Insured's Release of Insurer Defeats Claim of Third Party

Facts of the Case

Blocker Transfer &Storage Co. "operated various warehouse storage facilities" that it owned or leased "as part of its business as a moving and storage company." Diagnostic Leasing was an equipment rental and leasing company. In 1995, Blocker Storage stored Diagnostic Leasing's CT scanner. Associated Indemnity insured Blocker Storage under the trade name "Fireman's Fund Insurance Company."

That same year, two fires at Blocker Storage's warehouses damaged Diagnostic Leasing's CT scanner. Fireman's Fund informed Blocker Storage that the coverage limit for Diagnostic Leasing's insurance claim was $100,000 and that "Fireman's Fund decided to make available to Blocker [Storage]" the full $100,000 to use at Blocker Storage's discretion. Fireman's Fund advised Blocker Storage that any settlement in excess of $100,000 would have to be paid by Blocker Storage. Blocker Storage maintained that its liability was limited to $25,000 based on a contractual provision in the bill of lading from when the CT scanner was first moved into storage.

After the second fire, Diagnostic Leasing sent a second demand letter, this time to Fireman's Fund directly, asserting a higher replacement cost for the CT scanner—$427,515. Fireman's Fund advised Blocker Storage that it could not respond to Diagnostic Leasing on Blocker Storage's behalf because of Blocker Storage's uninsured exposure in excess of $100,000. Blocker Storage "specifically instructed" Fireman's Fund that "it [did] not want any of its insurance coverage tendered" to Diagnostic Leasing because "its maximum liability...[was] $25,000" and "[a] tendering of any amount by the Fireman's Fund directly to [Diagnostic Leasing might] prejudice Blocker [Storage] in enforcing its limitation of liability."

The Two Lawsuits

Eventually, Diagnostic Leasing sued Blocker Storage in Florida state court for breach of contract, negligent bailment, and spoliation of evidence. Fireman's Fund provided counsel to represent Blocker Storage alongside Blocker Storage's independent counsel.

While litigation against Blocker Storage was pending, Blocker Storage sued Fireman's Fund seeking a declaratory judgment regarding Blocker Storage's claims under the insurance policy.

In 2001, Blocker Storage and Fireman's Fund executed a "Release of All Claims" to resolve the declaratory judgment lawsuit. Blocker Storage and Fireman's Fund "[agreed] that the limit of liability coverage available, pursuant to the terms and conditions of the [policy], for the [first] fire [was] $100,000." In exchange, Blocker Storage released "Fireman's Fund, its employees, adjusters, agents, and attorneys" from the following.

[All] liabilities identified in Blocker [Storage's] complaint including, but not limited to, the matter of number of occurrences, the matter of the limits of insurance available, and the alleged breach of contract. This [release] includes, but is not limited to, all claims for contractual damages, extra-contractual damages, "bad faith" damages, whether statutory or common law, consequential damages, tort damages, attorney fees, expert costs, expenses, and interest arising out of or related to the allegations in Blocker [Storage's] complaint.

After 10 years of litigation, the state court granted judgment for Diagnostic Leasing against Blocker Storage after a bench trial, finding that Blocker Storage alleged that the $25,000 liability limitation was unenforceable and that Blocker Storage owed Diagnostic Leasing $451,431.82 plus pre-judgment interest ($229,431.82 in lost revenue and $222,000 to replace the CT scanner).

Diagnostic Leasing moved to include Fireman's Fund and Associated Indemnity as parties to the final judgment. Fireman's Fund, Associated Indemnity, and Diagnostic Leasing negotiated an agreed order to include Associated Indemnity as a party to the final judgment and deny Diagnostic Leasing's motion to include Fireman's Fund. The state court entered the agreed order, granting the motion with respect to Associated Indemnity, finding Associated Indemnity liable to the extent of its $100,000 coverage limit under the insurance policy and denying the motion with regard to Fireman's Fund. The state court entered final judgment against Blocker Storage for $994,638.37; $100,000 of that amount was recoverable from Associated Indemnity per the agreed order.

Analysis of the Case

Diagnostic Leasing argued that the district court erred in granting summary judgment for Associated Indemnity on its bad faith claims. The Eleventh Circuit disagreed.

Agency

The court held that because (1) the policy was issued by Associated Indemnity on behalf of Fireman's Fund, (2) Fireman's Fund directed Associated Indemnity to defend Blocker Storage and offer Blocker Storage the policy limits to settle Diagnostic Leasing's insurance claim, and (3) Fireman's Fund negotiated the 2001 release to release Blocker Storage's claims arising from the policy and because Diagnostic Leasing did not rebut the evidence of an agency relationship, the district court did not err in granting summary judgment for Associated Indemnity on the agency issue.

Effect of the 2001 Release

Under Florida law, once the insured releases the insurer from liability, the insured no longer has a cause of action against the insurer and neither does an injured third party. The court explained that the 2001 release was not limited to only those claims that existed at the time of the release; it released "all claims for … 'bad faith' damages, … arising out of or related to" Blocker Storage's insurance claims under the policy. Any bad faith claims against Associated Indemnity related to Blocker Storage's insurance claims under the policy.

Once Blocker Storage released Associated Indemnity from liability "arising out of or related to" Blocker Storage's insurance claims under the policy, including liability for any bad faith, "no such [bad faith] action [could] be maintained" by Diagnostic Leasing against Associated Indemnity. Associated Indemnity owed no independent duty of good faith to Diagnostic Leasing, which was not an insured under its policy.

Because the 2001 release preceded the assignment of Blocker Storage's claims under the insurance policy and released Associated Indemnity of "all claims … for 'bad faith' damages" arising out of or related to Blocker Storage's insurance claims under the policy, the release extinguished Diagnostic Leasing's claims for bad faith, which existed only by virtue of Blocker Storage's insurance relationship with Associated Indemnity.

The 2001 release settled the amount of Associated Indemnity's liability under its insurance policy issued to Blocker Storage and referenced the underlying litigation between Blocker Storage and Diagnostic Leasing where Associated Indemnity was the insurer and funded Blocker Storage's defense.

Conclusion

Diagnostic Leasing won a judgment against Blocker Storage for almost $1 million only to give up trying to collect from the responsible defendant by taking an assignment against Blocker Storage's insurer, who had, before the assignment, released the insurer. With greed and hope of getting the full judgment plus punitive damages from an insurer, Diagnostic and its lawyers failed to do their due diligence to deal with the release and tried to avoid the release by going after a sister insurer of the named insurer. Ultimately, it was a waste of time and effort.