In our firm's continuing effort to inform the public of important legal issues, from time to time we will reproduce in our blog letters, articles, and papers written by other people. Today's entry, published in the March, 2011 edition of The Florida Bar Journal, was written by Rutledge R. Liles, one of the most esteemed and accomplished lawyers in Florida, regarding, perhaps, the most important legal issue being debated in Florida today. Mr. Liles knows of what he speaks.
Florida Insurance Bad Faith Law: Protecting Businesses and You
by Rutledge R. Liles
This article is offered as a response to a troubling presentation on insurance bad faith by authors Young and Clark that appeared in the February Florida Bar Journal ("The Good Faith, Bad Faith, and Ugly Set-up of Insurance Claims Settlement"). (Footnote 1.) It is intended to address various misunderstandings that may have been created by that earlier discussion, and to provide a more balanced discussion of this most topical subject. To accomplish this goal, this article explains what insurance bad faith is, how it protects insureds, and why the statutory amendment suggested in that article is unfair, unworkable, and unwise.
Eight years ago, my article, "Insurance Bad Faith: The Set Up Myth" was published in The Florida Bar Journal. (Footnote 2.) The premise of the article was that "generally speaking...insurance companies set themselves up for the fall in a fashion that could easily be avoided or remedied." That statement remains as true today as it was eight years ago. Florida law remains consistently and appropriately focused upon the conduct of insurers when determining whether they have acted reasonably in the discharge of the fiduciary duty they owe their policy holders. If insurers acted reasonably in the discharge of the fiduciary duty they owe their policy holders, we would not be spilling ink over a contrived notion that claimants and insureds can somehow control the conduct of insurers in adjusting losses, thereby "setting up" bad faith claims. This contrivance is advanced as a justification for the passage of legislation to protect the insurance industry from its own failures at the cost of Florida's insured businesses and individuals.
Initially, it should be noted that the February article never mentions the common law duty of good faith, which the authors' proposed statutory amendment would largely eliminate. Moreover, the article ignores the well-established principle, recognized by both the courts and the legislature, that insurers owe a fiduciary duty to their insureds. These long-established tenets of insurance law are the cornerstones that ensure that businesses and individuals receive the benefit of the protection for which they bargained and paid in their insurance contract. Otherwise, insurance companies are without accountability and Florida's businesses, professionals, homeowners, and other insureds are left to pay the cost of careless and improper claims practices by insurers. The article makes absolutely no showing that the remedies crafted by the courts (common law) and by the legislature in F.S. §624.155 (statutory law) require the drastic revisions proposed.
The Florida Supreme Court recognized a common law action for third-party bad faith as early as 1938. (Footnote 3). Its decision to do so grew out of the realization that insurance contracts had come to "occupy a unique institutional role" in modern society, as they became an economic necessity for businesses and individuals. (Footnote 4.) Additionally, as liability policies replaced indemnity policies, the insurer's power over the insured's situation became greater, requiring a remedy for when that power was abused.
Under a liability policy, the insured's role is essentially limited to selecting the type and desired level of coverage and paying the corresponding premium. Insurance coverage, theoretically, offers security and peace of mind against unforeseeable losses. As part of the contract, the insured surrenders to the insurer all control over the negotiations and decisionmaking as to claims. The insured's role is relegated to the obligation to cooperate with the insurer's efforts to adjust the loss. The insurer makes all the decisions with regard to claims handling and thereby has the power to settle and foreclose an insured's exposure to liability, or to refuse to settle and leave the insured exposed to liability in excess of the policy limits. (Footnote 5.) As a result, "the relationship between the parties arising from the bodily injury liability provisions of the policy is fiduciary in nature, much akin to that of attorney and client," because the insurer owes a duty to refrain from acting solely on the basis of its own interests in the settlement of claims. (Footnote 6.) Accordingly, and because of this relationship, the insurer owes a duty to the insured to "exercise the utmost good faith and reasonable discretion in evaluating the claim" and negotiating for a settlement within the policy limits. (Footnote 7.) When the insurer fails to act in the best interests of the insured in settling a claim, an injured insured is entitled to hold the insurer accountable for its "bad faith."
Although Florida courts recognized a bad faith cause of action in the context of liability policies, they did not impose the same obligation in the context of first-party insurance contracts, when the injured party was also the insured under the insurance policy. At common law, first-party insurance policies were enforced solely through traditional contract remedies. However, in 1982, the legislature recognized that due to the same disparity in power between the insurer and the insured in first-party contracts, there was a need for a bad faith remedy in that context as well. (Footnote 8.) As a result, the legislature enacted F.S. §624.155, which established, inter alia, a first-party bad faith cause of action. It should be noted, however, that in F.S. §624.155(8), the legislature made it abundantly clear that the statute did not preempt the common law remedy. The standard for bad faith in settlement was the same as the common law standard: "Bad faith on the part of an insurance company is failing to settle a claim when, under all the circumstances, it could and should have done so, had it acted fairly and honestly towards its insured and with due regard for the insured's interest." (Footnote 9.)
The measure of whether an insurer has acted in good faith is, necessarily, determined by an assessment of the lengths to which the carrier went in an effort to provide the insured with the protection afforded by the insurance policy. It is for this reason that the focus in a bad faith case is upon the conduct of the insurer and not the person making the claims or presenting any opportunity for settlement. If the liability insurer undertakes a prompt investigation of the loss, timely evaluation of the legal liability of the insured, communicates to the insured the material events of the adjustment process, and acts reasonably with regard to opportunities to settle the loss and protect the assets of the insured, then it has no fear from Florida's bad faith laws.
It is within this framework that common law bad faith actions have been allowed in Florida for over 70 years without substantial change in the governing principles, with statutory bad faith claims being allowed for almost 30 years. The previous Journal article proposes a dramatic and unwarranted change to bad faith law for which no empirical justification is offered, and its anecdotal reliance on cases it cites actually undermines its basic premise. That is, an analysis of the relevant case law demonstrates that the courts have properly and consistently defeated attempts to allow "set-up" bad faith claims which were premised on the two tactics the article identifies: 1) arbitrary and unrealistic time deadlines for acceptance imposed by claimants, and 2) settlement offers containing unreasonable terms that cannot be complied with (and will not be negotiated).
With respect to the arbitrary and unrealistic time deadlines, the authors look for support in DeLaune v. Liberty Mutual Insurance Co., 314 So. 2d 601 (Fla. 4th DCA 1975), where no support is to be found. There, the claimant made a demand for policy limits, but required payment in 10 days. Neither the court nor the jury was impressed by that unreasonable time limit, and the bad faith claim was lost at trial and affirmed on appeal. In affirming, the Fourth District specifically noted that the 10-day time limit was "totally unreasonable under these circumstances," and that it was a charade designed to "set-up" a bad faith suit. (Footnote 10.) Subsequent cases have expanded on that and even determined that attempts to limit insurers to 30 days to verify a claim and pay limits cannot establish bad faith, as a matter of law, resulting in summary judgments against the claimants on their bad faith claims. (Footnote 11.) Thus, it is clear that the legal system has properly responded to unreasonable time demands to establish bad faith, and clearly determined it to be an ineffective tactic. Thus, established case law again completely undermines the article's premise that any amendment to Florida's bad faith law is needed to address a contrived concern, much less the dramatic and unwarranted amendment proposed by the authors.
The second set-up tactic that the authors rely upon involves settlement demands incapable of an insurer's reasonable acceptance. Examples advanced include demands that contain confusing or ambiguous terms that the claimant's attorney refuses to clarify or to otherwise cooperate with the insurer's efforts to negotiate a settlement. Again, existing Florida law completely undermines the authors' assertion that any amendment in bad faith law is needed to address the ability of an insurer to defend its conduct by showing that it did not have a reasonable opportunity to settle the claims. The authors suggest that insurers are hamstrung by being prevented from even presenting evidence that such offers were not made in good faith.
The article states: "Imposing the duty of good faith during settlement on only the insurer, as some courts appear to have done in light of the narrow language of the bad faith statute, is inconsistent with Florida's strong public policy encouraging settlement of claims." However, the authors do not cite a single case for the proposition that any court has suggested that the totality of the circumstances bearing on the ability of the insurer to settle the claims are irrelevant in a failure to settle setting. In fact, the only cases cited in the footnote to that passage relate to public policy encouraging settlement of claims. Therefore, the authors have no support for the contention that any court has precluded an insurer from showing that despite its reasonable efforts, it could not settle the claims. In fact, the courts have consistently applied existing Florida law to allow for consideration of the facts surrounding the settlement negotiations that bear on whether the insurer "could" settle.
In Barry v. Geico General Insurance Co., 938 So. 2d 613 (Fla. 4th DCA 2006), the jury ruled in favor of the insurance company on a third-party bad faith claim. On appeal, the claimant argued, inter alia, that the insurance company was improperly permitted to present evidence as to the claimant's motives and her attorney's conduct in declining to settle. That argument was rejected, with the court clearly holding that such evidence was relevant and admissible, even though the focus of an insurance bad faith case is primarily on whether the insurer fulfilled its duty to the insured. (Footnote 12.) The court stated that inquiries into the prior conduct and motives of the claimant were relevant and admissible because the insurer can defend on the ground that there was no realistic possibility of settlement within the policy limits, based on the claimant's intransigence. The Barry court stated:
The jury could have concluded that the failure of [the claimant's] attorney to notify GEICO of his representation coupled with her refusal to meet with Stone on the settlement, among other incidents, showed that she did not want to settle with GEICO for the policy limits. Thus, GEICO did not inject irrelevant information into the case. (Footnote 13.)
Additionally, in a published federal decision, it was specifically noted that a claimant's unwillingness to settle was "not completely ignored under Florida law," but was a relevant factor when the insurer is attempting to prove the defense that the claimant was actually unwilling to settle for the policy limits. (Footnote 14.)
In accordance with those cases, decisions have consistently addressed the likelihood that intransigence or a failure to cooperate by a claimant in settlement negotiations will fatally undermine a bad faith claim. When a claimant failed to provide medical information to the insurer regarding his injuries, a court has ruled that there was no bad faith, as a matter of law, arising from the insurer's failure to settle. (Footnote 15.) Additionally, when claimants have failed to respond to insurer's attempts to settle claims within the policy limits, courts have determined that there was no bad faith claim, as a matter of law. (Footnote 16.)
Thus, the courts have properly, effectively, and firmly rejected attempts to justify bad faith claims based on either arbitrary or unrealistic time deadlines, or in response to settlement offers, with which compliance is impossible, or which were not made in a good faith attempt to reach a resolution of the claim.
The article does not cite a single case in which the tactics of unreasonable deadlines or intransigence in negotiations has resulted in a successful bad faith recovery. Instead, the authors rely on statements contained in the dissenting opinions in Berges v. Infinity Insurance Co., 896 So. 2d 665 (Fla. 2004), but the facts of that case do not support its contention that the decision encourages or allows insureds or claimants to set up bad faith claims.
In Berges, James Taylor's wife was killed and his daughter seriously injured by a drunk driver. The insurance policy providing coverage to the drunk driver had limits of $10,000 per claimant. Mr. Taylor did not impose unreasonable deadlines in his offer and, in fact, did not even make an offer to settle until more than two months after the accident, when he hand-delivered an offer to settle for the $20,000 policy limits. At that time, the insurer had already conducted an investigation and issued a report concluding that its insured was completely at fault, and confirmed that Mrs. Taylor had died and that the daughter's medical bills already exceeded $30,000. Although initially there was a coverage issue, six days after Mr. Taylor's offer, the insurer concluded its coverage investigation and decided to extend coverage.
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