Beware the undertaker: handling covered and non-covered claims
Sunny Florida is not always a warm state for insurers. Insurers routinely face high-stakes questionable bad faith claims prosecuted by claimants hoping to convert the insured’s inadequate policy limits into deep pockets. In response, the Florida Supreme Court often gives insurers a chilly reception. Recently, in Harvey v. GEICO Ins. Co., 259 So.3d 1 (Fla. Sept. 20, 2018), the Supreme Court held that paying policy limits within days of a serious accident and warning the insured about a potential excess judgment did not satisfy the insurer’s duty of good faith to settle claims on behalf of the insured. The court even admonished Florida’s federal courts that have frequently disposed of questionable bad faith claims at the summary judgment stage. The court reminded the federal courts that “it is for the jury to decide whether the insurer failed to act in good faith with due regard for the interests of the insured”. Consequently, a federal district court was “compelled” post-Harvey to submit a bad faith claim to the jury, although the court said it would have otherwise granted the insurer’s summary judgment motion. Wiggins v. Gov’t Emples. Ins. Co., 2019 U.S. Dist. LEXIS 12794 (M.D. Fla. Jan. 28, 2019).
Despite Florida’s unfriendly confines, insurers can usually find comfort in the principle that there can be no bad faith liability for claims that are not covered under the policy. Hartford Ins. Co. v. Mainstream Constr. Group, 864 So.2d 1270 (Fla. 5th DCA 2004) (“If there is no insurance coverage, nor any loss or injury for which the insurer is contractually obligated to indemnify, the insurer cannot have acted in bad faith in refusing to settle the claim.”). Even in this context, however, Florida courts have recognized that an insurer may owe a duty – and breach such duty – where it “undertakes one” in the absence of coverage. Carapella v. State Farm Fla. Ins. Co., 2019 U.S. Dist. LEXIS 20711 (M.D. Fla. Feb. 8, 2019); see also Allstate Indem. Co. Oser, 893 So.2d 675 (Fla. 1st DCA 2005); Stephens v. Dairyland, 2013 WL 3771228 (M.D. Fla. July 17, 2013); Calhoon v. Leader Specialty Ins. Co., 2007 WL 4098840 (M.D. Fla. 2007); Ging v. American Liberty Ins. Co., 423 F.2d 115, 120–21 (5th Cir.1970).
When and how does an insurer “undertake” this duty of good faith where there is no coverage in the first place? Carapella, a recent Middle District of Florida decision, highlights that this can happen where an insurer excises control over a settlement that involves both covered and non-covered claims and then “fails to act in good faith as to such undertaking.” Though the Carapella court did not ultimately decide whether the insured in that case undertook a duty, several older decisions illustrate the parameters of this principle.
In Ging, the Fifth Circuit held that an insurer was potentially liable for mishandling settlement negotiations that were part of the defense that the insurer undertook to provide its insured. In Ging, although punitive damages were not covered under the insured's policy, the insurer had undertaken to defend its insured in an auto liability action involving both compensatory and punitive damages claims. The insured was not represented by independent counsel, and relied upon the insurer as his sole source of guidance with respect to the liability action. Ultimately, the jury entered a verdict against the insured for US$25 million in non-covered punitive damages and US$14,695 in covered compensatory damages. Finding that that the lower court's grant of summary judgment in favor of the insurer as to lack of bad faith was inappropriate, the Fifth Circuit highlighted evidence that the insurer had: (a) failed to advise the insured of the existence of settlement offers; (b) failed to warn its insured about the likelihood of a non-covered punitive damages award; and (c) failed to conduct settlement negotiations in good faith. Upon these facts, the court found that that there were grounds upon which the insured may establish the insurer's breach of good faith.
It is important to note, however, that in Hines v. GEICO Indem. Co., 2016 U.S. Dist. LEXIS 20382 (M.D. Fla. 2016), the Middle District of Florida determined that the Ging decision does not impose a duty to settle the non-covered portion of the claim merely because the insurer defends the entire claim. The Hines court explained that:
This court does not read Ging to hold that the insurance company has a duty to settle a claim for both punitive and compensatory damages if it can do so within the policy limit. Instead, this court reads Ging to hold that the insurance company must communicate with the insured to warn and advise him regarding a punitive damages claim once the insurance company undertakes the defense of such a claim. Accordingly, this court agrees with GEICO that GEICO did not have a duty to take punitive damages into consideration when evaluating Acosta's bodily injury claim.
The takeaway for insurers from these cases is that they must be mindful that certain actions taken in handling and resolving claims may be perceived by Florida courts as undertaking a separate duty of good faith even where there is no coverage under the policy. Merely providing a defense to the insured in a lawsuit with both covered and uncovered claims does not equate to undertaking a duty to take the non-covered claim into consideration when evaluating the entire claim for settlement purposes. Nevertheless, insurers must communicate with their insureds about the consequences of a judgment on a non-covered claim and advise the insured about steps they might take to protect their interests, including retaining personal counsel to defend their exposure. While these “undertaker” cases should give insurers pause when handling actions that include non-covered claims, insurers can insulate themselves from bad faith liability by being proactive and mindful of the pitfalls presented by these claims.