Many bad faith cases arise from a breach of contract lawsuit or are filed simultaneously with a breach of contract claim if permitted by state law. But policyholders do not necessarily need to succeed on a breach of contract lawsuit in order to pursue bad faith against an insurance company. In the case of Trafalgar At Greenacres, LTD. v. Zurich American Insurance Company,1 Florida’s Fourth District Court of Appeal evaluated whether an appraisal award constitutes a "favorable resolution" of an underlying contract dispute for purposes of filing a bad faith lawsuit against the carrier.
The property damage at issue was to a shopping center called Trafalgar at Greenacres. After Trafalgar filed its claim, Zurich American Insurance issued a check for $468,381.30 in January 2006, and another for $112,475.10 in April 2006.
Trafalgar submitted a Proof of Loss in the amount of $1,826,938.54. When Zurich claimed it was still investigating the loss, Trafalgar filed suit for breach of contract. Zurich made a final payment of $60,873.92 and invoked appraisal of the claim under the policy.
At this point, many policyholders probably think bad faith is no longer an option because the claim is undergoing an appraisal as provided by the terms of the policy. Those policyholders in Florida, however, may be mistaken.
When an appraisal award in the amount of $1,504,663.10 was entered in Trafalgar’s favor, the lower court granted summary judgment in Zurich’s favor on the breach of contract claim, but also simultaneously granted Trafalgar permission to amend its complaint to include a cause of action for statutory bad faith. Zurich claimed that because summary judgment on the breach of contract claim was entered against Trafalgar, Trafalgar’s bad faith claim was barred because Trafalgar did not succeed on the breach of contract claim. Trafalgar argued that the appraisal award (that was more than double the amount Zurich previously paid) constituted a favorable resolution enabling it to file a bad faith lawsuit against Zurich.
When deciding whether the appraisal award was sufficient for Trafalgar to pursue bad faith, the Court began with the underlying principle establishing when a bad faith claim can be raised:
Once a determination has been made as to liability and the extent of damages, there is no impediment to pursuing a bad faith claim. While it is necessary that there be a determination of the insured’s damages, there is no requirement that the insured’s underlying claim be by a trial or arbitration…Rather, all that is required is a "resolution of some kind in favor of the insured."
The Court relied on the Florida Supreme Court’s holding2 that an arbitration award establishing the validity of an insured’s claim satisfies the condition precedent required to bring a bad faith action. The Court determined that there was really no distinction between an arbitration award and appraisal award for purposes of deciding whether the matter was resolved in favor of the insured. Like success on a breach of contract case, an appraisal award is a favorable resolution for the insured that satisfies the prerequisite for asserting a bad faith action.
Though appraisal is not usually the manner in which a bad faith suit arises or is pursued, it is important that policyholders and their attorneys understand that it is a possibility. It is also important to keep in mind that this decision is specific to the Fourth District Court of Appeal in Florida and is not yet final.
1 Trafalgar At Greenacres, LTD. v. Zurich American Insurance Company, No. 4D11-1376 (Fla. 4th DCA Sept. 5, 2012).
2 Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co., 945 So. 2d 1216 (Fla. 2006).