The dance of the Porcupines: defense under a reservation of rights in Florida.

• Author: Grigsby, Andrew E.

Florida courts have addressed the mutual rights and responsibilities of the insurer and the insured where the insurance company offers a defense under a reservation of the right to deny coverage. The courts have rules on issues regarding the control of the litigation, the effect of conflicts on the right to mutually agreeable counsel or co-counsel paid for by the carrier, recovery of defense costs by both the carrier and the insured, and the nature and effect of a rejection of a defense under a reservation of rights by the insured.

In addition to the broad common law rules regarding a defense under a reservation of rights, a statutory subcategory has developed under the provisions of F.S. [section] 627.426, the Florida claims administration statute (CAS). Unlike a general defense under a reservation of rights, a reservation of rights and defense offered pursuant to the CAS applies only to a narrow category of cases, and has its own particular rules and regulations.

The Florida Claims Administration Statute

The seminal case regarding the interpretation of the CAS is AIU Insurance Co. v. Block Marina Investment, Inc., 544 So. 2d 998, 1000 (Fla. 1989). At issue was a comprehensive general liability insurance policy that had an express exclusion for bailment losses. Aware of the exclusion, the insured obtained a marine operator's legal liability endorsement specifically covering bailed goods. However, this endorsement had lapsed, thus, leaving the insured unprotected for the loss later sustained. At issue was whether a failure to comply with the CAS could create or resurrect coverage. The Florida Supreme Court started from the premise that it was not the legislature's intent to change the longstanding rule in Florida that the doctrine of estoppel may be used to prevent a forfeiture of insurance coverage, but the doctrine may not be used to create or extend coverage. (1) The court held that the provisions of the statute only apply to a "coverage defense." The court interpreted "coverage defense" to mean a defense to insurance coverage that otherwise exists and did not apply to circumstances where there was no coverage or where coverage was precluded by an express policy exclusion. (2) In doing so, the court brought its interpretation of the statute in line with its view of legislative intent.

The statute applies to policies issued for delivery or delivered in Florida. (3) Based on the AIU decision, the scope of the CAS has been limited to circumstances where a carrier asserts a coverage defense that would take away coverage that otherwise would exist under the policy terms and conditions. It focuses on the insured's behavior, post-loss in particular. An example of a defense to coverage that otherwise exists is late notice. (4)

In order to preserve its rights under the CAS, within 30 days of when it knew or should have known of the particular coverage defense, the carrier is required to issue a reservation of rights by certified mail to the named insured. Once the insured is on notice the carrier is asserting a defense under a reservation of rights, the carrier may amend that reservation, provided the new defense is outside of the CAS and the insured has not been prejudiced in the interim by the failure to assert the defense. (5) However, it is essential the carrier ensure that it issues the initial reservation of rights letter within the initial 30-day period. The statute considers what the carrier knew or should have known, thus, the carrier's knowledge of the facts and circumstances of a particular coverage defense and when those facts should have been known to the carrier can be critical in terms of the deadline and whether the statutory requirement has been met.

Once the initial threshold requirement of the reservation of rights letter has been satisfied, the carrier then has an additional 60 days to either deny coverage; defend under a nonwaiver agreement executed by the insured after full disclosure to the insured of the rights and responsibilities of both parties; or to retain mutually agreeable counsel to defend the insured. (6) The insured must be notified of their rights to participate in the selection. (7) The critical aspect of each of these requirements, except for the denial, is that it places in the hands of the insured absolute control over the process since the carrier cannot obtain a nonwaiver agreement or mutually agreeable counsel without the cooperation and assent of the insured. Florida courts do not allow the insurer to simply apply to the court for the appointment of mutually agreeable counsel, but rather require strict compliance with one of the choices under the statute within the 60-day period. (8) The only item that can be left open for resolution by the court is the reasonable attorneys' fees for the mutually agreeable counsel. The statute requires mutually agreeable counsel, not independent counsel, as is required in many states where a conflict of interest exists.

Various practical considerations govern the application of the CAS. Most insurance carriers may hesitate to use a nonwaiver agreement because of the ambiguity of the informed consent provision. A term like "full disclosure" inevitably suggests a question of fact concerning whether there was adequate compliance with this provision. As a result, carriers almost always resort to the mutually agreeable defense counsel option.

The "mutually agreeable" requirement also has its drawbacks for the carrier. It opens up an avenue for the insured to attempt to have its coverage counsel handle the litigation so that it can manipulate the facts and circumstances of the underlying case adversely to the insurance carrier. The second problem that has arisen in complying with the statute is that counsel selected by the process often will report only to the insured and keep the insurance carrier completely in the dark. Since control of the litigation is not transferred to the insured under the CAS, this should be avoided so that the carrier can continue to do its duty. Thus, in the effort to obtain mutually agreeable counsel within the required timeframe, the carrier should focus its efforts on avoiding the selection of the insured's coverage counsel to preclude an inherent conflict and reach agreement with the insured that the mutually agreeable counsel will keep both the insured and the carrier fully informed of all developments in the case. But the fact remains that the only option fully within the control of the insurer is to deny coverage.

Beyond this, it is usually recommended that the carrier notify the insured of its rights but, to expedite the process, initially make a recommendation concerning the appointment of counsel and place a reasonable time...