In Federal, an employee rear-ended an automobile, severely injuring one of the passengers and killing another. The tortfeasor’s employer had several layers of insurance. The primary insurer provided a first layer of coverage in the amount of $1 million, which it paid promptly. Another insurer provided an umbrella policy of $25 million, while a third insurer provided an excess policy of $25 million. The lower-level umbrella policy insurer settled certain derivative claims for $2.1 million, but rejected an offer to settle the remaining claims within its policy limits.
After a jury found in favor of the plaintiffs, the trial court entered judgment for nearly $31 million against the insured. While an appeal was pending, the plaintiffs entered into a confidential settlement with the excess insurer, agreeing to accept a $4.5 million payment and release the excess insurer — but not the lower level insurer — from liability. After the appellate court affirmed the trial court’s rulings in all material respects, the lower-level insurer settled with the plaintiffs for the remainder of its policy limits in exchange for a release of all of the plaintiffs’ claims against the insured and all its insurers.
The excess insurer subsequently sued the lower-level insurer for bad faith for failing to settle earlier within policy limits. The lower-level insurer moved for summary judgment, arguing that (i) the lack of a judgment or settlement in excess of its policy limits barred the excess insurer’s bad faith claim and (ii) a third-party could not state a claim for bad faith after the underlying judgment had been satisfied and the injured parties had released the insured and all of its insurers from all liability. The district court denied summary judgment, and the lower-level insurer appealed.
On appeal, the Eleventh Circuit noted that, under Florida law, an excess insurer can sue a primary insurer for bad faith only under the principle of equitable subrogation, which effectively substitutes the excess insurer for the insured. The Federal court acknowledged that the Florida Supreme Court has held that the release of an insured tortfeasor from all liability extinguishes a third-party bad faith claim because there is no potential for an excess judgment. The Eleventh Circuit reasoned that, because the lower-level insurer’s settlement had satisfied the underlying judgment and eliminated the insured’s exposure to an excess judgment, it had also extinguished any bad faith claim that either the insured or the excess insurer as subrogee might have had.
For a copy of the decision, please click here.