In Cawthorn v. Auto-Owners Insurance Co., No. 18-12067 (11th Cir. Oct. 25, 2019), the Eleventh Circuit affirmed the U.S. District Court for the Middle District of Florida’s grant of summary judgment in favor of Auto-Owners Insurance Co., ruling that a consent judgment does not constitute an excess verdict, which is an essential element of a Florida bad faith claim.

This appeal arose from an April 2014 underlying automobile accident in which David Cawthorn and Bradley Ledford were traveling in a vehicle owned by Ledford’s father’s business, Bob Ledford’s RV & Marine Inc. (Bob’s RV). Cawthorn was rendered paralyzed after Ledford fell asleep at the wheel, crashing into a concrete barrier. Bob’s RV and Ledford were insured by Auto-Owners under a $1 million garage liability policy and a $2 million umbrella policy, for a total of $3 million in limits.

After the accident, Auto-Owners was in communication with Cawthorn but did not tender the policy limits because, according to Auto-Owners, Cawthorn did not provide his medical records or authorization for Auto-Owners to obtain these records. In July 2014, Cawthorn initiated litigation against Ledford and Bob’s RV in Florida state court. Auto-Owners retained counsel to represent both Ledford and Bob’s RV.

Approximately one month after Cawthorn initiated litigation, Auto-Owners received a notice of lien from Cawthorn’s health insurer, which was enough for Auto-Owners to process Cawthorn’s claim. Accordingly, Auto-Owners tendered Cawthorn’s attorney the full $3 million in policy limits, but this offer was rejected.

After further settlement negotiations between Auto-Owners, Ledford, Bob’s RV, and Cawthorn broke down, Cawthorn and Ledford continued settlement discussions without Auto-Owners’ participation. Eventually, Cawthorn and Ledford executed a final settlement agreement under which Auto-Owners was to tender $3 million to Cawthorn for a release of Bob’s RV. Ledford and Cawthorn also agreed to the entry of a $30 million consent judgment against Ledford, and Ledford assigned Cawthorn his rights to sue Auto-Owners for bad faith. Despite not being a signatory to the final agreement, Auto-Owners tendered its limits to Cawthorn and Cawthorn accepted, releasing Bob’s RV. Cawthorn then initiated a bad faith suit against Auto-Owners, seeking to recover the $30 million consent judgment against Ledford.

After the district court granted summary judgment in favor of Auto-Owners, the issues on appeal were: (1) whether Cawthorn had obtained an excess verdict as required under Florida law to prosecute a claim of bad faith; and (2) whether Auto-Owners had acted in bad faith as a matter of law.

The Eleventh Circuit stated that in Florida, “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.” The Eleventh Circuit noted that while bad faith claims are rooted in negligence, Florida law imposes a heightened duty of care — mere negligence is not enough.

One of the requisite elements of a bad faith claim in Florida is an excess judgment, which is a judgment that exceeds policy limits. As the Eleventh Circuit noted, Florida courts have created three exceptions to this rule in situations in which there is a “functional equivalent” to an excess judgment. First is a Cunningham agreement, which is an agreement between an insurance company and the injured claimant to try the bad faith claim before the liability claim. Next is a Coblentz agreement, which occurs when the insurer refuses to defend the insured, who then enters into an agreement with the injured third party to allow the third party to sue the insurer for bad faith. Lastly, there is an exception for excess carriers to sue primary carriers under a theory of equitable subrogation when the primary carrier has acted in bad faith.

In Cawthorn’s case, the validity of his bad faith claim turned on whether the excess judgment requirement was satisfied by the $30 million consent judgment between Cawthorn and Ledford. The court first analyzed whether the consent judgment fell within any of the exceptions to the excess judgment rule, ultimately concluding that it did not. According to the court, the consent judgment was not a Cunningham agreement because Auto-Owners was not a party to the consent judgment, was not a Coblentz agreement because Auto-Owners was defending its insureds, and did not fall within the third exception because it was not the case of an excess carrier suing a primary carrier.

The court then turned to Cawthorn’s argument that the $30 million consent judgment itself was an excess judgment because it was in excess of the $3 million policy limits. The court, relying on Florida case law using “judgment” and “verdict” interchangeably, held that “judgment” in the context of the excess judgment rule referred to a verdict reached by a finder of fact, not to a stipulated judgment agreed to by the parties. According to the court, a holding to the contrary would eliminate the protection afforded to insurers by the excess judgment rule and allow insureds and injured third parties to collude in order to undermine the insurer’s policy, even where the insurer was defending.

Because the court determined that there was no excess judgment or its functional equivalent, it declined to decide whether Auto-Owners had acted in bad faith as a matter of law.

Cawthorn is an obvious win for Florida insurers because it affirms the well-established safeguards of the excess judgment rule. But Cawthorn also contains a less obvious, but perhaps more significant, victory for the Florida insurance industry. Recently, the Florida Supreme Court, in Harvey v. Geico General Insurance Co., 259 So. 3d 1 (Fla. 2018), seemingly adopted a negligence standard for bad faith actions. In contrast, the Cawthorn court, albeit in dicta, unequivocally stated: “An insurance company breaches its duty when it acts in bad faith — mere negligence is not enough.”