Bad Faith - Eleventh Circuit Applies Florida Law And Rejects Bad Faith Action By Excess Insurer Against Underlying Insurer
Last Thursday, in Federal Insurance Co. v. National Union Fire Insurance Co., No. 07-12274 (Oct. 30, 2008), the U.S. Court of Appeals for the Eleventh Circuit applied Florida law and held that an excess carrier could not sue
an underlying insurer for failure to timely settle a claim against the insured within policy limits. The court’s unpublished opinion concluded that the excess insurer’s rights arose by equitable subrogation and, because
the underlying carrier and claimants entered into a settlement that released all claims against the insured, the excess insurer’s right to bring a bad faith claim against the underlying insurer was extinguished.
This action arose from a December 2000 accident that injured members of the Mejia family. Manheim Auctions Government Services (“Manheim”), the insured, had an umbrella policy of $25 million from National Union and
an excess policy of $25 million from Federal. The Mejias initially demanded $45 million to settle their claims and later offered to settle for $21.25 million -- an amount within National Union’s limits. National Union rejected
the settlement offers.
Following trial in April 2004, judgment was rendered against Manheim for approximately $21 million, and the trial court later increased the non-economic damages award by $9.9 million. Manheim elected a new trial on the issue of non-economic
damages in lieu of accepting the additur, and appealed from the judgment against it. Believing that Manheim would lose the appeal and that a new trial would likely result in a judgment in excess of both carriers’ policy limits,
Federal agreed in October 2004 to pay the Mejias $4.5 million in exchange for a release from attempts to enforce any judgments arising out of the accident against Manheim or Federal. National Union was not told of this agreement,
and the Mejias specifically reserved the right to collect a judgment from National Union.
The appeal of the underlying case affirmed the adverse judgment and sent the case back for a new trial on non-economic damages. National Union then settled with the Mejias in May 2006. National Union paid its remaining policy limits,
and the Mejias released Manheim from all claims arising from the accident. Federal subsequently sued National Union seeking reimbursement of the $4.5 million it had paid in 2004. Federal alleged that National Union had acted in bad
faith when it failed to settle the Mejias’ claims within its policy limits prior to the trial. National Union moved for summary judgment asserting that Federal had no cause of action under the circumstances of the case. That
motion was denied by the district court.
On appeal, the Eleventh Circuit held that Florida law allows an excess insurer to sue a primary insurer for bad faith only under the principle of equitable subrogation. The court found that, in the 2006 settlement, the claimants
had fully released the insured Manheim from any exposure arising from the accident and thereby eliminated any risk to Manheim of a verdict in excess of National Union’s policy limits. According to the Eleventh Circuit, the
claimants’ release of the insured eliminated any bad faith claim by Manheim against National Union and, accordingly, any bad faith claim that Federal might have against National Union based on equitable subrogation. In so
holding, the Eleventh Circuit distinguished the case from situations where the insured reserved rights against its insurers to recover funds paid in settlement or assigned its rights against its insurers to a third party.