In many jurisdictions, a bad faith case predicated on a property insurer’s denial or alleged underpayment of a claim will not reach a jury if it is determined that the insurer fulfilled its obligations under the contract. The rationale is that if the insurer’s alleged conduct does not rise to the level of a breach of the policy, it could hardly be deemed “unfair or deceptive” so as to violate a statutory prohibition, or support a claim for breach of the implied covenant of good faith and fair dealing. These principles appeared to hold true in Florida courts…that is, until the Fourth District Court of Appeal handed down Trafalgar At Greenacres, LTD v. Zurich American Insurance Company, No. 4D11-1376 (Fla. 4th DCA Sept. 5, 2012). In that case, the Court held that because the insured secured an appraisal award that exceeded the amount paid by its insurer, the insured could bring a statutory bad faith claim against the insurer even though the trial court had found that the insurer satisfied its obligations under the policy.
Some background is useful to place this decision in context.
In Florida, a cause of action for insurer bad faith is conferred by Fla. Stat. § 624.155. A claim presented under that statute proceeds separately from the underlying action that determines the insured’s alleged entitlement to policy benefits. In order to proceed with a claim under Section 624.155, an insured must file a Civil Remedy Notice of Insurer Violations (“CRN”) alleging statutory violations related to the investigation, adjustment, and resolution of the claim, Fla. Stat. § 624.155. The CRN may allege, for example, that the insurer:
- Did not attempt in good faith to settle the claim 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 her or his interests;
- Made a claim payment to the insured not accompanied by a statement setting forth the coverage under which payment was being made; or
- Failed to promptly settle a claim, 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.
Once a CRN is filed with the Florida Department of Financial Services, an insurer has sixty days to “cure” the alleged statutory violations. If the insurer fails to cure, the insured may pursue a bad faith claim after a “favorable resolution” of the underlying breach of contract claim, whether by judgment or arbitration award. Pursuant to the Fourth District’s decision in Trafalgar At Greenaces v. Zurich, an appraisal award in favor of the insured now qualifies as a “favorable resolution” that paves the way for a subsequent bad faith claim, even if the insurer is deemed to have satisfied its obligations under the insurance contract. The facts of the case are instructive.
In October 2005, Hurricane Wilma damaged a shopping center owned by Trafalgar at Greenacres (“Trafalgar”). Trafalgar submitted a first-party claim under its commercial policy with Zurich. By April 2006—fewer than six months after the loss—Zurich had issued checks to Trafalgar totaling $580,856 (after applying the $150,000 deductible). Trafalgar At Greenacres, No. 4D11-1376, at 1. In June 2006, Trafalgar submitted a proof of loss seeking more than $1.8 million in total damages under the policy. In September 2006, while Zurich was busy reviewing Trafalgar’s claim, Trafalgar filed a lawsuit accusing Zurich of underpaying the claim in breach of its duties under the insurance policy. In October 2006, Zurich advised Trafalgar that it had completed its review of the proof of loss and issued an additional payment of $60,873. Id. Because it was clear by that time that the parties had a good faith disagreement as to the amount of loss, Zurich invoked its contractual right to appraisal. During the appraisal process, Trafalgar’s demand swelled from $1.8 million to $3 million. Id. at 2.
The appraisers published their award in September 2007, nearly two years after Hurricane Wilma made landfall. The total amount of the award was $1,504,663, approximately half the sum demanded by Trafalgar, but more than twice the amount paid by Zurich. Zurich paid the balance of the award in full within the requisite thirty days, and then moved for summary judgment on Trafalgar’s breach of contract claim. The trial court granted Zurich’s motion and entered judgment in its favor as to that claim. However, the court also granted Trafalgar’s motion to amend its complaint to add a bad faith claim pursuant to Fla. Stat. § 624.155. Id. at 2.
Zurich subsequently moved for summary judgment on the bad faith claim. In its motion, Zurich did not address the specific allegations of the amended complaint, but instead argued that Trafalgar’s bad faith claim was barred as a matter of law because judgment had entered against Trafalgar on the underlying claim for breach of contract. The trial court agreed and entered judgment in Zurich’s favor. Trafalgar appealed.
As noted, under Florida law, a first-party bad faith action is deemed premature until the insured has filed a CRN and two other conditions have been satisfied: “(1) the insurer raises no defense which would defect coverage, or any such defense has been adjudicated adversely to the insurer; and, (2) the actual extent of the insured’s loss must have been determined.” Id. at 3. Moreover, pursuant to Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So. 2d 1270, 1273 (Fla. 2000), an insured’s underlying first-party action for insurance benefits must be resolved favorably to the insured before the insured may proceed with a bad faith claim based on the failure to settle a claim. Id. Zurich argued that this condition was not satisfied because the trial court had entered judgment against Trafalgar on its breach of contract claim. For its part, Trafalgar argued that the entry of the appraisal award of more than double what Zurich paid was a favorable resolution of the underlying claim, even though Zurich’s alleged underpayment of the claim did not constitute a breach of contract. Id.
The Fourth District Court of Appeal sided with Trafalgar. It noted that,
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.’
Id. (citations omitted). The Court rejected the notion that a judgment on a breach of contract action is the only way of obtaining a favorable resolution necessary to proceed with a statutory bad faith claim. The Court ruled that the appraisal award of $1.5 million in Trafalgar’s favor was “tantamount” to such a resolution. Id. In an effort to bolster its analysis, the Court also relied on Florida authority holding that an arbitration award validating an insured’s first-party claim “satisfies the condition precedent required to bring a bad faith claim.” Id. at 4. The Court saw “no meaningful distinction between an arbitration award and the appraisal award in this case….” Id.
The Fourth District’s decision in Trafalgar has already caused some buzz in the blogosphere, with policyholder attorneys cautiously suggesting that it represents an opportunity to leverage more robust claim settlements from insurers. The excitement over the Fourth District’s decision may be misplaced, however. One could argue that the case does not support the proposition that an insurer is exposed to a statutory bad faith claim in every instance where an appraisal award of any amount is entered for the insured. Indeed, the decision seems to be narrower in scope, particularly given the allegations of the Amended Complaint. Trafalgar’s bad faith claim was not based solely on Zurich’s alleged underpayment of the insurance claim. Rather, Trafalgar alleged that Zurich engaged in a myriad of delay tactics including, for example, sending out numerous and unnecessary experts to investigate the claim; issuing burdensome and unnecessary document requests to Trafalgar; and taking unjustified positions concerning the nature and cause of damage to the roof of the shopping center. Time will tell whether Trafalgar can prove any of those accusations. The salient point is that those allegations—and not the mere underpayment of the claim—may have prompted the appellate court to allow the bad faith claim to proceed. Finally, it bears noting that Trafalgar At Greenacres is not yet final, and that if it does become final, it will be binding precedent only in the Fourth District Court of Appeal, and not throughout Florida.