Third Party Bad Faith Auto Claims Cost Florida $800 Million: IRC

Florida’s third-party bad-faith lawsuit environment may have resulted in more than $800 million in additional auto liability claim payments in 2013.

The industry-supported Insurance Research Council (IRC) in a new report estimates that this cost averages approximately $79 in additional claim costs for every insured vehicle in the state.

According to the IRC study, Third-Party Bad-Faith in Florida’s Automobile Insurance System, Florida experienced a dramatic increase in bodily injury liability claim frequency and an overall increase of 68 percent in average claim payments per insured vehicle from 1995–2013.

In contrast, other large no-fault states that do not authorize third-party bad-faith lawsuits against insurers, including New Jersey, New York and Pennsylvania, experienced significant declines in liability claim frequency and much smaller increases or declines in claim payments per insured vehicle.

“The virtually unrestricted ability to file a third-party bad-faith lawsuit against an insurance company poses a serious threat to Florida’s auto insurance system,” said Elizabeth A. Sprinkel, CPCU, senior vice president of the IRC. “The possibility of winning large bad-faith settlements and court judgments creates powerful incentives for potential claimants and their attorneys to file auto liability insurance claims that otherwise would not be filed.”

IRS says that the apparent failure of the state’s no-fault tort threshold to limit access to liability reimbursement is a contributing factor in Florida’s problem. In other no-fault states, the frequency of bodily injury liability claims is relatively low because the system is designed to limit the number of liability claims that are filed in exchange for access to no-fault reimbursement for lost wages and medical costs, according to IRC. Florida’s tort threshold, however, appears to have little or no effect on liability claim frequency, the report says. In 2013, Florida’s bodily injury claim frequency rate was higher than the claim frequency rate of most tort system states (states without no-fault coverage) and was higher than the liability claim frequency rate countrywide.

A third-party bad-faith lawsuit refers to a situation where a person who has filed a liability insurance claim alleging injury caused by another driver sues the other driver’s insurance company claiming that it failed to settle the person’s liability claim in good faith. According to IRC, most states do not allow third-party bad-faith lawsuits against auto insurers; instead they rely on administrative fines and penalties when the rules are violated.

A 1995 Florida Supreme Court decision — Auto Owners v. Bonita Conquest —is considered the triggering event for third party bad faith lawsuits in the Sunshine State and why IRC chose that year to begin its research. IRC says that prior to 1995, claim payments trends in Florida were similar to those countrywide and n the three comparison states. However, after 1995, bodily injury claim costs in Florida took off in another direction.

IRC said it will publish research on the impact of Florida’s tort threshold and other aspects of the state’s no-fault system later this year.