A Bad Faith Action is Not Ripe Until Liability and Damages are Established

One area of insurance coverage that we receive questions about is the issue of when a bad faith action can be filed.  The Florida Supreme Court has held  that a bad faith lawsuit is not ripe until there has been a determination that the insured is liable and the extent of the plaintiff’s damages.  In Blanchard v. State Farm Mut. Auto Ins. Co., 575 So.2d 1289, 1291 (Fla. 1991) the Court held:

If an uninsured motorist is not liable to the insured for damages arising from an accident, then the insurer has not acted in bad faith in refusing to settle the claim. Thus, 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. It follows that an insured’s claim against an uninsured motorist carrier for failing to settle the claim in good faith does not accrue before the conclusion of the underlying litigation for the contractual uninsured motorist insurance benefits. Absent a determination of the existence of liability on the part of the uninsured tortfeasor and the extent of the plaintiff’s damages, a cause of action cannot exist for a bad faith failure to settle.

The takeaway is the following rule: “Absent a determination of the existence of liability … and the extent of the plaintiff’s damages, a cause of action cannot exist for a bad faith failure to settle.”  The Florida Supreme Court later clarified:

Blanchard is properly read to mean that the “determination of the existence of liability on the part of the uninsured tortfeasor and the extent of the [insured’s] damages” are elements of a cause of action for bad faith. Once those elements exist, there is no impediment as a matter of law to a recovery of damages for violation of section 624.155(1)(b)1 dating from the date of a proven violation

Vest v. Travelers Ins. Co., 753 So. 2d 1270, 1275 (Fla. 2000).  This rule has been dubbed the “Favorable Resolution Requirement.”

This rule undoubtedly makes sense.  An insurance company cannot be found to act in bad faith to settle on behalf of its insured until the insured is found liable.  For this reason, the Florida Supreme Court has made liability and damages an element of bad faith.  See Vest, 753 So. 2d at 1275.

Since Blanchard, other cases have debated what constitutes this “Favorable Resolution Requirement” and, for example, have found that resolutions such as a settlement, see Brookins v. Goodson, 640 So. 2d 110 (Fla. 4th DCA 1994), and appraisal awards in uninsured motorist cases (UM), see Hunt v. State Farm Fla. Ins. Co., Case No. 2D11-6484 (Fla. 2d DCA April 5, 2013), suffice.

Bad Faith Discovery of Claims and Underwriting Files is Generally Irrelevant in a Coverage Action

Florida courts have consistently ruled that bad-faith discovery of an insurer’s business policies and claims handling procedures is premature until the insurer’s obligation to provide coverage has been established.  Florida’s Third DCA reiterated this rule in XL Specialty Ins. Co. v. Skystream, Inc., 988 So.2d 96, 98 (Fla. 3d DCA 2008).

In Skystream, the insurer initiated a declaratory judgment action to determine that it owed no duty to defend and indemnify against claims brought by the estates of passengers killed in an airplane crash. After the insurer’s duty to defend was determined on cross-motions for summary judgment, the insureds moved to amend to assert bad faith and also propounded bad faith discovery. In response, the insurer moved to dismiss and opposed the discovery with a motion for protective order, which the lower court denied. On certiorari review, the court held that the bad faith discovery was premature, even though there was a determination of coverage, because there still was not a ruling regarding damages. Id. at 98 (citing Imhof v. Nationwide Mut. Ins. Co., 643 So.2d 617, 619 (Fla. 1994)).

Action for Bad Faith Was Ordered to Arbitration Based on Insurance Policy’s Arbitration Provision

Truck Ins. Exchange v. Pediatrix Med. Grp., Inc. (4th DCA 2013)

In this very brief opinion concerning an insurance bad faith action, the court entered a stay of the proceedings and reversed a trial court’s order denying a motion to compel arbitration. The court explained that because the insurance policy in question contained an arbitration provision and because the issues raised in the bad faith action were “inextricably intertwined with arbitrable issues,” the “trial court should have granted the motion to compel arbitration of the underlying issues and stayed the present case until those issues are decided” in arbitration.

Third Party Bad Faith Claim May Not Be Brought in Underlying Tort Action

GEICO Gen. Ins. Co. v. Harvey (Fla. 4th DCA 2013)

In August of 2006, Harvey’s vehicle collided with a motorcycle at an intersection, killing the motorcyclist. The decedent’s estate sued Harvey for negligence and obtained a jury verdict in the amount of $8 million damages. Pursuant to Florida’s nonjoinder of insurers statute (§ 627.4136), the estate added as a defendant GEICO—who insured Harvey pursuant to an automobile liability policy with limits of $100,000—in order to facilitate the entry of final judgment.

Harvey filed a crossclaim against GEICO, raising a new cause of action for insurance bad faith, alleging (1) that GEICO failed to settle the claim when it should have and (2) that GEICO’s failure to notify Harvey that the plaintiff wanted to take a presuit statement led to the filing of suit.

GEICO attempted to remove the action to federal court, but the notice was found to be untimely and the case was remanded to state court where GEICO moved to dismiss or sever the bad faith crossclaim. The motion was denied and GEICO petitioned for a writ of certiorari.

The fourth DCA granted the petition, observing that the denial of GEICO’s motion to dismiss defeated its right to have the action removed to federal court. It then quashed the order denying the motion to dismiss, explaining that per Florida Rule of Civil Procedure 1.170(g), a third party bad faith claim against an insurer for failure to settle may not be brought in the underlying tort action but must be raised in a separate cause of action:

Florida Rule of Civil Procedure 1.170(g) provides [that] “[a] pleading may state as a crossclaim any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter of either the original action or a counterclaim therein, or relating to any property that is the subject matter of the original action.” The wrongful death action in this case sounds in tort and arose from the August 2006 automobile accident. By contrast, defendant’s third party bad faith crossclaim against his insurer arises from the insurer’s alleged breach of its duty to act in good faith in handling the estate’s claim against the defendant. We conclude that these causes of action accrued at different times and do not arise out of the same transaction or occurrence for purposes of rule 1.170(g).

Interlocutory Appeal in Declaratory Action Denied Because Facts of All Counts Were Intertwined

Universal Underwriters Ins. Co. v. Stathopoulos & W. Gen. Insurance Co. (Fla. 2d DCA 2013)

Shortly after a woman drove a newly-purchased car off a dealership lot, her application for financing was rejected and she was instructed to return the car to the dealership. Before she could do so, the car was involved in an accident that resulted in the death of another person.

Western General Insurance Company (“WG”) defended and indemnified the driver in that action, which resulted in a $3 million consent judgment and an assignment of any proceeds of any causes of action against Universal Underwriters Insurance Company (“Universal”), the insurer that had written the dealership’s “garage” policy. Although Universal had declined coverage for the wrongful death suit, it was potentially responsible for coverage because, absent financing, the car arguably belonged to the dealership while in the driver’s possession.

A three-count suit was filed against Universal for (i) declaratory relief; (ii) breach of contract; and (iii) bad faith. As to the count for a declaratory relief, the trial court entered an order declaring that the driver was an insured under Universal’s policy. Although the counts for breach of contract and bad faith remained pending, Universal filed an appeal. The second district dismissed the appeal without reviewing the merits explaining that “[b]ecause the amended complaint reflects that the three counts are based on the same facts and are intertwined, … allowing an appeal of the declaratory count at this stage would foster impermissible piecemeal review.”