This is one of a series of articles originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 22, #22 (March 26, 2009).
[Editor’s Note: Alan J. Nisberg is a partner with the law firm of Butler Weihmuller Katz Craig LLP with offices in Florida, North Carolina and Alabama. He is an experienced trial and appellate lawyer, active in the firm’s extra-contractual, class action and coverage departments. This commentary, other than the quoted material, are the author’s opinions – not the opinions of Butler Weihmuller Katz Craig LLP nor Mealey’s Publications. Copyright 2009 by the author. Responses are welcome.]
“I do not believe that it is acceptable for the Court to merely say that bad faith is a jury question. It is the Court’s responsibility to have logical, objective standards ….”1
Supreme Court of Florida
Justice Wells (dissenting)
Insurance companies, like the rest of us, sometimes make honest mistakes. More often than we like, those mistakes result in a breach of the insurance policy. However, an honest mistake is not the equivalent of “bad faith.” Often mistakes are made despite good intentions and diligent efforts of insurance representatives to do the right thing. Where the insurance company gives its level best to meet its good faith obligations to the insured, justice requires that policyholders be held to the insurance contract for a remedy – and prohibited from suing for extra-contractual damages. However, not everyone agrees. Claimants frequently decry “bad faith!” and file lawsuits for damages beyond the insurance contract. Extra-contractual damages may be awarded by an empathetic jury even where the insurer has been honest and reasonable in its approach to the claim handling.
Generations of anecdotal vignettes characterizing the insurance industry as an “evil empire” have resulted in laws designed to protect ordinary citizens against the evil ways of the powerful insurance industry. Consumer advocates were very successful in lobbying every branch of government to protect us from misconduct by the insurance industry. The executive branch of each state regulates the business of insurance and disciplines insurers for improper conduct. Our judicial and legislative branches have formulated the modern day tort of insurer bad faith. While intentional wrongdoing is repugnant to our societal norms, mores and public policy, intentional misconduct by insurers is the exception, not the rule in contemporary society. Nonetheless, bad faith litigation is prolific.
In addition to government intervention, the plaintiffs’ bar has been aggressive in litigating against insurance defendants for decades. Undoubtedly, this has had an impact on insurance industry behavior and the implementation of policies and procedures to ensure best practices. However, one reasonably may question the true motivation behind most of today’s bad faith litigation. Attorneys specializing in the representation of policyholders continue to develop new strategies every day intended to artificially force insurance companies to make mistakes. The bad faith “set up” of an insurance company is designed to give claimants limitless recovery for their losses.2 One could persuasively argue that setting up an insurance company to make mistakes that they would not otherwise make in order to force exposure beyond the insurance policy limit is inequitable.
Florida’s judiciary, however, has declined to address this behavior. The reason is that strategies initiated by plaintiffs’ legal counsel effectively may continue to assist regulators, legislators and judges in policing the claim handling policies and practices of the insurance industry. The Supreme Court of Florida has opined that the bad faith “set up” is not likely to lead to increased premiums for consumers and will continue to have “a beneficial effect on the handling of claims.”3 Therefore, the courts have effectively condoned a legalized form of extorting the insurance industry based on the perceived collateral benefits to the consumer. At the same time, almost every bad faith case that does not settle is forced to a jury trial. Requests for summary adjudication of bad faith actions are frequently denied. Florida’s high court views this as “beneficial.”
What can an insurer do to protect itself from overzealous litigation? Insurers have many tools at their disposal to block overreaching insurance claims. Policy limits, suit limitation clauses and conditions to coverage may be invoked. Insurers may deny claims for fraud, intentional loss, concealment of material information, and failure to cooperate. Insureds may also be subject to criminal prosecution for attempts to commit insurance fraud. However, most of the insurance company’s strategies to address an insured’s misconduct relate only to the contract claim, not allegations of bad faith. The most effective way to defeat a baseless bad faith claim is by filing a motion for summary judgment. This is easier to win in some jurisdictions than others.
Whether an insurer may summarily end an extracontractual claim is often dependent on where the lawsuit is pending. The universal standard in every state in the nation is whether the insurance company acted reasonably. However, the way this standard is applied differs from one state to the next. In some states, the insurer’s claim decision only has to be justifiable – it does not have to be correct. If it is “fairly debatable” that the claim decision may have been a reasonable one, then there is no bad faith. Summary judgments in favor of an insurer on allegations of bad faith come with some degree of frequency in these jurisdictions. In the past year alone, reported decisions applying the “fairly debatable” standard have granted or affirmed summary judgments in favor of insurance companies in California, Iowa, Kentucky, Mississippi, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania and Washington.4
In other states, where the insurer may be held liable for “bad faith” even if it had a reasonable basis for its claim decision, summary judgment is still possible but considerably more difficult to come by.5 In Florida, where consideration of the “totality of the circumstances” is the standard, summary judgment for the insurer does not come with frequency. This paper reviews the reported summary judgments for insurers in bad faith cases in 2008-2009 and compares the results to the experience in Florida.
1. Summary Judgments
In most of these United States, the judiciary applies a “fairly debatable” standard. Under this standard, an insurance company cannot be held accountable for “bad faith” unless it had no reasonable basis for its claim decision. If it is “fairly debatable” that the insurer had a valid reason to deny benefits or delay processing of a claim, then there is no bad faith. Thus, in a purely “fairly debatable” jurisdiction, an insurer has the right to be wrong so long as it had a reasonable basis for its actions.
In Hafiz v. Metropolitan Life Insurance Co.,6 the United States District Court recognized as “settled law in California” that an insurer denying or delaying the payment of policy benefits due to a genuine dispute over a possible misrepresentation in the insurance application is not liable in bad faith even though it ultimately might be liable for breach of contract. In granting summary judgment in favor of the insurer, the court noted that “where an objectively reasonable basis for denial of a claim actually exists, the insurer cannot be held liable for bad faith as a matter of law.”
In Michael v. Nuckolls Concrete Services, Inc.,7 the Court of Appeals of Iowa held that to succeed on a motion for summary judgment the insurer must demonstrate that it had a reasonable basis for denying or delaying payment of a claim. In Michael, a workers’ compensation insurer initially authorized medical treatment but eventually found ongoing treatment to be unnecessary. Michael sued the insurer for bad faith denial of continued medical care. The insurer filed a motion for summary judgment and won. The Iowa court held that if the claim can be disputed on any logical basis, the “fairly debatable” standard is met. Summary judgment under this standard did not require the court to weigh the evidence that was available to the insurer, but only to decide whether evidence existed to justify denial of the claim.
In Nautilus Insurance Company v. Cassady,8 an employee was seriously injured on a construction site during the tear down and removal of a shed on the property. The United States District Court (applying Kentucky law) found that the commercial general liability insurer who challenged coverage based on a “debatable” or “reasonable” interpretation of its demolition exclusion in the policy was entitled to summary judgment on the allegations of bad faith. The United States Court of Appeals affirmed summary judgment in favor of the insurer.
In State Farm Mutual Automobile Insurance Company v. Estate of Blanchard,9 Blanchard died from injuries sustained in a single car motor vehicle accident. He was a passenger in a vehicle negligently operated by the driver who had no automobile liability insurance at the time of the accident. Blanchard presented a claim for medical payment benefits and uninsured motorists coverage. The insurer expressed concerns regarding coverage, because Blanchard was not clearly an insured relative whose primary residence was with the named insured at the time of the accident. Two different reasonable views of the policy language were posited. Ultimately, the court found coverage, rejecting the insurer’s policy interpretation. However, because the insurer’s unsuccessful policy interpretation was a reasonable one, the court (applying Mississippi law) granted the insurer’s request for summary disposition of the bad faith claim.
In Esch v. State Farm Mutual Automobile Insurance Company,10 the Nebraska appellate court affirmed a summary judgment in favor of the insurer in a bad faith claim. The action involved a potentially fraudulent first-party claim for property damage to an allegedly stolen and burned automobile. Viewing the evidence that was available to the insurer at the time of the claim, the insurer had good reason to deny the suspicious claim even though it did not have enough information to “prove” that the insureds had caused the destruction of their vehicle. The insurer reasonably inferred from the initial facts that the insureds had engaged in concealment or fraud. The court declined to consider whether the insurer exercised the proper amount of care in investigating the insureds’ claim because there was an “arguable basis” to deny the claim. Where there is an “arguable basis” to deny the claim, a bad faith cause of action fails as a matter of Nebraska law regardless of the manner in which the investigation was conducted.
Similarly, in Newman v. State Farm Fire and Casualty Company,11 the United States Court of Appeals affirmed summary judgment in favor of an insurer on a bad faith case based upon its denial of a fire loss claim. A legitimate dispute existed about the cause of the fire. Under Oklahoma law, if there is a legitimate dispute about coverage, an insurer’s decision to refuse to pay a claim or to litigate a dispute is not a breach of one’s duty of good faith where the insurer’s position is reasonable and legitimate. The court held that the decisive question was whether the insurer had a good faith belief that there was a justifiable reason for withholding payment under the policy. Since there was evidence indicating that the fire was due to arson, no reasonable jury could find the insurer’s investigation and evaluation of Newman’s fire claim to be unreasonable.
In Vogias v. Ohio Farmers Insurance Company,12 the trial court entered summary judgment in favor of an insurer on a bad faith claim because the insured could not oppose the motion with evidence tending to show that the insurer had “no reasonable justification” for refusing to pay the claim. In Ohio, to grant a motion for summary judgment in favor of the insurer on the bad faith claim, the court must determine (when viewing the evidence in the light most favorable to the insured) that the claim was reasonably justified based on either the status of the law at the time of the denial or the facts that gave rise to the claim. Based on suspicious circumstances surrounding the insured’s jewelry theft claim and the insured’s unilateral termination of an examination under oath before the insurer could obtain substantive information crucial to recovery of insurance benefits, the Ohio appellate court affirmed the summary judgment.
In Bottke v. State Farm Fire and Casualty Co.,13 the United States District Court granted summary judgment in favor of an insurance company that disputed the scope of necessary repairs to restore Plaintiff’s property following a water leak. The insured alleged that the insurer engaged in bad faith by misrepresenting information to the contractor that inspected the loss site. Recognizing that under Pennsylvania law the essence of a bad faith claim is the denial of benefits without good reason, the court held that an insurer is entitled to summary judgment if it can show a “reasonable basis” for its actions. The supposed misrepresentation by the insurer to its contractor was that there was only one leak, even though there were multiple leaks in the house. Ultimately, the United States District Court found this to be unpersuasive in light of the complete and thorough investigation by the contractor.14
In Whitmore v. Liberty Mutual Fire Insurance Company,15 the court granted summary judgment under Pennsylvania law in favor of the insurer on a bad faith claim involving policy interpretation. The issue was whether the insurer’s pollution exclusion applied to the spill of heating oil in the insureds’ home. Even though the court found the pollution exclusion to be inapplicable to the spill of heating oil in the insureds’ home, this was not sufficient to establish bad faith by the insurance company. Pennsylvania law does not allow for the finding of bad faith when an insurer’s conduct is in accordance with a reasonable (albeit incorrect) interpretation of the insurance policy. Acknowledging that several published decisions referred to heating oil as a pollutant, the court determined as a matter of law that the insurer’s interpretation of the pollution exclusion was not “wholly, unreasonable or reckless.” Therefore, the court granted the insurer’s motion for summary judgment on the bad faith claim.
In Shepard v. Foremost Insurance Company, Inc.,16 a United States District Court (applying Washington law) also granted summary judgment for an insurer on a bad faith claim based on policy interpretation. The insured’s boat filled with water. The insurance company hired an expert who determined that the flooding was caused by rust to the engine. Following the insurer’s denial of the claim based on an exclusion for losses caused by rust, the insured obtained a competing expert opinion which created a genuine issue of material fact as to whether the exclusion applied to this loss. As a result of the competing expert opinions (and, thus, the applicability or inapplicability of the pertinent exclusion), the policyholder could not show that the insurers’ denial was “unreasonable, frivolous, or unfounded.” Thus, the court denied cross-motions for summary judgment on the contract claim, but granted summary judgment on the bad faith claim for the insurer.17
In Knoepfler v. Guardian Life Insurance Company of America,18 a New Jersey case involving interpretation of the insurance policy, the insurer denied disability benefits and moved for summary judgment on the bad faith claim, arguing that the action was barred by the contractual suit limitation clause. In New Jersey, a first-party claimant who is unable to obtain summary judgment on the breach of contract claim is not entitled to assert a claim for bad faith refusal to pay.19 The United States District Court held that there were genuine issues of disputed fact on the underlying breach of contract claim, requiring summary judgment in favor of the insurance company on the bad faith count. The existence of an arguable basis for the insurer’s claim decision precluded the insured’s action for bad faith.
Most of the cases discussed above were claims of first-party bad faith, but the “fairly debatable” standard often leads to summary judgment where the claim decision relies on an underlying third-party tort action.20
Nonetheless, it is not a foregone conclusion that the courts will apply the same standard to first-party and third party bad faith cases. For example, in a recent New Jersey appellate decision, Williams v. State Farm Indemnity Company,21 the court questioned whether the “fairly debatable” standard should apply to a bad faith case arising out of the handling of a third-party liability claim.22 The Williams court proposed that an insurer should not be entitled to summary judgment simply because it is “fairly debatable” that the insurer acted in good faith when failing to settle a bodily injury liability claim brought against its insured. Instead, the court essentially suggested just the opposite. If it is fairly debatable that the insurer acted in bad faith, then it should go to the jury.23 This proposed standard, although not expressly adopted for third-party bad faith actions in Williams, is akin to Florida’s “totality of the circumstances” standard discussed below.
2. No Summary Judgment
Of course, summary judgment in a “fairly debatable” jurisdiction is not always available to an insurer asserting that there is an arguable basis for denying a claim. The question of reasonableness of the insurer’s decision still may be a question of fact. For example, in Burgess v. Allstate Insurance Company a policyholder brought a claim for hurricane damage to her home. The parties disagreed on the amount of the loss. The insurer contended that the policyholder’s assertion of bad faith claim handling should be precluded by summary judgment because there is a continuing reasonable dispute over the extent and amount of property damage. The asserted that it had already paid the undisputed amounts, leaving only questionable claims for determination. In response, the policyholder contended that the advance payments were based on “absurdly low estimates” while ignoring expert reports provided by the homeowner. United States District Court (applying Louisiana law) found the issue to be “simply too close to call” and left the question of whether the dispute over the scope of damages was reasonable to the fact-finder at trial.25
In Guajardo v. AIG Hawaii Insurance Company, Inc., the Supreme Court of Hawaii addressed whether the insurer engaged in a reasonable interpretation of its policy. The case involved a policyholder who crossed the street and was struck by a van causing severe injuries. In an effort to protect its own subrogation rights, the insurer refused to tender underinsured motorists benefits. The insurer argued that its policy required the insured to pursue the tortfeasor to judgment in order to protect those subrogation rights and the insured should not have accepted a policy limits bodily injury liability settlement. On appeal, the question was whether the insurer’s interpretation of the policy was reasonable. Under Hawaii law, conduct based on an interpretation of the insurance contract that is reasonable does not constitute bad faith.27 The Hawaii Supreme Court found that there was a genuine issue of material fact as to whether the insurer’s interpretation of its underinsured motorist policy was reasonable, and remanded the case for a jury trial on the issue of bad faith.
Florida’s standard for determining whether an insurer acted in bad faith is based on the “totality of the circumstances.”28 This standard proves to be a greater challenge to insurance companies hopeful to get their motion for summary judgment granted in a bad faith case. The Supreme Court of Florida has opined that “the issue of bad faith is ordinarily one for the jury.”29 Of course, the complete lack of evidence of bad faith is always a basis for summary judgment.30 However, where matters such as reasonable diligence and ordinary care are material in determining bad faith, it is traditionally an issue for the fact finder to decide.31
1. No Summary Judgment
In the first-party context, in Paz v. Fidelity National Insurance Co.,32 a summary judgment favorable to the insurer was reversed where the insured demonstrated that there was a genuine issue of fact as to whether the insurer intentionally delayed or avoided payment. The Florida intermediate appellate court reversed summary judgment based on evidence of the insurer routinely demanding mediation and arbitration as a means of delaying or avoiding payment. The court did not consider whether the insurer had a reasonable basis for demanding alternative dispute resolution in that case.
In the third-party bad faith context, Florida’s appellate courts have reversed summary judgments that favored insurance companies where the jury could find that “a reasonably prudent person faced with paying the entire judgment would have settled” under disputed material facts.33 For example, in Farinas v. Florida Farm Bureau General Insurance Company,34 the appellate court held that the question of reasonableness of the insurer’s decision to settle with some claimants and not others precluded summary judgment on the bad faith claim.35 Similarly, in Robinson v. State Farm Fire & Cas. Co.,36 the appellate court held, in a case involving clear liability and damages in excess of policy limits, that the insurer’s “reasonable and legitimate” basis to deny coverage was not dispositive of an action for bad faith failure to settle a claim against its insured.
2. Summary Judgments
The only reported decisions in Florida in which an insurer has successfully moved for summary judgment to foreclose a bad faith action based on the reasonableness of its own conduct is where the insured failed to provide any evidence whatsoever of unreasonable conduct.37 All other Florida summary judgments in favor of insurers in bad faith cases have been on technical grounds. For example, first party cases may be subject to summary judgment where the claimant has failed to comply with statutory conditions precedent to recovery. In Florida, first-party bad faith is impermissible unless it meets the requirements of Florida’s bad faith statute.38 Failure to provide notice to the insurer of the misconduct and to give the insurer an opportunity to cure it is fatal to a first-party bad faith lawsuit.39 Notification to the insurance company that lacks sufficient specificity to give the insurer a reasonable opportunity to remedy the problem may entitle the insurer to summary judgment on the bad faith action.40
In certain third-party circumstances, Florida courts also have concluded as a matter of law that an insurance company could not be liable for bad faith.41 For example, in State Farm Fire & Casualty Co. v. Zebrowski,42 the Supreme Court of Florida affirmed a summary judgment in favor of the insurer, because Florida’s bad faith statute did not create any duty of the insurer to a third-party claimant in the absence of an excess judgment.43 In Gallina v. Commerce and Industry Insurance,a United States District Court noted that Florida has only three defined exceptions to the general principle that an excess judgment is an essential element of any third-party bad faith claim: (1) if the insurer denies coverage and refuses to handle the insured’s defense; (2) if the insurer offers to defend the insured under a reservation of rights to deny coverage; or (3) if the insurer and the third party claimant stipulate to try the bad faith case before trying the underlying negligence claim. The Gallina Court entered summary judgment in favor of the insurer on both the breach of contract and bad faith claims, finding no excuse for the insured’s failure to comply with the policy requirement that it obtain a determination of damages either with the insurer’s consent or after a trial and judgment.45
Just nine days later, in Perera v. USF&G, the United States Court of Appeals certified two questions to the Supreme Court of Florida: (1) whether a bad faith action can be maintained when there is no excess judgment against the insured; and (2) if so, then whether a bad faith action can be maintained when the insurer’s actions never resulted in excess exposure to the insured. Currently unresolved under Florida law, these certified questions highlight the possibility of an insurer’s entitlement to summary judgment in a bad faith action when the insured settles the underlying liability action without consent of the insurer and/or fails to demonstrate that there would have been exposure to an excess award.
Depending on the coverage language of the policy, an insurer may also obtain summary disposition where the insurer perfects a settlement within policy limits. For example, in Shuster v. S. Broward Hospital District Physician’s Professional Liability Insurance Trust, the Florida Supreme Court concluded that an insurer could not be liable for bad faith where it settled within policy limits and the policy provided that it had the authority to settle any claim “as it deems expedient.”
In addition, settlement of an underlying liability action may extinguish a bad faith case.48 For example, in Federal Insurance Company v. National Union Fire Insurance Company of Pittsburgh, P.A.,49 the United States Court of Appeals reversed an order which denied summary judgment to a primary insurer in a bad faith claim brought against it by the excess insurer. The excess insurer sued the lower tier insurer for failure to timely settle the liability claim. However, a settlement was procured which satisfied the underlying judgment and eliminated the possibility of excess exposure to the insured. Finding that the excess insurer had no right to a bad faith cause of action as a matter of law, the Eleventh Circuit held that the primary insurer was entitled to summary judgment.
In most jurisdictions, insurers are protected from frivolous bad faith lawsuits when they make honest mistakes. In some jurisdictions, however, any imperfection in claim handling – even if it is based on sound reasoning – may force protracted bad faith litigation. While there are some cases likely to obtain summary judgment in the “totality of the circumstances” jurisdictions, a jury trial more commonly becomes the only option. Forcing insurers to a bad faith trial usually means expensive litigation, invasive discovery, distraction of personnel, disruption of business activity, and potential exposure to significant verdicts by jurors who too frequently give their personal sympathy and the benefit of the doubt to insureds. Inequitable settlements usually result. By refusing to address the inequity of contrived lawsuits brought by insureds, and by permitting plaintiffs’ legal counsel to hold the insurance industry hostage to protracted bad faith litigation, the judiciary in Florida has overlooked the impact this ultimately may have on consumers. Skyrocketing insurance premiums and the flooding of our court dockets with unnecessary litigation should be a jumping off point for a more discerned look at Florida’s bad faith law.
In jurisdictions like Florida, the courts have thus far declined to address the impact of protracted bad faith litigation on the insurance industry, on the court, and ultimately on the consumer. Lobbying for legislative recognition of the problem and more thoughtful appeals to the judiciary based on empirical data may be necessary to bring about change.