Lawrence Ingram, Partner, Jessica Alley, Partner, and Hoyt Prindle, Attorney, all with Freeborn & Peters, Tampa

"Do not blame anybody for your mistakes and failures"—good advice from Bernard Baruch, trusted adviser to President Franklin D. Roosevelt. This article asks the question: Should a liability insurer in Florida be allowed to blame retained defense counsel for the insurer's bad faith? The answer is no. Both public policy and practical considerations, as expressed by the courts and legislature, provide that an insurer's obligations of good faith are personal to the insurer and nondelegable. Florida courts should not sanction the transfer of the insurers' good faith obligations to defense counsel.

A related issue is currently before the Florida Supreme Court. In Arch Insurance v. Kubicki Draper, the court will decide whether a liability insurer has standing to sue defense counsel for legal malpractice. Under Florida law, generally only clients have the right to sue an attorney for malpractice. The lower courts held that Arch, who was not the client, lacked standing to sue defense counsel. Arch argues that it is the injured party and that the lower courts' rulings allow negligent defense counsel to escape responsibility.

Regardless of the outcome in Arch, an insurer should not be allowed to blame defense counsel for damages resulting from insurer bad faith. To be sure, bad faith is a concern. In Florida, considered to be the epicenter of the bad faith "set-up" epidemic, insurers are increasingly blaming defense counsel in bad faith cases. Defense counsel, who often play a role in settlement discussions that culminate in a bad faith set-up, can be an easy target. The bad faith set-up occurs when calculating plaintiff attorneys manufacture circumstances to force an insurer to pay in excess of policy limits. Vaguely worded policy limit/time limit demands, which result in faulty acceptance or outright rejection, are common examples. Florida insurers risk extra-contractual exposure if they do not respond timely and properly to the settlement demand letter. When the insurer rejects, or the demand is deemed rejected due to a technicality, the insurer is "set-up."

Years later when the suit for bad faith is brought, or after it is settled, an insurer, looking for a scapegoat, attempts to shift responsibility for the failed settlement to retained defense counsel by joining them as third-parties or bringing independent suits. The insurer may contend any bad faith was caused by defense counsel's handling of the settlement communications and not on the insurer's conduct or that defense counsel breached a duty to warn the insurer about the draconian ramifications of a settlement demand denial. The insurer may even contend that defense counsel's opinion on the defensibility of the case, upon which the insurer relied, was flawed.

The Florida courts should halt this unfortunate trend for at least four reasons:

• Retained defense counsel cannot commit unfair claims practices. The essence of insurer bad faith is unfair claims handling. See Section 624.155(1), Florida Statutes. Insurers are regulated by the legislature. Attorneys, on the other hand, are regulated by the Florida Supreme Court. "The supreme court shall have exclusive jurisdiction to regulate the admission of persons to the practice of law and the discipline of persons admitted." Art. V, Section 15, Fla. Const. Retained defense counsel is not an insurer, is not regulated by the laws regulating insurers and cannot, by definition, commit insurer bad faith.
• Retained defense counsel cannot accept/reject a policy limit demand. The insurer holds the purse strings and alone decides whether or not to pay a claim. The failure to timely accept a demand or pay policy limits is the essence of insurer bad faith. Because defense counsel has no control over this threshold issue, they cannot be blamed for insurer bad faith.
• The duty of good faith is nondelegable. The legislature and the courts have imposed bad faith exposure on insurers who have acted in their own interests rather than the interests of their insureds. Bad faith exposure is intended to provide an incentive for insurers to "do the right thing." This incentive is negated if insurers who commit bad faith are able to escape or attenuate the punishment by shifting liability to retained defense counsel.
• The insurer has no right to indemnification. Under Florida law, a party seeking indemnity must be wholly without fault. An insurer in Florida is not entitled to common law indemnity against defense counsel for its bad faith because the insurer owes contractual and statutory obligations directly to the insured. Because the insurer's liability to the insured is direct, and not vicarious through defense counsel, the insurer can never be wholly without fault.

A final note to defense counsel—you can better protect yourself by making it clear that you are not representing the insurer. "The paramount interest independent counsel represents is that of the insured, not the insurer, see Aetna Casualty & Surety v. Protective National Insurance of Omaha, 631 So. 2d 305, 308 (Fla. 3d DCA 1993), on reh'g in part (Feb. 8, 1994) (quoting Feliberty v. Damon, 527 N.E.2d 261, 264 (N.Y.S. 1988)). While retained defense counsel may represent both the insured and the insurer, see R. Regulating Fla. Bar 4-1.7(e), the rules also require retained defense counsel to communicate who is the client. See R. Regulating Fla. Bar 4-1.7(e), 4.1-8(j). Florida defense counsels should avoid representing both the insured and insurer. The best practice is to represent only the insured.

Lawrence P. Ingram is managing partner of the Tampa office of Freeborn & Peters. Jessica Kirkwood Alley is a partner and Hoyt L. Prindle III is an attorney, both in the firm's Tampa office. All are members of the firm's insurance and reinsurance industry team. Ingram can be reached at [email protected]. Alley can be reached at [email protected]. Prindle can be reached at [email protected].