Mid-Continent Cas. Co. v. AMERICAN PRIDE BLDG. CO.

• Decision Date: 29 March 2010
• Docket Number: No. 09-11238.,09-11238.
• Parties: MID-CONTINENT CASUALTY COMPANY, Plaintiff-Counter-Defendant-Appellee, v. AMERICAN PRIDE BUILDING COMPANY, LLC, a Florida limited liability company, American Pride Building Co., LLC, a Florida limited liability company, American Pride Builder, LLC, a Florida limited liability company, Groff Construction, Inc., a Florida corporation, Defendants-Counter-Claimants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

601 F.3d 1143

MID-CONTINENT CASUALTY COMPANY, Plaintiff-Counter-Defendant-Appellee,
v.
AMERICAN PRIDE BUILDING COMPANY, LLC, a Florida limited liability company, American Pride Building Co., LLC, a Florida limited liability company, American Pride Builder, LLC, a Florida limited liability company, Groff Construction, Inc., a Florida corporation, Defendants-Counter-Claimants-Appellants.

No. 09-11238.

United States Court of Appeals, Eleventh Circuit.

March 29, 2010.

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Mark B. Yeslow, Fort Myers, FL, for Defendants.

Maureen G. Pearcy, Edward T. Sylvester, Ronald L. Kammer, Hinshaw & Culbertson, LLP, Miami, FL, for Plaintiff.

Before DUBINA, Chief Judge, FAY, Circuit Judge, and ALBRITTON,^* District Judge.

FAY, Circuit Judge:

This appeal arises out of a dispute between an insurance company and its insured regarding the insurer's duty to indemnify the insured for the settlement of an underlying litigation. Mid-Continent Casualty Company ("Mid-Continent") sued American Pride Building Company, LLC¹ ("American Pride") for declaratory judgment that it is not obligated to defend or indemnify American Pride against a copyright infringement claim by Groff Construction, Inc. ("Groff"). Mid-Continent asserts that it has no duty to defend or indemnify American Pride because the underlying complaint does not allege an injury covered under the policy. Mid-Continent also asserts that it has no duty to indemnify because American Pride violated the terms of the insurance policy in settling the underlying action without Mid-Continent's participation and consent. American Pride maintains that it properly rejected Mid-Continent's conditional defense, thus was free to settle the lawsuit in any way it chose. The district court denied summary judgment to Mid-Continent on its policy coverage claim and granted summary judgment on its lack of cooperation claim. The district court held that "although Mid-Continent had a duty to defend American Pride in the underlying litigation, American Pride's breach of the terms of the policy means that Mid-Continent is not required to indemnify American Pride for the settlement of the underlying litigation." Finding genuine issues of material facts, we reverse and remand.

I. BACKGROUND

A. Factual Background

American Pride was a homebuilder in the Fort Myers, Florida area. Mid-Continent, a commercial underwriter, issued general liability insurance policies to American Pride for the period December 30, 2003 through December 30, 2006. These substantively identical annual policies provided coverage up to $1 million for personal and advertising injury. American Pride is now out of business.

In January 2006, Groff, another homebuilder in Florida, brought a lawsuit against American Pride, and others, in federal district court alleging copyright infringement and unfair competition. Specifically, Groff alleged that American Pride and the other named defendants printed flyers for homes built by American Pride, which infringed Groff's copyright in two home designs. Groff's complaint alleged that American Pride "willfully and knowingly" copied Groff's designs for financial gain with the intent to damage Groff.

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Groff sought damages in the form of injunctive relief, disgorgement of profits, costs and attorney's fees, among others

American Pride informed Mid-Continent about the lawsuit and Mid-Continent initially refused to provide a defense citing possible coverage issues. Mid-Continent's February 2006 letter informed American Pride that "at this time, we will not hire an attorney to defend you in this matter" and that it was "reserving all of its rights regarding coverage in connection with this matter" including the "right to institute... an action to have the rights of the parties hereto determined." Several months later, Mid-Continent informed American Pride that it had "decided to provide a defense to American Pride at this time" under a reservation of rights and assigned the matter to an attorney. Six months later, Mid-Continent sent American Pride a third reservation of rights letter providing additional grounds for possibly denying coverage. Nevertheless, Mid-Continent continued to provide American Pride with a defense and American Pride continued to cooperate fully in that defense.

Notably, none of Mid-Continent's reservation of rights letters advised American Pride that it had the right to reject Mid-Continent's conditional defense or that if it accepted the conditional defense, it could not later reject that defense. Furthermore, none of Mid-Continent's letters informed American Pride that they may have to reimburse Mid-Continent for attorney fees or costs expended.

In February 2007, the parties in the underlying litigation engaged in court-ordered mediation. In his post-mediation report to Mid-Continent, Joseph Lowicky, the attorney hired by Mid-Continent to defend American Pride, noted that American Pride had a "limited chance" of succeeding in its liability defense and recommended a settlement value of $550,000. Lowicky advised American Pride and Mid-Continent that liability was certain and damages could exceed $10 million. Lowicky acknowledged that under the lost profits theory, Groff's damages ranged from $795,000 to $1,380,000 plus attorney fees and costs, and under the statutory damage theory, Groff could recover as much as $150,000 for each of the 51 to 76 infringing homes. As such, Lowicky advised American Pride and Mid-Continent that "under either Plaintiff's lost profits theory or a statutory award, the judgment likely to be entered in this matter ... will likely vastly exceed what it could now be settled for." Despite Lowicky's evaluation that actual damages could exceed the $1 million maximum coverage, Mid-Continent refused to authorize settlement for more than $75,000.

In early April, 2007, after the matter was mediated to an impasse, American Pride retained independent counsel and demanded that Mid-Continent withdraw its reservation of rights within ten days or American Pride would reject Mid-Continent's conditional defense. A week later, Mid-Continent responded that "once American Pride accepted the defense, it cannot reject it under Florida law." Mid-Continent also warned that "if American Pride rejects the defense and settles this case without Mid-Continent's consent, it will be Mid-Continent's position that American Pride has breached its duties under the policy."

On Tuesday, April 17, 2007, Groff sent American Pride a proposed Stipulation for Entry of Consent Judgment and Consent Judgment. Groff's accompanying letter stated that "we have attached the documents for your preliminary review and comments" and stated their desire "to wrap up this case by the end of this week...." Later that day, American Pride's attorney, Mark Yeslow, replied to Groff

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explaining that there was a legal issue as to whether an insured who has accepted a defense under a reservation of rights could then reject the defense and settle

Despite the strained relationship between Mid-Continent and American Pride, the parties continued to negotiate a settlement. On Friday, April 20, 2007, Lowicky informed Mid-Continent that he had "conveyed the increased settlement offer of $100,000 to Groff's counsel" and "that Groff now demands $250,000.00 and that this is a `take it or leave it' offer." In the same communication, Lowicky advised Mid-Continent that "it is my understanding based upon conversations with Groff's counsel and Mark Yeslow ... that if this matter is not settled for the $250,000.00 demand, American Pride ... will effectively `fire' my firm and reject Mid-Continent's continuing coverage under its reservation of rights" and enter into a settlement agreement with Groff in excess of $1 million.

On Wednesday, April 25, 2007, Mid-Continent informed American Pride that it did not intend to increase its offer of $100,000 prior to Groff's close of business deadline. During his deposition, Lowicky testified that "Mid-Continent had coverage issues and that is why they could only put $100,000 on it." Mid-Continent never explained the basis for its actions to American Pride. That same day Mid-Continent filed the instant lawsuit, seeking declaratory judgment that it is not obligated to defend or indemnify American Pride. The lawsuit also contends that American Pride is liable to pay Mid-Continent's attorney fees and costs. The next day, after obtaining a copy of the declaratory action, American Pride notified Mid-Continent that it was "respectfully rejecting any continued defense under a reservation of rights."

On May 3, 2007, American Pride and Groff entered into a Coblentz agreement² for $1.7 million. The signed agreement, which is essentially the same as the April 17 proposals, except for the added settlement figure of $1.7 million, provided that Groff would not seek to recover against American Pride and...