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Client Update

November 15, 2019
Re: Client Update

Cawthorn v. Auto-Owners Ins. Co., No. 18-12067, 2019 WL 5491557, (11th Cir. Oct. 25, 2019)

The following case highlights the importance of an insurer affirmatively excluding itself from a consent judgement agreed upon by its insureds and injured third party claimant.

On October 25, 2019, the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) rendered its opinion concerning David Madison Cawthorn’s (“Mr. Cawthorn”) appeal of the United States District for the Middle District of Florida’s (“District Court”) grant of summary judgement in favor of Auto-Owners Insurance Company on his assigned third-party bad faith insurance claim.

The underlying case arises out of an April 3, 2014 automobile accident in which Mr. Cawthorn sustained major injuries as a passenger in a vehicle operated by Bradley Ledford (“Mr. Ledford”). The vehicle was owned by Mr. Ledford’s father’s business, Bob Ledford’s RV & Marine, Inc. (“Bob’s RV”), and was insured by Auto-Owners Insurance Company. Bob’s RV was covered by two Auto-Owners policies: a $1 million Garage Liability Policy and a $2 million Commercial Umbrella Policy. Mr. Ledford was a scheduled driver under the Garage Liability Policy.

Auto-Owners learned of the accident the day after the incident. Its Florida adjuster, Pamela McLean (“Ms. McLean”), determined within the month that both Mr. Ledford was at fault and Mr. Cawthorn’s injuries were severe. Accordingly, within the month Ms. McLean opened a reserve for the policies’ combined limits. During April and June, Ms. Mclean attempted to retrieve Mr. Cawthorn’s medical records to process the claim. She was provided an authorization release signed and submitted by Mr. Cawthorn’s father (“Cawthorn Sr.”). The hospital did not accept this form, as Mr. Cawthorn was an adult and should have signed the authorization form himself.

This led to a contentious June 11, 2014 call between Cawthorn Sr. and Ms. McLean, of which they both give differing accounts. McLean states she simply requested another authorization form and Cawthorn Sr. purported that McLean refused to tell him how much money he would receive and that she had advised him not to get a lawyer. Shortly after the June 11 call, McLean emailed Cawthorn Sr. a blank authorization form. Cawthorn Sr. again asked Ms. McLean how much money his son was entitled to and Ms. McLean explained the $3 million policy limits. By Mr. Cawthorn’s account, the distrust sown by the June 11 phone call guided his decision to reject a $3 million settlement. He testified that he would have accepted the $3 million tender before June 11. Mr. Crawford then hired a lawyer who subsequently filed suit in Florida state court against Mr. Ledford and Bob’s RV for negligence.

Auto-Owners learned of the suit on July 14, 2014 and hired attorneys to represent Mr. Ledford and Bob’s RVs. On August 7, Auto-Owners had still not received Mr. Cawthorn’s medical records but had received a lien notice form Mr. Cawthorn’s health insurance company and, thus, were finally able to process the claim. McLean then tendered two checks to Mr. Cawthorn’s counsel, totaling $3 million. This tender was rejected.

Fast forward to 2016. A failed mediation attempt prompted counsel for Mr. Cawthorn to send a settlement proposal Mr. Ledford and Bob’s RV. This settlement agreement required Auto-Owners to tender the $3 million to settle the claim against Bob’s RV, a $33 million consent judgement against Mr. Ledford and Mr. Cawthorn’s covenant not to execute the judgement against Ledford.

Auto-Owners’ response to the proposal was critical to their success in the instant case. “[W]e continue to be willing to pay Mr. Cawthorn the full $3 million . . . while continuing to provide a defense to Mr. Ledford . . . . As for a future consent judgement [sic] against [Ledford], that will be solely up to [Cawthorn], you and [Ledford’s counsel].”

Mr. Cawthorn and Mr. Ledford went forward with settlement negotiation and finalized a settlement agreement thereafter without the inclusion of Auto-Owners. The October 20, 2016 final agreement terms provided that: 1) Auto-Owners would tender $3 million to Cawthorn for a full release of Bob’s RV; 2) Mr. Ledford agreed to a $30 million consent judgment against him, and Ledford assigned to Cawthorn his rights to sue Auto-Owners for its conduct during the insurance claim; and 3) Mr. Cawthorn would not record the consent judgment against Mr. Ledford and would deliver to Mr. Ledford a full and complete satisfaction of the consent judgment, regardless of the outcome of the future bad faith claim. There was no signature line for Auto-Owners contained in the agreement and there was no evidence that Auto-Owners even saw the agreement.

Cawthorn accepted Auto-Owners tender of $3 million and then, under assignment of Mr. Ledford’s rights, sought $30 million in a bad faith suit filed in December 2016. Mr. Cawthorn argued that he would have accepted the $3 million settlement but for Auto-Owners bad faith in handling his insurance claim.

Two issues were before the District Court: (1) whether Cawthorn could prosecute the bad faith claim against Auto-Owners without first obtaining an excess judgment or its functional equivalent, and (2) whether Auto-Owners acted in bad faith as a matter of law. The District Court found that the case was not ripe and did not decide the second question because there was no case or controversy for them to decide upon. The Eleventh Circuit reviewed the case de novo and affirmed both decisions by the District Court.

The Eleventh Circuit noted that for an insured to bring a bad faith claim, the injured party must first win an excess judgement. Cunningham v. Standard Guar. Ins. Co., 630 So. 2d 179, 181–82 (Fla. 1994), and that a case is not ripe if there is no case or controversy. The Eleventh Circuit also noted that there is no case or controversy unless there is an excess judgement. Until the insured is subjected to an excess judgment, any contention that he will be liable beyond policy limits “rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all.” Atlanta Gas & Light Co. v. Fed. Energy Regulation Comm’n, 140 F.3d 1392, 1404 (11th Cir. 1998); see Dixie Ins. Co. v. Gaffney, 582 So. 2d 64, 65 (Fla. 1st Dist. Ct. App. 1991); State Farm Mut. Automobile Ins. Co. v. Marshall, 618 So. 2d 1377, 1379–80 (Fla. 5th Dist. Ct. App. 1993). The Eleventh Circuit opined that there are functional equivalents that satisfy the excess judgement rule. These can be viewed as exceptions to the rule and are a 1) Cunningham agreement; 2) Coblentz agreement and 3) a subrogation claim.

A Cunningham agreement occurs when an Insurer and the Claimant agree to try the bad faith claim before an excess judgement is entered and, if the jury finds no bad faith, the parties settle for the policy limits. Cunningham, 630 So. 2d at 182. The instant case was not a Cunningham agreement because Auto-Owners was not a party to the consent judgement. By affirmatively excluding themselves, Auto-Owners shielded themselves from liability under this exception which caused Mr. Crawford to pursue a more tenuous argument that will be discussed further below.

A Coblentz agreements arise when an Insurer 1) does not defend its insured; 2) subsequently agrees with the claimant to settle the suit and then 3) allows the claimant to sue the insurer in a third-party bad faith case. Coblentz, 416 F.2d at 1063; Steil v. Fla. Physicians’ Ins. Reciprocal, 448 So. 2d 589, 591 (Fla. 2d Dist. Ct. App. 1984). Here, Auto-Owners never failed to defend Mr. Ledford so this exception did not apply. The instant case also clearly does not fall under the third exception, as this is not a case of equitable subrogation by another insurance carrier.

So, as Mr. Cawthorn could not claim an exception, he argued that the consent judgment was the functional equivalent to an excess judgement. Neither the District Court or the Eleventh Circuit were persuaded that a Consent Judgement between an insured and the claimant, without the insurer, is a functional equivalent to an excess judgement. The Eleventh Circuit stated that the consent judgement is akin to a private contract between the parties. The Eleventh Circuit declined to carve out a fourth exception to the excess judgement rule, as it would have flown in the face of the narrowly tailored exceptions provided by Cunningham and Coblentz. If Mr. Cawthorn’s claim had been successful, plaintiffs would never need the consent of an insurer to try a bad faith claim pre-excess judgment, pursuant to Cunningham. No case that Mr. Cawthorn cited to contained a consent judgement to which the insurer was not a party to or agreed to be bound by the consent judgement. As such, they were distinct from the instant case and were not persuasive enough to convince the Eleventh Circuit to carve out a new fourth exception wherein a claimant and an insured can circumvent the excess judgement rule.

This holding by the Eleventh Circuit preserves the protections granted to insurers by Florida law and their policies regarding control of litigation and agreement by settlement. It protects insurers against an insured and a claimant coming together, without the carrier’s consent, and attempting to circumvent the provisions of the insurance policy.

Parting recommendation, an insurer should only consider entering into a Cunningham agreement when:
1) the defense counsel has given the insurer a complete evaluation regarding liability, damages and a reasonable range for a jury verdict; and
2) the suggested monetary amount for the Cunningham agreement is at or below the low side of the defense counsel’s evaluation; and
3) the insured and his/her/its counsel specifically want to enter into such agreement.
As always, we will continue to keep you advised regarding any pertinent legislative changes. Should you have any questions regarding the above, do not hesitate to contact the undersigned.

Very Truly Yours,