Florida can get hot. It can get especially hot for an insurer dragged into a Florida court on a bad faith claim. Bad faith cases decided under Florida law have been among the least insurer-friendly decisions in the land. This article provides a historical perspective of the evolution of bad faith claims in Florida. It explores how the distinction between first- and third-party bad faith claims sculpted the law governing discovery in these cases. Finally, it reviews the current state of the law regarding discovery disputes in bad faith cases, more specifically, the applicability of the work product doctrine and attorney-client privilege to bad faith claims.

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 is exposed to liability for an excess judgment owing to the insurer’s failure to properly or promptly defend the claim.

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 action arises where the insurer allegedly violates the foregoing principles when handling the insured’s defense of an injured third party’s claims. Florida courts view an injured third party as the beneficiary of the bad faith claim, i.e., the real party in interest, akin to a “judgment creditor.”

See Thompson v. Commercial Union Ins. Co., 250 So. 2d 259, 264 (Fla. 1971). Accordingly, at common law, the injured third party – as well as the insured tortfeasor – can sue the tortfeasor’s insurer directly for third-party bad faith.

By contrast, first-party bad faith actions 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 injuries or losses.

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. Fla. Stat. § 626.9541.

The legislature also enacted section 624.155, Florida Statutes, entitled “Civil Remedy,” which created a statutory cause of action for first- and third-party bad faith. The insured tortfeasor and/or the injured third party can bring a statutory third-party bad faith claim.

The Discovery Distinction Between First- and Third-Party Bad Faith Claims: A Historical Drama in Three Acts 

Plaintiffs in bad faith actions invariably seek to discover the insurers’ litigation files, adjuster’s notes, claims handling manuals, and training manuals. Conversely, insurers seek to protect materials that reveal how they do business.

Under Florida law, an injured third party stands in the shoes of the insured and is therefore entitled to review an insurer’s claims and defense files, just as the insured is entitled to review all records relating to its representation. Thus, a plaintiff in a third-party bad faith case, seeking to review underlying claims and litigation files, usually can trump the insurer’s assertion of the work product doctrine and attorney client privilege, even if the injured third party brings the action directly against the insurer. There is an exception to this general rule: an insurer may successfully assert the attorney-client privilege with respect to communications between the insurer and separate counsel retained to solely represent the insurer’s interest. See Progressive Express Ins. Co. v. Scoma, 2007 Fla. App. LEXIS 6783 (Fla. 2d DCA 2007).

In contrast to third-party actions, insurers responding to discovery requests for claims files in first-party bad faith actions could historically assert the work product and attorney client privileges.

Act I – The First vs. Third-Party Discovery Distinction Is Born

In 1989, the Florida Supreme Court distinguished between the discovery available to plaintiffs in first- versus third-party bad faith claims in Kujawa v. Manhattan Life Ins. Co., 541 So. 2d (Fla. 1989). Reasoning that the relationship between insured and insurer in a first-party dispute is purely adversarial, the Court in Kujawa held that an insurer could invoke the work product doctrine and attorney client privilege in first-party bad faith litigation.

Act II – The First- vs. Third-Party Discovery Distinction Is Dead, or Is It?

In 2005, the Florida Supreme Court “reconsidered the wisdom” of its decision in Kujawa. In Allstate v. Ruiz, 899 So. 2d 1121 (Fla. 2005), the Court appeared to eviscerate the distinction between the discovery required from insurers in first-party claims versus in third-party bad faith claims. When considering whether the work-product doctrine should protect the insurer’s documents from discovery in a first-party bad faith case, the Court held:

... any distinction between first-and third-party bad faith actions with regard to discovery purposes is unjustified and without support under section 624.155 and creates an overly formalistic distinction between substantively identical claims.

Because the documents typically found in claims files are virtually the only direct evidence of how the insurer handled the insured’s claim, the Court held that all materials created before or on the date when the underlying dispute was resolved should be produced in a first-party bad faith action, just as they are in a third-party action. Material pertaining in any way to coverage, benefits, liability, or damages is currently discoverable in a Florida bad faith action. Thus, at least with respect to the work product privilege, Ruiz removed the distinction between the discovery that insurers must provide in first- and third-party bad faith actions.

However, the Court was divided on this point. Two Justices, concurring in part and dissenting in part, wrote:

In my opinion, there continue to be distinctions for purposes of discovery between first-party and third-party bad faith actions ... That difference is that in the claim on the policy, the insured and insurers are in an adversarial relationship, as this Court stated in Kujawa. The insurer must have the right to defend the claim without work product of the attorney for the insurer being subject to discovery while the claim remains pending.

Plaintiffs subsequently have used Ruiz to obviate the attorney-client privilege as well as the work product doctrine in bad faith cases and to justify broad and burdensome discovery requests. Moreover, some federal courts have interpreted Ruiz broadly and held that, under Florida law, insurers may not assert the attorney-client privilege in response to discovery requests for claims files in first-party bad faith cases. See, e.g., Cozort v. State Farm Mut. Auto. Ins. Co., 233 F.R.D. 674, 677 (M.D. Fla. 2005).

Act III – Developments Since Ruiz - The Attorney Client Privilege: Is Kujawa Still Alive?

After Ruiz, the debate in bad faith discovery cases centered on the application of the attorney-client privilege in first-party bad faith claims. In XL Specialty Ins. Co. v. Aircraft Holdings, LLC, 929 So. 2d 578 (Fla. 1st DCA 2006), the Court held that Ruiz related only to the work product privilege, and did not apply to attorney-client communications in first-party bad faith cases. The court noted that the attorney-client privilege was not an issue in Ruiz and the Court therefore could not have ruled upon the application of that privilege. The XL court painstakingly discussed Kujawa and concluded that Ruiz did not recede from Kujawa’s holding that an insurer may assert the attorney-client privilege in a first-party bad faith action in response to discovery requests for claims files. Finally, the XL court certified to the Florida Supreme Court the question whether, after Ruiz, the attorney-client privilege no longer applies to insurers in first-party bad faith actions.

Although the Court expressly receded from Kujawa in Ruiz, XL demonstrates that the precise parameters of the Ruiz opinion have not been definitively ascertained. On March 7, 2007, the Florida Supreme Court heard oral argument in XL, presiding over a spirited discussion of the insurers’ protections against discovery in first- versus third-party bad faith claims. A decision is pending. The Court might comment on the distinction, if any, between the privileges insurers may assert in first- and third-party bad faith cases, and thereby clarify the state of Florida law. Meanwhile, claims managers should not expect that their files and attorney communications will remain confidential in any Florida bad faith litigation.