Florida Appellate Court Rules Policyholder May Control Its Own Defense When Insurer Reserves Rights

I still need to catch up on several important Florida coverage decisions from this summer, but I could not wait to discuss this new coverage opinion out of the Third District Court of Appeal in Miami.  The case is Geico General Ins. Co. v. Rodriguez, Nos. 3D11-2905 & 3D12-506 (Fla. 3rd DCA Sept. 10, 2014), and it is important because it addresses a common coverage issue that does not have a lot of precedent.  The issue is what happens when an insurer agrees to defend an insured under reservation of rights, and the insured wants to hire its own defense counsel.

The facts of the Rodriguez case have as many twists and turns as a Grisham novel.  The dispute began simply enough with an automobile accident.  The at-fault driver was insured by Geico with a $20,000 policy limit.  Geico immediately tendered its policy limit, but the injured parties asserted that Geico also needed to also pay off their medical liens.  When Geico refused, the injured parties sued Geico’s insured.  Geico appointed defense counsel and the insured accepted the defense.

A year into the case, Geico’s insured was deposed and testified that he had no medical conditions that would affect his ability to drive.  Soon thereafter, the medical records of Geico’s insured were discovered.  It turned out the Geico’s insured was legally blind.  The claimants moved for sanctions based on the insured’s misrepresentations in his deposition.

Soon thereafter, the insured died, and the personal representative of his estate took over defense of the case.  Soon after that, Geico issued a new reservation of rights letter, adding a reservation to deny indemnity coverage based on the “Fraud and Misrepresentation” clause in the Geico policy.  Geico also filed a declaratory judgment action in federal court seeking a declaration that it did not owe coverage due to its insured’s misrepresentations at his deposition.

The insurance defense counsel appointed by Geico decided to appeal the sanctions award.  The personal representative did not agree with the decision to appeal.  The personal representative insisted that Geico appoint new defense counsel, and that Geico withdraw its reservation based on fraud and misrepresentation.  Geico refused to withdraw the reservation, and the personal representative fired the insurance defense firm and hired his own defense lawyer, who dropped the appeal of the sanctions award.

The claimants then amended their complaint to name Geico as a defendant pursuant to Fla. Stat. § 627.4136, since they now had a judgment against Geico’s insured for the sanctions award.  The personal representative cross-claimed against Geico for coverage, seeking a declaration that Geico was obligated to pay the sanctions award.

Geico not only denied any obligation to pay for the sanctions award, but it upped the stakes yet again by issuing a new reservation of rights letter claiming that its insured forfeited coverage by violating the cooperation clause when the personal representative fired the appointed counsel and chose his own counsel.

The personal representative fired back by entering into a $750,000 Coblentz agreement with the claimants.  Geico then sent a disclaimer letter disclaiming any obligation to defend or indemnify the insured.

The claimants filed a motion for partial summary judgment against Geico, seeking a judgment against Geico for the sanctions award.  The trial judge granted the motion, finding that Geico had violated Fla. Stat. § 627.426 and therefore had lost its right to rely on either the fraud and misrepresentation defense or the cooperation defense.

The appellate court affirmed, but did so on different grounds pursuant to the “tipsy coachman” doctrine, which instructs that an appellate court can affirm a trial court that came to the right conclusion, but for different reasons.  The appellate court determined that it need not analyze 627.426 because the “fraud and misrepresentation” exclusion did not apply.  The appellate court reasoned that the “fraud and misrepresentation” exclusion only applied to a fraud made for purposes of securing coverage, such as fraud on an insurance application, and not to a misrepresentation made in the course of defending an underlying claim.

Now here is the part of the decision I believe is most significant.  The appellate court next turned to the question of whether the insured violated the cooperation clause by insisting that the insurer revoke its reservation, and by firing the insurance defense firm and taking control of the defense.  The appellate court determined that the insured did not violate the cooperation clause, since the insurer’s reservation of rights, and institution of the coverage action, freed the insured from its obligation to cooperate.  The court cited Taylor v. Safeco Ins. Co., 361 So.2d 743, 745 (Fla. 1st DCA 1978) and Nationwide Mut. Fire Ins. Co. v. Beville, 825 So.2d 999, 1003 (Fla. 4th DCA 2002) for the proposition that an insured is entitled to reject a defense offered by an insurer under reservation of rights.

The appellate court reached the right conclusion, although its lack of analysis on this issue is disappointing.  A policyholder’s right to reject an insurer’s offer of a defense under reservation is now well-established in Florida.  This typically occurs at the outset of the case, when the policyholder can decide whether to accept or reject an insurer’s offer to defend the case when the insurer asserts reservations of rights.  But the Rodriguez case is somewhat different in that it involved an insurer that was already defending but amended its reservation of rights and filed a declaratory judgment action.

The case the appellate court should have cited is Mid-Continent Cas. Co. v. Am. Pride Bldg. Co., 601 F.3d 1143, 1150 (11th Cir. 2010), which held that a policyholder can reject a defense after it had already accepted the defense, if the insurer changes the terms of the conditional defense in a material way.  That is what happened in the Rodriguez case after Geico raised the “fraud and misrepresentation” defense, and again when Geico filed the declaratory judgment action, and again when Geico asserted a cooperation defense.  Each of these actions by Geico changed the terms of the defense it was offering under reservation, and each gave the insured the option to reject the newly-conditioned defense.  I like to call this the “cell phone rule”, since I analogize it to a consumer in a two-year cell phone contract that can get out of the contract if the carrier changes a term of service.

The Rodriguez decision is an important decision because it reinforces the right of a policyholder in Florida to control its defense when an insurer offers to defend under reservation.  Insurers typically argue that they have the right to control the defense, including the right to appoint defense counsel, despite asserting reservations of rights, and despite the “mutually agreeable” requirement in Florida’s Claims Administration Statute (627.426).  Insurers often appoint their crony law firms to defend insureds – the same law firms that sue insureds to try to get insurers off the coverage hook.  I have written before about this unethical practice that somehow continues to fly under the bar’s radar screen.  But the lesson here is that a policyholder need not blindly follow (pun intended) its insurer’s choice of counsel where coverage issues are disputed.  A policyholder has the right to select independent counsel and control its own defense, without prejudicing its coverage rights, even if it initially agreed to allow the carrier to control the defense.

The lawyers representing the claimants and insured in this case deserve kudos for standing up to Geico’s bullying, and matching the insurance giant blow-for-blow.  Whether it ultimately pays off remains to be seen, as the case enters its eighth year of litigation and the court has yet to determine whether Geico must pay the $750,000 judgment entered pursuant to the Coblentz agreement.

I suspect the wild ride will continue …