Insurance bad faith: the "setup myth".

• Author: Liles, Rutledge R.

When testifying in insurance bad faith cases, allegations to the effect that the carrier has been set up by the insured and the insured's attorney and/or the third-party claimant and his or her attorney ate frequently encountered. Such allegations are generally accompanied by an acrimonious charge of foul play, charade, dirty pool, contrivance, and so on.

Much has been written about insurance bad faith and the alleged "setup." As one writer correctly observed: "No subject is more likely to stir up controversy between plaintiffs' lawyers and insurance companies than the honored and reviled practice of setting up an insurance company for a bad faith claim." (1)

The angst created by the bad faith environment always seems to be laid at the doorstep of the insured or third-party claimant. In my experience, however, it is the insurance carrier that sets itself up for bad faith. The insured or claimant merely presents the opportunity by simply doing what should be done. Carriers never quite seem to be up to the challenge of responding in kind--a course of conduct that could provide comfortable insulation.

Under Florida law, any person may bring a civil action against an insurer when such person is damaged by the insurer's failure to attempt "[i]n good faith to settle claims when, under all circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for his interests." (2)

Until the 20th century, actions for breaches of insurance contracts were treated the same as any other breach of contract action, and damages were generally limited to those contemplated by the parties at the time they entered into the contract. (3) With the passage of time, how ever, insurance contracts began to be viewed as distinguishable from other types of contracts because they came to "occupy a unique institutional role" in modern society and affected a large number of people whose rates were dependent upon the acts of not only themselves, but also the acts of other insureds. (4) This became especially true when liability policies began to replace traditional indemnity policies as the standard form of insurance policy.

With indemnity policies, the insured defended the claim, and the carrier simply paid the claim upon conclusion. With liability policies, however, carriers assumed the obligation of defending the insured, with the insured surrendering control of the handling of the defense. This gave rise to an understandable vulnerability on the part of the insured which, in turn, gave rise to the existence of a fiduciary relationship between the carrier and the insured not unlike that between a lawyer and client. (5)

Consequently, courts began to recognize that carriers owed a duty to the insured to act in the insured's best interests rather than their own. In recognition of the fact that courts uniformly have acknowledged that carriers owe their insureds a duty of good faith and fair dealing, this duty evolved into the requirement that good faith be exercised or bad faith avoided.

In Florida, third-party bad faith actions were recognized as early as 1938. (6) Florida, however, is in the minority in holding that an action against an insurer for bad faith failure to settle sounds in contract rather than tort. (7) Most states treat such an action as a tort claim or a combination of tort and contract. (8) Third-party bad faith claims ate recognized under both Florida common law and Florida statute. First-party bad faith claims, however, are entirely a creature of the legislature.

In Florida, there is neither a "set-off" defense nor an affirmative defense of comparative bad faith. (9) Similarly, while evidence of negligence may be considered by the jury as it may bear on the question of bad faith, a cause of action based solely on negligence, which does not rise to the level of bad faith, does not lie. (10)

In sum, in determining whether an insurer has "acted fairly and honestly towards its insured and with due regard for his interests," the Florida Supreme Court applies the "totality-of-the-circumstances" standard, and not a "fairly debatable" standard. (11) Each case is determined on its own facts, and the question of the insurer's failure to act in good faith with due regard...