D&O Liability - Florida Court Holds That Defending Insurers “Fostered Cooperation” of the Insureds and Thus Are Not Liable to Indemnify for Settlement Achieved Without Insurers’ Consent
On September 11, 2007, Judge Harvey Schlesinger of the United States District Court for the Middle District of Florida granted final summary judgment in favor of Continental Casualty Company and Transportation Insurance Company in
litigation involving indemnification for the City of Jacksonville’s multi-million dollar settlement of bodily injury and property damage claims resulting from its disposal of allegedly lead-filled incinerator ash.
In Spring 2004, the City tendered the underlying claims to Transportation, seeking coverage for a lawsuit filed against it in Florida state court known as the “Williams Action.” Transportation agreed to defend
the City under a reservation of rights and, in the meantime, filed coverage litigation in November 2004 seeking resolution of the coverage issues. In August 2005, however, before any coverage issues were decided and after Transportation
had spent millions of dollars defending the City, the City settled with the bulk of the underlying plaintiffs, paying $25 million to more than 4,000 claimants who accepted the settlement. The settlement included a consent judgment
of $75 million, plus the City expressly agreed to remediate the US EPA sites at a projected total cost of approximately $100 million, bringing the total claimed damages to $175 million. Under the settlement, the City and the plaintiffs
agreed to share in any insurance recovery, and the plaintiffs’ counsel became lead counsel in the coverage litigation.
Shortly thereafter, in November 2005, Transportation moved for final summary judgment, arguing that the City breached the cooperation and voluntary payments clauses of the policy by settling without Transportation’s consent.
On April 11, 2006, the Court found that the settlement materially breached the insurance contract and substantially prejudiced Transportation. The Court also found, however, that Transportation had not yet met its burden of demonstrating
that it exercised good faith and due diligence in bringing about cooperation with the insured.
After the completion of extensive discovery focused on “fostering cooperation” (and numerous discovery disputes regarding the scope of the inquiry), Transportation filed a renewed motion for summary judgment. Transportation
argued that not only was the record undisputed that it had met its obligation to foster cooperation, but that Transportation’s efforts to do so were futile because of the City’s behind-the-back negotiations with the
Williams Plaintiffs that resulted in the settlement. The Court agreed with Transportation on both counts.
With respect to the first question, whether Transportation fostered the City’s cooperation, the bulk of the Court’s opinion focused on the question that was at the heart of all of the discovery disputes: what is the
scope of the “fostering cooperation” inquiry under Florida law. In analyzing this issue, the Court took great pains to distinguish between “(1) ‘bad faith’ cases; and (2) cooperation clause cases.”
According to the Court, bad faith arises when the insurer has failed to discharge its duties in good faith. A claim for bad faith failure to settle does not arise until after it has been determined that the insurer had a duty to
indemnify the insured. The Court explained that because there had been no determination of coverage, a claim for bad faith could not be brought against Transportation. The Court rejected the City’s argument that Transportation
breached its contractual duty of “good faith” in failing to settle the Williams action, calling the argument “pure sophistry.” The Court explained that good faith and bad faith were “two
sides of the same coin,” and that, as a result, a claim of good faith also required a finding of coverage. The Court noted that it had not found, and the City had not cited, any cases in which an insured had successfully argued
that the insurer breached its duty of good faith as a defense to its breach of the cooperation clause.
“Cooperation clause cases,” on the other hand, “are usually brought by an insurer who seeks to be excused from indemnifying its insured because its insured breached its duty to cooperate.” The Court cited
to Philadelphia Indemnity Insurance Co. v. Kohne, 181 Fed. Appx. 888 (11th Cir. 2006) for its articulation of the four-part test that an insurer must meet before it can deny coverage based on the breach of the cooperation
clause. The insurer must demonstrate that (1) the insured failed to cooperate; (2) the lack of cooperation was material; (3) the insurer suffered substantial prejudice as a result of the insured’s failure to cooperate; and
(4) the insurer exercised diligence and good faith in trying to bring about the insured’s cooperation. The Court noted that the only prong of the test still at issue was whether or not Transportation had exercised diligence
and good faith in trying to bring about the insured’s cooperation. According to the Court, to meet this prong of the test, an insurer is required to “in good faith employ methods that are reasonably calculated to locate
the insured and secure its cooperation.” Opinion at 45 (internal citations omitted).
The Court concluded that Transportation had met its obligation to attempt to secure the City’s cooperation. The Court pointed to the numerous letters written by Transportation in which it advised the City not to settle the
case without its consent. Id. at 46. The Court noted that the City ignored Transportation’s requests for a meeting and continued to unilaterally negotiate with the Williams plaintiffs. In short, the Court
found that “Transportation took good faith efforts to communicate its position to the City, reminding the City that it was bound by the terms of the insurance contract, and informing the City of the consequences of breaching
those terms.” Id. at 48. The Court stated that the reason Transportation’s efforts failed was that the City “by its own affirmative actions, rendered any good faith effort of fostering cooperation futile.”
With respect to the futility issue, the Court’s factual recitation focused upon the behind-the-back negotiation of the settlement and Transportation’s warnings that such a settlement would not be covered under the Policies.
For example, the Court pointed out that, in March 2005 the City told its carriers that it had “just received” a settlement proposal from the Williams plaintiffs stating that either the insurers would agree
to pay $75 million outright, or the City would pay $25 million of a $75 million consent judgment while assigning its insurance rights to the plaintiffs so that they and the City could pursue the insurers for the entire amount of
the judgment. In reality, that proposal was the result of months of negotiations that were not disclosed to Transportation. Transportation objected to that proposal and the City did not proceed with the March 2005 proposal. Thereafter,
in the summer of 2005, Transportation attempted to engage the City in a dialogue concerning the defense of the Williams claims and possible settlement options. Unfortunately, at the same time the City renewed its secret
settlement discussions with the Williams plaintiffs and, as a result, neither the City nor the Williams plaintiffs paid much heed to Transportation’s settlement efforts. Ultimately, the City and the underlying plaintiffs entered
into the very same settlement agreement as the March 2005 “just received” proposal. Given these and many other similar facts, the Court concluded that Transportation’s efforts to foster the City’s cooperation
were thwarted by the City, providing a separate and independent basis for discharging Transportation from its obligation to indemnify the City for the settlement.
Finally, the Court’s September 11 opinion re-affirmed its holding from its April 11, 2006 opinion that an insurer that defends under a reservation of rights has complied with its duty to defend obligation and has a right to
control the defense and make the settlement determinations.