Safeco v. Heikka: A New Application of the Contreras Standard?
Florida’s Fourth District Court of Appeal recently upheld a bad faith ruling against an insurer for unreasonably refusing to settle a claim against its insured within its policy limit. In Safeco Insurance Co. v. Rebecca Heikka, the insurer appealed a directed verdict finding bad faith for the insurer’s handling of a 2007 auto accident claim.
Within weeks of the accident, the insurer agreed to tender the $25,000 policy limit during a conversation with the claimant’s counsel. The claimant’s counsel indicated that any release would need to exclude punitive damages due to the insured driver’s drunk driving. Following that conversation, the insurer sent the $25,000 check with a draft general release of all claims. The claimant’s counsel revised the release to include the carve out language for punitive damages, returned the executed revised release, and cashed the check. However, the insurer did not receive the revised release and believed the claimant agreed to resolve all claims against the insured driver for the $25,000 policy limit.
The claimant filed suit against the insured seeking compensatory damages as a predicate for pursuing punitive damages. The insurer retained defense counsel for the insured, who moved to enforce the settlement based on the mistaken belief that the claimant had agreed to the general release of all claims. Realizing the confusion, the claimant’s counsel sent a letter to the insurer requesting agreement to the terms of the revised release within 60 days or the claimant would pursue a bad faith claim. This letter also acknowledged that the claimant would dismiss the claim for compensatory damages if the court found sufficient evidence for the punitive damages claim. The insurer rejected the revised release and continued with efforts to enforce the settlement for a release of all claims. The court found that no meeting of the minds had occurred, and no settlement had been reached. The claimant’s case against the insured continued, resulting in a jury verdict exceeding $1 million in compensatory damages and no award for punitive damages.
Given the excess verdict, the claimant initiated a bad faith suit, alleging the insurer failed to negotiate a settlement in good faith when it had the opportunity to do so. During the bad faith trial, the trial court entered a directed verdict against the insurer, finding that “because both the insured's liability and the extent of [the claimant]'s damages were clear, [the insurer] had a duty to settle the general negligence claim for the policy limits, rather than refusing to settle at all based on the desire to release punitive damages as well, where the burden of proof was higher.” The insurer appealed.
The Fourth District Court of Appeal noted that the insurer did not fulfill its good faith obligations by merely initiating timely settlement discussions. Rather, the Court stated that the pertinent issue was whether the insurer breached its good faith obligations by insisting on a full release of all claims when the claimant offered to exclude only punitive damages. Ultimately, the Court upheld the finding that the insurer acted in bad faith.
Notably, the Court used Contreras v. U.S. Security Insurance Co. to support the insurer’s obligation to resolve some claims against the insured to the exclusion of others when it became clear the claimant refused to settle a portion of the claim. The Contreras standard generally applies to claims against multiple insureds under one policy and an insurer’s obligation to resolve claims against one insured to the exclusion of other insureds under certain circumstances. Here, the Court relied on Contreras for the proposition that the insurer must resolve clearly covered claims (i.e., the compensatory claims) even if the claimant refuses to resolve uncovered claims (i.e., the punitive damages claims) against the same insured.
The Court also stressed the insurer’s obligation to adequately advise its insured about settlement opportunities and the potential for an excess judgment. While the insurer appropriately advised the insured of the risk of an excess judgment and that punitive damages were not covered under the policy, the Court found no evidence that the insurer had explained the settlement offers made by the claimant and the interplay of the punitive damages claim. The Court emphasized that the insurer should have presented the insured with the potential options: (1) to pay out the policy limits, which would protect the insured from an excess compensatory damages verdict but would expose the insured to a punitive damages verdict without the insurer providing a defense, or (2) to refuse to settle, which would expose the insured to both an excess compensatory damages award and a potential punitive damages award, but with the insurer providing a defense to the insured. The Court also noted that the insurer should have explained the insured’s potential punitive damages exposure, in addition to explaining such damages are not covered. This decision reiterates an insurer’s need to adequately communicate with its insureds.
Insurers handling claims in Florida should be aware of this new decision. Phelps will continue to monitor this matter for any additional appeals or rulings citing this decision.
Please contact Mallory Thomas or any member of the Phelps insurance team if you have any questions or need advice or guidance.
