By: D. Brad Hughes, Esq. and Hana Eldick, J.D. Candidate
General rules, as we are all too familiar, are privy to exceptions. A general rule concerning settlement agreements is that only parties to the settlement agreement are bound by its terms. Necessarily, there are instances wherein a party not in privity to a settlement agreement is nevertheless bound. One such instance is when an insurer disregards its duty to defend its insured.
What is the Duty to Defend?
Generally, an insurer has a duty to defend actions brought against its insured. This duty is assumed when the complaint alleges facts that “fairly and potentially bring the suit within policy coverage,” and continues throughout the case. McCreary v. Fla. Residential Prop. & Cas. Joint Underwriting Ass’n, 758 So. 2d 692, 695 (Fla. 4th DCA 1999). This duty is distinct from, and broader than, the duty to indemnify, which is contingent on “the entry of a final judgment, settlement, or a final resolution of the underlying claims.” Diamond State Ins. Co. v. Boys’ Home Ass’n, 172 F. Supp. 3d 1326 (M.D. Fla. 2016).
The duty to defend is particularly beneficial for the insured because it compensates for attorney’s fees even if liability is not likely. Without this duty, many insureds might not be able to afford the representation necessary to reach a determination of liability. The duty to defend is particularly beneficial for insurers too. Within an insurer’s duty to defend includes a right to assume control of the litigation. The insurer may seek a declaratory judgment defining the extent of its obligation. If the insurer elects to do nothing, however, it runs the risk of losing its right to assume control of the litigation. See Indep. Fire Ins.Co. v. Paulekas, 633 So. 2d 1111, 1114 (Fla. 3d DCA 1994); Gallagher v. Dupont, 918 So. 2d 342, 347 (Fla. 5th DCA 2005) (The insurer “is not permitted to assert any defense that it could have raised in the underlying lawsuit between the assignee and the insured.”). In the event that the insurer refuses to defend its insured, the insured can explore other options for possible relief, including executing a Coblentz agreement.
What is a Coblentz Agreement?
- the insured agrees to a consent judgment;
- the insured assigns all rights against the insurer to the claimant; and
- the claimant agrees not to execute upon the consent judgment against the insured.
Coblentz agreements are only appropriate when the insurer refuses its duty to defend. Additionally, Coblentz agreements can be risky for the parties entering into them; the insured necessarily concedes liability, and the claimant risks the possibility that the insurer does not provide coverage. Furthermore, to recover against the insurer in a subsequent action, the claimant has to prove:
- insurance coverage;
- wrongful refusal to defend; and
- the settlement was reasonable and made in good faith.
Nevertheless, a Coblentz agreement is a powerful tool. Coblentz agreements are binding despite the presence of valid affirmative defenses. One needs not look further than the seminal case on Coblentz agreements, Coblentz v. American Surety Company of New York:
Where either an indemnitor or liability insurer has notice of a proceeding against his indemnitee or insured, and is afforded an opportunity to appear and defend, a judgment rendered against the indemnitee or insured, in the absence of fraud or collusion, is conclusive against the indemnitor or insurer as to all material matters determined therein.
416 F.2d 1059, 1062-63 (5th Cir. 1969) (emphasis added).
In 2002, the Fourth District Court of Appeal recognized that:
[w]orkers compensation immunity is a defense that [the insurer] could have raised in the civil action…Because [the insurer] refused to defend its insured, it is bound by the settlement waiving the defense of workers compensation immunity and may not assert that defense against [claimant’s] claim for policy benefits to satisfy the judgment.
Under a properly executed Coblentz agreement, even “home run” affirmative defenses can be waived. Recently, in In re Estate of Arroyo, the Third District Court of Appeal ruled against an insurance company, notwithstanding the presence of a claim that would have been clearly barred if the insured would not have waived a statute of limitations defense.
In re Estate of Arroyo
In In re Estate of Arroyo, Delia Reyes (“Reyes”) was injured as a result of a car accident caused by Jorge Luis Arroyo’s (“Arroyo”) negligence in 2009. Arroyo died as a result of the accident. In 2011, Reyes filed a personal injury negligence lawsuit in circuit court against Arroyo’s estate (“the Estate”), but never filed the requisite written claim in probate court. See Fla. Stat. § 733.710. Thus, any judgment obtained by Reyes in the circuit court could not be levied against the Estate because she failed to file the appropriate claim in probate court.
Nevertheless, the insurer, Infinity, refused to defend the negligence claim, the reasons for which we can only speculate. In 2013, Reyes and the Estate subsequently settled the negligence lawsuit by entering into a Coblentz agreement. Pursuant to the agreement, Reyes and the Estate agreed:
- to the entry of a consent judgment;
- that Reyes would not execute judgment against the Estate; and
- that the Estate assigned any rights it had against Infinity to Reyes.
Following this settlement, Reyes sued Infinity in circuit court. Infinity attempted to raise affirmative defenses in both probate court and circuit court proceedings. Absent the Coblentz agreement, all of the various defenses would have been valid and would have killed the claim. Aside from the fact that Reyes’s claim was time-barred by the applicable statute of limitations, Reyes also failed to include various assertions in her initial brief and in the litigation proceedings. Reyes’s underlying claim was essentially dead on arrival, but she nevertheless won her coverage action against the insurer. How can this be so? The answer is simple—by refusing to defend the Estate, Infinity chose to sit out for the remainder of the game, and everyone knows that benchwarmers do not get to call the shots. By refusing to defend, Infinity gave up their right to have a say in the game’s turnout, and the victory necessarily went to the other team. Extreme cases such as In re Estate of Arroyo serve as a sobering reminder to insurers to consider alternative strategies before disregarding the duty to defend.
 Coblentz v. Am. Sur. Co., 416 F.2d 1059 (5th Cir. 1969).
 However, the Coblentz agreement usually specifies that the claimant can execute upon any insurance policy or proceeds.