Florida's new good faith duty on an insurer not to settle.

• Author: Hawkes, Frederick T.

What does a liability insurance company do when faced with multiple, competing claims, any one of which would exhaust the limits of its insured's policy? Can the insurer settle the first few of those claims that clearly appear to be legitimate and reasonable, exhausting coverage? Must the insurer wait for all potential claims to be made before it is permitted to resolve any of them? Must the insurer actively solicit all potential claims, and attempt to coordinate a global settlement, in order to minimize exposure of its insured from unsatisfied claims? If the insurer decides to make prompt payment of reasonable claims based simply on priority, which has the effect of exhausting the policy limits, can the insurer be liable for bad faith in settling too quickly?

The Fourth District Court of Appeal recently addressed this last question in Farinas v. Florida Farm Bureau Gen. Ins. Co., 850 So. 2d 555 (Fla. 4th DCA 2003), rev. denied, (Fla. Mar. 17, 2004), and determined that an insurer can be liable for prematurely settling some claims, leaving others with no coverage. This article addresses the implications of the duty imposed by this decision and whether there is anything an insurer can do to avoid liability in such a scenario. (1)

The Farinas Decision

Over eight years ago, an insured driver, Nicholas Copertino, caused a horrific automobile accident, killing five young people and injuring six others besides himself. One of the victims (14-year-old Farinas) was rendered a quadriplegic. The insured's automobile policy had limits of $100,000 per claim and $300,000 per accident. As the Fourth District observed, the policy limits were "plainly inadequate." Id. at 557. Liability was clear. The insurer (Florida Farm Bureau) promptly settled for the limits with the badly injured driver of the other car and the estates of two individuals who were killed in the accident. The value of each of these settled claims unquestionably exceeded the policy limits of $100,000 per claim.

The insurer then filed a declaratory judgment to determine whether it had any further duty to defend its insured after the exhaustion of the policy limits. Accident victims, or their survivors, intervened and filed a third-party bad faith action alleging that the insurer's hasty settlement of the three claims was without regard for its insured's interests, exposing Copertino to multiple multimillion dollar judgments, which several victims had obtained. (2)

The trial court entered summary judgment in favor of the insurer based on established Florida law allowing an insurer to choose how to settle multiple claims. On appeal, the Fourth District addressed three questions: 1) What did the insurer's duty of good faith require in this scenario? 2) Did the insurer meet that duty? 3) Were there any issues of fact that remained to be litigated?

The court determined that the insurer has three specific duties. First, the insurer is required to "fully investigate all the claims at hand to determine how to best limit the insured's liability." Id. at 560. The court noted, however, that an insurer does have some "discretion in how it elects to settle claims, and may even choose to settle certain claims to the exclusion of others, provided this decision is reasonable and in keeping with its good faith duty." Id. at 561. Second, the insurer should seek "to settle as many claims as possible within the policy limits." Id. at 560. Finally, the insurer has a "duty to avoid indiscriminately settling selected claims and leaving the insured at risk of excess judgments that could have been minimized by wiser settlement practice." Id. Whether these duties have been breached are jury questions. Id. The court held that jury questions remained as to whether the insurer's failure to pursue global and other settlement options was in the insured's best interests, whether the insurer's quick settlement with the three claimants was reasonable, and whether the insurer investigated the facts of all the claims. Id. at 561.

Harmon Decision and Policy Reasons Supporting it

The trial court in Farinas entered summary judgment relying on the decades-old, established rule, first adopted in Florida by Harmon v. State Farm Mut. Auto. Ins. Co., 232 So. 2d 206 (Fla. 2d DCA 1970). (3) There, the Second District held that an insurer can settle some claims, even where such a settlement exhausts policy limits and leaves the insured and other claimants without further coverage under the policy. Id. at 207. The Harmon court further held that an insurer has the right to determine what claims will be settled from the policy limits so long as the settlements in themselves are reasonable:

It is generally held that where multiple claims arise out of one accident, the liability insurer has the right to enter reasonable settlements with some of those claimants, regardless of whether the settlements deplete or even exhaust the policy limits to the extent...