The Florida Supreme Court recently decided, in a case of first impression, that a cause of action for third-party bad faith against an indemnity insurer cannot 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.  

In Perera v. United States Fidelity & Guaranty Co. (.pdf), the plaintiff’s husband, an employee of Estes Express Lines Corporation, was crushed to death by a piece of equipment, and his wife filed a wrongful death suit against Estes.  Estes had three insurance policies:  a $1 million commercial liability policy issued by Cigna, a $1 million excess worker’s compensation employer’s liability policy issued by USF&G, and a $25 million umbrella excess liability policy issued by Chubb.  USF&G denied coverage.  The parties entered into a settlement for $10 million, with Estes to pay $5 million, made up of $750,000 from Estes, $500,000 from Cigna, and $3.75 million from Chubb.  The remaining $5 million was to be sought by Estes or Perera in a lawsuit against USF&G. 

Perera, as Estes’ assignee, sued USF&G for breach of contract, seeking recovery of the $1 million policy limits, and bad faith, seeking recovery of the remaining $4 million.  USF&G removed the case to federal district court, which entered summary judgment in favor of Perera on the breach of contract claim, requiring USF&G to pay the $1 million policy limit.  The 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, and entered summary judgment for USF&G, holding that without an excess judgment there could be no cause of action for bad faith.  Perera appealed to the Eleventh Circuit, which remanded to the district court for a jury finding on bad faith.  The jury found that USF&G acted in bad faith.  The Eleventh Circuit agreed with the district court that there was no excess judgment against the insured, Estes, but because it was not clear whether an excess judgment was a necessary part of a bad-faith claim under Florida law, certified questions to the Florida Supreme Court, which the Florida court rephrased as:

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 Florida Supreme Court thoroughly reviewed existing Florida bad-faith law and concluded that although an excess judgment is not always a prerequisite to a bad-faith claim against an insurer, a causal connection must exist – the damages claimed by the insured must be caused by the insurer’s bad faith.  It held that regardless of whether USF&G should have promptly paid its policy limits, there was no causal connection between USF&G’s bad faith and the damages claimed, because 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.    It concluded 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, and therefore Perera, as Estes’ assignee, could not recover the unpaid portion of the consent judgment.