Is There a Legal Difference Between “Bad Faith” and a Lack of Good Faith in Insurance Contracts?

Last week, Shaun Marker brought up the case of Chalfonte Condo. Apartment Assoc., Inc. v. QBE Insurance Corp., 561 F.3d 1267 (11th Cir. 2009), in his post titled Enforceability of Large Hurricane Deductibles in Florida. As indicated by the title, Shaun’s post focused on the issue of enforceability of hurricane deductibles, which was only one of the issues appealed in Chalfonte. This week, I would like to continue Shaun’s exploration of Chalfonte, but turn your attention to another issue in that case: the implied warranty of good faith and fair dealing.

Merlin Law Group has been very involved with this case because of the enormous impact its decision will have on policyholders. Chip Merlin and Mary Fortson submitted an amicus brief to the Florida Supreme Court on the issue, and Chip has previously argued that a lack of “good faith” should be treated the same as “bad faith”. But what about the current state of Florida law regarding the implied warranty of good faith and fair dealing? Is it the same thing as “bad faith,” either under the common law or as a claim for violation of Fla. Stat. § 624.155?

To give some background on the Chalfonte case, Chalfonte Apartment Association sustained damage from Hurricane Wilma, and sued its insurer after becoming dissatisfied with the way the claim was handled. Chalfonte’s lawsuit had four counts: I. Declaratory Judgment; II. Breach of Contract; III. Breach of the Implied Warranty of Good Faith and Fair Dealing; IV. Violation of Fla. Stat. § 627.701(4)(a) (the deductible issue Shaun discussed last week). The trial court dismissed Count IV (the deductible issue), but the jury sided with Chalfonte on all three of the other counts.

The insurance company appealed the decision and asserted that Chalfonte couldn’t bring Count II for breach of the implied warranty of good faith and fair dealing on grounds that (a) Florida law does not recognize a cause of action for it based on an insurer’s failure to investigate within a reasonable time, or alternatively (b) it is the equivalent of a claim under Fla. Stat. § 624.155.

The insurance company essentially argued that a breach of the implied covenant of good faith and fair dealing was the same things as “bad faith” or a claim under Fla. Stat. § 624.155. While “breach of good faith” certainly sounds like it could be the same thing as “bad faith,” current Florida law is not that simplistic. The implied warranty of good faith and fair dealing is not synonymous with “bad faith;” there is a clear distinction in case law between the two.

The Eleventh Circuit noted that several federal district courts in Florida have recognized the distinction, and cited the Florida Third District Court of Appeal decision in O’Shields v. United Auto. Ins. Co., 790 So. 2d 570, 571 (Fla. 3d DCA 2001) as state court recognition of the distinction, albeit on grounds of failure to provide information relating to settlement of an insurance claim. The Eleventh Circuit clearly recognized the distinction, but couldn’t find controlling precedent to determine if a cause of action for breach of the implied warranty of good faith and fair dealing would stand on grounds of delay or failure to investigate an insurance claim within a reasonable time. The court certified the following questions to the Florida Supreme Court:

(1) Does Florida law recognize a claim for breach of the implied warranty of good faith and fair dealing by an insured against its insurer based on the insurer’s failure to investigate and assess the insured’s claim within a reasonable period of time?

(2) If Florida law recognizes a claim for breach of the implied warranty of good faith and fair dealing based on an insurer’s failure to investigate and assess its insured’s claim within a reasonable period of time, is the good faith and fair dealing claim subject to the same bifurcation requirement applicable to a bad faith claim under Fla. Stat. § 624.155?

The Florida Supreme Court heard oral arguments on the case in March of 2010, and the answers to these questions and the questions Shaun wrote about last week are still pending. Some possible outcomes could be (1) recognition of the distinction but denying a cause of action for breach of the implied warranty based on delay, (2) recognition of the distinction and allowing a cause of action for breach of the implied warranty based on delay, (3) removal of the distinction and allowing a breach of the implied warranty of good faith and fair dealing cause of action to stand, or (4) removal of the distinction and denying the cause of action altogether. Whatever the Florida Supreme Court’s answers to the above certified questions are, the decision will have an enormous impact on Florida insurance law. Stay tuned to this blog, and we will let you know as soon as the Supreme Court’s decision is published.