Lawyer Appointed by Insurer had a Duty of Zealous Representation

Comegys, an independent insurance agency, had an independent contractor relationship with Safeco, a liability insurer-in short, Comegys marketed Safeco insurance policies to the public. Comegys was allegedly negligent in procuring automobile insurance for one of its clients, Robert Smith. Comegys had provided Smith with an automobile insurance policy from Safeco, which Smith eventually needed to rely on when he caused a car accident that ended in a motorcyclist’s death. Comegys offered to settle (and did settle through the errors and omissions policy it had with Endurance) the potential negligence claim Smith had against it.

In Endurance American Specialty Insurance Company et al v. Liberty Mutual et al, No. 19-14664, United States Court of Appeals, Eleventh Circuit (May 16, 2022) the Eleventh Circuit resolved the dispute.

FACTS

Relying on the indemnification provision between Safeco and Comegys, Endurance sued Safeco. Endurance wants to be indemnified by Safeco because the attorney Safeco provided to Smith after the car accident pointed out the potential negligence claim Smith had against Comegys.

At trial, the jury found that, because Safeco had refused to indemnify Comegys, Safeco had both breached its contract with Comegys and violated the implied covenant of good faith and fair dealing. The jury awarded Endurance, the errors and omissions insurer for Comegys, about $1.6 million in damages plus a $25,000 deductible and $30,000 in attorneys’ fees paid by Comegys during litigation. Safeco appealed.

Comegys and Safeco operated under a contract, the Limited Agreement, that allowed Comegys to act as an independent contractor for Safeco “for the limited purpose of placing Safeco insurance products.”

The Limited Agreement contained a set of indemnification clauses between Comegys and Safeco. The indemnification agreements provided:

Safeco agreed to take responsibility when it messed up and its mess-up affected Comegys (and Comegys agreed to do likewise), and
Whether Safeco (or Comegys) messed up was defined by the terms of the Limited Agreement.

Smith’s Safeco automobile insurance policy became important when his car caused an accident with a motorcyclist in June 2015. About two weeks after the incident, the motorcyclist died in the hospital of his injuries.

Twelve days after the motorcyclist’s death, Safeco tendered Smith’s $1.25 million policy limit to the motorcyclist’s estate by mail. The estate rejected the tender because the estate believed its claim was more than the policy limit. In compliance with the insurance policy, Safeco then provided Smith with a defense attorney, whose job it was to represent Smith in any case the estate brought against him.

Smith’s attorney and the estate’s attorney then began discussing how to settle. In reviewing the history of the case, Smith’s attorney realized that Comegys might have been negligent in procuring automobile insurance for Smith. After the estate officially filed a wrongful death action against Smith in state court in December 2015, Smith’s attorney reached out to Comegys, asking Comegys to indemnify and defend Smith on the basis that Comegys had negligently procured insurance for Smith prior to the accident.

After a non-binding arbitration found Smith responsible for $7 million in damages, Smith and the estate entered into a joint stipulation and agreement. The terms of the joint stipulation were that the parties would agree to a mutual release of all claims, in exchange for Safeco’s $1.25 million policy limit on Smith and Smith’s assignment to the estate of his negligent procurement claim against Comegys.

The estate then sent Comegys a demand for $2 million based on Smith’s negligent procurement claim. Comegys’s errors and omissions insurance with Endurance had a policy limit of $2 million. Comegys and the estate settled for about $1.5 million in exchange for Comegys’ release from all liability. The settlement explained that Comegys was not at all admitting fault or wrongdoing in procuring insurance for Smith. As Comegys’ errors and omissions insurer, Endurance paid out this sum to the estate.

Endurance, on Comegys’ behalf, filed suit against Safeco for, among a host of other things, breach of the indemnification agreement between Comegys and Safeco in the Limited Agreement and breach of the implied covenant of good faith and fair dealing.

The case went to trial. In what the Eleventh Circuit concluded must have been the jury attributing the actions of Smith’s attorney to Safeco the jury then agreed with Endurance that Safeco had breached the indemnification provision and the implied covenant of good faith and fair dealing and entered a multi-million dollar judgment in favor of Comegys.

ANALYSIS

Under Florida law, indemnity contracts are subject to the general rules of contractual construction and must be construed on the express intentions of the parties. Looking at this breach-of-contract case, there is one problem according to the Eleventh Circuit, there was no breach. So, there was no legally sufficient evidentiary basis for Endurance to win this case.

Endurance apparently distracted the jury with facts that are totally irrelevant to this appeal. The distraction method may have worked with the jury in this case, but it did not work with the Eleventh Circuit.

What Endurance leaves off is that for Safeco’s actions to fall under the indemnification provision, the actions must fall into one of three buckets:

Safeco has breached the Limited Agreement;
Safeco has negligently or intentionally committed an act, error, or omission in the placement of business pursuant to the Limited Agreement; or
Safeco has negligently committed an act, error, or omission in the carrying out the terms of the Limited Agreement.

FIRST: Comegys was within the scope of its authority when it procured a Safeco insurance policy for Smith. Safeco then covered Smith. In due course, when Smith had an accident and needed his insurance coverage to kick in, Safeco tendered the policy limit within twelve days of the motorcyclist’s death. Safeco provided Smith with an attorney to negotiate the claim. And Safeco ultimately paid the policy limit pursuant to the settlement between Smith and the estate. In other words, Safeco covered Smith, just like it told Comegys it would in the Limited Agreement.

SECOND & THIRD: Endurance’s case is based on two facts: Smith’s attorney (provided by Safeco) 1) brought up the possible negligent procurement claim to the estate during negotiations and 2) recommended an insurance lawyer to the estate, if the estate wanted to assume the negligent procurement claim against Comegys in Smith’s place.

In a very generous reading of Endurance’s arguments at trial, it is basically saying that Safeco acted through the attorney it provided to Smith, ultimately prompting Comegys to voluntarily settle with the estate without Comegys admitting any fault. Endurance argued, because Comegys settled with the estate as a volunteer, Safeco now must indemnify Comegys even though Comegys never admitted any liability.

Endurance’s position was that Endurance equates the actions of Smith’s attorney with the actions of Safeco. However, the two are not the same. Safeco was bound by the terms of the Limited Agreement. Smith’s attorney, on the other hand, was not bound to protect Comegys in any way. Smith’s attorney had a duty of zealous representation, which is exactly what he provided to Smith in settling with the estate. Smith’s attorney was acting on behalf of Smith, not on behalf of Safeco.

The next problem with Endurance’s argument is that by looking at the plain (and clear) language of the Limited Agreement between Comegys and Safeco, it cannot be read as covering in any way, shape, or form how Safeco ultimately insures its policyholders.

Finally, Endurance’s breach-of-contract claim hinges on the fact that the indemnification provision protects Comegys from all liability or loss arising out of Safeco’s breach. The problem for Comegys is that in its settlement agreement with the estate it specifically disclaimed all liability, and it has not proven that it lost anything because of Safeco’s actions.

Because the indemnification provision between Safeco and Comegys hinges on Comegys having some sort of liability or demonstrating that Safeco’s actions caused loss, Safeco is not liable where Comegys is a volunteer in settlement. A court cannot create coverage out of whole cloth where it otherwise would not exist.

The Eleventh Circuit concluded that it refused to penalize Safeco for Comegys’ volunteer payment to the estate. Even if Comegys had been negligent and that fact had been proven in court by the estate, the Eleventh Circuit would still refuse to hold Safeco liable for Comegys’ own alleged negligence because Florida requires those kinds of arrangements to be clearly stated by contract. Safeco, therefore, was entitled to judgment as a matter of law. The case is remanded for entry of judgment in favor of Safeco.

Comegys convinced a jury that a lawyer appointed by an insurer to defend an insured is the insurer when, in fact, the lawyer is retained only to defend the insured, Smith, to the best of his or her ability. The lawyer’s action, working to best defend Smith cannot be claimed as wrongdoing against another. Comegys convinced the jury but could not convince the Eleventh Circuit because it, unlike the lawyer for Comegys and the jury, read the contract.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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