Bad Faith, Good Faith and the Florida Landscape

Florida has long recognised a third-party action for insurer bad faith, allowing an injured party to sue a tortfeasor’s insurer for bad faith at common law. However, the common law did not recognise a first-party action for bad faith by an insured against its own insurer. Florida enacted Section 624.155, Florida Statutes, creating a statutory cause of action allowing “any person” who is damaged by certain actions of an insurer to sue for bad faith and extended the duty of an insurer to act in good faith and deal fairly in instances where the insured seeks benefits under the policy in response to QBE Ins. Corp. v Chaflonte Condominium Apartment Ass’n., Inc., 94 So. 3d 541 (Fla. 2012).

The conduct for which the statute creates a private right of action includes, but is not limited to:

• violating certain provisions of the Unfair Insurance Trade Practices Act (the “UITPA”), Sections 626.9541(1)(i), (o), or (x), Florida Statutes;
• 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 his or her interests;
• making claim payments to insureds or beneficiaries not accompanied by a statement setting out the coverage under which payments are being made; or
• except as to liability coverage, failing to promptly settle claims, when the obligation to settle a claim has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

Admitted and non-admitted carriers alike must be mindful of the potential for bad faith liability and must have procedures in place to avoid the exposure. In fact, the need to establish and implement procedures for the adjustment of claims has never been more important. Recent legislative amendments require residential property insurers to evaluate and adjust claims more expediently, to produce any detailed written estimate prepared by an insurer’s adjuster, and to document and explain any revisions to the estimates. See Senate Bill 2-A (2022) and Senate Bill 7052 (2023).

As amended, Section 627.70131, Florida Statutes requires residential property insurers to respond to communications within seven days (reduced from 14), to provide a copy of any detailed estimate of the amount of the loss to the insurer within seven days, and to pay undisputed amounts owed within 60 days (reduced from 90) after receiving notice of the claim. The statute also significantly restricted the definition of “factors beyond the control of the insurer” which would justify or excuse an insurer’s untimely adjustment.

Importantly, the UITPA incorporates many of these timeframes and requirements. For example, the UITPA expressly states that it is an unfair claim settlement practice for an insurer to fail to “adopt and implement standards” to ensure proper claims investigations, to fail to “acknowledge and act promptly upon communications”, to fail to pay undisputed amounts owed under residential property insurance policies in a timely way, and to alter or amend an adjuster’s estimate without providing a detailed explanation of any changes which reduce the value of the estimate. See Section 626.9541(i)3., Florida Statutes.

The lead-in language to subsection (i)3 of the UITPA states that it is an unfair claim settlement practice for an insurer to engage in these actions “with such frequency as to indicate a general business practice”. However, even a single violation can give rise to bad faith exposure. Section 624.155(1), Florida Statutes states that: “[n]otwithstanding the provisions of the above to the contrary, a person pursuing a remedy under this Section need not prove that such act was committed or performed with such frequency as to indicate a general business practice.” Therefore, although a single instance may not constitute an “unfair claim settlement practice” under the UITPA, it may still give rise to a bad faith claim under Section 625.155, Florida Statutes.

Since 2022, the Gulf Coast of Florida has been impacted by four major hurricanes. In a catastrophe, resources are often stretched thin, and factors may arise that reasonably delay the claim process. In the past, these factors may have constituted “factors beyond the control of the insurer” and excused a delayed payment. However, under the new and narrow definition of that term, these circumstances will rarely excuse delayed payment.

Additionally, insurers are required to promptly produce any detailed estimate of the amount of the loss and to explain any revisions to that estimate which have the effect of reducing the estimate. There are many reasons why an estimate may need to be revised. However, revisions that reduce the estimate – regardless of how justified or well-intentioned they are – can invite scepticism and create confusion.

While many of these specific statutory requirements apply to residential property insurance claims, the concept of bad faith and the potential for bad faith liability exists across all lines of insurance. Now that Florida has repealed the “one-way” attorney fee statute which had historically provided a right to attorney fees in any action against an insurer, bad faith is one of the few remaining avenues for insureds and claimants to recover their fees. As a result, plaintiffs’ attorneys are more incentivised than ever to latch onto even seemingly technical violations as a basis for establishing bad faith liability and obtaining an award of extracontractual damages and attorney fees.

Reinsurance Concerns

The proliferation of bad faith insurance litigation over the last few years has likewise been a concern for reinsurers. Several legislative reforms are providing the necessary relief. Specifically, Florida law now provides that no action will lie until a named or omnibus insured or a named beneficiary has established that the property insurer breached the insurance contract through an adverse adjudication by a court of law and a final judgment or decree has been rendered against the insurer. Acceptance of an offer of judgment under or the payment of an appraisal award does not constitute an adverse adjudication.

The difference between an insurer’s appraiser’s final estimate and the appraisal award may be evidence of bad faith but is not deemed an adverse adjudication under this Section and does not, on its own, give rise to a cause of action under Section 624.1551, Florida Statutes. Before this legislative enactment, policyholders were able to bring a lawsuit alleging bad faith before there was a finding the insurance company breached the policy. This allowed insureds to use the threat of a bad faith claim as leverage in the underlying claim dispute, resulting in insurers and by extension, reinsurers, settling claims they may have otherwise sought to fight. With this leverage now gone, cedants can defend claims they believe are meritless without having to worry about fighting a bad faith claim at the same time.

A cedant being subject to a bad faith action is of concern to reinsurers, as reinsurance agreements typically contain wording that the agreement will cover extracontractual obligations and losses in excess of policy limits. Extracontractual obligations and losses in excess of policy limits are usually defined as liabilities or losses having been incurred because of, or arising from, the cedant’s handling of the claim, due to either the cedant’s failure to settle a claim within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith by the cedant in rejecting an offer of settlement or in the preparation or defence in the trial of any action against the cedant’s insured, or in the preparation or prosecution of an appeal consequent upon the action.

Reinsurers are also required to provide coverage under “follow the fortunes” or “follow the settlements” provisions. Under the “follow the fortunes” principle, a reinsurer is obligated to pay its share of a claim based on the same terms and conditions as the cedant settles the underlying claim. The reinsurer is obligated even if the cedant’s actions in handling the claim may be called into question. Imbued in every reinsurance transaction, however, is the concept that the cedant has a duty of “utmost good faith” or, uberrima fides. This generally requires a cedant to disclose all facts material to the risk to the reinsurer.

Courts have ruled that the “follow the fortunes” clause only binds the reinsurer where “the insurers have acted honestly and have taken all proper and businesslike steps in making the settlement” such as in the American Marine Ins. Group v Neptunia Ins. Co., 775 F.Supp. 703, 709 (S.D.N.Y. 1991) case (which quoted Insurance Co of Africa v Scor (U.K.) Reinsurance Co, [1985] 1 Ll. L.Rep. 312, 330 (C.A.). While there is no standard guidance as to what constitutes “proper and businesslike steps”, certain actions such as engaging coverage counsel, following counsel’s advice, retaining competent vendors to adjust claims, and engaging in timely and reasonable investigations would be viewed as proper claims handling activity.

Furthermore, mere errors in judgment and inadvertent mistakes by a cedant will not be sufficient to support a finding that the cedant breached its duty of utmost good faith. However, if a reinsurer can demonstrate that a cedant engaged in wilful misconduct, misrepresentation or fraud in connection with the claims process and/or its communications with the reinsurer, the reinsurer may be able to assert the cedant’s duty of utmost good faith was breached, and that the “follow the fortunes” principle need not be abided.

Political Impacts

Florida’s bad faith statutory structure and case law can of course be impacted every time the Florida legislature convenes. In 2023 the legislature passed, and the Governor signed, House Bill 837 which made a number of changes to the tort system in Florida, including bad faith actions. Significantly, this legislation created what has been dubbed a “safe harbour” for insurers by precluding bad faith actions against insurers when the insurer tenders the lesser of the policy limits or the amount demanded by the claimant within 90 days after receiving actual notice of a claim which is accompanied by sufficient evidence to support the amount of the claim.

Additionally, the legislation specifically allows for an insurer to use an interpleader action if multiple claims arise out of a single occurrence and the damages exceed the policy limits. Using this action would allow the insurer to tender policy limits to a finder of fact and absolve the insurer of bad faith exposure in the process. House Bill 837 also codified the existing common law principle that mere negligence alone is insufficient to constitute bad faith.

The Florida legislature is currently scheduled to convene in the 2025 regular session on 4 March 2025, and adjourn on 2 May 2025. It is widely anticipated that the Florida legislature will consider proposals altering the statutory structure that now exists for first and third-party bad faith actions, although the specifics of these proposals are unclear at this point. Whether or not these proposals will successfully pass the legislature and be signed into law in large part depends on some of the political developments in Florida.

The results of the 2024 general election have had a significant impact in the state. The Trump administration is pulling a number of Florida politicians into new roles at the federal level, creating a trickle-down impact at the state level. Special elections will be held in the near future for a number of federal and state offices including, but not limited to, the US Senate, several congressional seats, Florida’s chief financial officer, a number of state legislative seats, and potentially the office of the Governor of the State of Florida. The results of these changes will largely inform whether Florida’s laws regarding bad faith will remain as they are today.

Making Waves – Contractual Avoidance of Bad Faith and Use of “Utmost Good Faith”

Application of Florida’s bad faith statutes, although generally broad in reach, may be avoided in a first-party bad faith claim where the insurance policy was executed outside of Florida, pursuant to the doctrine of lex loci contractus. In the maritime insurance world, where transactions often involve global players, the parties may choose which substantive law applies if they are agreed to in an enforceable choice of law provision. This concept was recently solidified by the US Supreme Court “as a matter of federal maritime law, choice of law provisions in maritime contracts are presumptively enforceable” in the case of Great Lakes Ins. SE v Raiders Retreat Realty Co., LLC (Raiders Retreat), 601 U.S. 65, 76 (2024).

To enforce this choice of law provision, the party seeking enforcement must show there was “some rational basis” for choosing the law of a specific jurisdiction, and the chosen jurisdiction’s laws must not be in contravention of a controlling federal statute or in conflict with established federal maritime policy. However, courts are not allowed to second guess the wishes of the parties and substantial deference should be given. At least one federal trial court has suggested that a choice of jurisdiction is “rational” where the particular body of law is well developed, well known, and well regarded, even if none of the contracting parties have substantial connections to the jurisdiction. This was the case in Accelerant Specialty Ins. Co., v Z&G Boat and Jet Ski Rentals, Inc., 2024 WL 2939173 at *6 (M.D. Fla. June 11, 2024).

However regardless of which country or state’s jurisdiction applies, the principle of “utmost good faith” (uberrimae fidei) remains the mainstay of all maritime insurance transactions. The doctrine first developed out of necessity in the realm of maritime cargo insurance, where historically, and even to this day, underwriters do not have the resources to independently confirm information provided by an insured as to what a particular cargo consists of, how it is packaged, what its stated value may be, and under what conditions it is being transported prior to shipment. In these circumstances, maritime insurance underwriters must rely solely on the insured’s declarations.

The majority of federal circuit courts of appeal for the First, Second, Third, Eighth, Ninth and Eleventh Circuits have therefore established that, as a matter of federal law, any material non-disclosure by the insured allows the insurer to deny recovery and avoid the contract. The Eleventh Circuit, which governs actions arising out of federal courts in Florida, has even ruled that the doctrine, which embodies the “highest degree of good faith,” is the controlling federal rule, even in the face of contrary state authority. This was ruled in the case of Quintero v Geico Marine Ins. Co., 983 F.3d 1264, 1270 (11th Cir. 2020). Under uberrimae fidei, a material misrepresentation on a maritime insurance application is grounds for voiding the policy even if the misrepresentation is a result of a mistake, accident or forgetfulness. Furthermore, causation is not an element of the doctrine, and its application has been upheld, even if the subject of the misrepresentation had nothing to do with the loss. This ruling was handed down in the case of State Nat. Ins. Co. v Anzhela Explorer, L.L.C., 812 F.Supp. 2d 1326, 1358 (S.D. Fla. 2011). This stringent application appears to be limited to matters surrounding maritime insurance, as the same duty to act in “utmost good faith” may be avoided in the presence of inadvertence or unintentional mistake in a reinsurance context.

The almost uniform application of a doctrine established in England over 250 years ago by federal courts in the USA may seem harsh and incongruous in light of the UK’s shift to a less restrictive standard under the statutory obligation of “fair representation” of risks, which requires that representation be “substantially correct” and be provided in a “reasonably clear and accessible” manner to the insurer (see Section 3 of Chapter 4 of the UK Insurance Act, 2015). Despite this, federal courts in the USA have consistently established its stringent application even after the UK’s change in approach.

It is therefore interesting in the maritime insurance context that insurance carriers insuring maritime risks in Florida not only have the ability to choose a more favourable legal framework under which to operate if it is written into the policy, but may be able to impose the “highest degree of good faith” to avoid a policy if the insured has not disclosed material information.