Florida Supreme Court Endorses Enhanced Fee Shifting For Contractual Indemnity Claims

It has been a quiet period for insurance coverage opinions in Florida.  Today I want to discuss an important decision from the Florida Supreme Court that did not involve a coverage dispute but will have an impact on coverage and indemnity disputes going forward.  The case is First Baptist Church of Cape Coral, Florida, Inc., v. Compass Construction, Inc. (SC 11-1278 and SC11-1280, May 30, 2013).

The indemnification dispute in First Baptist arose out of a construction injury case.  A worker was injured at a construction project at a church.  (Hat tip to Marianne Moore.)  First Baptist was sued as the owner of the property and Compass Construction was sued as the general contractor.  The construction contract required Compass to indemnify First Baptist for any claims arising out of construction work.  After First Baptist was sued, it tendered the claim to Compass under its indemnification agreement, but Compass refused to defend.  First Baptist’s insurer provided the church with a defense and directed defense counsel to assert a contractual indemnification cross-claim against the general contractor.  First Baptist successfully defended the plaintiff’s claims, and also was successful in pursuit of its indemnification cross-claim.  As a result, First Baptist’s insurer sought repayment from Compass for the amount it had paid to defend First Baptist.

Here is where the case gets interesting.  The fee agreement entered into between First Baptist and its defense counsel stated that the insurance company would pay counsel $170 per hour.  However, the fee agreement also stated that if anyone other than the insurance company was required to pay the fee, then the rate would jump to either $300 per hour, or a rate determined by the court, whichever was higher.

This type of rate-tiered engagement agreement became common among lawyers, including policyholder-side coverage lawyers, after a series of opinions sanctioned their use in statutory-fee shifting cases.  The Florida Supreme Court put its stamp of approval on these agreements in Florida Patient’s Compensation Fund v. Rowe, 472 So. 2d 1145 (Fla. 1985).  Rate-tiered engagement agreements state that the plaintiff’s lawyer may be compensated at a rate higher than that set forth in the fee agreement if the enhanced fee is “contingent” and a court determines that a higher fee is reasonable.  Without this language, lawyers in Florida cannot seek fee multipliers or other fee enhancements to compensate them for the risk of taking on a case where payment is contingent.  Since Florida’s insurance fee-shifting statute, Fla. Stat. 627.428, was passed to encourage lawyers to take coverage cases, and to force insurers to pay the fees of policyholders’ counsel when insurers wrongfully deny coverage, the Florida Supreme Court has long endorsed an enhanced fee shift in coverage cases.

What is significant about First Baptist is that the Court expanded for the first time the use of two-tiered, fee enhancement agreements beyond the statutory context.  Now any contract that contains an indemnification clause – which is the case in most commercial contracts, including construction contracts, commercial leases, and manufacturer-supplier agreements, to give a few examples – provides the basis for a prevailing party fee enhancement.  There is no special language needed in the indemnification agreement.  The special language is found in the attorney’s retainer agreement with her own client.  Presumably, this language will become standard in every retainer agreement issued in Florida going forward.  Attorneys who do not use it are only doing themselves and their firms a disservice.

Justice Lewis’s dissent in First Baptist is forceful and comprehensive – one of the best dissents in recent memory at the Court.  Whether you agree with Justice Lewis or not (and clearly the rest of the Court did not), the dissent contains an encyclopedic treatment of fee enhancement agreements in Florida.  It is a must read for lawyers who wish to get up to speed on the history and current contours of permissible fee enhancement provisions in Florida.

The decision will have the greatest impact on the insurance defense bar.  Long derided as a practice area that is high volume but low margin, First Baptist gives insurance defense lawyers the ability to obtain fee enhancements to supplement the low hourly rates paid by insurance companies.  The decision also will benefit other defense-oriented law firms that provide volume discounts to large institutional clients for litigation work.

The decision also will benefit policyholders that negotiate favorable indemnification language in their commercial contracts.  It is frequently the case that insurers balk at paying the rates charged by policyholders’ preferred litigation counsel.  First Baptist gives policyholders a new option in cases involving indemnification cross-claims.  A policyholder can now ask its defense counsel to work for a lower hourly rate up front, but with more attractive back-end enhancements.  Such an arrangement costs the policyholder (or its insurer) nothing, and it may provide enough incentive for defense firms to do the work normally reserved for insurance defense firms, particularly if the firm is alsready uneasy about handing over a favored institutional client to an insurance defense firm.

Contractual indemnification claims can be an effective tool when companies negotiate for favorable language and enforce the agreements by filing cross-claims.  Too often, parties that owe contractual indemnification are able to avoid their responsibilities by ignoring indemnity tenders and betting that their co-defendant will not break up the unified defense front to pursue a cross-claim.  After First Baptist, a party that utilizes the right contractual indemnification language will gain the upper hand in such situations, since it can not only seek reimbursement of its fees from the co-defendant, but can seek an enhanced fee as well.

This is what troubled Justice Lewis, since First Baptist allows parties to recover from a co-defendant their “reasonable” counsel fees that are greater than what was actually paid.  Justice Lewis thought this was a boondoggle for defense lawyers.  The majority thought otherwise.  To the extent that the ultimate wrongdoer must pay the full freight, rather than get the benefit of a lower negotiated rate, the decision should help put some bite back into contractual indemnity claims in Florida.