The Eleventh Circuit Provides Guidance on "Bad Faith" Negotiation of Coblentz Agreements in Florida

Recently in Sidman v. Travelers Cas. & Sur., 15-15197, 2016 WL 6803034 (11th Cir. Nov. 17, 2016), the Eleventh Circuit Court of Appeals provided guidance on a very important issue to insurers in Florida – the circumstances under which a consent judgment, or so-called Coblentz agreement, will be deemed unenforceable against the insurer as being tainted by fraud or collusion. 

In Sidman, Travelers’ insured was sued, via counterclaim, and was facing exposure to statutory attorney’s fees.  Although defending other aspects of the litigation, Travelers denied coverage as to the fee claim.  The insured lost on summary judgment and sought to resolve the fee issue with plaintiff’s counsel, informing Travelers of the negotiations.  The parties reached a settlement in which the insured agreed to a $295,000 consent judgment against it for the fees and assigned any rights it had against Travelers to plaintiff’s counsel in exchange for agreement not to execute the judgment against the insured.  Unbeknownst to the state court, the insured and plaintiff’s counsel also executed a promissory note in which the insured agreed to pay $50,000 of the fees less any recovery achieved from Travelers; if plaintiff’s counsel recovered more than $50,000, the insured would pay nothing.

The underlying settlement resulted in a breach of contract action against Travelers for its failure to defend and indemnify its insured with respect to the fee claim.  Although an earlier decision by the Eleventh Circuit overturned the coverage aspect of the case, the significance of the Sidman decision can be found in the district court’s determination on remand that the settlement agreement did not bind Travelers as the insured had reached a collusive agreement.

Central in the district court’s decision, and upheld by the Eleventh Circuit, was the fact that there was credible testimony that in another very similar lawsuit, the insured had offered to agree to any fee amount sought against it, so long as the judgment would never be executed against the insured, and that the insured had made the same agreement here with plaintiff’s counsel.   The district court concluded that the settlement agreement was neither reasonable in amount nor negotiated in good faith as the insured had essentially offered to “lay down” and accept whatever amount plaintiff’s counsel sought in fees, so long as the insured would never be responsible for paying that amount.

In upholding the district court’s decision, the Eleventh Circuit recognized that although an insurer that wrongfully refuses to defend its insured may be bound by a resulting Coblentz agreement, that agreement will not be enforceable if unreasonable in amount or produced by bad faith.  The Court acknowledged that determining when a Coblentz agreement was made in “bad faith” was difficult and that the Florida Supreme Court has not fully addressed how such a determination should be made but found the framework outlined in Steil v. Florida Physician’s Insurance Reciprocal, 448 So. 2d 589 (Fla. 4th DCA 1984) persuasive and agreed that the burden of proving a valid Coblentz agreement properly rests with the party seeking to enforce it, who must prove that the settlement was both reasonable in amount and not tainted by bad faith. 

The Eleventh Circuit also held that:

1. the fact that an insurer is aware of such a settlement and fails to object does not mean that the insurer has waived all later objections to such a settlement, especially where there may have been underlying collusion of which the insurer was not aware;
2. that because there was substantial evidence in the case that the insured had agreed to settle the fee claim for any amount, so long as that amount would never be paid by the insured, the settlement agreement was not negotiated in good faith and was unenforceable, regardless of the actual amount noting that “a reasonable party would not be indifferent to the amount of a judgment entered against it were its own money on the line,” and;
3. that Chomat v. Northern Insurance Company of New York, 919 So. 2d. 535 (Fla. 3d DCA 2006), holding that a settlement agreement is collusive where parties have agreed to split or share in the proceeds, is only one example of the type of possible collusion that may occur in negotiating a Coblentz agreement, not the only form of possible collusion that may arise.

Ultimately, the Eleventh Circuit determined that any “agreement in which an insured agrees to accept essentially any judgment amount that the injured party seeks in exchange for a promise not to execute against it is collusive for Coblentz purposes.”  Sidman provides some useful guidance into how Florida courts will be required to view the underlying settlement interactions between the parties entering a Coblentz agreement and appears to better define the nature of good faith and bad faith in such negotiations.