One question that frequently arises in insurance coverage litigation is whether a declaratory relief action should be filed in cases where it appears clear that there is no coverage for a particular claim. And, conversely, what risks are involved in denying what appears to be a clearly uncovered claim without first obtaining a judicial ruling on [a lack of] coverage?
In Florida, the risk in not seeking early declaratory relief on the issue of insurance coverage comes from the risk of having to litigate the same issue at a later date -- with greater exposure if the carrier is later proven wrong.
In other words, where a carrier disclaims coverage without first obtaining a judicial ruling on its coverage position, an insured may be permitted to enter into a Coblentz agreement (a type of stipulated consent judgment) in which the insured admits liability and agrees to an amount to be entered in a judgment against it, with the understanding and agreement that the judgment will never be collected from the insured. As a part of this agreement, which is widely permitted in Florida, the insured then assigns its rights under the insurance policy to the claimant, who can then bring a coverage suit against the carrier directly in the amount of the consent judgment (plus interest, attorney fees under § 627.428, etc). Often, this happens many years later.
In order to recover under a Coblentz agreement, the claimant must prove three things:
(1) A wrongful refusal to defend by the insurer (i.e., a breach of duty-to defend);
(2) actual coverage for the claim itself (i.e., coverage for indemnity meaning that the claim is not excluded or uncovered for other reasons); and
(3) that the Coblentz agreement is reasonable and made in good faith.
Where a Florida court finds that the carrier was wrong in denying coverage in the context of a Coblentz agreement, there is a strong chance that the carrier will face the prospect of paying the entire consent judgment and associated fees and costs, although the carrier may still raise other coverage defenses that exist if the claim itself falls under some particular exclusion or is otherwise uncovered.
In addition, a carrier may also seek to challenge the third prong if the amount was excessive based on the actual exposure, or if it appears the agreement was collusive under Florida law.
In sum, the advantage of litigating coverage issues via an early proactive declaratory relief action is that the carrier is able to obtain a definitive position on coverage preventing “after-the-fact” litigation of the same issue at a point at which there is already a judgment amount entered and the carrier’s exposure could be much greater.
McIntosh Sawran & Cartaya, P.A. has extensive experience in litigating both coverage actions and defending against Coblentz agreements. For further information, please contact the author, Dale. S. Dobuler.