by Brenton N. Ver Ploeg, Esq.
Bad faith has now become part of the American landscape and an accepted tool to balance the playing field between insurers and policyholders.
In 1982, Florida's Legislature became the first in the United States to create the right to bring a private lawsuit for an insurance company's violations of the Unfair Insurance Trade Practices Act (UITPA).
UITPA, on the books since the mid-'70s, described and prohibited many unfair claims practices but saw them enforced only by the limited staff employed in the Insurance Commissioner's office. The 1982 law (Florida statute 624.155) commonly known as Florida's Bad Faith Statute, provides outside-the-contract remedies for consumers with a Florida claim. It promised much, but in its infancy brought little and was sparsely used. Though uninsured motorist claimants at the trial level were quick to benefit from the statute's plain effort to include them, appellate cases were slow to come, scattered and inconsistent. Even the basic procedural and substantive issues, undefined by either the statute or its legislative history, went largely begging for resolution.
The Bad Faith Statute is now into adolescence, and like most teenagers approaching their 16th birthday, is experiencing not only rapid growth but the confusion that comes from false starts. Here, we review some of both threads.
The underlying bad faith disputes: Chickens and eggs
One of the threshold issues in insurance bad faith law around the country is whether an insured can maintain a bad faith suit at the same time he pursues relief under the underlying insurance contract. Because the information an insurer is required to reveal in the discovery process in each type of case is different, litigating them together obviously poses some practical and legal dilemmas for the courts (and a solution is nowhere implied in the statute). The Florida Supreme Court took a large step in 1992 toward resolving this issue when it held in an uninsured motor-ist case that no bad faith suit could proceed absent resolution of the underlying case.
As often happens in this line of work, however, consumers and insurers construed "resolution" differently. Most insurers, accordingly, have argued for six years that each and every aspect of the underlying contractual claim had to be concluded before the bad faith lawsuit could continue. But this view created a problem - insurance companies could delay a bad faith lawsuit by intentionally paying something less than due on the underlying coverage in order to force the insured to either abandon a portion of their claim or suffer further delay in the prosecution of the bad faith lawsuit. It is perhaps not surprising, therefore, that several recent cases allow the bad faith lawsuit to continue once coverage is established in the underlying litigation; i.e., when the insurance company is found - by agreement, its own action, or judicial decree - to have an established obligation under the policy and all of the other conditions have been met. Because it's hard to fashion a rule that fits all cases, however, this issue is unlikely to fade.
The insurer's standard of care
A surprisingly large number of states have held that if an insurer has a factual dispute with the insured sufficient to take the case to a jury (not, that is, to lose outright by judicial decree) it cannot be guilty of bad faith. This approach, which began with the entirely reasonable hypothesis that an insurance company has a right to be wrong without being automatically in bad faith, has nevertheless often been employed to prevent a policyholder from even getting her bad faith case before a jury unless the insurance company lost the underlying dispute as a matter of law. This is an extremely difficult standard to meet, and had it been adopted in Florida, would have effectually neutered the statute and required trial judges to decide in every bad faith case whether the position adopted by the insurer was "fairly debatable," a term conspicuously absent from the statute.
In 1995, Florida's Supreme Court expressly declined to graft new standards of conduct and adopted instead the statute itself - nowadays, the insurer is liable if "it does not attempt in good faith to settle claims 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] interests." The practical effect of this holding is widespread and far more dramatic in the real world than a simple choice of one set of words over another, because a test that requires the consideration of all reasonable circumstances virtually requires a jury. Bad faith cases, in short, once ripe and unless settled, will almost always see a trial.
The statutory notice
The statute requires that a 60-day statutory notice be filed in advance of any bad faith lawsuit and bars a bad faith lawsuit if the "damages" are paid within the 60 days. The problem here, as you'd expect, is whether the consumer or the insurer gets to define the damages. One U.S. magistrate has written the word "contractual" into the statute immediately preceding damages and has held that insurers are not exposed to bad faith if the contractual claim was paid before 60 days lapsed. None of Florida's district courts of appeal has adopted this position, however, being more inclined to favor the policyholder's view that all damages caused as a result of an insurer's bad faith - whether contractual or not - must be paid in order to prevent a bad faith suit.
Insurers have also argued that the statutory notice is required to be so definitive as to provide them with all factual and legal analysis upon which the bad faith claim will be based, but the activities of the Department of Insurance - which over the years has slowly restricted the space available for the violations to be recited - seems to provide a contrary history. Given consumers' lack of access to their claim files at the time the statutory notice is filed, moreover, it should be sufficient to identify subsections of the statute said to have been violated and let discovery fill in the details.
Punitive damages: Risk, opportunity and chaos
The Bad Faith Statute exposes insurers to the risk that a jury may award punitive damages should they conclude that the insurer (a) acted willfully, wantonly and maliciously with respect to any person claiming damage under the statute, or (b) in reckless disregard of the rights of one of its insureds.
A hotly contested issue concerning punitive damages centers on the statute's requirement that such damages can be awarded only if the insurer's actions are committed with such frequency as to establish a general business practice. Some courts have already held that two or three violations are not enough to establish such a practice, and the issue here will doubtless be sharply joined in cases where the insurer has already been found in the wrong. This is hardly an insurer's defense of choice, however, and generally will be used only when much else has already gone wrong. As a central element of every bad faith case, however, many trees will doubtless perish in paper mills before the courts successfully define this issue.
The one area more likely than any other to create a snowstorm of contradictory trial and appellate court decisions until ultimately resolved by the Florida (or maybe U.S.) Supreme Court concerns the test properly applied to the amount of punitive damages under the Bad Faith Statute, an issue that remains as untracked by appellate decisions as the rest of the statute was for the first seven or eight years of its existence. These issues will involve not only whether restrictions exist on the amount of punitive damages that can be imposed other than those prohibiting the defendant's bankruptcy, but, if so, what they are and which of several competing (or cooperating) Florida statutes will govern.
Radical and innovative when adopted, Florida's Bad Faith Statute nevertheless remained, with the exception of uninsured motorist cases, a slumbering giant for years. In its adolescence at 16, however, the fires of controversy are well lit. Bad faith has now become part of the American landscape and an accepted tool to balance the playing field between insurers and policyholders, and Florida is one of the main players. The battle lines are better developed than ever before, the stakes enormous, and the resolution important to anyone who owns insurance. These days, that's just about everyone.
Brenton N. VerPloeg, Esq. holds a Bachelor of Science degree from Northwestern University and graduated from Hastings College of the Law, University of California, in 1973. His civil trial practice firm specializes in complex and scientific litigation, attorney negligence, and all types of insurance disputes with emphasis in matters of coverage and bad faith.