The Florida Supreme Court’s opinion issued at the end of May 2012, tackled several issues of concern to Florida insurers, including the viability of a claim for breach of the covenant of good faith and fair dealing and the effect of an insurer’s failure to comply with certain statutory requirements on wording and type-size in its policy. The decision also upheld the right to bond an adverse judgment pending decision on the coverage issue. The state’s highest court’s opinion is a rare win for the insurance industry and merits careful review by any insurer doing business in Florida.
Analysis of the decision, QBE Insurance Corporation v. Chalfonte Condominium Association, Inc., 2012 Fla. LEXIS 1063, requires a brief historical review of the development of Florida bad faith law. Until the twentieth century, actions for breach of insurance contracts in Florida were treated the same as any other breach of contract action. As insurance took on a larger institutional role and liability policies, which included a duty to defend and right to control a case, began to replace traditional indemnity polices as the standard policy form, courts started distinguishing insurance contracts from other types of contracts. Courts held that insurers owed a duty to their insureds to refrain from acting solely in the insurers’ own interests in settlement. State Farm Mut. Auto. Ins. Co. v. LaForet, 658 So.2d 55, 58-59 (Fla. 1995).
Florida courts impose a duty on liability insurers to act in good faith when defending insureds against third-party claims, and courts recognize a common law cause of action for bad faith within the context of third-party actions. Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980). Third-party bad-faith actions involve claims “in which an insured sues his liability insurance company for bad faith in failing to settle a claim which ultimately results in a third-party judgment against him in excess of the policy limits.” Time Ins. Co. v. Burger, 712 So. 2d 389, 391 (Fla. 1998). Even though the alleged bad faith conduct occurred between an insurer and its insured, Florida courts also allowed the injured third-party (not a party to the insurance contract) to bring a bad-faith action directly against the insurer without requiring an assignment of the cause of action by the insured. See Thompson v. Commercial Union Ins. Co. of New York, 250 So. 2d 259 (Fla. 1971).
A bad-faith action for first-party claimants (i.e., the insured) did not arise until much later, though. For many years, Florida was among a few states which distinguished between an insurer’s duties regarding first-party and third-party claims. This was because the duty owed to a first-party claimant (the insured) was based on that legal relationship being one of “debtor and creditor.” Baxter v. Royal Indem. Co., 285 So. 2d 652, 657 (Fla. 1st DCA 1973). This changed in 1982, when the Florida Legislature enacted Fla. § 624.155, “designed and intended to provide a civil remedy for any person damaged by an insurer’s conduct.” Allstate Indem. Co. v. Ruiz, 899 So. 2d at 1124 (Fla. 2005).
Section 624.155, provides, in part, that “[a]ny person may bring a civil action against an insurer when such person is damaged [by an insurer] not attempting in good faith to settle claims when, under all the circum-stances, 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 . . .”. Thus, Section 624.155 created a statutory first-party bad-faith cause of action, as well as codified prior decisions authorizing a third party to bring a bad-faith action under the common law. Importantly, the statute establishes a precondition to a bad faith action, requiring that the insured and third-party must first file a notice with the Florida Department of Financial Services and give the insurer a 60-day cure period. It also created a bifurcated scheme, in which the insured and third-party must first obtain a favorable adjudication regarding coverage before bringing a suit against the insurer for bad faith.
Recently, there have been a spate of lawsuits where an insured attempts to obtain, in essence, the benefit of the Section 624.155 claim of first-party bad faith without the burden of the statute’s preconditions or bifurcation of the coverage claim and the bad faith claim. Insureds bringing a coverage lawsuit were including a claim for “breach of the covenant of good faith and fair dealing,” as distinguished from a statutory bad faith action. The benefit to the insured was that this placed additional pressure on the insurer to settle and, perhaps more importantly, arguably made the insurer’s claim file relevant and discoverable prior to adjudication of whether there was coverage for the claim.
The recent Chalfonte opinion put a stop to this trend. The Chalfonte case arose from a claim of loss resulting from Hurricane Wilma. Dissatisfied with its insurer’s investigation and processing of the claim, the insured filed a multi-count complaint in federal district court. Count One was for declaratory relief. Count Two was for breach of contract. Count Three was for breach of the covenant of good faith and fair dealing. Count Four was for violation of Fla. Stat. Section 627.701(4)(a) governing certain disclosure and typeface requirements for language in a policy affording property insurance. The district court dismissed Count Four, ruling that the statute offered no private right of action, and the case went to trial on the remaining claims. A jury returned a verdict for the insured and judgment was entered for $8,140,099.68, and reduced on motion to $7,237,223.88.
The insurer appealed the amended final judgment and posted a supersedeas bond of 110% as allowed by Federal Rule of Civil Procedure 62(d). The insured moved to enforce the judgment, notwithstanding the bond, claiming that the policy contained language which waived the insurer’s right to stay execution and obligated payment of the judgment amount within 30 days. The insured cross-appealed dismissal of the statutory claim and the denial of its motion to enforce the judgment. The federal appeals court certified the following five questions of Florida law to the Florida Supreme Court:
1. Does Florida law recognize a claim for breach of the implied warranty of good faith and fair dealing by an insured against its insurer based on the insurer's failure to investigate and assess the insured's claim within a reasonable period of time?
2. If Florida law recognizes a claim for breach of the implied warranty of good faith and fair dealing based on an insurer's failure to investigate and assess its insured's claim within a reasonable period of time, is the good faith and fair dealing claim subject to the same bifurcation requirement applicable to a bad faith claim under Fla. Stat. § 624.155?
3. May an insured bring a claim against an insurer for failure to comply with the language and type-size requirements established by Fla. Stat. § 627.701(4)(a)?
4. Does an insurer’s failure to comply with the language and type-size requirements established by Fla. Stat. § 627.701(4)(a) render a noncompliant hurricane deductible provision in an insurance policy void and unenforceable?
5. Does language in an insurance policy mandating payment of benefits upon “entry of a final judgment” require an insurer to pay its insured upon entry of judgment at the trial level?
In analyzing the first question regarding the viability of a non-statutory claim for breach of the covenant of good faith and fair dealing, the Florida Supreme Court reaffirmed the fact that Florida does not allow a common law first-party bad-faith action, and found that a claim for breach of the covenant of good faith and fair dealing is, in essence, indistinguishable from a claim for statutory bad faith. Accordingly, the Court answered the first certified question in the negative, explicitly ruling that “such first-party claims are actually statutory bad-faith claims that must be brought under section 624.155 of the Florida Statutes.” This response to the first certified question rendered the second certified question moot.
Analyzing the third and fourth certified questions involving the effect of an insurer’s violation of certain language and type-face requirements of Fla. Stat. § 627.701(4)(a), the Court reviewed the relevant legislative history, the language of the statute, and lower court cases. The court ruled that there is no private right of action for a violation of Fla. Stat. § 627.701(4)(a), and that, even though the insurer committed minor violations of the language and type-size requirement (in that it substituted a near synonym for the required word “Hurricane” and the type-face was slightly small than required), on these facts, the violation had no effect on the policy’s windstorm damage sub-limit. The ruling is not a clear victory for insurers facing a similar issue, because the ruling was based on that the insurer in Chalfonte “substantially complied with the statutory requirements” and the insured could not point to any actual harm from the violation, since the insured was, nevertheless, on notice. It remains to be seen whether Florida courts will hold that a noncompliant policy provision is void in cases involving more significant violations of the requirements of Fla. Stat. §627.701(4)(a) or other statutes requiring specific disclosures or type settings.
Analyzing the last certified question, the Florida Supreme Court refused to interpret the policy language cited by the insured in such a way as to trump the relevant rules of civil procedure. The court found that the rules provided for a stay on payment of a supersedeas bond and that neither the policy language nor any other action of the insurer constituted an explicit waiver of the right to such a stay.
On a practical level, one of the greatest impacts of the Chalfonte case will be felt in the scope of discovery sought and permitted in coverage litigation. Because coverage and bad faith claims are bifurcated in Florida, claims handling discovery is generally not permitted in the breach of contract phase. However, where novel theories such as those advanced in Chalfonte are litigated, the scope of discovery can be a great source of friction. By rejecting the viability of a claim of breach of implied duty of good faith and fair dealing (brought as an undercover statutory bad faith claim), the Florida Supreme Court in effect also rejected discovery beyond that likely to lead to the discovery of admissible evidence of breach of contract. Moreover, in its analysis of the federal and similar state rules of civil procedure regarding appeal bonds, the Florida Supreme Court safeguarded the ability of an insurer to stay execution of a large adverse judgment pending the outcome of an appeal on the issue of whether there is coverage for the judgment.