Florida CGL Carriers' Duty To Defend And The Risks Of Failing To Object To A Defense Conditioned On Reimbursement Of Defense Costs.

Originally published December 19, 2006

Most contractors have commercial general liability ("CGL") policies, which offer any number of different coverages for projects large and small. These policies provide for a duty to defend the insured from potentially covered claims and a duty to indemnify the insured for covered losses. Generally, the insurer's duty to defend is much broader than the insurer's duty to indemnify and requires the insurer to defend the contractor regardless of the truth of the allegations contained in a given complaint and/or claim.

In Florida, a CGL carrier's duty to defend is very broad and may potentially require an insurer to defend a multi-million dollar lawsuit, even though the potentially covered claims are a small fraction of the dispute. Consequently, insurers have, sometimes successfully, attempted to recoup litigation costs by defending under a reservation of rights and specifically reserving the right to reimbursement for defense of claims that are not covered under the CGL policy.

This Legal Alert discusses the scope of a CGL carrier's duty to defend its insured in Florida, as well as Florida's and other jurisdictions' treatment of a CGL's reservation of the right to reimbursement of defense costs for non-covered claims.

A. The "Eight Corners" Rule in Florida

The "eight corners" rule provides that in determining whether an insurer has a duty to defend, the court looks to the four corners of the complaint and the four corners of the insurance policy. If there is arguably coverage based on the allegations alone (not the facts), then the insurer must defend the entire suit. Under Florida law, "it is a well-settled rule that the allegations of the underlying complaint control an insurer's defense obligations." Sunshine Birds & Supplies, Inc. v. United States Fid. & Guar. Co., 696 So.2d 907, 909 (Fla. 3rd DCA 1997). The duty of an insurer to defend exists even if the allegations are factually incorrect or without merit. See Nat'l Union Fire Ins. Co. v. Lenox Liquors, Inc., 358 So.2d 533, 536 (Fla. 1977); Marr Invs., Inc. v. Greco, 621 So.2d 447, 449 (Fla. 4th DCA 1993). "[T]he duty to defend is broader than, and distinct from, the duty to indemnify. If the complaint, fairly read, alleges facts which create potential coverage under the policy, the insurer must defend the lawsuit." Fun Spree Vacations, Inc. v. Orion Ins. Co., 659 So.2d 419, 421 (Fla. 3rd DCA 1995) (citations omitted).

Florida law further provides that "where a complaint alleges facts that are partially within and partially outside the coverage of an insured's policy, the insurer is not only obligated to defend, but must defend the entire suit." Sunshine Birds, 696 So.2d at 910 (reversing summary judgment holding that the insurer did not have a duty to defend); Grissom v. Commercial Union Ins. Co., 610 So.2d 1299, 1307 (Fla. 1st DCA 1992) (where complaint involves allegations of negligent and intentional acts, and policy excludes only intentional acts but covers negligence, insurer must defend entire suit); Metro Dade County v. Florida Aviation Fueling Co., 578 So.2d 296, 298 (Fla. 3rd DCA 1990). Thus, in Florida, any allegation of a complaint that is arguably covered by the CGL policy at issue may trigger the insurers' defense obligation, which includes defense of the entire lawsuit.

B. CGL Insurers May Potentially Recover Defense Costs if the Defense Offered is Conditioned on the Contractor's Agreement to Reimburse the Insurer for Defense of Non-Covered Claims

As a consequence of the breadth of an insurer's obligation to defend and costs associated with litigation, many insurers try to mitigate these costs by attempting to defend with the express reservation that defense of non-covered claims shall be reimbursed by the insured. One of the first cases to address this issue was Buss v. Superior Court, 16 Cal. 4th 35, 939 P.2d 766, 65 Cal. Rptr. 2d 366 (Cal. 1997), which recognized the right of an insured to seek reimbursement of defense costs "that can be allocated solely to claims that are not even potentially covered." 939 P.2d at 778.

In Florida, at least one case has recognized the right to seek reimbursement for defense of non-covered claims provided the insurer: 1) timely reserved the right to seek reimbursement; 2) the reimbursement is for defense of claims that are not arguably covered by the policy; 3) the defense costs are capable of segregation; and 4) the insured "manifests acceptance of the terms upon which [the insurer] offers to pay for the defense . . . ." (e.g., the insured does not object to the insurer's reservation of the right to seek reimbursement). See Colony Ins. Co. v. G & E Tires & Servs., Inc., 777 So.2d 1034, 1039 (Fla. 1st DCA 2000).

Other states recognizing an insurer's ability to seek reimbursement for defense of non-covered claims include Colorado (Flannery v. Allstate Ins. Co., 49 F. Supp. 2d 1223 (D. Colo. 1999)); Connecticut (Sec. Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 826 A.2d 107 (Conn. 2003)); Massachusetts (Dash v. Chicago Ins. Co., 2004 WL 1932760 (D. Mass. Aug. 23, 2004); Minnesota (Jostens, Inc. v. CNA Ins./Cont'l Cas. Co., 403 N.W.2d 625 (Minn. 1987)); and Nevada (Capitol Indem. Corp. v. Blazer, 51 F. Supp. 2d 1080 (D. Nev. 1999)).

States that reject the right of an insurer to seek reimbursement for non-covered claims include Illinois (Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 828 N.E.2d 1092 (Ill. 2005); Oregon (Timberline Equip. Co., Inc. v. St. Paul Fire & Marine Ins. Co., 281 or. 639, 576 P.2d 1244 (Or. 1978)); Texas (Texas Assn of Counties County Gov. Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000)); Virginia (Med. Protective Co. v. McMillan, 2002 WL 31990490 (W.D. Va. Dec. 16, 2002)); and Wyoming (Shoshone First Bank v. Pac. Employers Ins. Co., 2 P.3d 510 (Wyo. 2000)).

Much of the law is unsettled in this area. If a contractor believes it may be exposed to a claim for reimbursement of defense costs, it should promptly seek legal advice with respect to a conditional offer by the carrier to defend that reserves the right to seek costs reimbursement for non-covered claims and with respect to its right to have mutually agreeable counsel defend the entire suit.

[c] 2007 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.

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