When entering into a consent judgment that purports to assign rights under an insurance policy, both the assignee and insurer should be cautious of various issues that could preclude coverage. Some of these issues include whether the insured was an additional insured under the policy, whether the judgment is for damage/loss covered under the policy, and, if not, whether it allocates between covered and non-covered loss, and whether the judgment was reasonable in light of the facts that existed at the time of settlement. These issues were discussed in Bradfield v. Mid-Continent Casualty Company and resolved in favor of the insurer.
In Bradfield, the Bradfields brought suit against the insurer as a result of a Coblentz Agreement entered into in an underlying state court case. The underlying state court case (the “Underlying Lawsuit”) was brought by the Bradfields against two construction companies, Horgo Signature Homes, Inc. (“Horgo Signature”) and Winfree Homes, Inc. (“Winfree”). The Underlying Lawsuit alleged that the Bradfields’ home was constructed by Horgo Signature and Winfree with latent defects that materially affected the structural integrity of the home. The defendants requested defense and indemnity from their insurer, Mid-Continent Casualty Company (“Mid-Continent”), but the insurer denied coverage for the Underlying Lawsuit. As a result, an agreement, known as a Coblentz Agreement, was reached between the Bradfields and the defendants, whereby the defendants entered into a consent judgment with Bradfields and assigned their rights under the Mid-Continent policy to the Bradfields. Pursuant to the terms of the agreement, the Bradfields brought a federal action against Mid-Continent for breach of contract and declaratory judgment.
The parties filed cross-motions for summary judgment. The court ruled that Mid-Continent was not required to defend Horgo Signature or Winfree in the Underlying Lawsuit, and that it was not required to pay the consent judgment. The court determined that no defense or indemnity was owed to Horgo Signature because it was neither a named nor additional insured under the Mid-Continent policy at issue. The court determined that no defense was owed to Winfree based on the allegations of the complaint in the Underlying Lawsuit because the Bradfields failed to allege “property damage,” as that term is defined by the policy. To determine whether “property damage” was alleged, the court analyzed whether the allegations asserted damages for the costs of repairing or replacing work performed by Winfree, rather than seeking costs for the repair or replacement of other property that suffered damage due to Winfree’s faulty workmanship. The court determined that the former was asserted and therefore no defense was owed.
The court discussed the key elements required to enforce a Coblentz Agreement, which are: (1) a finding of a duty to defend; (2) a finding of coverage; and (3) a finding that the agreement is reasonable and/or made in good faith. Although the court found that the first element, the duty to defend, was not supported by the allegations of the complaint in the Underlying Lawsuit, and therefore summary judgment could be entered in favor of the insurer, it continued to discuss the remaining elements.
For purposes of determining coverage, the court assessed the insurer’s duty to indemnify, which is based on the facts that exist at the time of settlement. When the parties’ settlement agreement was drafted, the damages that existed at the time of settlement were excluded from coverage under the policy. The court stated that even if some damages were covered, the agreement did not allocate the settlement amount to identify the amount that could be attributed to covered versus uncovered claims. As stated by the court, “Florida law clearly requires the party seeking recovery . . . to allocate any settlement amount between covered and noncovered claims.”
The last element considered was whether the Coblentz Agreement was unreasonable and/or tainted by bad faith, fraud, or collusion. The test to determine the reasonableness of a settlement is “‘what a reasonably prudent person in the position of the defendant [the insurer] would have settled for on the merits of the plaintiff’s claim.'” Courts look to both objective and subjective factors, “‘including the degree of certainty of the tortfeasor’s subjection to liability, the risks of going to trial and the chances that the jury verdict might exceed the settlement offer.’” The court explained:
[P]roof of reasonableness is ordinarily established through use of expert witnesses to testify about such matters as the extent of the defendant’s liability, the reasonableness of the damages amount in comparison with compensatory awards in other cases, and the expenses which have been required for the settling defendants to settle the suit. Bad faith also may be established by evidence of the absence of any “effort to minimize liability.”
In Bradfield, no expert provided testimony regarding the reasonableness of the settlement, lack of bad faith, whether the claims asserted were sufficiently strong to justify the damages amounts, or the amount it would cost to continue to litigate versus settle the lawsuit. The court also mentioned that statements made in the agreement suggest there was collusion between the plaintiff and the underlying defendants for purposes of trying to seek coverage under their policies.
In sum, when entering into a Coblentz Agreement, or when your insured does so, it is important to seek counsel to determine whether a duty to defend and coverage exist. Once those have been established, the amount of the settlement and terms of the agreement are equally important. If the settlement amount includes covered versus non-covered amounts, Bradfield instructs that the settlement must allocate between those two amounts.