On February 6, 2014, in Intervest Construction of Jax, Inc., et al. v. General Fidelity Insurance Company, the Florida Supreme Court held that an insured can use payments from a third party to satisfy a self-insured retention provision, and that – absent an explicit provision to the contrary – a transfer of rights clause does not abrogate the “made whole doctrine.”
In 2000, Intervest Construction of Jax, Inc. (ICI) was building a residence and subcontracted with Custom Cutting, Inc. (Custom Cutting) to provide trim work and install attic stairs. The subcontract between the parties contained an indemnification provision requiring Custom Cutting to indemnify ICI for any damages arising from Custom Cutting’s negligence. In 2007, the resident was injured using the attic stairs and sued ICI, which sought indemnification from Custom Cutting, pursuant to the terms of the subcontract.
Custom Cutting had a commercial general liability insurance policy with North Pointe Insurance Company (North Pointe) and ICI held a general liability insurance contract with General Fidelity Insurance Company (General Fidelity). ICI’s General Fidelity policy contained a self-insured retention (SIR) endorsement of $1 million. This provision stated that General Fidelity would provide coverage only after the insured had exhausted the $1 million SIR. The policy also contained a transfer of rights clause, granting the insurer subrogration rights.
Custom Cutting, ICI and their carriers entered into mediation and the parties all agreed to a $1.6 million settlement. North Pointe agreed to pay ICI $1 million to settle ICI’s indemnification claim, and ICI would in turn pay that $1 million to the resident. The dispute arose as to whether ICI or its carrier was responsible for the remaining amount. They each paid $300,000 to the resident to complete the settlement, each reserving their right to seek indemnification. ICI then filed suit seeking the return of $300,000 it paid out of pocket. General Fidelity filed a counterclaim seeking recovery of the $300,000 it paid, and then removed the case to the Middle District of Florida, based on diversity jurisdiction. They each sought summary judgment.
ICI maintained that the $1 million contribution satisfied the SIR obligation, rendering General Fidelity responsible to pay the entire remaining $600,000. General Fidelity alleged that this indemnification payment did not count toward the SIR obligation. The Middle District Court of Florida held that ICI could not use the $1 million indemnification payment to satisfy the SIR.
Questions Certified to Florida Supreme Court
ICI appealed to the Eleventh Circuit, which certified two questions to the Florida Supreme Court for resolution:
- Does the General Fidelity policy allow the insured to apply indemnification payments received from a third party toward satisfaction of its $1 million SIR?
- Assuming that funds received through an indemnification clause can be used to satisfy the SIR, does the transfer of rights provision found in the General Fidelity policy grant superior rights to be made whole to the insured or to the insurer?
With regard to whether indemnification payments made by a third party satisfy an insured’s SIR, the Florida Supreme Court considered numerous other cases, which all held that payments could only be made by the insured. However, those cases were distinguished from the one at bar based on the specific policy language. In those cases, the language was explicitly restrictive, whereas the instant policy language was not.
For example, the policy language in Arena Group made clear that the Retained Amount had to be paid from the insured’s “own account.” 2007 WL 935611 at 1. Similarly, the court found in Acceptance Insurance that the policy SIR provision “clearly and unambiguously” required the insured to be responsible for satisfying the SIR with its own funds. 2002 WL 32515066 at 1 (the provision stated that regardless of other insurance, the insured would continue to be responsible for the full SIR before the limits would apply). Finally, in Forecast Homes, the court deemed the following language to be explicitly restricting: “[p]ayments by others, including but not limited to additional insureds or insurerers, do not serve to satisfy the self-insured retention.” 105 Cal. Rptr. 3d at 208.
In Intervest, however, the Florida Supreme Court said that requiring payment from the insured did not limit payments from the insured’s account. The relevant language of the policy is as follows: “We have no duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted by payment of settlements, judgments, or ‘Claim Expense’ by you. … The ‘Retained Limit’ will only be reduced by payments made by the insured.” The SIR did not expressly state a limitation as to source of funds used to satisfy the SIR. Thus, the court held that the General Fidelity policy allowed the insured to apply indemnification payments from a third party to satisfy its $1 million SIR.
The second issue concerned whether a “transfer of rights” clause in an insurance policy abrogates the so-called “made whole doctrine”; briefly, the “made whole doctrine” provides the insured with priority over the insurer to recover damages when there is a limited amount of funds available. See Schonau v. GEICO Gen. Ins. Co., 903 So. 2d 285, 287 (Fla. 4th DCA 2005) and Ins. Co. of N. Am. v. Lexow, 602 So. 2d 528, 529-30 (Fla. 1992). (“[T]he insured was entitled to be made whole before the subrogated insurer could participate in the recovery from a tortfeasor.”)
The Florida Supreme Court found that the insurance policy in this case gave no guidance as to how recovery would be prioritized if the indemnity amount was insufficient to make both parties whole. Thus, the court considered the “made whole doctrine” under equitable principles instead.
In this case, the court relied on a persuasive case, Bordeaux, Inc. v. Am. Safety Ins. Co., to hold that the “made whole doctrine” still applies despite a “transfer of rights” provision. 186 P.3d 1188, 1192-93 (Wash Ct. App. 2008) (wherein the court held that “[t]he trial court properly ruled that [the insureds] were entitled to be made whole before any third-party recovery funds are paid to the insurers.”). Under Florida law, this holds true unless there is an express contractual provision to the contrary. The Florida Supreme Court therefore held that the “transfer of rights” provision in the policy did not abrogate the “made whole doctrine,” meaning ICI maintained priority.
In sum, the Florida Supreme Court applied the “made whole doctrine” standard contract law to favor the insured over the insurer. With the Intervest ruling, Florida is in the minority of jurisdictions holding that the “make whole doctrine” applies to deductibles or self-insured retentions. See Wilson Elser Client Alert, “Connecticut Supreme Court: ‘Make Whole’ Doctrine Is Default Rule, But Does Not Apply to Policy Deductibles,” August 9, 2013.
Yet, these rules only apply in the absence of controlling policy provisions. If a policy contains a provision spelling out how any subrogation recovery obtained from a third party will be shared between itself and its policyholder, the terms of the insurance contract should trump the vagaries of case law.