What Is “Bad Faith” And What Can Be Done About It?

In Florida, the work of adjusting insurance claims engages the public trust. Policyholders, both commercial and residential, are generally not very sophisticated in insurance issues and therefore must rely on their insurance company to fairly and honestly adjust losses and timely pay the amounts due under the policy.

Many states, including Florida, recognize that all contracts inherently contain an obligation that the parties will act in good faith and deal fairly with each other. While an insurance policy may not seem like your typical contract, that is exactly what it is. Therefore the common law recognizes a cause of action for breach of contract if one of the parties does something that breaches this obligation of good faith and fair dealing.

Unlike many states, however, the Florida legislature has created a statutory cause of action for an insurer acting in bad faith. This is codified in Florida Statute §624.155 and contains a long list of violations that are considered “bad faith” pursuant to the statute.

While this list is too long to list here, some common violations are:

1. A material misrepresentation made to an insured or any other person having an interest in the proceeds payable under such contract or policy, for the purpose and with the intent of effecting settlement of such claims, loss, or damage under such contract or policy on less favorable terms than those provided in, and contemplated by, such contract or policy; or
2. Failing to adopt and implement standards for the proper investigation of claims;
3. Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;
4. Failing to acknowledge and act promptly upon communications with respect to claims;
5. Denying claims without conducting reasonable investigations based upon available information;
6. Failing to affirm or deny full or partial coverage of claims, and, as to partial coverage, the dollar amount or extent of coverage, or failing to provide a written statement that the claim is being investigated, upon the written request of the insured within 30 days after proof-of-loss statements have been completed;
7. Failing to promptly provide a reasonable explanation in writing to the insured of the basis in the insurance policy, in relation to the facts or applicable law, for denial of a claim or for the offer of a compromise settlement;
8. Failing to promptly notify the insured of any additional information necessary for the processing of a claim; or
9. Failing to clearly explain the nature of the requested information and the reasons why such information is necessary.
10. Not attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests

While it may seem odd, these violations may give rise to a claim for bad faith under Florida Statute §624.155 but they do not necessarily mean that a policyholder can recover, or even file suit for that matter. For a claim based on statutory bad faith to be actionable, there must first be a determination of liability. Basically, it must be determined that the insured was entitled to proceeds under the policy which were not previously paid. Based on this requirement, a claim for statutory bad faith is not ripe until after a breach of contract action or appraisal is completed. See Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So. 2d 1289 (Fla.1991).

Based on these requirements, a claim for statutory bad faith must be brought in a second and separate lawsuit after liability is established. Also, even the most egregious misconduct by an insurer will not allow a policyholder to bring an action under the statute if the policyholder is not able to recover under the policy.

There are quite a few misconceptions about Florida law regarding bad faith actions. I constantly get questions about these issues from policyholders, board members, adjusters, and attorneys alike. In order to help clear the air, I will regularly post about some of the important issues in this area of insurance law and explain how associations can overcome being treated unfairly by their insurer.