Insurer Not Bound by Settlement That Insured Negotiated in Bad Faith

Under Florida law, a settlement may not be enforced against an insurer where its insured did not negotiate in good faith, thus failing to adequately represent the interests of the party that would ultimately have to pay the settlement. The Eleventh Circuit, in an opinion published November 17, 2016, Sidman v. Travelers Casualty & Surety, 2016 WL 6803034, affirmed the district court’s ruling that the settlement reached by the insured would not bind the insurer—despite the insurer’s wrongful refusal to defend and its  knowledge of the settlement—because the settlement was allegedly made in bad faith, as supported by evidence that the insured would have agreed to any amount in exchange for an agreement to enforce the settlement only against the insurer.  The court also affirmed the district court’s refusal to set and award attorneys’ fees.  The decision authored by Judge Jill Pryor was reached by a quorum of two judges because the third member of the panel, Judge Rosenbaum, recused herself after hearing oral argument.

The case arose out of an action in state court brought by a property owners association against a homeowner, seeking to enforce restrictive covenants relating to her lawn and landscaping. The homeowner, Kirkwood, counterclaimed against the association for slander of title and also demanded her attorneys’ fees under Florida statute.  Travelers, the association’s insurer, provided counsel to defend against the counterclaim under a reservation of rights.  The association, however, retained a separate attorney for its claim relating to the restrictive covenants.  That case resulted in a grant of summary judgment in favor of the homeowner, Kirkwood, who then filed a motion seeking attorneys’ fees.  The association notified Travelers of the potential liability for fees and requested coverage under its policy, but Travelers denied the association’s request to defend and disclaimed coverage with respect to the fees.  Kirkwood and the association eventually reached a settlement on the fee claim, agreeing to a consent judgment in the amount of $295,000, payable to Kirkwood’s attorney, and assignment to Kirkwood and/or her attorney of the association’s rights against Travelers as its insurer.  In exchange for the association’s agreement, Kirkwood and her attorney agreed not to enforce the judgment against the association.  Travelers acknowledged that it knew of the terms of the settlement prior to its execution.

Kirkwood’s appointed guardian, Sidman, then brought a third-party breach of contract action in state court against Travelers. Travelers removed the action to federal court.  After discovery, the district court granted summary judgment to Travelers on the ground that the policy did not cover Kirkwood’s claim for attorneys’ fees.  The Eleventh Circuit, in an earlier decision, reversed and remanded, holding that Travelers had owed a duty to defend and indemnify the association.  On remand, the district court held a bench trial to determine whether the settlement bound Travelers.  The district court found that the settlement was neither reasonable in amount nor negotiated in good faith and therefore could not be enforced against Travelers.  Specifically, the district court found that the association had allowed Kirkwood to determine the amount of the consent judgment in exchange for an agreement to collect it only from Travelers and not the association itself.  The Eleventh Circuit affirmed the district court’s finding that the settlement had been negotiated in bad faith and was unenforceable for that reason, declining to consider whether the amount was, in fact, unreasonable.

Two questions were presented on appeal, first, whether the district court applied the correct legal standard to determine the enforceability of the settlement and, second, whether the district court had substantial evidence to support its factual findings. The court reviewed the first, a question of law, de novo, and it reviewed the second, a factual question, under the clearly erroneous standard.  The court held that the district court identified the correct legal rule, which requires the party seeking to enforce a settlement against a Florida non-participating insurer to make a prima facie showing of reasonableness and lack of bad faith, while the insurer carries the ultimate burden of proof.  Furthermore, an insurer is not bound by a settlement that is unreasonable or was negotiated in bad faith merely because it knew of and failed to object to the settlement before it was executed.

The Eleventh Circuit also affirmed that the district court had sufficient evidence of bad faith. To support its finding that the association was willing to agree to any fee so long as Kirkwood and her attorney would enforce the judgment only against Travelers, the court considered testimony from an attorney who had represented other homeowners in a similar suit brought by the association.  The attorney testified, in that lawsuit, that the association offered to “stipulate to whatever number that you want,” so long as they would agree not to seek to enforce the agreement against the association and also that the association acknowledged a similar arrangement with Kirkwood, including a large multiplier on the judgment amount.  Kirkwood, her attorney, and the association also had entered into a side agreement, which they had not disclosed to the state court, whereby the association agreed to pay up to $50,000 depending on their relative success in enforcing the settlement against Travelers.  The Eleventh Circuit held this evidence—that the association only acquiesced because it believed it could impose all or most of the financial burden of the settlement on Travelers—was sufficient for the district court to find bad faith because a reasonable party would not be indifferent to the amount of a judgment that it expected to pay.

Lastly, the Eleventh Circuit specifically affirmed that the district court had not erred in declining to determine a reasonable attorneys’ fee and award it to the plaintiffs, although the court stated in a footnote that the appellants had only challenged this ruling in their reply brief, and so it would not consider their argument.

Posted by Danny Wells.

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