Negligence in Adjusting Claims is Not Enough to Prove Bad Faith
To prove the tort of bad faith it is necessary that the plaintiff prove that the insurer acted with affirmative misconduct without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. It is more than refusing to pay the person insured what is demanded or what the insured believes if fair and reasonable.
In Alexandra Sims v. State Farm Mutual Automobile Insurance Company, United Policyholders Amicus on Behalf of Appellant(s), No. 17-1333, United States Court of Appeals For the Eighth Circuit (July 3, 2018) the Eighth Circuit was asked to reverse the district court’s grant of summary judgment to State Farm on plaintiff’s bad faith tort claim and on an evidentiary rulings on the underinsured motorist coverage claim.
Alexandra Sims sued her insurance carrier, State Farm Mutual Automobile Insurance Company (State Farm), for the tort of bad faith, violation of the Arkansas Deceptive Trade Practices Act (ADTPA), and for damages on an underinsured motorist coverage claim. She appeals the district court’s grant of summary judgment to State Farm on the bad faith claim, and an evidentiary ruling on the underinsured motorist coverage claim.
In 2008, while a senior in high school, Sims was involved in a two-vehicle crash. Her car was rear-ended by an underinsured 16-year-old who was texting while driving. Sims suffered numerous soft-tissue injuries as a result of the crash. Sims sued the underinsured driver and he settled for $50,000, which was the limit of his insurance coverage. Sims filed a claim for her remaining damages under her own underinsured motorist policy, provided by State Farm, seeking the policy limit of $100,000. She submitted past medical expenses of about $21,000, and expert reports that predicted future medical costs and economic losses that well exceeded the policy maximum. She also attached medical records documenting her injuries.
State Farm assigned the claim to claims adjuster Dean Ripley. Ripley sought the assistance of a State Farm medical professional to help assess the medical records Sims had provided. This review indicated that Sims had received treatment for “soft tissue” injuries for longer than the typical six-week period. Ripley, in consultation with claims supervisor Oscar Rodriguez, sought clarification from Sims’s treating chiropractor. The chiropractor explained that Sims suffered from torn ligaments, an injury that could not be expected to heal in six weeks, could not be repaired by surgery, and was likely permanent. After receiving this information, Ripley suggested that State Farm might want to ask for an independent evaluation of Sims’s injuries, but Rodriguez asked Ripley to prepare an offer of settlement based on the information he already had.
Ripley estimated that, after deducting the $50,000 Sims had already received from the underinsured driver, Sims’s damages were between $66,297.12 and $101,297.12. He provided his calculations to Rodriguez and asked for authority to settle Sims’s claim for up to $99,786.72. Rodriguez replied that most of Sims’s medical expenses were from 2008 and it was unclear from the records whether she was still receiving treatment. In his view, “a sympathetic jury would value this claim at [$]100,000 at most,” and he authorized Ripley to settle for a maximum of $50,000 (the estimated value of the claim minus the $50,000 from the underinsured driver).
Negotiations proceeded with no success. Sims sued State Farm who paid Sims $25,000 for undisputed medical expenses after the suit was filed.
As to the bad faith claim, the trial court found that Sims “has not shown that State Farm has committed any affirmative act of dishonesty, oppression, or malice” as required by Arkansas law. Sims does not contest the district court’s ADTPA ruling on appeal.
The case proceeded to trial on the underinsured motorist claim. At trial, Sims sought to introduce evidence that State Farm’s corporate policies incentivized claims adjusters (like Ripley) and claims supervisors (like Rodriguez) to deny claims regardless of their merit. The district court excluded this evidence as irrelevant and likely to confuse the issues.
After trial, the jury returned a $75,000 verdict for Sims. Because Sims had already recovered that sum from the underinsured driver ($50,000) and State Farm ($25,000), judgment was entered for State Farm.
The Arkansas Supreme Court has explained: “[I]n order to be successful a claim based on the tort of bad faith must include affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. Such a claim cannot be based upon good faith denial, offers to compromise a claim or for other honest errors of judgment by the insurer. Neither can this type [of] claim be based upon negligence or bad judgment so long as the insurer is acting in good faith.] Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 664 S.W.2d 463, 465 (Ark. 1984). This standard “is rigorous and difficult to satisfy.” Unum Life Ins. Co. of Am. v. Edwards, 210 S.W.3d 84, 87 (Ark. 2005). The “dishonest, malicious, or oppressive” acts must be “carried out with a state of mind characterized by hatred, ill will, or a spirit of revenge.” Id. Therefore, even when the insurance company is guilty of “negligence, gross ignorance, or a complete failure to investigate a claim,” the tort of bad faith is unavailable. S. Farm Bureau Cas. Ins. Co. v. Allen, 934 S.W.2d 527, 529 (Ark. 1996).
Even if Ripley and Rodriguez should have done a more thorough investigation and should have given greater weight to the opinions of Sims’s experts, Sims’s allegations show only negligence and fall short of dishonest, malicious, or oppressive conduct as a matter of law.
Viewing the record as a whole, the Eighth Circuit concluded that the nature of the evidence Sims presented reveals the essence of her claim to be that the denial itself was wrongful, which, under Arkansas law, is not enough to make out a claim for the tort of bad faith. The district court did not err in granting judgment to State Farm on this claim.
Sims wanted to introduce evidence that she said would show State Farm had a practice of denying all claims, even those they were contractually bound to pay. If Sims’s damages exceeded the $75,000 she had already recovered, she would receive the balance from State Farm. State Farm’s allegedly obstructive institutional practices had no bearing on the amount of damages proximately caused by the car crash. And even if the “institutional practice” evidence had any probative value on that point, it was substantially outweighed by a danger of confusing the issues and distracting the jury from the task at hand. The district court did not abuse its discretion.
To prove the tort of bad faith the plaintiff must prove more than the insurer failed to pay what plaintiff wanted. There was clearly good reason not to succumb to plaintiffs’ demands or the jury would have found damages. Bad faith, a tort I find to be overused and abused, requires activities that are dishonest, malicious, or oppressive. Plaintiff abused the tort of bad faith by insisting on this trial and could have avoided trial by negotiating reasonably with State Farm.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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