribute toward that settlement so that Travelers’ contribution would not exceed its $100,000 policy limit. The language of the complaint on this point is lacking in specificity. We think it is essential, consistent with the authorities cited in support of appellant’s position, for the excess carrier to allege that it offered to contribute a specific sum for which settlement could have been made, or that it was ready and willing to contribute, and offered to contribute an indefinite amount which, together with Travelers’ primary coverage of $100,000, would have produced a settlement at a figure less than Ranger was ultimately required to pay. 

We do not foreclose the possibility, if such be the case, that a cause of action might still be maintained if Ranger can allege and prove that its failure to communicate to Travelers an offer meeting these requirements should be excused as an exercise in futility because of Travelers unresponsive attitude. Even in such event, it would appear necessary to allege that Ranger was ready and willing to contribute an amount for which settlement could have been made. See Valentine, supra. Therefore, although we agree that the complaint was deficient, we determine that it was error to dismiss the complaint with prejudice, where there had been no prior dismissal without prejudice, since it is not apparent that the pleading cannot be amended so as to state a cause of action. 

Although we have indicated the possibility of an amended complaint being filed by Ranger, we caution that in so doing we are not ruling as a matter of law that any specific set of facts and circumstances would or would not be sufficient for recovery, since ordinarily this is a matter which must be determined by the jury.

  • Casualty Company v. Reserve Insurance Company, 238 N.W.2d 862 (Minn. 1976).

The rationale for finding the existence of a cause of action in behalf of the excess insurer is stated in the well-reasoned opinion of the Supreme Court of Minnesota in Continental Casualty Company v. Reserve Insurance Company, 238 N.W.2d 862 (Minn. 1976)..

The threshold question is whether a primary insurer owes any duty to an excess insurer in the settlement negotiation process. It is clear that any liability insurer owes its insured a duty of good faith in deciding whether to accept or reject a settlement. This duty includes an obligation to view the situation as if there were no policy limits applicable to the claim, and to give equal consideration to the financial exposure of the insured.

Breach of this duty by rejecting in bad faith an offer within policy limits subjects the insurer to liability to its insured in the amount of a judgment in excess of those limits. 

We hold that an excess insurer is subrogated to the insured’s rights against a primary insurer for breach of the primary insurer’s good-faith duty to settle. As one commentator has observed, “In the case of excess coverage, the primary insurer should be held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved.” 

When there is no excess insurer, the insured becomes his own excess insurer, and his single primary insurer owes him a duty of good faith in protecting him from an excess judgment and personal liability. If the insured purchases excess coverage, he in effect substitutes an excess insurer for himself. It follows that the excess insurer should assume the rights as well as the obligations of the insured in that position.

 

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