The Ins and Outs of Bad Faith Claims in Florida

Coverage, liability and damages analyses are the three common themes of Florida third party bad faith cases, according to two southeast Cozen O’Connor attorneys. The attorneys presented on the subject during a two-part webinar offering claims handling tips in the Sunshine State.

According to John David Dickenson, an attorney based in the global insurance department in Cozen’s West Palm Beach, Fla., office, bad faith is something more than negligence but less than intentional conduct.

He explained that sometimes a case ruling will find a carrier’s claims decision wrong but find no evidence of bad faith.

Dickenson said some prohibited claims handling practices include making material misrepresentations, failing to offer a reasonable explanation for coverage denial in writing, and failing to notify the insured in a timely manner of additional information needed in order to resolve the claim.

Florida recognizes a common law cause of bad faith in third party context only. But there are differences between a common law third party cause of action versus a statutory cause of action.

One key difference is Florida’s bad faith civil liability statute, which allows for a third party bad faith claim directly against an insurer as well as recovery of attorneys’ fees. Another key difference is a civil remedy notice requirement that provides a carrier a 60-day safe harbor period to examine the bad faith allegations and cure the issue.

He suggested carriers sign-up to get an automatic notice when a bad faith action is filed. An insurer will receive an email the morning after it is filed and have a head start on the 60-day required response time.

Because Florida is not a direct action state – under the non-joinder statute, Florida 627.4136(1) – an insurer can be sued only after a third party obtains a judgment. The statute was meant to make the availability of insurance transparent to a fact finder but Dickenson said this statute is often abused. Cases can get complicated when coverage gets intertwined with third party matters.

Totality of Circumstances

Dickenson said the “totality of circumstances” standard is five factors that need to be taken into consideration in order to evaluate third party bad faith actions. These factors developed from the case of State Farm v. LaForet, a 1995 Florida case decision. The case examines instances where coverage issues preclude a carrier from accepting a reasonable settlement offer.

The factors are:

• Did the insured obtain a reservation of right to deny coverage if the defense was provided?
• Was there any effort by the insurer to resolve the coverage issue in a timely manner and to limit possible prejudice to the insured?
• What is the basis of the coverage issue and/or legal authority on the issue?
• Was the insurer diligent and thorough in its investigation of facts relating to coverage?
• Did the insurer make an effort to settle the liability claim despite the coverage dispute?

Dickenson said an assignment of bad faith is not always necessary as long as there is an excess judgment against the carrier.

If an insurer refuses to defend an insured, the insurer can protect itself by entering into a Coblentz agreement, based on the 1969 case of Coblentz v. Am Surety Co of NY. It involves a consent judgment with the insured defendant and is usually seen where the duty to defend has been denied.

These agreements typically involve:

• Assignment of an insured’s direct claims against the insurer.
• Can also happen following a rejection of a defense under a reservation of rights.
• A claimant that agrees not to pursue a consent judgment against the tortfeasor in exchange for a right to pursue a coverage/bad faith case against tortfeasor’s carrier.
• A cooperation clause usually exists, an opportunity to demonstrate bias on the part of the insured if the insured is going to be a witness for the defense.

It’s important to note that these agreements won’t bind an insurer if it has rightfully denied coverage – the burden is on the insured to prove the coverage and defense denial was in error.

Punitive damages is another key difference between statutory and common law bad faith claims. An insured seeking punitive damages under statutory claims has to post costs of discovery in advance, in cases where it is not awarded, the money goes to the insurer.

Dickenson said insurers should be aware of the conduct that exposes them to contractual damages:

• First party claims – Typically there is a focus on delayed payments, inadequate investigation and/or the denial of claims.
• Third party claims – Focus is usually on defense denial and/or failure to settle within policy limits.

He outlined key questions to evaluate the duty to settle:

• Is liability clear?
• Are damages in excess of policy limits?
• Is there an opportunity to settle within policy limits?
• Is there coverage?
• Have the reserves been set? If reserved at policy limits, the insurers need to figure out a way to offer it.

Time limit demands are often seen, Dickenson said. Bad faith set-ups, a common scenario that started in third party cases but has now bled into first party cases, is when a third party attempts to create an opportunity to settle that the insurer misses because the failure to accept could make the carrier liable for the entire amount.

The Florida attorney said time limit demands aren’t always a set-up and that the most important consideration is determining who the attorney is behind it. Dickenson warned that the “Mirror Image” rule applies when accepting time limit demand, i.e., unless the terms of the demand are not met perfectly, it could be considered a counter-offer and a lost opportunity to settle within the policy limits.

Another key difference is the attorneys’ fee shifting provision, 627.428. This is an important claims handling aspect that applies to breach of contract and declaratory judgment cases, Dickenson said.

Key aspects of attorneys’ fee shifting:

• It’s a one way street – only the insured can get fees.
• Includes appeals.
• Fees can be subject to multiplier of up to 2.5x.
• Settlement can constitute a judgment.

Attorneys’ fees “can increase extra contractual exposure to a carrier,” Dickenson said. He recommended stipulating to entitlement but fighting the amount of the fees to stop the fee clock, which would continue if entitlement was contested.

Stacey Farrell, an attorney in Cozen O’Connor’s global insurance department in Atlanta, said that the policy appraisal clause is enforceable in Florida. The scope is to address the issue and amount of damages and not to address coverage issues. Farrell recommended getting coverage issues resolved before invoking the appraisal clause because an appraisal may waive an insurer’s coverage defenses.

Insurers can waive the right to an appraisal, Farrell said.

If an appraisal is paid before litigation ensues an insured cannot be entitled to attorneys’ fees where the insurer doesn’t pay the claim until after the appraisal is completed, according to Farrell.

Two conditions are needed to bring a statutory bad faith action per Florida Statute: A determination of liability on the insured contract; and a determination of the extent of damages owed. Farrell noted that an appraisal award satisfies the two conditions.

Dickenson offered some risk management tips for claims handling:

• Write letters;
• Keep insurers in the loop;
• Document the file;
• Know company position on similar cases;
• If not sure about facts relating to coverage, check with team and outside counsel.