Florida Insurance Bad Faith law: protecting businesses and you.

• Author: Liles, Rutledge R.
• Position: Cover story

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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. (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. (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. [section]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. (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. (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. (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. (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. (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. (8) As a result, the legislature enacted F.S. [section]624.155, which established, inter alia, a first-party bad faith cause of action. It should be noted, however, that in F.S. [section]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." (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...