Florida has a knack for being in the path of hurricanes. When a storm is on the horizon, Floridians busy themselves preparing their homes and commercial properties for impact. After a storm has passed, claims handlers and lawyers, in turn, busy themselves with the work that inevitably follows. Florida has been spared a major strike for a number of years now. But some of the claims resulting from the last barrage of storms in 2004 and 2005 are still working their way through the system. Recently, the Florida Supreme Court issued a decision in one of those claims that cleared the air with respect to some critical questions that arose in the aftermath of the 2004 and 2005 storm seasons.
On May 31, 2012, in a much-anticipated opinion, the Florida Supreme Court resolved five certified questions from the United States Court Appeals for the Eleventh Circuit in a case styled Chalfonte Condominium Apartment Association, Inc. v. QBE Insurance Corporation, Case. No. SC09-441. The case involves 2005 Hurricane Wilma damage sustained to a Boca Raton, Florida condominium property owned by the insured. Following the investigation and adjustment of its claim, the insured filed a declaratory judgment action seeking damages for breach of contract, breach of the implied warranty of good faith and fair dealing, and violation of the deductible disclosure provisions found in § 627.701(4)(a), Florida Statutes. The case proceeded to trial against the insurer resulting in a judgment, which forms the basis of the still pending appeal. Perhaps the most critical of the Eleventh Circuit’s certified questions involved the availability of a common law first party bad faith cause of action in Florida.
Florida Bad Faith Claims – A Historical Perspective
Florida courts have long recognized a common law cause of action for third party bad faith claims. In essence, a third party bad faith cause of action affords a remedy to an insured who has been exposed to liability for an excess judgment owing to the insurer’s failure to properly or promptly defend or settle the claim. This is, of course, in contrast to first party bad faith actions, which do not arise from injury to a third party. In a first party action, the insured asserts that its insurer acted in bad faith when it denied, delayed or underpaid a claim for the insured’s own injuries or losses.
In Boston Old Colony v. Gutierrez, 382 So. 2d 783 (Fla. 1980) the Florida Supreme Court enumerated an insurer’s duties in handling a third-party claim:
An insurer, in handling the defense of claims against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. For when the insured has surrendered to the insurer all control over the handling of the claim, ..., then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured... The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.
A third-party bad faith cause of action thus arises where the insurer allegedly violates the foregoing principles when handling the insured’s defense of an injured third party’s claims. Accordingly, Florida courts have long recognized a common law cause of action based upon third party bad faith. Because first party bad faith actions do not arise from the same circumstances, Florida courts have historically not recognized first party common law bad faith causes of action.
In 1982, the legislature re-enacted the Florida Insurance Code, codifying the duties enumerated in Boston Old Colony, and expanding upon those duties by incorporating parts of the new Unfair Insurance Trade Practices Act into the Code.1 As part of this effort, the legislature also enacted section 624.155, Florida Statutes, entitled “Civil Remedy,” which for the first time created a cause of action for first-party bad faith, and thus recognized the lack of a first party cause of action in Florida.2 This Civil Remedy statute became the only recognized first party bad faith cause of action in Florida.
Attempts to Re-Write Florida First Party Bad Faith History
Following the 2004 and 2005 storm seasons, the policyholder bar began attempts to broaden bad faith jurisprudence in Florida by utilizing a common law first party cause of action employed in other states, “breach of the implied warranty of good faith and fair dealing.” Policyholders rightfully identified numerous advantages with respect to this cause of action in Florida. First, if recognized, it could permit insureds to avoid the statutory 60 day “cure” period associated with the Civil Remedy statute. Specifically, providing an insurer with a Civil Remedy Notice of Insurer Violation (CRN) is a statutory condition precedent to bringing a bad faith cause of action under section 624.155 against that insurer. A CRN brings with it a 60 day “safe harbor” opportunity for insurers to cure the circumstances giving rise to the alleged violation, if appropriate. The recent use of the “implied warranty of good faith and fair dealing” cause of action, in some cases, permitted insureds to deny insurers this 60 day evaluation period by doing an end run around the statutory cause of action.
Further, Florida law is clear that a bad faith cause of action is premature until the insured prevails on its claim for benefits. Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So. 2d 1289, 1291 (Fla. 1991) (Under Florida law, an insured’s § 624.155 claim does not accrue until the insured prevails against its insurer on a claim for benefits under an insurance policy). Thus, Florida courts typically either dismiss or abate statutory bad faith causes of action where coverage actions are ongoing. This is sometimes referred to as the “bifurcation” requirement.
Because the “implied warranty of good faith and fair dealing” is often recognized (typically outside the context of insurance contracts) as part and parcel to a valid contract, insureds presented the argument that this cause of action could be prosecuted at the same time as a breach of contract/coverage action. In short, if such a cause of action were viable in the insurance context, it would permit insureds to obtain bad faith type discovery in cases where coverage had not yet been adjudicated. Bad faith discovery typically involves requests for materials and depositions relating to claims handling guidelines, underwriting guidelines, personnel files, among other items. This kind of intrusive discovery is, in Florida, typically not permitted in breach of contract or coverage cases where the insurance contract alone governs the rights of the parties. Fortunately, the Florida Supreme Court sunk this purported new common law cause of action in the Chalfonte decision.
The Chalfonte Decision
Critically, the Chalfonte decision clarified available bad faith causes of action in first party property cases. In its opinion, the Court held that Florida does not recognize a cause of action for “breach of the implied warranty of good faith and fair dealing” by an insured against its insurer. Rather, first party bad faith claims must be brought pursuant to § 624.155, Florida Statutes, Florida’s civil remedy statute. In so holding, the Court also declined the insured’s attempt to have the Court reconsider the application of the doctrine of “reasonable expectations” in the context of insurance contracts. Instead, the Court reaffirmed its longstanding position that the terms of an insurance policy define the scope of coverage, not the insured’s reasonable expectations.
Moreover, and in response to additional certified questions, after examining the legislative intent of § 627.701(4)(a) the Court also held that an insured may not bring a claim for failure to comply with the language and type-size requirements for deductible provisions as established in that section. Nor does an insurer’s failure to comply with that section render a non-compliant policy provision void or invalid as the statute itself does not provide for such a penalty. Finally, the Court held that an insured’s promise to pay benefits upon “entry of final judgment” does not waive the insurer’s procedural right to post a bond under Florida law pending an appeal of a lower court decision. After answering the certified questions, the Florida Supreme Court returned the case to the Eleventh Circuit Court of Appeals for further proceedings.
The Florida Supreme Court’s opinion in the Chalfonte case has provided some clarity with respect to available causes of action arising out of windstorm claims. When the winds recede from the next hurricane to hit Florida, Chalfonte will provide smoother sailing in the first party litigation surge that is sure to follow.