Insurer Exposure to Bad Faith Potentially Extended as Liability for Breach of Contract is No Longer Required
September 25, 2014
CASE LAW UPDATE
Dear Ladies and Gentlemen:
This correspondence is to advise you of a recent and extremely important bad faith decision from the Fourth District Court of Appeal which potentially extends insurance companies’ exposure to bad faith claims. In Cammarata v. State Farm Florida Ins. Co., 2014 WL 4327948 (September 3, 2014), the Fourth District enunciated essential elements for a bad faith claim including “1) the determination of an insurer’s liability for coverage and 2) the extent of damages, not an insurer’s liability for breach of contract.” Cammarata v. State Farm Florida Ins. Co., 2014 WL 4327948 (September 3, 2014).
FACTS AND PROCEDURAL HISTORY
This matter involved a lawsuit filed by an insured, Mr. Cammarata, against his insurance carrier, State Farm Florida Insurance Company (“State Farm”) alleging that the carrier acted in bad faith in handling his insurance claim. The trial court granted the insurance carrier’s motion for summary judgment, relying on Lime Bay Condo, Inc. v. State Farm Fla. Ins. Co. 94 So.3d 698 (Fla. 4th DCA 2012), and found that the bad faith claim was not ripe before the determination of liability for breach of contract. The trial court entered final judgment and the insureds appealed to the Fourth District Court of Appeal.
In the underlying lawsuit, the insureds claimed their property had sustained damages as a result of Hurricane Wilma in 2005. The insureds filed a claim with State Farm under their homeowner’s policy in September 2007. In October 2007, State Farm notified the insureds that after inspection of their home, their estimated amount for damages was lower than the policy deductible and as a result, State Farm did not owe them payment. The insureds requested the insurer to participate in the policy’s appraisal process and the insureds and State Farm identified their appraisers. The insureds’ appraiser submitted a damage estimate which was higher than the policy deductible. State Farm’s appraiser submitted an estimate which was lower than the policy deductible. The insureds and State Farm petitioned the court to appoint a neutral umpire and the circuit court appointed same. The umpire issued a damage estimate lower than the insureds’ appraisal estimate but higher than State Farm’s estimate, which was higher than the policy deductible. Thereafter, on October 27, 2009, State Farm agreed to the umpire’s damage estimate and in December 2009 paid that amount minus the policy deductible to the insureds. The court then entered an agreed order dismissing with prejudice the parties’ petitions to appoint an umpire.
The insureds then filed a bad faith action against State Farm pursuant to Florida Statutes section 624.155(1)(b) for not attempting in good faith to settle their claim. The complaint alleged that before the umpire was appointed, the insureds had filed a notice of violation pursuant to section 624.155(3)(a) and that State Farm failed to pay the damages or correct its violation within the statutory time period. State Farm filed a motion for summary judgment contending, inter alia, that because its liability for breach of contract had not been determined, the insureds’ bad faith action was not ripe and cited to the Fourth District Court’s opinion, Lime Bay Condo, Inc. v. State Farm Fla. Ins. Co. 94 So.3d 698 (Fla. 4th DCA 2012). The insureds relied on Trafalgar Greenacres, Ltd. v. Zurich American Insurance Co., 100 So.3d 1155 (Fla. 4th DCA 2012), in support of their argument that a court need not determine whether the carrier breached the contract before a bad faith action could be brought.  The insureds claimed that instead, the trial court need only determine coverage and the extent of damages for a bad faith claim case to ripen.
APPELLATE COURT DECISION
The Fourth District Court of Appeal reversed and remanded the trial court’s decision and held that a trial court need only determine an insurer’s liability for coverage and the extent of damages, and not an insurer’s liability for breach of contract, before a bad faith action becomes ripe. The court based its rationale on the evolution of the Florida Supreme Court opinions from Blanchard v. State Farm Mutual Automobile Insurance Co., 575 So.2d 1289 (Fla. 1991) to Vest v. Traveler’s Insurance Co., 753 So.2d 1270 (Fla. 2000). The court addressed each case in detail.
In Blanchard v. State Farm Mutual Automobile Insurance, 575 So.2d 1289 (Fla. 1991), the Florida Supreme Court held that an insured’s statutory bad faith cause of action did not accrue until the conclusion of the insured’s underlying action for benefits against the insurer. In Blanchard, the insureds made a claim with their insurance carrier, State Farm for Uninsured Motorist benefits. State Farm denied their claim and the insureds filed suit seeking to compel State Farm to perform under the insurance policy. The insureds obtained an excess verdict of its uninsured motorist policy limits and proceeded to file suit against State Farm for bad faith.
State Farm moved to dismiss the complaint, arguing that the insured had improperly split their cause of action by failing to bring their bad faith claim along with their coverage claim. On review, the Eleventh Circuit Court of Appeals certified to the Florida Supreme Court the following question: Does an insured’s claim…under section 624.155(1)(b)1, Florida Statutes for allegedly failing to settle the ..claim in good faith accrue before the conclusion of the underlying litigation for contractual benefits? In response, the Florida Supreme Court held:
[a]n 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. Absent a determination of the existence of liability…and the extent of the [insured’s] damages, a cause of action cannot exist for a bad faith failure to settle.
Id. at 1291.
In reviewing Blanchard, the Cammarata court stated that there was no language in the case which expressly stated that an insured must have filed a breach of contract action before a bad faith action accrues.
The court then reviewed Vest v. Traveler’s Insurance Co., 753 So.2d 1270 (Fla. 2000). In Vest the Florida Supreme Court found that an action for bad faith was premature until such time as the underlying insurance claim was decided. In Vest, the deceased was insured by Traveler’s Insurance Company (“Traveler’s”). The deceased’s wife, also insured with Traveler’s, filed a claim for Uninsured Motorist benefits and requested Traveler’s pay its $200,000.00 UM policy limits. Traveler’s failed to pay the UM benefits and the insured filed a Civil Remedy Notice with the Department of insurance. The insured then proceeded to file suit for breach of contract and bad faith. During the litigation, Traveler’s approved a settlement between the insured and the tortfeasor and also tendered its UM policy limits. Traveler’s filed a motion for summary judgment on the bad faith claim which was granted by the trial court.
On appeal, the Florida Supreme Court citing to Blanchard held that a cause of action for statutory bad faith “[was] premature until there [was] a determination of the existence of liability and the extent of the insured’s damages owed on the first-party insurance contract.” Id. The Vest court examined Brookins v. Goodson, 640 So.2d 140 (Fla. 4th DCA 1994), disapproved on other grounds 658 So.2d 55 in support of its position. In Brookins, the Fourth District held that the insurance carrier’s payment of the policy limits was sufficient to satisfy the requirement that the liability and damages in the underlying claim be determined for a bad faith claim to accrue. The insured in that case made a claim with his insurer for uninsured motorist benefits but the insurer failed to acknowledge coverage and failed to make an offer of settlement. The insured filed suit and sometime during the litigation, the insurer tendered its policy limits. The insured then brought an action for bad faith.
The insurer argued that an excess judgment was a prerequisite to a statutory bad faith action under section 624.155, Florida Statutes. The Fourth District disagreed and noted “[b]y settling for the policy limits, the insured has in effect conceded that the insured had a valid claim and the insured’s minimum value set at the amount of the policy limits. The settlement resolves the underlying litigation for contractual uninsured motorist benefits. It does not foreclose the bad faith claim.” Brookins, 640 So.2d. at 114. The Brookins holding was cited with approval by the Florida Supreme Court in Vest. See Vest, 753 So.2d at 1273-1274 (“[t]he payment of the policy limits by [an] insurer is the functional equivalent of an allegation that there has been a determination of the insured’s damages. It satisfies the purpose of the allegation to show that insured has a valid claim.”).
Based on the Vest decision and the Florida Supreme Court’s reliance on Brookins, the Cammarata court held that an insurer’s liability for coverage and the extent of damages, and not an insurer’s liability for breach of contract, must be determined before a bad faith action becomes ripe. The court held that the only prerequisites to a bad faith action are: (1) determination of the existence of liability and the extent of the insured’s damages and (2) the filing of a civil remedy notice of insurer violation under Florida Statutes 624.155(3)(a). These conditions may be established when a settlement determines the existence of liability and extent of damages. The damages do not need to be determined by way of litigation; instead a settlement is sufficient. In the present case, the parties’ settlement by the appraisal process satisfied the first two elements of the cause of action as the appraisal award constituted “a favorable resolution of an action for insurance benefits.” Cammarata, 2014 WL 4327948 at 6 (September 3, 2014). The Fourth District Court of Appeal found that the trial court erred in finding that the insureds’ bad faith claim was not ripe and reversed and remanded for reinstatement of said action. In so holding, the court receded from its decision in Lime Bay to the extent that it held that an insurer’s liability for breach of contract must be determined before a bad faith action becomes ripe even though the insurer’s liability for coverage and the insured’s damages have been determined by an appraisal award favoring the insured.
Although this is a first party case and is a pronouncement of only a single court of appeal, this case can potentially have a very wide impact on an insurance company’s exposure to bad faith claims in both the first-party and third-party context. In a first-party context, if this decision was applied to uninsured motorist coverage under an automobile policy, property damage coverage under a homeowners policy or any other first-party benefits, the rationale of the Cammarata court indicates that a bad faith suit can be brought once coverage and damages are determined without any determination of breach of contract. Thus, first-party claims which eventually are adjudicated or resolved whether by the court, appraisal, arbitration or some other process within policy limits, could potentially expose the insurance carrier to a claim for bad faith.
In a third-party context, the same rationale might be applied where the parties had a dispute over an evaluation of a claim and a civil remedy notice was filed but not resolved within the 60-day safe harbor period. If the case is later resolved and damages determined by way of settlement or judgment within the policy limits, the insurance carrier may still be potentially exposed to a claim for bad faith.
Our recommendation for insurance carriers going forward is to attempt to obtain a global release if settlement is reached that releases claims of negligent, improper, and/or bad faith claims handling whether under common law or by statute. We will continue to monitor this case and will prepare a subsequent update depending on whether the court’s decision is appealed.
We hope you find the above-referenced case helpful and insightful. Should you have any questions with respect to the foregoing, please do not hesitate to contact the undersigned at your earliest convenience.
Very truly yours,
 In Lime Bay Condo, Inc. v. State Farm Fla. Ins. Co. 94 So.3d 698 (Fla. 4th DCA 2012), the Fourth District Court of Appeal affirmed a trial court’s dismissal of a bad faith complaint holding that the trial court must first determine the insurance carrier’s liability for breach of contract and consider the significance of the appraisal award before a bad faith claim could accrue. Thus, the bad faith complaint was filed prematurely Id. The court began its analysis by noting that if a plaintiff brining a bad faith cause of action could not allege that there has been a final determination of liability and the amount of damages owed by the insurer, the bad faith cause of action was premature. In cases where a bad faith complaint is premature, the court can either dismiss the complaint without prejudice or abate the bad faith action until a determination of the insurer’s liability. In Lime Bay Condo, Inc., since the breach of contract case was still pending, the insured could not allege that there had been a final determination of liability.
 In Trafalgar, an insured filed a complaint for breach of contract against his insurance carrier. The insured invoked the appraisal process of the contract. The appraisal process resulted in an award closer to the amount of the insured’s damage claim. The insurer paid the award and moved for summary judgment on the breach of contract claim. The insured amended his complaint to add a count for bad faith against the carrier. The court granted both motions and the insurer then moved for summary judgment on the bad faith claim. The insurance carrier contended that since the court had granted its motion for summary judgment on the breach of contract claim, the insured did not obtain a favorable resolution on the breach of contract claim. The trial court granted summary judgment on the bad faith claim. Thereafter, the Fourth District Court of Appeals reversed holding that the appraisal award which occurred after the insured filed the breach of contract action was a favorable resolution so as to satisfy the necessary prerequisite to file a bad faith action.