Attempting to reduce the effect of insurance fraud is difficult enough. In Florida, when an insurer denies a claim, whether for fraud or some other reason, it will pay for its mistake and pay the insured's lawyer if it fails to pay a settlement.
The Florida Supreme Court in Pepper's Steel & Alloys, Inc. v. United States, 850 So. 2d 462 (Fla. 2003) ruled that claimants involved in disputes with insurance companies are entitled to attorney fees when they are forced to return to court to enforce a settlement.
Under Florida Statute 627.428, policyholders are entitled to attorney fees when they prevail in their claims against their insurance companies for coverage. The statute provides:
1) Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of any named or omnibus insured or the named beneficiary under a policy or contract executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured's or beneficiary's attorney prosecuting the suit in which the recovery is had.
This is a "loser-pays" system that only works in one direction, from the insurer to the insured. If the insurer succeeds, it is not entitled to recover attorney fees from the insured. It appears, therefore, that this statute has a problem with the equal protection clause of the U.S. constitution.
Section 627.428 "direct[s] the courts to assess attorney fees against only one side of the litigation in certain types of actions." [Danis Indus. Corp. v. Ground Improvements Tech., Inc., 645 So. 2d 420, 421 (Fla. 1994).] "Here, the statute is a one-way street offering the potential for attorneys' fees only to the insured or beneficiary." As the Florida Supreme Court has said, the statute's purpose:
is to discourage insurance companies from contesting valid claims, and to reimburse insureds for their attorney's fees incurred when they must enforce in court their contract with the insurance company.
Bell v. U.S.B. Acquisition Co., 734 So. 2d 403, 411 n. 10 (Fla. 1999).
Section 627.428 must be strictly construed because an award of attorney fees is in derogation of common law. [Roberts v. Carter, 350 So. 2d 78, 78-79 (Fla. 1977).] In Florida, therefore, the Legislature believes that only insurers can act wrongfully with regard to a settlement and made no provision for recovery of fees by an insurer if the insured refuses to go forward with an agreed settlement.
Pepper's Steel v. United States
The case arose out of a dispute between Pepper's Steel and its insurance company, U.S. Fidelity and Guaranty Co. (USF&G). In March 1985, the federal government filed suit in U.S. District Court against Pepper's Steel, a scrap metal recovery business. The government was trying to recover cleanup costs for toxic waste on Pepper's Steel's 30-acre site. The insurance company refused coverage, claiming the cleanup costs were not covered under Pepper's policy because of a pollution exclusion.
In 1991, USF&G offered to settle the claims for $2 million. Pepper's Steel did not accept the offer until October 1993, months after the state supreme court issued an opinion in Dimmit Chevrolet v. Southeastern Fid. Ins. Corp.. The court's interpretation of the pollution exclusion clauses in Dimmit was favorable to insurance companies. When Pepper's accepted the offer, the insurance company claimed it had been withdrawn. Pepper's filed a motion to enforce the settlement agreement.
After a 2-day hearing, U.S. District Judge James Paine ruled that the settlement had never been revoked and was binding. Judge Paine ruled, however, that each side was responsible for its attorney fees.
The Florida Supreme Court held that where an insured sues its insurer for coverage under a policy, and the parties later contest whether they have reached a settlement, Section 627.428 allows a prevailing insured to be awarded the attorney fees incurred in litigating that issue.
Travelers Indem. v. Meadows MRI
In Travelers Indem. Ins. Co. of Ill. v. Meadows MRI, LLP, 900 So. 2d 676, 679 (Fla. 4th DCA 2005). concluded, citing to Pepper's that in Florida the payment of a settlement claim is the functional equivalent of a confession of judgment or a verdict in favor of the insured. [Wollard v. Lloyd's & Cos. of Lloyd's, 439 So. 2d 217, 218-19 (Fla. 1983).] Therefore, as the Eleventh Circuit Court of Appeals recognized that, in Florida, an insured may recover attorney fees incurred in reaching a settlement, but an insurer cannot.
Disallowing Attorney Fees
However, courts generally do not apply the confession of judgment doctrine allowing for attorney fees, where the insureds were not forced to sue to receive benefits because applying the doctrine would encourage unnecessary litigation by rewarding a race to the courthouse for attorney fees even where the insurer was complying with its obligations under the policy. [Basik Exports & Imports, Inc. v. Preferred Nat'l Ins. Co., 911 So. 2d 291, 293 (Fla. 4th DCA 2005); and Tristar Lodging, Inc. v. Arch Specialty Ins. Co., 434 F. Supp. 2d 1286, 1297-98 (M.D. Fla. 2006).] In reasoning to disallow attorney fees, the court found the following facts to be true:
State Farm promptly paid $93,167.82, the benefits to which the Lorenzos were entitled under the policy. The Lorenzos through their public adjuster concealed the fact they had already performed the act necessary under the policy terms to entitle her to the $6,346.29 final payment for replacement costs. State Farm was abiding by its obligations under the loss settlement provision, and did not withhold benefits or compel the Lorenzos to sue. The circuit court applied the incorrect law by relying on the confession of judgment doctrine. [State Farm Florida Ins. Co. v. Lorenzo, 969 So. 2d 393, 397-98 (Fla. 5th DCA 2007).]
As Tristar Lodging explains, applying the confession of judgment doctrine undermines the statute's purpose by simultaneously rewarding unnecessary litigation and discouraging insurers' prompt compliance with their obligations. Similarly, when the insured loses the coverage issue he or she cannot recover fees. [Ufer v. State Auto Ins. Cos., 961 So. 2d 1007 (Fla. App. 2007).]
In California a similar result was reached on the ground that attorney fees are a type of damage recoverable for breach of the covenant of good faith and fair dealing. In California, when an insured sues its insurer for breach of the duty of good faith and fair dealing to secure policy benefits unreasonably withheld by the insurer, the insured can recover its attorney fees. [Brandt v. Superior Ct., 37 Cal. 3d 813, 817 (1985); Cassim v. Allstate Ins. Co., 94 P.3d 513, (Cal. 2004); Hangarter v. The Paul Revere Life Ins. Co., 236 F. Supp. 2d 1069 (N.D. App. 2002).] Brandt applies only where the insured must sue to obtain policy benefits.
These cases, by statute or court decision, make it difficult for insurers in Florida and California because, by statute or court decision, it changes the terms of the contract of insurance to include a right for the insured—not the insurer—to collect attorneys fees. The cases and the Florida statutes modify a freely entered into contract of insurance and give more rights to the insured than it allows the insurer.
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