By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on April 7, 2017
Impact and Potential Effects on Practice after Trafalgar, Lime Bay and Cammarata
It is important to understand that, although Trafalgar and Cammarata undeniably favor insureds, they do not establish bad faith and they do not create a presumption of bad faith. The cases more closely stand for the proposition that in certain contexts, and under certain circumstances, the entry of an appraisal award may perfect an insured’s right to bring a bad faith claim. While this isn’t great news for insurers, it isn’t necessarily the end of the world either.
Trafalgar did not substantially change the underlying bad faith jurisprudence in Florida.The rule in Florida since Blanchard, 575 So.2d 1289 has remained relatively unchanged. Namely, an insured’s right to bring a cause of action for statutory bad faith in the first-party context does not accrue until there has been a finding of liability and damages. Trafalgar involved a situation in which both liability and damages were determined. Similarly, Cammarata arose after liability and damages were determined,albeit the liability determination was made for different reasons. As a result, under the rule set forth by Blanchard and its progeny, the 4th DCA determined this was enough for bad faith.
The facts that the insurer in Trafalgar prevailed on summary judgment motion that it did not breach contract and that there was never litigation or a judicial finding of breach of contract in Cammarata, played no part in each respective courts' decisions to allow the bad faith claim to be brought. It should be noted that the courts only allowed the bad faith claim to be brought, but made no statements as to the merits of the bad faith claims, which may very well turn on the lack of breach of contract.
So what can insurers do to avoid a situation like Trafalgar or Cammarata, where a bad faith claim was allowed, even though the insurer's underlying conduct did not necessarily and definitively constitute bad faith? One suggestion is to provide timely claim analysis, including raising potential coverage defenses early in the process to preserve the insurer's rights and early invocation of the appraisal process, as this may avoid the dilatory tone in the claim handling process — even if bad faith was not ultimately committed. Insurers and counsel should also keep in mind the distinction between the courts' allowing bad faith claims after preconditions are met and the merits of the bad faith claim. Many of the factors that would assist an insurer in prevailing in a bad faith claim may not play a role in the court's decision to allow the bad faith claim to be brought. Therefore, insurers need not be discouraged if bad faith claims are brought,they only need to formulate a skillful defense strategy.
The analysis above provides for two different scenarios to consider when trying to obtain the best possible result for the insurer. The first scenario is if the insurer is going to admit that there is coverage. If this is the case, then the insurer must do all it can to avoid appraisal. An insurer that goes to appraisal under these circumstances opens itself up to a potential bad faith claim, as were the cases in Trafalgar and in Cammarata. A good idea in this situation, under the right circumstances, may be to try to settle as early as possible in order to be released from a potential bad faith claim. As a side note,it is imperative that the insurer makes sure to negotiate and include a release from bad faith claims, as that might have made a difference in Cammarata, where the settlement itself was the basis for accrual of the bad faith claim. If the insurer must go to appraisal,then they should make sure not to delay, as doing so is just providing the insured with ammo for a bad faith case.
The second possible scenario in this context arises when the insurer is not going to admit liability. In this case, the insurer should reserve coverage defenses. This protects the insurer from an immediate amendment to include bad faith if there is an appraisal award entered. This is the Lime Bay situation. In this instance, even if the appraisal sets the amount of loss, the insurer has the ability to still litigate its coverage defenses.Notice the insured will still need an underlying resolution of the breach of contract claim in their favor to bring a bad faith claim. This also allows for the insured to use those reserved defenses to push for a favorable settlement releasing bad faith claim.
Reserving Coverage Defenses to be Asserted After Appraisal
The courts seem to be split on some details involving this topic. In Three Palms Pointe, Inc. v. State Farm Fire & Casualty Co., 362 F.3d 1317 (11th Cir. 2004), the 11th Circuit addressed the issue of reserving coverage defenses and asserting them after appraisal.In that case, the court, under Florida law, held that where there has been an appraisal award, an insurer can only dispute coverage as to the whole loss. Id at 1319. According to Three Palms, the insurer cannot dispute a portion of coverage for a claim, but rather can only challenge the entirety of the claim. Otherwise the entirety of the award must be paid. Therefore, according to Three Palms, the only defenses that exist after an appraisal award are (1) the entire claim is not covered, or (2) the insured failed to comply with policy conditions.
By contrast, the 2nd DCA in Liberty American Insurance Company v. Kennedy, 890So.2d 539 (Fla. 2d DCA 2005) held that once an appraisal award is entered, the insurer can dispute a portion of the claim and admit liability as to the other. This allows an insurer to reserve coverage defenses even where it believes that some of the claim is covered. Therefore, the reasoning followed by Florida State Courts is that insurer can reserve coverage defenses in state court if it really wants to contest coverage or if it would like to posture for settlement to get a general release.
After both Kennedy and Three Palms, the Middle District held in Muckenfuss v. Hanover Insurance Co., 2007 WL 1174098 (M.D. Fla. 2007) that despite the Kennedy decision,Three Palms still applies in federal court. The Middle District determined that where the 11th Circuit and lower state appellate courts are split, the federal district courts are bound by the 11th Circuit decision. Therefore, in the Middle District, Three Palms is still the controlling law.
However, the Southern District has rejected to follow Three Palms, and instead followed Kennedy. In Sands on the Ocean Condo. Ass'n, Inc. v. QBE Insurance Corp., 2012 WL6217497 (S.D. Fla. 2012) insurer wanted to challenge coverage for part of the appraisal award. The Sands court held that insurer could do this because the appraisal award specifically stated that “it did not account for any prior payments, deductibles, or the terms and conditions of the insurance policy”. That court reasoned that the appraisal panel specifically decided to forego taking coverage into consideration. Therefore,insurer could challenge part of the award. Id.
Therefore, jurisdiction should play a key role in the litigation strategy formed in these cases. If the case is in Florida state court, then Kennedy applies and the insurer can reserve partial coverage defenses while paying on agreed upon items. The insurer here may use the coverage defenses to either contest coverage or leverage for settlement with a general release. If in federal court, however, then the court might apply either Three Palms or Sands. Likely, Middle District and Northern District will apply Three Palms and Southern District will apply Sands.
Attorneys' Fees in Insurance Bad Faith Cases
Attorneys' fees in insurance bad faith cases are allowable pursuant to Fla. Stat. 627.428 where an insured recovers under its insurance policy in an action at law. "Florida courts have consistently held that the purpose of § 627.428 and its predecessor is to discourage the contesting of valid claims against insurance companies and to reimburse successful insureds for their attorneys’ fees when they are compelled to defend or sue to enforce their insurance contracts." Travelers Indemnity Insurance Company of Illinois v. Meadows MRI LLP, 900 So.2d 676, 679 (Fla. 4th DCA 2005), citing Insurance Co. of North America v. Lexow, 602 So.2d 528 (Fla. 1992). The statute is meant to "place the insured or beneficiary in the place she would have been if the carrier had seasonably paid the claim or benefits without causing the payee to engage counsel and incur obligations for attorney’s fees." Federated Nat’l Insurance Co. v. Esposito, 937 So.2d199 (Fla. 4th DCA 2006), citing Meadows MRI, LLP, 900 So.2d at 679. However, "[i]n order to be entitled to attorney’s fees, it must have been reasonably necessary for the insured to file a court action." Travelers of Florida v. Stormont, 43 So.3d 941, 944 (Fla.3d DCA 2010). "Where suit is filed without any necessity to do so, attorney’s fees under§ 627.428 will be denied." Stormont, 43 So.3d 941 at 944. Simply stated, the right to attorney’s fees turns upon whether the filing of the suit served a legitimate purpose.Lewis v. Universal Prop. & Cas. Insurance Co., 13 So.3d 1079, 1082 (Fla. 4th DCA2009).
The above cases stand for the proposition that an insured will only be entitled to attorneys’ fees where they were forced to file suit to recover. This issue comes up many times in the context of appraisal. An insured will file suit prior to complying with post-loss conditions, will move to compel appraisal, and then when they receive an appraisal award they will claim entitlement to fees. The counter-argument to this position is whether the plaintiff needed to file suit, or whether they could have gotten the insurer to submit to appraisal pursuant to the terms of the contract without having to file suit. An area where this may come up often is where an insurer is demanding compliance with post-loss duties prior to determining whether it should submit to appraisal. The insured prematurely files suit, and then argues that it is entitled to fees when an award is entered. The insurer will surely argue here that the insurer would have agreed to go to appraisal had the insured properly complied with post-loss conditions. If insurer can show suit was not necessary to obtain insurance proceeds, then the above case law should render fees unrecoverable.
Furthermore, failing to respond to a CRN may sometimes give rise to attorney fees. The court in Imhof v. Nationwide Mut. Insurance Co., 614 So. 2d 622 (Fla. 1st DCA 1993),held that insurer's failure to respond to CRN within 60 days, if followed by adverse adjudication at trial or on appeal, renders insurer liable for damages together with court costs and reasonable attorney fees incurred by plaintiff. This is yet another reason for insurer to ensure they properly answer and, if necessary, contest every CRN they receive.
The potential for first-party bad faith claims against the insurer is always present in cases where the amount of damages or insurer's liability is in dispute. This is complicated even more when you consider the variation in treatments of such claims from jurisdiction to jurisdiction and the constant changes in this area of law. However,as detailed above, there are certain steps that may be taken by the insurer to protect itself against from first-party bad faith claims at the outset. Furthermore, once the insured has made a claim of loss, insurers that are looking to dispute certain elements of the claim should ensure proper procedures so that a successful bad faith claim does not arise from the handling of the claim. Finally, should a bad faith claim arise,knowledge of the intricacies of bad faith litigation will surely assist insurers and their counsel with an effective defense.