In many lawsuits, the defendant’s only significant asset is its insurance policy, which may or may not cover a resulting judgment. That can lead to collusion in which the plaintiff and the defendant agree to a settlement that is collectible only against insurance proceeds. What could possibly go wrong, you ask? Plenty.
A recent decision from a federal court in Florida shows the potential pitfalls of these types of settlements, known locally as Coblentz agreements. In the Florida case, the defendant, Attorney’s Title Insurance Fund (ATIF), agreed to settle the lawsuit for $40 million and, in exchange, the plaintiff agreed not to sue ATIF to collect that sum—leaving insurance proceeds as the only possible source of recovery. (Of course, in this type of situation, it is normally the plaintiff who bears all the risk of non-collection.)
The court noted that, for a Coblentz agreement to be enforceable against an insurance company, three factors must be met: (1) the insurer must have wrongfully refused to defend in the underlying litigation; (2) the insurer must have had a duty to indemnify; and (3) the settlement must have been reasonable and reached in good faith.
The court’s ruling shows how easily a savvy insurance company can derail a Coblentz agreement. First, the insurance company here, Travelers Indemnity Company of Connecticut, defeated the alleged failure to defend by previously having offered to defend under a reservation of rights. Second, all insurance policies require the insured to cooperate with the insurer’s investigation, and these policies were no different. Travelers proved that ATIF and the plaintiff had carried on months of secret negotiations, which the insurer was shut out of. That violated ATIF’s duty to cooperate, the court held. Finally, the reasonableness of the settlement was simple to attack given the lack of back-and-forth negotiations between the parties.
So, if you are contemplating a Coblentz-type settlement, do your homework in advance and learn what things a court will consider before enforcing the agreement.