Eleventh Circuit expands excess judgment rule for bad faith claims

This week’s decision by the Eleventh Circuit in McNamara v. Gov't Employees Ins. Co., __ F.4th __, No. 20-13251, 2022 WL 1013043 (11th Cir. Apr. 5, 2022) expands the circumstances under which insurers in Florida may face exposure to third-party bad faith claims.  At issue in McNamara was whether a bad faith action based on the insurer’s failure to settle a claim within policy limits may be predicated on a consent judgment between the claimant and insured, rather than a litigated judgment against the insured. 

The case involved a collision that caused claimant’s catastrophic injuries. The insureds’ auto policy provided limits of $100,000.  The insurer promptly tendered the limits to settle the claim.  However, purported misunderstandings caused the settlement to fall apart.  The claimant sued the insureds for negligence, and the insurer agreed to defend the case.  The claimant served settlement proposals for $5,000,000.  The proposals were conditioned upon entry of a stipulated judgment against the insureds, and the insurer’s agreement not to assert that the settlement breached the policy.  Defense counsel advised the insurer that $5,000,000 was less than the full value of claimant’s damages.  The insurer ultimately agreed not to deny coverage for breach of the policy, and a consent judgment for $5,000,000 was entered against the insured.

The claimant then sued the insurer seeking to collect the excess judgment, alleging that the insurer’s failure to settle the claim within the $100,000 limits was in bad faith. The district court granted summary judgment for the insurer.  The district court reasoned that the insurer’s alleged failure to settle could not have caused a stipulated excess judgment to be entered against the insured, and therefore was not the “functional equivalent” of an excess judgment under Florida law.  The Eleventh Circuit reversed the district court, holding that a consent judgment is the “functional equivalent” of an excess judgment that permits the insured to proceed against the insurer for bad faith. 

The McNamara decision is a significant reversal by the Eleventh Circuit, which previously held that a consent judgment arising from a settlement between the claimant and insured was not the “functional equivalent” of an excess judgment.  The McNamara court held that under Florida law, “a jury verdict is not a prerequisite to an excess judgment in a bad faith action and that, instead a plaintiff can base a bad faith claim on a consent judgment that exceeds available insurance coverage.” 

The McNamara case appears to approve a new method by which an insured can obtain the “functional equivalent” of an excess judgment to support a bad faith case: a stipulated judgment by the insured and claimant while the insurer is still providing a defense to the insured in the underlying case.  It is possible that McNamara may increase attempts by claimants to utilize a consent judgment as proof of bad faith damages and causation. That said, the McNamara court did add an important concluding footnote, which states that: “Indisputably, [the insurer] authorized [the insureds] to accept the settlements by agreeing not to assert that they had violated any policy provision by doing so.”  2022 WL 1013043  at *5 n.7.  The insurer’s decision not to challenge coverage for the settlement for breach of the policy, despite the insurer’s control over defense and settlement, is a unique fact that may distinguish McNamara from future bad faith cases.