Shuster v. South Broward Hosp. Dist. Physicians' Professional Liability Ins. Trust, 89-1422

• Decision Date: 05 December 1990
• Docket Number: No. 89-1422,89-1422
• Citation: 570 So.2d 1362
• Parties: 15 Fla. L. Weekly D2918 Marvin M. SHUSTER, M.D., and Marvin M. Shuster, M.D., P.A., Appellants, v. SOUTH BROWARD HOSPITAL DISTRICT PHYSICIANS' PROFESSIONAL LIABILITY INSURANCE TRUST, a Florida self-insurance trust, Appellee.
• Court: Florida District Court of Appeals

Page 1362

570 So.2d 1362

15 Fla. L. Weekly D2918

Marvin M. SHUSTER, M.D., and Marvin M. Shuster, M.D., P.A., Appellants, v. SOUTH BROWARD HOSPITAL DISTRICT PHYSICIANS' PROFESSIONAL LIABILITY INSURANCE TRUST, a Florida self-insurance trust, Appellee.

No. 89-1422.

District Court of Appeal of Florida Fourth District.

Dec. 5, 1990.

Charles C. Powers of Powers and Koons, West Palm Beach, for appellants.

Jay Cohen and Scott J. Frank of Atkinson, Jenne, Diner, Stone & Cohen, P.A., Hollywood, for appellee.

WARNER, Judge.

This case presents an issue of first impression in Florida: whether an insured can maintain a common law action for bad faith against his insurer where the insurer has settled a cause of action against the insured within the policy limits of the insurance contract, exposing the insured to no excess liability. We hold that such a complaint fails to state a cause of action and affirm.

Appellants, a physician and his professional corporation, were insured by appellee, an insurance carrier, against liability for medical malpractice. Appellants' complaint alleged that appellee had breached its obligations to appellants by settling three malpractice suits without fully investigating the claims. ¹ Specifically, appellants alleged that appellee: a) failed to investigate the facts of the case; b) failed to determine the basis of the plaintiffs' claims; c) failed to obtain independent expert evaluation of the claims to determine the merits; d) ignored appellants' request to deny liability and defend the suits; and e) settled the suits for sums substantially in excess of reasonable settlement values. Appellants alleged that appellee was acting in bad faith in the above actions. The complaint alleged that as a direct result of the insurer's bad faith settlements, the insured was no longer able to obtain malpractice insurance leading to a loss of income because of his inability to perform certain procedures for which insurance was required. Appellant Shuster also claimed damages to his reputation and for emotional distress. Defendant moved to dismiss the complaint for failure to state a cause of action. The trial court granted the motion and entered final judgment in favor of appellee. From this final order, this appeal has been lodged.

Appellants argue on appeal for an extension of Boston Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783 (Fla.1980) which held that an insurer has an obligation of good faith to its insured in the handling of the defense of claims against its insured and may be liable for an excess judgment against its insured where it fails to act in good faith. Specifically, it is appellants' contention that when the insurance company breaches the duty of good faith it is liable for any reasonably ascertainable damages even where the insurer settled the case within the policy limits. Appellee contends that both the contract provisions and the law are against such an expansion of liability of the insurer.

The policy in question provides:

The company shall have the right and duty to defend any suit against the named insured seeking such damages, even if any of the allegations of the suit are groundless, false or fraudulent. The company may make such investigation and such settlement of any claim or suit as it deems expedient. The company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements (emphasis supplied).

Such clauses are common in insurance contracts and have been construed by the courts to provide a broad duty to defend, see Baron Oil Co. v. Nationwide Mut. Fire. Ins., 470 So.2d 810 (Fla. 1st DCA 1985), and a discretionary duty to settle. In Boston Old Colony, the supreme court set the standard that an insurer must exercise toward its insured in settling a case.

An insurer, in handling the defense of claims against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. Auto Mutual Indemnity Co. v. Shaw, 134 Fla. 815, 184 So. 852 (1938). For when the insured has surrendered to the insurer all control over the handling of the claim, including all decisions with regard to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured. Liberty Mutual Ins. Co. v. Davis, 412 F.2d 475 (5th Cir.1969). This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. Ging v. American Liberty Ins. Co., 423 F.2d 115 (5th Cir.1970). The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where the reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Government Employees Ins. Co. v. Grounds, 311 So.2d 164 (Fla. 1st DCA 1975), cert. discharged, 332 So.2d 13 (Fla.1976); Government Employees Ins. Co. v. Campbell, 288 So.2d 513 (Fla. 1st DCA 1973), quashed, 306 So.2d 525 (Fla.1974); Baxter v. Royal Indemnity Co., 285 So.2d 652 (Fla. 1st DCA 1973), cert. discharged, 317 So.2d 725 (Fla.1975).

However, in Boston Old Colony, as in all the other Florida cases we could locate, the issue of the insurer's bad faith was presented in cases where the insurer failed or refused to settle within the policy limits resulting in an excess judgment against the insured. In Fidelity and Cas. Co. of New York v. Cope, 462 So.2d 459 (Fla.1985) the Supreme Court quoted with approval from Kelly v. Williams, 411 So.2d 902 (Fla. 5th DCA), rev. denied, 419 So.2d 1198 (Fla.1982).

The essence of a "bad faith" insurance suit (whether it is brought by the insured or by the injured party standing in his place), is that the insurer breached its duty to its insured by failing to properly or promptly defend the claim (which may encompass its failure to make a good faith offer of settlement within the policy limits)--all of which results in the insured being exposed to an excess judgment.

Fidelity at 460. The opinion went on to reiterate this point, stating "The basis for an action remained the damages of an insured from the bad faith action of the insurer which caused its insured to suffer a judgment for damages above his policy limits." Fidelity at 461. Fidelity was also an excess case. We must now consider whether the rule of Fidelity precludes the cause of action alleged by appellant.

Other jurisdictions are split on the recognition of bad faith action against an insurer who has settled within the policy limits but caused other damages to its insured. In A.W. Huss Co. v. Continental Cas. Co., 735 F.2d 246 (7th Cir.1984), the insured sued the insurer for exercising bad faith in settling a third party claim. It alleged that even though the insurer knew the case was one of clear liability it refused to settle until the eve of trial, causing the insured anxiety and concern and attorney's fees to monitor the case. Thus, although the case was settled within the policy limits, the insured sought these incidental damages. After reviewing Wisconsin case law, the federal appellate court held that a third party bad faith refusal to settle required as a necessary predicate the insured's liability for an excess judgment.

The Supreme Court of Ohio considered the question in Marginian v. Allstate Ins. Co., 18 Ohio St.3d 345, 481 N.E.2d 600 (1985) and held that under a policy provision similar to the one in this case:

where a contract of insurance provides that the insurer may, as it deems appropriate, settle any claim or action brought against its insured, a cause of action alleging a breach of the insured's duty of good faith will not lie where the insurer has settled such claim within the monetary limits of the insured's policy.

Marginian 481 N.E.2d at 603. The court's decision is grounded on principles of contract law that where the parties have expressly contracted with respect to the subject, namely the insurer's right to settle the case, the court could not rewrite the contract by allowing the insured a cause of action against the company when it exercised its right.

Relying in part on Marginian, the Illinois appellate court held in Casualty Ins. Co. v. Town & Country Pre-School Nursery, Inc., 147 Ill.App.3d 567, 101 Ill.Dec. 669, 498 N.E.2d 1177 (1 Dist., 1986), that where the terms of the insurance contract are clear and enforceable, the insurer had the right to settle within the policy limits, and its duty of good faith was not a material issue. The issue of an insurer's good faith is only relevant in cases involving claims beyond the policy limits, where the insured's interest with which the insurance company must be concerned is that which is contemplated by the contract of insurance, namely the avoidance of a money judgment against the insured.

A similar case to the instant case is found in Feliberty v. Damon, 72 N.Y.2d 112, 531 N.Y.S.2d 778, 527 N.E.2d 261 (Ct. of App.1988), where a physician sued his carrier for bad faith in settling a malpractice case against him. The doctor alleged that the insurance company failed to properly investigate and represent him throughout the proceedings, resulting in a settlement without his knowledge which damaged his professional reputation. The doctor's policy had a clause which was nearly identical to the clause quoted from the policy in this case. The New York court held that where the contract gave the insurer unconditional right to settle without the insured's consent, there could be no action for bad faith in settling within the policy limits.

However, in Barney v. Aetna Cas. & Sur. Co., 185...