Insurance is a large part of the construction industry. Whether you are a contractor, subcontractor, design professional, supplier, or owner, you (should) have insurance to cover risks inherent in the industry and the particulars of a project.
There are instances in a dispute involving insurance coverage that either an insured or third-party claimant will become frustrated with an insurer. The frustration may stem from the insurer not considering or initiating settlement opportunities to resolve the dispute. When this occurs, the insured and/or third-party claimant consider preserving rights to what is known as a bad faith action largely based on the insurer “[n]ot attempting 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 her or his interests.” See Fla. Stat. s. 624.155(1)(b)(1).
There are two types of bad faith actions: (1) third-party bad faith actions and (2) first-party bad faith actions.
Third-Party Bad Faith Actions
A third-party bad faith action arises when a third-party asserts a claim against the insured and the insured is exposed to damage exceeding the coverage / policy limits of its insurance policy. Naturally, the insured would be responsible for any judgment that exceeds the policy limits of its insurance policy.
But, what if the insurer had the opportunity to settle the claim for the policy limits or under the policy limits but did not and exposed the insured to a monetary judgment exceeding the policy limits? It is this opportunity to settle a covered claim within coverage limits but refusing to do so that triggers the bad faith action. To this point, the Florida Supreme Court stated that “the essence of a third party bad faith cause of action is to remedy a situation in which an insured is exposed to an excess judgment because of the insurer’s failure to properly or promptly defend the claim.” Macola v. Government Employees Ins. Co., 953 So.2d 451, 458 (Fla. 2006) (internal citations omitted).
On the other hand, if the insurer effectuates a resolution with the third-party that includes a release of the insured, there is no third-party bad faith action considering the insured would not be exposed to a judgment in excess of the policy limits. See Fidelity and Cas. Co. of New York v. Cope, 462 So.2d 459 (Fla. 1985).
A third-party can bring a third-party bad faith action directly against the insured’s insurer only if it obtains a judgment against the insured in excess of the policy limits. State Farm Fire & Cas. Co. v. Zebrowski, 706 So.2d 275 (Fla. 1997).
A third-party bad faith action can be based on Florida Statute s. 624.155 or the common law. A difference is that a statutory bad faith action under s. 624.155 requires what is known as a civil remedy notice identifying the insurer’s violation to be submitted to the Florida Department of Financial Services as a condition precedent to initiating the bad faith action. See Fla.Stat. s. 624.155(3)(a). The insurer is given 60 days to cure the violation before the bad faith action can be initiated.
A common law third-party bad faith action does not require the civil remedy notice. See Macola 953 So.2d 451 (insurer tendering policy limits to insured in response to civil remedy notice and in accordance with Florida Statute s. 624.155 which did not eliminate underlying third-party action would not eliminate a common law third-party bad faith action.)
However, it is important to understand that a party (whether the insured or third party) initiating a third-party bad faith action will not be able to obtain a judgment for both the common law and statutory bad faith causes of action and will ultimately have to choose the cause of action it wants to pursue. Fla. Stat. s. 624.155(8). The statutory third-party bad faith action is probably more commonly pursued and parties should serve the civil remedy notice before initiating the bad faith action.
First-Party Bad Faith Actions
A first-party bad faith action is not based on a third-party action but based on the insured’s own claim against its insurer (such as with a first-party property insurance policy or for uninsured motorist coverage). This may occur when the insured submits a claim against its own insurance policy and the insurer denies the claim or otherwise refuses or delays in paying the full covered amount of the claim. Unlike the third-party bad faith action, a first-party bad faith action has nothing to do with an insurer exposing an insured to a judgment in a third-party claim in excess of the policy limits.
A first-party bad faith claim is a statutory action under s. 624.155 that requires the civil remedy notice as a condition precedent to initiating the bad faith action. However, unlike a third-party bad faith action, there is no common law first-party bad faith action. QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541, 545 (Fla. 2012).
Before a bad faith action can be initiated in a first-party action, there needs to be a determination that there is coverage, i.e., that the insurer is liable to the insured under the insurance contract, and what the covered damages are. See Liberty Mut. Ins. Co. v. Farm, Inc., 754 So.2d 865 (Fla. 3d DCA 2000) (first-party bad faith action was premature prior to coverage dispute); see also State Farm Florida Ins. Co. v. Seville Place Condominium Ass’n, Inc., 74 So.3d 105 (Fla. 3d DCA 2011) (first-party bad faith action was premature until both coverage and extent of insured’s loss has been adjudicated).
(Notably, there is no statutory bad faith action against a surety issuing a payment or performance bond in Florida. Fla.Stat. s. 624.155(9).)
Bad faith actions are complicated actions and involve a host of issues (such as discovery-related issues, burdens of proof, and damages) that are not discussed in this article. The point of this article is for parties to understand the difference between third-party bad faith actions and first-party bad faith actions and to ensure their rights are protected if there is an insurance coverage dispute, whether it is a dispute involving an insured’s first-party insurance policy or a third-party claim that triggers an insured’s liability policy.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.
A third-party claimant may bring a common law bad faith claim against a defendant’s liability insurer. Mccullough v. Royal Caribbean Cruises, 2019 WL 2076192, *2 (S.D.Fla. 2019). “A bad faith claim may be brought by a third party absent an assignment from the [defendant] insured.” Id. This can only be done in the third-party bad faith context with the argument that the insurer’s “bad faith” conduct resulted in a judgment against the defendant-insured in excess of the policy limits. However, in any third-party bad faith claim (and, really, bad faith claim in general), coverage must first be determined under the policy. Mccullough, supra. (“An injured third party must therefore first obtain a resolution of some kind in favor of the insured’ on the coverage issue” before pursuing his bad faith against the insurer.”) (internal quotations omitted).