Avoiding the Tort of Bad Faith

Defenses to the Tort of Bad Faith

Adapted from Zalma on Insurance Claims Part 106 Second Edition: A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims now available  here. 

Read about these and other insurance books by Barry Zalma at http://zalma.com/blog/insurance-claims-library/

The basic test in bad faith cases is whether the insurer has unreasonably and “without proper cause” refused to compensate the insured for a loss covered by the policy. [Gruenberg v. Aetna Insurance Co., 9 Cal. 3d 566, 108 Cal. Rptr. 480].

The adjuster should not attempt to adjust a claim, or even contact an insured, until he or she knows everything necessary to protect the rights of the insurer without doing anything to injure the right of the insured to receive the benefits of the policy. This means the adjuster must have thoroughly reviewed the wording of the insurance policy, the application for insurance, and the loss notice. The adjuster must then, begin to investigate all claims fully and thoroughly.

Charges of “bad faith” can be eliminated by adjusting all claims in a detailed and fundamentally sound manner.

People insure themselves for peace of mind and security. To protect these interests it is essential that an insurer fully inquire into the possible bases that might support the insured’s claim and act promptly.[1]

The insurer may not gather just enough evidence to support a belief that the policy does not provide coverage and then quit the search.[2]

Furthermore, the adjuster must:

  • know the state’s Unfair Claims Settlement Practices Act and the Regulations created to enforce the act. Following the statutory guidelines can support a defense to allegations of bad faith;
  • send reservation of rights letters and formal denials of coverage to an insured as soon as possible;
  • make sure there is a reasonable factual and legal basis before denying coverage, for example:
  • interview the appropriate individuals to determine whether they possess any knowledge relevant to coverage;
  • document the results of the investigation;
  • make sure all facts relied upon in making a decision are accurate;
  • obtain advice of legal counsel;
  • check with counsel to determine whether the policy provision relied on to deny a claim has been held invalid or unenforceable by any state or federal court;
  • if a claim is related to an individual’s health or personal injury, make reasonable efforts to obtain all available medical information relevant to the claim, and use skilled personnel in evaluating these documents;
  • carefully consider the ramifications before refusing to settle a claim;
  • if you believe a claim should be settled, settle promptly;
  • where there is any concern over potential bad faith ramifications, have a claims supervisor analyze and oversee the management of the claim;
  • be courteous and truthful in all contacts with the insured(s) and/or claimant(s);
  • be ready to conduct additional investigation when new information arises;
  • be familiar with the policy, conditions, warranties, exclusions and provisions and apply them to the direction of the investigation;
  • determine how the applicable policy provisions have been interpreted by the courts;
  • ensure the reference materials (such as claims and underwriting manuals) are current;
  • make a complete and impartial evaluation of the claim;
  • inform the insured of his or her rights under the policy; and
  • respond to the insured’s requests for clarification of those rights. [Carolina Bank & Trust Co. v. St. Paul Fire & Marine Co., 279 S.C. 576, 310 S.E. 2d 163 (Ct. App. 1983)].

If it is clear that an insurer had no liability, an action for unfair trade practices cannot go forward. In Rogers v. Unitrim Auto & Home Ins. Co., 388 F.Supp.2d 638, 643 (W.D.N.C.2005) the District Court held that because the insureds’ “loss was excluded from coverage … their claim for unfair and deceptive trade practices must also necessarily fail. Similarly, in Central Carolina Bank Trust Co. v. Sec. Life Of Denver Ins. Co., 247 F.Supp.2d 791, 802 (M.D.N.C.2003) and Carolina Bank And Trust Co. v. St. Paul Fire And Marine Co., 279 S.C. 576, 310 S.E.2d 163 (Ct.App.1983).the court held that where liability was not “reasonably clear,” insured could not recover on unfair and deceptive trade practices claim.

In South Carolina, although the insurer owes the insured a duty of good faith and fair dealing, [Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983)] this duty of good faith arising under the contract does not extend to a person who is not a party to the insurance contract. Thus, no bad faith claim can be brought against an independent adjuster or independent adjusting company although, Washington state has a case pending before its Supreme Court that contends an adjuster can be sued for bad faith. [Keodalah v. Allstate Ins. Co., 413 P.3d 1059 (Wash. App., 2018)]

The adjuster should ask counsel to check recent federal and state court decisions to determine whether any of the policy provisions relied on to deny the claim have been held invalid in the state where the loss occurred.

The investigator must not:

  • resort to fraud, deceit, or misrepresentation to gain information from a person being investigated. Unruh v. Truck Insurance Exchange, 7 Cal. 3d 616, 102 Cal. Rptr. 815 (1972);
  • eavesdrop, trespass on the insured’s property, shadow the insured, or participate in any other form of harassment without good cause. Pinkerton National Detective Agency, Inc. v. Stevens, 108 Ga. App. 159, 132 S.E. 2d 199 (1963);
  • destroy evidence supporting the insured’s claim for benefits. Upthergrove Hardware, Inc. v. Pennsylvania Lumbermans, 146 Wis. 2d 470, 431 N.W. 2d 689 (1988);
  • refuse to investigate a claim because the insured has failed to fill in the entire claims form;
  • evaluate a claim if the insured fails to use a particular form as long as he or she provides the information required. McCormick v. Sentinel Life Insurance Co., 153 Cal. App.3d 1030, 200 Cal. Rptr. 732 (1984);
  • withhold pertinent information from the examining physician. Little v. Stuyvesant Life Insurance Co., 67 Cal. App. 3d 451, 136 Cal. Rptr. 653 (1977);
  • ignore your state’s Unfair Claims Settlement Practices Act and Regulations created to enforce it;
  • refuse to follow the statutory guidelines;
  • deny claims or reserve rights orally; or
  • engage in investigative and claims handling techniques that are illegal, fraudulent, intrusive, or harassing. For example:
  • the concealment of and/or failure to disclose benefits;
  • the concealment of and/or failure to disclose coverages or other provisions that are pertinent to a claim;
  • making intentional misrepresentations of fact, law, or policy provisions;
  • refusing to pay claims without conducting a reasonable or thorough investigation;
  • failing to promptly provide a reasonable and proper explanation of the basis for a denial of claim;
  • making threats of dire consequences to force the insured to agree to an unfair settlement;
  • making false accusations or oppressive demands;
  • exploiting an insured’s vulnerable position;
  • interpreting the policy in an unduly restrictive way; and
  • failing to appropriately advise a claimant of their rights under the law, including any relevant statute of limitations.

The only way for an insurer to avoid an action being brought for statutory bad faith in Florida is set forth in section 624.155(2)(d). It follows that an insurer cannot escape liability for a violation of section 624.155 by the simple expedient of a belated payment of the policy limits after the 60 day time period provided in section 624.155(2)(a) has expired. The belated payment by the insurer neither automatically proves nor disproves first party bad faith. The insured must still establish that the insurer’s failure to pay the policy limits by the expiration of the 60 day window period constituted bad faith as defined by statute. The sixty-day window is designed to be a cure period that will encourage payment of the underlying claim, and avoid unnecessary bad faith litigation.

The statutory cause of action for extra-contractual damages simply never comes into existence until expiration of the sixty-day window without the payment of the damages owed under the contract. We find that in creating this statutory remedy for bad-faith actions, the Legislature provided this sixty-day window as a last opportunity for insurers to comply with their claim-handling obligations when a good-faith decision by the insurer would indicate that contractual benefits are owed.  [Talat Enterprises, Inc. v. Aetna Cas. & Sur. Co., 952 F.Supp. 773 (M.D. Fla., 1996) and Talat Enterprises, Inc. v. Aetna Cas. & Sur. Co., 2000 WL 232303, 753 So.2d 1278 (Fla., 2000)]

The ruling by the Supreme Court in McCallum v. Quarles, 214 Ga. 192, 104 S.E.2d 105 an insurance company could always avoid a bad faith penalty and payment of attorneys by instituting a declaratory judgment action within the period of sixty days from demand on it, with little prospect of having the issue decided before the expiration of sixty days, unless it subjected itself to a ruling against it on the question of bad faith. [Reliance Ins. Co. v. Brooks Lumber Co., 115 S.E.2d 271, 101 Ga.App. 620 (Ga. App., 1960)]

[1].        Kanne v. Connecticut General, 607 F. Supp. 899 (C.D. Cal., 1985).

[2].        Leslie Salt Co. v. St. Paul Mercury, 637 F. 2d 657 (9th Cir. 1981).

Adapted from Zalma on Insurance Claims Part 106 Second Edition: A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims now available  here.

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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