Navigating the "good faith" and "reasonableness" requirements of Coblentz.

• Author: Tramont, Andrew V.

For a variety of reasons, a liability insurer may decline to cover an insured against whom a third party has asserted a claim. Perhaps the insurer believes that the language of the operative policy forecloses coverage for the claim or that the policy itself is void or otherwise invalid. When an insurer denies coverage to its insured for a particular claim, it may refuse to defend the action asserted against the insured, deny indemnification for any loss or damages suffered, or both.

Once the insurer denies coverage for a claim, the insured has the option of taking control of the case and settling with the claimant. The insured and the claimant may then enter into an agreement whereby the claimant obtains a negotiated consent judgment against the insured; the insured assigns its rights under the policy to the claimant; and the claimant releases the insured from any liability (through a covenant not to execute on the consent judgment or otherwise attempt to collect from the insured) regardless of whether the claimant successfully recovers anything from the insurer. This settlement device is known as a "Coblentz agreement" after the Fifth Circuit Court of Appeals' decision in Coblentz v. Am. Sur. Co. of New York, 416 F.2d 1059 (5th Cir. 1969).

Enforcement of a Coblentz Agreement

In Coblentz situations, the insurer can be bound by the settlement even if it was not a party to the agreement or the proceedings leading up to the settlement, and even if it was not made aware of the impending settlement, provided the claimant (i.e., the injured party or "Coblentz plaintiff") successfully "bring[s] an action against the insurer and prove[s] coverage, wrongful refusal to defend, and that the settlement was reasonable and made in good faith." (1) Importantly, the burden is on the Coblentz plaintiff to make a prima facie case that each prong has been met. (2)

The first two prongs--coverage and wrongful refusal to defend--have been extensively litigated in both Coblentz and non-Coblentz contexts. Courts routinely rely on non-Coblentz cases when evaluating, for the purposes of a Coblentz analysis, coverage under a particular policy of insurance or whether the insurer breached its duty to defend (i.e., whether there was a wrongful refusal to defend). (3)

The final prong of Coblentz, which combines an analysis of both the reasonableness and good-faith elements of the settlement agreement, has not been discussed in as much depth by Florida courts as the coverage and wrongful refusal to defend requirements. This article, thus, focuses on that prong, discussing what factors affect a court's evaluation of whether a settlement was entered into in good faith and is reasonable in amount. We also highlight recent caselaw denying the enforcement of Coblentz agreements based on both the unreasonableness and lack of good faith infecting the stipulated settlements.

Analyzing Reasonableness and Good Faith

The policy behind making reasonableness and good-faith prerequisites to enforcement of a consent judgment against a nonparty insurer is best expressed by Florida's Second District Court of Appeal in Steil v. Florida Physicians' Ins. Reciprocal, 448 So. 2d 589 (Fla. 2d DCA 1984):

The real concern in this type of case is that the settlement between the claimant and the insured may not actually represent an arm's length determination of the worth of the plaintiff's claim. In a situation where the insured actually pays for the settlement of the claim against him or where the case is fully litigated at trial before the entry of a judgment, the amount of the settlement or judgment can be assumed to be realistic. Therefore, if the insurer is later determined to have wrongfully refused to defend and the claim is within the coverage, it will be obligated to pay the amount of the settlement or judgment, at least within its policy limits, in the absence of a showing of collusion or fraud.

However, in the instant case or one involving a consent judgment with a covenant not to execute, the settlement figure is more suspect. The conduct of an insured can hardly be characterized as fraudulent simply because he stipulates to a large settlement figure in order to obtain his release from liability. He has little or nothing to lose because he will never be obligated to pay. As a consequence, the settlement of liability and damages may have very little relationship to the strength of the plaintiff's claim. Due to this problem, the ordinary standard of collusion or fraud is inappropriate. Thus, we hold that in a case such as this, a settlement may not be enforced against the carrier if it is unreasonable in amount or tainted by bad faith. (4)

In other words, if a Coblentz plaintiff were not required to prove that the settlement it reached with the insured was both reasonable and entered into in good faith in order to enforce its consent judgment against the insurer, the insured would be incentivized to "lie down" and offer the claimant a judgment for an exorbitant amount bearing no relationship to the damages actually suffered by the insured, because the insured knows the claimant would readily offer in exchange for this bounty a release from liability. The insurer--while not a party to any of the underlying proceeding and unable to protect its interests--would be bound and left "holding the bag," responsible for reimbursing the claimant not only for any legitimate damages, but in addition a windfall the claimant never would have recovered had the insured, knowing it would be responsible for satisfying the judgment, provided any meaningful opposition. Thus, the third prong serves a vital function by preserving due process for insurers in Coblentz situations and preventing abuses of the settlement device by claimants and insureds.

The third Coblentz prong--bifurcated by courts into dual consideration of both the reasonableness and good faith of the settlement whose enforcement is sought--is unique in that it is the only aspect of obtaining an enforceable consent judgment against an insurer that is entirely within the control of the parties to the initial action, making it especially important for potential claimants to get it right if they want to collect. Coblentz plaintiffs cannot control whether the relevant insurance policy provides coverage for the claim at issue, nor can they decide whether an insurer will defend the claim or not, but they certainly can endeavor to accept a reasonable amount from the insured and conduct legitimate negotiations and consummate the settlement in good faith.

Securing a reasonable figure and obtaining it in good faith the first time around is of the utmost importance to any potential Coblentz plaintiff, since failure to make a prima facie case of either requirement will prevent enforcement of the settlement against the insurer. (5) Furthermore, once the factfinder has determined that the Coblentz agreement is unreasonable in amount, there are no "do-overs," and the claimant may not ask the factfinder to set an alternative (reasonable) amount of damages. (6) Because...