To Insure Or Not to Insure? That Is The Question

To Insure Or Not to Insure? That Is The Question.

By : Robert S. Tanner, Esq. and Larry R. Leiby, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com. For more information, please visit www.mkpalaw.com.

In Mid-Continent Casualty Co. v. American Pride Building Company, LLC, 2010 WL 1173101 (11 th Cir. March 29, 2010), Groff Construction, Inc. ("Groff") sued American Pride Building Company, LLC ("American"), alleging that American built and advertised homes in violation of the copyrights Groff held on the home designs. Groff sought to disgorge American of profits earned using the copyrighted designs.

American was insured under a general liability insurance policy issued by Mid-Continent Casualty Company ("Insurer"). The policy provided one million dollars in coverage for personal and advertising injury. Insurer initially refused to provide a defense, asserting that the claim was not covered by the policy. Insurer then agreed to provide a conditional defense; i.e., Insurer would provide a defense but reserved the right to later seek a determination that the claim was not covered by the policy. Insurer never informed American that it had the right to reject the conditional defense or that American might later be obligated to reimburse Insurer for the cost of the defense. Insurer appointed an attorney to represent American. After mediation, the Insurer-appointed lawyer reported to Insurer that American had a limited chance of defeating the claim, recommended a settlement value of $550,000, and indicated that damages could exceed $10 million. Despite this advice, Insurer limited settlement authority to $75,000.

American retained independent counsel and made a demand for Insurer to withdraw its reservation of rights or else American would reject Insurer's conditional defense. The Insurer-appointed counsel informed Insurer that Groff demanded $250,000 on a take-it-or-leave-it basis. He also informed Insurer that if the $250,000 demand was not paid, American would discharge him as counsel, reject Insurer's coverage and settle the case with Groff for more than $1 million with an agreement that Groff would seek recovery only from Insurer pursuant to an assignment of rights. Insurer refused to increase its offer. That same day, Insurer filed a lawsuit seeking a declaratory judgment that it had no obligation under the policy to defend or indemnify American. Insurer also contended in the suit that American was liable for the attorney's fees paid by Insurer. The next day, after receiving a copy of the lawsuit, American rejected Insurer's conditional defense. Shortly thereafter, American and Groff signed a settlement agreement whereby American consented to a judgment of $1.7 million, American assigned its rights against Insurer to Groff, and Groff agreed not to seek collection from American.

Insurer amended its complaint to request a declaration that it had no duty to indemnify American for the consent judgment American agreed to with Groff. Insurer filed a motion for summary judgment on that issue. The trial court found that American had secretly negotiated and settled with Groff before actually signing the agreement and before rejecting Insurer's defense under the reservation of rights, which amounted to a breach of the duty to cooperate required by the policy, thereby relieving Insurer of its duty to indemnify American for the settlement. American appealed.

On appeal, the court noted the applicable law: (a) An insurer may provide a defense under a reservation of rights when it is uncertain that a claim is covered by the policy; but (b) "when an insurer agrees to defend under a reservation of rights or refuses to defend, the insurer transfers to the insured the power to conduct its own defense." Further, (c) an insured may reject a conditional defense if the insurer materially changes the terms under which it is provided; and (d) if the insured accepts the insured's conditional defense, the insured must cooperate in that defense or else may release the insurer of its obligation to pay if the claim is determined to be covered.

The appellate court found that a reasonable person could conclude from the facts that Insurer changed the terms of the conditional defense on the day that it filed the declaratory action by demanding attorney's fees. Additionally, the appellate court found that the Insurer-appointed lawyer knew and informed Insurer of the settlement terms being discussed between American and Groff, which dispelled the argument that American had acted in secret. Finally, the appellate court found that a reasonable person could conclude that, although American and Groff had discussed those settlement terms before Insurer filed the declaratory action, they did not consummate the agreement until afterwards, which would permit the further conclusion that American's rejection of the conditional defense was proper. As a result, the appellate court sent the case back to the trial court for a jury trial on the open questions of fact.