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NEW AREAS OF BAD FAITH By Edward M. Ricci, Esq. Introduction Insurance companies are in the business of protecting their insureds by spreading risks. In so doing, they are entitled to make a fair and reasonable profit. However, in the conducting of their business, insurance companies "owe a duty to the insured to exercise the utmost good faith." Baxter v. Royal Indemnity Company, 285 So.2d 652 (Fla. 1st DCA 1973). Florida courts did not choose the word "utmost" loosely. The word is defined in the dictionary as "of the highest or greatest degree-the greatest possible amount-the maximum." American Heritage Dictionary of the English language. The key to understanding insurance bad faith is to first understand the duty owed by an insurance company to its insured. Before one can understand bad faith, one must understand the definition of good faith. Paraphrasing the Florida Standard Jury Instruction MI3.1 "Good faith consists of settling a claim within policy limits when under all the circumstances the insurance company could and should have done so had it acted fairly and honestly towards its insured and with due regard for its insured's interest." Phrasing the issue as simply as possible: an insurance company must put the interest of the insured ahead of its own. When it fails to do so, it is presumed to have acted in bad faith. Background Why have the courts come down so strongly against insurance companies? Why have the courts imposed such strict duties upon insurance carriers? The answers lie in the nature of the insurance business. Insureds - ordinary citizens - sign contracts of adhesion when they buy insurance policies. "When the insured has surrender to its insurer all control over the handling of the claim, including all decisions with respect to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interest of the insured." Boston Old Colony v. Gutierrez, 336 So.2d 783 (Fla. 1980). The consumer does not get to pick the language of an insurance policy. The ordinary consumer, unlike huge corporations, are faced with a "take it or leave it" deal. Accept the insurance in the form presented, or get no insurance at all. The standard policy reserves to the insurance company all control over the handling of claims. As a consequence the courts impose strict duties upon insurance carriers to act "fairly and honestly toward the insured and with due regard for his interests." FSJI MI3.1. What Policies Really Say When a consumer purchases an insurance policy, the insurance carrier contractually agrees to undertake two separate duties: First, the insurance company agrees to defend the insured against all claims, even frivolous ones, that arise during the policy period and which on the face of the claim, assuming it to be true, fall within coverage. This can be critical because an insurance company cannot deny a defense to a claim which it believes is false or not factually within the coverage of the policy if the allegations in the complaint on their face appear to fall within the limits of coverage. Example: Nixon and Powell v. West American. Aaron v. Allstate, 559 So.2d 275 (Fla. 4th DCA 1990); Carrousel Concessions, Inc. v. Florida Insurance Guaranty Association, 483 So.2d 513 (Fla. 3rd DCA 1986); Florida Farm Bureau Mutual Insurance Company v. Rice, 393 So.2d 552 (Fla. 1st DCA 1980); Ging v. American Liberty, 423 F.2d 115 (5th Cir. 1970). If an insurance company, in good faith, believes there is no coverage despite the fact that the allegations in the complaint facially fall within coverage provisions of the policy, the carrier still must defend but may do so under a reservation of right. As the case develops or in a declaratory judgment action, the insurance company can resolve the coverage issue. However, under no circumstances can it just leave the insured out on the line to dry, as it were, because, in its judgment, it concluded that the claim against the plaintiff did not fall within the limits of coverage despite the allegations of the pleading against the insured to the contrary. Second, an insurance company owes a duty to settle a claim within policy limits when under all of the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for its insured's interest. Most bad faith claims arise under a failure to settle within policy limits. Good Faith Duties Imposed Upon Carriers Insurance companies must act in good faith in all aspects of claims handling. These include Understanding all of the duties of an insurance company requires one to remember that insurance companies act as fiduciaries for the insured consumer: i.e., the carrier must exercise the "utmost due care." Baxter v. Royal Indemnity, supra. Examples of Bad Faith Insurance companies have an affirmative duty to settle, for policy limits if appropriate, even before a demand is made. Florida law holds that where "liability is clear and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations." Powell v. Prudential, 584 So.2d 12 (Fla. 3rd DCA 1991) and Hartford Accident and Indemnity v. Mathis, 511 So.2d 601 (Fla. 4th DCA 1987); Cert. Denied, 518 So.2d 1275 (Fla. 1987). In cases of clear liability with serious injuries, insurance companies cannot sit back and play possum waiting for plaintiff's counsel to make a demand or set a time limit for tender of policy limits. Remember: the insurance carrier has the utmost duty of care to the insured and that duty is not contingent upon the conduct of an adverse party or its counsel. The most common bad faith case is the failure of an insurance carrier to tender policy limits within a reasonable time frame set forth by plaintiff's counsel in a "demand letter." Caution must be taken however to be certain that the insurance carrier was provided ample opportunity to fully investigate the claim and was provided all the necessary information to evaluate the claim, i.e., medical bills, voluntary statement from claimant, etc. The classic "short fused" demand letter is probably one of the least attractive bad faith cases from a plaintiff's point of view. The "Set Up" Defense Several years ago insurance companies concocted the "set up" defense. In short, simple language, the defense is an attack on lawyers who are sneaky, cagey and tricky. They "set up" insurance companies to violate their absolute duties to their insureds. There are no cases that we could find specifically that sanction this defense and plaintiff's counsel should move in limine whenever possible to block this type of unfairly prejudicial type of argument especially under Section 403 of the Florida Rules of Evidence (confusion of issues, probative value outweighed by prejudicial effect). Acceptance of an Offer Acceptance of an offer does not simply mean sending a letter saying "when we get around to it, we will send you a check and release." Acceptance of an offer should be specified in any demand made upon an insurance company that it constitutes the actual delivery of the settlement check, to a specific location by a specific date and time. Anything less does not constitute a tender and may well rise to the level of bad faith. First Party and Third Party Bad Faith 1. Mr. Smith runs a red light and strikes a car being driven by Mrs. Jones. Mrs. Jones is injured. Mrs. Jones' lawyer demands policy limits from Mr. Smith's insurance company. This is a classic third party claim. 2. Mr. Smith strikes the car driven by Mrs. Jones. Mr. Smith is uninsured. Mrs. Jones carries uninsured motorist coverage. Her UM carrier does not act fairly or in good faith in the handling of her claim. Her claim against her UM carrier is a potential first party bad faith action. 3. Mr. Smith strikes Mrs. Jones. Jones' insurance company does not act in good faith. Smith obtains an excess judgment. Jones' sues her own insurance company. This is a third party action. Florida recognizes two types of claims. First party actions and third party under F.S. 624.155 et seq., the Florida Unfair Claims Practice Act, and third party bad faith, claims (not first party) arising under the common law. So, who can sue? In the classic auto accident case a defendant can sue his own insurance company or the injured plaintiff can take an assignment of the insured's bad faith claim against the carrier. Aaron v. Allstate, 559 So.2d 275 (Fla. 4th DCA 1990), Rev. Den. 569 So.2d 1278 (Fla. 1990). Punitive damages, however, are only available where the insured brings the claim. They are available to any person damaged under F.S. 624.155. Special Considerations Before a claim can proceed under the Unfair Claims Practice Act, there are notice requirements set forth in the statute which must be satisfied. F.S. 624.155 (2).
Damages Bad faith compensatory damages are generally limited to the amount of the excess judgment. See Don v. National Security, 631 So.2d 1103 (Fla. 5th DCA 1993). Occasionally, consequential damages may lie. A claim for mental pain and suffering is allowed in third party claims only where the conduct is "so gross and extreme as to amount to an independent tort and to merit a punitive award." See Butchikas v. Travelers, 343 So.2d 816 (Fla. 1976); and Salt Marsh v. Detroit Auto, 344 So.2d 862 (Fla. 3rd DCA 1977). Direct consequential damages such as loss of business resulting from execution of a judgment may be allowable but indirect consequential damages such as loss of profits due to loss of reputation or adverse publicity are generally held to be outside the contemplation of the parties to the contract and are not recoverable. See Swamy v. Caduceus Self Ins. Fund, 648 So.2d 758 (Fla. 1st DCA 1994). Punitive Damages Punitive damages is a clouded and confusing area which recently may have had some clarity. See CSX v. Palank, 1999 WL 641885 (Fla. App. 4th DCA); Owen Corning v. Ballard, 24 Fla. L.Week. S401 (S.Ct. August 26, 1999). 1. When may punitive damages be plead in a first party or third party bad faith claim, in a common law or 624.155 action? Special Procedural Considerations It is possible to try a bad faith case before the underlying action so long as there is consent among the parties. See Cunningham v. Standard Guaranty, 630 So.2d 179 (Fla. 1994). The procedural mechanism recognized in Cunningham allows the parties to avoid the time consuming and expensive trial on the underlying negligence claim. If the bad faith claim is tried first successfully, in all likelihood the parties can then reach settlement and avoid the necessity of trying two cases. If the bad faith case is unsuccessful, the parties typically stipulate that the plaintiff receives the policy limits. This procedural approach can also be used under 624.155. See Clough v. GEICO, 636 So.2d 127 (Fla. 5th DCA 1994). Cunningham agreements, however, are fraught with many dangers. For example, the release language executed before prosecution of the Cunningham case can result in an extinguishment of bad faith liability. See Kelly v. Williams, 411 So.2d 902 (Fla. 5th DCA 1982) and Fidelity & Casualty v. Cope, 462 So.2d 459, 461 (Fla. 1985). Effect of Bankruptcy A bankruptcy discharge is not the same as a complete release and satisfaction and does not preclude pursuit of a bad faith claim against a carrier. See Camp v. St. Paul Fire & Marine, 616 So.2d 12 (Fla. 1993). No Comparative Bad Faith There is no comparative bad faith defense in Nationwide Property & Casualty v. King, 568 So.2d 990 (Fla. 4th DCA 1990), the court refused to create a new affirmative defense of comparative bad faith. The court also refused to give a new version of legal causation jury instructions and held that the Florida Standard Jury Instructions on bad faith were adequate and were to be followed. Payment of Limits Paying policy limits does not extinguish bad faith claims. In Dunn v. Nationwide Security, 631 So.2d 1103 (Fla. 5th DCA 1993), the court held that payment of the excess judgment during the pendency of the bad faith suit does not extinguish the bad faith cause of action. The excess judgment is not the sole measure of damages in bad faith cases. No "Fairly Debatable" Defense The fairly debatable claim defense. The Supreme Court of Florida rejected the fairly debatable standard and first party context. See State Farm v. LaForte. ERISA Exclusions In 1988 the Eleventh Circuit U.S. Court of Appeal in Anschultz v. Connecticut General, 850 F.2nd 1467 (11th Cir. 1998) buried any hope of bad faith claims against insurance companies who are part of employee benefits plan: ERISA (Employee Retirement Income Security Act of 1974, 29 USC Sec. 100 et. seq.) For 12 years insurance companies have enjoyed unfettered immunity and could not be sued under the Unfair Claims Practice Act F.S. 624.155 et. seq. As managed care has revealed more and more of its dark side, the American public, Congress and now even the courts are moving away from immunity. See Bauman v. U.S. Healthcare, 193 F.3rd 151 (3rd Cir. 1999). Certain common law causes of action withstand ERISA preemption. The leading case however is UNUM Life Insurance Company of America v. Ward, 119 S.Ct. 1380 (1999). Here for the first time the Supreme Court of the United States has clarified how state common and statutory cause of actions against carriers should be analyzed in light of alleged ERISA preemption and preserved within the savings clause of the ERISA statutes. The case involved a claim for denial of disability income benefits where UNUM refused to pay on the grounds that the plaintiff did not comply with its notice requirements. The plaintiff sued alleging that California followed the "Notice - Prejudice Rule" under which an insurer cannot avoid liability if the claim is untimely unless it also shows that it suffered actual prejudice from the delay. The 9th Circuit U.S. Court of Appeals ruled that the Notice Prejudice Rule of California common law was a rule that "regulates insurance as a matter of common sense." This language was adopted as part of the holding of Justice Ginsberg which, in effect, said that is the end of the analysis. A Change in the Law Why all the brouhaha? In Anschultz the 11th Circuit ruled that in addition to meeting the common sense definition of "regulates insurance" state causes of action must also meet all three requirements of the McCarran Ferguson test, i.e., (1) where the practice has the effect of transferring and spreading policy holders risk; (2) where the practice is an integral part of the policy relationship between the insurer and the insured and (3) where the practice is limited to entities within the insurance industry" citing Metropolitan Life Insurance Company, 105 S.Ct. at 2391 (1982). Justice Ginsberg finally clarified and ruled that the three conditions which Anschultz said required mandatory compliance were only factors whose "relevancy" should be looked at as "checking points not separate essential elements that must each be satisfied" UNUM at 1383. The court went on to state: "The court need not determine whether the rule at issue satisfies the first "risk spreading," McCarran Ferguson factor, because the remaining factors verifying the common sense rule are surely satisfied. Last fall the United States District Court for the Northern District of Oklahoma in Lewis v. Aetna U.S. Healthcare Inc., 78 F.Supp. 2d 1202 (N.D. Oklahoma 1999), found "Preliminary the court notes that the UNUM opinion expressly rejected the assertion that a state regulation must satisfy all three McCarran Ferguson factors in order to "regulate insurance" under ERISA's savings clause-rather the UNUM court indicated that the McCarran Ferguson factors are considerations to be "weighed" in determining whether state law regulates insurance-and that no one of these criteria is necessarily determinative in itself." The Lewis court went on to say: "The Supreme Court called McCarran Ferguson factors "relevant;" it "did not describe them as "required." "That the factors are merely relevant suggest that they need not all point in the same direction else they would be required. The framework established, - first requires the court to ask whether the law in question fits a common sense understanding of insurance regulation-and then look to the McCarran Ferguson factors as checking points or guide posts not separate essential elements that must be satisfied-as in UNUM this court need not pursue this point because the remaining McCarran Ferguson factors verifying the common sense view are securely satisfied." New Life for F.S. 626.9541 So what's the big deal in Florida? The big deal is that the Unfair Insurance Trade Practices Act, F.S. 626.9541 (at 951) states "the purpose of this part is to regulate trade and practices relating to the business of insurance and in accordance with the intent of Congress as expressed in the Act of Congress of March 5, 1945 (Bub. L.No. 15, 79th Congress) by defining, or providing for the determination of all such practices in this state which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. (2) This part shall be entitled the Unfair Insurance Trade Practices Act." Under the Civil Remedy Section, F.S. 624.155, "any person may bring a civil action against an insurer when such person is damaged by: violation of any of the following provisions by the insurer: Section 626.9541(1)(i)(o)(x). So what is proscribed and actionable: Navigating ERISA Claims Has Become A Little Easier There are still many caveats: Good News There is some good news. ERISA preemption never applies to insurance benefits provided to employees of governmental agencies, i.e., public employees: city, county, state or federal are exempt from the reach of ERISA (which was the case in Chipps v. Humana). Chipps v. Humana Examples: |
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