In Florida, an excess judgment is when the judgment in the case exceeds the policy limits. The excess judgment rule requires an injured plaintiff to obtain an excess judgment before prosecuting a bad faith claim against an insurer. Injured plaintiffs have looked to the courts for clarity on whether a settlement agreement in excess of the policy limits can satisfy the excess judgment rule. In the Eleventh Circuit’s earlier decision in Cawthorn v. Auto-Owners Ins. Co., No. 18-12067, 2019 WL 5491557 (11th Cir. Oct. 25, 2019), the court held that a jury verdict was a prerequisite to an excess judgment. However, important news for insurers, the Eleventh Circuit recently reversed its prior reasoning in Cawthorn and holds in Erika L. McNamara, Willard F. Warren and  Kenneth Bennett v. GEICO, 2022 U.S. App. LEXIS 9090 (11th Cir. Apr. 5, 2022) that a settlement agreement can satisfy the excess judgment rule.

The Eleventh Circuit’s Prior Reasoning

In Cawthorn, the validity of the injured plaintiff’s bad faith claim turned on whether a $30 million consent judgment in excess of the insurer’s $3 million policy limits satisfied the excess judgment rule. The Cawthorn court held that an excess judgment required a verdict reached by a factfinder, not a stipulated consent judgment agreed to by the parties. The Cawthorn court reasoned that a holding to the contrary would eliminate the protection afforded to insurers by the excess judgment rule and allow injured parties to collude in order to undermine the insurance company’s policy. The Cawthorn decision was an obvious win for Florida insurers because it limited Florida’s bad faith excess judgment rule to jury verdicts. 

Eleventh Circuit’s More Expansive View of What Constitutes an ‘Excess Judgment’

In McNamara, the Eleventh Circuit reversed its prior reasoning in Cawthorn and held that an excess judgment may be based upon a consent judgment that memorializes a private settlement agreement. The McNamara court reasoned that while showing the existence of an excess judgment from a jury verdict is generally the most straightforward way to prove causation for bad faith, there is no single way of proving causation. The McNamara court found that requiring a verdict as a prerequisite to an excess judgment would only incentivize litigation, and in direct contravention of Florida’s public policy favoring settlement. The McNamara decision is a win for injured parties because it expands Florida’s bad faith excess judgment rule to include agreed settlements.

Takeaway for Insurers

The Eleventh Circuit emphasizes the McNamara decision will not leave insurance companies unprotected because the plaintiff in a bad faith action must still prove the insurer breached its duty by acting in bad faith. Moreover, a consent judgment will be enforced against an insurer only to the extent that the judgment is not unreasonable in amount and is not tainted by bad faith on the part of the insured. Insurers should be prepared to investigate any bad faith claims predicated on consent judgments that exceed policy limits to ensure the consent judgment resulted from an arm’s length compromise and was reached without the use of any collusive measures.