Constance Anastopoulo authored a very interesting article in the University of Memphis Law Review, Bad Faith: Building a House of Straw, Sticks or Bricks.1 While the research includes third party bad faith actions, it also evaluates how the 50 states handle bad faith for first party losses and what steps insurance companies can take to limit their risk or least give an appearance of good faith claims handling.
An entire section of our Merlin Law Group blog postings over the years have been devoted to uncovering and explaining the failures of insurance companies to act in good faith. Anastopoulo’s article is interesting because it puts readers on notice of some of the differences in bad faith laws as you move across state lines. This is a great resource for policyholders, public insurance adjusters and other advocates for insureds. Insurance companies must be held accountable for their actions and failure to follow proper protocols.
Anastopoulo writes about states that are made of brick, straw, and sticks on bad faith insurance matters.
‘“Houses of Brick” are represented by states that have endorsed the broadest definition and application of bad faith, including recognizing actions in tort as well as contract, in contrast to the states above which either offer only actions in contract—“Straw”—or offer tort and contract claims—“Sticks”—which are sometimes limited. What truly distinguishes these states, however, is that they have some form of third party claims provided by either statute or common law. This distinction is significant to differentiate the states detailed above which offer no rights to third parties or only limited causes of action.
Anastopoulo also gives tips to insurance companies on how to avoid allegations of bad faith and gives combat tips during the claims process to decrease the ability for an insured to show unfair acts. The advice is interesting and you can read below to see if your insurance claim has been handled following Anastopoulo’s tips.
Preventing Huffing and Puffing in Vain: Lessons for the Big, Bad Wolf, or How to Avoid a Bad Faith Claim
Once it is established what constitutes bad faith, it is important to consider how to avoid a bad faith claim. While not purporting to provide an exhaustive catalogue of situations necessarily giving rise to a bad faith claim, this Part includes several easily identifiable areas of risk.
A. Relay Settlement Demands
One of the simplest means for an insurer’s attorney to establish negligence on the part of the insurer, and thereby set up a potential claim for bad faith, is to identify the failure of the insurer to communicate with the insured. Whenever a settlement demand is made, the demand should be forwarded and reviewed by the insured. The importance of maintaining open lines of communication with the insured cannot be overstated. When there has been appropriate communication, the settlement offer is more likely to be acceptable, avoiding an excess verdict and a claim for bad faith.
B. Appropriately and Timely Respond to All Demand Letters
Counsel for the insurer must appropriately and timely respond to a demand letter, which is an important element in some states for the establishment of a claim. While a response itself is important, the insurer’s counsel must ensure it is both sufficiently prompt and specific. Oftentimes, the injured third party’s attorney is motivated to send the demand letter for settlement within the policy limits early in the case in order to establish the elements for excess liability, as well as to possibly set up a claim of bad faith. One may avoid this situation by including in the response any additional information or investigation that is needed, including information from the third party asserting the claim, before the insurer can appropriately respond to the demand.
C. Be Cognizant of a “Limits Demand”
The insurer and the insured must be aware of a “limits demand,” i.e., a demand for settlement up to the limits of the coverage. For a plaintiff’s attorney, it is important to assert a limits demand for several reasons. One consideration in making this demand is protection from a possible malpractice claim by the client for demanding “too little.” By demanding the “limits,” an attorney cannot be accused of demanding an amount insufficient to fully compensate the client. Additionally, a demand for settlement within or at the policy limits is an element to establishing payment by the insurer under the excess liability doctrine, as well as a claim of bad faith. Therefore, it is important that plaintiff’s counsel convey a demand to settle within the limits of the policy. Conversely, a limits demand requires some type of response from the insurer’s counsel, which again should be specific, as outlined above.
D. Paper the File
It is important for both the plaintiff’s counsel—whether representing a third party or the insured—and the insurer’s counsel to document the file. If a claim of bad faith arises, it is certain the file will become discoverable in order to ascertain the attorney’s actions. For the plaintiff’s counsel, it is imperative that the attorney conveyed a “limits demand” offering to settle within the limits of the policy accompanied by a time demand. It is equally important that the defense counsel document his or her file, noting what was communicated to the insured and when, how the insured responded, and how the adjuster responded. . . .
When it comes to bad faith protections against your insurance company, Florida is classified as a brickhouse state:
Florida does not recognize a common law “bad faith” cause of action against a first-party insurer and thus would not seem to qualify as a “Brick” state. However, in 1982, the Florida legislature enacted section 624.155 of the Florida Statutes, referred to as the “Civil Remedy Statute,” becoming the first in the United States to create the right to bring a private lawsuit for an insurance company’s violations of the Unfair Insurance Trade Practices Act. Since the enactment, Florida courts have interpreted the statute to authorize first-party “bad faith” legal actions. Opperman v. Nationwide Mutual Fire Insurance Co. was the first such Florida appellate decision, holding:
[T]he plain meaning of section 624.155(1)(b) extends a cause of action to the first party insured against its insurer for bad faith refusal to settle. The language of section 624.155 is clear and unambiguous and conveys a clear and definite meaning. It provides a civil cause of action to “any person” who is injured as a result of an insurer’s bad faith dealing.
The statute provides outside-the-contract remedies for consumers. Specifically, the Civil Remedy Statute cross references another Florida statute entitled the “Unfair Claims Settlement Practices Act,” which lists specific conduct which may give rise to a claim. Moreover, the Civil Remedy Statute exposes insurers to the risk that a jury may award punitive damages should they conclude that the insurer: (1) acted willfully, wantonly, and maliciously with respect to any person claiming damage under the statute; or (2) in reckless disregard of the rights of one of its insureds. In addition to protections for claimants, the statute provides some protections for the insurer, as it requires that a sixty-day statutory notice be filed in advance of any bad faith lawsuit, and it bars a bad faith lawsuit if payment is made within that time.
Further delineating Florida bad faith law, in State Farm Mutual Automobile Insurance Co. v. LaForet, the Florida Supreme Court rejected the “fairly debatable” standard, which states that a claim for bad faith can succeed only if the plaintiff can show the absence of a reasonable basis for denying the claim. Florida differs from most jurisdictions given that first-party bad faith actions are actionable only under statute and not the common law, thus the “fairly debatable” test was unnecessary. The statute provides an insurer has acted in bad faith if it has “[n]ot attempt[ed] 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 [the insured’s] interests.” Perhaps the most distinguishing feature of the Florida statute—and why Florida is deemed a “Brick” state—is that the statute provides for a direct action for bad faith by “any person against an insurer when such person is damaged” including actions by third-party claimants. Florida is unique in both its statute and its extension of statutory claims to third-party claimants, and therefore qualifies as a “Brick” state.
1 Constance A. Anastopoulo, Bad Faith: Building A House of Straw, Sticks, or Bricks, 42 U. Mem. L. Rev. 687 (2012).