When you purchase an insurance policy, your expectation is that you will be covered in unanticipated circumstances.  However, if your insurer ends up denying your coverage for a legitimate claim filed under a valid policy, the insurer might be acting in “bad faith” and you may be able to bring a claim against the insurance company. An insurer’s wrongful denial of coverage constitutes a breach of contract and an insurer that denies coverage on a mistaken but sincere belief that coverage does not exist will bear the risk of consequences.

Where the insurer fails or refuses to defend a claim against its insured that is covered under a valid policy, in the absence of any breach from the insured releasing the insurer from liability, the insured can take whatever steps are essential to defend itself from the claim such as entering into a settlement agreement.  Consequently, upon breach of the insurance contract, the insurer will not be permitted to rely upon the contractual provision proscribing the insured from settling the claim with a responsible party in order to relieve itself from liability.  Gallagher v. Dupont, 918 So.2d 342 (Fla. 5th DCA 2005).  However, merely because an insurer denies a claim or declines to pay an amount demanded by the claimant does not automatically result in a finding of bad faith. The insured individual must still establish that the actions of the insurer were actually made in bad faith. Dadeland Depot, Inc. v. St. Paul Fire Ins. Co., 945 So.2d 1216 (Fla. 2006).

The standard for evaluating bad faith claims is whether the insurer acted fairly and honestly toward its insured with due regard for the insured’s interests. General Star Indem. Co. v. Anheuser-Busch Co., Inc. 741 So.2d 1259 (Fla. 5th DCA 1999).  A court will determine whether an insurer has acted in bad faith in handling claims under a totality of the circumstances standard.  As such, all of the circumstances involved in the denial of a claim should considered when determining whether bad faith exists.  An insurer faced with coverage disputes will be evaluated on:

  • Whether the insurer was able to obtain a reservation of the right to deny coverage if a defense were provided
  • Efforts or measures taken by the insurer to resolve the coverage dispute promptly or in such a way as to limit any potential prejudice to the insureds
  • The substance of the coverage dispute or the weight of legal authority on the coverage issue
  • The insurer’s diligence and thoroughness in investigating the facts specifically pertinent to coverage; and
  • Efforts made by the insurer to settle the liability claim in the face of the coverage dispute.

Robinson v. State Farm Fire & Cas. Co., 583 So. 2d 1063, 1068 (Fla. 5th DCA 1991).  Some factors indicative of bad faith actions by an insurer include an insurer’s failure to properly investigate a claim, an insurer’s failure to settle within the deadline set by a claimant’s attorney, an insurer concealing from the insured the terms of the settlement offers, etc.  When faced with a bad faith claim, the insurer only has a limited period of time to make a decision on its course of action.  Furthermore, pursuant to Florida Statutes, section 627.426(2), a liability insurer is not permitted to deny coverage based on a particular coverage defense unless:

  1. Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery; and
  2. Within 60 days of compliance with paragraph (a) or receipt of a summons and complaint naming the insured as a defendant, whichever is later, but in no case later than 30 days before trial, the insurer:
    1. Gives written notice to the named insured by registered or certified mail of its refusal to defend the insured;
    2. Obtains from the insured a nonwaiver agreement following full disclosure of the specific facts and policy provisions upon which the coverage defense is asserted and the duties, obligations, and liabilities of the insurer during and following the pendency of the subject litigation; or
    3. Retains independent counsel which is mutually agreeable to the parties. Reasonable fees for the counsel may be agreed upon between the parties or, if no agreement is reached, shall be set by the court.

While Florida’s “bad faith” statute was created to protect the insured by encouraging quick and fair settlement of insurance claims, the one-sided duty of good faith imposed on the insurer has started to present issues for insurers who are generally attempting to settle claims.  Since the statute only addresses the insurer’s duty to act in good faith, it leaves open opportunities for insureds to exploit settlement opportunities in his or her favor.  Florida’s bad faith statute permits a civil action against an insurer if the insurer fails to settle a claim when, under all the circumstances, it could and should have settled. See Fla. Stat. § 624.155(1)(b)1.  The current disparity in Florida’s bad faith statute can be subjugated to create bad faith claims where they otherwise would not exist, such as attempting to prompt the insurer to commit a tort in order to recover damages in excess of the policy limits.  Ultimately, the claimant would attempt to recover an award above the policy amount, even in instances when the insurer may be seeking to settle in an appropriate manner.

One example of setting up a bad faith claim is to propose a settlement offer that would be extremely difficult for the insurer to comply with.  Knowing the difficulty of the insurer meeting the settlement demands, the claimant will wait for the insurer to fail, and then bring forth a bad faith claim.  In some circumstances the claimant may make a settlement offer containing an arbitrary acceptance deadline, before the insurer even has the opportunity to complete a full investigation of the claim. Then when the insurer is reluctant to immediately accept the claimant’s demands, a bad faith claim is filed. See DeLaune v. Liberty Mut. Ins. Co., 314 So. 2d 601 (Fla. 4th DCA. 1975).

Bad faith claims are significant when it comes to the recovery of damages.  This is because, absent a finding of bad faith, an insurer’s damages should only be limited to the coverage amount under the insurance policy.  Gov’t Employees Ins. Co. v. Robinson, 581 So.2d 230 (Fla. 3rd DCA 1991).  In other words, bad faith claims can give rise to increased damages above the policy cap. Irrespective of whether or not the insurer acted in good faith when denying the insurance coverage, the insurer will be liable for attorney’s fees and court costs where the claimant proves a wrongful denial of his or her claim.  Travelers Ins. Co. v. Rodriguez, 387 So.2d 341 (Fla. 1980).

While “bad faith” law was intended to aid insured individuals by encouraging quicker and fairer settlements of insurance claims, it is now ironically becoming increasingly difficult for insurers to willingly settle claims. Florida’s bad faith statute, while imposing a “duty of good faith” on insurers, does not impose that same duty on the insured.  However, factors such as unreasonable time restraints by the claimant have illustrated instances where an insurer can prevail.  Ultimately, it is up to the courts to evaluate the totality of circumstances and determine whether the wrongful denial of insurance coverage was made in good or bad faith.