Applying Florida law, the Eleventh Circuit has held that a liability insurer that settled, for more than its policy limits, a tort claim against its named insured was liable for breach of contract to a second insurer that defended another insured for the same occurrence and also settled above its policy limits. Nova Cas. Co. v. OneBeacon Am. Ins. Co., No. 13-15799, 2015 U.S. App. LEXIS 4205 (Mar. 17, 2015). As a result, the liability insurer must pay substantial extra-contractual damages, far above its per occurrence limits, even though no bad faith claim was asserted. The decision adds another cautionary note and risk to the complex challenge of handling related claims against multiple insureds where limits are plainly inadequate to resolve all claims.

A patron severely injured at a Florida bank sued the bank and its landlord. Under a CGL policy with a $1 million primary limit and $4 million excess limit, Nova insured the lessor and settled the claim against it for $1.5 million. OneBeacon insured the bank under a policy that named the lessor as additional insured but, on grounds the opinion does not explain, refused to defend the lessor or participate in its settlement. Later, after the lessor settled, OneBeacon settled the claim against the bank for an undisclosed amount above its $1 million per occurrence limit. So, each insurer settled for more than its per occurrence primary limit.

Nova sued OneBeacon, seeking a declaration that OneBeacon was obligated to defend and indemnify the lessor and, in the lessor’s stead by way of equitable subrogation, seeking damages for OneBeacon’s alleged breach of those duties. On cross-motions for summary judgment, the district court found that OneBeacon breached those duties to its additional insured but, having exhausted its policy limits, and absent a showing of bad faith (apparently never alleged), OneBeacon was not liable to Nova. The Court of Appeals reversed, mainly because OneBeacon breached its contract duties to the lessor as additional insured before it exhausted limits when settling the claim against its named insured, the bank.

A key issue was choice of law. Applying Florida conflicts principles, the Court of Appeals held that New York law governed interpretation of OneBeacon’s policy, including whether it breached its duties to defend and indemnify, because the policy was delivered there. But contrary to the district court’s view, Florida law governed Nova’s equitable subrogation claim and remedies, as those related to “the manner and means of [contract] performance,” including location of the property, the tort, and the litigation. (The location of policy breach, i.e., failure to defend litigation in Florida court, seems more pertinent than location of the tort that was the basis of the suit.)

Oddly, much of the court’s discussion of Nova’s subrogation claim focused on Florida bad faith case law, while emphasizing that Nova alleged only breach of contract. Evidently OneBeacon relied on cases holding that “an insurer may exhaust policy limits by settling with one insured even if doing so leaves the other insured exposed, so long as these negotiations are conducted in good faith,” at least where parties cannot reach a global settlement and release. The court concluded that point, although accurate, was unavailing because OneBeacon had “ignored” and “disregard[ed] its duty to defend” the lessor, i.e., breached its policy obligations when due.

OneBeacon’s argument that it could not be liable in excess of policy limits without having acted in bad faith was equally inapposite. The court observed that Florida law is “discordant,” but stated it need not reach that issue because, before depleting its policy, OneBeacon breached its duties to the lessor as additional insured. In this context the opinion, for the first time, describes OneBeacon as the lessor’s primary insurer and Nova as excess, with Nova’s coverage attaching only if the primary layer was exhausted. The opinion quotes no policy wording; perhaps Nova’s policy had an “other insurance” clause making it excess to OneBeacon’s for the underlying tort claims. The court found controlling cases applying Florida law to effect that, “[i]f the insurer breaches its duty to defend, it – like any other party who fails to perform its contractual obligations – becomes liable for all damages naturally flowing from the breach.”