Understanding Insurance Company Bad-Faith Doctrine
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Florida law requires insurance companies to act in “good faith” toward their policyholders by promptly investigating insurance claims, settling claims at or below the policy limits whenever
possible, and protecting policyholders from judgments in excess of their policy limits. That’s a complicated way of saying that Florida lawmakers want insurance companies to protect their policyholders from bankruptcy and loss of personal assets in the event of a successful lawsuit against that insured customer.
But how does that actually work? Consider the following hypothetical:
You are involved in an accident with a driver who, while texting on his cell phone, ran a red light directly into the passenger side of your vehicle. Your car is damaged beyond repair, and you have injuries requiring hospitalization and surgery. Your medical bills alone are $125,000. The other driver, Bob, has insurance with a policy limit of $100,000, but his insurance company, Company A, only wants to pay $60,000 because it claims that you were partially to blame for the accident. You offer to settle for $100,000, but Company A refuses to settle despite Bob’s request that it do so.
At trial, the jury awards you $300,000, but because Bob’s insurance with Company A only covers up to $100,000, Bob will have to pay the remaining $200,000 out of his own pocket. Bob doesn’t have $200,000, though, so he is in danger of filing for bankruptcy. As a result, your chances of recovering the remaining $200,000 are slim.
This is where the bad-faith doctrine comes in. If you or Bob can prove that Company A failed to settle the claim for the $100,000 you demanded when, under all the circumstances, it could have and should have done so had it acted fairly and honestly toward Bob, then Company A will be required to pay the entire judgment amount of $300,000.
The bad-faith doctrine thus serves as a powerful incentive on insurance companies to correctly evaluate claims against their insureds and to settle cases within policy limits. If they do not, the companies run the risk that they will have to pay over and above the limits of the policy, along with all the expenses they incurred during the trial.
The bad-faith doctrine can obviously help you as a plaintiff, when negotiating against an insurance company. If you know the limits of the defendant’s insurance policy, and if you are willing to settle the case within those limits, you can leverage the bad- faith doctrine to give you an extra edge in negotiation. Always consult with your attorney before relying too heavily on this doctrine, however: If your legitimate claim only amounts to half the policy limits, the insurance company is unlikely to pay the maximum just to avoid trial.
The Tampa, Florida law firm of Wagner McLaughlin has experience representing clients against insurance companies. Contact us today for a free consultation.