Monthly Archives: March 2009

Bad Faith Considerations with Punitive Damages Cases (March Litigation Quarterly 2009)

Cost claims representatives are aware of the concept of punitive damages and that they are not to be routinely permitted in personal injury cases in addition to the customary recovery of non-economic and economic damages, i.e, compensatory damages.  Punitive damages are permitted to punish the person who engages in willful and wanton conduct.  Fortunately, punitive damages are rare.

Florida courts have long held that there is no insurance coverage for punitive damages.1 In the case of Nicholson v. American Fire and Casualty, the court rejected the argument that the policy language obliging the insurance carrier to pay “all sums which the insured shall legally become obligated to pay as damages because of bodily injury, sickness or disease” included an award for punitive damages.2 The court’s decision was based on public policy.3 The court noted that it would be improper “to shift the burden [of punitive damages] to an insurance company.”4 The court also noted that the injured plaintiff would be made whole for his injuries by the award for compensatory damages.5

Although there is no duty to pay for an award of punitive damages, the insurance company does have a duty to the insured to defend against the same once they are properly pled in the complaint.6 In the case of American Hardware Ins. Co., the insured was sued for malicious prosecution.7 Punitive damages were sought in addition to compensatory damages.8 The insurance company agreed to defend against the claim for malicious prosecution, but informed the insured that it would not provide a defense as to the punitive damage claim.9 The insured subsequently retained personal counsel to defend against the punitive damage claim.10 The insured then sued the insurance company to recover the attorney’s fees that it was required to expend in defense of the punitive damage issue.11 The trial court granted the insured’s motion for summary judgment and the appellate court affirmed.12 The court stated:

Where the complaint against the insured contains allegations which are partially within and partially without the scope of the insured’s coverage, then the insured must defend even those portions of the complaint which are outside the coverage.13

What is the claims representative’s duty toward the insured in evaluating claims where the value of the case is less than the policy limits, but the plaintiff’s attorney rejects a generous settlement offer due to the specter of a punitive damage award?  Can the insured file a bad faith case against the insurance company if the verdict for compensatory damages falls within the policy limits, but there is an award for punitive damages?

A 1970 opinion from the United States Court of Appeals for the Fifth Circuit, Ging v. American Liberty Ins. Co., suggests that the answer is “yes.”14 Ging was a wrongful death case arising from an automobile accident that occurred in Florida in 1962.15 The insured was uncooperative and did not attend the trial.16 The jury awarded $14,695.00 for compensatory damages and punitive damages in the amount of $25,000.00.17 The trial court later reduced the compensatory award to $11,195.00.  The insurance company paid that amount.18

Subsequently, the insured assigned all of his rights against the insurance company to Ging who then filed a bad faith lawsuit against American Liberty.19 The trial court granted the insurance company’s motion for summary judgment.20 However, the appellate court reversed and remanded the case back to the lower court for a jury trial on the bad faith issues.21 The appellate court was less concerned over the public policy issue regarding a punitive damages recovery from an insurance company than it was on the duty to defend the insured as vigorously on the matters that were not covered under the policy (punitive damages) as it did for the matters that were covered under the policy.  In its analysis the court stated:

Once having undertaken the defense of a non-covered claim, the insurance company is under an obligation to act in good faith toward its insured to the entire extent of its undertaking.22

The appellate court found that there was sufficient evidence to submit the case to a jury on the issue of bad faith conduct of the insurance company through the insurance adjusters and defense counsel.23 The appellate court noted that the insured, who clearly failed to cooperate, was never informed that there was a strong probability that punitive damages would be awarded by the jury, that there had been settlement offers, including offers to settle for the policy limits, that the insured could contribute to the settlement damage claim, that the insured needed to attend the trial to offer counter evidence to the punitive damages concerning his poor financial condition, that no continuance was moved for when it was realized that the insured would not attend the trial in Florida, and finally that the insured was not informed as to the outcome of the trial until five and a half months after the same, which was thirteen days before the time to file a notice of appeal.24

In conclusion, the appellate court held that a duty existed to apprise the insured of settlement opportunities within a reasonable time after they were made, a duty to warn the insured of the pros and cons of the litigation even if the “cons” were not covered under the policy, a duty to timely advise the insured of the outcome of the litigation, a duty to advise the insured of actions by the insured to mitigate his own damages, and most importantly to conduct settlement negotiations in good faith including “where those interests might be divergent from the interests of the insurance company.”25

As noted at the outset, Ging is a 1970 opinion, and there have been no additional significant subsequent opinions on its holding.  This is due, in part, upon the fact that punitive damages claims are encountered on an infrequent basis.  It could also be due, in part, to good claims handling procedures by claims examiners, as well as vigorous defense tactics by defense attorneys when punitive damages are litigated.

The Ging decision was based on a federal appellate court’s interpretation of Florida law.  No Florida state court has dealt with the concept advanced in Ging.  However, courts in New York, California, and Colorado have held that the insurer is not liable for punitive damages to its insured when the insured may have acted in bad faith and exposed the insured to a judgment for punitive damages.

Soto v. State Farm,was a New York case that held the same.26 Soto involved a wrongful death case arising from an automobile accident in which the defendant driver was legally blind, not wearing eyeglasses, and intoxicated.  The insurance company was given an opportunity to settle the double-death case for the policy limits of $100,000.00.  The insurer declined the settlement and defended on the basis of lack of permission and consent to use the vehicle by the driver who was the girlfriend of the insured.  The jury awarded $420,000.00 in compensatory damages and $450,000.00 in punitive damages.  The insurance company paid the excess verdict for compensatory damages, but declined to pay the punitive damage award.  The insureds assigned their rights to proceed against the insurance company to the plaintiff.  The plaintiff then sued the insurance company in an attempt to recover payment for the punitive damage award against its insureds.  The insurance company filed a motion to dismiss, which was granted at the trial court level and affirmed by the appellate court.  The basis for the appellate court’s affirmance was that the public policy of the state prevented reimbursement by an insurance company for punitive conduct.

A similar result was reached in the case of  PPG Industries v. Transamerica Ins. Co. where a California court used similar public policy reasons to deny the insured’s recovery against its insurance company for the punitive damage award rendered against it.27 However, three out of seven appellate court justices dissented.  Similarly, in the case of Lira v. Shelter Ins. Co., the Colorado Supreme Court reached the same conclusion as PPG and Soto for basically the same reasons.28 However, as in PPG, three out of the seven justices dissented.

What is the significance to the claims examiner faced with a punitive damage case when comparing the holding in Ging with the holding in Lira, PPG, and Soto?  In practice, PPG, Soto, and Lira would have the same “persuasive” effect on a Florida state court judge as would Ging; i.e, all cases are from foreign jurisdictions and not binding on a Florida state court judge.  Each would serve as persuasive authority to the trial judge and could be adopted or ignored.  Given Florida’s long-standing public policy argument as discussed above in Nicholson v. American Fire and Casualty (the burden of punitive damages on the wrongdoer should not be shifted to the wrongdoer’s insurance company) one would expect a Florida judge to be more persuaded by the Lira trilogy than the holding in Ging. Notwithstanding, the holding of Ging might be enough persuasive authority to a Florida judge to deny a motion for summary judgment brought by an insurance company and to allow the matter  proceed to a jury trial.

Although punitive damage cases are not commonplace in Florida, the prudent claims examiner should have a working knowledge of Florida Statute Section 768.72, which will not permit a plaintiff to bring a count for punitive damages in the initial complaint.  This knowledge would be helpful in pre-suit negotiations where punitive damages are threatened by the plaintiff.

The claims examiner should have a working understanding of the limitation on punitive damages, especially paragraph (a) of Section 768.73.  This will permit the claims adjuster to adequately place the insured on notice of its potential exposure to punitive damages as discussed in Ging.  Furthermore, the claims examiner should be aware that a motion for statutory remittitur is available should a punitive damage award be entered against the insured.

The claims examiner should be aware that even though there is no requirement that the insurance company reimburse any insured for punitive damages rendered against it at the current time in the state of Florida, there is a duty to defend the same once the punitive damage claim is alleged in an amended complaint.  The examiner should be aware that pursuant to the holding in Ging, the defense of the punitive damages should be as vigorous as the defense of the compensatory damages, including the hiring of an economic expert for the insured relative to the bad faith issue, if appropriate.

The claims examiner should also be aware of the other dictates elucidated in Ging.  The insured should obviously be notified of the addition of punitive damages in the lawsuit and the fact that there is no insurance coverage available to pay for punitive damages.  The insured should be given an assessment of the potential that punitive damages could be awarded against him by a jury.  The examiner should be hypervigilant in notifying the insured of any and all settlement offers at all times, but especially when punitive damages are permitted.  The insured should be advised that he or she is permitted to contribute his  or her own funds to the settlement of punitive damage claim.  The insured should be advised by a defense counsel that his or her participation in the punitive damage lawsuit is essential to establish his or her lack of net worth so that a jury would have a basis to adjust its award to one that would not bankrupt him.  The insured should be immediately notified of the outcome of the jury trial when it pertains to punitive damages or otherwise.  Finally, the claims examiner should conduct settlement negotiations in good faith and be open to paying settlement funds on the higher end of the settlement evaluation when punitive damages are present.

(Endnotes)

1         Nicholson v. American Fire and Casualty, 177 So. 2d 52 (Fla. 2d DCA 1965).

2         Id.

3         Id.

4         Id. at 54.

5         Id.

6         American Hardware Ins. Co. v. Miami Leasing and Rentals, 362 So. 2d 28 (Fla. 3d DCA 1978).

7         Id.

8         Id.

9         Id.

10       Id.

11       Id.

12       Id.

13       Id.

14       Ging v. American Liberty Ins. Co., 423 F.2d 115 (5th Cir. 1970).

15       Id.

16       Id.

17       Id.

18       Id.

19       Id.

20       Id.

21       Id.

22       Id.

23       Id.

24       Id.

25       Id.

26       Soto v. State Farm, 635 N.E. 2d 1222 (N.Y. 1994).

27       PPG Industries v. Transamerica Ins. Co., 975 P. 2d 652 (Cal. 1999).

28        Lira v. Shelter Ins. Co., 913 P. 2d 514 (Colo. 1996).

Proposed Florida New Slip and Fall Statute (March Litigation Quarterly 2009)

In 2009, HB 495 was proposed in the legislature of the State of Florida that would repeal the current slip and fall statute, Section 768.0710, Florida Statutes.

The language of the proposed statute reads as follows:

768.0755      Premises liability for transitory foreign substances in a business establishment. – – If a person slips and falls on a transitory foreign substance in a business establishment, the injured person must prove that the business establishment had actual or constructive knowledge of the dangerous condition and should have taken action to remedy it.  Constructive knowledge may be proven by circumstantial evidence showing that:

(1) The dangerous condition existed for such a length of time that, in the exercise of ordinary care, the business establishment should have known of the condition; or

(2) The condition occurred with regularity and was therefore foreseeable.

Section 2.    Section 768.0710, Florida Statutes, is repealed.

Section 3.    This act shall take effect July 1, 2009.

The proposed statute shifts the burden of proof in claims of negligence involving transitory foreign objects or substances from the duty to maintain premises of Section 768.0710, Florida Statutes, to the allegedly injured plaintiff, who, pursuant to Section 768.0710, Florida Statutes, must prove that the business establishment had actual or constructive knowledge of the condition and should have taken action to remedy it.  The change will make slip and fall actions more difficult to successfully bring.

The Impact of the Marketable Title Record Act on Homeowners’ and Community Associations’ Declarations of Covenants, Conditions and Restrictions (March Litigation Quarterly 2009)

Pursuant to Florida law, the Marketable Title Record Act (“MRTA”) was created via the enactment of Chapter 712, Florida Statutes.  Pursuant to Florida Statute Section 712.02:

“Any person having the legal capacity to own land in this state, who, alone or together with her or his predecessors in title, has been vested with

any estate in land of record for 30 years or more, shall have a marketable record title to such estate in said land, which shall be free and clear of all claims except the matters set forth as exceptions to marketability in s. 712.03.”

The purpose of MRTA is to extinguish claims to property which are at least 30 years old and which predate the root of title of the property in question.1 MRTA contains the scheme to accomplish the objective of stabilizing property law by clearing old defects from land titles, limiting the period of record search, and clearly defining marketability by extinguishing old interests of record not specifically claimed or reserved.2 In short, MRTA was established in order to assist in the simplification and facilitation of land transactions by letting interested parties rely on record title.3

The impact of MRTA is of vital importance to Homeowners and Community Associations, as it administers and provides the stipulations by which the Association and its members are governed and regulated while seeking to maintain and enforce their Declaration of Covenants, Conditions and Restrictions.  The Declaration of Covenants, Conditions and Restrictions provides the legal mechanism by which the Association’s rules and regulations can be enforced,4 as the failure to properly secure their enforceability would be damaging to the Association’s oversight of its members. If an Association’s Declaration of Covenants, Conditions and Restrictions is permitted to expire, residents will no longer be compelled to act in accordance with the Declaration, and organizational and financial ruin could potentially ensue.

In order to address the evident concerns relating to the expiration of an Association’s Declaration of Covenants, Conditions and Restrictions, the Florida Legislature enacted Florida Statute Section 712.05, which aimed to provide a means for parcel owners to preserve any established covenant or restriction.  Due to the fact that the original version of Florida Statute Section 712.05 did  not permit an Association to independently act in the preservation of  its Declaration of Covenants, Conditions and Restrictions, several amendments to the statute were passed in order to expand an Association’s authority to do so.

One of the more recent amendments to Section 712.05, implemented in 2003, states:

[a]ny person claiming an interest in land or a homeowners’ association desiring to preserve any covenant or restriction may preserve and protect the same from extinguishment by the operation of this act by filing for record… a notice, in writing.

Section 712.05(c) specifically outlines the requirements for such notice as it pertains to Homeowners’ Associations. As such, a notice filed by a Homeowners’ Association must be “approved by at least two-thirds of the members of the board of directors…at a meeting for which a notice” was provided at least seven (7) days prior to the meeting.

At the time of the 2003 amendment, this incarnation of Section 712.05 provided the clearest route for an Association to preserve its Declaration of Covenants, Conditions and Restrictions by removing sole preservation authority from individual parcel owners and providing the Association’s Board of Directors such capability under a specified voting formula. Although the 2003 amendment allowed the Association’s Board of Directors to participate in the preservation of yet-expired Declaration of Covenants, Conditions and Restrictions, another unresolved set of circumstances remained: How would the Association proceed in the revival of already-expired Declarations?

Subsequently, Florida Statute Section 720.403 was enacted to address such a situation. Specifically, Section 720.403 created a clearly delineated process by which expired Declarations of Covenants, Conditions and Restrictions could be revived.  Pursuant to Section 720.403(2):

“[i]n order to preserve a residential community and the associated  infrastructure  and  common  areas  for  the purposes described in  this  section,  the  parcel  owners in  a  community that was previously subject to a  declaration of covenants that has ceased to  govern one or more parcels in the  community  may  revive  the  declaration  and  the homeowners’ association for the community upon approval  by the parcel owners to be governed thereby as provided in this act, and upon approval of the declaration and the other  governing  documents for   the association by  the Department of Community Affairs in a manner consistent with this act.”

In conjunction with the revival process described herein, Florida Statute Section 720.404 outlines the specific requirements by which eligibility for such revival is permitted. These requirements set forth strict guidelines as to the substance of the Declaration of Covenants, Conditions and Restrictions, as well as the particular parcels that may seek revival.  More specifically, Florida Statute Section 720.405 establishes that “[t]he proposal to revive a declaration… shall be initiated by an organizing committee consisting of not less than three parcel owners located in the community…”  Pursuant to Florida Statute Section 720.406(1), “[n]o later than 60 days after the date the proposed revived declaration and other governing documents are approved by the affected parcel owners, the organizing committee or its designee must submit the… materials to the Department of Community Affairs” for their review and determination.

Although Florida Statutes, Chapter 720 displays much progress in the protection against the extinguishment and lapse of an Association’s Declaration of Covenants, Conditions and Restrictions, further advancements are still necessary. As was the case with the evolution of Florida Statute Section 712.205, the scope of Section 720.403 and the revival of Declarations must be expanded to provide for an Association’s Board of Directors direct involvement in the revival process.

It is essential for Homeowners’ or Community Associations to be able to maintain the enforceability of its Declaration of Covenants, Conditions and Restrictions, or to have the ability to revive a Declaration that may have unintentionally expired. The Declaration permits an Association to impose fees, file liens, collect assessments, and implement other financial standards, which contribute to the economic security and well-being of the Association. If a Declaration is permitted to expire and the parcel owners hold the authority to revive the Declaration, the Association may be subject to parcel owners who do not want to live under such constraints and limitations.

As such, additional safeguards should be implemented in order to allow the Association further means to protect its established Declaration of Covenants, Conditions and Restrictions, especially in these times of economic uncertainty. It is understood that such overtures are currently being made in the Florida Legislature, but the situation remains unsettled. It is apparent that Homeowners and Community Associations must presently take it upon themselves to properly oversee the status of their Declaration of Covenants, Conditions, and Restrictions.

(Endnotes)

1         Berger v. Riverwind Parking, LLP, App., 842 So. 2d 918 (Fla. 5th DCA 2003).

2         H & F Land, Inc. v. Panama City-Bay County Airport and Industrial District, 736 So. 2d 1167 (Fla. 1999).

3         Sawyer v. Modrall, 286 So.2d 610 (Fla. 4th DCA 1973), cert. denied, 297 So. 2d 562 (Fla. 1974).

4              Hunt Ridge at Tall Pines, Inc. v. Hall, 766 So.2d 399 (Fla. 2d DCA 2000).

Trigger of Coverage In Construction Defect Cases (March Litigation Quarterly 2009)

 

It is well-established that in order to trigger coverage under an insurance policy, “the accident or injury must occur    during the time period of coverage; or stated otherwise, no liability exists if the accident or injury occurs outside the time period of coverage of a liability policy.”1 Nonetheless, the appropriate trigger of coverage in construction defect cases remains unresolved and a hotly contested issue in Florida.

There are four triggers of coverage theories that are generally accepted: (1) exposure; (2) manifestation; (3) continuous trigger; and (4) injury-in-fact.2 Under the exposure theory, property damage occurs upon installation of the defective product.3 Under the manifestation theory, property damage occurs at the time damage manifests itself or is discovered.4 The continuous trigger approach defines property damage as occurring continuously from time of installation until the time of discovery.5 Finally, under the injury-in-fact trigger, which is also referred to as damage-in-fact, coverage is triggered when the property damage underlying the claim actually occurs.6

The appropriate trigger of coverage continues to plague practitioners in Florida due to the broad sweeping statements made by courts when examining this issue.  In Travelers Ins. Co. v. C. J. Gayfer’s & Co., Inc, Travelers issued a policy of liability insurance to a plumbing contractor.7While the policy was in effect, the contractor installed a roof drainage system in the attic of Gayfer’s Pensacola store.8 After the policy expired, a joint in the drainage system failed, discharging rain water into the store.9 Gayfer’s filed suit against the contractor under various theories of negligence and implied warranty to recover for property damaged by the leak and for loss of use of undamaged property left idle when the store was closed for a day following the drainage system failure. Gayfer’s argued, among other things, that the definition of “property damage” was ambiguous since it may be fairly read as extending coverage “when the causative negligence occurs within the policy period though that negligence is not manifest until damage occurs beyond the policy period.”10

The apellate court disagreed with the injured’s argument and stated:

The phrase caused by an occurrence informs the insured that’ an identifiable event other than the causative negligence must take place during the policy period. The term’occurrence is commonly understood to mean the event in which negligence manifests itself in property damage or bodily injury, and it is used in that sense here.11

The curious use of the word, “manifests” has led many, including some of the courts cited below, to hold that Florida is a manifestation state.

In American Motorists Ins. Co. v. Southern Sec. Life Ins. Co., a United States District Court in Alabama interpreting Florida law, held that Florida courts follow the general rule that the time of occurrence, within the meaning of an indemnity policy, is the time at which the plaintiff’s injury first manifests.12 This case involved bodily injury and not property damage.13

In 2002, the case of Auto Owners Ins. Co. v. Travelers Cas. & Surety Co., a federal court interpreting Florida law held that the “trigger” of coverage for commercial general liability policies is “when the damage occurs and if damage is continuously occurring, the ‘trigger’ is the time the damage ‘manifests’ itself or is discovered.”14 In 2006, another federal court in the middle district ratified the opinion of its sister court in Essex Builders Group, Inc. v. Amerisure Ins. Co.15

By contrast, the case of Trizec Properties, Inc. v. Biltmore Construction Co., a federal appellate court held the potential for coverage is triggered “when an ‘occurrence’ results in ‘property damage.’”16 Significantly, the court stated, “there is no requirement that the damages ‘manifest’ during the policy period. Rather, it is the damage itself which must occur during the policy period for coverage to be effective.”17 In Trizec, the insured was subcontracted to install a roof deck on a shopping mall.18 The plaintiff sought damages for faulty workmanship.  The complaint alleged the mall was constructed “commencing on or about 1971 and ending in or about 1975.”19 The complaint did not allege when the consequential effects of the improper installation actually began to occur.20 It did allege that the defects “involve latent defects” which were not discovered by plaintiff until their “manifestation” in 1979.21 Finding the insurer had a duty to defend, the court stated:

The potential for coverage is triggered when an “occurrence” results in “property damage.” There is no requirement that the damages “manifest” themselves during the policy period. Rather, it is the damage itself which must occur during the policy period for coverage to be effective. Here, the actual date that the damage occurred is not expressly alleged, but the language of the complaint, “at least marginally and by reasonable implication,” could be construed to allege that the damage (cracking and leaking of roof deck with resultant rusting) may have begun to occur immediately after installation, 1971 to 1975, and continued gradually thereafter over a period of time. The complaint’s allegations are therefore broad enough to allow the insured to prove that at least some of the damage occurred during insurer’s policy period, 1972 to 1976.22

Arguably, Trizec stands for the proposition that Florida is an injury-in-fact state since the court stated the damage itself             must occur during the policy period. Pursuant to injury-in-fact trigger, coverage is triggered when the property damage underlying the claim actually occurs.23 Others argue that since the court found that there was a potential for coverage because the damage could have occurred from the time of installation and continued gradually over time, Trizec makes the trigger of coverage, a continuous trigger.  The continuous trigger approach defines property damage as occurring continuously from time of installation until the time of discovery.24 It should be noted that the court did not use the time of discovery, 1979, as the cut-off point in reaching its decision.25 Accordingly, it can be argued that Trizec does not stand for the proposition that the trigger of coverage is a continuous one. Regardless of whether Trizec holds the trigger of coverage is “injury-in-fact” or adopts the continuous trigger approach, it is clear, contrary to the court’s holding in Auto Owners, supra, Trizec does not hold that the trigger of coverage is manifestation.26

In conclusion, no Florida appellate court has recently addressed the issue as to which trigger of coverage theory applies in Florida.  However, a federal court interpreting Florida law has determined that manifestation is the trigger of coverage where the damage is continuous, as in construction defect cases. Furthermore, at least one circuit court judge in Miami-Dade County has held that manifestation is the trigger of coverage.27 This decision is currently on appeal at the Third District Court of Appeal.  Until this case is resolved, and the trigger of coverage issue is specifically addressed, the trigger of coverage issue in Florida remains unsettled.

(Endnotes)

1         New Amsterdam Casualty Co. v. Addison, 169 So. 2d 877, 886 (Fla. 2d DCA 1964).

2         In re Celotex Corp., 196 B.R. 973, 1000, fn. 187 (Bkrtcy.M.D.Fla.1996)

3         Id.

4         Id.

5         Id.

6         Id.

7         Travelers Ins. Co. v. C. J. Gayfer’s & Co., Inc, 366 So. 2d 1199 (Fla. 1st DCA 1979).

8         Id.

9         Id.

10       Id.

11       Id. at 1979

12       American Motorists Ins. Co. v. Southern Sec. Life Ins. Co, 80 F.Supp.2d 280 (M.D. Ala. 2000).

13       Id.

14       Auto Owners Ins. Co. v. Travelers Cas. & Surety Co., 227 F.Supp. 2d 1248, 1266 (M.D.Fla.2002).

15       Essex Builders Group, Inc. v. Amerisure Ins. Co., 485 F.Supp. 2d 1302, 1309 (M.D. Fla. 2006).

16       Trizec Properties, Inc. v. Biltmore Const. Co., 767 F.2d 810, 813 (11th Cir. 1985).

17       Id.

18       Id. at 811.

19       Id.

20       Id.

21       Id.

22       Id.at 813.

23       In re Celotex Corp., 196 B.R. 973, 1000, fn. 187 (Bkrtcy.M.D.Fla.1996)

24       Id.

25       Trizec, 767 F.2d at 813

26       Id.

27            Master Plaster, Inc. v. Scottsdale Insurance et al., Case No. 08-26260 CA 40.

When can a Franchisor be Liable for the Actions of a Franchisee (March Litigation Quarterly 2009)

By its very definition, a franchisee is an independent business separate from its franchisor.1 However, even though a franchisee is an independent business, its franchisor can still be liable for the franchisee’s actions in situations where the franchisee is found to be the agent of the franchisor.2 “The party alleging the agency relationship bears the burden of proving it.”3 Whether that party is successful in establishing the agency relationship will be a question of fact, unless the party’s allegations, if taken as true, fail to meet even the minimum requirements necessary to prove that an agency relationship existed.4

There are two types of agency relationships: (1) actual agency; and (2) apparent agency.5 To prove the existence of an actual agency relationship, a party must prove three elements: “(1) acknowledgement by the principal that the agent will act for him or her, (2) the agent’s acceptance of the undertaking, and (3) control by the principal over the actions of the agent.”6 In establishing whether the franchisor has control over the franchisee, the question is whether the franchisor has the right to control the actions of the franchisee.7

In analyzing whether an actual agency relationship exists, the analysis should begin with a review of the franchise agreement.8 However, because it is not unusual for a franchise agreement to use conclusory terms in an attempt to establish that the franchisee is independent of the franchisor, one must consider the entire agreement when analyzing whether an agency relationship exists between the franchisor and the franchisee.9 For example, in Parker v. Domino’s Pizza, Inc., the Fourth District Court of Appeal (“Fourth District”) reversed the trial court’s ruling that as a matter of law the franchisee, J & B Enterprises, was an independent contractor, and not an agent of Domino’s Pizza, Inc.10 Even though the franchise agreement labeled J & B Enterprises as an independent contractor, the Fourth District looked at the entire franchise agreement and the operations manual for Domino’s Pizza, Inc. and concluded that it was error to determine that as a matter of law Domino’s Pizza, Inc. did not have the right to control J & B Enterprises.11 Ultimately, there is no bright-line rule for determining whether an actual agency relationship exists between the franchisor and the franchisee.12 Rather, the specific facts of the relationship between the franchisor and the franchisee will determine whether an actual agency relationship exists.13

To prove the existence of an apparent agency relationship, a party must also prove three elements: “(1) a representation by the purported principal; (2) a reliance on that representation by a third party; and (3) a change in position by the third party in reliance on the representation.”14 The theory behind the doctrine of apparent agency is that “[t]he principal is estopped [from denying] the authority of the agent, because he has permitted the appearance of authority in the agent and thereby justified the third party in relying on that appearance of authority as though it were actually conferred upon the agent.”15

In analyzing whether an apparent agency relationship exists, one must first look to the actions of the purported principal.16 There must be some “genuine factual representation” by the purported principal that it is exercising control over the purported agent.17 For example, in Mobil Oil Corporation v. Bransford, the Supreme Court of Florida ruled that the use of Mobil symbols and products throughout a gas station, along with Mobil providing support services, was insufficient to establish the required level of control to establish an agency relationship.18 The Court reasoned that “[i]n today’s world, it is well understood that the mere use of franchise logos and related advertisements does not necessarily indicate that the franchisor has actual or apparent control over any substantial aspect of the franchisee’s business or employment decisions.  Nor does the provision of routine contractual support services refute this conclusion.”19

On the other hand, in Orlando Executive Park, Inc. v. P.D.R., the Supreme Court of Florida ruled that a hotel’s use of “signs, national advertising, uniformity of building design and color schemes” was enough to establish that The Howard Johnsons Company had the required level of control over the hotel to create an agency relationship between the owner of the hotel and The Howard Johnsons Company.20 The Court reasoned that “[t]here was sufficient evidence for the jury to reasonably conclude that [The Howard Johnsons Company] represented to the traveling public that it could expect a particular level of service at a Howard Johnson Motor Lodge.”21

In addition to proving the required representation by the purported principal, in order for a party to successfully prove the existence of an apparent agency relationship, that party must show that it actually relied on the purported principal’s representation in making his or her decision to use the services of the franchisee.22 For example, in Orlando Executive Park, Inc. v. P.D.R., the Court found that there was enough evidence presented that the patron of a hotel selected that hotel because of the belief that she was dealing with The Howard Johnsons Company.23 Without evidence of this reliance, a party cannot be successful in establishing an apparent agency relationship.24

In conclusion, when analyzing whether a franchisor can be liable for the actions of a franchisee, one must look beyond the franchising agreement to the specific facts of the case to determine whether an actual or apparent agency relationship exists between the franchisor and the franchisee.  If such an agency relationship is found to exist, a franchisor could be liable for the actions of a franchisee.

(Endnotes)

1         Fla. Stat. § 817.416; see also Font v. Stanley Steemer International, Inc., 849 So. 2d 1214, 1216 (Fla. 5th DCA 2003).

2         Mobil Oil Corporation v. Bransford, 648 So. 2d 119, 120 (Fla. 1995).

3         Font, 849 So. 2d at 1216 (citation omitted).

4         Parker v. Domino’s Pizza, 629 So. 2d 1026, 1027 (Fla. 4th DCA 1993); Mobil Oil Corporation, 648 So. 2d at 121; see also Caranna v. City of Clearwater, 466 So. 2d 259, 264 (Fla. 2d DCA 1985).

5         See Mobil Oil Corporation, 648 So. 2d at 120-21; and Font, 849 So. 2d at 1215-16.

6         Font, 849 So. 2d at 1216 (citations omitted).

7         Parker, 629 So. 2d at 1027.

8         See Font, 849 So. 2d at 1217; see also Parker, 629 So. 2d at 1028.

9         Font, 849 So. 2d at 1218-19.

10       Parker, 629 So. 2d at 1029.

11       Id. at 1027-29.

12       Font, 849 So. 2d at 1219.

13       Id.; Sapp v. City of Tallahassee, 348 So. 2d 363, 367 (Fla. 1st DCA 1977) (citation omitted).

14       Mobil Oil Corporation, 648 So. 2d at 121 (citations omitted).

15       Orlando Executive Park, Inc. v. P.D.R., 402 So. 2d 442, 449 (Fla. 5th DCA 1981) (citation omitted).

16       See Mobil Oil Corporation, 648 So. 2d at 121.

17       Mobil Oil Corporation, 648 So. 2d at 120-21; see also Orlando Executive Park, Inc., 402 So. 2d at 449-51.

18       Mobil Oil Corporation, 648 So. 2d at 120-21.

19       Id. at 120.

20       Orlando Executive Park, Inc., 402 So. 2d at 450.

21       Id. at 450 (citations omitted).

22       See Orlando Executive Park, Inc., 402 So. 2d at 451; see also Caranna, 466 So. 2d at 264.

23       See Orlando Executive Park, Inc., 402 So. 2d at 451.

24            See Caranna, 466 So. 2d at 264).