Consider the following hypothetical: You enter into a contract with Company A whereby, in exchange for $10,000, Company A agrees to give you a painting, currently valued at $100,000, upon the happening of a certain contingency over the course of the next year. If that contingency does not occur, Company A keeps your $10,000 and you get nothing. Six months later, the contingency occurs, and Company A refuses to fulfill its end of the bargain while retaining your $10,000, because Company B already gave you a similar painting.
Unfortunately, this scenario has become a reality for many insureds who have sought protection under any one of the many permutations of third-party liability insurance policies. Although such policies obligate the insurer to pay on behalf of the insured “loss” which the insured becomes legally obligated to pay, insurers are attempting to side step their obligation to pay where a third-party pays the “loss” to the underlying third-party plaintiff on behalf of the insured while the insurer delays in rendering a decision on defense and coverage.
This article briefly discusses why the issue of whether the insured, or anyone else, has paid all or part of a “loss” on the insured’s behalf has no bearing on a liability insurer’s coverage obligations.
A Liability Insurer’s Obligations Become Fixed the Moment the Insured Becomes Legally Obligated to Pay a Covered Loss
Insurers faced with a covered claim that has been paid in whole or part by a third party often argue that their liability has been eliminated by the third-party payment because the insured is no longer legally obligated to pay the “loss.” Any payment under the policy, insurers proclaim, would amount to a “windfall” or double recovery, unjustly enriching the insured. Unlike disputes sounding in tort, however, contractual obligations and remedies are governed by the express language contemplated and agreed to by the parties to that contract. Particularly in the insurance context where insurers control the risk assumed under language they choose, what must or must not be paid when is a function of the policy language. Under the plain language of most liability policies, the insured incurs a “loss” — and the insurer’s liability thus becomes fixed — the moment the insured incurs a legal obligation to pay that “loss.” Thus, whether the insured or a third party has subsequently paid a part of that “loss” is irrelevant to the respective obligations of the parties to the insurance contract absent policy language dictating a different result. 1
A liability policy is an express, bargained for agreement between an insured and its insurer, whereby the insurer agrees to pay, on behalf of the insured, “loss” which the insured is legally obligated to pay. “Loss” is often defined as damages, settlements and defense expenses incurred by the insured. In exchange for the insurer’s promise to pay such “loss” on behalf of the insured, the insured pays a substantial premium — a premium based not on the risk that others will or will not pay, but on the risk that the carrier must pay. As courts and other authorities have recognized, such policies must be distinguished from indemnity policies, where the insurer is obligated only to reimburse the insured for amounts that the insured has already paid:
- In general, under an indemnity policy the insurer is obligated only to reimburse the insured for [a] covered loss that the insured himself has already paid. Under a liability policy, by contrast, the insurer’s obligation to pay arises as soon as the insured incurs liability for the loss; the insured need not pay the loss first. 2
- Insurers have also recently argued that where “loss” means, for example, damages, settlements and defense expenses incurred by the insured, the insured does not incur a “loss” where the insured itself does not pay anything. This argument is equally as unavailing, as it is well established in Florida and elsewhere that “to ‘incur’ means to become liable for the expense, but not necessarily to have expended it.” 3
Absent certain unusual circumstances, both parties to an insurance contract are bound by the plain and unambiguous language of the policy. As drafter of the policy, an insurer has the power to contract out of its obligation to pay on behalf of the insured by, for example, ensuring that any payment by third parties is primary to the insurer’s obligation under the policy, retaining a right to subrogate, or requiring that the insured itself pay the “loss” as a condition precedent to the insurer’s obligations under the policy. 4 Insurers may not, however, re-write their policies to avoid the bargain struck. If the contract is structured such that the carrier’s obligation to pay on behalf of the insured is triggered upon the occurrence of a particular contingency, such as when the insured becomes “legally obligated to pay” a covered loss, the insurer may not disclaim its liability upon the happening of that contingency on the basis of subsequent payments by others. To do so would run contrary to the express intentions of the parties to the insurance contract, deprive the insured of the benefit for which it paid substantial premiums, and result in an unwarranted windfall to the insurer equal to the premiums paid.
1. See, e.g., Dawson v. Blue Cross Ass’n, 366 So. 2d 536, 538 (Fla. 1st DCA 1979) (“The fact that a relative or friend pays a bill for an insured and does not seek to demand reimbursement does not relieve the insurer of its obligation to pay.”).
2. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Brown, 787 F. Supp. 1424, 1429-1430 (S.D. Fla. 1991) (“The D & O Liability … Policy defines loss as ‘any amount which the Insureds legally must pay.’ The only reasonable interpretation of the loss clause … is that the insurer’s obligation to pay accrues when the insured incurs the obligation, not after it has paid a judgment.”) (citing Little v. MGIC Indem. Corp., 836 F.2d 789, 793 (3d Cir.1987)).
3. See, e.g., Ceballo v. Citizens Property Ins. Co., 967 So. 2d 811, 815 (Fla. 2007).
4. See, e.g., Intervest Const. of Jax, Inc. v. Gen. Fid. Ins. Co., 133 So. 3d 494 (Fla. 2014).
By Christopher T. Kuleba
and Arya Attari
Ver Ploeg & Lumpkin
100 SE Second St., 30th Floor
Miami, FL 33131
South Florida Legal Guide 2015 Edition