First-Party Bad Faith Claims Against Medical Malpractice Liability Insurers (Anniversary Issue Litigation Quarterly March 2008)
Florida courts have long recognized an insurer’s obligation to act in good faith when defending claims against the insured. In Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980), the Florida Supreme Court outlined the insurer’s duty to act in good faith as follows:
An insurer, in handling the defense of claims against the insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. For when the insured has surrendered to the insurer all control over the handling of the claim, including all decisions with regard to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured. This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so … [w]here that duty is breached the insured [first-party] has a cause of action against the insurer.
Id. at 785, 786.
Despite the broad language of Gutierrez, some insurers have been able to limit their exposure to insured or “first-party” bad faith claims by adding creative language to their insurance contracts. In Shuster v. S. Broward Hosp. Dist. Physicians’ Prof’l Liab. Ins. Trust, 591 So. 2d 174 (Fla. 1992), an insurance company settled three medical malpractice claims against the insured within the policy limits, but the settlements resulted in the insured being unable to obtain medical malpractice insurance. The insured brought a first-party bad faith claim against the insurance company, but the trial court dismissed the action. Id. The Florida Supreme Court upheld the trial court’s decision to dismiss the bad faith claim because the policy at issue contained a “deems expedient” provision, in which both parties agreed in writing that the insurance company could investigate and settle as it “deems expedient.” Id. As a result, insurance companies put the insured on notice, through a provision in the insurance agreement, that the insurer had exclusive authority to control settlement and to be guided by its own self-interest when settling the claim for amounts within the policy limits, even where the claim was frivolous and without consideration of the insured’s interest. Shuster, 591 So. 2d at 176-77. Thus, Shuster significantly limited the insured’s ability to bring a bad faith claim against the insurer.
The above discussion addresses with bad faith causes of action under common law, which is created by the courts. However, insurance companies must also be weary of potential bad faith causes of action created by the legislature through statutes, such as section 627.4147, Fla. Sta. which states:
(1) In addition to any other requirements imposed by law, each self-insurance policy as authorized under s. 627.357 or s. 624.462 or insurance policy providing coverage for claims arising out of the rendering of, or the failure to render, medical care or services, including those of the Florida Medical Malpractice Joint Underwriting Association, shall include … a clause authorizing the insurer or self-insurer to determine, to make, and to conclude, without the permission of the insured, any offer of admission of liability and for arbitration pursuant to s. 766.106, settlement offer, or offer of judgment, if the offer is within the policy limits. It is against public policy for any insurance or self-insurance policy to contain a clause giving the insured the exclusive right to veto any offer for admission of liability and for arbitration made pursuant to s. 766.106, settlement offer, or offer of judgment, when such offer is within the policy limits. However, any offer of admission of liability, settlement offer, or offer of judgment made by an insurer or self-insurer shall be made in good faith and in the best interests of the insured.
§ 627.4147, Fla. Stat. (2007).
Although section 627.4147 gives the insurer the sole authority to settle a claim within the policy limits, it also requires the insurer to act in the best interests of the insured. This language is in contrast with Shuster, which permitted the insurer to settle a claim within the policy limits in its own self-interest.
On May 16, 2007, the Fourth District Court of Appeal of Florida determined that insured parties could bring a bad faith cause of action under section 627.4147 against insurers who allegedly failed to act in the best interests of the insured. Rogers v. Chicago Ins. Co., 2007 WL 1427041 (Fla. 4th DCA 2007). The Court went on to say that in the context of a claim for medical malpractice, it may not always be in the best interests of the insured to concede liability, where none is present, and settle the claim within the policy limits. Id.
Rogers is a major decision in the area of medical malpractice liability insurance because insurers can no longer rely exclusively on the Shuster decision, which protected insurers who inserted “deems expedient” or “self-interest” provisions into their insurance agreements. If they are not doing so already, medical malpractice liability insurers should take precautionary steps to protect themselves against potential first-party bad faith claims under section 627.4147. Most importantly, medical malpractice liability insurers may want to consider drafting and implementing policies that require the insurer to keep in close contact with the insured throughout the settlement process and carefully document all correspondence between the insurer and the insured regarding a potential settlement.