The Eleventh Circuit Court of Appeals reversed a Florida district court’s award of damages to the excess insurer on the ground that the excess insurer failed to prove the primary insurer’s alleged bad faith had caused the excess insurer damages. Westchester Fire Ins. Co. v. Mid-Continental Casualty Co., No. 13-12932 (11th Cir. June 19, 2014).
Florida law allows an excess carrier to sue a primary insurer for bad faith by virtue of equitable subrogation. Under that doctrine, an excess carrier has the right to maintain a cause of action for damages resulting from the primary carrier’s bad faith refusal to settle the claim against the common insurer. The rationale of these equitable subrogation cases is that the primary insurer is responsible to the excess insurer for improper failure to settle, as the position of the excess insurer is analogous to that of the insured when only one insurer is involved.
In the underlying case, Jesus Pillado sued Continental Manufacturing (“Continental”) for products liability. Pillado alleged damages in excess of $1 million. Mid-Continental Casualty, Continental’s primary insurer, provided a defense. During the litigation, Mid-Continental and its defense counsel made several attempts to settle. Continental’s excess insurer, Westchester Fire Insurance Company, demanded that Mid-Continental settle the suit. However, Pillado’s lowest demand was $1 million, while Mid-Continental’s settlement range was $150,000-$350,000, and the case did not settle. A jury trial resulted in a verdict of $1,705,173.
Defense counsel believed the net award would not exceed $1.6 million due to a worker’s compensation setoff. Pillado offered to settle the case, post-trial, for that amount. Mid-Continental did not inform Westchester of the offer, instead advising defense counsel to decline the demand, as it was “no deal for us.” The state court did not permit the setoff, and awarded Pillado $285,000 in costs, resulting in a total judgment of $1,990,173. As the costs were the primary carrier’s obligation, Westchester’s policy was exposed to $705,173.
Westchester sued Mid-Continental alleging bad faith refusal to settle. The district court concluded Mid-Continental had acted in bad faith by failing to notify Westchester of the post-verdict settlement offer, and awarded Westchester $390,173 in damages, the amount Westchester would have saved if Mid-Continental and Westchester had accepted Pillado’s post-verdict settlement offer. Continental appealed.
The Court of Appeals first cited to the Supreme Court of Florida for the proposition that a valid bad faith claim must show “a causal connection between the damages claimed and the insurer’s bad faith.” Perera v. U.S. Fid. & Guar. Co., 35 So.3d 893, 903-04 (Fla. 2010). The claimed damages must be caused by the bad faith. Id.
In the case sub judice, the district court did not find that Mid-Continental’s failure to communicate the settlement offer caused any damage to Westchester. Westchester did not identify any evidence showing that it incurred an obligation it should not have been required to pay absent the primary insurer’s bad faith. Westchester’s oral argument claimed its previous pre-verdict request for settlement was sufficient proof it would have accepted the post-verdict settlement. The court rejected the claim, concluding many of the pre-verdict demands were pro forma. Westchester had offered no evidence or testimony that it would have accepted the post-verdict settlement offer. Accordingly, the Court of Appeals reversed the district court on the ground that there was no proof that Mid-Continental had caused any injury to Westchester.