A recent Eleventh Circuit decision warns of the dangers in handling claims against multiple insureds. In Nova Casualty Co. v. OneBeacon America Insurance Co., (U.S. Ct. Apps., 11th Cir., Mar. 17, 2015) the district court for the Southern District of Florida granted summary judgment in favor of the primary insurer, finding that although it had breached its duty to defend and indemnify an additional insured in the underlying action, the excess insurer was not entitled to damages because the primary insurer had exhausted its policy and there were no allegations of bad faith. The district court decided all issues under New York law. On appeal, the Eleventh Circuit reversed the district court’s decision, applying Florida law to the subrogation issue and obligating the primary insurer to pay the $1 million primary limits for the substantial extra-contractual damages for its breach of contract.
The insurance dispute arose out of an underlying personal injury litigation where a claimant was paralyzed after being shot during a bank robbery. The claimant brought an action against the property lessor and the operator of the bank. The primary insurer insured the bank under a commercial general liability policy with limits of $1 million per occurrence primary limits and $20 million in excess limits. The lessor was named as an AI in the primary policy and the lease contract required the bank to name the lessor as an additional insured and contained an indemnification agreement. The primary insurer defended the bank in the underlying action but refused to defend or indemnify the additional insured lessor. The lessor’s own insurer, acting as an excess insurer, settled the claim against the lessor for $1.5 million. After again refusing to contribute, the primary insurer settled the action against the bank for a sum in excess of its primary limits.
The excess insurer brought the instant subrogation suit challenging the primary insurer’s decision not to defend or indemnify the lessor. The district court and the Eleventh Circuit found that the primary insurer had breached the insurance contract by failing to defend or indemnify the lessor in the underlying action. The Eleventh Circuit held that New York law governed the obligations arising out of the insurance contract, but that Florida law would govern the manner and means of performance of the contract.
Applying Florida law to determine the remedies available to the excess insurer in light of the breach of contract, the Eleventh Circuit phased the issue before it as: “If [the primary insurer] breached its duty to defend and indemnify before settling [the underlying plaintiff’s] suit against [the bank], can its settlement for the limits of its policy absolve it of any responsibility to [the additional insured]?” The court answered this question in the negative analyzing the issue under the “good faith” obligations of an insurer in this situation.
The court held that the “damages against [the primary insurer] are measured from the date that [it] refused to defend [the additional insured], and [the excess insurer], forced to undertake the obligations of the primary insurer, settled the case for $1.5 million. Critically, when [the excess insurer] settled the McQuade action on behalf of [the additional insured], [the primary’s] $1 million policy was intact and available. Hence, even though [the primary insurer] subsequently exhausted its primary limits, the breach and the damages are measured at a point in time before that money was spent.”