Editor's Note: I have reprinted the facts and procedural history in its entirety (except for footnotes). The facts and procedural history section is quite lengthy and important to understanding the case.
This case, pending in the federal court, involves interpretation of Florida law on third-party bad-faith causes of action in insurance cases. We have jurisdiction because the Eleventh Circuit Court of Appeals certified two questions, which are “determinative of the cause and for which there is no controlling precedent.” Art. V, § 3(b)(6), Fla. Const. Although in this case the Eleventh Circuit has asked us broad questions regarding common law bad-faith cause of actions under Florida law, we have determined that, based on the unique circumstances of this case, the answer to whether the appellant, Pamela Perera (“Perera”), has an actionable bad-faith case against appellee, United States Fidelity and Guaranty Company (“USF&G”), allows for a more narrow framing of the question: MAY A CAUSE OF ACTION FOR THIRD-PARTY BAD FAITH AGAINST AN INDEMNITY INSURER BE MAINTAINED WHEN THE INSURER’S ACTIONS WERE NOT A CAUSE OF THE DAMAGES TO THE INSURED OR WHEN THE INSURER’S ACTIONS NEVER RESULTED IN EXPOSURE TO LIABILITY IN EXCESS OF THE POLICY LIMITS OF THE INSURED’S POLICIES?
The jury in this case found that USF&G acted in bad faith and that finding is not controverted. The issue raised by the rephrased certified question is whether the insured sustained recoverable damages as the result of the bad faith. We answer the rephrased certified question in the negative because, based on the facts of this case, the insurer’s actions neither caused the damages claimed by the insured nor resulted in exposure of the insured to liability in excess of the policy limits of the insureds’ polices.
FACTS AND PROCEDURAL HISTORY
Perera’s husband, Mitchell Perera, an employee of Estes Express Lines Corporation (“Estes”), was crushed to death by a piece of equipment during the course of his employment. As the personal representative of his estate, Perera filed a wrongful death suit against Estes and specified named employees of Estes (“employees”) in Hillsborough County Circuit Court (“state trial court”). At the time of Mitchell Perera’s death, Estes maintained three insurance policies: a commercial liability policy (insuring only the employees of Estes) issued by Cigna Property and Casualty Insurance Company (“Cigna”) with a limit of $1 million, subject to a $500,000 deductible; an excess worker’s compensation employer’s liability policy (insuring only Estes) issued by USF&G with a limit of $1 million after Estes’ self-insured retention of $350,000; and an umbrella excess liability policy (insuring both Estes and its employees) issued by the Chubb Group of Insurance Companies (“Chubb”) with a limit of $25 million. All three policies required Estes to provide its own defense.
In setting forth the facts, we rely on the Eleventh Circuit’s opinion as well as facts in the trial court record from the bad-faith case.
After learning of Perera’s lawsuit, USF&G denied coverage, asserting that the intentional acts exclusion contained in the USF&G policy precluded coverage of Perera’s claim against Estes. In March 2001, Perera formally demanded $12 million to settle the case. About a week later, Perera, Estes, and the three insurance companies met to mediate the case. During mediation, when USF&G insisted on its coverage defense and refused to tender its policy limits of $1 million, USF&G was asked to leave the mediation. At mediation, Cigna offered $500,000 (representing the policy limits of $1 million minus Estes’ $500,000 deductible), Estes offered $750,000, and Chubb offered $1.25 million. However, the last demand from Perera was $8 million, and the case failed to settle at mediation.
In the months that followed, Chubb took an active role in handling the settlement negotiations. According to trial testimony and correspondence written by Chubb, after mediation Perera had demanded $8 million in total to settle the case and Chubb offered $3.5 million. There is some indication that USF&G was willing to participate in a settlement by contributing $100,000 but that it continued to rely on its coverage defense in declining to offer its policy limits. Then, in early August 2001, Perera demanded $7 million in total and Chubb offered $4.25 million
for a global settlement to settle the entire case, provided that the right to seek indemnity, contribution, or reimbursement from USF&G be preserved.
In late August 2001, Perera, Estes, and its employees entered into a “Stipulation to Settle” for $10 million.4 The stipulation provided that Estes and its employees would pay $5 million and provide a written waiver of the workers’ compensation lien. Although not stated in the stipulation, the negotiated settlement provided that the $5 million would be paid as follows: $750,000 from Estes,5 $500,000 from Cigna, and $3.75 million from Chubb. The remaining $5 million was to be sought in a lawsuit against USF&G, which Estes agreed to either bring or assign to Perera. Perera agreed in the settlement not to execute or record the judgment pending resolution of the lawsuit against USF&G. Perera further agreed that she would issue a satisfaction of judgment at the conclusion of the lawsuit, even if the suit did not result in the recovery of any additional proceeds.
In accordance with the provisions in the stipulation, the state trial court held a limited evidentiary hearing for the purpose of determining that the stipulation
was entered “in good faith” and that the amount of the settlement was reasonable. After finding that the settlement was in good faith and that the amount of the settlement was reasonable, the state trial court approved the stipulation. Pursuant to the terms of the stipulation, a final judgment was then entered in the amount of $10 million against Estes and its employees. After the approval of the settlement and the entry of the judgment, Perera was paid $5 million total by Estes, Cigna, and Chubb, each in accordance with the amount previously agreed to as part of the settlement. Perera executed a release of any further claims against Chubb. In March 2002, Perera, as Estes’ assignee, brought suit in the state trial court against USF&G for the remaining $5 million of the consent judgment, asserting two causes of action: breach of contract (seeking recovery of the $1 million policy limits) and bad faith (seeking recovery of the remaining balance). USF&G removed the case to federal court, after which the federal district court granted summary judgment in favor of Perera on the breach of contract claim, requiring USF&G to pay its policy limit of $1 million. USF&G has not challenged the decision regarding coverage and has paid $1 million, leaving $4 million of the consent judgment outstanding.
With regard to the bad-faith cause of action, the federal district court found that no bad-faith action existed because Estes still had over $21 million in
insurance coverage from Chubb at the time of settlement. The district court entered summary judgment in favor of USF&G, holding that without an excess judgment there can be no cause of action for bad faith. Perera appealed the district court’s decision to the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit determined that the threshold factual issue of whether USF&G acted in bad faith held the potential to moot the case and remanded to the federal district court to have a jury consider that limited issue.
At trial in the federal district court, the jury instructions contained stipulated facts, including that the $10 million consent judgment was reasonable in amount. The jury was instructed that “[a]n insurance company acts in bad faith in failing to settle a claim when, under all of the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured with due regard for its interests.” The jury was given the following factors to evaluate in determining whether USF&G acted in bad faith: (1) “the efforts taken by USF&G to resolve the coverage dispute promptly or in such a way as to limit any potential prejudice to Estes”; (2) “the substance of the coverage dispute or the weight of legal authority on the coverage issue that existed at the time of the dispute”; (3) “USF&G’s diligence and thoroughness in investigating the facts specifically pertinent to coverage”; and (4) “efforts made by USF&G to settle the liability claims in the face of the coverage dispute.” The jury was instructed that coverage had been
determined to exist, but that factor was not controlling on the question of bad faith. However, with regard to the issue of damages, the jury was instructed that should it find USF&G liable for bad faith, “the issue of any damages will be decided at a later date.” The jury found that USF&G acted in bad faith. After the case returned to the Eleventh Circuit, the Eleventh Circuit agreed with the federal district court that there was no excess judgment against the insured because, as of the time the settlement agreement was negotiated, Estes had $1 million in coverage from the Cigna policy, $1 million in coverage from USF&G’s policy, and $25 million from the Chubb policy, but the judgment entered was for only $10 million. Perera, 544 F.3d at 1275-76. The Eleventh Circuit further reasoned that Estes was never exposed to liability in excess of its policy limits because any such exposure was covered by the Chubb insurance, which had limits of $25 million. Id. After determining that Estes faced no liability above its existing policy limits (and accordingly no excess judgment), the Eleventh Circuit stated that it was not clear whether an excess judgment is a necessary part of a claim for bad faith under Florida law. Id. at 1276.
The Eleventh Circuit then noted that USF&G made an alternative argument that even if an excess judgment is not required, Perera’s bad-faith claim was barred because the insured was never exposed to liability in excess of the limits of the policies. Id. at 1277. The court considered Perera’s sole argument on this point,
which was that Estes was required to advance sums for which it would not otherwise have been liable in order to persuade Chubb to contribute to the settlement, even though the $1 million USF&G limit had not been paid. Id. This argument was rejected for two reasons: first, the record was clear that Chubb was committed to settling and did not refuse to do so before USF&G’s $1 million was paid; and second, even if Estes had paid the $1 million, it would have imposed on Estes an exposure of only $1 million. Id. The Eleventh Circuit, after rejecting Perera’s arguments, concluded that “Estes was never exposed to liability in excess of the limits of its several polices, because any exposure above USF&G’s limits was covered by the Chubb coverage with limits of $25 million.” Id.6
The Eleventh Circuit held that Perera had waived two arguments. First, it noted that Chubb, the excess carrier in the instant case, had not asserted a bad-faith claim against USF&G and did not assign any such claim to Perera, and Perera did
not argue entitlement to assert any rights of Chubb by virtue of subrogation or otherwise. Id. at 1277 n.2. Thus, the Eleventh Circuit held that any such argument was deemed abandoned. Id.
Second, it noted that Perera could have raised a potential factual issue of liability for punitive damages, but that any such argument had been waived. Id. at 1277 n.4.
ANALYSIS
We begin with a brief overview of the relevant and well-established bad-faith law in this State. We then discuss the types of circumstances that have been recognized by case law as giving rise to a third-party bad-faith cause of action (we do not intend to limit the types of bad-faith claims that may be brought in other cases to only the case law discussed in this opinion. We discuss the case law only to determine whether the principles from prior bad-faith case law may be relevant to the facts of this case). Finally, we examine the application of the law of bad faith to the facts of this case.
We start with the basic proposition that when an insurer is handling claims against its insured, it “has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.” Berges v. Infinity Ins. Co., 896 So. 2d 665, 668 (Fla. 2004) (quoting Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980)). This duty includes an obligation to settle “where a reasonably prudent
person, faced with the prospect of paying the total recovery, would do so.” Boston Old Colony Ins. Co., 386 So. 2d at 785. Breach of this duty may give rise to a cause of action for bad faith against the insurer.
The reasoning of the equitable subrogation cases is that the primary insurer is “held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved.” Id. In other words, the excess insurer “stands in the shoes of the insured,” to whom the primary insurer directly owes a duty to act in good faith. U.S. Fire Ins. Co., 600 So. 2d at 1151. Accordingly, when the primary insurer’s bad-faith refusal to settle causes the excess insurer to pay an amount greater than it would have had to pay if the primary insurer had acted in good faith, the excess insurer is entitled to maintain a common law bad-faith claim against the primary insurer. See Ranger, 389 So. 2d at 277. In this circumstance, there is an explicit requirement of a causal connection between the primary insurer’s bad-faith actions and the loss or damage suffered by the excess insurer. See id. at 276-77; see also Vigilant Ins. Co. v. Cont’l Ins. Co., 35 Fla. L. Weekly D750, D751 (Fla. 4th DCA Mar. 31, 2010) (“[T]he insured, or the excess insurer standing in the shoes of the insured, is damaged because it has paid the judgment. It has paid money that it should not have been required to pay, absent the primary insurer’s bad faith.” (emphasis added)).
Although an excess judgment is not always a prerequisite to bringing a bad-faith claim, the existence of a causal connection is a prerequisite—in other words, the claimed damages must be caused by the bad faith. These principles are further illustrated by the case of North American Van Lines v. Lexington Insurance Co., 678 So. 2d 1325 (Fla. 4th DCA 1996), which involved indemnity policies. In North American, according to the allegations in the complaint,11 the insured claimed that both the primary insurer and the excess insurer failed to act in good faith in attempting to settle the claim against the insured.
In focusing on the insurer’s bad-faith failure to settle, forcing a payment of funds that would not otherwise have been expended had the insurers acted in good faith, the reasoning of North American is analogous to an equitable subrogation claim brought by an excess insurer. However, in North American, as in the equitable subrogation cases, there must be a causal connection between the damages claimed and the insurer’s bad faith. As can be seen under Florida law, an excess judgment is not always a prerequisite before a bad-faith case can be brought against the insurer. However, the damages claimed by the insured or its assignee must be caused by the insurer’s bad faith.
Application of Law to Facts
First, we begin with the classic bad-faith case involving a judgment in excess of the policy limits and conclude that in this case there is no excess judgment because the consent judgment was within the limits of all applicable policies.
Second, this case does not involve a Cunningham agreement where the insurer protects the insured by agreeing to try the bad-faith issues first and stipulate to an amount of damages. In this case, USF&G did not participate in any such agreement, and Chubb agreed to the settlement but did not agree to pay $10 million contingent on a finding of bad faith.
Third, we address the potential applicability of Coblentz. Although Coblentz agreements have arisen in the context of liability policies, where there is a breach of the duty to defend, we do not reject the application of Coblentz to indemnity policies. Perera argues that under Florida law, an insured is not required to put its personal assets on the line to settle a case in which its insurer acts in bad faith; rather, Perera asserts, the insured may enter into a settlement that assigns to the plaintiff the insured’s rights against the insurer in exchange for a release from personal liability. As a general proposition, Perera is correct; however, it does not apply to the facts of this case.
We next address the applicability of equitable subrogation, where the excess carrier pays monies it would not otherwise have been obligated to pay if the primary insurer had acted in good faith. This type of claim, which may be assigned to a third-party claimant, is not applicable here. In this case, Chubb did not assign to Perera any potential cause of action it may have had against USF&G by virtue of equitable subrogation. In fact, under the terms of the agreement, Perera actually executed a release of liability of any further claims against Chubb.
However, in this case, regardless of whether USF&G should have promptly paid its policy limits, there is no causal connection between USF&G’s bad faith and the damages claimed. The following facts are important to the resolution of this question: there was a substantial excess policy protecting Estes, Chubb was willing to negotiate a settlement without contribution from USF&G, Estes did not face exposure to liability in excess of the combined policies, and Chubb did not choose to either bring a bad-faith claim against USF&G or assign its claim to Perera.
CONCLUSION
Based on the facts of this case, we conclude that USF&G’s actions did not cause Estes to sustain the claimed damages of $4 million or to be exposed to liability in excess of its policy limits. Accordingly, Perera, as Estes’ assignee, is not entitled to recover the unpaid portion of the consent judgment. We answer the rephrased certified question in the negative and return this case to the Eleventh Circuit.
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