Be Careful About Settlements and Coblentz Agreements
Counsel for an insured or a claimant must pay special attention when intending to settle a claim with a Coblentz Agreement.
A "Coblentz Agreement" (named for Coblentz v. Am. Sur. Co. of N.Y., 416 F.2d 1059 (5th Cir. 1969)) is a settlement device which can be utilized only when an insurer refuses to defend an insured. The insured is permitted to take whatever steps necessary to protect itself from exposure to a claim. This protection includes the right to enter into a consent judgment which will bind the insurer.
A failed Coblentz Agreement, and failed attempt to base it on provisions of Florida's Claims Administration Statute, was recently at issue in Zurich American Insurance Company v. Frankel Enterprises, Slip Copy, 2008 WL 2787704 (C.A. 11 July 18, 2008) (unpublished opinion). In Frankel, the United States Court of Appeals, 11th Circuit, upheld summary judgment for an insurer in a dec action, holding the insurer established as a matter of law that it was not bound by a settlement agreement between the claimant and the insured. In order to more fully appreciate the facts of the underlying case, the opinion should be read in conjunction with the district court case, Zurich American Ins. Co. v. Frankel Enterprises, Inc., 509 F. Supp.2d 1303 (S.D. Fla. 2007).
The underlying facts were as follows: In 1992, the claimants purchased a house from the insured. The house suffered from roof leaks. The leaks ultimately led to property damage and mold. The homeowner/claimants filed suit against the insured, alleging that his negligent construction and repairs led to the water infiltration. The lawsuit included claims not only for property damages, but also for personal injuries.
The insured builder was listed as an "additional insured" on a Zurich American Insurance Company policy with limits of $1 Million per occurrence. When the insurance company was notified of the claim, Zurich responded with a letter in which the insurer agreed to provide a defense, but did so under a reservation of rights. Specifically, Zurich asserted a coverage defense under policy exclusions for certain claims related to mold and workmanship.
As a component of the defense, the insurer selected a lawyer to defend the insured. In later correspondence, the insurer stated it believed some of the claims fell outside of the insurance coverage. Notwithstanding, the insurer continued to provide a defense for the insured, including assignment of the defense counsel. It is undisputed that the insured never rejected the assigned defense counsel, and never rejected the defense offered by Zurich. It is also undisputed that Zurich never withdrew its defense of the case, even after reserving its rights.
The parties to the lawsuit ultimately participated in court-ordered mediation. The claimants and their counsel, and the insured and his insurer-appointed counsel attended the mediation in person. The insurance company's representative attended by telephone, and only spoke with the insured's appointed counsel. The insurer refused to offer any money at mediation to settle the case. The insured paid $50,000 to settle, consented to a judgment against it for $1,800,000.00, and also assigned its rights against Zurich to the claimant (a classic Coblentz agreement).
Zurich did not authorize or consent to the settlement.
Zurich subsequently told its insured it was not bound by the settlement, because it was entered into without the insurer's express consent. The insurance policy clearly prohibited settlement without its permission, and also clearly provided the insurer's consent to be sued for recovery on an "agreed settlement" (defined in the policy as "a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.") (emphasis added) The Coblentz agreement was not signed by Zurich.
Subsequent to the Coblentz agreement, the insurer then filed a dec action seeking a declaration that it was not bound by the settlement. The trial court noted that an insurer is not bound by an unauthorized settlement unless: the insurer refuses to defend--not merely denies coverage; or if the insurer defends under a reservation of rights, and the insured rejects the defense (neither of which happened here). The insured/claimant tried to bolster their argument regarding coverage defenses by invoking Florida's "Claims Administration Statute."
Florida's Claims Administration Statute, Section 627.426, Fla. Stat., provides that an insurer may not deny coverage based on a coverage defense unless it has undertaken specific steps to inform the insured, protect the insured, and allow the insured itself an opportunity to protect its interests. The trial court deemed the Florida statute did not apply since the policy was issued for delivery and delivered in New York state. Further, the court determined the insurer's reservation of rights only raised the potential for a lack of coverage, not an outright "coverage defense." Finally, the court determined that the coverage defenses actually raised by the insurer in the dec action--breach of cooperation and "no action" clauses--arose out of the Coblentz agreement and more than year after the reservation of rights letter was issued.
The district court entered summary judgment for the insurer. The summary judgment was based on the foregoing, but also was based in part upon an admission by the insured's appointed attorney. The attorney was asked to admit that "Frankel did not obtain Zurich's authorization to enter into the Memorandum of Settlement reached during the April 22, 2004 mediation." The attorney replied: "Admitted."
The 11th Circuit upheld the trial court's order on summary judgment on these grounds, noting that the insured neither objected to the request or asked the court to withdraw or amend the response. In response to the insured/claimant's argument that a jury could conclude that the appointed attorney's conduct at mediation could allow a jury to conclude that the insurer consented to settlement, the 11th Circuit dismissed this argument noting: "we cannot ignore [the insured's] admission." The court also dismissed an argument that the appointed lawyer was acting as the insurer's agent during settlement negotiations, because under Florida law, the defense counsel hired to represent the insured is an independent contractor, and the insurer is not liable for the acts and omissions of the lawyer.
When advising a claimant and/or the insured about the viability of a Coblentz agreement, it is wise to be sure the insurer has denied the defense, withdrawn the defense, or failed to abide by the Claims Administration Statute. A loose interpretation of these requirements will not suffice.
A "Coblentz Agreement" (named for Coblentz v. Am. Sur. Co. of N.Y., 416 F.2d 1059 (5th Cir. 1969)) is a settlement device which can be utilized only when an insurer refuses to defend an insured. The insured is permitted to take whatever steps necessary to protect itself from exposure to a claim. This protection includes the right to enter into a consent judgment which will bind the insurer.
A failed Coblentz Agreement, and failed attempt to base it on provisions of Florida's Claims Administration Statute, was recently at issue in Zurich American Insurance Company v. Frankel Enterprises, Slip Copy, 2008 WL 2787704 (C.A. 11 July 18, 2008) (unpublished opinion). In Frankel, the United States Court of Appeals, 11th Circuit, upheld summary judgment for an insurer in a dec action, holding the insurer established as a matter of law that it was not bound by a settlement agreement between the claimant and the insured. In order to more fully appreciate the facts of the underlying case, the opinion should be read in conjunction with the district court case, Zurich American Ins. Co. v. Frankel Enterprises, Inc., 509 F. Supp.2d 1303 (S.D. Fla. 2007).
The underlying facts were as follows: In 1992, the claimants purchased a house from the insured. The house suffered from roof leaks. The leaks ultimately led to property damage and mold. The homeowner/claimants filed suit against the insured, alleging that his negligent construction and repairs led to the water infiltration. The lawsuit included claims not only for property damages, but also for personal injuries.
The insured builder was listed as an "additional insured" on a Zurich American Insurance Company policy with limits of $1 Million per occurrence. When the insurance company was notified of the claim, Zurich responded with a letter in which the insurer agreed to provide a defense, but did so under a reservation of rights. Specifically, Zurich asserted a coverage defense under policy exclusions for certain claims related to mold and workmanship.
As a component of the defense, the insurer selected a lawyer to defend the insured. In later correspondence, the insurer stated it believed some of the claims fell outside of the insurance coverage. Notwithstanding, the insurer continued to provide a defense for the insured, including assignment of the defense counsel. It is undisputed that the insured never rejected the assigned defense counsel, and never rejected the defense offered by Zurich. It is also undisputed that Zurich never withdrew its defense of the case, even after reserving its rights.
The parties to the lawsuit ultimately participated in court-ordered mediation. The claimants and their counsel, and the insured and his insurer-appointed counsel attended the mediation in person. The insurance company's representative attended by telephone, and only spoke with the insured's appointed counsel. The insurer refused to offer any money at mediation to settle the case. The insured paid $50,000 to settle, consented to a judgment against it for $1,800,000.00, and also assigned its rights against Zurich to the claimant (a classic Coblentz agreement).
Zurich did not authorize or consent to the settlement.
Zurich subsequently told its insured it was not bound by the settlement, because it was entered into without the insurer's express consent. The insurance policy clearly prohibited settlement without its permission, and also clearly provided the insurer's consent to be sued for recovery on an "agreed settlement" (defined in the policy as "a settlement and release of liability signed by us, the insured and the claimant or the claimant's legal representative.") (emphasis added) The Coblentz agreement was not signed by Zurich.
Subsequent to the Coblentz agreement, the insurer then filed a dec action seeking a declaration that it was not bound by the settlement. The trial court noted that an insurer is not bound by an unauthorized settlement unless: the insurer refuses to defend--not merely denies coverage; or if the insurer defends under a reservation of rights, and the insured rejects the defense (neither of which happened here). The insured/claimant tried to bolster their argument regarding coverage defenses by invoking Florida's "Claims Administration Statute."
Florida's Claims Administration Statute, Section 627.426, Fla. Stat., provides that an insurer may not deny coverage based on a coverage defense unless it has undertaken specific steps to inform the insured, protect the insured, and allow the insured itself an opportunity to protect its interests. The trial court deemed the Florida statute did not apply since the policy was issued for delivery and delivered in New York state. Further, the court determined the insurer's reservation of rights only raised the potential for a lack of coverage, not an outright "coverage defense." Finally, the court determined that the coverage defenses actually raised by the insurer in the dec action--breach of cooperation and "no action" clauses--arose out of the Coblentz agreement and more than year after the reservation of rights letter was issued.
The district court entered summary judgment for the insurer. The summary judgment was based on the foregoing, but also was based in part upon an admission by the insured's appointed attorney. The attorney was asked to admit that "Frankel did not obtain Zurich's authorization to enter into the Memorandum of Settlement reached during the April 22, 2004 mediation." The attorney replied: "Admitted."
The 11th Circuit upheld the trial court's order on summary judgment on these grounds, noting that the insured neither objected to the request or asked the court to withdraw or amend the response. In response to the insured/claimant's argument that a jury could conclude that the appointed attorney's conduct at mediation could allow a jury to conclude that the insurer consented to settlement, the 11th Circuit dismissed this argument noting: "we cannot ignore [the insured's] admission." The court also dismissed an argument that the appointed lawyer was acting as the insurer's agent during settlement negotiations, because under Florida law, the defense counsel hired to represent the insured is an independent contractor, and the insurer is not liable for the acts and omissions of the lawyer.
When advising a claimant and/or the insured about the viability of a Coblentz agreement, it is wise to be sure the insurer has denied the defense, withdrawn the defense, or failed to abide by the Claims Administration Statute. A loose interpretation of these requirements will not suffice.
