In Florida’s current justice system, anyone who feels that an insurance company has caused an unfair settlement of a claim can seek restitution in court. Unless they were parties to the original policy (a contract), they must wait until there has been a verdict or settlement in the original case.

If an insurer fails to honor its commitments outlined in an insurance policy, the policy owner may have grounds for a “first-party bad faith claim.” For example, an insurer may incorrectly deny coverage for a legitimate claim or may fail to protect the insured as required by the policy. Either behavior could be grounds for a third-party “bad faith” lawsuit.

Third-party bad faith rights were intended to protect parties who have been wronged but who may lack the resources to pursue a court settlement. Unfortunately, while well-intended, third-party bad faith litigation has degenerated frequently into vague, meritless claims bolstered by emotional arguments that appeal to juries.

For example, a truck may kick up a stone that breaks an automobile’s windshield. The truck owner and auto insurer may agree on the facts, the assignment of liability and cost of replacement. The truck’s insurer might quickly offer payment for damages.

The auto owner’s attorney might reject a prompt offer of settlement (even with full policy limits). He may instead send a “time demand” counteroffer detailing what will be needed to settle the windshield case. A time demand could address the repair costs, the attorney fees, any other conditions the auto owner wants, and a very narrow timeframe, say 10 days, within which the auto insurer must satisfy the demand for settlement. If any aspect of the settlement demand is refused, the auto owner’s attorney will probably launch a new civil lawsuit for “bad faith.” That’s when the craziness accelerates.

Jury verdicts for third-party bad faith cases have often been lavish and run in the millions. The extravagant scale of third-party bad faith verdicts is an inducement for more bad faith claims and more outrageous settlements. The outsized verdicts seem to be driven by the public’s views on attorneys, insurance companies, the plight of the common man, and a lack of legal standard for adjusting an award size commensurate to the consequences of the “bad faith” damage.

In Florida, the jury is encouraged to consider the “totality of the circumstances,” a very loose standard loose that is conducive to harvesting million-dollar awards.

A jury may see Insurance companies as bursting at the seams with illegitimate profits. The injured plaintiff in a bad faith lawsuit is likely to be the person with whom jury members have the deepest affinity. Together those factors can increase the jury’s tendency toward big awards.

Bad faith awards train the company to pay out quicker and more than might be prudent for investigation of each case. Those settlement behaviors will result in higher costs for the insurer. The overall effect of bad faith awards is to put upward pressure on already high insurance premiums that Floridians face.

So, there may be a few plaintiffs who enjoy a huge settlement, but there are millions of Floridians who will eventually pay higher costs in future years.

Legislated reforms are needed to provide a time allotment sufficient for the insurer’s prudent investigation of cases. The Florida legislature should present guidance on calibrating award sizes to the nature of the alleged bad faith. For example, a six-figure bad faith award is an excessive penalty for a two-day delay in meeting a 10-day demand letter. Accommodation should also be possible for the payout of emergency cash (not necessarily the entire claim) to pay medical bills related to the claim or to make payroll for his employees when the insured’s injuries are the cause of his financial incapacity.

The Institute for Legal Reform conducted a survey that found that ” Florida families pay about $4,400 a year for goods and services due to the state’s lawsuit climate.“ In other words, a few hundred families reap a multimillion dollar windfall, but millions of households suffer a $4,400 shortage in their budget. Third-party bad faith settlements may look like the jury is righteously “sticking it to the man,” but it’s regular Floridians who are being skewered.