Florida appeals court broadens insureds’ ability to sue for bad faith

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When policyholders are disputing claims with their carriers, any denial of coverage may be perceived as “bad faith.” But there are specific actions or inactions under most state insurance laws that must occur (or not) before such a claim can be filed. And policyholders could believe that the procedural hurdles only make it more difficult to file the claim.

But now a Florida appeals court has issued a decision making it significantly easier for insureds to bring bad faith claims against their insurers.

The case

In October 2009, the home owned by Thomas and Joanne Demase sustained suspected sinkhole damage, which the couple reported to their insurer, State Farm Florida Insurance Company.

State Farm hired Geohazards, Inc., which confirmed the existence of sinkhole activity at the property and recommended certain repairs. The Demases performed the recommended repairs, which, they said, resulted in further damage to their home. Geohazards then re-inspected the home and made additional recommendations.

In August 2012, a neutral evaluator agreed there was sinkhole activity at the property and recommended further repairs. The Demases agreed to proceed with the neutral evaluator’s recommended repairs under protest.

However, in April 2013, State Farm hired MCD of Central Florida to inspect the property. In MCD’s opinion, there was no sinkhole activity affecting the Demases’ property. When the Demases persisted with their claim for insurance benefits, State Farm demanded additional documentation, inspections and examinations under oath. The Demases complied with all of these demands.

Related: Appeals court resurrects $5M bad faith lawsuit against insurance company

Time for a ‘cure‘

Following the procedures set out in Florida’s insurance law, on Aug. 27, 2014, the Demases served a civil remedy notice (CRN), alleging that State Farm had engaged in bad faith insurance practices by failing to promptly and properly investigate the claim, adjust the loss, and act with due diligence and good faith to resolve and pay the claim. The Demases demanded the immediate tender of “all insurance monies due and owing … that would reasonably place [them] back to their pre-loss condition.”

The Florida Department of Financial Services, which regulates insurance companies, accepted the CRN the same day, which began a 60-day period within which State Farm could “cure” its alleged wrongful conduct. State Farm paid nothing during the 60-day cure period, but on April 10, 2015 — 231 days later — it conceded that the Demases’ home could not be repaired and tendered the policy limits.

Was the case ‘ripe‘?

The Demases then sued State Farm for bad faith, alleging various violations of Florida law.

In response, State Farm moved to dismiss the complaint, relying on a 1991 decision (Blanchard v. State Farm Mutual Automobile Insurance Co.), which held that “an 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.” State Farm argued that before the Demases could file a claim for bad faith, they had to have some kind of favorable decision. For example, State Farm said, the Demases first had to go through the steps of obtaining an appraisal award, an arbitration award, or a judgment in an underlying breach of contract case, which they had not done.

The Demases replied that their bad faith action “ripened” — that is, was ready to be taken to court — when two conditions had been satisfied:

1. The insurer raised no defense that would defeat coverage; and
2. The actual extent of the insured’s loss had been determined.

They submitted that State Farm’s payment of the insurance policy limits after the expiration of the 60-day cure period satisfied those requirements, and was the “functional equivalent of a determination of liability – in other words … the payment established that [they] had a valid claim.”

The trial court dismissed the Demases’ complaint, reasoning that it “did not allege there had been a favorable resolution of an underlying civil action for insurance benefits against the insurer – whether in the form of a judgment, arbitration, appraisal, or ‘action on the contract.’” The trial court added that the Demases’ complaint also failed to allege that State Farm’s liability for coverage and the extent of damages had been determined.

The Demases appealed.

Related: 9th Circuit reduces $2.5M bad faith award against GEICO to $1M

The appellate court’s decision

The appellate court reversed, holding that an underlying action on the insurance contract was not required for there to be a determination of the insurer’s liability and the extent of the damages as a prerequisite to filing a statutory bad faith action. Instead, it ruled, an insurer’s payment of an insurance claim after the 60-day cure period constituted a determination of an insurer’s liability for coverage and extent of damages under Florida law, even when there was no underlying action.

In its decision, the appellate court explained that a statutory bad faith claim was “ripe for litigation” after:

1. A determination of the insurer’s liability for coverage;
2. A determination of the extent of the insured’s damages; and
3. The filing of the required notice.

The appellate court then said that “no language in Blanchard” expressly stated that an insured must have filed any breach of contract action before a bad faith claim accrued.

Litigation was “not the only means for an insured to obtain the determination of liability and the full extent of his or her damages,” the appellate court said. An insured, the appellate court added, may obtain a determination of the insurer’s liability and the extent of damages “by litigation, arbitration, settlement, stipulation, or the payment of full policy limits.” In other words, according to the appellate court, “only a determination of liability and a determination of damages” were needed before a bad faith suit could be filed.

Here, the appellate court found, the payment of the full policy limits after the 60-day cure period satisfied the requirement of a final determination of the insurer’s liability and damages. In obtaining a determination of liability and damages, the “key” was not the underlying breach of contract action, but rather, the payment by the insurer, the appellate court ruled.

The appellate court concluded that the Demases’ complaint adequately stated a cause of action. It reversed the trial court’s decision and sent the case back for further proceedings.

The case is Demase v. State Farm Florida Ins. Co., No. 5D16-2390 (Fla. Ct.App. March 29, 2018).

Editor’s Note: The appellate court, in this case, sent a clear message to insurers that are served with statutory notices providing 60 days for them to cure their allegedly wrongful conduct: Paying policy limits after the 60-day cure period has passed is enough to permit policyholders to sue for bad faith. This decision likely will increase the number of bad faith cases filed against insurers in Florida – and the number of instances when insurers pay policy benefits to their insureds before the 60 day cure period expires.

Related: 11th Circuit: Florida’s bad faith insurance claims have 5-year statute of limitations

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.