By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on April 6, 2017
The Florida standard jury instruction regarding insurers' bad faith states: "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 its interests." Fla. Std. Jury Instr. (Civ.) 404.4. However, this standard is rarely so clear cut in practice. Developments in case law have made this area of insurance law increasingly complex. As an inevitable result, the door has been opened for an expanding amount of bad faith claims against insurers. In fact, an insurer's failure to effectively guard against potential claims for bad faith may expose the insurer to such claims even if its actions would not necessarily constitute bad faith, in the traditional meaning of the term. The flip side of that, is that an understanding and working knowledge of the intricacies of this area may help insurers from falling prey to unwarranted bad faith claims by taking the necessary steps to protect itself from such claims being brought in the first place or by mounting a favorable defense.
The Florida Supreme Court has held that a claim for bad faith "is founded upon the obligation of the insurer to pay when all conditions under the policy would require an insurer exercising good faith and fair dealing to pay." Vest v. Travelers Insurance Co., 753 So. 2d1270, 1275 (Fla. 2000).This obligation on the part of an insurer requires the insurer to timely evaluate and pay benefits owed on the insurance policy. Id. However, the Florida Supreme Court also stated that:
the denial of payment does not mean an insurer is guilty of bad faith as a matter of law. The insurer has a right to deny claims that it in good faith believes are not owed on a policy. Even when it is later determined by a court or arbitration that the insurer's denial was mistaken, there is no cause of action if the denial was in good faith.
Id. Under Florida law, an insured must prove three elements to prevail on a bad faith claim:(1) bad faith conduct on part of insurer; (2) compliance with statutory notice requirements;and (3) resolution of underlying insurance benefits dispute in insured's favor. In re Simmons, 520 B.R. 136 (Bankr. M.D. Fla. 2014).This article aims to shed light on some of the more convoluted issues that insurers may encounter when dealing with each of these elements, their developments in the law, and certain safeguarding procedures and remedial methods to minimize liability.
Conditions Precedent to Bringing Bad Faith Claims
It is well-settled Florida law that a bad faith action may not be brought until the following two conditions are satisfied: (1) the insurer raises no defense which would defeat coverage, or any such defense has been adjudicated adversely to the insurer (i.e. there is coverage);and (2) the actual extent of the insured's loss must have been determined. Vest, 753 So. 2d1270, 1273.
Furthermore, “an insured’s underlying first-party action for insurance benefits against the insurer necessarily must be resolved favorably to the insured before the cause of action for bad faith in settlement negotiations can accrue.” Blanchard v. State Farm Mut. Auto.Insurance Co., 575 So.2d 1289, 1291 (Fla. 1991). However, such resolution in favor of the insured of the underlying claim, need not be by trial or arbitration. Essentially, to fulfill this requirement, the insured only need some kind of resolution in its favor. Vest, 753 So.2d at 1274. As discussed below, this broad requirement is insured friendly and invites an abundance of bad faith claims when insurers do not take proper action.
Civil Remedy Notice
Under Fla. Stat. 624.155(3), a condition precedent to bringing a bad faith action against an insurer is that the insurer must have been given 60 days written notice of the violation for which the bad faith action will be sought. In fact, it can be stated that the statutory notice requirement is the third condition precedent to a bad faith action, along with a determination of the existence of coverage liability and the extent of the insured's damages.
This notice is given on a standard form and is commonly referred to as the civil remedy notice (CRN). Use of the standard CRN form is required, as courts have found that actual notice to insurer through legal correspondence was not a valid substitute for CRN required by first-party bad faith statute. Nowak v. Lexington Insurance Co., 464 F. Supp. 2d 1248(S.D. Fla. 2006).
According to the statute, the CRN shall state with specificity the statutory provision allegedly violated by the insurer, the facts and circumstances giving rise to the violation, the name of any individual involved in the violation, reference to specific policy language that is relevant to the violation, and a statement that the CRN is given in order to perfect the right to pursue the civil remedy for bad faith. As such, insurers facing a bad faith action should challenge the validity of the CRN as to its form and specificity, because an improper CRN or the lackof CRN may kill the bad faith claim at the outset.
The CRN gives the insurer 60 days to cure the alleged bad faith violation. This 60 day window following notice to the insurer is designed to be a cure period that will encourage payment of the underlying claim and avoid unnecessary bad faith litigation. Galantev. USAA Cas. Ins. Co., 895 So. 2d 1189 (Fla. 4th DCA 2005). Therefore, if within 60 days after filing the notice, the damages are paid or the circumstance giving rise to the bad faith violation are corrected, bad faith action cannot be brought. Fla. Stat. 624.155(3).
Courts have held that the CRN is crucial to the procedural integrity of a statutory bad faith action against an insurer under Florida law; it is a condition that must be satisfied in order for an insured to perfect the right to sue under the statute. Heritage Corp. of S. Florida v.Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 580 F. Supp. 2d 1294 (S.D. Fla. 2008), aff'd 361F. App'x 986 (11th Cir. 2010). Furthermore, the above mentioned statutory requirements of CRN applicable to bad faith action against an insurer under Florida law are to be strictly construed. Id.
Moreover, bringing a cause of action for bad faith failure to settle is premature until there is a determination of liability or extent of damages owed on the first-party insurance contract.However, the insured may submit a CRN before liability or damages have been determined;the insurer's appropriate response to the CRN is not dependent on such a determination.Rather the insurer must make a good-faith evaluation of what is owed based upon proof of loss required by the policy and the insurer's expertise in advance of a determination by a court or arbitration. Hunt v. State Farm Florida Insurance Co., 112 So. 3d 547, 551 (Fla. 2ndDCA 2013).
If an insurer fails to respond to a CRN within the 60-day window, there is a presumption of bad faith sufficient to shift the burden to the insurer to show why it did not respond. Fridman v. Safeco Insurance Co. of Illinois, 185 So. 3d 1214 (Fla. 2016). Of course, the insurer has the right to fully investigate the claim, and may, therefore, ask for insured's compliance in doing so before determining whether settlement is proper within the 60 days harbor period after the CRN is given. However, not responding to CRN within that time frame is rarely excusable. Especially, since the insurer is free to include its concerns, defenses,and reasons for not settling in the response to the CRN. Of note, the Supreme Court in Fridman, supra, further held that that "damages in first-party bad faith actions are to include the total amount of a claimant's damages, including any amount in excess of the claimant's policy limits without regard to whether the damages were caused by the insurance company —damages that are, in substance, a penalty." 185 So. 3d 1214, 1223.
Is Non Compliance of Post-Loss Condition Sufficient for Summary Judgment?
For more than 15 years, the law in Florida has been that the failure of an insured to comply with its post-loss duties under a policy of insurance is sufficient for summary judgment for the insurer. Starling v. Allstate Floridian Insurance Company, 956 So.2d 511 (Fla. 5th DCA2007) (failure to produce documents, submit proof of loss, or appear for EUO are sufficient for summary judgment for insurer); Goldman v. State Farm Fire General Insurance Company, 660 So.2d 300 (Fla. 4th DCA 1995) (failure to submit to EUO is breach of contract and sufficient for MSJ for insurer). This principle of law has been reaffirmed numerous times by the Florida District Courts of Appeal. Correa v. Sunshine State Insurance Co., 2012 WL 1859704 (Fla. 4th DCA 2012) (affirming summary judgment for failure to produce proof of loss); Edwards v. State Farm Florida Insurance Company, 64So.3d 730 (Fla. 3d DCA 2011). This is still the controlling law in the Third DCA and the Fourth DCA.
However, in the Fifth DCA there is a movement towards a prejudice analysis. Allstate Floridian Insurance Company v. Farmer, 2012 WL 6719459 (Fla. 5th DCA 2012). These cases stand for the proposition that the failure to submit a proof of loss, and arguably a failure to appear for an examination under oath (EUO), will not be deemed to forfeit coverage unless the insurer can show that it was prejudiced by such failure on the part of the insured. This standard has not yet been adopted by any other district court of appeal,but it is something that must be considered in Florida. Some trial judges are following the Fifth DCA opinions, and holding that prejudice is necessary.
Post-Loss Compliance Necessary for Court to Compel Appraisal
It has been widely held since United States Fidelity & Guaranty Company v. Romay, 744So.2d 467 (Fla. 3d DCA 1999) that before a court can compel parties to appraisal, the court must first find that the insured complied with its post-loss duties. This is because the courts have found that an insurer cannot determine whether there is an “amount of loss” dispute that is appropriate for appraisal without getting the information needed through an insured’s post-loss compliance. Thus, without post-loss compliance, there can be no compelling of appraisal.
In fact, many district courts of appeal have found that a court cannot compel appraisal without making specific findings of fact demonstrating post-loss compliance. Such fact finding must be issued in an order compelling appraisal, and must be determined by way of an evidentiary hearing. See e.g. United Property and Casualty Insurance Company (Fla. 3dDCA 2011); Citizens Prop. Ins. Corp. v. Gutierrez (Fla. 3d DCA 2011); Citizens Property Ins. Corp. v. Mango Hill Condo Ass’n, 54 So.3d 578 (Fla. 3d DCA 2011). Therefore, before a court can compel appraisal, the court must hold an evidentiary hearing to show that post-loss condition compliance has occurred.
Favorable Appraisal Award as Basis for Bad Faith Claim
Typically, the insurer can take some refuge in the protection of a properly and timely invoked appraisal clause. For instance, if the award is determined by appraisal and paid within the contracted time period, the insurer has not breached the contract and therefore has not acted in bad faith. Notably, in Federated National Insurance Co. v. Esposito, the court denied attorney’s fees to a home owner who recovered at appraisal, because it became clear that the party only filed the lawsuit to obtain a fee award. 937 So.2d 199, 200(Fla. 4th DCA 2006). Furthermore, the plaintiff started the appraisal process and then once underway, filed suit for breach of contract. Id. Ultimately the appraisal resulted in a"favorable resolution" of the claim and the plaintiff requested the court ratify the appraisal and tax attorney’s fees. Id. Other cases have been in agreement and limited the extent of the insurer's protection in the appraisal process. See Travelers Indemnity Insurance Co. OfIllinois v. Meadows, MRI, LLP, 900 So.2d 676 (Fla. 4th DCA 2005), as discussed in Lewis v.Universal Property and Casualty Insurance Co., 2009 WL 1531790 (Fla. 4th DCA 2009).
The 4th DCA has also held that an appraisal award in insured's favor constituted a favorable resolution of the underlying breach of contract dispute between insured and insurer for purposes of insured's bad faith cause of action. Trafalgar at Green acres Ltd. v.Zurich Am. Insurance Co., 100 So. 3d 1155 (Fla. 4th DCA 2012). In that case, the insured made a claim following a hurricane loss and the insurer issued payments on the loss for over 6 months and seemingly raised no coverage defenses during its investigation of the claim. During this investigation, the insured filed suit for breach of contract. The insurer then made one more payment, totaling $641,730 and invoked the appraisal clause of the policy.The appraisal result in an award for $1.5 million, which the insurer timely paid. The insurer obtained summary judgment on the breach of contract claim upon its payment of the appraisal award. Subsequently, the insured amended its claim to assert statutory bad faith.The insurer argued that the bad faith action was barred, as the insured failed to obtain a"favorable resolution" of the breach of contract claim. Id.
The court in Trafalgar found the appraisal award in favor of insured formed a basis for a bad faith claim by the insured. 100 So. 3d 1155 (Fla. 4th DCA 2012). Specifically, the difference in the appraisal award and the payments made by the insurer provided a basis for bad faith.It seems that this court relied on the insurer's conduct to decide that there probably was some bad faith, and thus, reached in order to allow a bad faith claim based on the difference between the appraisal award and payments made. Nonetheless, this case definitely opened the door to more causes of action for bad faith claims against insurers.
The 2nd DCA in Hunt v. State Farm Florida Insurance Co., 112 So.3d 547 (Fla. 2d DCA2013) reaffirmed the Trafalgar reasoning and found that an appraisal award is a favorable resolution for purposes of satisfying prerequisites of liability and damages for bad faithclaim. In State Farm Insurance Co. v. Ulrich, 2013 WL 4525287 (Fla. 4th DCA 2013), the 4th DCA again reaffirms Trafalgar as current law and restates that appraisal is favorable resolution for purposes of bringing bad faith action.
Reconciling Trafalgar, Lime Bay and Cammarata
At first glance, it is difficult to reconcile Trafalgar and Lime Bay. However, a more in depth look at both cases highlights some significant differences, which ultimately led to their different decisions. In Lime Bay Condominium Inc. v. State Farm Florida Insurance Co., 94So.3d 698 (Fla. 4th DCA 2012), the loss also arose from hurricane damages. Insurer made a determination as to coverage of some of the covered items, and made a payment. Lime Bay subsequently filed a complaint for breach of contract against its insurer. Insurer demanded appraisal and the breach of contract case was abated pending resolution of the appraisal. The most important difference between the actions of the insurer in Trafalgar and the insurer in Lime Bay is that the insurer in Lime Bay reserved some defenses to coverage to be litigated in the breach of contract case after the appraisal process was completed.Lime Bay, 94 So.3d 698. As such, the Lime Bay insurer did not admit liability, unlike the insurer in Trafalgar.
Ultimately in Lime Bay, the appraisal came back, it was paid by the insurer, and the breach of contract case proceeded. When the insured attempted to bring the bad faith claim, the 4th DCA found that because the underlying breach of contract case was ongoing, and because there were still coverage issues being litigated, a bad faith claim was premature.This is actually not inconsistent with Trafalgar.
A more recent 4th DCA case expressly receded from Lime Bay. The court in Cammarata v.State Farm Florida Insurance Co., under similar facts as those in Trafalgar and Lime Bay,held that it is "compelled to recede from Lime Bay to the extent it held that an insurer's liability for breach of contract must be determined before a bad faith action becomes ripe,even though the insurer's liability for coverage and the extent of the insured's damages already have been determined by an appraisal award favoring the insured. 152 So. 3d 606,613 (Fla. 4th DCA 2014). Therefore, a cause of action for insurer bad faith matures upon a resolution of coverage liability and amount of damages, and a finding that the insurer actually breached the insurance policy is not required.
In Lime Bay, the 4th DCA held that the breach of contract dispute must be resolved before a bad faith action becomes ripe, because until the underlying breach of contract dispute is resolved, the insured could not allege that there had been a final determination of coverage liability. 94 So. 3d 698 at 699. By contrast, however, there was no such underlying breach of contract litigation pending in Cammarata when the bad faith action was commenced.
After the appraisal in favor of insureds, insurer paid the appraisal estimate and an agreed order dismissing the petitions was entered by the court. After settlement of the coverage claim via the appraisal process, the insured filed suit for bad faith against the insurer. That court held that since the two conditions precedent for bad faith claims in Florida (coverage and amount of damage) were established through settlement of the coverage claim and the appraisal award, then the bad faith claim may be brought. Therefore, insured’s prevailing on a breach of contract action was not the only means by which to obtain a favorable resolution in order to proceed with a bad faith action. As such, it may be argued that the court's holding that there was no need for a judicial finding that the insurance policy was breached is not necessarily contradictory to Lime Bay because no such breach of contract litigation was pending in Cammarata, whereas such litigation was indeed pending in Lime Bay.However, if Cammarata is read as providing that a bad faith action is ripe after an appraisal award, even where there is still a breach of contract claim pending, then Cammarata does,effectively, recede from Lime Bay.
Cammarata has the potential to have major implications for insurers in Florida. Notice that the insureds in Cammarata never sued for breach of contract, no breach of contract dispute was settled, and the appraisal process did not determine that a breach of the policy had occurred. Instead, the settlement itself was enough for the bad faith claim to accrue. This is worrisome for insurers because it may now be argued that an appraisal award, obtained through the insurer's right under the policy to request an appraisal, may serve as determination of liability satisfying the requirement for ripeness of bad faith claims.
A valuable lesson from Cammarata and Trafalgar, is that if the insurer is going to admit liability, then it must do everything it can to stay away from the appraisal process. An unfavorable appraisal estimate may open the insurer up to bad faith claims for not paying the amount initially requested by the insured for the loss. The advice that can be inferred from Lime Bay, provided that the courts do not now view it as bad law in the face of Cammarata and that no appraisal award in favor of the insured has been issued, is that insurers should reserve coverage defenses while disputing the damage amounts. This way,a resolution of the underlying claim in favor of the insured will be necessary before the bad faith claim can accrue.