United States: Insurer’s Liability For Breach of Contract Is Not A Condition Precedent To Insured’s Bad Faith Claim

A Florida appeals court recently held in Cammarata v. State Farm Florida Insurance Co. that an insured is not required to show that its insurer breached the insurance policy before it can bring a claim for bad faith.  Although the insured must show that the insurer is liable for coverage, this prerequisite can be established by something other than a judgment, such as the insurer's voluntary payment of policy limits or a settlement.  The decision is an important one, as a company's ability to hold its insurers liable for bad faith when unreasonably withholding insurance benefits is crucial to protecting the policyholder's interests.  Eliminating curbs on that ability helps to discourage unfair practices by insurers.  But the decision's importance is not limited to Florida policyholders.  The bad faith claim challenged in Cammarata was brought under a statute patterned off of a model unfair insurance practices act that has been adopted by numerous other states, such as California, Delaware and Massachusetts.  So the Florida courts' interpretation of that statute in a way that broadens the circumstances under which a bad faith claim may be brought lends support to the same interpretation of similar statutes in those other states.

In Cammarata, the insureds sustained damage to their home as a result of Hurricane Wilma and filed a claim with their insurer, State Farm.  State Farm contended that the amount of damage was less than the policy's deductible; so it refused to provide coverage.  A neutral umpire appointed by a court estimated the damage in an amount above the policy's deductible and closer to the amount of Cammaratas' damage claim.  Thereafter, State Farm paid the Cammaratas the amount of the neutral umpire's estimate, less the policy's deductible. 

The Cammaratas then sued State Farm, under Florida's Civil Remedy Act, for not attempting in good faith to settle their claim.  The Florida law, like similar laws passed by several other states, prohibits insurance companies from engaging in certain unfair practices.  The trial court granted summary judgment in favor of State Farm, concluding that the Cammaratas' bad faith claim was premature because State Farm had not been held liable for breaching the insurance policy.

In reaching its conclusion, the trial court relied on the appellate decision in Lime Bay Condominium, Inc. v. State Farm Florida Insurance Co., in which the Fourth District Court of Appeal held that a final determination of both the insurer's liability and the amount of damages owed by the insurer were conditions precedent to a bad faith claim.  There was no such determination in that case because the policyholder's breach of contract claim was still pending, and so the policyholder's bad faith claim was not ripe, according to the Fourth District.

A month after issuing the Lime Bay decision, however, the Fourth District reached the opposite result in Trafalgar at Greenacres, Ltd. v. Zurich American Insurance Co.  There, the Fourth District held that the insured's bad faith claim was not precluded by summary judgment in the insurer's favor on the insured's breach of contract claim.  While it was true that an action for insurance benefits must be "resolved favorably" to the insured before the insured can sue for bad faith, a "favorable resolution" need not be a court judgment, according to the Fourth District.  A subsequent appraisal award in the insured's favor "constituted a 'favorable resolution' . . . [and] satisfied the necessary prerequisite to filing a bad faith claim."

On appeal of the judgment in favor of State Farm in Cammarata, the Fourth District applied its reasoning in Trafalgar and essentially acknowledged that it had incorrectly decided Lime Bay.  While Florida Supreme Court precedent provided that a bad faith claim was only ripe when there had been a "determination of liability," that determination can be made absent a finding that the insurer breached the policy.  An insurer's settlement payment of the full policy limits, or an appraisal award in the insured's favor, like the one awarded the Cammaratas, were sufficient.

The Cammarata case goes beyond simply resolving a prior inconsistency in Florida case law on bad faith.  The Florida statute at issue in the case is patterned off of the Model Unfair Claims Practices Act.  The model act, crafted by the National Association of Insurance Commissioners, has been adopted by numerous other states, such as California, Delaware, Massachusetts and Washington.  The Florida courts' interpretation of its own statute in a way that gives broader meaning to "final determination" and "favorable resolution" lends support for applying the same interpretation in these other states, and recognizes that policyholders are entitled to seek relief under broad circumstances when they believe their insurers have not acted in good faith.

Insurer's Liability For Breach of Contract Is Not A Condition Precedent To Insured's Bad Faith Claim

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