Insured’s Settlement Without Regard to Reasonableness Rendered Consent Judgment Unenforceable Against Insurer that Breached Duty to Defend

The United States Court of Appeals for the Eleventh Circuit, applying Florida law, has held that an insurer’s breach of the duty to defend did not render it liable for a consent judgment where the insured did not consider the reasonableness of the settlement amount.  Sidman v. Travelers Cas. & Sur., 2016 WL 6803034 (11th Cir. Nov. 17, 2016).

The insured, a homeowners’ association, was sued by a resident.  The homeowner prevailed and, under a state statute, was entitled to attorneys’ fees.  The insurer denied coverage for the fee claim, however, and the insured entered into a consent judgment with the claimant.  In later proceedings, the court determined that the insurer breached its duty to defend and indemnify the insured in connection with the fee claim.  After a bench trial, however, the court ruled that the insurer was not bound by the settlement because the settlement was neither reasonable in amount nor negotiated in good faith.  The claimant appealed.

On appeal, the court affirmed.  First, the court noted that an insurer that breaches its duty to defend is liable for a settlement entered into by its insured unless the agreement is obtained through “fraud or collusion.”  The court rejected the claimant’s argument that the insurer knew about and acquiesced to the settlement – and thus waived its objections based on fraud or collusion – noting that there was “no such rule in Florida law.”  Second, the court ruled that the evidence supported the district court’s refusal to bind the insurer to the settlement.  The court noted that the evidence supported the trial court’s finding that the insured agreed to settle the claim for any amount in exchange for the claimant’s agreement not to execute the judgment against it.  According to the court, that evidence was sufficient to find that the settlement agreement was negotiated in bad faith, thus eliminating the need to consider whether the settlement was reasonable in amount.  The court also rejected the claimant’s argument that the settlement was not collusive as a matter of law because the claimant and insured never agreed to share the settlement proceeds, concluding instead that although such an agreement would be sufficient to establish collusiveness, it was not necessary to find collusion.