Disciplined in Sophisticated Defense and Insurance Litigation

October 20, 1998 | Publication| Does a Liability Insurer Have a Duty to Initiate Settlement Negotiations?

Lee Craig

This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report:  Bad Faith, Vol. 12, #10, p. 22 (Sept. 15, 1998) (Part I), and Vol. 12, #11, p. 21 (Oct. 20, 1998) (Part II).  Copyright Butler 1998.


Liability insurance policies typically provide the insurer with complete control over thedefense and settlement of third-party claims against the insured. This control imposesupon the insurer a duty to exercise good faith in settling claims. When the claimant makesa reasonably prudent offer to settle within the policy limits, courts generally agree the good-faith duty owed an insurer will require the insurer to settle the case. However, when theclaimant does not make an offer to settle within the policy limits, courts are split as towhether the insurer's good-faith duty requires it to initiate settlement negotiations.(1)

Part I of this article reviews the numerous rationales and policy concerns offered by thecourts with regard to a liability insurer's duty to initiate settlement negotiations. Part II ofthis article then presents general views regarding a liability insurer's duty to initiatesettlement negotiations. It also focuses on a handful of decisions which epitomize theviews espoused by a majority of the jurisdictions.

Part I

Rationales & Policy Concerns

No Duty to Initiate Settlement Negotiations

Courts have offered a number of rationales and policy concerns for not imposing the dutyto initiate settlement negotiations. First, courts have found placing the burden on theinsurer to initiate settlement within the policy limits creates an incentive to delay settlementnegotiations until the eve of trial. In American Physicians Insurance Exchange v. Garcia,the Supreme Court of Texas expounded on this public policy concern:

Requiring the claimant to make settlement demands tends toencourage earlier settlements. Unlike the insurer, the claimant owes theinsured no Stowers duty(2) and cannot face any additional risk or become adefendant in a second lawsuit for refusal to settle, no matter howunreasonable. However, the claimant stands to benefit substantially andincrease the assets available to satisfy any judgment by committing to settlefor a reasonable amount within policy limits if the insurer rejects the demand.If the claimant makes such a settlement demand early in the negotiations,the insurer must either accept the demand or assume the risk that it will notbe able to do so later. In cases presenting a real potential for an excessjudgment, insurers have a strong incentive to accept. Early acceptance notonly settles the liability case but obviates the possibility of subsequentStowers litigation altogether.

Conversely, if the burden of proposing settlement within policy limitsis on the insurer, then the incentives shift in favor of delayed settlement.First, if the insurer offers less than the policy limits, the claimant canreasonably anticipate that the offer will increase as trial approaches, so longas the case presents a genuine risk of an excess judgment. For the insurerto stand on a below-limits offer under such circumstances is to risk excessliability for its recalcitrance. Therefore, a claimant will have an incentive to"play chicken" with the insurer in anticipation that the final offer on the eveof trial will equal either the policy limits or the insurer's reservation price -- themost the insurer thinks the case could reasonably be worth for settlementpurposes.

Second, if the insurer tenders the policy limits earlier than the trialdate, the claimant will not necessarily accept the offer. One reason isbecause the insurer has now established a "floor" for negotiations and muststand by its offer or later risk excess liability for unreasonably withdrawing itsoffer. Because the claimant bears little risk of losing the opportunity to settlefor the policy limits, the claimant has no incentive to settle until he or shedetermines whether the defendant's assets other than liability insurancewould make an excess judgment worth collecting. This is further complicatedby the fact that evidence of the assets available to satisfy the judgment is notrelevant before liability is established, and except for liability insurance,remains undiscoverable until after the liability case is finally resolved.(3)

Second, absent some indication from the claimant that the claim can be settled within thepolicy limits, requiring insurers to initiate settlement negotiations is tantamount to requiringthem to bid against themselves. In Garcia, the court briefly touched upon this policyconcern: "From the standpoint of judicial economy, we question the wisdom of a rule thatwould require the insurer to bid against itself in the absence of a commitment by theclaimant that the case can be settled within the policy limits."(4)

Third, requiring insurers to initiate settlement negotiations imposes a burden on insurersthat is not imposed on any other litigant.(5)

Lastly, some critics contend that requiring insurers in all cases to bear the financial consequences of its failure to offer its policy limits in settlement will make it easier for plaintiffs' counsel to extract money from insurers by means of nuisance suits, will increase claims costs, and will thereby raise premium rates substantially.(6)

Duty to Initiate Settlement Negotiations

Courts have strenuously argued that insurers should have an affirmative duty to initiate settlement negotiations on a number of grounds. In Rova Farms Resort, the court announced several policy reasons to support its holding. Among them, the court emphasized that such a duty should be imposed because of the insured's relatively powerless position to guide the litigation:

The assured is not in a position to exercise effective control over thelawsuit or further his own interests by independent action, even when thoseinterests appear in serious jeopardy. The assured may face the possibilityof substantial loss which can be forestalled only by action of the carrier. Thus the assured may find himself and his goods in the position of apassenger on a voyage to an unknown destination on a vessel under theexclusive management of the crew.(7)

Second, courts have imposed the duty to initiate settlement negotiations because separate representation for the insured does not adequately insulate the insured from the inherent conflict of interest created by the risk of an excess verdict. One court has stated:

The normal legal remedy for conflicts of interest is separaterepresentation for the conflicting interests. This remedy, however,possesses only a limited usefulness in the present situation, for while theassured can be advised, as he usually is, that he may employ separatecounsel to look after his interests, separate representation usually amountsto nothing more than independent legal advice to the assured, since controlof the litigation remains in the hands of the carrier. Control of the defenseof the lawsuit cannot be split, and independent legal advice to the assuredcannot force the carrier to accept a settlement offer it does not wish toaccept. In this instance the normal legal remedy of separate representationis an inadequate solution to the conflict in interest.(8)

Third, courts believe that when a duty to initiate settlement negotiations does not exist,insureds are faced with an anomalous situation:

Where a settlement opportunity exists, the more faultless the client seemsto have been the more feasibly he may be subjected by the company to atrial of the case and all the dangers it entails. In the case of an obviouslyblameworthy client, the carrier would normally take advantage of asettlement opportunity within policy limits since any other disposition wouldbe unduly optimistic. The least blameworthy insured, however, may morereadily be delivered to face the risk of excess judgment, since a refusal tocompromise a case thought to be a "no liability" case would not be regardedas unreasonable. Thus, in those cases where a compromise may beeffected within policy limits the more innocent an insured appears to be, theworse position he is in and the more he is exposed to loss.(9)

Fourth, courts have attempted to undercut the argument that cost to insurers and insuredsshould militate against imposing a duty to negotiate by contending that costs will be offset by other factors and should not alone defeat the rule's adoption. With regard to this issue, the Rova Farms Resort court stated:

[A]ny conceivable effect on costs such a rule [insurer's duty to initiatesettlement negotiations] could exert might be more than offset by otherfactors. For example, savings might be realized from the company's nothaving to maneuver for position on the issue of bad faith during the originaltrial, or from not having to litigate excess liability suits brought by its clients.. . .

[T]he possibility that a broadened standard may increase insurancerates should not alone defeat its adoption. An insurer's decision not to settleis justified on the basis of that decision's contribution, in keeping costs down,to the benefit of all insureds. Since policyholders as a class, rather than theparticular individual involved in a case, thus profit from the company's refusalto settle within the coverage afforded, then surely insureds as a whole shouldshare the expense when the refusal results in an excess judgment.(10)

Lastly, courts have pointed to the "elementary justice" in the duty to initiate settlementnegotiations. That is, where the insurer's and insured's interests conflict, the insurer, which may reap the benefits of its determination not to settle, should also suffer the detriments of its decision.(11)

Part II

General Views Regarding the Duty to Initiate Settlement Negotiations

Courts across the county have not adopted consistent positions regarding an insurer's duty to initiate settlement negotiations.(12) In fact courts within the same jurisdiction sometimes adopt conflicting positions. Accordingly, it is very difficult to solidify the morass of decisions on this issue into a simple discussion. The discussion that follows classifies the cases on this issue based on common threads running throughout them.

Conflict of Interest

Some jurisdictions couch the issue of whether the insurer had a duty to initiate settlement negotiations in terms of whether a conflict of interest developed between the insured andthe insurer.(13) If no conflict of interest ever arose then the insurer could not be liable for bad faith in not initiating settlement negotiations. For example, in Merritt v. Reserve Insurance Company, Plaintiff Dewey Merritt sued J.A. Stafford Company (Stafford) after his truck collided with a Stafford truck. Defendant Reserve Insurance Company had issued aliability insurance policy to Stafford that provided limits of $100,000 for each person and$300,000 for each accident. Merritt sought $400,000 in damages and raised his prayer forrelief to $650,000. Reserve accepted the tender of Stafford's defense, and the counsel hired to defend Stafford consistently maintained the defendant would prevail. The jury, however, returned a verdict in favor of the plaintiff for $434,000. Reserve paid Merritt its policy limits of $100,000, and Stafford paid an additional $20,000 and assigned to the plaintiff its cause of action against Reserve. Merritt sued Reserve as Stafford's assignee,claiming in part that Reserve had acted in bad faith towards Stafford by failing to initiate settlement discussions with Merritt during the underlying litigation.

The Merritt court concluded Merritt owed Stafford no duty to initiate settlement discussionswith Merritt. After surveying prior decisions, the court noted:

While much remains obscure in this field of the law it is apparent . .. that (1) the legal rules relating to bad faith come into effect only when aconflict of interest develops between the carrier and its insured; (2) a conflictof interest only develops when an offer to settle an excess claim is madewithin policy limits or when a settlement offer is made in excess of the policylimits and the assured is willing and able to pay the excess.(14)

After restating the essential facts, the court concluded:

[T]he interests of carrier and assured at all times were parallel and notdivergent [and] nothing occurred to create any conflict of interest betweenthem or to suggest the existence of any factors, which, if acted upon, mighthave created some conflict of interest. Since no offer to settle was evermade, either within policy limits (the normal prerequisite for conflict ofinterest) or above policy limits but within feasibility limits of the assured'sresources, we conclude that no conflict of interest ever developed betweenassured and carrier, and therefore the issue of the carrier's bad faith inrelation to its assured never arose.(15)

On the other hand some courts believe a conflict of interest develops between an insurer and insured as soon as "an excess verdict far beyond the policy limit" becomes possible regardless of whether there has been an offer within the policy limits.(16) In Rova Farms Resort, the court asserted:

There was always, in fact and in law, a conflict of interest between[the insurer] and its insured from the time it realized the gravity of [theplaintiff's] awful injury and recognized that its insured must one day confronta jury, unspared from such ordeal by legal control by the trial court andvulnerable, under the most simplistic view of the probabilities, to an excessverdict far beyond the policy limit. These factors projected immediately themost urgent duty to act in good faith and with diligence in attempting toarrange a possible settlement, including the policy limit, even if somethinghad to be added by [the insured]. Only thus could the larger interest of [theinsured] be protected.(17)

Policy Provisions

Some courts have looked to the presence or absence of certain policy provisions todetermine whether a duty to initiate settlement negotiations existed.(18) In some cases thisis a somewhat inconsistent approach because the duty to deal in good faith with the insured "is a duty imposed by law, not one arising by the terms of the contract itself."(19)

In Morrell Construction the insured brought an action against its liability insurer claiming it exercised bad faith in refusing to investigate and pursue settlement negotiations before suit was filed against the insured. The trial court granted summary judgment in favor of the insurer, and the insured appealed to the Ninth Circuit Court of Appeals. After the SupremeCourt of Idaho declined to address questions certified by the Ninth Circuit, the Ninth Circuit addressed whether Idaho's bad faith tort imposes a noncontractual duty on insurers to initiate settlement negotiations before a third party files a suit.(20)

In answering this question in the negative, the court looked to whether there was any evidence in the policy which required the imposition of such a duty:

[I]f Morrell wanted its insurer to investigate third party claims beforea complaint was filed, it could have bargained for a different insurance policy,most likely with a higher premium. Instead, it purchased a policy whichexplicitly left investigations to the discretion of its insurer. We decline torewrite the parties' insurance policy via tort law to impose an obligation on aninsurer to investigate a claim before a third party files suit.

. . . .

[W]e see little reason to impose a judicially-created contract term herewhich would require insurers to investigate third party claims before suit isfiled. We are in no position to guess what terms the parties would haveagreed to if they had equal bargaining power. Nor do we think insurersshould have to waste their time investigating third party losses which maynever give rise to legal action. A contrary holding would increase the cost ofinsurance premiums and would force all Idaho insurance purchasers to payfor coverage which they may not need or want. We choose not to extendIdaho's bad faith cause of action.(21)

On the other hand many courts find that a duty to initiate settlement negotiations exists based, in part, on policy language vesting the insurer with total control over the litigationof any action or claim brought against the insured.(22)

When Liability is Clear and an Excess Verdict is Likely

Some courts have imposed the duty to initiate settlement negotiations when liability is clear, certain, or probable and when the damages will likely exceed the policy limits, whenthe probability of an excess judgment is high, or when the injuries are severe or serious.(23) In one case the court admitted that the application of such a rule could be problematic:

Application of this relatively simple principle to a case in which the plaintiffhas made no demand for settlement and has eschewed the process ofnegotiation by refusing to submit counter-offers is, however, fraught withgreat difficulty. Unfortunately too, any settlement offer, viewed from thehindsight perspective of a high verdict, inevitably tends to be colored therebyand look disproportionately low.(24)

In Florida the opinion in Powell v. Prudential Property & Casualty Ins. Co.(25) is frequently cited for the proposition that if an insured's liability is clear and the injuries are so seriousa judgment in excess of the policy limits is likely, an insurer has an affirmative duty toinitiate settlement negotiations. In Powell the insured's daughter struck two pedestrianswalking along side the road. The insurer evaluated liability as 80-100% "within days"following the accident and placed the entire policy limits of $10,000.00 in reserve acknowledging the severity of the injuries. Within nine days of the accident, an attorney representing one of the injured pedestrians wrote the insured and related the seriousness of the injuries, the need for immediate funds to satisfy medical bills which alreadyexceeded $20,000.00, and asked that Prudential disclose its policy limits. A second letter to the same effect was sent approximately two weeks later. Prudential failed to respond to either of these letters and the attorney sent a third letter describing his client's direfinancial situation and demanded Prudential to disclose its policy limits within three days. This letter went on to indicate the attorney was interested in promptly settling the casewithin policy limits. Once again Prudential did not respond, nor did they inform the insuredof his potential liability.

Sixty-two days after the accident a Prudential claims adjuster informed the claimant's attorney's secretary Prudential was tendering its policy limits. The attorney responded indicating a lawsuit had already been filed and rejected the tender of policy limits. At trialthe injured pedestrian presented expert testimony that in cases where liability is clear,injuries are severe, and policy limits are minimal, settlements are standard practice withinthe insurance industry. The trial court directed a verdict in favor of the insurer holding thatin the absence of a time demand, an insurer is entitled to a judgment as a matter of lawon the issue of bad faith.

The appellate court reversed the trial court's decision. In determining that sufficient evidence existed to send this case to a jury, the appellate court found that the lack of a formal offer did not preclude a finding of bad faith, but was only one factor to be considered along with a failure to disclose policy limits, a failure to affirmatively initiate settlement negotiations in view of the severity of the claim, and the failure to properly advise the insured as to his potential exposure.(26)

The Powell court held that because there was sufficient evidence of bad faith to take the case to the jury, it should not have been decided as a matter of law. In short Powell standsfor the following when assessing whether an insurer acted in bad faith: the court mayconsider whether liability is "clear," and whether the injuries are so serious that a judgmentin excess of the policy limits is "likely."

Similarly, some states have imposed a duty to initiate settlement negotiations throughstatute when liability is "reasonably clear."(27)

Offer or No Offer Within the Policy Limits

Some courts hold that if there is no demand or offer to settle within the policy limits the insurer cannot be liable for bad faith for failing to initiate settlement negotiations.(28) Other courts hold that an offer from the claimant is not a prerequisite to instituting a bad faithaction against an insurer.(29)

In American Physicians Insurance Exchange v. Garcia,(30) the Texas Supreme Courtconcluded an insurer did not breach its Stowers duty(31) to settle because it never received a settlement demand within its policy limits. From 1980 until the beginning of 1983, Dr.Ramon Garcia treated Gustavo Cardenas. He prescribed two drugs which allegedly caused Cardenas to develop a debilitating brain disease. In 1980 Garcia was covered bya $100,000 claims-made malpractice insurance policy issued by Insurance Corporation ofAmerica (ICA). In 1981 and 1982 Garcia was covered under two consecutive one-year ICA "occurrence" policies, each providing him with $500,000 in coverage. In 1983 Garciapurchased a $500,000 occurrence-based policy from American Physicians InsuranceExchange (APIE).

On March 23, 1984, APIE received the Cardenases' original petition which alleged Garciahad treated Cardenas from October 3, 1980 until April 12, 1982. On the day of the trial,the Cardenases filed a sixth amended petition alleging for the first time that Garcia's malpractice had continued into 1983, and thus into APIE's coverage period. After a trialthe court found Garcia's treatment of Cardenas constituted continuing negligence fromSeptember 1980 until February 1983. The court rendered judgment for $2,235,483.30.

The Cardenases, as Garcia's assignees, sued ICA and APIE for breach of their duty to accept a reasonable settlement demand within policy limits. The claimants settled with ICAfor $2,000,000 and entered into a partial settlement with APIE for $500,000. After a trialon the bad faith claims, the jury found that APIE had failed to settle the malpractice caseand had failed to defend Garcia. The court rendered judgment against APIE in the amount of $1,331,574.

On appeal, the Supreme Court of Texas addressed whether APIE had breached any duty to settle the malpractice case. The court reasoned an insurer has no duty to settle a claim that is not covered under its policy and APIE, therefore, had no duty to settle before the Cardenases filed their sixth amended petition on the morning of trial. The court then setout the circumstances in which a settlement offer may trigger a duty to settle.(32) The court acknowledged that in Ranger County Mutual Insurance Co. v. Guin(33) it had extended the Stowers' doctrine to include a duty not only to accept reasonable settlement offers or demands, but to explore settlement possibilities and to enter into reasonable settlement negotiations.(34) The court, however, rejected the contention that Ranger requires an insurer to initiate settlement negotiations.(35) The court then distinguished out-of-state cases which impose such a duty because those cases involve "affirmative misconduct by the insurer to subvert or terminate settlement negotiations."(36) The court reasoned that to require the insurer to initiate settlement negotiations would undermine the public policy to encourage settlement of claims.(37)

On the heels of this reasoning, the court addressed whether APIE had ever received apolicy limits settlement offer. Because APIE was never faced with the opportunity to settlethe Cardenases' claim within the policy limits, the court held that APIE was not subject to liability for not settling.

Taking the opposite approach to Garcia is Rova Farms Resort, Inc. v. Investors Insurance Co.,(38) which imposes an affirmative duty upon insurers to initiate settlement negotiations even when the claimant does not make an offer to settle within the policy limits. In Rova,an accident entailing severe personal injuries occurred on Rova's premises(39) where it operated a recreational resort. Rova's insurer, Investors Insurance Company of America(Investors), issued to Rova a comprehensive general liability policy with a limit of $50,000. The policy entitled Investors to make such investigations, negotiations, and settlement of any claim or suit as it might deem expedient.

The injured party, Lawrence McLaughlin, sued Rova and its general manager. Investors assumed the defense and once plaintiff added an allegation of willful and want negligence, Rova retained independent counsel because of Investor's admonition thatsuch wrongful conduct may not be covered. On the first day of trial, Investors offered $12,500 in settlement of the case, which approximated the plaintiff's "special" damages. The jury returned a verdict of $225,000 and the magnitude of the verdict did not causeInvestors to increase its offer nor cause it to explore the possibility of settlement. After an appeal, a reversal, and a reinstatement of the verdict, Investors paid its $50,000 and Rova paid the excess judgment of $175,000.

Rova then sued Investors for bad faith in not settling or attempting to settle in good faith. After a full hearing on the merits, the trial judge entered judgment for Rova for the amountof the excess judgment plus interest. The intermediary appellate court in Texas affirmed. The Texas Supreme Court granted certification.

The supreme court first noted that "substantial evidence before the court revealed amultitude of circumstances which should have impelled Investors to energize a clearly attainable settlement of the McLaughlin claim."(40) The court then rejected Investors'argument that it had no obligation, as a matter of law, to offer its policy limit in settlement without a firm demand from the plaintiff's attorney:

This seems to us an unduly restricted view of the law. Although thecases cited involved claimant offers either during trial or pending appeal,their delineation of the carrier's obligation of good faith would clearlyembrace the situation vis-a-vis settlement disclosed in the instant case. When Investors suggests that no conflict of interest can exist, in law, underany circumstances until there has been a formalized offer within policy limitsby plaintiffs, it may be thinking of older concepts, before the emergence anddevelopment of those principles of equity, fair dealing and good faith (suchas in the very cases Investors cites) which breathed new lifegiving honestyinto the bare contractual relationship sometimes mentioned as existingbetween insured and insurer.

. . . .

[I]t would be unrealistic to believe that such an offer is a prerequisitefor finding the insurer to have acted other than in good faith. The better viewis that the insurer has an affirmative duty to explore settlement opportunities. At most, the absence of a formal request to settle within the policy is merelyone factor to be considered in light of the surrounding circumstances, on theissue of good faith.(41)

In conclusion, the court found that insurers have an affirmative duty to initiate settlementnegotiations:

We, too, hold that an insurer, having contractually restricted theindependent negotiating power of its insured, has a positive fiduciary duty totake the initiative and attempt to negotiate a settlement within the policycoverage. Any doubt as to the existence of an opportunity to settle within theface amount of the coverage or as to the ability and willingness of theinsured to pay any excess required for settlement must be resolved in favorof the insured unless the insurer, by some affirmative evidence,demonstrates there was not only no realistic possibility of settlement withinpolicy limits, but also that the insured would not have contributed to whateversettlement figure above that sum might have been available.(42)

Accordingly, the court affirmed the verdict against Investors finding them liable for the excess verdict.


The extreme views espoused by the courts on this issue-an absolute and affirmative duty to initiate settlement negotiations versus no duty at all-do not appear toprovide insurers, insureds or courts with a reasonable approach to this issue. On the one hand, courts have remarked that an absolute duty to initiate settlement negotiations imposes a more onerous obligation upon the insurer to seek settlement than is imposed where an actual offer of settlement within the policy limits is made.(43) On the other hand, courts have objected to an insurer being totally insulated from bad faith simply because the claimant has not offered to settle within the policy limits. In sum courts should develop astandard that reasonably balances the conflicting interests of the insurer and insured.


1. Cindie Keegan McMahon, Annotation, Duty of Liability Insurer to Initiate SettlementNegotiations, 51 A.L.R.5th 701, 701 (1997).

2. The Stowers duty is the duty of an insurer to exercise ordinary care in thesettlement of claims to protect its insureds against judgments in excess of policylimits. See Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544 (Tex.Comm'n App. 1929).

3. Garcia, 876 S.W.2d at 851 n.18 (citations omitted).

4. Garcia, 876 S.W.2d at 851.

5. See Kavanaugh v. Interstate Fire & Casualty Co., 342 N.E.2d 116, 121 (Ill. Ct. App.1975).

6. Rova Farms Resort, Inc. v. Investors Ins. Co., 323 A.2d 495, 509 n.7 (N.J. 1974).

7. Rova Farms Resort, 323 A.2d at 507.

8. Rova Farms Resort, 323 A.2d at 507-08.

9. Rova Farms Resort, 323 A.2d at 508.

10. Rova Farms Resort, 323 A.2d at 509 n.7.

11. See Crisci v. Security Ins. Co., 425 P.2d 173, 177 (Cal. 1967); Rova Farms Resort,323 A.2d at 510.

12. Even commentators disagree about whether insurers owe a duty to initiatesettlement negotiations with injured third parties. Keeton and Appleman argue thatinsurers should have a duty to explore settlement opportunities, even when noaction has been brought by a third party against its insured. See R. Keeton & A.Widiss, Insurance Law § 7.8(c), at 889-90 (1988); John Alan Appleman, InsuranceLaw & Practice § 4711, at 377 (Berdal ed. 1979). However, Couch contends thatthere is no liability for bad faith in the absence of an offer to settle by the personclaiming against the insured. 14 Couch on Insurance 2d § 52:17, at 406 (rev. ed.1982).

13. Fulton v. Woodford, 545 P.2d 979, 983 (Ariz. Ct. App. 1976) (discussing Merritt,infra); Coe v. State Farm Mut. Auto. Ins. Co., 136 Cal. Rptr. 331, 335-36 (Cal. Ct.App. 1977); Merritt v. Reserve Ins. Co., 110 Cal. Rptr. 511, 524 (Cal. Ct. App.1973); Rova Farms Resort, Inc. v. Investors Ins. Co., 323 A. 2d 495, 504-05 (N.J.1974); but see Morrell Constr., Inc. v. Home Ins. Co., 920 F.2d 576, 579 (9th Cir.(Idaho) 1990) (discussing conflict of interest when third party's demand exceeds theinsured's policy limits and duty to initiate settlement negotiations); Farmers Ins. Exch. v. Schropp, 567 P.2d 1359, 1366 (Kan. 1977) (same) (quoting Coleman v.Holecek, 542 F.2d 532 (10th Cir. 1976).

14. Merritt, 110 Cal. Rptr. at 523-24.

15. Merritt, 110 Cal. Rptr. at 524.

16. Rova Farms Resort, Inc. v. Investors Ins. Co., 323 A.2d 495, 504 (N.J. 1974).

17. Rova Farms Resort, 323 A.2d at 504-05.

18. See Abernethy v. Utica Mut. Ins. Co., 373 F.2d 565 (4th Cir. (N.C.) 1967) (duty tonegotiate under circumstances of case); Morrell Constr., Inc. v. Home Ins. Co., 920F.2d 576 (9th Cir. (Idaho) 1990) (see discussion, infra); Rova Farms Resort, Inc. v.Investors Ins. Co., 323 A.2d 495 (N.J. 1974) (duty to explore settlementopportunities); Maine Bonding & Casualty Co. v. Centennial Ins. Co., 693 P.2d 1296(Or. 1985) (implying that insurer has duty to initiate settlement negotiations).

19. See Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1037 (Cal. 1973).

20. It should be noted that in this case the injured third party did not make a settlement offer prior to filing suit. Morrell Constr., 920 F.2d at 579.

21. Morrell Constr., 920 F.2d at 580. It appears that when the court refers to theinsurer's duty to investigate before suit is filed it is also referring to an insurer's dutyto initiate settlement negotiations.

22. See, e.g., Rova Farms Resort, Inc. v. Investors Ins. Co., 323 A.2d 495 (N.J. 1974);Alt v. American Family Mut. Ins. Co., 237 N.W.2d 706, 712 (Wis. 1976).

23. See Peterson v. Allcity Ins. Co., 472 F.2d 71 (2d Cir. (N.Y.) 1972) (holding thatinsurer acted in bad faith when it failed to attempt to negotiate settlement of claimagainst its insured, when insured's liability was apparent, claimant was severelyinjured, potential for prevailing on affirmative defense was dubious, and claimantindicated willingness to settle for policy limits); Texoma Ag-Products v. Hartford Accident and Indem. Co., 755 F.2d 445 (5th Cir. (Tex.) 1985) (holding that insurerhad duty to initiate settlement negotiations because, under circumstance of case,third party's injuries were serious and there was almost certain liability); Covill v.Phillips, 452 F. Supp. 224, 226, 237 (D. Kan. 1978) (stating that "in potential excessjudgment cases where there is no reasonable question as to the liability of theinsured, the duty of good faith may require an insurance company to makereasonable, timely efforts to initiate settlement negotiations"); Tannerfors v. American Fidelity Fire Ins. Co., 397 F. Supp. 141 (D. N.J. 1975) (holding insurerliable for bad faith in failing to offer policy limits because insurer knew that itsinsured faced certain liability in excess of policy limits); Powell v. Prudential Property& Casualty Ins. Co., 584 So. 2d 12 (Fla. Dist. Ct. App. 1991) (see discussion, infra); Van Vleck v. Ohio Casualty Ins. Co., 471 N.E.2d 925, 927 (Ill. App. Ct. 1984)(stating that "[w]here it appears that the probability of an adverse finding on liabilityis great and the amount of damages would exceed the policy limits, the insurer hasa duty to settle within the policy limits"); Kavanaugh v. Interstate Fire & CasualtyCo., 342 N.E.2d 116, 121 (Ill. App. Ct. 1975) (holding that although the general ruleis that an insurer does not have a duty to initiate settlement negotiations, there issuch a duty when "the probability of an adverse finding on liability is great and theamount of probable damages would greatly exceed the coverage); Eastham v.Oregon Auto. Ins. Co., 540 P.2d 364, 368 (Or. 1975) (stating that "when there isclear liability it may be bad faith for the insurer to refuse to settle"); State Auto. Ins.Co. v. Rowland, 427 S.W.2d 30 (Tenn. 1968) (concluding that while insurer doesnot have affirmative duty to negotiate in all circumstances, it cannot decline tonegotiate where insured's liability is certain, injury to claimant is great, and there ispossibility of settling within policy limits); but see Snodgrass v. State Farm Mut.Auto. Ins. Co., 804 P.2d 1012, 1022 (Kan. Ct. App. 1991) (holding that when thereare legitimate grounds to deny coverage there is no duty to initiate settlementnegotiations even when liability is clear and the injuries severe).

24. Covill, 452 F. Supp. at 237-38.

25. 584 So. 2d 12 (Fla. Dist. Ct. App. 1991).

26. Powell, 584 So. 2d at 14.

27. See, e.g., Van Vleck v. Ohio Casualty Ins. Co., 471 N.E.2d 925, 927 (Ill. App. Ct.1984) (section 154.6(d) of the Illinois Insurance Code establishes that "notattempting in good faith to effectuate prompt, fair and equitable settlement of claimssubmitted in which liability has become reasonably clear" is an improper claimpractice); Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 628 N.E.2d 14, 17(Mass. 1994) (stating that statutory unfair practice is the failure "to effectuateprompt, fair and equitable settlements of claims in which liability has becomereasonably clear"); State of New York v. Merchants Ins. Co. of New Hampshire, 486N.Y.S.2d 412, 413 (N.Y. App. Div. 1985) ("Insurance Law § 2601(a)(4) notes, interalia, that it is an unfair trade practice for insurers 'not [to attempt] in good faith toeffectuate prompt, fair and equitable settlements of claims submitted in whichliability has become reasonably clear'").

28. See Bush v. Allstate Ins. Co., 425 F.2d 393, 396 (5th Cir. (Fla.) 1970); Bailey v.Hardware Mut. Casualty Co., 322 F. Supp. 387, 393 (W.D. La. 1969), affirmed, 439F.2d 763 (5th Cir. 1971); Snodgrass v. State Farm Mut. Auto. Ins. Co., 804 P.2d1012, 1021-22 (Kan Ct. App. 1991); Peterson v. American Family Mut. Ins. Co., 160N.W.2d 541, 544 (Minn. 1968); State Farm Fire & Casualty Co. v. Metcalf, 861S.W.2d 751, 756 (Mo. Ct. App. 1993); American Physicians Ins. Exch. v. Garcia,876 S.W.2d 842, 851 (Tex. 1994); Ins. Corp. of America v. Webster, 906 S.W.2d77, 79 (Tex. App. 1995); cf. American Mut. Ins. Co. v. Bittle, 338 A.2d 306, 309 (Md.1975) (holding that insurer could not be liable for third-party bad faith when insurednever demanded the insurer to settle the claim against him); Miller v. Public Library of Columbus and Franklin County, 519 N.E.2d 856, 858 (Ohio Ct. App. 1987)(holding that insurer does not have duty to initiate settlement negotiations whenplaintiff had not previously instituted negotiations).

29. See Powell v. Prudential Property & Casualty Ins. Co., 584 So. 2d 12, 14 (Fla. Dist.Ct. App. 1991) ("The lack of a formal offer to settle does not preclude a finding ofbad faith. Although an offer of settlement was once considered a necessaryelement of a duty to settle . . . an offer to settle is not a prerequisite to the impositionof liability for an insurer's bad faith refusal to settle, but is merely one factor to beconsidered."); Farmers Ins. Exch. v. Schropp, 567 P.2d 1359, 1366 (Kan. 1977)(holding that "the duty to settle does not hinge on the existence of a settlement offerfrom the plaintiff"); Rova Farms Resort, Inc. v. Investors Ins. Co., 323 A.2d 495, 505(N.J. 1974) (recognizing that a settlement demand within the policy limits is nolonger an absolute prerequisite for finding an insurer to have acted in bad faith); Altv. American Family Mut. Ins. Co., 237 N.W.2d 706, 711 (Wis. 1976) (concludingthat "the submission of a legally binding offer from a claimant is not a necessarycondition antecedent to the maintenance of a bad-faith excess-liability action").

30. 876 S.W.2d 842 (Tex. 1994). For an analysis of the issues resolved in Garcia, see Stephen S. Ashley, American Physicians Insurance Exchange v. Garcia and the Cost of Unnecessary Decisions, 10 Bad Faith Law Report 45 (Apr. 1994). TheGarcia decision is also the subject of an American Law Reports annotation. SeeCindie Keegan McMahon, Annotation, Duty of Liability Insurer to Initiate SettlementNegotiations, 51 A.L.R.5th 701 (1997).

31. As mentioned earlier, the Stowers duty is the duty of an insurer to exercise ordinarycare in the settlement of claims to protect its insureds against judgments in excessof policy limits. See Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544(Tex. Comm'n App. 1929).

32. Garcia, 876 S.W.2d at 849.

33. 723 S.W.2d 656 (Tex. 1987).

34. Garcia, 876 S.W.2d at 849, 863.

35. Garcia, 876 S.W.2d at 849.

36. Garcia, 876 S.W.2d at 850 n.17.

37. Garcia, 876 S.W.2d at 851 n.18. The court's explanation of the public interest favoring early dispute resolution is discussed, infra.

38. 323 A.2d 495 (N.J. 1974).

39. The accident occurred when Rova's commercial invitee, Lawrence McLaughlin,dove from a "diving platform" into three or four feet of murky water. He sustainedfractures of the fourth and fifth cervical vertebrae and damage to the spinal cord. His body is paralyzed from the fifth cervical vertebrae down and he has very littlemovement of his arms. Rova Farms Resort, 323 A.2d at 479 & 479 n.1.

40. Rova Farms Resort, 323 A.2d at 485.

41. Rova Farms Resort, 323 A.2d at 504, 505 (citations omitted).

42. Rova Farms Resort, 323 A.2d at 507.

43. See Fulton v. Woodford, 545 P.2d 979, 983 (Ariz. Ct. App. 1976).

September 08, 2015 PublicationThe Ongoing Struggle Over Removal Of First-Party Bad Faith Cases In Florida

The critical fact that seems to have been glossed over by all of the courts considering this question is the fact that once a final judgment has been entered by a Florida trial court, the court loses jurisdiction to do anything further.

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April 27, 2015 PublicationRicky's Believe It Or Not: Part Two

In the January 26, 2015 edition of this publication, I shared a collection of excerpts from documents authored by attorneys. Given the sheer volume of paper which crosses my desk in reviewing claims for coverage and bad faith, I inevitably come across some very humorous (though not intentionally so) mistakes in the various documents reviewed. This month, I share some of the funniest entries I've seen in deposition transcripts and medical records.

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January 26, 2015 PublicationRicky's Believe It Or Not

As an attorney for more than sixteen years, and a practitioner of insurance bad faith for nearly eleven years, I have seen virtually every kind of bad faith set-up one could imagine. I have shared my observations through various articles published in this fine periodical as well as other publications. The law of insurer bad faith is obviously one which is constantly in flux. Therefore, it would be a simple matter to wax eloquent upon the latest pronouncement from the high court of one of our many state and federal courts. However, I feel compelled to digress from the usual stately discussion of the intricacies of bad-faith law and share some of the more amusing things I have come across during my review of tens of thousands of documents contained in claim files, medical records and correspondence, done in connection with representing insurers in this field.

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December 22, 2014 PublicationChallenging Consent Judgments As Unreasonable Or Tainted By Bad Faith

Generally, if an insurance company refuses to defend its insured against a claim, the insured may protect himself by entering into a stipulated agreement with the claimant and holding the insurance company responsible for paying the claimant the agreed-to amount.

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November 24, 2014 PublicationThe Coverage Action 'Fixed' Bad Faith Damages: Are The Total Damages Binding?

Florida state and federal courts struggle with excess damage verdicts in first-party bad-faith actions arising out of uninsured motorist/underinsured motorist (UM) coverage. Recent case decisions produce mixed results for insurers. But mention UM coverage, bad faith, and total damages, and Florida Statute Section 627.727(10) immediately comes to mind. Comments by two judges framed the Section 10 debate.

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October 27, 2014 PublicationThree Is A Crowd: Revisiting The Third Party Beneficiary Doctrine

This article examines the third party beneficiary doctrine in conjunction with the approaches courts follow with regard to the collection of an excess judgment from a liability insurer.

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September 22, 2014 PublicationCourts' Different Views On Additional Insureds' Duties Under Liability Policy Notice Provisions

Liability policies typically require the insured to provide prompt notice of a claim or suit. Notice is regarded as a condition precedent to the insurer's duty to defend or indemnify. The notice provisions in a typical liability policy seem straightforward. However, issues surrounding notice become complicated when an additional insured, who is typically not a party to the insurance contract and sometimes unnamed in a policy, is involved. Under those situations, courts have had to address, among other issues, the sophistication and resources of the additional insured, whether the additional insured is aware that coverage potentially exists or even that policies potentially exist, whether the jurisdiction requires the additional insured to actually tender the claim or suit or whether another insured's tender of the claim or suit is sufficient and whether there was late notice or no notice at all by the additional insured. Different jurisdictions have reached different results. 

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August 25, 2014 PublicationWall Of Confusion: GEICO General Insurance Company v. Bottini And Its Ill-Begotten Progeny

On July 20, 2012, a three-judge panel of Florida's Second District Court of Appeal released what, on its face, appeared to be a relatively innocuous opinion in Geico General Insurance Company v. Bottini . The Bottini appeal arose as a result of Geico's appeal of a jury verdict in the amount of $30,872,266 rendered against it in an uninsured/underinsured motorist (‘‘UIM'') case. Consistent with precedent, the trial court entered a judgment against Geico in the amount of the policy's limit of liability, $50,000. Because the huge verdict had the effect of fixing the plaintiff's damages in a subsequent bad faith case, Geico naturally sought review of that verdict. The panel opinion concluded simply, ‘‘Based on the evidence presented, we are satisfied that even if Geico were correct that errors may have affected the jury's computation of damages, in the context of this case and the amount of the judgment, any such errors were harmless.''

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June 26, 2014 PublicationUninsured Motorist Bad-Faith Claims: Separate Action, Separate Trial, Separate Damages

First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.

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May 22, 2014 PublicationBurden Of Proof Issues In Consent Judgments

When a carrier refuses to defend its insured, the insured may consent to entry of a stipulated judgment. 1 In most jurisdictions the insured (or claimant) bears the burden of proof to show coverage exists as a prerequisite to recovery of an excess judgment. 2 The burden of proving coverage for a consent judgment can sometimes create problems. Consent judgments raise many other issues beyond the scope of this article. 3  

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April 25, 2014 PublicationAn Insurance Carrier's Good Faith Obligations Toward Its Insureds In Liability Settlements Where Not All Of the Insureds Are Released

Generally, liability insurers must secure a release of all of their insureds when settling claims against their insureds. However, some courts have recognized circumstances where an insurer may settle for an insured at the exclusion of another while still maintaining its good faith duties toward all of its insureds. Other courts have seemingly rejected the notion that an insurer can ever settle for one of its insureds at the exclusion of others. These release issues occur most prevalently in automobile accidents involving insured owners and additional insured drivers.  

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March 27, 2014 PublicationAnother Item For Your Checklist: The Bad Faith Concerns Related To Overreaching Proposed Releases

A common scenario: claimant's counsel issues a time limit demand for policy limits and the insurer decides to accept the demand and tender the limits. Once the decision is made to accept the demand, the insurer should go through its checklist of concerns to make sure that each element of the time demand is met, while ensuring that the insured is adequately protected.

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March 13, 2014 PublicationBad Faith And Ordinary Negligence: Distinguishing The Excusable From The Culpable

Bad faith and ordinary negligence typically involve two very different standards of care. In most jurisdictions, courts agree that proof of bad faith requires a showing of insurer culpability greater than ordinary negligence.

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December 19, 2013 PublicationRecent Cases Discussing The Advice Of Counsel Defense: The Good, The Bad, And The Discovery

The gravamen of a third-party claim of bad faith is that the insurer failed to settle a claim against an insured when it had the opportunity to do so. The essence of the claim is that the insurer acted solely on the basis of its own interests, failed to properly and promptly defend the claim, and thereby exposed the insured to an excess judgment. However, a claim based on insurer negligence is insufficient to establish bad faith

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November 21, 2013 PublicationThis Mediation Is Confidential, Right?

Mediation is an effective dispute resolution tool because it allows participants to openly discuss all aspects of a dispute without the fear of recourse or retribution. Confidentiality is a critical component of this process. Litigants and insurers participating in mediation often proceed under the assumption that all communications and conduct occurring during mediation will be cloaked with protection. However, exceptions to confidentiality are slowly eroding what is commonly referred to as the absolute ‘‘mediation privilege.''

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October 24, 2013 PublicationSeparating Fact From Fiction: Strategies For Contesting The Excess Consent Judgment

Few legal maneuvers generate greater skepticism – among courts and insurers – than the excess consent judgment, an increasingly common settlement device used In liability cases.

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September 26, 2013 PublicationSome Considerations In Addressing Time-Limit Demands

Liability insurance carriers should be prompt and proactive when they receive a time-limit demand from a claimant. Time is usually not on the carrier's side when it comes to these settlement communications.

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August 22, 2013 PublicationCausal Friday: Better To Be Lucky Than Good

Sometimes it is better to be lucky than good, as the insurers in the following cases learned. These cases demonstrate that, even where the facts indicate that the insurer acted in bad faith, it is still possible for the insurer to escape extra-contractual exposure. In the absence of a causal link between the excess judgment and the insurer's actions, bad faith liability cannot exist as a matter of law.

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July 25, 2013 PublicationAn Insurer's Liability For A Hospital Lien After Settlement Of A Claim That Impairs The Lien

Over forty states have hospital lien laws. Those laws typically allow hospitals to recover against parties, including insurers, who impair their liens. In many states, the hospital lien laws do not clearly identify the type and extent of damages a hospital can recover against a party who impairs a hospital lien. The damages a hospital can recover from a party who impairs a lien depends upon the language of the applicable hospital lien law and the courts' interpretations of that law. Results vary from state to state. 

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June 27, 2013 PublicationWhy Sue For Bad Faith When Consequential Damages Are Available?

Bad faith aside, insurers often assume a claim's ‘‘total" exposure under the insurance contract is the policy's limit.  Courts traditionally allow insureds to recover contractual damages based on the limit, plus legal interest.  However, a new trend is emerging in some jurisdictions.

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May 23, 2013 PublicationIs The Bad Faith Claim A Part Of The Package?

In an effort to create yet another way to present a claim for bad faith against an insurance company, plaintiff attorneys have been submitting ‘‘package deal'' demands on behalf of multiple claimants who have all incurred damages as a result of the same occurrence.

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April 25, 2013 PublicationRevisiting The Litigation Privilege And Its Application In Bad-Faith Cases

Over the last 25 years, courts have wrestled with the issue of whether to apply an absolute privilege to preclude bad-faith lawsuits based on an insurance company's conduct during the litigation of an underlying first-party or third-party claim. Some courts still refuse to recognize a bad-faith claim against an insurance company based upon its post-litigation conduct.  However, the prevailing trend seems to suggest that courts will find that some of the insurer's conduct remains relevant and admissible, while the conduct of the insurer's attorneys in defending the claim remains privileged.

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March 28, 2013 PublicationWho Is Entitled to the Claims File?

The United States Supreme Court has recognized the "attorney-client privilege" as "one of the oldest recognized privileges for confidential communications," the purpose of which is to encourage "full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice."

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February 28, 2013 PublicationNavigating The Southern Bad-Faith Buffet: Extra-Contractual Liability In The Absence Of Breach Of Contract

In the Southeast, catastrophic natural disasters have become all too common, and the physical and financial consequences are borne by the entire region. Five of the top ten costliest hurricanes to hit the United States have impacted North Carolina, and with approximately $159.6 billion in insured coastal assets, North Carolina continues to have significant loss exposure.

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January 31, 2013 Publication‘Bad-Faith' Discovery: Claim Files, Training Materials, Personnel Files, And The Kitchen Sink

A recent discovery order in the federal court case of Signature Development, LLC v. Mid-Continental Casualty Company is illustrative of our liberal discovery. Note, this liability insurer has yet to be found liable or guilty of any wrongdoing.  Signature alleges, however, that the corporate defendant insurer breached the contract of insurance, committed ‘‘bad-faith,'' breached its fiduciary duty to its insured, committed unfair trade practices, intentionally inflicted emotional distress and vexatiously refused to pay. Based upon these allegations alone, the court addressed the scope and burden of discovery. 

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November 21, 2012 PublicationMediation (Resolving Cases With Extra-Contractual Exposure)

By definition, mediation begins with ‘‘me.'' Once conflicting parties have resorted to litigation, they naturally act purely in their own respective self-interest. When a mediation involves allegations of insurer ‘‘bad faith,'' this is especially so. The parties are initially polarized. 

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October 25, 2012 PublicationSquare Pegs In Round Holes: When The Adjustment Process Meets The Evidence Code

If given the chance, most property adjusters would skip the aspect of their job involving litigation. Avoiding lawyers, depositions, and, of course, trials would alleviate much stress. Unfortunately, dealing with lawyers and litigation is an unavoidable job hazard for most adjusters.

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September 27, 2012 PublicationThe Troubles Of Trafalgar : Bad Faith In the Absence Of Breach Of Contract

How can a first-party insurer be legally liable for insurance ‘‘bad faith'' if it has already been found not to be liable for breach of the insurance contract? According to at least one Florida appellate court, by paying an Appraisal Award timely.

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August 23, 2012 PublicationScary Stuff: Insurance Claim Files And Exceptions To The Attorney-Client Privilege

Are all attorney-client communications contained in such claim files that were thought to be confidential now discoverable because the insurer lost the underlying first-party claim, litigation, or appeal

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July 26, 2012 PublicationThe Vanishing Right To Federal Jurisdiction In Bad Faith Claims In Florida

On April 25, 2012, the United StatesDistrict Court for the Southern District of Florida issued its opinion in Moultrop v. GEICO General Ins. Co., remanding a bad faith claim to state court pursuant to the one-year ‘‘repose'' provision of 28 U.S.C. § 1446(b). The Moultrop decision is one more in a growing line of cases which refuse insurers access to a federal forum based on the repose provision, under the anomalous reasoning that the right to removal expired before the cause of action for bad faith accrued. Unfortunately for the insurers, 28 U.S.C. section 1447(d) precludes appellate review of an order granting a motion to remand.

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May 24, 2012 PublicationProtecting Confidential Communications: Application Of The Attorney-Client Privilege In First-Party Insurance Bad-Faith Cases

Discovery of the insurance company's entire claim file—including confidential communications between the insurer and its attorney—is often the first target on the insured's agenda in a first-party bad-faith lawsuit. In any other context, a party's request for discovery of the opposing party's confidential attorney-client communications would be viewed by courts as a brazen and inappropriate attempt to obtain information obviously protected by the attorney-client privilege; however, in the context of bad-faith litigation, this type of request has been dignified by courts who often look for ways to permit discovery of the insurer's attorney-client communications.

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April 26, 2012 PublicationCreative Methods Used To Set-Up ‘Bad Faith' Claims — Use Of Multiple Coverage Demands

In the past decade, the bad-faith environment has rapidly shifted from a useful tool used by consumers to protect themselves from arguably egregious actions to an elaborate trap set by personal injury plaintiff attorneys to reap outrageous awards from seemingly innocent conduct by claims professionals. Insurance companies now fear multi-million dollar verdicts based on policies written for insureds who did not want more than the absolute minimum coverage allowed. Based on technicalities, clever plaintiff attorneys attempt to convince courts to rewrite insurance policies, allowing for unlimited recoveries.

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March 22, 2012 PublicationA Liability Insurer's (Almost Absolute) Right To Settle Claims Without The Insured's Consent

Many cases hold that a liability insurer can settle a claim against its insured without the insured’s consent because the policy language gives an insurer the right to settle even when an insured may not want to settle.1 For the most part, courts in California, Florida, and Louisiana allow insurers to settle claims without the insured’s consent where the policy gives the insurer the right to settle as it deems expedient. However, courts may nonetheless consider whether a settlement may have adversely impacted the insured to determine whether an insurer acted in good faith.

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February 23, 2012 PublicationBullock v. Philip Morris USA, Inc.: Where ‘Reprehensibility' As An Exception To Constitutional Protections And the Ratio Guidepost Includes The Wealth Of The Defendant

On November 30, 2011, the California Supreme Court exercised its discretion and let stand a $13.8 million punitive damage award that was more than 16 times the compensatory damages awarded by the jury. The case, Bullock v. Philip Morris, 1 (Bullock) involved a smoker diagnosed with lung cancer who filed suit against the cigarette manufacturer, seeking damages based on products liability, fraud, and other theories.

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January 26, 2012 PublicationWho Killed Reverse Bad Faith? And Why It Could Make A Comeback

In every state in the union an insured can seek some form of compensation for an insurer’s ‘‘bad faith’’ in adjusting a claim.Yet only one state, Tennessee, currently allows an insurance company to recover damages caused by the insured’s bad faith.This imbalance has allowed ‘‘bad faith’’ litigation to become big business.The tendency of courts to treat insureds like a disadvantaged class has created an uneven playing field for insurance companies in claims adjustment.

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December 22, 2011 PublicationA Wolf In Sheep's Clothing (Insurers Should Be Vigilant In Florida)

[ Editors note: Alan J. Nisberg, Esq., is a partner with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial and appellate attorney, specializing in extra-contractual, class action and complex coverage litigation. This commentary, other than the quoted material, expresses the authors opinions -  not the opinions of Butler or Mealey's. Copyright © 2011 by the author. Responses are welcome. ] 

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November 23, 2011 PublicationProximate Causation In Third-Party Bad Faith: Not Every Bad Decision Is A Bad-Faith Suit

Proximate causation is an element of a claim for bad faith. An often-overlooked element, but an element nonetheless. Even claims with grievous claim-handling errors and high excess judgments can still be very defensible if there is no proximate causation between the two. This article examines the element of the bad-faith cause of action that is most often glossed over. 

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October 27, 2011 PublicationRecent Application Of State Farm v. Campbell In Bad-Faith Cases

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 25, #10 (September, 2011). © 2011 

[ Julie A. Simonson is an associate with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. She is active in the firm's Extra-Contractual and Liability Departments. Any commentary or opinions do not reflect the opinions of Butler or Mealey's. Copyright © 2011 by Julie A. Simonson. Responses are welcome. ]

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August 25, 2011 PublicationApplying The Litigation Privilege In Bad-Faith Cases

[BrianD.Webb,Esq.,is a partner with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial and appellate attorney specializing in extra-contractual and complex coverage litigation. This commentary expresses the author's opinions–not the opinions of Butler or Mealey's. Copyright#2011 by Brian D. Webb. Responses are welcome.] 

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July 28, 2011 PublicationThe Insurer's Bill Of Rights (A Balance Of Power)

[Editor's Note: Alan J. Nisberg is a partner in the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial attorney and appellate lawyer, specializing in extra-contractual, class action, and complex coverage litigation. This commentary, other than the quoted material, expresses the author's opinions - not the opinions of Butler or Mealey's. Copyright#2011 by the author. Responses are welcome.] 

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June 23, 2011 PublicationChoice-Of-Law Principles Affecting Insurance Bad-Faith Claims

[R. Steven Rawls is a partner and Ryan K. Hilton is a senior associate with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. This commentary expresses the author's opinions–not the opinions of Butler or Mealey's. Copyright © 2011 by R. Steven Rawls and Ryan K. Hilton. Responses are welcome.] 

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February 24, 2011 PublicationThe Duty to Initiate Settlement Negotiations: Where Does it Begin and How Far Does it Go

In some jurisdictions, including Florida, the courts recognize a duty in some circumstances for a liability insurer to initiate settlement negotiations with a third-party claimant before the claimant has ever made a demand. This duty is a relatively recent invention in the common law and has yet to be fully defined. While most articles on the subject tend to focus on whether or not this duty should exist in the first place, this article skips that threshold question and delves into the particulars that apply in the jurisdictions that recognize it. What triggers the duty? What is required of the insurer to discharge it? What are the defenses to a claim for bad-faith failure to initiate settlement negotiations? This article tackles these emerging questions and more in attempt to define this nascent duty.

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December 23, 2010 PublicationDoes Policy Reformation Create A Retroactive Bad-Faith Claim?

[Editor's Note: Laura A. Turbe-Capaz is a senior associate in the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee, and Miami. She is an experienced trial attorney in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Copyright#2011 by Laura A. Turbe-Capaz. Responses are welcome.] 

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December 09, 2010 PublicationSplitting The Baby: The Insurer's Duty To Notify The Insured Of The Need For An Allocated Verdict

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #15 (December 9, 2010). © 2010  

[Editor's Note: Fay E. Ryan is a partner the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee and Miami. She is an experienced trial attorney in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Kimberly N. Gorak is a senior associate in the Tampa office of Butler , also practicing in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Any commentary or opinions do not reflect the opinions of Butler or Mealey's. Copyright © 2010 by Fay E. Ryan and Kimberly N. Gorak. Responses are welcome .]

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November 24, 2010 PublicationPitfalls For The Unwary: The Use Of Releases To Preserve Or Extinguish Any Potential Bad-Faith Claims Between The Primary And Excess Insurance Carriers

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #14 (November 24, 2010). © 2010 

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September 23, 2010 PublicationWe Said What We Meant And We Meant What We Said! — Enforcing Contract Language Despite Assertions Of Bad Faith And Insurer 'Misconduct' During The Adjustment Of The Claim

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #10 (September 23, 2010). © 2010  

[Editor's Note: John V. Garaffa is a Partner and Jason M. Seitz is an associate with the law firm of Butler Weihmuller Katz Craig LLP in Tampa, Florida.  Any commentary or opinions do not reflect the opinions of Butler or Mealey's Publications. Copyright © 2010 by Jason M. Seitz and John V. Garaffa. Responses are welcome.]

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August 26, 2010 PublicationChinese-Drywall Cases And Their Impact On Liability-Insurance Carriers In Settling Multiple Claims In Good Faith Against Their Insureds In Certain State Courts

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #8 (August 26, 2010). © 2010  

[Editor's Note: Steve Rawls is a partner and Ryan K. Hilton is a senior associate with the law firm of Butler Weihmuller Katz Craig LLP in Tampa, Florida. Any commentary or opinions do not reflect the opinions of Butler or Mealey's Publications. Copyright © 2010 by R. Steve Rawls and Ryan K. Hilton. Responses are welcome.]

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July 29, 2010 PublicationBad Faith - Variations On A Theme

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #6 (July 29, 2010). © 2010  

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May 27, 2010 PublicationBad Faith and Beyond: A Business Law Primer For Insurers

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #2 (May 27, 2010). © 2010  

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May 13, 2010 Publication(Almost) Twenty Years After Powell: Case Studies On A Liability Insurer's Duty To Initiate Settlement Negotiations

The Florida Third District Court of Appeal’s 1991 decision in Powell v. Prudential Property & Casualty Insurance Co. recognized a duty, in some circumstances, for a liability insurer to initiate settlement discussions with a third-party claimant who has not made a demand. The case proved to have a strong ripple effect, bringing about a sea change in bad-faith jurisprudence for the next twenty years. This article examines the expansion of Powell from a unique facts-driven anomaly to an entire branch of bad-faith jurisprudence and discusses early indications that the courts may be retreating again to applications more in line with the original case.

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March 25, 2010 PublicationBreaking Down Privileges: Discovery of the Claim File In Florida Bad-Faith Actions

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 23, #22 (March 25, 2010). © 2010  

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February 25, 2010 PublicationExtracontractual Recovery Without Bad Faith

Insurance intermediaries (insurance agents and insurance brokers) are especially vulnerable to claims by insureds. While bad-faith actions continue to be the favored method of pursuing recovery beyond a policy limit, some litigants turn to claims against insurance intermediaries (and the insurers they represent) for extracontractual recovery. In addition to bad-faith law, insurers need to know what kinds of claims can be brought in relation to the procurement of the insurance policy itself and what defenses can be raised. This article delves into this often-misunderstood area of the law and illuminates some legal issues with which every insurer should be familiar.

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January 28, 2010 PublicationA Look Back At Some Of 2009s Significant Bad Faith Decisions

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 23, #18 (January 28, 2010). © 2010

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October 22, 2009 PublicationDoes An Insured Owe A Duty Of Good Faith To Its Insurer When The Insured Is Responsible For Defense Costs In A Self-Insured Retention?

Many businesses are increasingly utilizing insurance policies with large self-insured retention endorsements in order to exercise better control over the defense of claims. In these circumstances, an issue may arise regarding whether an insured who is responsible for defense costs under a self-insured retention ("SIR") owes a duty of good faith to its insurer.

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August 27, 2009 PublicationFairly Debatable?

On August 5, 2009, the South Dakota supreme court joined an exceedingly small minority of courts in the United States that have imposed a duty to conduct a reasonable investigation into first-party claims in order to avoid "bad-faith" liability.2 As they say, the road to Hell is paved with good intentions. This decision certainly affirms the truth of that old saw

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July 30, 2009 PublicationWrit Of Certiorari Dismissed As Improvidently Granted -- The Ambiguous End To Philip Morris USA, Inc. v. Williams

On March 31, 2009, the United States Supreme Court dismissed, as improvidently granted, a writ of certiorari in Philip Morris USA, Inc. v. Williams. While the reason for the court's action remains a mystery, it seemed to signal an end to the court's interest in the central constitutional issue in the case: punitive damages. Unfortunately, the court's decision to abandon the issue leaves both the litigants and observers wondering what, if anything, had been gained by years of decisions, reversals and remands.

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April 23, 2009 PublicationArbitrary and Capricious

In Grilletta v. Lexington Insurance Company,8 the United States Court of Appeals for the Fifth Circuit reviewed the insurer's handling of a Hurricane Katrina property claim.9 Mr. Xavier Grilletta and Mr. Randy Lauman owned a vacation lakehouse on the southeastern shore of Lake Pontchartrain, a lake bordering New Orleans to the north. 

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March 26, 2009 PublicationFlorida's Bad Faith Quagmire: Is Summary Judgment Ever Available?

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #22 (March 26, 2009).

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February 26, 2009 PublicationIs Abnormal Becoming The New Normal In Alabama?

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #20 (February 26, 2009).

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November 25, 2008 PublicationUnreasonable Consent Judgments; What Next?

The scene is all too familiar: an insured, disenchanted with its insurer's refusal to defend an action the insured believes is within coverage, decides to enter into a "consent judgment" with the plaintiff, in return for which, the plaintiff agrees only to pursue satisfaction of the "judgment" against the insurer. 

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August 28, 2008 PublicationTorts for Tots (Bad Faith And Other Independent Torts)

The responsibility of caring for a child is not one to be taken lightly. Our society demands vigilance from those who bring new life into rld, and rightly so. We are held to a higher standard in dealing with our offspring than with others. The special relationship between a parent and a child is built upon trust and an expectation that one (the parent) will give security tothe other (the child). So too is the bond between insurer and insured.

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July 15, 2008 PublicationExxon Shipping Co. v. Baker: Sailing Into The Confluence Of Common Law And Constitutional Standards For Punitive Damages

On June 25, 2008, the United States Supreme Court issued its much anticipated opinion in Exxon Shipping Co. v. Baker. The Supreme Court reduced the punitive damage award from $2.5 billion dollars to $507 million dollars, an amount approximately equal to the jury's award of compensatory damages. While the decision certainly warmed the hearts of Exxon's previously discomfitted stockholders, the Court's opinion provides only limited encouragement to defendants involved in the current punitive damage lottery.

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June 17, 2008 PublicationConsequential Damages Under the Insurance Contract -- The New "Bad Faith?"

The ability of an insured to recover consequential damages under an insurance contract allegedly caused by failure or delays in the insurer making payments has traditionally been controversial. Jurisdictions have been divided in their approach as noted in the following annotation cited by the district court in Indiana

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January 22, 2008 PublicationRipe for Campbell Review: A Florida Uninsured Motorist Claimant's Statutory Right to Recover Excess Verdict Damages in a Bad Faith Action

In many jurisdictions, jurors can award punitive damages to punish or penalize an insurer for improper claims handling, in addition to any compensatory damages caused by an insurer’s bad faith. Such jury awards of punitive damages now are subject to scrutiny under State Farm Mutual Automobile Insurance Company v. Campbell.1 As a result of Campbell, insurers have one final check against excessive punitive damages awards by juries.

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December 18, 2007 PublicationPunitive Damages - the Rationale of Ratios

Since the Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell, courts have struggled to define when the Campbell court’s presumptive limit of 9 to 1 ratio of punitive damages to compensatory damages is appropriate. The Supreme Court stated that the "most important indicium of the reasonableness of a punitive damages award" was the highly subjective measure of the "degree of reprehensibility." Wrestling with such an amorphous concept trial courts and appellate courts have sought to justify various punitive damage awards on the basis of a sliding scale, doing little more than subjectively comparing the "reprehensibility" in the case being reviewed, to other recent cases decided before it. The result is a marked disparity from one court to the next as to what constitutes behavior falling within the five (5) factors of reprehensibility discussed in Campbell.

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July 24, 2007 PublicationOxymoronic ("Tortious Breach of Contract")

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 21, #6, p. 32 (July 24, 2007).

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June 19, 2007 PublicationWilliams v. Philip Morris Inc. II – The Fog of Legal Rationale

On February 20, 2007, the United States Supreme Court issued its much-anticipated second opinion in the negligence and fraud suit brought by the widow of Jesse Williams against Philip Morris. Mrs. Williams had asserted that the company had purposefully taken actions to obscure the dangers of smoking and, as a result, her husband was deceived into believing smoking was not harmful, a 47 year delusion that ultimately led to his illness and death.

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March 20, 2007 PublicationCaveat Insuror

On December 21, 2006, the Florida Supreme Court released its opinion in Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co.[FN1] In Dadeland, a bare majority of the high Court, led by Justice Lewis, held that an obligee under a performance bond qualifies as an "insured" within the meaning of section 624.155, Florida Statutes (1999). The Court's decision resulted from the following question certified to it by the Eleventh Circuit Court of Appeals:

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September 19, 2006 PublicationRemanded in Light of State Farm v. Campbell: The Opportunity For Further Illumination Presented by Williams v. Philip Morris Inc.

On May 30, 2006, the U.S. Supreme Court again granted a petition for writ of certiorari in the ongoing dispute between Philip Morris and the widow of Jesse Williams, an Oregon resident who died of lung cancer after smoking cigarettes for about 47 years.

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June 15, 2006 PublicationSelected Third-Party Bad Faith Liability Standards Governing Failure to Settle Cases

Under liability insurance policies, insurance companies assume the obligation of defending their insureds. In so doing, carriers can settle and foreclose their insured's exposure or refuse to settle, leaving the insured potentially exposed to damages that exceed the policy limits.  Most courts find that this obligation places insurers and insureds in a fiduciary (or fiduciary-type) relationship.  Accordingly, courts recognize that an insurer owes a duty to the insured to refrain from acting solely on the basis of the insurer's own interests in settlement. This duty extends to situations where an insurer has an opportunity to settle a third-party liability claim against its insured within policy limits and requires an insurer to pay an excess judgement against an insured, where the carrier in good faith should have settled.
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April 18, 2006 PublicationAchilles' Heel: First-Party Property "Bad-Faith" Damages

Insurance "bad-faith" is recognized throughout the United States. In the setting of first-party property insurance, the relationship between the insured and insurer commences contractually. However, that contractual relationship can also provide exposure for tort damages in a first-party "bad-faith" action. Indeed, the threat of facing a first-party property "bad-faith" tort action commonly influences insurers to resolve litigation out of fear, rather than for substantive purposes based on the merits. One of the "Achilles' Heels" of such causes of action is the inability of the insured to prove any measurable "bad-faith" damages. The identification and measurement of "damages" in first-party property "bad-faith" actions varies greatly depending on the jurisdiction. This commentary will discuss certain jurisdictional differences relating to damages in first-party "bad-faith" actions, exclusive of punitive damages.[FN1]

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February 21, 2006 PublicationThe Implied Covenant of Good Faith and Fair Dealing

Until the 20th Century, insurance contracts were treated the same as any other contract, with recovery generally limited to the damages contemplated by the parties when they entered into the contract. Insurance contracts, like any other, were enforced by their explicit terms, and courts were reluctant to substitute their own judgment for the terms upon which the parties agreed absent some independent tort or injustice. By the end of the 19th Century, however, the judiciary in the United States began to recognize a general obligation of good faith performance implied in every contract.  By the 1930s, the implied covenant of good faith became a standard doctrine. This duty of good faith and fair dealing originated to resolve disputes over agreements that were not explicit on pivotal contract terms, or left discretionary power in the hands of one of the contracting parties.

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June 07, 2005 PublicationAn Insurer's Liability For Punitive Damages In An Excess Judgment

Ging v. American Liberty Insurance Company, 423 F.2d 115 (5th Cir. 1970) is a case often cited for the proposition that third party insurers who act in bad faith could be held liable for punitive damages awarded against their insureds. However, the strength of this proposition appears to depend upon the extent to which a jurisdiction would permit the insurability of punitive damages. Those jurisdictions that permit coverage for punitive damages would also likely permit recovery of those damages later as a result of the carrier's bad faith. Jurisdictions whose public policy precludes insuring against punitive damage awards, may be more reluctant to permit recovery in a later bad faith action, depending upon the nature of the liability giving rise to the punitive damage award.

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April 19, 2005 PublicationDetours: Campbell Stops At The Willow Inn

Dealing with punitive damage claims is like driving down a road that is constantly under repair. The road is dangerous, uncomfortable, and full of detours. Although the United States Supreme Court has issued a rather clear and accurate map to help us through this rocky road, in some respects the map is already outdated, just as the road darkens and your interior auto light dims.

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March 22, 2005 PublicationThe Timely Demise of Excess Judgments (Probate Nonclaim Statutes)

Imagine your insured is at fault in an accident that kills her and causes devastating injury to another individual. You (the insurer) fail to meet a settlement demand within policy limits. Liability is clear and excess exposure is inevitable. The claimant files a civil lawsuit naming the "estate" of the insured as the defendant. However, the estate of the insured is not set up yet. Having no entity to actually serve with the complaint, the claimant petitions the probate court for administration of the decedent's estate, has a personal representative appointed, and immediately serves legal process on that representative. A multi-million dollar excess judgment is obtained in the civil action.

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January 18, 2005 PublicationPiece Of Mind: The Utah Supreme Court's Response To Campbell

Given that the Utah Supreme Court (“Utah”) previously reinstated a $145 million punitive damages award in favor of the Campbells, it is not surprising that on remand from the U.S. Supreme Court, this same state high court goes to great lengths to justify the largest punitive damages award it believes could possibly survive further constitutional review.

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November 16, 2004 PublicationHospital Lien Laws and Personal Injury Settlements

Many jurisdictions have hospital lien laws. These laws ensure payment to hospitals for the beneficial services they provide. Some jurisdictions liberally interpret these laws so that technical deficiencies in establishing or seeking enforcement do not defeat payment to the hospitals. Other jurisdictions are less likely to ignore such deficiencies.

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July 07, 2004 PublicationThe Continuing Need for De Novo Review of Punitive Damage Awards -- Liggett Group, Inc. v. Engle

In Liggett Group Inc. v. Engle, the Florida's Third District Court of Appeal reversed the largest punitive damage award in history. The circumstances of the award indicate it would have bankrupted the defendants and was, in essence, a civil death sentence. If that were the only error, Engle would merely mark another notch in the continued upward spiral of American jury awards. However, the compounded procedural and constitutional errors in Engle make it particularly useful for those who wish to examine the pros and cons of the current system of punitive damages. 

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January 21, 2004 PublicationDo Liability Insurers Have A Duty To Make An Offer Where There Is No Claim Against The Insured?

A liability insurer has a duty to handle and settle claims made against its insured in good faith. Courts have grappled with whether this duty requires an insurer to make a settlement offer when there is no claim against the insured.

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October 15, 2003 PublicationJuggling Multiple Claims With Inadequate Limits

Everyone knows that an insurer has to act in good faith to its insured when settling claims with third parties. However, when an insurer is faced with multiple claims exceeding the limits of coverage, the insurer is faced with tough choices. Insurers are frequently called upon to defend these choices in “bad-faith” actions. Can an insurer get summary judgment on the issue of “bad-faith” in multiple claimant/inadequate limits cases? Will the insurer be forced to litigate the “bad-faith” issue through a trial? This article attempts to answer these questions and provide guidance to insurers on meeting their duty of good faith when met with multiple claims, the sum total of which exceed policy limits.

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August 13, 2003 PublicationReflections – Thirty Years After Gruenberg v. Aetna Ins. Co.

It has long been accepted that parties to an insurance contract have an obligation to deal with each other fairly and in good faith. As early as 1914, this obligation was found to be grounded within an implied covenant within the contract between the insurer and its insured.  If a denial of benefits under the policy was ultimately resolved by a suit on the contract of insurance, a policyholder who prevailed would receive the amount due plus interest. The recognition of a cause of action for the tortious breach of the duty of good faith and fair dealing in the context of the first-party contract of insurance is relatively recent.

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July 16, 2003 PublicationWhat is a "Reasonable" Settlement When There Are Multiple Claimants?

Sometimes several people sustain injuries in an accident. This article addresses a recent decision of Florida's Fourth District Court of Appeal, Farinas v. Florida Farm Bureau General Insurance Company, that discusses what liability insurers should do when several people sustain injuries in an accident caused by the insured and the value of most, if not all, of each individual claim exceeds policy limits. This article discusses the basis for the Farinas holding and identifies some questions raised by Farinas.

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June 18, 2003 PublicationAppraising Windstorm Claims

Once again the annual “hold-your-breath” season is upon us. In Hartford, New York, and London weather channels are beating “sitcoms” on the “Nielson” ratings. Internet strikes on weather.com are out-numbering those for kournikova.com – well, maybe this is a slight exaggeration. But the point remains; that is, CAT losses, especially windstorm, commonly called Hurricanes, make or break a property insurer's profitability, not just in the year of the occurrence, but typically with a two to three year tail.

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April 16, 2003 PublicationThe Current State of Comparative Bad Faith

In most every jurisdiction, the basis for a claim of insurer bad faith is the recognition of a duty of good faith and fair dealing inherent in any contract of insurance. See, e.g., Boston Old Colony v. Gutierrez, 386 So. 2d 783 (Fla. 1980). The focus in such cases is usually the question of whether or not the insurer has violated that duty. Inevitably, the question arises as to whether or not the actions of the insured can be considered bad faith and, if so, whether such actions can be raised as an affirmative defense to a claim of insurer bad faith. 

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March 19, 2003 Publication"Advice of Counsel" – Defense or Defeat

The involvement of legal counsel to provide advice concerning the settlement of property and liability claims has become increasingly commonplace. This is primarily due to the general proliferation of litigation and specifically "bad-faith" claims. As the involvement of legal counsel becomes more prevalent, so does the "defense" of "advice of counsel." This commentary will address this so-called "defense" in the context of "bad-faith" cases.

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February 19, 2003 PublicationInstitutional Bad Faith: Individual Or Class Action Litigation (All For One? - Or - One For All?)

In 1844, Alexandre Dumas, one of the most famous French writers of the nineteenth century, shared his vision of comradery and unified ambition. In his classic, The Three Musketeers, set under the seventeenth century rule of Louis XIII, a small association of elite combatants swore their allegiance to a common purpose . . . and to each other: All for one, and one for all! Is this sense of nobility and uniformity present in the battle cry of plaintiff lawyers brandishing their swords in modern day litigation against the insurance industry?

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January 22, 2003 PublicationAnger And Punishment

Horace once wrote: “Anger is a brief madness.” Such human condition apparently has not changed in over 2000 years.

USA Today's January 9, 2003 editorial page began with the topic sentence: “Horror stories abound about huge damage awards turning courts into lotteries, transforming plaintiffs and their lawyers into instant winners.” In addressing a recent Ohio Supreme Court decision, the editorial stated

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December 18, 2002 PublicationCan It Be 'Bad Faith' For An Insurer To File A Declaratory Action?

In recent months, insurance company clients of the author have faced allegations that the filing of a declaratory action, by an insurer, to determine or cut off coverage, is bad faith. This is a somewhat novel and, as it turns out, disfavored cause of action. To begin with, a “declaratory judgment action is the preferred manner of deciding a dispute between an insured and insurer over the construction and effect of the terms of the insurance contract.”

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October 23, 2002 PublicationTime Bombs

Insurers find nothing more frustrating than paying for unearned indemnification dollars. In a first-party context this may result from unreported values causing a deflated premium. In other words, the insurer's actual exposures require more premium than charged -- usually over many policy years. In a third-party context this unearned protection is the result of an excess judgment that the liability carrier is required to pay. In most jurisdictions this is the consequence of the liability insurer's failure to settle within policy limits when it had the opportunity to do so. 

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September 18, 2002 PublicationSpoliation As Bad Faith

What happens when an insurer's employee, insured, adjuster or attorney alters or destroys critical evidence? Can spoliation of evidence also constitute bad faith? Although there is no published decision directly on point, it appears that some courts may be willing to extend an insurer's exposure to include extra-contractual damages for such conduct

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April 17, 2002 PublicationSeventh Circuit Court Of Appeals Finds "Independent" Insurance Broker To Be Intermediary Of Insured, Barring Coverage And Bad Faith Claims

The Seventh Circuit recently addressed the question of whether an independent insurance broker, who provided clients to the insured, was their intermediary, thus barring coverage and bad faith claims. (First Insurance Funding Corporation v. Federal Insurance Company, No. 01-2855 (7th Cir. March 28, 2002)).

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November 21, 2001 PublicationRecognizing Subtle Exposures To Avoid Bad Faith Claims

“The insurer does not . . . insure the entire range of an insured's wellbeing outside the scope of and unrelated to the insurance policy, with respect to paying third party claims. It is an insurer, not a guardian angel.”

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October 17, 2001 PublicationJustices: Please Take This Case!

Two recent state court decisions jeopardize the right of insurers to consult legal counsel when considering whether to pay or deny the claim of a policyholder. The Arizona and Ohio state supreme courts have issued opinions eroding, even abrogating, the attorney client and work product privileges. In one of these decisions, Boone v. Vanliner, 744 N.E.2d 154 (Ohio 2001), the insurer has petitioned the United States Supreme Court to issue the writ of certiorari, hear the case and reverse the Ohio Supreme Court. The undersigned urges the United States Supreme Court to take the Vanliner case for the reasons stated below.

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September 19, 2001 PublicationAdditional Insured Coverage And Bad Faith

Coverage determinations regarding the nature of policy duties that liability insurers owe to additional insureds may create bad faith exposure for the unwary insurer. Bad faith liability frequently arises when an insurer fails to recognize the scope of defense and indemnification obligations it owes to an additional insured. Issues also arise when additional insureds compete with named insureds for limited policy proceeds which cannot adequately protect the interests of both. This article highlights the source of the dilemma – the scope of the coverage afforded to an additional insured – and provides illustrations of bad faith exposure in the wake of claims asserted against additional insureds.

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April 18, 2001 PublicationResolution of the Underlying Claim as a Prerequisite to Bad Faith

In every jurisdiction that has considered the issue, a claim for bad faith does not accrue until there has been a final determination of the underlying claim for insurance benefits or third party damages. Taylor v. State Farm Mutual Automobile Ins. Co., 913 P.2d 1092 (Ariz. 1996); Blanchard v. State Farm Mutual Automobile Ins. Co., 575 So. 2d 1289 (Fla. 1991). Thus, before a plaintiff can sue an insurance company for bad faith, he must first finally resolve the claim which he contends the insurance company failed to settle in good faith. What constitutes a resolution of that claim varies with the type of claim asserted and the jurisdiction in which it is brought, but it can generally be broken down into three categories: excess judgment, settlement of the underlying claim, and judgment below policy limits.

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March 21, 2001 PublicationDiminished Value In Auto Damage Claims

We have seen, in recent years, a spate of actions for bad faith, and class actions, on the issue of so-called diminished value. These suits claim payment by the insurance company of the actual cash value of a property loss - or the cost to repair a loss - does not make the insured whole. This is because of some intangible quality in the property that cannot be restored by repair. Before the loss it was pristine or original. Afterward it is corrupted or compromised. It is worth less in the market.

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February 21, 2001 PublicationPossible Bad Faith In The Allocation Of Coverage For Third Party Continuous Loss Claims

An insured causes damage or injury that results in a third party claim for continuous loss spanning three years. The third party makes a claim under the policy in effect at the time of the loss. The policy covers the same three years as the loss and provides $300,000.00 for each year. In other words, the policy provides a total of $900,000.00 aggregate coverage over three years. We will assume the claim is settled for $300,000.00.

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October 24, 2000 PublicationRaising the Coverage Defense in the Bad Faith Case

In representing insurers in bad faith litigation, from time to time one will find a coverage issue that was not raised in the underlying litigation. The question to be addressed in this article is whether the coverage issue may be raised for the first time as a defense to the bad faith litigation.

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August 22, 2000 PublicationIs It Bad Faith to Settle Covered Claims Only?

It is beyond dispute that the duty to defend, under liability insurance, is contractual, and is broader than the duty to indemnify. National Grange Mut. Ins. Co. v. Continental Cas. Ins. Co., 650 F. Supp. 1404 (S.D.N.Y. 1986). Even if some allegations of the complaint clearly are outside the scope of coverage, the insurance company is obligated to defend the entire suit. Id. See also, Aerojet-General Corp. v. Transport Indemnity Co., 948 P.2d 909 (Cal. 1997).

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July 25, 2000 PublicationLevel The Playing Field: Abate Or Stay The Bad Faith Action Pending Resolution Of The Underlying Liability Or Coverage Case

Before resolution of a first-party action for coverage or a third-party action to establish an insured's liability, a plaintiff will often initiate an action for bad faith. By doing so, the plaintiff attempts to gain an unfair advantage in discovery and at trial. This article outlines some of the reasons why the bad faith action should be abated in its entirety or, at the very least, stayed pending resolution of the underlying claim.

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June 20, 2000 PublicationThe Public Adjuster's Perspective

Mr. Lesser is a prominent public adjuster. His business office is located in Miami Beach, Florida. The views and opinions stated by Mr. Lesser in this interview are his own. Neither Mr. Craig, nor Butler , necessarily approve or agree with any of them.

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May 19, 2000 PublicationContractors' Bonds: Who Can Sue The Surety For Bad Faith?

A contractor's performance and payment bond creates rights and obligations among three parties ­ the principal, the obligee and the surety. The principal may be the general contractor or a subcontractor. The obligee (under a performance bond) usually is the owner of the project or (under a payment bond) the subcontractors, materialmen and equipment suppliers. The surety most often is an insurance company or financial institution engaged, among other things, in the business of issuing performance and payment bonds.

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April 18, 2000 PublicationThree Reasons Why Loss Reserves Ought Not Be Admissible In A Bad Faith Case

In the trial of a bad faith case, plaintiff often tries to put into evidence the reserves the insurance company set for the claim. This article contends that evidence ought not be admissible. It will outline three reasons why not.

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March 01, 2000 PublicationIssue Revisited: Who Can Sue The Surety For Bad Faith Under A Construction Bond?

In this journal, in May 2000, the author discussed the then recent decision in Ginn Construction Co. v. Reliance Insurance Co., 51 F. Supp. 2d 1347 (S.D. Fla. 1999). He argued that, contrary to a suggestion in Ginn, an obligee under a general contractor's performance bond ought not be allowed to sue the surety for bad faith. This article will look at some decisions handed down since. The trend is toward no bad faith liability by a surety to either an obligee or a principal under a surety bond.

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February 15, 2000 PublicationPerfunctory Defense

per-func-to-ry   per-fúngk'te­re   adj.   Done or acting routinely andwith little interest or care. The American Heritage Dictionary, NewSecond College Edition (1983).

The Scenario

Consider a common scenario. An insurance company issues a liability policy. The policyholder does something, or fails to do something, as a result of which a partyis injured. The injured party becomes the plaintiff, and the policyholder the defendant,in a tort action. The insurance company reviews the tort action and sees right awaythat probably it is not covered. It retains a defense attorney to handle the tort action butsends a reservation of rights letter to the policyholder and files a separate declaratoryaction to determine coverage. So far so good. See, e.g., Insurance Co. of the West v.Haralambos Beverage Co., 195 Cal. App. 3d 1308, 1319 (1987).

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December 21, 1999 PublicationMalicious Defense

This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 13, #16, p. 25 (December 21, 1999). © Copyright Butler 1999.

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November 16, 1999 PublicationWhy A First Party Insurer Is Not A Fiduciary

Courts, commentators, lawyers and others have applied the word "fiduciary" to insurance companies and insurance claims in a loose manner. The result has been bad law and confusion over if and when an insurer is a fiduciary. This article will argue that an insurer does not, and ought not, owe a fiduciary duty to an insured who has presented a first party claim.

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October 19, 1999 PublicationThe Duty of Good Faith: Continuing Into Litigation

First-party bad faith cases are typically based on conduct or events (e.g., settlement offers, investigations and evaluations) occurring during the time period after a claim is made but before any litigation is commenced. Once a breach of contract or declaratory action is filed, it is generally understood that the insured and insurer stand in an adversarial relationship which presumably entitles each party to zealously pursue its litigation tactics and strategy. Thus, courts generally will not permit an insurer's litigation conduct to be admitted as evidence of bad faith. Over the years, however, a significant number of courts have held an insurer owes a continuing duty of good faith to an insured throughout the litigation process and, therefore, an insurer's post-filing conduct may be admitted as evidence of bad faith. This article is a brief review of some of the leading cases addressing the continuing duty of good faith and its ramifications affecting insurance companies and defense counsel.

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September 21, 1999 PublicationGood Faith Settlement of Claims in Excess of Policy Limits Against Multiple Insureds


Insurers and insureds alike may find themselves in the dark when claims against multiple insureds exceed policy limits. Only a few jurisdictions explicitly have addressed how policy proceeds should be allocated in this situation. The jurisdictions that have addressed the issue have split into two general camps. Some hold that carriers must allocate proceeds proportionately among all insureds. Other jurisdictions hold that a carrier need only act in "good faith" and may settle on behalf of fewer than all insureds. The manner of proportional allocation and the characteristics of a "good faith" settlement under such circumstances are not well described in the case law.

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August 17, 1999 PublicationMultiple Claims Exceeding the Policy Limits

When courts and state legislatures expand the duties owed by liability insurers to insureds there is a commensurate expansion of the grounds for extracontractual claims. One area of expansion has been in cases involving multiple third-party claimants - with liability clear and damages exceeding the policy limits. These cases make difficult issues for claims professionals.

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July 20, 1999 PublicationAdvice of Counsel: Insurance Companies' First and Last Line of Defense / Mealey's Litigation Reports: Bad Faith

The dynamic nature of bad faith law throughout the country practically mandates that insurers have ongoing legal advice to protect the interests of the company, the shareholders and all insureds. Such advice can prevent unwitting misconduct by the insurer. The "advice of counsel defense" in the context of insurance bad faith litigation issimply an insurer asserting, as proof that it did not act in bad faith, that it reasonably relied on the advice given by its legal advisors.

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July 01, 1999 PublicationStandard of Care in First Party Bad Faith Actions: Is "Fairly Debatable" Fair?

Since the early 1970s, when first-party bad faith actions came into being, a considerable body of law has developed on the standard of care for insurers to avoid liability. In creating and defining such standards, courts have struggled to balance the interests of insureds and insurers. This article is a general review of those decisions and standards.

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March 16, 1999 PublicationStatute of Limitations in a Bad Faith Action: Which One Applies and When Does It Accrue?

Determining which statute of limitations governs a cause of action against an insurer for bad faith is complicated. It depends on whether the action is a first or third party action. It depends also on whether the controlling jurisdiction deems the action to be one sounding in tort or contract.

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January 19, 1999 PublicationDuty of Insurers to Advise Insureds of Policy Benefits

This article considers whether an insurer has a duty to advise an insured of policy benefits not claimed. Some courts require insurers to protect an insured's interests affirmatively by informing the insured of available benefits. Other courts have refused to impose this duty upon insurers. Recent cases suggest a trend toward imposing this duty.

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December 15, 1998 PublicationFederal Preemption of Extracontractual Claims Under Flood Insurance Policies

During the past year, numerous areas in the United States have experienced severe and, at times, unprecedented flooding. Whether the flooding occurred as a result of the active Atlantic hurricane season or the effect of "El Nino" on national weather patterns, the result for insurers is the same: an increase in the number of claims under flood insurance policies. With this comes a corresponding increase in the likelihood of extracontractual or bad faith claims.

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December 14, 1998 PublicationSupplement to Federal Preemption of Extracontractual Claims Under Flood Insurance Policies

This is a supplement to the December 1998 article published in Mealey's Litigation Reports: Bad Faith on "Federal Preemption of Extracontractual Claims Under Flood Insurance Policies" following the U.S. Third Circuit Court of Appeals reversal of its decision on rehearing in Van Holt v. Liberty Mutual Fire Insurance Co. This supplement was originally published in Mealey's Litigation Report: Bad Faith, Vol. 12, #18, p. 27 (Jan. 19, 1999). Copyright Butler 1999.

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November 17, 1998 PublicationThe Expanding Scope of Discovery in Bad Faith Cases

Bad faith litigation is complex and the stakes are high. In such cases, the discovery process has become critical as litigants struggle for advantage. The litigation often raises issues outside the facts of the particular case or claim. The conduct of the insurance company as a whole sometimes is placed on trial.

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August 18, 1998 PublicationChoice of Law in Bad Faith Cases

The substantive law of bad faith is not uniform from state to state. Some states treat bad faith as a breach of contract; some as a tort. In some states, punitive damages are available. In others, they are not. Some allow claims for emotional distress, while others reject them.

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July 21, 1998 PublicationRecovery of Damages for Emotional Distress in Tort, Contract and Statutory Bad Faith Actions

Emotional distress damages may be the most significant aspect of any bad faith action in jurisdictions that allow them. This article outlines the several theories that justify the recovery of such damages. It discusses also the impact of a recent Florida Supreme Court decision which authorized recovery for emotional distress under that state's bad faith statute.

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Key Points