Colony Ins. Co. v. G & E TIRES & SERVICE, INCORPORATED

• Decision Date: 29 December 2000
• Docket Number: No. 1D00-0326.,1D00-0326.
• Parties: COLONY INSURANCE COMPANY, Appellant, v. G & E TIRES & SERVICE, INCORPORATED, Appellee.
• Court: Florida District Court of Appeals

777 So.2d 1034

COLONY INSURANCE COMPANY, Appellant, v. G & E TIRES & SERVICE, INCORPORATED, Appellee.

No. 1D00-0326.

District Court of Appeal of Florida, First District.

December 29, 2000.

William R. Mitchell, Esquire, of Hook, Bolton, Mitchell, Kirkland & McGhee, P.A., Pensacola, for Appellant.

Richard M. Denney, Esquire, Fort Walton Beach, for Appellee.

BENTON, J.

Colony Insurance Company (Colony) appeals an order denying reimbursement it seeks for expenses it incurred in defending a lawsuit Felicia Frulla Hollis brought against G & E Tires & Service, Inc. (G & E). In the absence of even a potential basis for the duty to defend that G & E claimed Colony had—and in keeping with the parties' understanding when Colony assumed financial responsibility for G & E's defense—we reverse the order denying reimbursement, and remand for further proceedings.

Colony's Garage Liability and Garage Keepers Legal Liability Policy insured G & E against liability G & E might incur for property damage or for bodily injury caused by accidents resulting from garage operations. But the policy excluded from coverage liability for intentional acts, for acts by fellow employees resulting in bodily injury, and for bodily injury to any G & E employee arising out of and in the course of employment. The policy also specifically excluded coverage for liability for any injury to "[a] person arising out of any ... [e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination directed at that person...."

While Ms. Hollis was at work for G & E, her complaint alleged, G & E's owner, manager and other male employees subjected her to battery, sexual harassment, invasion of privacy, and intentional infliction of emotional distress, causing her "mental anguish, physical discomfort, pain and suffering, humiliation [or shame] and embarrassment." Three times G & E requested Colony to defend against these claims and three times Colony refused,¹ evidently denying that the insurance it provided G & E covered liability for intentional torts or for injuries to employees in the workplace (even assuming "bodily injury" had been fairly pleaded).

Only after reserving (among other rights) its right to be reimbursed for "defense costs incurred or to be incurred in the future," did Colony accede to G & E's fourth request to undertake the defense of Ms. Hollis's lawsuit, on April 23, 1998:

Colony will agree to defend the insured under a reservation of rights. At the same time, we will file a declaratory judgment action against the insured to resolve the coverage and duty to defend issue.... As you know, recent case law in Florida requires that we reach an agreement as to mutually agreeable counsel to handle the defense when there are coverage issues involved. Please contact me ... so that we can discuss and agree upon counsel for the insured.

Colony specified the rights it reserved in a second letter dated May 19, 1998, as follows:

This letter is to serve as a reservation of Colony's rights to deny coverage and/or defense under the Policy and/or applicable law and further, with respect to defense costs incurred or to be incurred in the future, to be reimbursed and/or obtain an allocation of attorney's fees and expenses if it is determined that there is no coverage.

In accepting the defense provided by Colony, G & E necessarily agreed to the terms on which Colony extended the offer. Cf. Southampton Dev. Corp. v. Palmer Realty Group, Inc., 769 So.2d 1113 (Fla. 2d DCA 2000); Tassy v. Hall, 429 So.2d 30, 35 (Fla. 5th DCA 1983).

A liability insurer has a duty to defend third-party claims against its insured that is distinct from, and broader than, its duty to indemnify its insured. See Irvine v. Prudential Property and Cas. Ins. Co., 630 So.2d 579, 580 (Fla. 3d DCA 1993) (citing Florida Ins. Guar. Ass'n v. Giordano, 485 So.2d 453, 456 (Fla. 3d DCA 1986)); Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So.2d 810, 813-14 (Fla. 1st DCA 1985). In Grissom v. Commercial Union Ins. Co., 610 So.2d 1299, 1306-07 (Fla. 1st DCA 1992), we said:

An insurer's duty to defend is to be determined from the allegations in the complaint against the insured. National Union Fire Ins. Co. v. Lenox Liquors, Inc., 358 So.2d 533 (Fla.1977); State Farm Fire and Cas. Co. v. Edgecumbe, 471 So.2d 209 (Fla. 1st DCA 1985); Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So.2d 810 (Fla. 1st DCA 1985). The insurer must defend if the allegations in the complaint could bring the insured within the policy provisions of coverage. State Farm Mutual Auto. Ins. Co. v. Universal Atlas Cement Co., 406 So.2d 1184 (Fla. 1st DCA 1981), rev. denied, 413 So.2d 877 (Fla.1982). If the complaint alleges facts partially within and partially outside the coverage of the policy, the insurer is obligated to defend the entire suit. Tropical Park, Inc., v. United States Fidelity and Guaranty Co., 357 So.2d 253, 256 (Fla. 3rd DCA 1978). The duty to defend is separate and apart from the duty to indemnify and the insurer is required to defend the suit even if the true facts later show there is no coverage. Klaesen Bros., Inc. v. Harbor Ins. Co., 410 So.2d 611 (Fla. 4th DCA 1982). All doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured. Baron Oil Co., 470 So.2d at 814. So long as the complaint alleges facts that create potential coverage under the policy, the insurer must defend the suit. Tropical Park, 357 So.2d at 256.

Here, as the learned trial judge ultimately found, Colony's policy unequivocally excluded coverage for liability arising from the injuries Ms. Hollis's complaint against G & E alleged. Her allegations plainly do not create potential coverage under the policy, in whole or in part. Nor does Section 627.426(2), Florida Statutes (1997), somehow give rise to coverage for injuries or losses the policy had unambiguously excluded.²

Where coverage is disputed, an insurer must decide whether to (1) assume its insured's defense without reservation, despite the dispute; or (2) obtain a non-waiver agreement after full disclosure of the coverage defenses it seeks to preserve; or (3) send a reservation of rights letter and appoint mutually agreeable defense counsel. See § 627.426(2)(b)(3), Fla. Stat. (1997); Steadfast Ins. Co. v. Sheridan Children's Healthcare Serv., 34 F.Supp.2d 1364, 1366 (S.D.Fla.1998)(construing Florida law); First Am. Title Ins. Co. v. Nat'l Union Fire Ins. Co., 695 So.2d 475, 477 (Fla. 3d DCA 1997) ("An insurer does not breach its duty to defend an insured when it provides a defense under a reservation of rights."); Irvine, 630 So.2d at 580 ("We believe that the better process is to require the insurer to defend the action under a reservation of rights."). A duty to defend does not create coverage where coverage does not exist.

As planned, after assuming G & E's defense in the lawsuit Ms. Hollis had brought,³ Colony filed a separate declaratory judgment action against G & E on June 8, 1998, seeking to establish that Colony had no obligation under the policy either to defend or to indemnify. The trial court entered final declaratory judgment in Colony's favor on May 17, 1999, finding no duty to defend G & E on any of the claims asserted by Ms. Hollis because the exclusions from coverage in Colony's policy applied.⁴ At no time did Colony seek to recover attorney's fees and costs incurred in the declaratory judgment action.

After entry of final judgment in the declaratory judgment action, however, Colony did file a motion seeking reimbursement for the attorney's fees and other costs Colony had expended defending G & E against Ms. Hollis's suit. The trial court denied the motion, reporting an absence of controlling authority on the question, and Colony appealed.

We have also been unable to find reported decisions by Florida courts on when or whether an insurer should be reimbursed for costs (including attorney's fees) expended in defending claims which do not, as alleged, give rise even to a potential duty to defend. But other courts have addressed the question. The California Supreme Court reasoned in Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766, 775-77 (1997) (citations omitted):

As to the claims that are at least potentially covered, the insurer may not seek reimbursement for defense costs. Apparently, none of the decisional law considering such claims in and of themselves suggests otherwise.

The reason is this. Under the policy, the insurer has a duty to defend the insured as to the claims that are at least potentially covered. With regard to defense costs for these claims, the insurer has been paid premiums by the insured. It bargained to bear these costs. To attempt to shift them would upset the arrangement....

As to the claims that are not even potentially covered, however, the insurer may indeed seek reimbursement for defense costs. Apparently, all the decisional law considering such claims in and of themselves so assumes. So has it been held: "California law clearly allows insurers to be reimbursed for attorney's fees" and other expenses "paid in defending insureds against claims for which there was no obligation to defend."

The reason is this. Under the policy, the insurer does not have a duty to defend the insured as to the claims that are not even potentially covered. With regard to defense costs for these claims, the insurer has not been paid premiums by the insured. It did not bargain to bear these costs. To attempt to shift them would not upset the arrangement. The insurer therefore has a right of reimbursement that is implied in law as quasi-contractual, whether or not it has one that is implied in fact in the policy as contractual.

Similarly, in Knapp v. Commonwealth Land Title Insurance Company, 932 F.Supp. 1169, 1172 (D.Minn.1996),...