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When Gov. Jeb Bush’s task force on medical malpractice held hearings in November, the Florida insurance industry’s chief legal lobbyist unveiled a surprising remedy for curbing rising doctors and hospitals’ professional liability insurance costs. Rather than simply offering the usual nostrum of caps on noneconomic damages, Vince Rio, chairman of the legal reform committee of the Florida Insurance Council, suggested to the task force that the state radically overhaul the body of law governing insurance bad-faith litigation arising from all types of claims — not just medical malpractice. That was a fervent wish of the insurance industry long before the current medical liability insurance crisis began. The task force proposal released Feb. 4 would dramatically reshape the burgeoning field of bad-faith litigation in every area of insurance. Bad-faith lawsuits arising from the whole spectrum of policies — including motor vehicle coverage and workers’ compensation — would be limited in terms of who could bring such actions and what damages can be sought. Even though the state plaintiffs’ bar denounced the proposal as a subterfuge and betrayal of physicians and other insurance policyholders, Rio’s gambit was successful. In addition to recommending noneconomic damage caps, the five-member task force voted unanimously to endorse his proposal and recommend it to Bush and the Legislature. Much of the language on bad faith in the task force report was adopted wholesale from Rio’s recommendations. Donna Shalala, president of the University of Miami, said the panel had “studied the issues in depth and independently.” The task force report recommends that “the common law cause of action … should be legislatively cured … so that only insureds, not third-party plaintiffs, can bring a bad-faith cause of action against its insurer.” It also proposed that the Legislature rewrite current statutory definitions of bad faith “to articulate standards of what constitutes bad faith on the part of the insurer.” In addition, the task force urged “that the maximum liability for bad faith be calculated as the amount of the damages that were actually caused by the bad faith, limited by the amount of the reachable assets of the insured.” In other words, if, as a result of the insurer’s bad faith, the policyholder is hit with a judgment exceeding his or her policy limit by $1 million but only is collectable for $100,000, the insurer would be liable only for $100,000 — not for the full $1 million excess judgment. Leaders of the plaintiffs’ bar were stunned. “Rio showed up out of the blue,” said Jeff Liggio, co-chair of the Academy of Florida Trial Lawyers committee on medical malpractice reform. “We were caught unprepared and the panel was bamboozled.” “Insurance companies have a fiduciary duty to protect policyholders and a public policy obligation to settle claims promptly and fairly,” Liggio continued. “Bad-faith law is the only thing that keeps them in line. The insurance companies are using the doctor’s plight to gut bad-faith law across the board.” Richard Slawson, a partner at Slawson Cunningham Whalen & Smith in Palm Beach Gardens, who has 25 years’ experience in bad-faith litigation on behalf of both doctors and injured patients, argues that eliminating third-party bad-faith claims robs doctors of a legal escape hatch. Under current law, he notes, when a doctor assigns his right to sue his insurer for bad faith to the malpractice plaintiff, the plaintiff generally agrees not to execute the judgment against the doctor — relieving the doctor of any excess exposure. He assailed the task force’s proposed changes as “only beneficial to insurers, narrowing the scope of their own responsibility.” In addition, he said limiting insurers’ bad-faith liability to “actual damages” offered no compensation to policyholders for what is often years of litigation, as well as for collateral damage like a destroyed credit rating. BAD FAITH BURGEONING Plaintiffs’ attorneys say auto, property and casualty, life and other types of insurers are systematically offering lowball settlements and dragging out the claims process, figuring that they’ll come out ahead on overall claims costs even if they lose an occasional judgment. In response, plaintiffs’ lawyers, after filing and winning tort lawsuits against policyholders, increasingly are following up by filing what are known as third-party bad-faith lawsuits against the policyholders’ insurance carriers. While policyholders themselves can file bad-faith actions against their insurers for leaving them exposed to excess judgments, third-party injury victims also have the right to sue the insurer. To bring such suits, plaintiffs’ lawyers typically obtain an assignment from the policyholder for the third party to sue the insurance company on the policyholder’s behalf. When a jury finds that an insurer’s act of bad faith grows out of its general business practices, the carrier can face punitive damages, which experts say are the real teeth behind bad-faith actions. But insurance defense lawyers counter that greedy plaintiffs’ attorneys often are concocting allegations of bad faith out of thin air. They say the plaintiffs’ bar has developed increasingly sophisticated tactics for setting up insurers for bad-faith claims where no such misconduct occurred. While no statistics are available on the number of bad-faith suits filed in Florida, lawyers in both camps say such suits are on the rise. Those who purchase the insurance policy “should be the owner of the [bad-faith] lawsuit and should control it,” Rio had told the governor’s task force back in November. He contends that will limit the number of such suits and keep insurance premiums down. LAW EVOLVED OVER DECADES The task force’s proposed changes in bad-faith law would require the Legislation to pre-empt Florida Supreme Court decisions recognizing a common-law basis for third-party bad-faith claims. It would also require amending the state’s bad-faith code, Florida Statutes 624.155. Bad-faith law has evolved over the decades to hold insurers accountable for promptly paying valid claims against their policyholders and protecting policyholders from excess judgments that could have been avoided through settlement within the policy limits. The Florida Supreme Court as early as 1938 recognized the right of insured individuals to sue insurance carriers whose refusal to settle valid third-party claims results in judgments against the insured. The court held that the carriers’ liability extends to awards that exceed the insured’s coverage. In 1971, in Thompson v. Commercial Union, the supreme court, relying on the doctrine of third-party beneficiary, extended to injured plaintiffs the same right to sue carriers. Florida’s bad-faith law has had the desired effect of reducing litigation, Liggio said. According to insurance industry figures, 33 percent of medical malpractice claims nationally are settled before trial; in Florida, however, such claims are settled more than 50 percent of the time before trial. Liggio said these data prove that current bad-faith law “assures prompt, fair settlements” and “relieves the clogging of the courts.” But insurance industry representatives say the higher settlement percentage in Florida reflects the pressure to settle questionable claims rather than face bad-faith lawsuits, which carry the potential of much larger damages than the underlying suit and which also may carry punitive damages exposure. Sam Miller, vice president of the industry’s Florida Insurance Council, said this pressure to settle marginal cases raises premiums for policyholders. “That money isn’t ours,” he said. “We have to pass it along to doctors and consumers.” Rio, a staff attorney for State Farm Insurance, argues that under current bad-faith law, it makes more sense for plaintiffs not to have their claims settled and instead file a third-party bad-faith lawsuit against the defendant’s insurer in hopes of a “lottery-style windfall.” He said judgments in those suits are a factor in the high cost of medical malpractice coverage. He also said insurance companies face a big disadvantage in defending against third-party bad-faith lawsuits filed by medical malpractice victims. The plaintiff comes before the jury already having won a judgment against the medical provider — often for a crippling, sympathy-inducing injury. “If the justice system were perfect we’d take the emotion out of it,” Rio said. “The way things are now the deck is stacked.” CAUSE OF INCREASES DISPUTED Florida physicians undeniably are facing steeply rising liability premiums. But what’s driving the increases is a matter of deep dispute — whether it’s increasing malpractice litigation and payouts, insurance industry price gouging, or business and investment errors by insurers. For the moment, the medical community has joined hands with the insurance industry, blaming the rise in rates on frivolous lawsuits and excessive damage awards to injured patients. Plaintiffs’ lawyers reply that insurance companies are raising premiums to make up for losses in the companies’ investment portfolios. The doctors’ and insurers’ chief proposal for the problem of rising premiums is a $250,000 cap on noneconomic damages, like pain and suffering. Gov. Bush already has endorsed the task force’s proposal to impose this cap. Plaintiffs’ lawyers oppose it on the grounds that it would reduce the financial incentive for attorneys to take on cases of malpractice victims with valid cases but lesser economic damages. Liggio, a partner at West Palm Beach firm Liggio, Benrubi & Williams, said the insurance industry is cynically using the malpractice insurance crisis to push through huge changes to Florida bad-faith law that it could never have achieved before. He notes that Florida’s legal system currently offers insurers plenty of opportunity to determine which malpractice claims are without merit — enabling them to settle meritorious cases promptly and avoid bad-faith litigation. State law mandates a 90-day pretrial period for investigation, renewable for another 90 days, before a lawsuit can be filed. “If insurers investigated fairly instead of filing cookie-cutter expert witness denials in pretrial, we’d see less litigation and no bad-faith exposure,” Liggio said. Liggio expresses frustration that more doctors don’t realize what insurers are up to with their bad-faith proposal. “Rank and file physicians are out of the loop on this,” Liggio said. “If I could talk to them, I’d grab them and tell them, ‘They’re using you, man!’” A representative of the Florida Medical Association said the group has “no position” on the bad-faith matter. But vascular surgeon Arthur Palamara, who heads the Broward County Medical Association’s legislative committee, called the task force’s bad-faith proposal “contrary to the best interests of the doctors of Florida.” Current bad-faith law is “one of the few breaks we get in insurance,” he said.

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