Case Summary by Colodny Fass’s Rich Fidei: Insurers’ Obligation to Defend and Pay on a Policy Claim Under A Reservation of Rights

Jun 17, 2010



By Richard J. Fidei, Esq, Partner
Colodny Fass


A recent federal appeals court decision involving an insurance company’s duty to defend and pay a claim against a policyholder underscored the need for all insurers to take diligent and good faith steps to properly define all terms of their defense in advance when obtaining the cooperation of their insured during the defense of an underlying lawsuit under a reservation of rights.

In the case, Mid-Continent Casualty Company v. The American Pride Building Company, LLC, 2010 WL 1173101 (11th Cir. March 29, 2010), the federal Eleventh Circuit Court of Appeals found that factual issues still needed to be resolved in connection with whether an insured properly rejected the defense of a claim by its insurer under a reservation of rights prior to the insured entering into a Coblentz settlement agreement with the third party claimant. 

In the Mid-Continent case, the decision made by the insurer, after months of litigation, to institute a declaratory judgment action and to seek to recover the attorney’s fees and costs previously paid by the insurer constituted a material change in the conditions applicable to the insured’s original acceptance of the defense under a reservation of rights.  This allowed the insured to argue that the terms of the proffered defense had changed, leaving it free to enter into the Coblentz Agreement.

Under a Coblentz settlement agreement, the insured independently agrees to the entry of a consent judgment against it for an agreed upon monetary amount, if its insurer refuses to defend the claim or the insurer defends the claim under a reservation of rights.  In a Coblentz agreement, the third party claimant (in this case, Groff) agrees to the consent judgment in its favor and to not execute on any assets owned by the insured in an effort to collect the judgment.   Rather, the third party claimant agrees to accept an assignment of all rights held by the insured to pursue any insurance coverage available from its insurer which has either refused to defend the insured or has done so under a reservation of rights.

The Court recognized several principals of Florida law applicable to the defense of a case under a reservation of rights, as follows:


  • While an insurer must defend its insured, that defense can be under a reservation of rights. However, if the insurer defends under a reservation of rights, the insured is not required to accept that defense. Furthermore, even if the insured initially accepts the defense under a reservation of rights, the insured can refuse this conditional defense if the insurer changes the terms of the conditional defense in a material way.


  • If the insured accepts a conditional defense by the insurer, the insured is required by standard policy language to cooperate with the insurer in the defense of the lawsuit. An insurer can deny coverage if the insured fails to cooperate. However, that failure must constitute a “material breach” and “substantially prejudice” the rights of the insurer in the defense of the lawsuit. In order to properly deny a claim for failure to cooperate, the insurer must be able to establish that it exercised “diligence and good faith” in seeking the cooperation of the insured.


In the Mid-Continent case, the insured, American Pride, in addition to other companies, was sued by Groff Construction, Inc. Both American Pride and Groff were homebuilders and, in its lawsuit, Groff asserted that American Pride and others infringed upon their copyrights related to the design of homes and engaged in unfair competition.  Mid-Continent had issued three commercial general liability insurance policies to American Pride covering personal and advertising injury. Mid-Continent ultimately offered a defense to American Pride with a reservation of rights based on its assertion that it did not provide coverage for these types of claims.

During the course of litigation, there was no indication given by the carrier that American Pride would be obligated to pay the attorney’s fees and costs Mid-Continent incurred to defend the claims. Ultimately, Groff and Mid-Continent were unable to settle the claims asserted. Once settlement negotiations reached an impasse, American Pride retained independent counsel and demanded that Mid-Continent withdraw its reservation of rights and agree to not only continue its defense of the claims against American Pride, but also pay any judgment which may be entered against American Pride up to the applicable policy limits.  American Pride further asserted that if Mid-Continent did not accept full liability, American Pride would reject Mid-Continent’s defense under a reservation of rights and proceed on its own to settle the case filed by Groff.

Mid-Continent refused this demand and filed an action for a court declaration that it was not obligated to defend or pay the Groff claim and, for the first time, asserted a right to recover the attorney’s fees and costs paid in defense of American Pride.  At the same time, American Pride entered into independent settlement negotiations with Groff, which ultimately resulted in the entry of a Coblentz settlement agreement.

The trial court entered a summary judgment in favor of Mid-Continent in its declaratory judgment action against American Pride. The basis of the summary judgment was that American Pride had failed to cooperate with Mid-Continent and, therefore, breached any rights under the policy when it entered into the Coblentz agreement with Groff without the consent of Mid-Continent.

On appeal, the Eleventh Circuit Court of Appeals ultimately determined that there were factual issues that needed to be resolved as to whether American Pride actually settled the case with Groff under the Coblentz agreement prior to, or after, its rejection of the continuing defense by Mid-Continent under a reservation of rights. 

In particular, the appellate court determined that they still need to determine whether American Pride failed to cooperate with Mid-Continent when it entered the Coblentz agreement.

A noteworthy component of this case involves not only the continuing obligation of the insured to cooperate, but also of the insurer to exercise diligence and good faith to secure that cooperation during the defense of a case. Furthermore, it is instructive that the insured will not be bound by its decision to accept the defense of a lawsuit by an insurer under a reservation of rights if the insurer materially changes the terms of its conditional defense. 

It seems a crucial decision made by the insurer in the Mid-Continent case was demanding reimbursement of its attorney’s fees and costs for the first time after its settlement negotiations broke down with Groff. This gave the insured an opportunity to argue the conditional defense offered by Mid-Continent was under new terms and could be rejected by the insured. As a result, the insured could separately enter the Coblentz agreement, and shield itself from any liability for payment of the Groff claim even if the court ultimately determines that there is no coverage under the Mid-Continent policy for the asserted claims.

This case instructs that all insurers defending under a reservation of rights due to a coverage issue need to properly define in advance all terms of their defense and to assure that they take diligent and good faith steps to obtain the cooperation of their insureds during the defense of the underlying lawsuit.  



Should you have any questions or comments, please contact Rich Fidei ( at Colodny Fass.


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