Personal Injury Attorneys: Good First Step for a Bad Faith Claim – Get an Excess Judgment

Last Friday, the Eleventh Circuit affirmed the ruling of a Florida district court and held that an insurer was not liable in a bad faith claim for a $30 million settlement that a car crash victim reached with the at-fault driver. The case turned on whether the plaintiff, Cawthorn, could prosecute a bad faith claim against Auto-Owners without first obtaining an excess judgment or its functional equivalent. The Eleventh Circuit focused its analysis on the interpretation of the word “judgment,” and held an injured party must first win an excess judgment or fall within a well-defined exception before the party can bring a bad faith claim.

Background Facts

As background, in 2014, two men – Cawthorn and Ledford – were on a road trip when they were involved in a serious car accident. Ledford fell asleep at the wheel and crashed into a concrete barrier. He was not injured. Unfortunately, Cawthorn, who was asleep in the passenger seat, sustained serious injuries resulting in paralysis from the waist down. At the time of the accident, Ledford was driving a vehicle owned by his father’s business, Bob Ledford’s RV & Marine, Inc. (“Bob’s RV”).

Bob’s RV was insured through Auto-Owners Insurance Company (“Auto-Owners”). Bob’s RV was covered by two Auto-Owners policies: a $1 million Garage Liability Policy and a $2 million Commercial Umbrella Policy, for $3 million of total coverage. Ledford was a scheduled driver under the Garage Liability Policy. Auto-Owners learned about the accident the day after it occurred. At the end of the month, the claims adjuster opened a reserve for $3 million, the policies’ combined limits. Three months later, Auto-Owners agreed to settle for the full policy limits. However, plaintiff rejected the settlement proposal and sued Ledford and Bob’s RV in Florida state court. Auto-Owners provided a defense to both Ledford and Bob’s RV.

In 2016, after an unsuccessful mediation (Question: What are you mediating if the insurer already offered policy limits?) counsel for the Plaintiff circulated a proposed settlement agreement to the defendants, including Auto-Owners. The agreement required Auto-Owners to tender its $3 million policy limits to settle claims against Bob’s RV, but contemplated a consent judgment against Ledford and a covenant not to execute the judgment against Ledford. The Auto-Owners claims adjuster responded: “[W]e continue to be willing to pay Mr. Cawthorn the full $3 million . . . while continuing to provide a defense to Mr. Ledford . . . . As for a future consent judgement [sic] against [Ledford], that will be solely up to [Cawthorn], you and [Ledford’s counsel].”

On October 20, 2016, the Plaintiff and Defendants executed a settlement agreement. Notably, Auto-Owners was not a party to the settlement agreement– and possibly did not have knowledge of the finalized agreement. Under the terms of the agreement, Auto-Owners would tender $3 million to Cawthorn for a full release of Bob’s RV. Ledford agreed to a $30 million consent judgment against him, and Ledford assigned to Cawthorn his rights to sue Auto-Owners for its conduct during the insurance claim.

In December 2016, after accepting $3 million from Auto-Owners, Cawthorn filed a suit for bad faith claims handling against Auto-Owners. The bad-faith theory was that Auto-Owners acted in bad faith when handling Cawthorn’s insurance claim, and but for the bad faith, Cawthorn would have settled for the $3 million policy limits. Auto Owners moved for summary judgment on the issue of whether Cawthorn could prosecute the bad faith claim against Auto-Owners without first obtaining an excess judgment or its functional equivalent. 1 The District Court granted summary judgment on the excess judgment issue and Cawthorn appealed.

Legal Points

Policy Underlying Bad Faith Recovery – Bad faith claims arise when a party incurs liability that is covered by his insurance policy, but due to the alleged bad faith of his insurance company, the liability is higher than the policy limits.

Elements of Bad Faith Claim – a plaintiff must show that (1) the insurer owed the insured a duty, (2) the insurer breached its duty, (3) and the breach caused the insured to suffer (4) an injury. See Bos. Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980).

Excess Judgment Rule – In a bad faith claim, the causation element is proved with an excess judgment, a judgment above the insurance policy limits. Normally, the injured party must first win an excess judgment before it can bring a bad faith claim. Cunningham v. Standard Guar. Ins. Co., 630 So. 2d 179, 181–82 (Fla. 1994).

Policy for Excess Judgment Rule
Until the insured is subjected to an excess judgment, any contention that he will be liable beyond policy limits “rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all.” Atlanta Gas & Light Co. v. Fed. Energy Regulation Comm’n, 140 F.3d 1392, 1404 (11th Cir. 1998).

Three exceptions to Excess Judgment Rule

Cunningham Agreement – wherein the insurance company and the injured third party agree to try the bad faith claim first, and, if the jury finds no bad faith, the parties agree to settle for policy limits.

Coblentz Agreement – where the insurance company fails to defend the insured and, in response, the insured and the injured third party agree to settle the suit and allow the injured third party to sue the insurance company on a theory of bad faith.

Equitable Subrogation Exception – when an excess carrier incurs damages because the primary carrier acted in bad faith. In such cases, an excess carrier may bring a bad faith claim against a primary insurer “by virtue of equitable subrogation.”

Holding and Takeaway
In this case, Cawthorn argued that a consent judgment is an excess judgment. The Eleventh Circuit disagreed and focused its analysis on the interpretation of the word “judgment.” The Court held that a “judgment is a final decision—a verdict—reached by a factfinder.” The Court went on to state that “a consent judgment, on the other hand, is akin to a private contract, one that it is simply acknowledged and recorded by a court.” In summary, the Court rejected Cawthorn’s attempt to circumvent the excess judgment rule. Lesson learned. If you want to bring a bad faith claim in Florida, satisfy the excess judgment rule – or one of the well- established exceptions, before filing your suit.

To discuss a bad faith claim or for additional information, contact Austin Bersinger at (404) 965-3692.

1 Auto-Owners also moved for summary judgment on the issue of whether the insurer acted in bad faith. But, neither the district court nor the appellate court addressed this issue.