Travelers Indemnity Co. of Connecticut v. Attorney's Title Insurance Fund, Inc.
Docket: Case No: 2:13-cv-670-FtM-38CM
Court: District Court, M.D. Florida; July 7, 2016; Federal District Court
Plaintiffs Travelers Indemnity Company of Connecticut and St. Paul Fire and Marine Insurance Company filed a Motion for Final Summary Judgment related to a real estate fraud scheme involving Defendant Section 10 Joint Venture, LLP and others. The case arose from extensive state court litigation, culminating in a Coblentz agreement that transferred liability from Attorneys’ Title Insurance Fund, Inc. (ATIF) to its insurers. The primary issue is whether Travelers and St. Paul are liable for either the full or partial amount of that agreement.
Initially, ATIF sued Section 10 and related parties to recover $3 million paid due to fraudulent property sales, asserting claims of equitable lien, injunctive relief, and unjust enrichment. ATIF recorded a lis pendens to notify potential buyers of the ongoing litigation. In response, Section 10 counterclaimed for slander of title and other claims, obtaining a court order requiring ATIF to post a bond to maintain the lis pendens, which ATIF failed to do. The lis pendens was eventually discharged after ATIF ignored multiple court orders.
After nearly three years, Section 10 amended its counterclaims, alleging significant losses due to ATIF's wrongful actions related to the lis pendens. ATIF did not oppose this amended counterclaim, which led to Section 10 suffering a foreclosure on the Property. ATIF subsequently dismissed its claims for equitable lien and injunctive relief, retaining only the unjust enrichment claim. After numerous motions and amendments, the court dismissed Section 10's claims with prejudice, allowing them to pursue a malicious prosecution claim in a separate action following the resolution of the ATIF lawsuit.
Section 10 filed an amended motion seeking to add a third amended counterclaim and initiate a new action against ATIF for malicious prosecution. Amidst ongoing non-binding arbitration and mediation, ATIF permitted Section 10 to file the counterclaim and requested consolidation of the ATIF Lawsuit and the Malicious Prosecution Action. From 2007 to 2012, Plaintiffs provided ATIF with commercial general and umbrella liability insurance. In June 2013, ATIF sought coverage evaluation from Plaintiffs regarding the third amended counterclaim. Plaintiffs inquired about the motion but received limited information from ATIF, citing Florida’s Mediation Privilege Statute. Subsequently, ATIF submitted the Malicious Prosecution Action complaint, indicating awareness of an impending court order that would allow further claims. Shortly after, the court permitted the filing of the third amended counterclaim, which ATIF forwarded to Plaintiffs for coverage consideration.
In early September, Plaintiffs agreed to defend ATIF under a reservation of rights, while reserving the right to seek a declaratory judgment on their obligations and potentially withdraw from defense or recoup expenses. Shortly thereafter, ATIF and Section 10 reached a Coblentz agreement, wherein ATIF consented to a judgment in favor of Section 10 for approximately $40 million, enforceable only against ATIF's insurers. To facilitate this, ATIF assigned its policy rights to Section 10. With Section 10 pursuing enforcement of the Coblentz agreement, Plaintiffs filed for summary judgment, arguing there is no coverage under their policies for the claims presented.
The legal standard for summary judgment requires the movant to demonstrate no genuine dispute of material fact exists, allowing for judgment as a matter of law. Only disputes affecting the case's outcome under governing law can prevent summary judgment. The court must view evidence in the light most favorable to the non-movant and resolve reasonable doubts in their favor, focusing on whether a genuine issue for trial exists rather than weighing evidence.
To enforce the Coblentz agreement against Plaintiffs, Section 10 must demonstrate three elements: (1) Plaintiffs wrongfully refused to defend ATIF in the underlying litigation; (2) Plaintiffs had a duty under the insurance policies to indemnify ATIF; and (3) the settlement between ATIF and Section 10 was reasonable and made in good faith.
Regarding the first element, Plaintiffs contend that Section 10 cannot prove wrongful refusal to defend, citing a prior Court ruling that their offer to defend under a reservation of rights did not constitute a breach of the duty to defend. The Court confirms that an insurer is allowed to defend under a reservation of rights without breaching that duty. However, the Court finds that there is no binding case law establishing that the duty to defend equates to the wrongful refusal to defend under the Coblentz framework. Consequently, there remains a material fact issue regarding whether Plaintiffs wrongfully refused to defend ATIF.
For the second element, Plaintiffs assert that they do not have an indemnification duty because the claims against ATIF are excluded under the policies. They argue that the claims arose from ATIF’s handling of title claims and a breach of the cooperation clause in the policies. Florida law mandates that insurance contracts be interpreted according to their plain meaning and as a whole. Both the Travelers and St. Paul policies exclude coverage for claims related to the handling of insurance claims, with specific definitions provided for what constitutes financial services. Plaintiffs support their argument with deposition testimony from ATIF's corporate representative, Ford MacConnell, suggesting these exclusions bar coverage for Section 10’s claims against ATIF.
MacConnell affirmed that 'claims handling' can involve efforts to recover payments on claims, indicating that claims attorneys or paralegals would engage in salvage activities, such as in the ATIF Lawsuit. Plaintiffs argue this suggests salvage actions are part of claims handling. However, Section 10 counters that this interpretation improperly broadens the exclusionary language in the policy. Section 10 asserts that if salvage or recovery activities were meant to be excluded, they would have been explicitly mentioned. It also points out that the policy’s exclusion only applies to financial services provided "to others," thus not applicable when the insurer seeks recovery solely for its benefit.
The Court finds Plaintiffs’ argument compelling, stating that the policies clearly exclude claims related to handling insurance claims. Regardless of the parties' disagreement on the inclusion of salvage activity in claims handling, undisputed facts confirm it is relevant in this case, supported by MacConnell’s deposition testimony. Section 10’s rebuttal, based on attorney Matthew Lucas’s opinion that the ATIF Lawsuit does not constitute claims work, is insufficient as it lacks evidence to refute that ATIF considers salvage part of claims handling. Hence, the claims against ATIF stem from handling insurance claims, which are barred by the Financial Services and Insurance Company Exclusions.
Both insurance policies require the insured's complete cooperation. The Travelers policy specifies that the insured must assist in investigations or settlements, while the St. Paul policy mandates immediate notification of any demands related to claims. Plaintiffs argue ATIF breached these cooperation requirements before the Coblentz agreement by failing to disclose settlement negotiation statuses and misleading Plaintiffs. Additionally, ATIF allegedly facilitated claims against itself to tender to Plaintiffs for coverage, including not opposing Section 10's motion to amend counterclaims, accepting service of a malicious prosecution lawsuit, and allowing consolidation of actions, contrary to a state court order.
ATIF did not inform Plaintiffs about settlement demands from Section 10, including a mediation demand from April 2013. Section 10 contends that ATIF had no duty to cooperate since it did not accept Plaintiffs' defense offer under a reservation of rights. Even if there was a duty to cooperate, Section 10 argues that ATIF fulfilled this by keeping Plaintiffs informed of the claims against it, including the 2013 Counterclaim and Malicious Prosecution Action. Additionally, Section 10 claims that Plaintiffs did not make reasonable efforts to secure ATIF's cooperation and were not significantly harmed by any breach of duty.
Florida law stipulates that an insurer cannot avoid liability solely due to an insured's lack of cooperation; material breach and substantial prejudice must be demonstrated. The insurer must also show it acted diligently and in good faith to obtain cooperation, with these determinations typically being factual, unless the facts are undisputed. The situation here is distinct as ATIF never accepted the defense offer while actively collaborating with Section 10 to create a claim shifting liability to the insurer.
Emails and notes indicate that ATIF and Section 10 worked closely to secure coverage for Section 10’s claims, even as ATIF feared regulatory scrutiny and sought to terminate litigation without liability. Settlement negotiations began unbeknownst to Plaintiffs, around the time when Section 10’s counterclaims had been dismissed. Despite this, ATIF sought to mitigate potential liability by engaging in non-binding arbitration with Section 10, discussing how to present a claim to Plaintiffs that would be covered under the insurance policies. Shortly after negotiations commenced, ATIF submitted a request for coverage concerning Section 10’s third amended counterclaim and Malicious Prosecution Action.
Plaintiffs questioned ATIF about the delay in filing a motion for a coverage decision and whether any settlement negotiations were occurring. ATIF disclosed only that discussions were ongoing under a mediation confidentiality agreement and denied having received written settlement demands, despite drafts being exchanged. Plaintiffs urged ATIF to include them in settlement discussions due to an urgent deadline, noting that the motion did not qualify for a coverage decision, as Travelers does not provide advisory opinions. ATIF, however, continued to collaborate with Section 10, agreeing that "live" claims were necessary for a coverage determination, which led to the filing of a third amended counterclaim in state court. Section 10 also initiated a separate malicious prosecution claim, to which ATIF accepted service. With "live" claims, ATIF approached Plaintiffs for a coverage decision, yet continued to withhold information about settlement talks while negotiating a Coblentz agreement with Section 10. Although Plaintiffs offered to defend ATIF under a reservation of rights, ATIF was finalizing the Coblentz agreement and ultimately rejected the defense offer in favor of executing the agreement with Section 10 shortly thereafter. This behavior exemplifies ATIF's failure to cooperate, as it did not provide Plaintiffs with necessary information for resolution and instead sought to minimize its liability through collusion with Section 10, which prejudiced Plaintiffs significantly. ATIF accepted unfavorable settlement terms, including $40 million in damages, while ensuring that Section 10 would enforce the settlement against Plaintiffs. Throughout, Plaintiffs demonstrated good faith efforts to secure ATIF's cooperation, with no evidence of their non-compliance with policy terms, highlighting the substantial prejudice suffered by Plaintiffs due to ATIF’s lack of transparency and cooperation. Section 10 subsequently proposed two arguments against this cooperation defense.
Section 10 contends that Travelers did not comply with the Florida Claims Administration Statute (Fla. Stat. 627.426) because it failed to provide timely notice by certified or registered mail regarding its reservation of rights to assert a cooperation defense. Section 10 argues this noncompliance resulted in a waiver of that defense. However, the Court disagrees, noting that after ATIF submitted a Malicious Prosecution Action complaint for coverage, ATIF sought advice from Section 10 on how much information to disclose to Travelers about settlement negotiations. Section 10 advised that the status of these negotiations remained confidential until Travelers confirmed coverage in writing. ATIF's counsel acknowledged concerns about withholding information and recognized the potential for cooperation issues. ATIF was aware that Travelers was likely to assert a cooperation defense, given past denials of coverage for similar claims and the reservation of rights based on failure to cooperate. The Court concluded that ATIF had sufficient notice of Travelers' intent to assert this defense.
Furthermore, the Court found no support for Section 10's assumption that Travelers should have known to assert the cooperation defense upon ATIF’s claim submission. At the time Travelers sent its reservation of rights letter on September 6, 2013, it was unaware that ATIF would consent to a $40 million judgment three days later. The preceding discussions between ATIF and Travelers revolved around agreeing on legal counsel, not the cooperation defense. Travelers only became aware of the potential cooperation issue after the Coblentz agreement was executed on September 9, 2016, and it was less than ten days later that Travelers formally notified ATIF of its intent to assert the cooperation defense.
The Court also addressed Section 10’s argument based on Florida’s Mediation Privilege Statute (Fla. Stat. 44.405), which Section 10 claimed mandated confidentiality in settlement negotiations. The Court disagreed, stating that ATIF's mediation status during the four months leading to the Coblentz agreement execution was questionable, suggesting that ATIF's failure to disclose those discussions did not constitute a lack of cooperation under the statute.
Communications between the parties primarily occurred through email and phone calls without a mediator, indicating that they were engaged in general settlement discussions rather than formal mediation. The interpretation of mediation privilege in Section 10 contradicts Florida law by suggesting that mediation communications cannot be disclosed to insurers regarding potential claims, which undermines the requirement for insurance carrier representation at mediation. Consequently, the court found that Plaintiffs were not obligated to indemnify ATIF, leading to a summary judgment in favor of the Plaintiffs.
Regarding the Coblentz Agreement, Plaintiffs contended it was neither reasonable nor made in good faith, asserting that ATIF had leverage in state court and that the $40 million settlement significantly exceeded the $11 million offer made during mediation. The court partially agreed, stating that to enforce a Coblentz agreement, the assignee must prove both reasonableness and good faith. The court emphasized concerns that settlements may not reflect the true value of claims when they involve covenants not to sue, as insured parties have little risk. An insurer can challenge a Coblentz agreement if either requirement is unmet.
While reasonableness is assessed based on what a prudent insurer would settle for, good faith lacks a clear standard and can be demonstrated through evidence of false claims, collusion, or lack of negotiation efforts. The court determined that the agreement was not made in good faith, noting that ATIF submitted an initial draft with an empty damages section, which Section 10 filled with $42,680,000. Despite negotiations on other terms, the damages figure remained unchanged until it was lowered to $40 million just before execution, with no evidence of negotiation for this change. ATIF's representatives could not recall negotiating the damages, contradicting Section 10's claims of prior negotiations for a higher amount.
Section 10's argument lacks a citation to support its claims regarding the Coblentz agreement, specifically concerning prejudgment interest and the $42 million principal. There is no evidence indicating that ATIF negotiated for a reduction in liability, as it accepted any damages proposed by Section 10 after securing a covenant that the judgment would not be enforced against it. Consequently, the undisputed facts demonstrate that ATIF did not act in good faith to minimize its liability, which is essential for enforcing the Coblentz agreement. As a result, the court grants summary judgment in favor of the Plaintiffs, Travelers Indemnity Company of Connecticut and St. Paul Fire and Marine Insurance Company, while denying Section 10's motion as moot. The court orders judgment for the Plaintiffs on their declaratory relief claim and dismisses the counterclaims from Section 10 and its affiliates with prejudice. The court instructs the Clerk to terminate pending motions or deadlines and to close the case. Additionally, it is noted that hyperlinks contained in documents filed may incur PACER fees and that the Court does not endorse the content of linked third-party websites. The Coblentz matter applies solely to the Travelers policy, as the St. Paul policy does not include similar language, and the Florida Claims Administration Statute is not relevant to excess insurers like St. Paul.
The reservation of rights letter did not include a cooperation defense but did maintain the right to assert any future defenses. Prior to this letter, the Plaintiffs had already reserved their rights in several emails. Additionally, there is an indication that the Plaintiffs and ATIF had a "common legal interest" in reducing ATIF’s liability, which permitted ATIF to share its settlement discussions with the Plaintiffs. The Court refrains from addressing this matter currently. It criticizes Section 10 for misrepresenting the case of Monticello Ins. Co. v. City of Miami Beach, asserting that Section 10 incorrectly claims the Monticello court determined the bad faith of settlement agreements at the summary judgment stage, while this issue was actually resolved at the motion-to-dismiss stage. The Court emphasizes that different standards apply at these two stages and cautions against misrepresentations, stating that district judges should not have to sift through extensive records to find relevant facts.
