Insurance Bad Faith: What is it? Why should you care?

Insurance Bad Faith: What is it? Why should you care?

Nearly every year for the last decade or so, lawmakers in Tallahassee have tried to alter Florida’s insurance bad faith law.  Their motivation is to diminish the ability of people who file claims to hold insurance companies to their obligation to act reasonably in dealing with and settling those claims. I will attempt to explain what bad faith is and why it is important.

WHAT IS BAD FAITH?

It seems that these days nearly everyone has heard the term “insurance bad faith,” but not many people understand its true meaning. Clients will often come to see me after an accident, telling me that they want to bring a claim for bad faith because an insurance company acted rudely or was dismissive or slow in responding. Similarly, many lawyers mistakenly believe that if a client’s case is more valuable than the available insurance coverage, it’s, therefore, a bad faith case. Unfortunately, it is more complicated than that.

Insurance companies are held to a standard of “acting in good faith” in administering and settling claims. If they don’t (which is usually a bone of contention) the first requirement to bringing a bad faith claim is met. But more is required. To truly have a bad faith case, the insurer must have acted wrongly and there must be damages over and above the insurance policy limits in question. For instance: you have a case where the insurer kept you on the line and ultimately made you an offer that was well below what would be considered fair—or perhaps they failed to make an offer altogether. As a result, you were forced to take them to trial, and let’s say it resulted in a verdict and judgment below the insurance limits. In this example, there would be no basis for a bad faith case, because the damages fall under the limits of the insurance policy in question, instead of above. It would take what is called an “excess verdict,’ or a verdict that exceeds the available policy limits, to truly have a bad faith claim against the insurer.  One perspective is that bad faith law allows the policy limits to be expanded to match the true value of a case.

Bad faith law is state law, so it varies from state to state (some states don’t even have a Bad Faith law). Florida has two types of bad faith insurance claims: 1st party and 3rd party. 1st party claims are cases against your own insurance company, and the governing law is based on statute – enacted by legislators in Tallahassee. 3rd party claims are against the adverse party (the defendant) and are governed by common law – prior cases decided by judges. The standard for determining whether an insurer is in bad faith is essentially the same in both 1st or 3rd party cases. The difference here is that the legislature set up a “notice” process as a predicate to bringing a 1st party case. This process is referred to as filing what’s called a “civil remedy notice” (also called a CRN) with the state insurance commissioner to allege that an insurer has acted in bad faith. Once filed, the insurer has 60 days to “cure” and “make right” whatever conduct is alleged. If the insurer does so, assuming it truly does, the potential for a bad faith claim is averted.  Most often, it doesn’t; most often the insurance company simply denies any wrongdoing.

HOW CAN A BAD FAITH CASE PLAY OUT?

It should be noted that while the definition of bad faith conduct is the same in both 1st party and 3rd party cases, there are other important differences. A 1st party case (which often means the case is for Uninsured Motorist benefits) the CRN is filed as discussed above, and the excess judgment would ultimately be paid by your insurance company. In a 3rd party case, once an excess judgment is obtained, the effort is then to collect the excess judgment. The adverse insurance company generally tenders its policy limits in partial satisfaction of the judgment and the adverse party, or defendant is left to pay the difference. Of course, most private persons don’t have the kind of money to pay a large award and the likelihood of getting additional funds from the other party are very slim, but as you can imagine, the defendant isn’t likely to be very happy that his insurance company failed to settle the case within his policy limits. In this scenario, the law allows the defendant to hand over his claim for bad faith to you. The theory is basically that, had the insurance company been reasonable and settled for an amount within its policy limits when it had a chance, its insured, the defendant, would never have been subjected to the excess verdict. He, then, has a claim against his own insurance company which he then assigns to you.

Turning the excess judgment into an actual money recovery is accomplished in one of three ways: first, the plaintiff could negotiate a settlement of the excess judgment directly with the insurer. This requires a compromise of the amount. Let’s say a jury awarded you $250,000 for your injury case and the defendant had insurance of $100,000. You have a $150,000 excess judgment. If the plaintiff is able to settle the upcoming bad faith case without actually filing the lawsuit for, say, another $100,000, they would end up with a $200,000 recovery when there was only $100,000 in insurance actually available.

Another option to gain recovery is to persuade the insurer to pay excess dollars back in the injury case litigation phase. The plaintiff’s attorney may appear at the mediation for the injury case with the same $100,000 limits telling the insurer and its lawyer that there was bad faith involved in the handling of the case by the insurer (of course, presenting documentation to support that position). If the insurance company acknowledges that it handled the case improperly, usually meaning that it failed to settle the case for a reasonable sum and didn’t, it may pay excess dollars to settle early.

Finally, a separate lawsuit can be filed based on the excess judgment. This lawsuit would probably be brought in federal court because it is a direct action against the insurance company and the diversity laws would apply (diversity means that the defendant is a resident of a state other than Florida). A bad faith lawsuit would require bringing in a new lawyer to handle the case, due to the ethical rules that govern such cases: the lawyer in the underlying case that resulted in the excess award would be a witness to the insurance company’s conduct. As a witness, the lawyer can’t prosecute the case. Unfortunately, bad faith cases are expensive to litigate, they often take a long time to resolve, and there is the inherent risk (as in any lawsuit) that you may not win or that you will win, but not enough money to justify the expense. Generally speaking, a bad faith case should be reasonably settled, if possible.

WHY SHOULD I CARE ABOUT BAD FAITH?

The answer to this question belies the reasons that lawmakers have business interests at heart over the interests of ordinary people. Bad faith laws are the only thing that forces insurance companies to behave, to handle cases reasonably, and to pay claims fairly and without undue delay. In states that have no punitive laws for insurance bad faith, often the insurers will take advantage by knowingly making and sticking with “low ball” offers, without any legal incentives to act otherwise. Claimants are left hoping that the insurance company will act reasonably. One common scenario is where a claim has value that clearly exceeds the policy limits, say a

$500,000 case with $100,000 of insurance available. Logic would dictate that the insurer, knowing that the damages clearly exceed the limits, would hastily offer the $100,000 limits.  But, what often happens in states with no bad faith laws, is that the insurer offers $75,000 knowing that you will have to go to trial to get the full $100,000. Between the costs of the trial (which average around $30,000) and the length of time it will take due to the court’s backlog of cases, claimants often feel their best option is to settle for the $75,000 now. Contrast that with a state like Florida, where an insurer may be more motivated to settle fairly because failing to do so could “open up” the policy limits to more than the $100,000. It gives the insurer a real consequence for not dealing fairly. Even though Florida has a bad faith law, insurance companies still make a lot of bad decisions, overplay their hand, are slow in responding, or just under-evaluate cases. Florida’s bad faith law has resulted in insurance companies paying huge sums over the years. That is precisely why pro-business lawmakers annually try to get rid of or reduce the bad faith law. Bad faith laws protect people from heavy-handed insurance companies.

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Mike Walker is a board certified Florin|Roebig trial attorney with 31 years experience representing clients in Personal Injury cases. He has been named a Top Rated Attorney by Super Lawyers and is a member of the Million Dollar Advocates Forum, with board certifications from both the Florida Bar and the National Board of Trial Advocacy in matters of civil trial advocacy.

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