How Legal Reforms Changed the Requirements for Demonstrating Bad Faith in Insurance Claims

Insurance companies have a legal obligation to act in good faith when handling claims filed by policyholders. When they act wrongfully, insurance companies can be held liable for acting in bad faith. However, changes in Florida law have made it more difficult for policyholders to recover compensation for bad faith claims. That makes it more important than ever to work with an attorney with a thorough knowledge of the insurance industry and the nuances of legal obligations.

Good-faith obligations apply in many types of insurance situations, from commercial and residential policies to D&O liability, disability insurance, business interruption, and construction defects, to auto and boat policies. When you’ve paid an insurance company to protect you against a particular type of loss, if the insurance company fails to recognize, investigate, process, and evaluate your claim in accordance with legal requirements, you may have a valid claim for legal relief. Insurers are also required to defend and indemnify policyholders against liability claims, and failure to fulfill those obligations may constitute bad faith.   

If you contact Ver Ploeg & Marino, our attorneys can analyze your situation and determine whether the insurance company has acted in bad faith based on the new legal requirements. For general background, here is an overview of how the standards for bad-faith claims have changed.

Mere Negligence is No Longer Enough

Prior to the change in the law, a policyholder could bring a bad-faith claim based on sloppy handling of an insurance claim. In many situations, an insurance company’s negligent handling of a claim was sufficient to constitute bad faith, thereby initiating legal remedies.

Now, Section 624.155 of the Florida Statutes has been amended to specify that negligence alone is not enough to constitute bad faith. Instead, to demonstrate bad faith, claimants need to delve more deeply into the conduct of the insurance company to establish how the insurer’s conduct revealed actionable bad faith.

Insurance Companies Now Have Some Insulation from Bad Liability

Another change to the bad-faith law provides insurance companies with what is often referred to as a “safe harbor.” If they act within certain guidelines, their actions are automatically insulated from bad faith liability. The rule gives insurance companies 90 days after receiving appropriate notice and evidence to either pay the amount claimed in a liability claim or pay the full amount of the coverage under the policy. So, an insurer can sit on a claim for three months without facing any risk of bad faith liability. Moreover, the rule allows insurance companies to argue that the evidence supporting the claim is insufficient, thereby necessitating additional time to pay the claim.

In addition, the rules give insurance companies a way to avoid bad-faith claims in cases where multiple parties seek liability compensation under the same limited policy coverage. The insurance company can use legal procedures or arbitration to essentially force the claimants to share the policy proceeds, while the company walks away from the conflict without fear of bad-faith liability.

Policyholders Have a New Obligation to Act in Good Faith

Another aspect of the legal revisions is the creation of a good-faith obligation for policyholders and their representatives. The obligations pertain to:

• Furnishing information regarding the claim
• Making demands of the insurance company
• Setting deadlines
• Attempting to settle a claim

While insurance companies cannot sue claimants for violating their good-faith obligations, the good-faith obligation can be used by the insurance company as a defense when a policyholder seeks compensation for bad faith. The insurer may claim that the policyholder’s actions constituted bad faith and that, therefore, no compensation is appropriate, or that any compensation owed should be offset by the comparative negligence of the policyholder.

Procedural Hurdles

Generally, a policyholder must establish that an insurance company has breached the terms of the contract before a court will consider a bad-faith claim. Disagreeing over the value of the damage is not an act of bad faith.

The policyholder must provide written notice to both the insurance company and the Department of Financial Services at least 60 days before filing a bad-faith claim. In addition, the provisions regarding payment of attorneys’ fees have changed, so filing a claim now carries a risk that did not exist previously. The court can potentially order either party to pay the other’s legal fees, so it is important to be confident in the merits of a claim before proceeding.

The Right Legal Guidance is Critical When Insurance Companies Fail to Honor Their Obligations

Insurance companies act in bad faith all the time. However, it is now much more challenging to prove that their actions violate the law.

At Ver Ploeg & Marino, we have decades of experience working with the insurance industry, and we’ve seen countless examples of conduct that not only violates policyholders’ contractual rights but also disrespects the value of their time and causes hardship on numerous levels. At one time, policyholders could cry “bad faith” and get relief, but lawmakers have made that remedy harder to obtain. Difficult, but not impossible.

When you work with an experienced legal team prepared to conduct an honest assessment of the merits of a bad faith claim, it is possible to pursue effective legal remedies for bad faith as well as breach of contract. Every claim involves nuances that impact how the policy should be interpreted and how obligations should be applied. If you are in dispute with your insurance company, we invite you to schedule a confidential consultation with our knowledgeable insurance attorneys to discuss your potential options for obtaining relief. Just call us at 305-577-3996 or contact us online at your convenience.

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