How I Learned to Stop Worrying and Love Punitive Damages

In 1893, when Florida sat at the tail end of Henry Flagler’s railway and before the state had commercial importance or many insurers of its own, it was hard for Floridians to get the attention of out-of-state companies. Those who sold insurance policies were apparently no exception. The Legislature’s reaction to this difficulty began a pro-consumer tradition that, then and now, placed Florida’s Insurance Code among the most aggressive in the country. This article is a short synopsis of some of its most important pro-consumer provisions.

Attorneys Fees

An individual insurance policy issued for delivery in Florida comes with a free and valuable addition you can’t buy even at a price — a right to compel an insurer who wrongly resists a payment due its insured to pay not only the benefit, but his or her attorneys fees as well. This right, which Floridians are fortunate enough to take for granted, is not only rare among the 50 states, but levels the playing field between insurers and consumers in a way that consumers and their counsel in most other states can only envy. The absence of such a simple provision, in fact, is often said to have spawned years of legal maneuvering in California designed to secure by judicial decision the right to attorneys fees enjoyed by Florida’s policyholders for over a century. Such fees make possible the litigation of cases otherwise economically prohibitive, so that a consumer need not abandon a policy dispute because the cost of litigation far outweighs the amount at issue.

Attorneys fees alone, however, do not address the problems created if an insurer’s behavior once a claim is submitted causes severe problems for the insured. Though Florida law allows insureds to sue for truly outrageous actions under intentional tort theories, such cases have largely been limited to ones where an insurer’s representatives imperil the insured’s economic livelihood, and are tightly restricted otherwise. In 1982, on the heels of similar actions then active (but since withdrawn) in California, Florida’s Legislature expanded the options, and brought the concept of “bad faith” to all individual insurance claims originating in Florida.

Bad Faith

The concept of insurance “bad faith” is shorthand for what evolved from a duty on the insurer’s part to deal with its policyholders in good faith during its processing of their claims for policy benefits. Florida first opened this door in 1938, holding insurers to fiduciary standards (“the management of his own business”) when representing its policyholders in cases where they are a defendant in someone else’s lawsuit (called “third party” cases, because of the other’s involvement). This position of trust, however, was not extended by the courts to cases where policyholders were suing their own insurance company (called “first party” cases), and as recently as 1983 an appellate court refused to find bad faith even though the insurer’s claim handling was “bungling, arbitrary, and callous”.

For insurance claims handled after 1982, however, the rules changed dramatically. The Legislature, as part of a widespread revision of the Insurance Code, added a section with the unassuming title of “Civil Remedies Provision”, Fla. Stat. ¤624.155. This change adopted a private cause of action for violations of the Insurance Code previously enforceable only by the commissioner’s office, and, now allows “any person damaged” by an insurer’s unfair claims handling to bring an action for bad faith.

At its most generic, the statute defines a violation when an insurer has

[Not attempted] 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 his interests.

The Supreme Court has held that the above standard governs all bad faith cases, and has rejected a proposed rule that would have protected insurers from bad faith if their reasons for acting were at least “fairly debatable”.

The statute also prohibits misrepresenting pertinent facts or policy provisions, failing to act promptly upon claims communications, denying claims without a reasonable investigation, failing to promptly notify the insured of any additional information needed to process the claim, and eight other related practices.

Remedies

Proving bad faith separately entitles the insured to attorneys fees, which is often redundant but may be applicable if the policy was issued outside Florida. No bad faith verdict is possible, however, no matter how flagrantly it violates its duties to handle the claim fairly, unless the insurer was proven wrong on the underlying dispute.

Since attorneys fees are usually recovered by successful insureds anyway, the question is whether Florida’s bad faith statute is all dressed up with nowhere to go. What, in other words, is the remedy if an insurer violates the statute? Though the answer is not completely resolved by our courts, it probably includes the right for an insured to recover for any mental and emotional distress caused by the way the insurer handled the claim (not of much use, of course, to a corporate insured), and any economic losses caused by the violations (the foreclosure of a home, for example, caused by a failure to maintain disability insurance payments). These damages are recoverable even if the insurer’s bad faith occurred nowhere else but the insured’s case.

If the insured can show that the insurer’s acts reflected its general business practice, however, the stakes rise dramatically. If a jury finds that the insurer’s acts represented its general business practice, and further that the acts were (a) willful, wanton and malicious, or (b) in reckless disregard for the rights of any insured or of a beneficiary under a life insurance contract, then the insurance company is exposed to possible liability for punitive damages, i.e., damages to punish the insurer rather than to compensate the insured for her loss. These damages, which are much in the news these days and hard to predict successfully, are the real teeth behind the bad faith statute.

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