[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 09-11238 MAR 29, 2010
________________________ JOHN LEY
D. C. Docket No. 07-00258-CV-FTM-99-SPC CLERK
MID-CONTINENT CASUALTY COMPANY,
Plaintiff-
Counter-Defendant-
Appellee,
versus
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.
________________________
Appeal from the United States District Court
for the Middle District of Florida
_________________________
(March 29, 2010)
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, LLC 1 (“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
*
Honorable William H. Albritton III, United States District Judge for the Middle District
of Alabama, sitting by designation.
1
The named defendants in this action also include American Pride Building Co., LLC and
American Pride Builder, LLC. It appears that these entities are merely alternate names for
American Pride Building Company, LLC; thus, we refer to a single “American Pride” defendant.
2
judgment on its lack of cooperation claim. The district court held that “[a]lthough
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. Groff sought damages in the form
of injunctive relief, disgorgement of profits, costs and attorney’s fees, among
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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 “[a]t 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-
4
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 “[i]f American Pride rejects the defense and settles
5
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 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 “[i]t 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
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$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 assigned
American Pride’s rights under the policies to Groff.
B. Procedural Background
2
Coblentz v. American Surety Co. of New York, involves an agreement for entry of a
consent judgment against an insured in situations where the insurer declines to defend or offers
to defend under a reservation of rights. 416 F.2d 1059 (5th Cir. 1969). In return for a stipulated
judgment, the claimant agrees not to execute against the insured. Id.
7
Mid-Continent’s original complaint, filed April 25, 2007, asserts that Mid-
Continent has no duty to defend or indemnify American Pride against Groff’s
claims for copyright infringement and unfair competition. In June 2007, Mid-
Continent amended its complaint to also assert that Mid-Continent has no duty to
indemnify American Pride against the consent judgment in the underlying lawsuit.
American Pride answered Mid-Continent’s amended complaint and asserted a
counterclaim for indemnification.
Mid-Continent filed two motions for summary judgment arguing that it has
no duty to defend or indemnify American Pride in the underlying litigation. Mid-
Continent’s first motion for summary judgment contends that Groff’s complaint
does not allege an injury covered under the policy. Mid-Continent’s second
motion for summary judgment asserts that American Pride breached its duty to
cooperate under the terms of the policies.
In February 2009, the district court denied Mid-Continent’s Motion for
Summary Judgment on its policy coverage claim and granted its Motion for
Summary Judgment on its lack of cooperation claim. The district court’s ruling on
the policy coverage claim is not before us in this appeal. On the lack of
cooperation claim, the district court held that although Mid-Continent had a duty to
defend American Pride under the terms of the insurance policy, “American Pride’s
actions in secretly negotiating and entering into a settlement agreement without the
8
consent of Mid-Continent, prior to American Pride rejecting Mid-Continent’s
conditional defense, constituted a breach of American Pride’s duty of cooperation
and relieved Mid-Continent of the duty to indemnify American Pride for the
settlement.” In reaching its conclusion, the district court found that American
Pride could properly reject the conditional defense and settle the case because Mid-
Continent materially changed the terms of the defense by seeking attorney fees and
costs. However, the district court determined that “American Pride settled the
underlying litigation on April 17,” nine days before rejecting Mid-Continent’s
conditional defense. Based on this factual determination, the district court
concluded that American Pride breached the policy’s cooperation clause relieving
Mid-Continent of its duty to indemnify. American Pride appeals the district court's
grant of summary judgment to Mid-Continent.
II. STANDARD OF REVIEW
We review the district court’s grant of summary judgment de novo, viewing
all evidence and any reasonable inferences that might be drawn therefrom in the
light most favorable to the non-moving party. See S. Solvents, Inc. v. N.H. Ins.
Co., 91 F.3d 102, 104 (11th Cir. 1996). Under Fed. R. Civ. P. 56(c), a motion for
summary judgment is properly granted when “the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the moving party is
9
entitled to a judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317,
322, 106 S. Ct. 2548, 2552 (1986).
III. DISCUSSION
We begin by noting that this declaratory judgment action was brought on the
basis of diversity jurisdiction, pursuant to 28 U.S.C. § 1332. Thus, state law
applies to any issue not governed by the Constitution or treaties of the United
States or Acts of Congress. See 28 U.S.C. § 1652; Erie R. Co. v. Tompkins, 304
U.S. 64, 78, 58 S. Ct. 817, 822 (1938). The district court implicitly determined
that Florida law controls Mid-Continent’s legal duties and obligations under its
insurance policies and accordingly, applied Florida law throughout the dispositions
below. The parties have not objected; thus, we examine the various claims asserted
on appeal under Florida law.3 See Cavic v. Grand Bahama Dev. Co., Ltd., 701
F.2d 879, 882 (11th Cir. 1983) (“Because the parties did not raise any conflict of
laws issue in the district court and do not raise it on appeal, under applicable
conflict of laws principles the law of the forum ( [Florida] ) would govern the
substantive issues due to the absence of facts justifying the application of the law
of some other jurisdiction.” (internal quotation marks omitted)).
A. Insurer’s Duty to Defend
3
Although it has no precedential authority, we find this Court's discussion in
Continental Casualty Co. v. City of Jacksonville, of an insurer's duty to defend and an insured's
duty to cooperate under Florida law, persuasive and borrow substantially from that unpublished
opinion. 283 Fed. Appx. 686 (11th Cir. 2008) (per curium).
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Under Florida law, “an insurer’s duty to defend is separate and distinct from
its duty to indemnify” and “is determined solely by the allegations of the
complaint.” First Am. Title Ins. Co. v. Nat’l Union Fire Ins. Co., 695 So. 2d 475,
476 (Fla. 3d DCA 1997). “Thus, an insurer is obligated to defend a claim even if it
is uncertain whether coverage exists under the policy.” Id. Under these
circumstances, an insurer may reserve its right to challenge coverage under the
policy without breaching its duty to defend by providing a defense under a
reservation of rights. See id. at 477. Such a conditional defense “resolves the
urgent question of who shall defend and postpones resolution of the contingent
question of who shall pay any judgment.” Taylor v. Safeco Ins. Co., 361 So. 2d
743, 745 (Fla. 1st DCA 978).
While an insurer must defend its insured, and may tender its defense subject
to a reservation of rights, Florida law does not require an insured to accept such a
defense. “It is well-settled law that, when an insurer agrees to defend under a
reservation of rights or refuses to defend, the insurer transfers to the insured the
power to conduct its own defense . . . .” BellSouth Telecomm., Inc. v. Church &
Tower of Fla., Inc., 930 So. 2d 668, 670-71 (Fla. 3d DCA 2006); see also
Nationwide Mut. Fire Ins. Co. v. Beville, 825 So. 2d 999, 1003 (Fla. 4th DCA
2002) (explaining that when an insurer either refuses to defend or makes a
reservation of rights, it violates its duty to unconditionally defend its insured and
11
thereby transfers to the insured the power to defend). As the Florida First District
Court of Appeal explained in Taylor:
Just as the insurer is not required to abandon its contest of a duty to
pay as a condition of fulfilling an assumed or admitted duty to defend,
the insured is not required to abandon control of his own defense as
the price of preserving his claim, disputed by the insurer, that the
insurer pay any judgment.
361 So. 2d at 745. In Taylor, “[the insurer’s] reservation of its assertion of
nonliability, though privileged, relinquished to [the insured], at his election, control
of the litigation.” Id. at 746. Thus, “if the insurer offers to defend under a
reservation of rights, the insured has the right to reject the defense and hire its own
attorneys and control the defense.” BellSouth, 930 So. 2d at 671.
In the instant case, Mid-Continent tendered a defense subject to a full
reservation of rights and American Pride accepted that defense allowing Mid-
Continent to defend the action for almost a year. As required by its duty to defend,
Mid-Continent hired an attorney and paid all attorney fees and costs associated
with defending the Groff litigation. While it is undisputed that Mid-Continent
provided American Pride with the basic requirements of a defense, it is less clear
whether Mid-Continent acted in good faith in that defense. Nevertheless, by
accepting and not rejecting Mid-Continent’s fully-funded defense, American Pride
was required to cooperate with Mid-Continent throughout the Groff litigation.
B. Insured’s Duty to Cooperate
12
The insurance contracts between Mid-Continent and American Pride outline
American Pride’s “Duties In The Event Of Occurrence, Offense, Claim Or Suit.”
Those duties include immediately notifying Mid-Continent of any demands and
“cooperat[ing] with [Mid-Continent] in the . . . settlement of the claim or defense .
. . .” In addition, the policies provide that “[n]o insured will, except at the
insured’s own cost, voluntarily make a payment, assume any obligation, or incur
any expense . . . without [Mid-Continent’s] consent.”
Florida law has long established that “an insurer may deny coverage and
avoid payment of compensation to the victim of the insured's tort where the insured
has been guilty of lack of cooperation . . . .” Ramos v. Nw. Mut. Ins. Co., 336 So.
2d 71, 75 (Fla. 1976). However, “[n]ot every failure to cooperate will release the
insurance company. Only that failure which constitutes a material breach and
substantially prejudices the rights of the insurer in defense of the cause will release
the insurer of its obligation to pay.” Id. While the question of “whether the failure
to cooperate is so substantially prejudicial as to release the insurance company of
its obligation is ordinarily a question of fact . . . under some circumstances,
particularly where the facts are admitted, it may well be a question of law.” Id.
Furthermore, an insurer may only avoid its obligation to pay “where the insurer has
exercised diligence and good faith in seeking to bring about the cooperation of the
insured, and where the insurer has in good faith complied with the terms and
13
conditions of the policy.” Id.
Mid-Continent argues 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 insists that it
did not violate the policy’s cooperation clause and only settled with Groff after
properly rejecting Mid-Continent’s conditional defense based upon changed terms
and conditions. Additionally, American Pride argues that Mid-Continent did not
seek to foster American Pride’s cooperation and did not fulfill its own contractual
obligations.
The district court correctly held that “an insured may reject a conditional
defense after the initial offering if the insurer changes the terms of the conditional
defense in a material way.” Nevertheless, the district court determined that
“American Pride has failed to show that it rejected the defense after Mid-Continent
changed the terms of the defense agreement in a material way, and therefore has
failed to establish that it properly rejected Mid-Continent’s defense.” The district
court appears to base this conclusion on the fact that American Pride told Mid-
Continent that it would reject its defense if it did not withdraw its reservation of
rights within ten days. However, we find record evidence to suggest that American
Pride actually rejected Mid-Continent’s conditional defense the day after Mid-
Continent filed its declaratory judgment action informing American Pride that it
14
intended to seek attorney fees and costs. If believed, this evidence could be found
to establish that American Pride properly rejected Mid-Continent’s defense under
the reservation of rights based upon these changed terms and conditions. Of
course, if American Pride properly rejected Mid-Continent’s defense it was free to
enter into a settlement. Under this scenario, American Pride violated the policy’s
cooperation clause only if it secretly negotiated a settlement prior to rejecting Mid-
Continent’s defense.
The district court held that even if “American Pride rejected Mid-
Continent’s defense because of the attorney’s fees issue, the evidence shows that
American Pride settled the underlying litigation on April 17, but did not reject the
defense until April 26.” The district court’s conclusion appears to rely on its
previous assertion that “on April 17, 2007, American Pride and Groff had agreed in
principle to a settlement” and that “American Pride did not inform Mid-Continent
about this agreement.” While American Pride and Groff may have agreed in
principle to a settlement, there is evidence that could support a finding that
settlement was not consummated until after American Pride rejected Mid-
Continent’s conditional defense. Groff sent American Pride a proposed settlement
agreement and stated that “we have attached the documents for your preliminary
review and comments.” This language indicates that Groff did not expect or intend
this to be the final settlement agreement. American Pride’s only response to Groff
15
regarding the proposed agreement was a concerned email from Mark Yeslow
explaining that “the key issue will be when you accept defense under a reservation
of rights can the insured then reject the defense and settle?” This email
contemplates the legal issues surrounding a future rejection of Mid-Continent’s
defense and subsequent settlement and raises legitimate concerns about whether or
not a settlement could be completed. It also appears that even Mid-Continent
recognized, in its motion for summary judgment, that American Pride did not settle
with Groff until May 3, 2007.4 Thus, it is clear that there is a genuine issue
concerning when this settlement was finalized.
In addition, the district court’s conclusion that “American Pride did not
inform Mid-Continent about this agreement” is contradicted by the evidence.
Lowicky’s April 20 email informed Mid-Continent that it was his “understanding
based upon conversations with [Groff]’s counsel and Mark Yeslow . . . that if this
matter was not settled for the $250,000.00 demand,” American Pride would reject
Mid-Continent’s conditional defense, “then negotiate a judgment significantly
higher than $250,000.00, probably in excess of $1,000,000.00, with an agreement
that [Groff] will not seek to collect any portion of that judgment against individuals
associated with American Pride” and that “as part of any such settlement, the
4
“Despite [Mid-Continent]’s objection to the unauthorized settlement, on May 3, 2007,
American Pride entered into a consent judgment with Groff for $1.7 million . . . .”
16
American Pride defendants will also assign their rights under Mid-Continent’s
policy to [Groff], and [Groff] will then seek to collect the negotiated judgment
directly against Mid-Continent.” This was more than mere speculation. Lowicky
confirmed in his deposition testimony that he had learned of the proposed consent
judgment in his conversations with American Pride and Groff and had reported
that information to Mid-Continent. There was nothing secret about the intended
resolution by American Pride and Groff and Mid-Continent was made fully aware
of this plan.
Summary judgment is proper only when there are no genuine issues of
material fact. Viewing the evidence and any justifiable inferences in American
Pride’s favor, a reasonable person could conclude that American Pride informed
Mid-Continent of the proposed settlement agreement and that American Pride did
not settle the underlying litigation until after it properly rejected Mid-Continent’s
conditional defense. Consequently, the district court’s reasoning in this regard is
insufficient to sustain summary judgment. Finding these genuine issues of
material fact, that must be resolved by a jury, we reverse the district court’s grant
of summary judgment to Mid-Continent.
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IV. CONCLUSION
For the foregoing reasons, we reverse the district court’s grant of summary
judgment to Mid-Continent based on lack of cooperation and remand for further
proceedings consistent with this opinion.
REVERSED and REMANDED.
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