The good faith, bad faith, and ugly set-up of insurance claims settlement.

• Author: Young, Gwynne A.
• Position: Cover story

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Can an insurer be acting in bad faith for failing to settle a claim when the insured or claimant is deliberately attempting not to settle in order to create a bad faith "refusal to settle" claim against the insurer and thereby avoid low policy limits? Or must the insured/claimant be making a good faith effort to settle, such that minor, technical issues or delays cannot be seized on to avoid a settlement the insurer clearly sought to reach? Does the bad faith statute need to be amended to affirmatively impose a concomitant good faith obligation on the insured/claimant?

These issues are explored below, followed by a proposed amendment to Florida's bad faith statute that would level the uneven playing field that now exists. Although this statute has a worthy prophylactic purpose, it is sometimes exploited, resulting in the anomalous situation of insurers being unable to accomplish the very settlements the statute seeks to encourage. That can be avoided, while still assuring the statutory purpose of insurance settlements is fulfilled. Florida law requires an insurer to handle claims in good Faith--fairly and honestly--and provides for damages if it fails to do so. Florida's bad faith statute permits "any person" to bring a bad faith action against an insurer for not attempting in good faith to settle a claim. (1) Although the duty of good faith and fair dealing is mutual in all insurance contracts, (2) the language of Florida's bad faith statute currently addresses only the insurer's duty to act in good faith during the settlement process. Reciprocal duty of good faith of the insured claimant, at a minimum, should be a part of the totality of the circumstances considered when a bad faith claim is asserted.

The bad faith statute undoubtedly provides social benefit by encouraging insurers to make fair settlements. (3) But its one-sided provisions as to the insurer's good faith obligations is being exploited in some cases in order to create bad faith claims through the settlement process, even when it is clear the insurer is perfectly willing and attempting to settle the claim. (4) Lawyers for insureds/claimants sometimes affirmatively seek to avoid--contrary to the public policy favoring settlements--in an effort to convert $10,000 policy limits into a multi-million dollar recovery under the policy. That plainly was not the intent behind this statute, which instead is intended to encourage settlement of insurance claims. (5)

When an insurer is forced to expend time and resources attempting to reach a settlement of a claim that the insured/claimant is affirmatively attempting to avoid, it negatively affects not only the insurer, but also society in general through increased litigation and burdens on the judicial system that settlements prevent. In order for the bad faith statute to accomplish its intended purpose of encouraging quick and fair settlement of insurance claims, (6) the bad faith statute should be amended to explicitly reflect that all parties owe the duty of good faith and fair dealing when attempting to settle an insurance claim and that an insurer cannot be held liable for bad faith if the other party has not acted with a good faith effort to achieve a settlement.

Reaching a Settlement

The bad faith statute creates a civil action against an insurer if the insurer fails to settle a claim it could and should have settled. (7) Missing from this statute, however, is an affirmative, reciprocal obligation on the part of the insured or third-party claimant to likewise act in good faith in attempting to settle the claim. Florida common law has long recognized that every contract imposes on each contracting party the duty of good faith and fair dealing. (8) Insurance policies, which are governed by contract law in this state, are no exception. (9) In fact, it has been stated that "'[t]he duty of good faith and fair dealing in an insurance policy is a "two-way street," running from the insured to his or her insurer as well as vice versa.'" (10) Although a third-party claimant is not a party to the insurance contract, as a party seeking the benefits of that contract, it should be required to exercise good faith and fair dealing in the settlement process, just as the insured is obligated to do. (11)

Thus, the claim settlement process cannot and should not be viewed as the responsibility of just the insurer, such that only one side should be charged with conducting itself in good faith during settlement. Rather, reaching a settlement requires each party's involvement and cooperation. (12) Therefore, it is essential in efforts to settle a claim fairly that the duty of good faith be mutually required of all parties involved. Imposing the duty of good faith during settlement on only the insurer, as some courts appear to have done in light of the narrow language of the bad faith statute, is inconsistent with Florida's strong public policy encouraging settlement of claims. (13)

The current imbalance in Florida's bad faith statute can be exploited to create bad faith claims where they otherwise would not exist. (14) This practice is commonly referred to as the "bad faith set-up," and the various tactics used to set up bad faith claims have been well-documented by courts and commentators alike. (15) Simply put, the "bad faith set-up" is "nothing more than an attempt to induce the insurer to commit a tort in order to explode the policy limits." (16) The end goal is to collect an award in excess of the actual policy limits paid by the insured, even in those instances when the insurer is seeking to settle while taking steps it believes are appropriate to protect the insured in any such settlement or has failed in some technical and immaterial way to comply in all respects with a settlement demand.

Common tactics used to set up a bad faith claim

One tactic for setting up a bad faith claim is to make a settlement offer that likely cannot be complied with by the insurer. (17) Knowing the settlement demands may not be met, the insured/ claimant waits for the insurer's misstep, then asserts a bad faith claim. Sometimes the insured/claimant will make an offer for settlement containing an arbitrary and unrealistic deadline for acceptance, before the insurer has had the opportunity to fully investigate the claim. When the insurer is unwilling to agree immediately to the insured's/claimant's demands, a bad faith claim is filed. (18)

For example, in DeLaune v. Liberty Mut. Ins. Co., 314 So. 2d 601 (Fla. 4th DCA. 1975), plaintiffs made an offer to settle their claim stemming from an automobile accident for the $10,000 policy limit, attaching a 10-day deadline for the defense to accept the offer. Defense counsel, believing that settlement for the policy limits was possible, but not yet authorized to approve the settlement, contacted the plaintiffs' counsel on the last day of the deadline and asked for an extension of the offer until the following Monday after the Friday deadline. (19) The plaintiffs refused and initiated a...