Opinion
CASE NO. 02-23548-CIV-JORDAN-BROWN.
June 15, 2004
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON COVERAGE
Plaintiff Solar Time Limited ("Solar Time"), as judgment creditor of XL Specialty Insurance Co.'s ("XL") insured, Lancer International Corp. ("Lancer"), has sued XL for statutory and common law bad faith. XL has asserted as an affirmative defense that there is no coverage for the underlying claim under its policy. The Court bifurcated the coverage issue from the bad faith issue, and the coverage issues were tried non-jury on March 4, 2004.
FINDINGS OF FACT
XL (then known as Intercargo Insurance Co.) issued a claims-made Errors and Omissions ("EO") policy to Lancer International Corp., a freight forwarder, effective from December 31, 1993 through December 31, 1996 (Pl's Ex. 13). XL issued a subsequent EO policy to Lancer effective from January 1, 1997 through December 31, 1997 (Pl's Ex. 14). These policies contain identical provisions.
Condition 2 of both policies states that XL will only cover claims that are based on a negligent act that occurred during the policy period and only if the claim is first made during the policy period and reported to XL during the policy period while the agreement is in effect. Condition 2 contains exceptions for "prior acts" and "reported acts":
A. Prior Acts. We'll cover claims based on a negligent act, error or omission that occurred before the effective date of this agreement, but only if all of the following conditions are met:
(1) — No protected person (past or present) had knowledge of the prior negligent act, error or omission on the effective date of this agreement, nor any reasonable way to foresee that a claim might be brought.
(2) — The claim is reported by you to us in writing while this agreement is in effect.
(3) — Any other insurance covering the claim is used up.
B. Reported Acts. We'll cover claims first made against a protected person any time after this agreement ends, but only if all of the following conditions are met:
(1) — The protected person involved has reasonable knowledge that a negligent act, error or omission occurred and a claim might be made.
(2) — The suspected negligent act, error or omission is reported by you to us in writing while this agreement is in effect. We must also be told what loss or damage may result.
Both policies also provide:
Condition 7 — What To Do If You Know Of, Or Believe You Might Have A Loss:
(a) You must immediately notify us in writing of the negligent act, error or omission. Do this even though no claim has been made. If you, or another protected person is aware that something was done that shouldn't have taken place, or something wasn't done that should have, then you must tell us and provide us with:
The time and place;
The protected person involved;
What happened, or didn't happen, and what claim might be made against you;
The amount of damages that may result;
The names and addresses of the possible claimants;
Copies of documents relating to the transaction, including those instructions received prior to the negligent act; error; or omission; and your terms and conditions of service used with the transaction. (Emphasis in original).
On August 26, 1996, Lancer received a letter from a shipper, Three HHH, Inc., advising it of the loss of watches shipped to Solar Time (Def's Ex. E). Lancer memorialized Three H.H.H.'s claim against Lancer in a letter dated August 27, 1996 to a company named Tie Cargo Corp. which was used by Lancer to ship the goods (Def's Ex. G).
Claims or errors reported by an insured were not made directly to XL but to its sister company, Trade Insurance Services, Inc. ("Trade"), which acted as its insurance agent. On June 16, 1997, Trade faxed to XL two letters from attorneys for Solar Time to Lancer making demand upon Lancer for payment of the value of the watches. These letters were dated June 3 and June 13, 1997 (Pl's Exs. 1 2). These faxes were followed by an "EO Claim Report" prepared by Trade, which was received by XL on June 17 (Pl's Ex. 3). This report states that the date of the claim is 6/3/97 (the date of the first letter from the attorneys for Solar Time), which falls within the policy period of the 1997 policy. Numerous documents were attached to the EO Claim Report. The claim described in the EO Claim Report is generally the type of loss that would be covered by the policy.
XL contends that the EO Claim Report was its first notice of the loss. Solar Time attempted to prove that notice of the loss was given to XL or Trade in 1996 through the testimony of Miguel Delgado, the president of Lancer. Mr. Delgado testified that the first thing Lancer's employees would do when it had a lost shipment was to file the proper paperwork and turn it in to the insurance company. Mr. Delgado assumed that this was done by Lancer's employee, Julio Blanco, when the loss occurred in this case (in 1996).
The court finds that Mr. Delgado's testimony is insufficient to establish that notice of the loss was given in 1996. Therefore, paragraph 2.B. of the Conditions of the 1993 policy, extending coverage for claims first made against the insured any time after the agreement ends, but only if the loss was reported in writing while the agreement was in effect, does not apply.
On June 19, 1997, Ben Llaneta, the vice president of XL who handled this claim, sent a form letter to Lancer acknowledging receipt of the notice of claim and describing the coverages of the policy (Pl's Ex. 4). XL also reserved its rights "until it has been afforded the opportunity to fully investigate this claim." On June 20, 1997, Llaneta sent a letter to Miguel Delgado of Lancer advising him that XL had reviewed the documents submitted in connection with the claim, and had retained the law firm of Hyman Kaplan to represent Lancer (Pl's Ex. 5). Although Hyman Kaplan had represented Lancer in other matters, XL also used Hyman Kaplan to represent its insureds, and had done so since prior to 1990.
The June 20 letter advised Delgado of the following coverage issue:
Please note that the claim was made against you on June 3, 1997 and reported to us on June 17, 1997. However, we note that the events leading to the claim occurred on August 18, 1996 and Lancer could have reasonably believed at that time that a claim could be made against it. Yet, this matter was not reported to us at that time. We wish to direct your attention to Condition 7 of the EO policy . . . which states as follows: . . .
This letter does not mention Condition 2. XL reserved its right to deny coverage "if our ability to defend, investigate or otherwise resolve this claim are [sic] prejudiced as a result of this late notice."
Llaneta based his conclusion in the June 20 letter that Lancer could have reasonably believed in 1996 that a claim could be made against it solely on the documents attached to the EO Claim Report and not on any other investigation. The documents attached to the report revealed sufficient information for Llaneta to determine what coverage defenses were available to XL. Based on the documents, Llaneta determined that the reporting requirement was triggered in 1996, and he knew that Lancer did not report the claim until 1997. He admitted that he knew at the time of this letter that Condition 2 had not been met. Llaneta attempted to explain the omission of Condition 2 in this and all subsequent documents by his belief that Condition 7 encompasses Condition 2 in its content; that Condition 2 is "definitional" and that Condition 7 is "instructional."
Suit had not been served on Lancer at the time of the June letters. On September 8, 1997, Llaneta wrote to Delgado acknowledging XL's receipt of the suit by Three HHH against Lancer and advising Delgado that the suit had been submitted to Hyman Kaplan, who was already handling the file (Pl's Ex. 6). This letter also reserved XL's right to deny coverage, but did not in fact decline coverage. Llaneta thereafter monitored the litigation, and XL paid for the defense of Lancer. Llaneta also attended a mediation conference and made an offer on behalf of XL to settle the case against Lancer.
The evidence adduced in this action reflects that Lancer chose the law firm of Hyman Kaplan to represent them on numerous occasions. Lancer would have retained the firm to represent it in the underlying action even if Defendant had not paid for the defense.
XL did not handle the defense of this claim any differently than it normally would, even though Hyman Kaplan had represented Lancer in other matters and was suggested by Lancer as the attorneys to handle this claim. According to Delgado, Lancer was not involved in the investigation of the claim and relied upon Hyman Kaplan to investigate and defend the claim. Lancer also relied upon the attorneys to evaluate the case and make settlement offers. Lancer was never asked to contribute money to a settlement nor did Delgado have any input on whether the case should be settled.
When XL was advised of the claim in 1997, XL made no investigation into coverage other than reviewing the documents submitted in connection with the EO Loss Report. As to liability, XL did not attempt to investigate the claim itself. XL did not take statements of any of the witnesses, and Llaneta does not know what Hyman Kaplan did. Llaneta has no knowledge of any witnesses or documents that could not be located because of late notice that were pertinent to the defense of the underlying case. As to the Tie Cargo bankruptcy, asserted by XL as another basis for prejudice, XL never investigated the availability of insurance issued to Tie Cargo, nor did it know of the bankruptcy at the time. Llaneta admitted that XL's subrogation rights against Tie Cargo would not have arisen unless and until XL paid the claim against Lancer, and that never occurred. Based on the foregoing, the court finds that XL was not prejudiced by the failure of Lancer to give notice of the loss in 1996.
During the pendency of the underlying litigation, XL retained the law firm of Adorno Zeder to represent it on coverage issues. Adorno Zeder wrote a letter dated October 26, 1999 advising Lancer that XL renewed its reservation of rights, citing Condition 7 and the intentional acts exclusion, but not mentioning Condition 2 (Pl's Ex. 7).
XL filed a complaint for declaratory relief against Solar Time and Lancer in January, 2000 (Pl's Ex. 8). The complaint alleges that there is no coverage due to late notice, citing Condition 7 but not Condition 2. This complaint was voluntarily dismissed in August, 2000 (Pl's Ex. 9). At the time this complaint was filed, XL had not denied coverage to Lancer. XL in fact never denied coverage to Lancer, although Llaneta admitted that XL could have done so at the outset.
On March 19, 2001, Solar Time obtained a judgment against Lancer in the total amount of $225,975.83. On June 6, 2001, Miguel Delgado, as president of Lancer, executed a release of XL from any and all claims, including but not limited to bad faith, in return for up to $5,000 in additional defense costs to cover the appeal from the underlying judgment (Pl's Ex. 10). In the release, Delgado agreed that there was no coverage due to late notice pursuant to Condition 7, but the release does not cite Condition 2.
On November 15, 2002, Solar Time filed this lawsuit against XL in state court, alleging common law and statutory bad faith. XL removed the action to this Court on December 13, 2002.
In its answer to interrogatories seeking the basis for its coverage defenses in this case, XL cited Condition 7 as the only policy provision (Pl's Ex. 11). XL supplemented its answers on September 19, 2003 to mention for the first time in the long history of this claim that there was no coverage for failure to report the loss during the policy period pursuant to Condition 2 (Pl's Ex. 12).
CONCLUSIONS OF LAW
1. The finding of no prejudice to XL due to late notice defeats forfeiture of coverage under Condition 7.
Condition 7 is the sort of provision for "immediate notice" or "notice as soon as practicable" found in almost all liability policies. Plaintiff contends that breach of such provisions only operates to forfeit coverage where the insurer has been prejudiced by the late notice. Tiedtke v. Fidelity Casualty Co. of New York, 222 So. 2d 206 (Fla. 1969). Defendant contends that prejudice is not an issue, claiming that no prejudice is required for denial of a claim on the basis of late notice in the context of a claims-made policy. Gulf Ins. Co. v. Dolan, 433 So. 2d 512 (Fla 1983).
Neither party is entirely correct. "[T]he proper interpretation of the effect of prejudice in delayed notice cases [is] that while prejudice to the insurer is presumed, if the insured can demonstrate that the insurer has not been prejudiced thereby, then the insurer will not be relieved of liability merely by a showing that notice was not given `as soon as practicable'."See Tiedtke, 222 So. 2d at 209; see also Florida Physicians Insurance Company v. Stern, 563 So. 2d 156, 159 (Fla. 4th DCA 1990). In this case the Court has found that plaintiff, "standing in the shoes of the insured" for this purpose, has demonstrated the absence of prejudice.
XL argues that the rule is different for claims-made policies. This position is contrary to that which XL took in its reservation of rights letter of June 20, 1997 (Pl's Ex. 5), where it advised Lancer that it might deny coverage under Condition 7 "if our ability to defend, investigate or otherwise resolve this claim are [sic] prejudiced as a result of this late notice."
This Court's finding that XL suffered no prejudice as a result of the late notice precludes XL from denying coverage based on breach of Condition 7. The issue is then whether XL waived or should be estopped from asserting non-coverage under Condition 2.
2. There is no coverage under Condition 2 of the policy.
The Court finds that paragraph 2 of the Conditions is not a "coverage defense" for which notice must be specifically given by the insurer. The policy states in three separate areas that the "policy covers only those claims that are first made against you during the policy period and reported by you to us in writing during the policy period." It states this on the declaration page, the master page of the application which becomes a part of the contract and under Condition 2 of the policy. In order for there to be coverage under a claims-made policy, the insured must demonstrate that the claim falls within that requirement in order for coverage to even be considered. Lancer failed to report the claim in writing during the applicable policy period. This is not a defense to coverage that otherwise exists, but there is no coverage under the policy for any claim unless the claim meets this definition.
The law in Florida is now well-settled with respect to the difference between a "coverage defense" and a denial of coverage. A "coverage defense" is a defense to otherwise-existing coverage. A denial or disclaimer of coverage based on a complete lack of coverage in the first instance is not a "coverage defense." See AIU Insurance Company v. Block Marina Investment, Inc., 544 So. 2d 998 (Fla. 1989). The distinction between the two is significant in that an insurer must give its insured notice, usually through a reservation of rights, of a coverage defense, but the insurer has no such obligation with respect to a total disclaimer of coverage. The failure to provide the insured with notice of a disclaimer of coverage does not effect a waiver of the insurer's right to assert that disclaimer. See Atlantic Casualty and Fire Insurance Company v. National American Insurance Company, 915 F. Supp. 1218 (M.D. Fla. 1996); Pioneer Life Insurance Company v. Heidenfeldt, 773 So. 2d 75 (Fla. 2nd DCA 2000); Almendral v. Security National Insurance Company, 704 So. 2d 728 (Fla. 3rd DCA 1998); U.S. Fidelity and Guaranty Company v. American Fire and Indemnity Company, 511 So. 2d 624 (Fla. 5th DCA 1987); Country Manors Association, Inc. v. Master Antenna Systems. Inc., 534 So. 2d 1187 (Fla. 4th DCA 1988).
Defendant provided notice to Lancer of paragraph seven of the policy's Conditions in a reservation of rights letter. It did not, however, immediately give Lancer notice of the total disclaimer of coverage provided by paragraph two. An insured's breach of paragraph seven's notice provision would permit the insurer to forfeit coverage that otherwise exists. Therefore, condition seven is a "coverage defense" for which Defendant was obligated to provide timely notice. On the other hand, paragraph two defines the parameters of coverage, the circumstances under which coverage will be extended. The failure of a claim to meet the prerequisites described in paragraph two would not forfeit coverage. Rather, the claim would simply not be covered in the first instance. Paragraph two is not a "coverage defense" and Defendant's failure to provide notice to Lancer as to this lack of coverage does not effect a waiver of Defendant's right to rely on that lack of coverage.
It is clear that one can't extend the reporting limitations of a claims-made policy, which both parties agree is the type of policy at issue here. See Gulf Insurance Company v. Dolan, Fertig, and Curtis, 433 So. 2d 512 (Fla. 1983); Pantropic Power Products, Inc. v. Firemen's Fund Insurance Company, 141 F. Supp. 2d 1366, 1369 (S.D. Fla. 2001), aff'd., 2002 WL 655011 (11th Cir. Mar. 29, 2002).
3. Estoppel does not create coverage in this case
Under Eleventh Circuit law, in the context of an insurance contract, five elements must be satisfied for estoppel to be considered; (1) there must be a misrepresentation of material facts; (2) with the party to be estopped having knowledge of misrepresentation; (3) "the party to be estopped intended that the misrepresentation be acted on or had reason to believe the party asserting the estoppel would rely on it"; (4) the party asserting estoppel neither knew nor should have known the true facts; and (5) "the party asserting the estoppel reasonably and detrimentally relied on the misrepresentation." Carneiro Da Cunha v. Standard Fire Insurance Company/Aetna Flood Insurance Program, 129 F.3d 581, 587 (11th Cir. 1997). "Further, as a general rule estoppel may not be invoked to enlarge or extend the coverage specified in an insurance contract." Id. This is true whether plaintiff attempts to invoke the doctrine of equitable estoppel or promissory estoppel.See Nova Information Systems, Inc. V. Greenwich Insurance Company, 365 F.3d 996, 1005 (11th Cir. 2004).
The Court finds that Plaintiff has no standing to argue that Defendant is estopped from denying coverage. Estoppel is an extraordinary remedy and to justify a claim of estoppel there must be a representation by the party estopped to the party claiming estoppel as to a material fact and reliance on the representation by the party claiming estoppel and a change in the party's position caused by the reliance. General Security Ins. Co. v. Barrentine, 829 So. 2d 980 (Fla. 1st DCA 2002);Department of Revenue v. Hobbs, 368 So. 2d 367, 368 (Fla. 1st DCA 1979). The law is well-settled that "strangers to transactions from which an estoppel arises cannot take advantage of estoppel." Barrentine, supra.; Hobbs, supra.; see also Atlantic Casualty and Fire Insurance Company, 915 F. Supp. at 1225 (non-named insured has no standing to raise estoppel). Stated another way, a party does not have standing to raise estoppel against another unless the parties are in privity.See Fouke v. Schenewerk, 197 F.2d 234 (5th Cir. 1952);Villas of Lake Jackson, Ltd. v. Leon County, 884 F. Supp. 1544 (N.D. Fla. 1995).
Plaintiff Solar Time is neither a party to the insurance contract nor in privity with Defendant's insured, Lancer. Nor did Plaintiff receive an assignment from Lancer. Plaintiff has taken no assignment of Lancer's rights under the policy vis-a-vis Defendant. Thus, Plaintiff has no standing as a third-party claimant to raise the issue of estoppel. Since Plaintiff is neither a party to the contract nor in privity with a party to the contract or with Defendant, nor a qualified "third-party beneficiary" of the policy, Plaintiff does not have standing to raise estoppel.
There is an exception to the rule, however, which provides that `when an insurance company assumes the defense of an action, with knowledge, actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage.'" Stem, 563 So. 2d at 159 (quoting Cigarette Racing Team, Inc. v. Parliament Insurance Company, 395 So. 2d 1238, 1239-40 (Fla. 4th DCA 1981)). See generally John Alan Appleman 7C Insurance Law and Practice § 4692 (1979) (where the insurer undertakes the defense with knowledge of the insured's breach without disclaiming liability, the insurer is generally estopped to invoke such breach subsequently).
This Court finds the exception inapplicable herein for three reasons: (1) in this case there was a reservation of rights letter issued; (2) the arguments of plaintiff not only want to place it "in the shoes of the insured" but in a better position than that of the insured; and (3) not only was the insured not harmed by the actions of the insurer, but if anything received a benefit from those actions. The only harm, if there was any, actually injured the insurance company itself.
While the Florida Supreme Court approved the exception in Doe v. Allstate Insurance Co., 653 So. 2d 371 (Fla. 1995), there is an important factual difference between that case and the instant case — there was no reservation of rights in that case. There is no case that this Court is aware of with the exact facts present herein, which leads to the following unanswered question: Can the doctrine of estoppel apply if the insurer issues a reservation of rights letter, but leaves out a coverage defense therein? This Court answers the question in the negative. As correctly noted in the proposed findings of fact and conclusions of law submitted by plaintiff, most Florida cases apply the estoppel exception in cases where, absent a reservation of rights, the assumption of the defense by the insurer leads the insured to believe that there is coverage. That is precisely the fatal flaw in this case. Because a reservation of rights letter was issued, there was nothing misleading the insured into believing there was coverage.
Plaintiff argues that the failure of XL to mention Condition 2 in any of its reservation of rights letters or in its declaratory action created a false sense of security in the insured that is different only in degree from the false sense of security created by the absence of any reservation of rights. There is, however, no evidence in the record to support that supposition. In reviewing the harm to the various entities that occurred as a result of the insurer's failure to deny coverage promptly, it is clear that: (1) the insured was provided a defense at the insurer's expense . . . that the insured was not entitled to; (2) the insured received an additional $5,000 in settlement; (3) plaintiff herein would still have had a judgment against the insured as it has now; (4) the insurer would not have spent far in excess of its coverage ($100,000) in the defense of the underlying case and the handling of this one.
DECISION OF THE COURT
Based on the foregoing findings of fact and conclusions of law, the Court concludes that Plaintiff did not comply with the notice requirement of the insurance policies and that failure is an absolute bar to coverage. The court further concludes that Defendant did not waive its right to deny coverage on this basis and is not estopped from denying coverage.
The court finds there is no coverage under this policy for the underlying claim.