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August 18, 2001

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 14, #24, p. 25 (April 18, 2001). © Copyright Butler 2001. 

In every jurisdiction that has considered the issue, a claim for bad faith does not accrue until there has been a final determination of the underlying claim for insurance benefits or third party damages. Taylor v. State Farm Mutual Automobile Ins. Co., 913 P.2d 1092 (Ariz. 1996); Blanchard v. State Farm Mutual Automobile Ins. Co., 575 So. 2d 1289 (Fla. 1991). Thus, before a plaintiff can sue an insurance company for bad faith, he must first finally resolve the claim which he contends the insurance company failed to settle in good faith. What constitutes a resolution of that claim varies with the type of claim asserted and the jurisdiction in which it is brought, but it can generally be broken down into three categories: excess judgment, settlement of the underlying claim, and judgment below policy limits.

A.   Excess Judgment

For claims in litigation, the underlying claim is finally resolved when a final judgment has been entered and all appellate rights have been exhausted. Taylor, supra; Romano v. American Casualty Co. Of Reading, Pa., 834 F.2d 968 (11th Cir. 1987). The judgment is considered excess where its total amount exceeds the limitation of coverage under the insurance policy. Once the excess judgment is final, a bad faith action can generally move forward in both third party and first party cases.(1) State Farm Fire & Casualty Co. v. Zebrowski, 706 So. 2d 275 (Fla. 1997).

Entry of an excess judgment is the scenario with which insurance companies are most familiar. For example, in an automobile accident, the insured has bodily injury liability limits of $10,000.00, and the insurance company refuses to offer those limits to the plaintiff to settle the claim. The case proceeds to trial and, lo and behold, the jury returns a verdict of $100,000.00 for the plaintiff. Once that verdict is reduced to judgment, and if the judgment withstands review on appeal, the insurance company can then be sued for bad faith, ostensibly to recover the excess judgment itself. Of course, not all cases proceed to trial and result in the entry of judgment; most cases are settled.

B.   Settlement of the Underlying Claim

Most jurisdictions agree that settlement of the underlying claim is the “functional equivalent” of a final determination of damages and liability sufficient to move forward on a bad faith claim. Brookins v. Goodson, 640 So. 2d 110 (Fla. 4th DCA 1994); Rawlings v. Apodaca, 726 P.2d 565 (Ariz. 1986). In fact, in many states, the payment of policy limits will not absolve the insurer of bad faith liability, nor will payment of an excess judgment. Campbell v. State Farm Mutual Automobile Insurance Co., 840 P.2d 130 (Utah 1992). This is because the liability for bad faith, if any, arises at the time the insurer fails to settle the claim, even though the cause of action for bad faith does not accrue until later, when the underlying claim is finally determined.

Drawing again on our automobile accident example, if, at the outset of the case, the insurance company had been provided conclusive evidence of a catastrophic injury with clear liability on the part of its insured, yet still refused to pay the $10,000.00 policy limits, a later attempt to “undo” the bad faith by paying the $10,000.00 will be unsuccessful. In this scenario, the plaintiff’s attorney frequently refuses the policy limits, claiming that they should have been offered earlier, perhaps pursuant to a time-limited demand. The plaintiff then proceeds to trial, recovers a $100,000.00 judgment, and then sues the insurance company for bad faith to recover the excess. Much to the dismay of many an insurance adjuster, payment of $100,000.00 at that point will not extinguish the bad faith in most jurisdictions. The plaintiff still has a claim for attorney’s fees and perhaps other extracontractual damages such as mental anguish, which can still be recovered even if the insurer pays the excess judgment after trial. It was the failure to pay the $10,000.00 in the early days of the case which constitutes bad faith. The plaintiff can then sue for that early failure to settle upon payment of the excess judgment, or the judgment becoming otherwise final.

Some jurisdictions treat third party bad faith claims differently, however. In Oregon and Florida, for example, the payment of an excess judgment can extinguish a third party bad faith claim. Kricar, Inc. v. General Accident, Fire & Life Ins. Corp., 542 F.2d 1135 (9th Cir. 1976); Fidelity Casualty Co. v. Cope, 462 So. 2d 459 (Fla. 1985). The reasoning of these cases is that the injury to the insured is the exposure to the excess judgment, which is eliminated by virtue of it being paid.(2) In these states, then, if the plaintiff accepts payment of the excess judgment, the bad faith claim is effectively rendered moot. Most savvy plaintiffs, however, will not accept payment on the judgment, as they would rather sue the insurance company to recover attorney’s fees and other extracontractual damages in addition to that excess.

It is possible for the parties to agree to try the bad faith claim first, then determine the amount of damages in the underlying claim. Cunningham v. Standard Guar. Ins. Co., 630 So. 2d 179 (Fla. 1994). These agreements generally absolve the insured of liability and allow the injured plaintiff the opportunity to determine whether the insurer will be exposed to damages in excess of its policy limits before incurring the expense of determining what those damages might be. Looking again to our auto accident hypothetical, the insurance company can agree to try the bad faith claim first, to determine if its liability will be limited to its $10,000.00 policy or something more. If bad faith is found, the parties either try the underlying claim to determine the extent of damages, or judgment is entered on a previously agreed upon amount. In either case, the courts reason that the insurance company has essentially waived the requirement that the underlying claim be determined first, thereby dispensing with the usual legal prerequisite. See, Cunningham, supra.

C.   Judgment Below Policy Limits

As noted above, once a judgment is final and has been through the appellate process, the underlying claim for insurance coverage or third party damages has been resolved and a bad faith claim can move forward. In the first party context, the amount of the damages is generally irrelevant, so long as the determination is final. Imhoff v. Nationwide Mutual Ins. Co., 643 So. 2d 617 (Fla. 1994); Campbell, supra. Because first party bad faith is premised on the insurer’s obligation to its insured under the policy, any damages incurred by the insured outside the policy are recoverable even if the judgment is below policy limits. Thus, if an insured proves that the insurance company failed to settle the claim in bad faith, the insured can recover attorney’s fees or other bad faith damages even if it ultimately recovered less than policy limits.

In many states, this is true in the third party context as well. For example, in Campbell, the Utah Supreme Court recognized that the bad faith cause of action is a tort independent of the insurance contract, and thus the insured can maintain a bad faith action even if the underlying claim is resolved favorably to the insured. The concept behind this line of cases is that the insured may incur legal expenses or suffer emotional distress or other extracontractual damages as a result of having to litigate the case. These damages are cognizable in a bad faith claim independent of the entry of an excess judgment, and therefore can be recovered even if the insured prevails in the underlying claim, assuming the insurance company acted in bad faith.

This concept is usually quite hard to swallow by the insurance industry, but it is a reflection of the general policy consideration given by most courts against insurers and in favor of the insured. Thus, in the auto accident example, assume that the insurer refuses to settle the claim for $5,000.00 of its $10,000.00 policy pursuant to an early demand. The case then proceeds to trial, and a verdict comes in for $7,500.00. Because the insurer could have settled for $5,000.00 early on, it could conceivably be found in bad faith, and be required to pay the plaintiff’s attorney’s fees or other extracontractual damages incurred as a result of having to proceed to trial.

Of course, the Utah Supreme Court points out in Campbell that where the judgment is below policy limits or there is no judgment against the insured at all, it will be extremely difficult to prove a bad faith claim. 840 P.2d at 141, n.5. A judgment below policy limits tends to indicate that the insurance company was justified in not settling the case early on, but does not exonerate the insurance company entirely as in the example above. Thus, while a victory in the underlying claim would seem to go a long way towards eliminating a bad faith claim, it provides no absolute guarantee.

On the other hand, in jurisdictions such as Florida where the excess judgment is recognized as the legal justification for third party bad faith, a judgment below policy limits essentially eradicates the third party bad faith claim. Zebrowski, supra. In these states, a victory in the underlying claim demonstrates not only that the insurer was justified in not settling, it renders it impossible to move forward on a third party bad faith claim at all.(3)

D.   Conclusion

In any bad faith case, the liability of the insurer cannot be determined until such time as the underlying claim is finally resolved. Whether this condition is met by an excess judgment, a settlement, or a judgment below policy limits depends upon whether the claim is for first party or third party benefits, and where the claim is brought. In any event, insurers should be careful in resolving claims where bad faith has been threatened; paying policy limits or even obtaining a defense verdict for the insured is frequently no insulation from a later bad faith claim. Settlement of such claims should therefore expressly release the insurance company from any extracontractual liability as well as resolving the underlying claim.


  1. “First party” insurance cases involve claims by insureds against their own insurance company for their own damages, for example health insurance or uninsured motorist coverage cases. “Third party” cases involve claims for the payment of damages incurred by a third party, such as automobile or homeowner’s liability cases.
  2. Under Florida’s bad faith statute, the aggrieved party is required to file a notice with the state Insurance Commissioner in statutory bad faith claims, which allows the insurer 60 days in which to “cure” the bad faith. Payment of policy limits within this 60 day period bars any subsequent statutory bad faith. Talat Enterprises, Inc. v. Aetna Casualty & Surety Co., 753 So. 2d 1278 (Fla. 2000). Florida recognizes only third party common law bad faith, and thus this statutory defense applies to all first party cases and those third party cases in which a statutory notice is filed.
  3. It should be noted that under Florida’s bad faith statute, claims for institutional bad faith under Florida Statute § 624.155(1)(a) extend to any “person” and not just the insured, arguably removing such claims from the purview of Zebrowski and removing the requirement of an excess judgment.