Defendant Shelby Mutual Insurance Company (Shelby) appeals from a judgment awarding its insured, T.D.S. Incorporated d/b/a Lord & Lady Restaurant (TDS), $2,620,000.00 in damages. TDS claimed that Shelby breached an insurance contract by refusing to pay on a fire loss claim submitted by the corporation. TDS also sought punitive damages based on the tortious conduct of Shelby and its agents. Shelby, on the other hand, asserted the defenses of arson and material misrepresentation, and also counterclaimed for the amount it paid to another insured, Eugene Cohenour. The jury found in favor of plaintiff on all claims, and returned a verdict for $100,000.00, an amount equal to the insurance policy limit, plus special compensatory damages of $420,000.00, and $2,100,000.00 in punitive damages.

On appeal, Shelby essentially argues that (1) the district court should have directed verdicts against TDS on the punitive and special compensatory damages claims; (2) the awards on these claims are excessive; and (3) the district court committed reversible error by not ordering separate trials on plaintiff's contract and tort claims. We agree with Shelby that the award for special compensatory damages is excessive and therefore should be reduced. Our review of the record, however, convinces us that in all other respects the judgment appealed from should be affirmed.I. FACTUAL BACKGROUND

In 1979, Thomas and Dorothy Starr formed TDS, a closely held corporation incorporated under Florida law, in order to open a restaurant in Bradenton, Florida. TDS purchased the business assets of the Lord & Lady Restaurant for $150,000.00 in July of that year. To finance the deal, TDS made a $40,000.00 cash down payment, assumed a promissory note owing to a local bank, and gave Belfrap, Inc., the seller of the business, a $55,000.00 promissory note. The accrual of interest and payments on this note were deferred for five years.

Contemporaneous with the purchase of the restaurant's personal property, the restaurant's lease was assigned to the Starrs individually. The lease contained an option to purchase the building in which the restaurant was located. To preserve the option, the Starrs, as lessees, were required to make an annual payment of $2,000.00 to Eugene Cohenour, the owner of the building.

TDS engaged the services of an independent insurance agent, and through him purchased from Shelby a multi-peril insurance policy. Shelby agreed in that policy to provide TDS with $100,000.00 in fire coverage for personal property including leasehold improvements.

The building which housed the restaurant also contained a warehouse, used for storage by the building's owner, and a beauty salon. On January 13, 1980, at approximately 1:30 a.m., a fire began in the building. Although the restaurant had already closed for the day, customers and several TDS employees still occupied the lounge, as did the Royal Shaft, a band engaged by TDS to provide musical entertainment. Both Mr. & Mrs. Starr were also in the building at this time. After the fire was discovered, the fire department was summoned and everyone safely evacuated the building.

Shortly thereafter, the Westside Fire Department arrived and, with the help of two other volunteer fire departments, extinguished the blaze. The building and its contents sustained extensive damage.1

Because the fire was of suspicious origin, the Westside Fire Department requested the assistance of the State Fire Marshall. Deputy State Fire Marshall Joseph Ladika arrived at the scene soon after the fire had been extinguished. After conducting a fire and site investigation, he concluded that the fire had only one point of origin--the locked office of the Lord & Lady Restaurant, to which only the Starrs had the keys. He also believed that the fire was of incendiary origin, fueled by some type of accellerant. In the early part of February, Mr. Ladika prepared an official State Fire Investigation Report outlining his findings.

Gene Spencer, claims manager for Shelby's local office, visited the fire site on January 14, 1980. He examined the building and took some photographs.2 Mr. Spencer concluded that two fires had been intentionally set in the building; one in the office of the restaurant, and one in the warehouse. He also suspected Mr. Starr as the arsonist. Mr. Spencer submitted a memorandum containing his conclusions to Shelby's claims supervisor, William Brennan, on January 17.

A day or two after the fire, Mr. Spencer retained Equifax, Inc., to investigate the cause and origin of the fire. Equifax sent Gary Haun to conduct a site investigation on January 15, 1980. Contrary to Deputy State Fire Marshall Ladika and Mr. Spencer, Mr. Haun concluded that three separate fires had been intentionally set--one in the restaurant's office, one in the warehouse, and one in the area above the restaurant's kitchen. Mr. Haun also concluded that the Starrs had set the fire. Mr. Cohenour had immediately been dismissed as a serious suspect. Based in part on the erroneous assumption that TDS stood to collect $150,000.00 from Shelby, Mr. Haun projected a clear motive for the Starrs to commit arson. He sent a report reflecting his views to Shelby on January 29, 1980.

On January 14th or 15th, Gene Spencer retained Richard Wilson, an experienced arson attorney. Mr. Spencer felt this was necessary because of his inexperience in adjusting arson claims of such complexity. Mr. Wilson, under Mr. Spencer's direct and close supervision, coordinated Shelby's fire investigation and was privy to all information given to Shelby by the fire investigators. By letter dated March 5, 1980, Mr. Wilson advised the Starrs that he was representing Shelby and was assisting in the investigation of TDS's fire loss claim. The letter noted that Shelby had reason to believe that the fire was the product of arson, and requested, pursuant to a clause in the insurance policy, an examination of the Starrs under oath. The letter also asked the Starrs to bring with them to the examination numerous financial documents.

Two days after the Starrs received the letter, Arthur Vandroff, the Starrs' business attorney, telephoned Mr. Wilson. Mr. Vandroff informed Mr. Wilson that he was not qualified to represent anyone in a case involving arson, and that he wished only to assist TDS in preparing its proof of loss. Mr. Vandroff also told Mr. Wilson that if Shelby had any information implicating his clients in arson, he wanted to know up front so he could refer the case to a qualified arson attorney. Mr. Wilson mollified Mr. Vandroff with the assurance that Shelby had no such information, and by stating that the examination under oath would involve only the proof of loss and some general questions concerning the Starrs. Mr. Vandroff was not informed at that time that Shelby had information suggesting that a fire had been set in the restaurant's locked office.

Mr. Starr's examination under oath was conducted by Mr. Wilson on March 26, 1980. Also present were Gene Spencer and Arthur Vandroff. Before the examination began, Mr. Wilson informed Mr. Vandroff that Shelby had reason to believe that four separate fires had been set--one in the office, and three in Eugene Cohenour's warehouse. Mr. Wilson then asked Mr. Vandroff to inform the Starrs that this information concerning the fire's points of origin was to be kept in the strictest confidence. Mr. Vandroff was not told, however, that Shelby had already paid Mr. Cohenour $125,000.00, his policy limits. Mr. Vandroff spoke with the Starrs, who indicated they were willing to proceed with the examination. He advised Mr. Wilson that because he was not an arson attorney, he would not allow Mr. Starr to testify if Shelby had any information or reports indicating that the Starrs had set the fires. Mr. Vandroff again was assured that Shelby had no such knowledge. The examination which followed lasted a full day. A few days later, Mr. Wilson sent Mr. Vandroff a letter thanking him and the Starrs for their cooperation.

Mrs. Starr's examination under oath was scheduled for April 10, 1980. Prior to that time, however, Mr. Starr received a letter from ASIC, the insurer which paid for the fire damage to the beauty salon. See infra note 1. The letter stated that ASIC was subrogated to the rights of its insured, and that an investigation indicated that Mr. Starr was legally liable for the fire loss. Mrs. Starr gave the letter to Mr. Vandroff the same day she was to be examined by Mr. Wilson.

Mr. Vandroff confronted Messrs. Wilson and Spencer with the letter and their prior assurances that Shelby had no information or reports implicating the Starrs in arson. Mr. Spencer stood by their earlier representations, and asked to use a phone in Mr. Vandroff's office. After making a telephone call, Mr. Spencer told Mr. Vandroff that the letter should not have been sent. Mr. Spencer then reiterated his assurances concerning the Starrs and arson. The examination of Mrs. Starr proceeded as scheduled.

Mr. Starr later received a letter from ASIC informing him that the prior letter had been sent in error. Mr. Vandroff was now satisfied that Mr. Spencer had been telling him the truth.

After the April 10 examination, Mr. Wilson told Mr. Vandroff that Shelby was still investigating the cause and origin of the fire. Later, in response to a letter sent by Mr. Vandroff in late May, 1980, inquiring as to status of TDS's claim, Mr. Wilson, also by letter, finally informed Mr. Vandroff that Shelby was denying TDS's claim. The stated reasons for denial were willful and intentional misrepresentation and concealment of material facts regarding the cause of the fire and the nature and extent of TDS's loss. Mr. Vandroff received the denial letter on April 23, 1980. Baffled by the denial, he immediately telephoned Mr. Wilson who stated that Shelby believed the Starrs committed the arson. Mr. Vandroff was livid considering the repeated assurances he had been given concerning Shelby's lack of information tending to inculpate the Starrs in arson.

TDS brought suit against Shelby in state court in October, 1980. The law firm of Richard H. Wilson, Esquire, appeared on behalf of Shelby and removed the case to federal district court.

In Count I of its third amended complaint, TDS sought payment under the personal property fire insurance policy issued by Shelby and special damages. Count II of that complaint sought punitive damages for the tortious conduct of Shelby. In general terms, that count alleged fraud, tortious interference with property rights, and defamation. Shelby answered and asserted the defenses of arson and misrepresentation. Shelby also counterclaimed against TDS for $125,000.00, the amount it paid Eugene Cohenour for the fire damage to his building.

Because the trial court would not grant separate trials on the two counts, Richard Wilson moved the court to allow him to withdraw as Shelby's counsel; it became clear that he might be called as a witness during the trial of the punitive damages count. The district court granted the motion, and substitute counsel tried the case in the district court, and represents Shelby on appeal.

A jury trial lasted nearly two and one-half weeks. TDS presented a considerable amount of evidence concerning the following: (1) the adequacy of the various cause and origin investigations; (2) Shelby's single-minded pursuit of only that evidence reinforcing its conclusion that the Starrs were guilty of arson; (3) the financial solvency of the Starrs; (4) the fact that Lord & Lady Restaurant was approaching profitability; (5) the allegedly fraudulent conduct of Shelby, particularly the actions of Richard Wilson and Gene Spencer in dealing with Arthur Vandroff; and (6) the litigation conduct of Shelby. Shelby, on the other hand, focused at trial on its contention that only the Starrs had access to all of the areas found by its experts to be points of origin of the fire, the fact that the business had been consistently losing money, and the reasonableness of denying TDS's claim in light of the reports submitted to it. The jury returned a verdict in favor of TDS on all claims. Shelby's post-trial motions for relief were denied, and this appeal followed.

Shelby advances several theories in support of its argument that the district court should have directed a verdict in its favor on the plaintiff's claim for punitive damages: (1) the plaintiff was allowed to introduce prejudicial evidence relevant only to a "bad faith refusal to pay" claim, a claim not recognized in Florida for first party3 insurance claims; (2) the submission of the defense of arson to the jury precluded the jury's consideration of the punitive damages claim; and (3) there was no evidence that an independent tort caused Shelby to deny TDS's claim. We address these arguments seriatim.

A. Florida Law and "Bad Faith Refusal to Pay"

Florida law is clear "that a suit for punitive damages will not lie against an insurance company for bad faith in failing to pay a first party claim." Smith v. Standard Guaranty Insurance Co., 435 So.2d 848, 849 (Fla.Dist.Ct.App.), petition for review denied, 441 So.2d 633 (Fla.1983); see Kent Insurance Co. v. Hassan, M.D., 447 So.2d 323 (Fla.Dist.Ct.App.1984). This view is premised in part on the notion that in a first party claim situation, the insurer "and its insured occupy the status of debtor and creditor." Smith, 435 So.2d at 849 (citing Baxter v. Royal Indemnity Co., 285 So.2d 652 (Fla.Dist.Ct.App.1973), cert. discharged, 317 So.2d 725 (Fla.1975)). To recover punitive damages, the plaintiff must show more than generalized "bad faith;" the plaintiff must show that the conduct of the insurer rose to the level of "deliberate, overt and dishonest dealings," Smith, 435 So.2d at 849, constituting an independent tort. See Kent Insurance Co., 447 So.2d at 324; Industrial Fire & Casualty Co. v. Romer, 432 So.2d 66 (Fla.Dist.Ct.App.), petition for review denied, 441 So.2d 633 (Fla.1983). Neither Shelby nor TDS dispute the applicable Florida law or the district court's charge to the jury on this issue.4 Shelby, however, does argue that the trial court erroneously allowed TDS to try a "bad faith" claim, to Shelby's prejudice. We disagree.

The gist of Shelby's complaint is that TDS was allowed, over objection, to attack the accuracy and adequacy of the fire investigation which Shelby asserted resulted in the denial of TDS's claim. According to Shelby, the assessment of punitive damages was based not on any evidence of an independent tort, but rather on Shelby's decision to raise an arson defense. From this reasoning, it follows that evidence of Shelby's litigation conduct and the evidence concerning the adequacy of the basis upon which Shelby denied the claim was irrelevant to the independent tort claim. The straw man erected by Shelby, however, is easily dismantled.

Relevant evidence is defined as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401. True, the allegedly objectionable evidence is relevant to a claim not countenanced by the Florida courts; it does not ineluctibly follow, however, that this evidence also is irrelevant to claims which are properly entertained. Certainly the litigation conduct of Shelby was relevant to the claim that Shelby or those acting on its behalf dealt dishonestly with TDS. Although this conduct occurred after the denial of TDS's claim, it did corroborate TDS's contention that Shelby deliberately deceived it while Shelby was investigating the fire. Additionally, much of the evidence concerning the recklessness of the investigation and the poor quality of the investigative reports Shelby stated it relied upon to deny TDS's claim is relevant to the issue of whether in fact the fire was the result of arson and, if so, the identity of the arsonist. Surely these are matters of consequence in an insurance suit where arson is raised as a defense.

Shelby next asserts that the district court's refusal to strike Shelby's defense of arson at the conclusion of the evidence in defense precluded submission of the punitive damages claim to the jury.5 In support of this position, Shelby refers us to cases from jurisdictions, which, unlike Florida, do sanction first party "bad faith refusal to pay" claims. Shelby's reliance on these cases, however, is misplaced.

This court, in Winningham v. Centennial Insurance Co., 708 F.2d 658, 659 (11th Cir.1983), a diversity case in which Georgia law provided the rule of decision, concluded that an insurance company is not liable for punitive damages for refusing to pay on a claim by its insured when the insurer has a reasonable basis for litigating, rather than paying, the claim. Similarly, in Dempsey v. Auto Owners Insurance Co., 717 F.2d 556 (11th Cir.1983), we had occasion to apply Alabama "bad faith refusal to pay" law in a first party claim situation. We noted that in Alabama, an insurer may subject itself to punitive damages when it has no legal or factual defense to a claim, yet nonetheless refuses to pay it. Id. at 561. Put another way, "[w]hen a [first party] claim is 'fairly debatable,' the insurer is entitled to debate it whether it concerns a matter of fact or law." Id. at 560. More recently, the Alabama Supreme Court held in a first party claim case that when a jury question is presented on the insurance contract claim, the jury is precluded from also considering the tort claim of "bad faith refusal to pay." National Security Fire & Casualty Co. v. Vintson, 454 So.2d 942 (Ala.1984). Shelby argues that the policy behind these decisions compels a similar conclusion here. Shelby again, however, skews the distinction between a true "bad faith refusal to pay" claim and the one actually tried and submitted to the jury in the district court.

We need only compare the elements of a first party refusal to pay claim and its Florida cousin to realize that, although superficially similar, these theories of recovery are materially different. The Alabama Supreme Court defined the tort of "bad faith refusal to pay" a first party insurance claim as follows:

[A]n actionable tort arises for an insurer's intentional refusal to settle a direct claim where there is either "(1) no lawful basis for the refusal coupled with actual knowledge of that fact or (2) intentional failure to determine whether or not there was any lawful basis for such refusal."

Id. at 944 (quoting Chavers v. National Security Fire & Casualty Co., 405 So.2d 1, 7 (Ala.1981)) (emphasis deleted). That court fleshed out the contours of the fledgling tort in National Security Fire & Casualty Co. v. Bowen, 417 So.2d 179 (Ala.1982), where it stated that a plaintiff in a "bad faith refusal to pay" case has the burden of proving:

(a) an insurance contract between the parties and a breach thereof by the defendant;

(b) an intentional refusal to pay the insured's claim;

(c) the absence of any reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason);

(d) the insurer's actual knowledge of the absence of any legitimate or arguable reason;

(e) if the intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer's intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.

Id. at 183 (quoted in Vintson, 454 So.2d at 944).

From these authorities, it is clear that an essential element of a first party bad faith claim is the indisputable nature of the claim denied by the insurer. If a fact question exists concerning an insurer's defense, i.e., the plaintiff is not entitled to a directed verdict on the contract claim, the plaintiff, by definition, has failed to carry the initial burden of proof. By contrast, Florida law, the law applied by the district court, requires a plaintiff to establish that the insurer engaged in dishonest conduct constituting a tort separate and distinct from the insurance contract sued upon. For example, in this case, evidence was presented and the jury was instructed on the independent tort of fraud. The presence of a fact question on the defense of arson does not negative TDS's claim that Shelby engaged in deliberate, overt, and dishonest dealings. The bad faith refusal to pay cases simply are not controlling in the facts before us.

To comply with Florida's independent tort requirement, the district court provided the jury with standard fraud instructions. Specifically, the court instructed the jury on four allegedly fraudulent statements which supposedly occurred between the day of the fire and the day TDS's claim was denied.6 Shelby argues that since there is no evidence that these statements resulted in denial of the claim, the district court erred in even submitting the punitive damage claim to the jury. We disagree.

Contrary to Shelby's suggestion, TDS has never argued that these statements caused the denial of the claim submitted by the plaintiff. TDS instead maintained throughout these proceedings that Shelby's tortious conduct, inter alia, (1) impaired TDS's ability to timely prove that its agents did not set the fire; (2) exposed TDS to unnecessary collateral lawsuits; (3) impaired TDS's ability to discover who set the fire so as to recover from that person its uninsured loss; and (4) made it impossible to reestablish the restaurant business. Shelby has not directed our attention to, nor have we found, any Florida case holding that, to be actionable, the independent tort sued upon must have caused the breach of the insurance contract or the actual denial of a first party claim. We accordingly discern no sound reason for disturbing the district court's decision to submit the punitive damage claim to the jury.

We conclude, therefore, that (1) plaintiff was not erroneously allowed to try a "bad faith refusal to pay" claim, in contravention of Florida law; (2) the fact that a jury question existed on the arson defense did not preclude submission of the punitive damages claim to the jury; and (3) the absence of evidence that the fraudulent statements caused the denial of TDS's claim does not counsel holding that the punitive damage claim should not have been submitted to the jury. Viewing all the evidence, along with all logical inferences flowing from the evidence, in the light most favorable to TDS, we hold that there was sufficient conflict in substantial evidence to warrant submission of the punitive damage claim to the jury. See Neff v. Kehoe, 708 F.2d 639, 641-42 (11th Cir.1983). After carefully reviewing the record, we also hold that reasonable jurors could have concluded that Shelby engaged in deliberate, overt and dishonest dealings with TDS. See infra pp. 1530 - 1531. The assessment of punitive damages was justified.

Shelby next argues that the district court erred in denying its post-judgment motions for remittitur, or, in the alternative, for a new trial. We disagree, finding that the district court acted well within its discretion in leaving intact the $2,100,000.00 punitive damage award.7

The Florida courts are chary of disturbing punitive damages verdicts returned by juries.8 The Florida Supreme Court stated the law as follows:

Although the verdict may be for considerably more or less than in the judgment of the court it ought to have been, still the court should decline to interfere, unless the amount is so great or small as to indicate that the jury must have found it while under the influence of passion, prejudice, or gross mistake. In order to shock the sense of justice of the judicial mind the verdict must be so excessive or so inadequate so as at least to imply an inference that the verdict evinces or carries an implication of passion or prejudice, corruption, partiality, improper influences, or the like.

Lassitter v. International Union of Operating Engineers, 349 So.2d 622, 627 (Fla.1976) (citation omitted). To determine whether a punitive damage award is excessive, the court may consider the relationship between the amount awarded and (1) the degree of misconduct involved, as well as (2) the defendant's ability to pay the judgment. Arab Termite and Pest Control, Inc. v. Jenkins, 409 So.2d 1039, 1042-43 (Fla.1982); see Louisville and Nashville Railroad v. Hickman, 445 So.2d 1023 (Fla.Dist.Ct.App.1983), petition for review dismissed, 447 So.2d 887 (Fla.1984). More specifically, a court may:

order a new trial or remittitur when the manifest weight of the evidence shows that the amount of punitive damages assessed is out of all reasonable proportion to the malice, outrage, or wantonness of the tortious conduct.... [T]his finding must be affirmatively supported by the record or the judge must find that the jury was influenced by matters outside the record.

Arab Termite, 409 So.2d at 1042. Additionally, a punitive damage award may be deemed excessive if it not only "smarts," but also is out of all proportion to the defendant's financial position. Hickman, 445 So.2d at 1028; see also Arab Termite, 409 So.2d at 1043 ("Punitive damages should be painful enough to provide some retribution and deterrence, but should not be allowed to destroy the defendant.").

With these principles in mind, we conclude that the district court properly denied Shelby's motions for post-trial relief. As we have seen, Florida law allows recovery of punitive damages in a first party refusal to pay case when the plaintiff demonstrates that the insurer engaged in "deliberate, overt and dishonest dealings." Smith, 435 So.2d at 849. In this case, the jury so found9 and the district judge who presided over the lengthy and bitterly fought trial refused to disturb their considered judgment. Moreover, the plaintiff introduced considerable evidence showing that Shelby, from as soon as a day after the fire, had decided not to pay TDS's claim, regardless of any evidence tending to exonerate TDS from the charge of arson. The record also reflects that Richard Wilson and Gene Spencer deliberately deceived TDS throughout the period that Shelby had been solidifying an arson defense, to TDS's detriment. Post-denial conduct of Shelby corroborated TDS's essential contention that what it purchased from Shelby was not insurance against various hazards but rather years of contentious, costly litigation fueled initially by fraud. In these circumstances, we cannot hold that the manifest weight of the evidence shows that the $2,100,000.00 punitive damage award is out of all proportion to the deliberate, overt and dishonest dealings which reasonable jurors could have found. Similarly, the record indicates that the award will not inflict undue financial hardship on Shelby. Indeed, Shelby has never argued that the amount awarded is disproportionate to its ability to pay.10 We therefore conclude that the award does not exceed " 'the maximum limit of a reasonable range within which the jury may properly operate.' " Warren v. Ford Motor Credit Co., 693 F.2d 1373, 1380 (11th Cir.1982) (quoting Keyes v. Lauga, 635 F.2d 330, 336 (5th Cir.1981) ); accord, Lassitter, 349 So.2d at 627. That part of the judgment awarding TDS $2,100,000.00 in punitive damages is accordingly affirmed.

In addition to punitive damages, the jury also returned a verdict of $88,000.00 for damaged business personal property, $12,000.00 for damages to leasehold improvements, and $420,000.00 in special compensatory damages. Shelby contests on appeal only the special damage award, contending that the district court erred in not directing a verdict in Shelby's favor on TDS's claim to these damages. In the alternative, Shelby argues that the special damage award is excessive. After reviewing the record, we conclude that the district court did not err in submitting the claim of special damages to the jury; the award, however, is excessive and will be reduced to comport with the evidence adduced at trial.

The district court instructed the jury that TDS could be awarded special damages for (1) loss of a valuable business opportunity, or (2) loss of a business or credit reputation, due to Shelby's failure to pay amounts due under the insurance policy. T. 13:323. The jury was further instructed that an award could be returned for these special elements of damages if TDS had shown that "special circumstances" allowing for these damages had been in the contemplation of the parties at the time the insurance policy was entered into. Id. at 13:319. The district court's charge also stated that special damages could be awarded if Shelby had committed fraud upon TDS. Id. at 13:320. Neither party objects to the content of these instructions.11 Shelby, however, argues that the district court should never have given these instructions because the evidence could not support an award of special damages, under either a contract or tort theory.

TDS presented a considerable amount of evidence on the issue of special damages.12 For example, Mr. Alario and Mrs. Starr gave their opinion on the value of the restaurant and lounge. Mrs. Starr and Attorney Vandroff also testified that several collateral lawsuits were filed against either TDS or the Starrs as a result of Shelby's failure to pay on the fire claim. Additionally, TDS contended throughout the trial that Shelby's misrepresentations concerning the arson investigation and the part TDS played in it deprived it of the ability to conduct its own timely investigation of the fire so as to prove its innocence and insist on payment from Shelby. In this regard, TDS maintained that Shelby's fraudulent statements hampered efforts to discover the identity of a blonde boy seen in the warehouse shortly before the fire occurred, as well as the whereabouts of a waitress the Starrs had fired an hour before the fire began. Id. at 9:322. TDS also presented evidence that, absent Shelby's fraud, TDS would have secured the debris which had been removed from the office and later discarded. Arthur Vandroff, TDS's business attorney, testified that he advised the Starrs that once a settlement was reached with Shelby concerning the fire loss, they should, pursuant to the lease, instruct Eugene Cohenour to rebuild13 the building so that the restaurant and lounge could be reopened. Id. at 9:90. The Starrs indicated that they were anxious to follow this advice. Id. Attorney Vandroff further testified that had he known during the period he was dealing with Mr. Wilson of the one-dimensional approach of Shelby's investigation, its singular focus on TDS and its agents as suspects, its decision early on that TDS was responsible for the fire, and the information which implicated his client in arson, he would have promptly called in an arson expert to investigate the cause of the fire. Id. at 9:95-96. He also testified that had he realized the true nature of Shelby's investigation, he would have referred his client to an attorney experienced in handling a case involving an arson defense. Id. at 8:321.

We are unable to hold that these facts and the logical inferences to be drawn from them "point so strongly and overwhelmingly in favor of" Shelby that we believe "that reasonable men could not arrive at a contrary verdict." Neff v. Kehoe, 708 F.2d 639, 641 (11th Cir.1983). Reasonable and fair-minded jurors certainly could have concluded that but for Shelby's deception, TDS would more likely than not have been able to reestablish the valuable restaurant and lounge business. The district court therefore properly denied Shelby's motion for a directed verdict on TDS's claim to special damages.

Shelby argues that even if the special damage claim was properly submitted to the jury, the amount awarded, $420,000.00, is clearly excessive. We agree.

As we have seen, the jury was instructed that special damages, under either a tort or contract theory, could be awarded only if TDS demonstrated a loss of a valuable business opportunity or a loss of a business or credit reputation. Shelby correctly notes that TDS did not show any entitlement to lost profits; indeed, the district court refused to give the jury an instruction on lost profits.14 We also agree with Shelby that the special damage award could not properly be predicated on the option to purchase the Cohenour building, even though there was much testimony concerning the value of the option itself as well as the value of the real estate which it secured. The option was owned by the Starrs individually, not by TDS, the only party-plaintiff in this action.15 We thus cannot hold that the Starrs' loss of the ability to exercise the option is equivalent to TDS's loss of a valuable business opportunity. Additionally, though sufficient evidence concerning damage to TDS's credit reputation may have been presented to avoid a directed verdict, TDS does not suggest on appeal that these injuries approach the amount awarded by the jury. TDS does not even offer a figure for these damages, and we accordingly can only conclude that they do not support a $420,000.00 award.

After carefully reviewing the record before us, the only lost business opportunity shown by TDS with the requisite degree of certainty is the value of the restaurant and lounge.16 Charles Alario, the real estate broker who handled the sale of the Lord & Lady Restaurant from Belfrap, Inc. to TDS, valued the business in the spring of 1978 to be $240,000.00. T.1:115. Mrs. Starr, an experienced businessperson, valued the business in January, 1980, without consideration of the value of the option to purchase the building and the land, at $225,000.00. Id. at 9:279-80. Shelby presented no evidence to the contrary. We therefore perceive no sound reason not to accept her estimate of the business' value as the proper measure of damages for TDS's loss of a valuable business opportunity. Cf. Neff, 708 F.2d at 644 (though self-serving and uncorroborated, owner's testimony concerning value of property is admissible; proper manner in which to refute owner's valuation is by cross-examination or independent evidence). For this reason, we conditionally remit the special compensatory damages award to $225,000.00. If plaintiff refuses the remittitur, the district court shall grant a new trial solely on the issue of special compensatory damages. See Warren, 693 F.2d at 1380; see also Stewart & Stevenson Services v. Pickard, 749 F.2d 635, 650 n. 18 (11th Cir.1984) (ordinary practice is to direct district court on remand to order remittitur, or to grant new trial on damages issue at option of plaintiff); Quality Foods, Inc. v. U.S. Fire Insurance Co., 715 F.2d 539, 543 n. 3 (11th Cir.1983) (court of appeals has authority to reduce a judgment).

Shelby's final argument on appeal is that the district court erred in not ordering separate trials on Shelby's defense of arson and TDS's claim for punitive damages. Shelby maintains that it was unfairly prejudiced since the jury simultaneously heard evidence of Shelby's arson defense and TDS's "bad faith" punitive damages claim, a claim which Shelby regards as based solely on its decision to raise an arson defense. In support of this position, Shelby likens TDS's punitive damages claim to one for malicious prosecution.

We acknowledge that an essential element of a malicious prosecution action is the bona fide termination of the prosecution in the plaintiff's favor. See, e.g., DeMarie v. Jefferson Stores, Inc., 442 So.2d 1014, 1016 n. 1 (Fla.Dist.Ct.App.1983); Waite v. Ward, 413 So.2d 830 (Fla.Dist.Ct.App.1982). We thus concede that if in fact TDS's claim for punitive damages was predicated on Shelby's arson defense, the malicious prosecution analogy might be persuasive and militate against allowing both to be tried in the same action.17 Shelby, however, again confuses a first party bad faith claim with the one involved in this case. TDS presented evidence of an independent tort involving deliberate, overt and dishonest dealings, i.e., fraud. TDS did not allege, nor was the jury instructed, that a finding of dishonest dealings could be premised on Shelby's decision to raise an arson defense; rather, the gravamen of TDS's quarrel with Shelby stems from the latter's deception and concealment concerning the arson investigation and the facts derived from it. It is clear, therefore, that the punitive damages claim does not rise or fall with the decision to raise the arson defense, or, for that matter, the legal sufficiency of that defense. See infra Part II. B. Shelby's reliance on malicious prosecution cases is accordingly misplaced.18

Rule 42 provides that the district court may order separate trials of any claims or issues "in furtherance of convenience or to avoid prejudice, or when separate trial will be conducive to expedition and economy." Fed.R.Civ.P. 42(b). We will not disturb a district court's decision not to order separate trials absent an abuse of discretion. See Itel Corp. v. Cups Coal Co., 707 F.2d 1253, 1260 (11th Cir.1983). We have reviewed the record, and discern no such abuse.

In summary, we affirm the judgment appealed from in all respects except the award of special damages. We find $225,000.00 to be the maximum possible recovery for these damages and order a conditional remittitur to that amount. If TDS refuses the remittitur, the district court shall grant a new trial solely on the special damages issue.

AFFIRMED in part, REVERSED in part, and REMANDED for proceedings consistent with this opinion.19

The district court was confronted in this case with an arson fire. The question was who set the fire: T.D.S. Incorporated or some third party. Shelby Mutual Insurance Company had good and ample reason, founded on credible evidence, to believe that T.D.S. committed the arson. It therefore refused to pay the claim, relying on the venerable principle of insurance law that an insured should not profit from his unlawful acts.1 The majority holds that an insurer can be held liable for punitive damages under the circumstances presented here, for as much as $2.1 million. The majority claims that its holding comports with the law of Florida. I find nothing in Florida law, much less in logic or common sense, that would countenance the majority's holding. I therefore dissent.

The jury's verdict was caused by the failure of the trial judge to come to grips with the issues in this case and to prepare them properly for trial. T.D.S.'s lawyer, John W. Berry, pled his case in such a way that one could hardly discern, at first blush, precisely what it was that he was claiming--beyond the conclusory allegations that Shelby Mutual, in refusing to honor its insured's proof of loss, had been guilty of "fraud," "recklessness," and "dishonesty." The case proceeded through discovery and to trial on these vague conclusory allegations despite Shelby's repeated efforts to get the court to make T.D.S. state its claims in a coherent, orderly manner, as the Federal Rules of Civil Procedure require.

In his opening statement to the jury, Berry told the jury practically nothing about T.D.S.'s claims. Rather, he focused his attention on the plight of Thomas and Dorothy Starr, T.D.S.' principals, as if they had brought the suit, describing the complaint against Shelby with this brief, cryptic statement:

The complaint, ladies and gentlemen of the jury, is pretty specific in what it charges with. It charges them with fraud, false pretenses, pretending to investigate, and other tortious things that are wrong, civil law. In law it's called a tort. Bias, prejudice, reckless presumption of guilt which resulted in an accusation of two people going into the retirement business, who are two of the finest people that their employees and neighbors had known in their lives. And it's for real, and they knew it.

Berry then set out to "try" Shelby and its lawyers for having the audacity to accuse the Starrs of arson. Most of the evidence he brought before the jury had absolutely nothing to do with the fundamental questions Florida law required it to decide: the extent of T.D.S.'s property loss (up to the $100,000 policy limit) and whether T.D.S. committed the arson. Shelby's repeated objections to this irrelevant evidence were overruled.

The trial court made no attempt to settle the issues in this case until it framed its final charge to the jury. Had the court attempted to settle the issues earlier, it would have recognized T.D.S.' claim that Shelby conducted a reckless and inadequate investigation of the fire and refused to pay T.D.S.' property loss without good cause as a "bad faith" claim proscribed by Florida law and struck it from the case. The court also would have found T.D.S.' fraud and deceit claim insufficient as a matter of law, and removed it from the jury, because T.D.S. could not have justifiably relied on any representations Shelby's agents or attorneys made to T.D.S. or the Starrs during the course of its fire investigation. Without these tort claims, T.D.S. could not have recovered punitive damages. As for T.D.S.' suit under the insurance policy, the court should have granted Shelby's motion to strike T.D.S.' claim for consequential damages. Having taken the foregoing action, all of which Shelby requested, the court would have reduced this controversy to what it should have been: a suit to recover the property damage proceeds of a fire insurance policy.

By substituting jury instructions for rulings that would have precluded the jury from considering T.D.S.' legally insufficient claims, the district court was unable to avoid what I consider to be a patent miscarriage of justice. As an issue-settling device, the court's charge came too late because the jurors had heard too much irrelevant and highly prejudicial evidence, and argument from plaintiff's counsel thereon, to be able to decide the case on that which was pertinent. The charge was inadequate because the court failed to instruct the jurors to disregard such evidence and argument and because much of it, particularly the instructions concerning T.D.S.' "fraud and deceit" claim, was incomprehensible. In consequence, plaintiff's counsel, in closing argument, presented the issues to the jurors on his terms: had a powerful and wealthy insurance company subjected two hardworking people, the Starrs, to tremendous personal suffering for the sake of a mere $100,000; if so, it should be punished, severely.

The majority, I submit, has compounded the trial judge's errors. This becomes clear when one analyzes the record in this case, from the beginning.

In 1979, Thomas and Dorothy Starr, then in their early fifties, moved to Bradenton, Florida to "retire" and also to fulfill their dream of operating their own restaurant. The Starrs came from Silver Spring, Maryland. Thomas had been a U.S. Army cook and, after retiring from the Army, had worked as a kitchen and cafeteria supervisor. Dorothy had worked for the federal government as a purchasing agent, sold real estate, and shortly before moving to Florida owned and operated a kindergarten.

The Starrs moved to Bradenton because they found a restaurant for sale there at the right price, the Lord & Lady Restaurant and King's Pub Lounge (the "Lord & Lady"), which was owned by Belfrap, Inc. The resources the Starrs had available to invest in the purchase of a restaurant, and to provide operating capital, were modest, $124,000 in bank deposits and $96,000 in real estate mortgages, but the price Belfrap was asking, $150,000, fell within these means. That price included all of the Lord & Lady's assets, the business' "good will," Belfrap's leasehold interest in the premises, and its option, renewable annually for five years beginning February 15, 1978, to purchase from Eugene R. Cohenour the building that housed the Lord & Lady.2 Thus, a buyer could move in and continue operating the Lord & Lady with minimal business disruption.

Belfrap's offer was attractive to the Starrs, and they decided to accept it. They wanted to operate the Lord & Lady as a corporation, to limit their personal liability, so they hired attorney Arthur Vandroff to organize T.D.S. Incorporated and to handle the closing. The Starrs provided T.D.S. with the necessary capital and, on July 23, 1979, T.D.S. paid for and acquired the Lord & Lady. The Starrs, personally, acquired Belfrap's lease and option. T.D.S. paid Belfrap the $150,000 purchase price by giving it, at closing, $95,000 in cash and a promissory note for $55,000. T.D.S. raised $55,000 of the $95,000 cash payment by borrowing that sum from the Westside National Bank of Bradenton. The loan was secured by a mortgage on the Lord & Lady's furniture, fixtures, and equipment and the Starrs' guaranty.

The building that housed the Lord & Lady was a prefabricated structure measuring 86 by 140 feet. The restaurant and lounge were located in the eastern half of the building. Eugene R. Cohenour had a small warehouse in the northwest quarter of the building, which he permitted the Starrs to use, and a beauty salon occupied the southwest quarter.

T.D.S. purchased the Shelby Mutual multi-peril insurance policy involved in this suit the day it acquired the Lord & Lady. The policy provided a variety of coverages, including $100,000 in fire insurance for T.D.S.' personal property in the restaurant and lounge, including its leasehold improvements. The policy named Westside National Bank of Bradenton as a loss payee, to protect its security interest in the Lord & Lady's assets.

The Starrs, as T.D.S.' owners, officers, and principal employees, managed and operated the Lord & Lady restaurant and lounge from the moment T.D.S. acquired the business until the fire five and a half months later. Mr. Starr ran the kitchen and food service, and Mrs. Starr handled the finances. The Lord & Lady lost money from the moment it began operating under the new management until the outbreak of the fire, despite the fact that the Starrs drew no salary. By the time of the fire, T.D.S. had suffered a net loss in excess of $46,000. In December 1979, the last full month it was in business, T.D.S. lost $6,800 even though it catered more than twenty Christmas parties. The company's cash flow problem was even worse; during the five and a half months it operated the Lord & Lady it had a negative cash flow of over $97,000. The Starrs underwrote these losses by dipping into their savings. They soon realized that they had made a bad investment; they stood to lose their life's savings.

The fire occurred at 1:43 a.m. on Sunday, January 13, 1980. The restaurant had closed, but the lounge was still open, serving approximately twenty-five customers. Mr. Starr had been in the lounge most of the evening, and after the restaurant closed Mrs. Starr joined him. According to the Starrs, the fire broke out shortly after they went to their office (which was in the restaurant, adjacent to the dining room) to obtain a check to pay the band, which had just finished playing in the lounge. The office was locked, and the Starrs had the only keys to the door. Before they could open it, they noticed that the lights had gone out, so they returned to the lounge to see what was wrong. When they got there, the ceiling was afire. A waitress called the local fire department, and by the time the firemen arrived the fire had engulfed a substantial portion of the northern half of the building.

The department's fire marshal, Robert Kline, immediately requested the assistance of the State Fire Marshal. Deputy State Fire Marshal Joseph Ladika arrived on the scene at 4:00 a.m. He was a man of sixteen years experience in the Fire Marshal's office and, prior to that, considerable experience as a fireman and fire chief. Ladika concluded that the fire had been deliberately set, originating in the restaurant office, and had been fueled by an accelerant, a highly flammable material such as gasoline. Using a "sniffer," a device designed to locate accelerant vapor, he had picked up what he termed a "tremendous reading" at the west wall of the office.

The day after the fire, Shelby Mutual employed Equifax to investigate the origin and cause of the fire. Equifax assigned Gary Haun, Sr., who had previous experience in the Tennessee Fire Marshal's office, to the case. Working with Fire Marshal Kline, Haun conducted an examination of the premises, taking numerous photographs of the debris and the remains of the building's interior structures, and concluded that the fire originated in three places: the restaurant office, above the restaurant's kitchen (which was located next to the office), and the warehouse. Haun agreed with Deputy State Fire Marshal Ladika that the fire had been fueled by an accelerant; a "pour pattern" on the carpeting in the office, uneven burn patterns on several rugs in the warehouse, spalling on the cement floor in the warehouse, and severe spot burning in the kitchen ceiling pointed to such. Haun also noted that one could enter the warehouse from the restaurant through an interior door. The area above the kitchen ceiling (which was suspended) could be reached by removing an acoustic tile. Haun agreed with Ladika that the physical evidence pointed to arson.

The beauty salon was insured by American States Insurance Company. American States hired Systems Engineering Associates to investigate the origin and cause of the fire, and on January 23, Mervin Stringer examined the premises. Stringer was an experienced fire investigator; he had a bachelor's degree in chemistry, an associate's degree in fire technology, and prior experience as a fireman. He also found evidence of an incendiary fire in the restaurant office, over the kitchen and in the warehouse. Since there was no reason to suspect arson on the part of the beauty salon operator, because he had a profitable business, Stringer advised American States to pay the loss, which it did.

Two other experts eventually rendered opinions as to the origin and cause of the fire. Weldon Carmichael, a renowned fire expert and past president of the International Association of Arson Investigators whom Shelby retained prior to trial, opined that the fire had been deliberately set in three locations, including the restaurant office, and had been fueled by incendiary elements. Roland L. Kennedy, a fire investigator employed by T.D.S. after it brought this suit, admitted that the fire was of "suspicious cause," that it "looked funny," and that the hole burned into the office carpet was "similar to a pour pattern" an arsonist would create in starting a fire by lighting a flammable liquid. Kennedy, however, would not say that the office was a point of the fire's origin.

A day or so after the fire, Shelby Mutual retained Richard Wilson, an experienced arson attorney, to handle the property damage claims it anticipated T.D.S. and Eugene R. Cohenour, the owner of the building, would make. Cohenour also had fire insurance with Shelby Mutual. Cohenour filed a proof of loss for his policy limits, $125,000, and Shelby, having no reason to suspect that Cohenour was responsible for the fire, promptly paid it.

Shelby treated T.D.S.' proof of loss differently, however. On March 5, Wilson wrote Mr. Starr, T.D.S.' president, requesting a statement under oath. See Appendix, Exhibit A. Wilson's letter put T.D.S. and Starr on plain notice that Shelby Mutual suspected arson and that, if it became demonstrable that T.D.S. had set the fire deliberately, Shelby would deny coverage. At this point, Shelby and T.D.S. occupied an adversary debtor-creditor relationship, a quasi-litigation posture. See infra p. ----. Shelby had a contract right to depose Starr, and his wife as well, as the principal officers of its insured, and to examine them about the circumstances of the fire, including any motive they may have had to ignite it, and the Starrs should have expected Shelby to exercise that right. Moreover, their failure to provide Shelby with the information it requested3 could forfeit T.D.S.' insurance coverage.

Wilson examined Mr. Starr under oath on March 26, 1980. He began by advising Starr and his lawyer, Arthur Vandroff, that Shelby had evidence of arson but was not yet able to identify the arsonist. He also told them that any misrepresentation Starr might make could operate to void the insurance coverage. Starr answered all the questions Wilson put to him and made no patently incriminating statements.

In early April, the Starrs terminated their lease. (They had already abandoned their option to purchase the building, having failed to make the $2,000 option payment due on February 15.) Shortly thereafter, Wilson examined Mrs. Starr under oath. Like her husband, she made no patently incriminating statements.

Shelby Mutual concluded that the Starrs had deliberately caused the fire. No one had doubted that the fire had been caused by arson. The primary focus of the investigation was to identify the arsonist. The evidence pointed to the Starrs, because they appeared to be the only ones who stood to benefit by the fire. The fire enabled them to cut their losses and to get out from under their lease. In addition to having a motive to set the fire, the Starrs had the only access to the locked restaurant office, one of the places where the fire started; they also had access to the other possible points of origin, the area over the kitchen and the warehouse. On June 18, Wilson wrote attorney Vandroff that Shelby was denying the claim because the Starrs had made several intentional misrepresentations in their sworn testimony with respect to their knowledge of the fire's origin and the value of the destroyed property. Though Wilson did not explicitly accuse the Starrs of arson, Vandroff already knew that Shelby had concluded that the Starrs were responsible for the fire, and he had discussed the case with a specialist on the subject, attorney John W. Berry.

In October 1980, attorney Berry commenced this action on behalf of T.D.S.4 The complaint contained two counts. In the first count, T.D.S. made claim against Shelby for the $100,000 fire insurance coverage for the damage sustained to its personal property at the Lord & Lady. In the second count, T.D.S. sought punitive damages because of the manner in which Shelby had handled its policy claim. T.D.S. alleged that Shelby had a "duty of diligent and good faith efforts" to determine the cause and origin of the fire, that it had breached that duty by conducting a wholly inadequate investigation, and that its denial of T.D.S.' claim was "willful, reckless and without good cause." Count two attempted to state what is commonly called a "bad faith" tort claim, notwithstanding that Florida law prohibited an insured from collecting punitive damages from his insurer for rejecting his policy claim in bad faith. See infra Part II.A.

Attorney Berry's strategy in presenting this bad faith claim was obvious; Berry had to counteract Shelby's anticipated arson defense and divert the jury's attention to issues that would create sympathy for the Starrs. If he could succeed in persuading the district court that Florida law no longer foreclosed the type of bad faith claim he alleged, Berry could materially enhance the settlement value of his client's case. And if Shelby refused to settle, he could turn the trial into a critique of Shelby's investigation of the fire and its decision, based on Richard Wilson's recommendation, to deny coverage. In the process, he could delve into Wilson's work product and, in essence, make it virtually impossible, and unethical,5 for Wilson to represent Shelby at trial. This, of course, is precisely what occurred. Finally, in proving the extent of the punitive damages the jury should award his client, Berry could introduce into evidence Shelby's financial statement and implore the jury to punish Shelby substantially for the suffering it had caused the Starrs. This, too, came to pass.

Shelby, represented by attorney Wilson, moved to dismiss the second count of T.D.S.' complaint, contending, correctly, that Florida law did not recognize the sort of bad faith tort claim the count presented and, further, that T.D.S. had not alleged facts establishing a separate, independent tort, one not rooted in Shelby's handling of T.D.S.' fire insurance claim. Berry countered Shelby's motion to dismiss by moving the court to grant T.D.S. a summary judgment on both counts of its complaint. Relying on his own affidavit, in which he stated that he was an arson specialist, Berry attempted to demonstrate that, as a matter of law, Shelby's anticipated "arson defense" was unfounded and that Shelby was liable to T.D.S. for the $100,000 policy limit and punitive damages.6

On August 27, 1981, the district court perfunctorily denied both parties' motions, and Shelby answered T.D.S.' complaint. Shelby's answer to count one of the complaint admitted the existence of the fire insurance coverage, but denied liability, in separate affirmative defenses, on the ground that T.D.S. had deliberately caused the fire and that the Starrs had deliberately concealed that fact in processing T.D.S.' proof of loss.7 Responding to count two, Shelby denied that it had acted tortiously in processing T.D.S.' fire insurance claim and denying coverage, stating that its action was mandated by the investigative results reached by the State Fire Marshal's office and the other experts who had investigated the origin and cause of the fire and the Starrs' concealment of facts material to the fire loss.

After receiving Shelby's answer, T.D.S. filed several motions for summary judgment. Shelby successfully opposed each of these motions, presenting the affidavits of Deputy State Fire Marshal Ladika and the other experts, who had concluded that the fire had been caused by arson, and other circumstantial evidence indicating that the Starrs had a strong motive to burn the restaurant and lounge.

As the litigation progressed toward trial, Shelby, on several occasions, moved the court to sever T.D.S.' count two bad faith claim and to defer the disposition of that claim until after it disposed of the count one policy claim. Assuming arguendo that Florida law recognized such a claim, Shelby argued that the bad faith count, as it was then framed, would be mooted if Shelby presented an arson defense sufficient to go to the jury and that, in the interest of expediency and economy, the court should sever the counts. See Fed.R.Civ.P. 42(b). Although Berry agreed that count two would be moot if Shelby had a demonstrable arson defense,8 he opposed Shelby's severance motions, arguing that the two counts should be tried together, since much of the evidence he planned to introduce at trial would be common to both. The court denied each of Shelby's requests for severance, without prejudice to Shelby's right to move for a severance if a new, compelling ground arose.

Shelby's final motion for severance presented such a ground. T.D.S.' bad faith claim, Shelby pointed out, constituted a tort that would continue throughout its defense of the case and would implicate not only the conduct of Shelby's claims department but that of its trial attorney, Richard Wilson, as well. This tort would continue until the legal sufficiency of Shelby's arson defense was finally resolved. If the court allowed the two claims to be tried together, Shelby argued, the court and jury would be required to focus on attorney Wilson's conduct in handling T.D.S.' fire loss prior to and during the litigation and Wilson, being a critical, material witness, would have to withdraw from the case.9 The court refused to sever the counts, and Wilson accordingly withdrew. He was replaced by Fowler, White, Gillen, Boggs, Villareal and Banker, who tried the case and prosecuted this appeal.

Less than two weeks before the case was set for trial, Berry moved for leave to amend T.D.S.' complaint. Berry knew that his count two bad faith claim could not withstand scrutiny in the light of Florida precedent and that his prayer for punitive damages might be stricken from the case. He therefore tendered a revised count two which sought punitive damages on the theory that Shelby had committed the independent torts of slander, tortious interference with property rights, and "bad faith breach of fiduciary duty." The court denied his motion for leave to amend as untimely.

On September 27, 1982, the court called the case for trial. After an extended discussion with counsel, the court concluded "that the issues to be tried were wholly undefined" and struck the case from the trial calendar. The court also instructed T.D.S. to file an amended complaint, in an obvious attempt to isolate its claims and bring them to a triable posture.10

Attorney Berry filed the amended complaint as directed. Count one again demanded judgment for the $100,000 fire insurance coverage, but it also sought the recovery of a host of "special" or "consequential damages." They included the expenses T.D.S. had incurred in defending various suits by creditors, the expenses it had incurred in attempting to disprove Shelby's arson theory, the loss of good will and the injury T.D.S. had suffered to its credit reputation as a result of Shelby's bad faith handling of its fire insurance claim, and the value of the option (to purchase the building) the Starrs had abandoned. Count two sought punitive damages, alleging that Shelby had engaged in "bad faith conduct giving rise to the independent torts of breach of a fiduciary relationship, intentional interference with property rights, slander per se, fraud and deceit and reckless breach of an assumed duty."

In addition to reconstituting counts one and two, the amended complaint presented two new counts. The claimants in these counts were Thomas and Dorothy Starr. Berry added them as parties plaintiff, even though the court had not granted him leave to do so, and sought on their behalf the recovery of compensatory and punitive damages, alleging that Shelby had slandered them and caused them severe emotional distress.

Shelby moved to dismiss the amended complaint on the grounds, among others, that the complaint failed to state a claim for relief, that the complaint failed to constitute "a short and plain statement of the claim showing that the pleader is entitled to relief," as Fed.R.Civ.P. 8(a)(2) requires, and that Berry had failed to obtain leave of court before adding the Starrs as parties plaintiff. See Fed.R.Civ.P. 21.11 The court granted Shelby's motion in part, dismissing the Starrs' claims as untimely and instructing T.D.S. to replead its claims in a new amended complaint.12 The court also directed Shelby to answer13 such amended complaint within ten days, indicating that it would promptly take the case to trial on the issues joined by those pleadings.

T.D.S. filed its repleader, a third amended complaint, and Shelby answered as directed, raising the defenses it had presented earlier. Shelby also filed a counterclaim, seeking the recovery of the $125,000 it had paid to Eugene R. Cohenour under his fire insurance policy, and T.D.S. responded with a general denial.

T.D.S.' third amended complaint contained two counts, each of which contained a myriad of claims. Attorney Berry apparently read the district court's order directing him to replead his case, and Shelby to answer it, as a statement that the case would proceed to trial on the claims he presented in his repleader regardless of their legal sufficiency and his compliance with the Federal Rules of Civil Procedure favoring the presentation of claims, or causes of action, in separate paragraphs or counts and in "short and plain statements," see Fed.R.Civ.P. 8(a) and 10(b), because he treated the court's order as a license to disregard these rules.14 A reading of the third amended complaint, which I have set out in the Appendix as Exhibit B, makes this clear.

The pleading contains two counts. In the first count, Berry attempted to raise a myriad of claims, among them a simple breach of contract (Shelby's liability for the $100,000 in fire insurance proceeds) and several torts. The torts allegedly came into being on the "date of the fire loss" and continued "to the present." They included the common law torts of fraud and deceit (false statements by Shelby during the course of its investigation that T.D.S. allegedly relied on to its detriment), libel, slander, and defamation (presumably Shelby's implied statement, in denying T.D.S.' claim, that the Starrs had set the fire), and deliberate interference with T.D.S.' "credit and business reputation" (purportedly caused by Shelby's implied statement that the Starrs were responsible for the fire), and a statutory tort, under Florida's Unfair Insurance Trade Practices Act, Fla.Stat. Sec. 626.9541 (1984). The first count, in paragraph 12, sought various special damages for Shelby's "willful breach of contract" and "tortious misconduct," including the loss of "a valuable option to purchase the building," "a valuable business opportunity," "business and credit reputation," and "litigation expenses" (presumably incurred by T.D.S. in defending several lawsuits brought against it by third parties between the date of the fire and the filing of the third amended complaint because its business had collapsed).

In addition to combining a variety of discrete claims in one count in such a way as to make it difficult to discern which allegations or damages pertained to which theory of recovery, attorney Berry improperly included the Starrs' claims the court had stricken from the case earlier, such as their claims for libel, slander, and defamation and their claim that Shelby's breach of its insurance contract with T.D.S. caused them to terminate their lease to the Lord & Lady premises and to forfeit their option to purchase Cohenour's building.

In count two of his third amended complaint, Berry repled the allegations of count one and expanded on the plaintiff's common law tort claims of fraud and deceit, libel, and slander. Ignoring strong Florida precedent to the contrary, see infra Part II.A., Berry also alleged that T.D.S.' insurance contract with Shelby "created a fiduciary relationship" between the parties,15 that Shelby, in investigating and handling T.D.S.' fire loss, had breached its fiduciary duty to T.D.S., and that the breach continued to the present. Berry's allegation, in both counts, that Shelby's unlawful conduct was of a continuing nature and embraced the entire lawsuit, including the trial, set the stage for Berry to criticize Shelby's trial strategy before the jury, something that obviously had no bearing on the important threshold questions of whether the Starrs had set the fire and/or deliberately concealed from Shelby material facts about the fire and the extent of T.D.S.' property loss.

The case proceeded to trial on this third amended complaint.16 The trial judge gave the parties ninety-six hours in which to try the case. Under this format, the plaintiff could take whatever portion of that time it needed to put on its case in chief; the defendant could have the rest.17 The plaintiff's case in chief consumed all but two and a half days worth of these ninety-six hours, concluding on a Monday evening at about suppertime.

In presenting the plaintiff's case, Berry took full advantage of the broad, all-encompassing allegations of his third amended complaint. He began by telling the jury, in his opening statement, that the case involved "one of the most reckless fire investigations known to the fire industry" and that it would be asked to assess punitive damages against Shelby for "conduct [toward the Starrs] that was truly unbelievable." And his evidence addressed this theme. The Starrs were portrayed as honest, hardworking folk who had come to Florida to pursue the American dream and had been done in by a callous multimillion dollar insurance company that was willing to defame them, with false accusations of arson and fraudulent concealment, simply to avoid paying a $100,000 fire loss. Over defense objection, the jury was told of the anxiety and emotional distress the Starrs had endured and the losses they and T.D.S. had incurred because of Shelby's "tortious" conduct. According to Mrs. Starr, Shelby's conduct had destroyed a going business worth $225,000 at the time of the fire.

The Starrs, flatly denying any involvement in the fire, told the jury how they relied to their detriment on Shelby's false representations, particularly those of its lawyer, Richard Wilson, that it was investigating the origin and cause of the fire, that it had uncovered no information which implicated them or any other T.D.S. employees, and that, if it acquired such information, it would confront them with it. Berry called Richard Wilson to the stand and cross-examined him about these representations (which he denied making). He also probed Wilson in depth about the advices he gave Shelby as his investigation of the fire progressed. Finally, Berry delved into the thought processes behind Shelby's decision to deny coverage and the litigation strategy Wilson employed in Shelby's behalf as this case proceeded to trial. The court overruled Shelby's objection to this line of inquiry, agreeing with Berry that Wilson's testimony was relevant, and admissible, because Shelby was on trial not only for what it had done to T.D.S. and the Starrs in handling the fire loss, but for the manner in which it had been, and was, handling the litigation. In short, the court permitted the plaintiff insured to litigate a bad faith tort claim, which Florida law forbade, along with its policy claim.

When the plaintiff rested, both parties moved for a directed verdict. Since the dinner hour had arrived and the court wanted Shelby to begin its case after supper, it deferred the argument on those motions until the following morning. Shelby's counsel objected to this procedure, arguing that he needed a few hours to line up his witnesses, but his objection was overruled. Shelby's defense began that evening and concluded two days later, at about noon.

After lunch, the court ruled on the parties' motions for directed verdict, denying them, and completed the charge conference it had begun that morning before the jury assembled. During that conference, the court did a complete about-face with respect to the plaintiff's bad faith claim. It finally accepted Shelby's argument that Florida did not recognize the right of an insured to sue its insurer for handling its policy claim in bad faith. Contrary to the position the plaintiff had maintained throughout the case, the insured's contract did not make Shelby T.D.S.' fiduciary; rather, Shelby and T.D.S. occupied a debtor-creditor relationship. The court also agreed with Shelby that, to recover against it in tort, T.D.S. had to make out an "independent" tort, such as fraud and deceit, libel, or slander, arising out of Shelby's breach of some duty not created by the insurance contract. The court, apparently reflecting on the record before it, opined that the only independent tort the evidence established was fraud and deceit. The court concluded the conference by stating that, with respect to the plaintiff's count two tort claim, it would only instruct the jury on the law of fraud and deceit.18 Attorney Berry tacitly agreed to this limitation.19

In his closing argument to the jury which followed, Berry focused, as he had in his opening statement, on the economic losses and emotional stress the Starrs had sustained at Shelby's hands and the need for the jury to punish Shelby accordingly. The jury responded, awarding T.D.S. the full amount of its insurance claim, $100,000, $420,000 in special damages, and $2.1 million in punitive damages.

Shelby moved for a judgment n.o.v., attacking the sufficiency of the evidence to support both counts of the plaintiff's third amended complaint. Shelby also moved for a new trial, contending that the trial of counts one and two together created undue prejudice to Shelby's defense of T.D.S.' insurance claim. Shelby's motions were denied, and, following the court's entry of judgment in accordance with the jury's verdict, it took this appeal.

The district court should have granted Shelby a judgment n.o.v. as to T.D.S.' count two tort action because, as a matter of law, the record did not disclose an actionable tort. With respect to T.D.S.' count one breach of contract claim, the court should have reduced T.D.S.' $520,000 recovery by $432,000. $420,000 of that recovery represented certain consequential or special damages not cognizable under Florida law in a suit on a fire insurance policy such as the one before us. $12,000 of that amount represented destroyed leasehold improvements; since T.D.S. had no leasehold interest in the premises (the Starrs having the lease), it could have had no insured leasehold improvements.

Having taken this action, the district court should have granted Shelby a new trial on T.D.S.' count one claim for the fire insurance proceeds. Shelby is entitled to a trial on that claim, and its arson and deliberate concealment of material fact defenses, that is free of the irrelevant and highly prejudicial evidence the trial judge permitted the plaintiff to bring before the jury in this case. In the discussion that follows, I address, in sequence, the legal sufficiency of T.D.S.' count two tort claim(s), its count one claim under the policy, and the necessity for a new trial.

Though the trial court, in its charge conference with counsel, finally concluded that Florida did not recognize the bad faith tort claim T.D.S. had been pressing throughout the proceedings, it inexplicably presented such a claim to the jury. The court also charged the jury on fraud and deceit. Both claims must be examined, therefore, in assessing the legal sufficiency of count two.

The court, in charging the jury on count two, instructed it that T.D.S. could recover punitive damages if the jury concluded that Shelby should have paid T.D.S.' fire insurance claim (meaning that the jury rejected Shelby's affirmative defenses of arson and deliberate concealment of material fact) and that Shelby's refusal to pay it "amounted to deliberate, overt, and dishonest dealings."20 This instruction, I submit, placed before the jury a bad faith tort claim heretofore unrecognized by the Florida courts or any other jurisdiction.

In some jurisdictions, but not in Florida, an insured can sue his insurer in tort for refusing in "bad faith" to pay his policy claim. To recover, the insured must demonstrate that the insurer had no lawful basis for its action. See, e.g., Pirkl v. Northwestern Mutual Insurance Association, 348 N.W.2d 633 (Iowa 1984); Hoskins v. Aetna Life Insurance Co., 6 Ohio St.3d 272, 452 N.E.2d 1315 (1983); National Savings Life Ins. Co. v. Dutton, 419 So.2d 1357, 1362 (Ala.1982); Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973). See Southeast Nursing Home v. St. Paul Fire & Marine Ins. Co., 750 F.2d 1531 (11th Cir.1985). For example, in the factual context presented here the insured must establish that, as a matter of law, the insurer had no basis for its arson and deliberate concealment of material fact defenses. He does this by producing a judicial ruling, usually a summary judgment or a directed verdict, to that effect. The judicial ruling triggers the insured's bad faith claim; it is the sine qua non. In charging the jury on T.D.S.' bad faith claim in this case, the district court added a gloss to this triggering element. It allowed the insured to recover notwithstanding the presence of two valid policy defenses. All the insured had to do was convince the jury to reject those defenses, i.e., to conclude that Shelby had not discharged its burden of proving them by a preponderance of the evidence.21 The court's instruction, as I have stated, described a tort claim foreign to the law of Florida or any other state.

Under Florida law, an insured has no tort action, and therefore cannot recover punitive damages, against his insurer for refusing to pay his insured loss even if the refusal is groundless and in "bad faith." Industrial Fire & Casualty Insurance Co. v. Romer, 432 So.2d 66, 67 (Fla.Dist.Ct.App.1983); Smith v. Standard Guaranty Insurance Co., 435 So.2d 848, 849 (Fla.Dist.Ct.App.1983) (punitive damages not justified even though insurer's conduct was "callous," "bungling and arbitrary"); Allstate Insurance Co. v. Gibbs, 340 So.2d 1202, 1204 (Fla.Dist.Ct.App.1976) ("[a]n insuror's [sic] bad faith refusal to settle a claim of its insured is not per se a willful and independent tort...."); MacDonald v. Penn Mutual Life Insurance Co., 276 So.2d 232, 233-34 (Fla.Dist.Ct.App.1973). In sum, an insured cannot make out a claim for punitive damages even though the insurer's refusal to pay is willful, flagrant, malicious, or motivated by spite or ill will. Baxter v. Royal Indemnity Co., 285 So.2d 652, 657 (Fla.Dist.Ct.App.1973), cert. discharged, 317 So.2d 725 (Fla.1975); Romer, 432 So.2d at 67.

This rule is nothing more than a particular application of the common law rule in Florida that punitive damages will not be awarded in a breach of contract action unless the breach is accompanied by some "intentional wrong, insult, abuse or gross negligence that amounts to an independent tort." Griffith v. Shamrock Village, 94 So.2d 854, 858 (Fla.1957). See also Associated Heavy Equipment Schools, Inc. v. Masiello, 219 So.2d 465, 467 (Fla.Dist.Ct.App.1969); Maco Supply Corp. v. Masciarelli, 213 So.2d 265, 266-67 (Fla.Dist.Ct.App.1968), affirmed in part, vacated in part, and remanded on other grounds, 224 So.2d 329, 330 (Fla.1969); Fountainebleau Hotel Corp. v. Kaplan, 108 So.2d 503, 505-06 (Fla.Dist.Ct.App.1959). As the Florida Supreme Court reiterated recently in Lewis v. Guthartz, 428 So.2d 222, 223 (Fla.1982), the reason for this requirement is the "unwillingness to introduce uncertainty and confusion into business transactions as well as the feeling that compensatory damages as substituted performance are an adequate remedy for an aggrieved party to a breached contract."

The controversy in this case is a first party insurance claim; an insured seeks to recover the proceeds of an insurance policy from its insurer. The "bad faith" rule applicable to first party insurance claims should not be confused with the one that applies to third party claims. In the latter, the insurer is liable to its insured for punitive damages when it fails to defend or negotiate a settlement for the insured in good faith. The insurer's liability arises because it stands in a fiduciary relationship with the insured. As the court explained in Baxter, 285 So.2d at 655: "The relationship between the parties ... is ... much akin to that of attorney and client." The insurance contract "provides that the insurer will defend the insured in any action brought against him, and complete control of the litigation is vested in the insurer. The insured binds himself to cooperate fully with the insurer and to neither negotiate for nor settle the claim against him without the insurer's knowledge and consent." Id. When the insured is attempting to collect on his policy, however, he and his insurer stand in an adversarial, creditor-debtor relationship. Consequently, his insurer owes him no fiduciary duty and cannot be held liable, in contract or in tort, for not exercising good faith in processing his claim. Id. at 656-57.

The preclusion of a bad faith tort claim in an insured's first party suit against his insurance company to collect on a fire loss serves many important state policies. First, and foremost, it deters arson. An insured who has committed arson is more likely to sue his insurer for the insurance proceeds and to obtain a settlement or jury verdict if he can prosecute a bad faith claim at the same time. If the insured can try these claims together, the bases for admitting evidence, and, hence, his chances of confusing the jury and prejudicing its treatment of the insurer, will be far greater than they would be were he restricted to a suit on his policy. This case is a perfect example. Had the court limited the trial to T.D.S.' property loss,22 the plaintiff's case in chief could have been presented in a few hours; moreover, most of the testimony the jury heard would have been inadmissible, including the testimony of Richard Wilson about the advices he gave his client and his litigation strategy. The parties having stipulated to the admissibility into evidence of T.D.S.' insurance policy, the plaintiff would have proceeded to show the value of its insured property consumed in the fire and then rested its case.

Shelby's defense would have focused on the origin and cause of the fire. The jury's attention would have been drawn to the eyewitness accounts of the fire, the post-fire examination of the scene, and the experts' opinion testimony as to where the fire started and what caused it. The defense would also have focused on who caused the fire and the Starrs' motive for setting it. In its rebuttal, if any, T.D.S. would have advanced its theory as to how and why the fire started.

Had the district court's bad faith instruction expressed the law of Florida at the time of the fire in this case, Shelby Mutual would have settled this case long before it got to the courthouse. The fact that the evidence indicated that its insured probably set the fire and that it was sufficient to make out a case of arson for the jury would have mattered little, because, under the district court's view, T.D.S. could collect punitive damages in spite of Shelby's valid arson defense.23 Shelby simply could not have run the risk of a multimillion dollar verdict, especially if it could avoid that risk by paying T.D.S. $100,000.

Shelby would have settled for another reason, one unrelated to its potential liability for punitive damages. T.D.S.' bad faith claim was a continuing tort. According to T.D.S., it began with the fire and continued "to the present." This is why the district court allowed T.D.S. to examine Shelby's lawyer, Richard Wilson, about his communications to and from his client and his litigation strategy. Under T.D.S.' and the district court's continuing tort theory, which today this court sanctions by affirming T.D.S.' punitive damages award, T.D.S. could have called Shelby's trial lawyers, William A. Gillen and A. Donald Cox, to the stand and cross-examined them (as adverse parties) about their trial strategy, up to that very moment and, perhaps, even beyond. Shelby would have weighed the expense of such harassment in considering whether to honor T.D.S.' proof of loss and would have concluded that the plaintiff could effectively deprive it of its day in court.

The Florida rule precluding a bad faith claim in this situation allows the insurer to have its day in court without paying the sort of penalty imposed here. As I have pointed out supra, even those jurisdictions that recognize a bad faith claim do not do so until the insured has obtained a judicial determination that, as a matter of law, the insurer had no lawful basis for refusing to pay. This rule, like Florida's, allows the insurer to litigate a valid, demonstrable policy defense without fear of penalty and to do so with a lawyer who cannot be shackled, or, as here, removed from the case, by the insured's threats to call him as a material witness or even to sue him for fraud and deceit. It thus enables a fire insurer to assume its proper role in the enforcement of the law against arson. It stands to reason that encouraging fire insurance companies vigorously to investigate fire losses, especially those caused by arson, and to resist payment in those instances in which there is a demonstrable arson case against the insured should deter arson and fraudulent attempts to collect fire insurance proceeds.

The majority's approval of a punitive damages award based on the "bad faith" jury instruction delivered in this case, punishes an insurance company for taking a strong stand in an arson case. It also punishes society. In time, the jury verdict here and in the cases that inevitably will follow, especially in the federal district courts in Florida, will be reflected in the fire insurance rates. In short, the public will bear the cost of this "fledgling tort" the majority embraces and the verdicts it spawns. The public will bear an additional burden as well: some insurance companies will cease underwriting fire risks and many law-abiding citizens will go without coverage. The district court, I conclude, transgressed the law of Florida and committed manifest error in submitting T.D.S.' bad faith claim to the jury.

The district court also erred in submitting T.D.S.' fraud and deceit claim to the jury. The elements of fraud and deceit under Florida law are the same as those at common law,

(1) a false statement concerning a specific material fact; (2) a showing that the representer knew, or should have known, that the representation was false; (3) an intention that the representation induce another to act on it; and (4) consequent injury to the party acting in justifiable reliance on the representation.

Royal Typewriter Co. v. Xerographic Supplies Corp., 719 F.2d 1092, 1103 (11th Cir.1983). See, e.g., Cavic v. Grand Bahama Development Co., 701 F.2d 879, 883 (11th Cir.1983); Banco Nacional de la Vivienda v. Cooper, 680 F.2d 727, 730 (11th Cir.1982); Suntogs of Miami, Inc. v. Burroughs Corp., 433 So.2d 581, 585 (Fla.Dist.Ct.App.1983).

The fourth element, "justifiable reliance," assumes that the party claiming fraud had a right to rely upon the misrepresentation in question. Pettinelli v. Danzig, 722 F.2d 706, 709 (11th Cir.1984). "[N]ot every false representation constitutes fraud on which a claim for relief can be based." Greenwald v. Food Fair Stores Corp., 100 So.2d 200, 202 (Fla.Dist.Ct.App.1958). See Columbus Hotel Corp. v. Hotel Management Co., 116 Fla. 464, 156 So. 893, 901 (1934) ("[t]o be remedial, a representation must have been of such a nature and made under such circumstances that the injured party had a right to rely upon it "); Bruce v. America Development Corp., 408 So.2d 857, 858 (Fla.Dist.Ct.App.1982) ("[f]or a complaint to state a cause of action for misrepresentation, there must be a right to rely"). The majority apparently believes that fraud and deceit can be established without proof of justifiable reliance; all the plaintiff need show is conduct amounting to "deliberate, overt and dishonest dealings." Ante note 1530. I find no support in the Florida law for such a proposition, and the majority has cited none.

T.D.S. claimed that Shelby, acting through its representatives, principally Richard Wilson, who were handling T.D.S.' fire loss, made four false statements of material fact to T.D.S. prior to denying liability for the loss: (1) that Shelby was conducting an investigation into the origin and cause of the fire, (2) that it would share with T.D.S. any information it obtained from its investigation, (3) that it had no information implicating T.D.S. in arson, and (4) that it would confront T.D.S. with any information implicating T.D.S. in arson.24

I will assume, for sake of argument, that all four utterances were statements of material fact,25 that they were false and Shelby knew them to be such, that they were made with the intent that T.D.S. act on them, and that T.D.S. did so to its disadvantage. T.D.S. still failed to make out a case of fraud and deceit; for its reliance on the statements could not have been justified. This is because T.D.S. and Shelby, at the time the statements were made, occupied an adversarial relationship and T.D.S. was not entitled to rely on the truth thereof. Shelby was in the process of determining whether T.D.S., acting through its officers or employees, had committed arson, and the Starrs, and therefore T.D.S., were fully aware of this fact. Florida law allows no recovery for one who relies on his adversary's false statements under these circumstances.

In Columbus Hotel Corp. v. Hotel Management Co., supra, for example, the Florida Supreme Court held that the plaintiffs could not rescind a contract allegedly procured by fraud because they had no right to rely upon the defendant's misrepresentations. The misrepresentations had been made during settlement negotiations, in the midst of threatened litigation. The court concluded that

even if the alleged misstatements and false representations ... had been made, as charged by the complainants, prior to the making of the contract sought to be rescinded, the circumstances shown by the evidence to have existed at the time of the execution of that contract were such that the [complainants] had no right to rely upon any such representations, in view of the fact that the parties were informed and must have understood at all times that they were in hostile relations to each other and were dealing at arm's length.

156 So.2d at 901. In my view, this describes the relationship between T.D.S. and Shelby when the fraud alleged here occurred. And the supreme court's final words on the reliance issue also apply to the case at hand. "There can be no ground for complaint against representations where the hearer lacked the right to rely thereon, because he had reason to doubt the truth of the representation, as where ... a party ... was obviously hostile to the hearer and interested in misleading him." Id.

We have followed this Florida rule in a similar factual context, holding that adverse parties negotiating a settlement in an attempt to avoid litigation have no right to rely upon the representations of one another. Pettinelli v. Danzig, 722 F.2d 706 (11th Cir.1984). In Pettinelli, several disgruntled stockholders of a land development corporation requested the board of directors to bring a stockholders' derivative suit against itself. The board, comprised substantially of the targets of the stockholders' complaints, declined to sue, saying that a suit would have an adverse impact on the company. In due course, the stockholders and the board settled their dispute. The stockholders then sued some of the board members, alleging that the latter had fraudulently induced them to settle. Id. at 707-08. Citing Columbus Hotel Corp., supra, Judge Fay, writing for the court, held that the complainants "failed to make a prima facie case of fraud because they had no legal right to rely on any representations under these circumstances." Pettinelli, 722 F.2d at 710. He said that the parties, each represented by counsel, had been in an adversarial relationship with one another throughout the settlement negotiations; thus, the stockholders could not justify their reliance upon the board members' representations. Id. at 710. Cf. Smith v. Holley, 363 So.2d 594 (Fla.Dist.Ct.App.1978) (party in dispute over inheritance, seeking rescission of a settlement agreement based upon fraudulent failure to disclose, must plead sufficient facts to establish duty to disclose in order to survive a motion to dismiss, "especially in light of the fact that at the time the agreement was executed, the parties were adversaries in contested litigation").

There can be no question that T.D.S. and Shelby were adversaries from the time the Lord & Lady Restaurant burned, since it became evident at the very outset that T.D.S. would make a first party claim against Shelby for the $100,000 fire insurance proceeds. In this setting, "the interests of the insurer are wholly adverse to those of its insured as to every facet of a claim." Baxter v. Royal Indemnity Co., 285 So.2d 652, 656 (Fla.Dist.Ct.App.1973), cert. discharged, 317 So.2d 725 (Fla.1975). See also Smith v. Standard Guaranty Insurance Co., 435 So.2d 848, 849 (Fla.Dist.Ct.App.1983).

The testimony at trial made this clear. It firmly established that the Starrs, and therefore T.D.S., had every reason to doubt any representation Shelby might make that they were not arson suspects. The Starrs knew that Deputy State Fire Marshal Ladika came to the scene, while the embers were still smoldering, because the fire was suspicious. His report, issued in early February and readily available to T.D.S. and the Starrs, was particularly damning, stating that the fire had originated in the Starrs' private office. Mr. Starr admitted that he knew he was an arson suspect as early as two days after the fire, when he spoke with Gary Haun, Shelby's arson investigator. If Mr. Starr had any doubt as to his suspect status, the doubt was removed on March 5, prior to the first of the four alleged misrepresentations, when he, and his wife, were informed that Shelby Mutual had retained Richard Wilson, an experienced arson attorney, to assist in Shelby's investigation of the fire loss. Shortly thereafter, Wilson notified Mr. Starr that he intended to examine them under oath about the loss. See Appendix, Exhibit A. Wilson made it plain that Shelby believed that someone had intentionally set the fire, and he advised Mr. Starr that his attorney should be present during the examination. Wilson requested Mr. Starr to produce every conceivable piece of financial information about T.D.S.' business that would aid him in evaluating the merits of T.D.S.' claim. The examination was exhaustive. All indications were that Shelby suspected the Starrs of arson and that it would not decide whether to honor T.D.S.' proof of loss until it had concluded an extensive investigation. In this adversarial, quasi-litigation context, T.D.S. and the Starrs, as a matter of law, had no right to rely upon Wilson's representations or those of any other Shelby representative.

The district court should have struck T.D.S.' fraud and deceit claim from its third amended complaint.