Under Florida law, must a policyholder first prevail on a breach of contract action against the insurer before a bad faith claim may be filed? No, said a majority of the Florida Fourth District Court of Appeal, en banc (the entire court, rather than just a panel of selected judges) in Cammarata v. State Farm Florida Ins. Co., So.3d, (Fla. 4th DCA, September 3, 2014). This decision reversed a lower court ruling that the bad faith claim was not ripe and granted summary judgment for the insurer. 

Background 

The insureds sustained damages to their home as a result of Hurricane Wilma in October 2005, and filed a claim for benefits under their homeowners’ policy. The insurer responded that it had inspected the home, estimated the amount of damages to be lower than the policy deductible and owed no payment to the insureds as a result.

The insureds then requested the insurer to participate in the policy’s appraisal process. The insureds’ appraiser submitted a damage estimate that was higher than the policy deductible. The insurer’s appraiser submitted a damage estimate that was lower than the policy deductible. 

Both the insurer and the insureds filed a petition requesting that the circuit court appoint a neutral umpire pursuant to the policy. The court appointed the umpire, who issued a damage estimate in an amount lower than the insureds’ appraiser’s estimate but higher than the insurer’s appraiser’s estimate. The estimate was higher than the policy deductible.

The insurer’s appraiser agreed to the umpire’s damage estimate, and the insurer paid the insureds the umpire’s damage estimate minus the policy deductible.

Proceedings

Before the umpire was appointed, the insureds filed a notice of violation pursuant to section 624.155, Florida Statutes (2011), which reads in pertinent part (emphasis added):

624.155. Civil remedy

(1) Any person may bring a civil action against an insurer when such person is 

damaged:

… (b) By the commission of any of the following acts by the insurer:

1. 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;

After the Circuit Court entered the agreed order dismissing with prejudice the parties’ petitions to appoint a neutral umpire, the insureds filed their action against the insurer for not attempting in good faith to settle their claim. The Circuit Court ruled that the bad faith claim was not ripe and granted summary judgment for the insurer. Thereafter, the insureds appealed.

The Court’s Analysis

On appeal, a majority of the Fourth District Court of Appeal reversed the Circuit Court decision granting the insurer summary judgment that the bad faith claim was not ripe. In so ruling, the court relied on two Florida Supreme Court rulings: Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So.2d 1289 (Fla.1991), and Vest v. Travelers Insurance Co., 753 So.2d 1270 (Fla.2000). In Blanchard, the Supreme Court ruled that:

The 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 … for failing to settle the claim in good faith does not accrue before the conclusion of the underlying litigation for the contractual … benefits.

However, the majority in Cammarata reasoned that “no language inBlanchard expressly states that an insured must have filed any breach of contract action before a bad faith claim accrues.” Instead, the court determined that “Blanchard’s references to the “underlying first-party action for insurance benefits” and “underlying litigation for the contractual … benefits” being “resolved favorably to the insured before the cause of action for bad faith in settlement negotiations can accrue” related only to the procedural context under which Blanchard arose.” (emphasis added).

The Fourth District cited Vest as evidence that its interpretation ofBlanchard was correct. In Vest, the Florida Supreme Court attempted to clarify its holding in Blanchard by stating that their “decision in [Blanchard] had to do with the timing of the bringing of causes of actions and not as to what claims could be pursued when a claim for bad faith ripened.” The Court went on to state that “Blanchard is properly read to mean that the “determination of the existence of liability … 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.” 

The majority in Cammarata concluded, based on its interpretation ofBlanchard and Vest, that the settlement in the appraisal process determined the existence of liability and the extent of the insured’s damages, and thus established the conditions precedent for a bad faith action. The majority opinion was troubling to four of the eleven justices who heard the appeal, one of whom outlined his concerns – and no doubt the concerns of the defense bar and insurance industry – in a separate concurring opinion:

Based on Vest’s controlling nature, I am compelled to concur in the majority opinion. I write separately to express my concern regarding the possible effect of the majority opinion.

In theory, the majority opinion would open the door to allow an insured to sue an insurer for bad faith any time the insurer dares to dispute a claim, but then pays the insured just a penny more than the insurer’s initial offer to settle, without a determination that the insurer breached the contract. Such a slippery slope would appear to conflict with the supreme court’s own warning in Vest:

We hasten to point out that the denial of payment does not mean an insurer is guilty of bad faith as a matter of law. The insurer has a right to deny claims that it in good faith believes are not owed on a policy.

In sum, the record here provides no basis indicating that the insurer breached the contract, much less failed to act in good faith to settle the claim. On the contrary, the record here indicates that the insurer merely exercised its rights under the contract’s agreed-upon dispute resolution process of appraisal. The insurer’s exposure should be at an end.

Practice Pointer

The key takeaway from Cammarata: In Florida, at least in the context of first-party claims, an affirmative ruling that the insurer has breached the insurance contract is not a prerequisite to the insureds filing a bad faith claim; rather, a cause of action for bad faith accrues once there has been a “determination” of liability for coverage and the extent of the insured’s damages. Such a determination need not occur in the formal setting of litigation or arbitration. As Cammarata instructs, a settlement of a disputed claim following a determination of liability and damages in an appraisal process will suffice.

Is review by the Florida Supreme Court a possibility? Yes, but unlikely. The only other appeals court decision to address this issue – Hunt v. State Farm Insurance Company, 112 So.3d 547 (Fla. 2nd DCA 2013) – reached the same result as the majority in Cammarata

With the bad faith landscape continuously expanding, insurers would be well advised to retain bad faith counsel early to evaluate and advise on the potential for extra-contractual claims.