Routine automobile crashes and insurance settlements are the normal business of insurance companies. Seldom is a courtroom or attorney needed, and usually the case is settled within the policy limits of the insured’s policy.

In rare circumstances, however, there may be a dispute between an insured and his insurer. The insured may contend that his insurer either failed to pay a legitimate claim or failed to protect his interests from actions by another party. This is a first-party bad faith allegation.

Florida also allows for bad faith claims by third-parties, for those who were not a party to the original insurance policy. A third-party bad faith claim is not, per se, about the personal injury or the auto damage. Instead a third-party bad faith claim is a separate proceeding about damage inflicted by the defendant’s insurer and attorney.

Third-party bad faith cases are rarely launched because a defendant has not made a full policy limits offer to settle the damages. Many third-party bad faith lawsuits are notionally triggered by a late offer of settlement – even if the settlement is presented just a day later than the plaintiff wanted. A late offer to settle may frequently be the excuse for initiating a bad faith lawsuit, but in truth it is not the cause. Indeed, in many instances, there is often no explanation before the bad faith case is launched.

While it is a goal of the insurer to adequately compensate the injured party, that purpose is addressed by the original verdict and settlement. For most, the offered “full limits” compensation would be fully adequate.

The “damage” in a third-party bad faith lawsuit may be as trivial as a day’s delay in offering settlement, or a failure to provide certified copies of the defendant’s tax records, or a belief that a full limits settlement is inadequate. Indeed, the damage may be substantial. But few plaintiffs have suffered a third-party “bad faith” injury that an unbiased onlooker would regard as worth $5 million (note $5.1 million is the average bad faith settlement amount in the 8 Florida cases in Table 1).  This level of excess compensation is just money the jury feels compelled to push into the plaintiff’s pocket.

While there are a rare few instances where a plaintiff genuinely needs the funds that are excess to a full limits settlement, the great majority of plaintiffs do not need an average of $5.1 million extra. The net effect of these oversized payouts is that insurance companies increase the “normal” payout offers so they dilute the temptation of attorneys to go the bad faith route.

The Institute for Legal Reform conducted a survey which revealed the financial damage that lawsuits impose on ordinary Floridians. The survey found that ” Florida families pay about $4,400 a year for goods and services due to the state’s lawsuit climate.“ The imbalance is obvious. A few hundred families reap a $5 million dollar windfall, but millions of households suffer a $4,400 shortage in their budget.

The Florida legislature should require that at minimum to establish bad faith, an insurer must have shown reckless disregard for the rights of an insured or beneficiary. Indeed, SB924 does that and is helpful to consumers.