The purpose of this article is to explain why the Third District's decision in Otero v. The Midland Life Insurance Company, 753 So. 2d 579 (Fla. 3dDCA 2000), should be reversed to permit the recovery of mental distress damages in bad faith claims against life insurers. This article is intended to acquaint the reader with the well-established body of law across the nation which recognizes that the essence of insurance is peace of mind, and which generally supports the recoverability of emotional distress damages in bad faith claims. Finally, the article will explain why the evidentiary predicate for such recovery imposed in Time Insurance Co., Inc. v. Burger, 712 So. 2d 389 (Fla. 1998), should be receded from.
In Time, the Florida Supreme Court confirmed that mental distress damages were recoverable in a first party bad faith claim, and also established a three-pronged evidentiary predicate for recovery of such damages in bad faith claims against health insurers. In Otero, the Third District Court of Appeal interpreted Time to apply to claims against health insurers only, and ruled that a claimant in a bad faith action against a life insurer was not entitled to recover for mental distress.
After Midland Life Insurance Company denied the Oteros life insurance because of their national origin, in violation of both F.S. [section] 626.9541(1)(x) and a bulletin issued by the Florida Insurance Commissioner, Mr. and Mrs. Otero became virtually uninsurable due to health problems. Trial of their bad faith claim resulted in an award of the full benefit value of the two wrongfully denied life insurance policies to the Oteros, and an additional $400,000 to each of the Oteros for mental distress arising from the insurer's willful, wanton, and malicious or reckless refusal to insure. The trial judge vacated the Oteros' award of mental anguish damages because it was not supported by medical testimony, as required by Time. On appeal, the Third District held that Time was limited in its application to bad faith claims against health insurers, precluding recovery of mental distress damages in this claim against a life insurer. The Oteros' appeal of that decision is currently pending in the Florida Supreme Court.
The plain language of [section] 624.155(7) establishes the recoverability of all reasonably foreseeable damages which result from a bad faith violation. Life insurance has a unique emotional purpose, inseparable from its indemnity function: to provide the insured with peace of mind, knowing that his or her survivors will be protected from financial duress in the event of death. Emotional distress is undeniably a "reasonably foreseeable result" of the sort of violation of [section] 624.155 which was established in Otero. The Florida Supreme Court's ruling in Time that emotional distress damages are recoverable in a first party bad faith action is in accord with the weight of national authority on this issue. There is no basis in the legislative history, the language of the bad faith statute, or the Time opinion itself which would confine its holding that emotional distress damages are recoverable in first party bad faith claims to cases involving health insurers alone.
Legislative History Supports Recovery of Extracontractual Damages
The relevant legislative history was recounted by the Florida Supreme Court in Time. For more than half a century, Florida courts have imposed a duty upon insurers to act in good faith when defending their own insureds against third-party claims; they have authorized actions by both insureds and judgment creditors of insureds against insurers who have dealt in bad faith with their insured; and the measure of damages has always been the "excess judgment" obtained against the insured, notwithstanding that such a judgment was in excess of the insurer's contractual policy limits. See, e.g., Auto Mut. Indem. Co. v. Shaw, 134 Fla. 815, 184 So. 852 (1938); Thompson v. Commercial Union Ins. Co. of New York, 250 So. 2d 259 (Fla. 1971); Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980). However, with respect to first party claims, Florida courts had historically declined to impose a duty of good faith upon the insurer; the insureds were limited to actions for breach of contract; and the measure of damages was therefore limited to breach of contract damages, costs, and, where statutorily authorized, attorneys' fees. See, e.g., Life Inv. Ins. Co. of America v. Johnson, 422 So. 2d 32 (Fla. 4th DCA 1982); Hobbley v. Sears, Roebuck & Co., 450 So. 2d 332 (Fla. 1st DCA 1984); and Baxter v. Royal Indem. Co., 285 So. 2d 652 (Fla. 1st DCA 1973), cert. disch., 317 So. 2d 725 (Fla. 1975).
In 1982, the legislature corrected this anomalous situation by enacting F.S. [section] 624.155 and requiring insurers to act in good faith at all times when dealing with their insureds, whether defending them against claims by third parties or dealing with them directly on first party claims. The timing and stated legislative intent of [section] 624.155 establish that the legislature was providing for recovery of extracontractual damages as a sanction for abuses by insurance companies which were threatening the welfare of Florida insureds.
Section 624.155 requires insurers to deal in good faith to settle claims. Current case law requires this standard in liability claims, but not in uninsured motorist coverage; the sanction is that a company is subject to a judgment in excess of policy limits. This section would apply to all insurance policies. (1)
Consequently, the approach taken by the bill is to provide a civil remedy, which may be pursued by any policyholder damaged by the actions of an insurance company that violate the Insurance Code. An insured who successfully sues an insurance company under this provision can recover the amount of damages suffered, together with court costs and attorneys' fees. (2)
Before the institution of bad faith liability, insurers "had nothing to lose, and everything to gain, by refusing payment of even meritorious claims." Aetna Life Ins. Co. v. Lavoie, 470 So. 2d 1060, 1079 (Ala. 1984) (Torbert, C.J., dissenting), vacated on other grounds, 475 U.S. 813 (1986). Imposition of bad faith liability changed the measure of damages recoverable in an action by an insured against his insurer and altered the insurer's economic incentives. "The function of the bad faith claim is to provide the insured with an extracontractual remedy." Hollar v. International Bankers Ins. Co., 572 So. 2d 937, 939 (Fla. 3d DCA 1990).
Pursuant to [section] 624.155(1)(a)1, consumers were empowered to bring civil actions for damages resulting from unfair methods of competition and unfair or deceptive acts or practices of insurers. In 1990, the Florida Legislature amended [section] 624.155 to add the following pertinent subsection:
(7) The civil remedy specified in this section does not preempt any other remedy or cause of action provided for pursuant to any other statute or pursuant to the common law of this state. Any person may obtain a judgment under either the common law remedy of bad faith or this statutory remedy, but shall not be entitled to a judgment under both remedies. This...