In an interesting and informative blog, "Property Insurance Coverage Law Blog," the Merlin Law Group and Florida Attorney Chip Merlin, Esquire made some thoughtful recent comments about the meanings of "Good Faith" and "Bad Faith" under the Law generally, and under Florida Law in particular. Their recent post ended with this question to me: "Does anybody, even Dennis Wall, disagree?"
Their question calls for a response in my judgment. I hope that my response will be equally as thoughtful and informative as their post was to begin with.
This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" Chapter 14, § 14:1 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).
Asterisks (* * *) reflect omitted material.
Litigation and Prevention of Insurer Bad Faith, Second Edition
Database updated September 2009
Dennis Wall
Part
V. Summary and Conclusion
Chapter
14. Summary and Conclusion
§ 14:1.Summary and conclusion
Bad faith is a term without concrete meaning. It is employed in many different areas of the law, and in each of those areas its meaning is fixed by different rules. The meaning of bad faith also depends on how the law intervenes in the differing relationships among these several areas.
In the law of so-called insurer bad faith, the prime concern is with shifting the responsibility to pay damages from the insured to the insurer. If the shift is successful, the insurer will be paying extracontractual damages, i.e., sums not provided in its insurance contract and even beyond the policy limits. The basis for an insurer's liability to pay extracontractual damages is its fault, or so-called bad faith.
When a liability insurer faces duties to settle claims on behalf of its insured, it acts as a fiduciary. The basis of its excess or other extracontractual liability is breach of fiduciary duties, which is actionable in tort as well as in equity.
A liability insurer's wrongful refusal or failure to defend is a breach of contract. The contract doctrine of consequential damages is the basis of the liability insurer's responsibility to pay extracontractual damages at common law.
The liability insurer's final exposure to pay extracontractual damages at common law comes when it inadequately conducts the insured's defense. The basis of this exposure is negligence. Statutes regulate and provide remedies in each of these three categories of bad faith by liability insurers. Statutory law operates on these separate categories of settlement, refusal to defend, and inadequate conduct of the insured's defense in different degrees. Over all, existing statutes basically codify the common law.
First-party insurers have long paid consequential, and therefore extracontractual, damages at common law. First-party insurers have very few fiduciary duties, but where those duties are breached, first-party insurers are liable as fiduciaries regardless of any limits explicitly or implicitly imposed by their policies.
In order to allow insureds to recover certain kinds of extracontractual damages, many courts have fashioned a new tort of insurer bad faith. It is a mixture of objective and subjective standards of tort liability. The reality of this hybrid tort is that it is new. Its origins have as their only legal precedent past and existing remedies which were likewise fashioned in response to judicially perceived unfairness.
Statutes regulate and provide remedies in the area of first-party bad faith as well. These statutes are generally held to preempt the availability of actions or certain kinds of damages at common law.
In short, bad faith is a term which is given content only by examining the context in which it is employed. The law of an insurer's extracontractual liability in particular would benefit from greater attention to analysis and less reliance on a label.
From Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 14"1 published by West, a Thomson Reuters business, and UPDATED.
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