How Does Insurance Bad Faith Happen?
ABC Trucking Company, a successful, multi-generational, family business employing 100s of workers, buys $2 million of liability insurance from XYZ Insurance Company to protect it from being put out of business by a lawsuit. ABC pays thousands of dollars in premiums to XYZ over the years, which XYZ dutifully pockets giving nothing in exchange but its promise to be there if a terrible day ever comes. Then, one day, while delivering food to a grocery store, one of ABC Trucking Company’s drivers loses his concentration and runs into the back of a minivan, paralyzing a child. The child’s parents, faced with $8 million of future medical care needs for their child, have a choice.
They could sue ABC Trucking Company, or they could offer to settle with ABC Trucking Company.
Thankfully, they offer to settle their case against ABC in exchange for only its $2,000,000 of liability insurance. ABC Trucking Company begs XYZ Insurance Company to pay the full $2,000,000 to settle the case. But, XYZ Insurance Company does not want to part with the $2 million, so XYZ offers the parents $1 million instead. Angered by the response, the child’s parents reject the $1,000,000 and sue the trucking company for $15 million. And win.
After the verdict, XYZ Insurance Company pays its full $2,000,000, leaving ABC Trucking Company to pay the remaining $13 million, which will certainly put ABC out of business unless XYZ Insurance Company shares some responsibility for the additional $13 million. The only way ABC Trucking Company can hold XYZ Insurance Company accountable is by suing XYZ for Bad Faith for the unreasonable gamble it took with ABC Trucking Company’s future.
What Can a Florida Customer do NOW If Its Insurance Company Commits Bad Faith?
Currently, the last resort for Florida’s Customers is a civil action against the insurance company to enforce the Customer’s contractual rights. For more than 70 years, Florida has permitted a Customer to sue its insurance companies for the amount owed as a result of the insurance company’s bad faith in failing to settle claims brought against the policy holder. But this relief exists only under very limited circumstances. The Customer will lose its case against the insurance company unless the Customer proves that the insurance company failed to settle a claim 1) that it should have settled based upon the information available and 2) that it could have settled if the insurance company had acted fairly, honestly, and with due regard for the interests of its Customer. Insurance companies frequently win cases brought by their Customers even when the insurance company’s failure to settle the claim causes a massive judgment to be entered against the policy holder. Florida law states that if an insurance company is negligent, without more, it will not be liable for any amount of damages exceeding its policy limit.
Is the Current Law Fair to Liability Insurance Companies?
Under the current law, insurance companies enjoy greater protection than the people and businesses they insure. While virtually every person and business in Florida is liable for damages if their negligence causes harm to another person, insurance companies have no liability for failing to settle a claim, no matter how much harm they cause, if their conduct is the result of “mere negligence.” Some have argued that the low standard of care required of insurance companies reduces their incentive to protect their Customers. They argue that insurance companies should instead be held to the same standard as the people and businesses they insure. Yet, some insurance companies argue that they should have greater protection in the form of even lower standards of care and legal “cure” periods.
What is Wrong With Allowing a Liability Insurer a “Cure Period” to Pay its Policy Limit?
Liability insurance, which protects the Customer from lawsuits by third parties, is a special type of insurance that does not lend itself to the “cure periods” that apply to other types of insurance. With many types of insurance, cure periods make sense. For instance, where an insurance company commits bad faith by wrongly denying payment of medical benefits to its Customer, it is reasonable to permit that insurance company 60 days to “cure” the bad faith by paying the owed benefits.
However, where an insurance company commits bad faith in failing to settle the claims of a third party against its Customer, simply paying the policy limit to the third party during a “cure period” does nothing at all to actually “cure” the harm caused by the Customer, which still faces an enormous judgment because of the insurance company’s prior bad faith. A cure period for a liability insurer is no cure at all. It simply allows an insurance company who has already committed bad faith to use its Customer as a shield to protect itself.
Won’t “Reduced Premiums” Benefit Customers?
Any reduction in premiums is far outweighed by the costs of eliminating Customers’ ability to enforce these critical rights. After all, an insurance company that paid no claims at all could offer the lowest prices of all. But that would not benefit Customers.
Insurance companies correctly observe that as a business’s costs go down, so does its ability to offer lower prices. Frequently, this justifies reducing unnecessary costs through measures like tax cuts and reduced government regulation. However, it is one thing to request less government intervention in the form of tax cuts or reduced regulation. It is quite another to ask for greater government intervention in order to limit a Customers ability to enforce its private contractual rights. While reducing unnecessary costs to insurance companies is justifiable, the law should not permit an insurance company to sell insurance policies, accept premiums and then prohibit Customers from enforcing their contractual rights.
Won’t Stopping Abusive “Set Ups” by Trial Lawyers Increase Settlements and Reduce Lawsuits?
Some insurance companies argue that trial lawyers are getting rich by “setting up” insurance companies to commit bad faith. According to the insurance companies, the lawyer and injured person know that if their settlement offer is accepted, the case will be settled, but they both actually hope that the insurance company fails to comply with the terms of their offer, so that in the absence of a settlement, they can sue the customer who will now have a lawsuit against his insurance company which, if successful, will give the customer the ability to pay the injured person (along with his lawyer’s percentage contingency fee).
Some insurance companies argue that the mere fact that the law sometimes imposes liability on insurance companies who fail to accept settlement offers is what drives these settlement offers to be made. Their solution, of course, would be to change the law to eliminate these types of settlement offers.
However, eliminating settlement offers is never a good idea. These insurance companies wrongly expect that if these settlement offers were not made, that claimants would instead feel obligated to accept whatever the insurance company offered.
It is far more likely that claimants and their lawyers would make no settlement offers at all, particularly when the insurance customer is a business or successful person who has accumulated assets.
Yet, in order to avoid responsibility for failing to settle claims, some insurance companies would prefer to not even have a chance to settle – even though settlement is their customer’s only hope of avoiding financial ruin. While this may decrease lawsuits against insurance companies for bad faith, it will certainly increase the number of lawsuits against businesses and successful individuals.
Why Are Florida Taxpayers Against the Proposed Changes to the Insurance Bad Faith Laws?
We taxpayers all have liability insurance policies requiring insurance companies to act in good faith and protect us like they promised to do in exchange for the premiums we paid. The free market and our contractual rights are all that is needed to ensure fairness and economic prosperity for both customers and insurance companies. We do not need a whole new statutory framework that does nothing more than use business as a shield to protect the insurance company after the insurance company has been paid premiums to protect the business.
If you have any questions regarding Insurance Bad Faith, or the TAIBF, please contact Lawlor Winston at [email protected], or visit www.TAIBF.com