Beware the delay: Florida court creates coverage where insurer defended suit without a reservation of rights
A homeowners insurer recently found itself faced with the prospect of covering a $4.4 million judgment against its insured even though the policy did not provide coverage for the intentional tort claims in the underlying lawsuit. The insurer assumed the defense without issuing a reservation of rights. Hurchalla v. Homeowners Choice Prop. & Cas. Ins. Co., Inc., __ So. 3d __, 44 Fla. L. Weekly D2527, 2019 WL 5198731 (Fla. 4th DCA Oct. 16, 2019).
The Court’s Decision
In Hurchalla, the insured was an environmental activist, former Martin County commissioner, and sister of Attorney General Janet Reno. The insured emailed friends on the Martin County commission to express her disagreement with a development project in the county. As a result, the County changed course on the project. The developers then filed suit against the insured for tortuously interfering with the development contract.
The homeowners insurer initially defended the suit without issuing any reservation of rights. After defending for over a year, the insurer initiated a declaratory judgment action seeking a determination that the policy did not provide coverage for its insured’s alleged “intentional acts.” The insured, in response, raised equitable estoppel as an affirmative defense. After the verdict in the underlying action the insurer moved for summary judgment. The insured argued that summary judgment was inappropriate because the insurer failed to negate the equitable estoppel defense. The trial court disagreed and entered summary judgment in favor of the insurer.
The Fourth District reversed and held that the insurer was not entitled to summary judgment because it had failed to “factually negate” its insured’s affirmative defense of equitable estoppel. While Florida law takes the general approach that estoppel may not be used to create or extend insurance coverage where none originally existed, the Florida Supreme Court embraced a narrow exception to this rule in Crown Life Ins. Co. v. McBride, 517 So. 2d 660 (Fla. 1987), where it held that “promissory estoppel” – i.e. the insured’s detrimental reliance on the insurer’s representation of coverage - “may be utilized to create insurance coverage where to refuse to do so would sanction fraud or other injustice.” The Florida Supreme Court subsequently extended this holding to situations where an insured provides a defense without a reservation of rights in Doe on Behalf of Doe v. Allstate Ins. Co., 653 So. 2d 371, 374 (Fla. 1995). In that case, the Court ruled that when an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage.
The Hurchalla Court recognized that, under Doe, “an insurance company may be estopped from denying coverage, even where the policy does not cover the claim, where the insured has been prejudiced by the insurer’s assumption of the insured’s defense.” Because the insured alleged the insurer assumed the defense of the underlying action for over a year without issuing a reservation of rights, the Court found entry of summary judgment to be error since the insurer failed to factually negate the insured’s “legally sufficient” estoppel defense.
Impact of Hurchalla
As Hurchalla makes clear, trying to assert no coverage after assuming the defense of a claim without a reservation of rights is risky business. While the Court in Hurchalla did not comment on whether the insured’s equitable estoppel defense would ultimately prevail, the prospect of negating allegations of prejudice at the summary judgment stage may prove difficult because it generally requires a factual determination. E.g., State Nat. Ins. Co., Inc. v. Highland Holdings, Inc., No. 8:14-cv-00524-EAK-EAJ, 2015 WL 3466215, at *6 (M.D. Fla. June 1, 2015) (applying Florida law). For example, the Highland Holdings court denied a motion for summary judgment since a reasonable jury could find prejudice where the insurer defended the lawsuit for nearly five months and the insured alleged it missed a settlement opportunity as a result. Without disposing of the coverage issues at the summary judgment stage, the case will fall into the hands of a jury, with uncertain outcomes.
On the other hand, issuing a written reservation of rights letter upon assuming the defense of a lawsuit will typically foreclose any argument by the insured for coverage by equitable estoppel. E.g., Scottsdale Ins. Co. v. Outrigger Beach Club Condo. Ass’n, Inc., 304 F. Supp. 3d 1208, 1215 (M.D. Fla. 2018) (applying Florida law). In fact, when a reservation of rights letter generally states that the insurer is not waiving any defenses or rights, an equitable estoppel defense may still be precluded, even if the basis for denying coverage is not specifically listed in the reservation. See Solar Time Ltd. v. XL Specialty Ins. Co., 142 F. App’x 430, 434 (11th Cir. 2005) (applying Florida law).
It is imperative that the insurer provide its insureds with a reservation of rights when issues of coverage arise in an underlying lawsuit, and it is often better for the insurer to be overly cautious and reserve its rights early in the claim if there is even any doubt about coverage. Failure to do so may have significant consequences, as the Hurchalla case demonstrates. Without a reservation of rights, insurers face an uphill battle in negating an estoppel defense and obtaining a ruling in their favor, even where coverage definitively does not exist under the terms of the insurance policy.