By Brett R. Bloch

The scenario is as old as insurance itself - an insurance company receives notice of a claim, normally a lawsuit based upon allegations of conduct that may or may not be covered by the terms and conditions of the policy.   The claim requires a final factual determination to determine whether coverage applies. 

In Florida, as in most states, the insurer would be obligated to provide a defense to all of these allegations on behalf of its insured, subject to a reservation of its rights or a non-waiver agreement between the insurer and the policyholder.  If the question of the insurer’s indemnity obligation was of particular significance, the insurance company would, in all likelihood, file a declaratory judgment action against its insured, seeking a judicial determination as to the interpretation of key policy provisions as well, as the pertinent facts of the claim.

Because the insurer may be obligated to pay legal fees and costs defending a claim for which no indemnity coverage may ultimately prove to exist, the insurance company desires a determination of coverage as quickly as possible.  Florida courts, however, have shown a traditional reluctance to resolve factual issues relating to coverage in the context of a declaratory judgment action.  Florida courts typically have considered the underlying liability lawsuit to be the better vehicle for the determination of ultimate facts.  For insurers, the consequence of this view is the potential for incurring increasing defense costs on a questionable matter through trial with the hope that it will, at some point, be ultimately relieved of its duty to indemnify its insured.  With the prospect of such a hollow victory, the insurance company, more times that not, proceeds directly towards settlement in an effort to hedge the negative aspects of this situation in favor of a “business decision.”  The recent decision of the Supreme Court of Florida in Higgins v. State Farm, 2004 WL 2201474 (Fla. 2004) on this issue is the culmination of a shift towards permitting insurers to make a quick exit from questionable claims.  But, as we will see, this benefit is not without its own costs.

The Traditional View
Florida follows the generally accepted rule that the duty to defend is broader than the duty to indemnify.  Therefore, as long as potentially covered allegations are pled, even as alternate theories of recovery to clearly non-covered allegations, an insurer must provide its insured with a defense.  As the Supreme Court of Florida clearly stated in National Union Fire Insurance Co. of Pittsburgh, P.A. v. Lenox Liquors, Inc., 358 So.2d 533, 536 (Fla. 1977), “the allegations of the Complaint govern the duty to defend.” 
With the insurer already supplying a defense to the claim (and therefore, removing for the insured any sense of urgency to complete the coverage determination), Florida courts had assumed the position that a “determination as to its duty to indemnify should be deferred” until such time that liability of the underlying tort action had been determined.  International Surplus Lines Ins. Co. v. Markham, 580 So.2d 251, 254 (Fla. 2nd DCA 1991).  From this standpoint, significant questions of fact, and their application to the terms and conditions of the subject policy, could only be resolved in the liability action.  The declaratory judgment action, therefore, was not utilized to determine those issues.  See Columbia Casualty Co. v. Zimmerman, 62 So.2d 338 (Fla. 1952).

A Change Begins
By the mid-1990s, Florida courts began to recede from this strict position, possibly recognizing the financial burden placed upon insurers required to assume defense obligations for what are later proven to be uncovered claims.  This change was coupled with the growing recognition of declaratory judgment actions as an acceptable method to resolve all types of contractual disputes in Florida.  For example, in Allstate Insurance Company v. Conde, 595 So.2d. 1005 (Fla. 5th DCA 1992), the court was forced to reconcile the interrelationship between the underlying liability action and the declaratory judgment action in a situation where the insured was alleged to have either intentionally or unintentionally injured his common law wife and her children.  Recognizing the serious nature of the allegations, as well as the apparent need to allow the declaratory judgment action to proceed, the court held:

It is only appropriate that the insurer be permitted to participate in the coverage issues in an alternative, mutually exclusive case.  Otherwise, the insurer must sit back and provide an attorney to “defend” an insured by, in concert with the plaintiff, establishing that what might be the most deliberate shooting was, in fact, a negligent shooting.  Even it not bound by the coverage verdict, it may nevertheless suffer . . . “irreparable harm” by providing a defense when it had no legal obligation to do so.

Id. at 1008. Florida’s Fourth District Court of Appeal, in Britamco Underwriters, Inc. v. Central Jersey Investments, Inc., 632 So.2d 138 (Fla. 4th DCA 1994), came to a similar conclusion, but went even further by explaining that all parties could benefit from a prompt coverage determination.  It reasoned:

If the insured is precluded from having a good faith issue of coverage expeditiously determined, this interferes with early settlement of claims.  Plaintiff certainly benefits from a resolution of coverage in favor of the insured.  On the other hand, if coverage does not exist, the plaintiff may chose to cut losses by not continuing to litigate against a defendant who lacks insurance coverage.

Id. at 141.  The Supreme Court of Florida subsequently provided its pronouncement on this change in Canal Insurance Company v. Reed, 666 So.2d 888 (Fla. 1996), relying primarily upon the strength of Florida’s Declaratory Judgment Act, § 86.011 Fla. Stat.  Under this law, a declaratory judgment has the force and effect of a final judgment and is res judicata of all matters at issue between the parties.  This statute also requires that all persons who have or claim any interest in the insurance dispute (i.e. the claimant) are to be named as parties in the declaratory judgment action which would be affected by the declaration. Thus, it was not surprising that the high court would conclude that it is “in the best interests of all the parties for coverage issues to be resolved as soon as possible” and a declaratory judgment would effectively resolve such questions of coverage.  Id. at 892.

The Right Facts
The facts best illustrating the foundation of this trend were apparent in State Farm Fire and Casualty Co. v. Higgins, 788 So.2d 992 (Fla. 4th DCA 2001), rev. granted, 794 So.2d 604 (Fla. 2001).  In Higgins, the plaintiff filed an action for assault and battery against State Farm’s insured.  The insurer denied coverage for this claim, pursuant to the policy’s intentional bodily injury exclusion.  Subsequently, the Complaint was amended to instead assert only a cause of action for negligence, purportedly in an effort to obtain the coverage that State Farm had previously denied.  The plaintiff further amended the pleadings to include a cause of action against the tortfeasor’s former wife, also an insured under the policy.  State Farm, in response to the new pleading, provided a defense for its insured subject to a reservation of its rights to deny coverage, and commenced a declaratory judgment action.  A settlement between the plaintiff and the former spouse was later reached. 

In the Higgins case, however, the declaratory judgment action regarding the husband’s coverage  proceeded to trial, in advance of the underlying liability action, as the trial court no longer saw any necessity to keep the declaratory judgment action from resolving factual issues (particularly in light of the claimant’s highly questionable motive in changing her legal theories).  The jury determined that Higgins had acted intentionally and, as a result, State Farm was not obligated to indemnify its insured for the claimed loss.  As such, the jury’s findings regarding Higgins’ conduct would be considered res judicata and were deemed applicable to the liability action.  An appeal was thereafter taken.  The Fourth District Court of Appeal sought to lay this issue to rest, holding that the trial court possessed the necessary discretion, and properly allowed the declaratory judgment action to be tried first.  The court, however, also recognized that this decision created a conflict with the law in other Florida districts. 

While no other Florida district courts have rendered opinions following Higgins, the Fourth District Court of Appeal continued to follow this course, supporting the belief that factual issues could be resolved in declaratory judgment actions.  See Florida Municipal Insurance Trust v. City of South Bay, 784 So.2d 480 (Fla. 4th DCA 2001); Argus Photonics Group, Inc. v. Dickinson, 841 So.2d 598 (Fla. 4th DCA 2003). 

After almost a three-year wait, on September 30, 2004, the Supreme Court of Florida finally rendered its opinion and resolved the differing position of the Florida districts with a resounding “it depends.”  Explaining that declaratory judgments “are and can increasingly be a valuable procedure,” the Court held that the statutory provisions of Florida’s Declaratory Judgment Act expressly authorizes a declaratory judgment action to determine the existence or nonexistence of such material facts.  Higgins, 2004 WL 2201474, *3. (Fla. 2004).  To do otherwise, the court reasoned, is “illogical and unfair” to the insureds and insurers.  Therefore the “timing determination” as to which action may proceed first is within the trial court’s discretion. Id. at *9.

In an effort to guide the trial courts in the exercise of this discretion, the court recognized three factors to be considered in making such a determination: (1) the issues to be resolved; (2) the promotion of settlement and avoidance of collusion; and (3) the hardship to the claimant.  Id. at *10-*11.

Double-Edged Sword
At first glance, it would appear that an insurance company would benefit from a factual determination of liability in a declaratory judgment action.  Because the insurer would be currently providing its policyholder with a defense, pursuant to a reservation of its rights to later deny coverage, any procedure that would lead to a final determination of necessary facts that would appear to quickly resolve any indemnity obligation (as well as those regarding a defense) would be advantageous to the insurance company. 

One must consider, however, that in Florida, like most states, it is a well-established principle that, unless the existence or amount of insurance coverage has a direct relevancy to the matter in dispute, the defendant’s insurance coverage is considered to be an improper matter for the jury’s consideration on the issues of liability and damages.  Beta Eta House Corp. of Tallahassee v. Gregory, 237 So.2d 163, 165 (Fla. 1970).  The logic behind this rationale is straightforward - if jurors learn that there exists a possibility of coverage, they may be “influenced to fix liability where none exists” or “arrive at an excessive amount through sympathy for the injured party.”  Id.  This problem is normally resolved by a motion in limine to exclude the introduction of insurance information at trial.

If, however, a factual determination of liability is made in the context of a declaratory judgment action, and therefore issues regarding insurance coverage are entirely relevant, it is not possible to prevent the jury from learning what is at stake in the litigation - even the most inattentive juror can glean this fact from the case caption.  As a result, while the resolution of facts potentially providing the insurer with the solid basis it needs to deny coverage will come sooner, it could ultimately come at a much higher cost.

Conclusion
It is difficult to predict how the Higgins decision will affect courts in Florida and elsewhere.  While those courts within Florida’s Fourth District have already shown support for the resolution of fact issues in declaratory judgment actions, other Florida courts continue to employ the traditional method of delaying the declaratory judgment action until the underlying liability action has been resolved.  In this regard, the Higgins decision may not have effected any change, as it did not provide any clear direction nor requirement.  Rather, the Supreme Court of Florida’s ruling provides the authority that the trial court may exercise its discretion in setting these lawsuits for trial.  Until such time as the courts perceive “creative lawyering” in an effort to avoid policy exclusions, the real value of the Higgins decision will not be realized.  Nor will anyone know, until that time, the net value, if any, it has for the insurance company involved in that litigation.

---

Brett R. Bloch, Esq., is a partner of Seiden, Alder & Matthewman, P.A.  He concentrates his practice on insurance coverage, bad faith and professional liability litigation.  Mr. Bloch heads the firm's Insurance Coverage Litigation Practice Group representing insureds, insurers and reinsurers in all forms of disputes regarding insurance coverage.  Additionally, he is a member of the firm's Professional Liability Practice Group, representing the interests of architects, engineers, lawyers, insurance agents and other professionals.