As a general rule, Florida law imposes a duty of good faith on insurers to defend claims against insureds and to settle those claims where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. An insured may, rightly or wrongly, claim an insurer’s conduct in handling a claim falls short of that standard of care. But a claim for bad faith will not accrue until the alleged claims handling results in liability that exceeds the limits of the insurance policy. Thus, a claim for bad faith against an insurer requires entry of an excess judgment, in order to establish that the insured’s liability exceeds the policy limits. In Cawthorn, the eleventh circuit emphasized this rule, clarifying that consent judgments are not the same as excess judgments, and unless an excess judgment or its equivalent can be shown, a bad faith claim cannot stand and it is unnecessary to examine the claims handling.
As with any rule, there are a few, limited exceptions. In Florida, the following three exceptions are recognized and repeatedly litigated:
- Coblentz agreements, which occur when the insurer declines to defend the insured and the insured enters into a negotiated consent judgment with the claimant in order to resolve the lawsuit and permit the claimant to pursue a claim of bad faith against the insurer
- Cunningham agreements, which occur when the insurance company and the claimant agree to litigate the claim of bad faith before the insured’s liability is determined and enter into a full release of the insured if bad faith is not established
- Equitable subrogation claims, which occur when an excess insurer asserts a claim of bad faith against a primary insurer based upon its refusal to settle a claim against the common insured
In Cawthorn, the eleventh circuit affirmed a district court’s award of summary judgment in favor of the insurance company on a claimant’s assigned third-party bad faith insurance claim. In its holding, the eleventh circuit reiterated the requirement of an excess judgment, as a general rule, in the context of bad faith claims. While the Cawthorn court recognized the three exceptions to this requirement, the parties conceded that none of those exceptions applied since the insurer tendered its policy limits and defended the insureds in the underlying litigation.
The eleventh circuit declined to “carve out a fourth exception to the excess judgment rule” by construing a consent judgment as akin to an excess judgment. In its holding, the Cawthorn court emphasized that the excess judgment rule is designed to protect insurance companies by ensuring that a fact-finder has reached a verdict of liability against the insured. By contrast, the Cawthorn court likened consent judgments to “private contracts,” which are simply acknowledged and recorded by the court. Were the Cawthorn court to construe consent judgments as “judgments,” the consequence would be to “eviscerate the well-established safeguards without paying any attention to the gravity of the decision.” Since the claimant could not demonstrate the existence of an excess judgment, the court declined to examine whether the insurer’s claim handling was proper.