Insurance Litigation

Insurance “Bad Faith” Litigation

Perhaps there is no other “industry” in this country in which the economic purpose for being in business (i.e. to make a profit) comes into greater conflict with the stated purpose of the industry’s existence (to indemnify or pay individuals who have suffered a loss) than the insurance industry. American consumers purchase insurance and pay hefty premiums to guard against potential loss. Insurance companies, however, make profits based upon their ability to maximize the amount of premium dollars they take in and minimize the loss dollars they pay out! Because of this, there is an inherent conflict within the industry which has the potential to present itself each time a consumer suffers a loss.

I can find no better example of this conflict than in the recent case of Campbell vs. State Farm Mutual Auto Insurance, coming out of the Salt Lake County District Court, Utah. State Farm Insurance was accused, either directly and/or through its agents, of intentionally deceiving policy holders and/or customers over a period of 19 years! This conduct included:

1. Misleading policyholders about their policy benefits.
2. Convincing policyholders they were partially at fault when they were not.
3. Cheating policyholders out of benefits by inflating a small benefit to engender their trust, then short-changing them on larger benefits.

During the discovery process, State Farm Insurance went on a company wide campaign to destroy documents. They issued The Excess Liability Handbook to their personnel which included chapter titles like “Self-Serving Correspondence” which urged agents to “build a file by padding it with self-serving memos that bolster the company’s position and warns against putting a written case evaluation in the official case file. It was shown that State Farm Insurance purposefully left out any information that reflected badly on its case. It was also shown that State Farm knowingly used falsified medical records and denied resolution of legitimate claims in an effort to litigate the “opponent” to death.

After hearing all the evidence, State Farm Insurance was found guilty and the jury awarded damages against State Farm Mutual Auto Insurance Company in the amount of $145 Million! And you thought because you paid ridiculous insurance premiums your insurance company would be there for you? Think again! This is a prime example why insurance companies would like to find a way to end punitive damages…so there will be no consequences to pay for their actions. By way of example, your next door neighbor is constantly borrowing your horse, without asking, and delays in returning the horse when you need it most. What can you do? Do you need to retain and pay for an attorney and otherwise go through the time and expense of going to court to get your horse back? What do you accomplish? You get your horse back, but have expended considerable time and money to accomplish it. The next day, your neighbor comes over and borrows your horse again! The only thing that will discourage continuing improper conduct is punitive damages…hit them so hard, where it hurts (in the pocket book) that they won’t continue with the improper conduct.

In determining your rights and the insurance company’s responsibilities, it is important to understand the difference between first-party and third party insurance policies. In first-party insurance situations, the insured seeks direct coverage from the insurer for losses that he/she has suffered and that are covered by said policy. However, under third-party (liability) coverage, the insured is usually faced with a claim by a third party or outside claimant and the insured seeks indemnity from his/her insurer for the claim. Invariably, this also requires the insurance carrier to provide an attorney and defend any lawsuit against the insured.

The tort of “bad-faith” ultimately arises as a result of the internal conflict between the insurance industry’s business purpose (to make a profit) and its stated purpose (to indemnify and defend insureds when they have suffered a loss). Normal rules of contract law are not sufficient in the insurance context. This is principally because the insurance industry has incredible power and bargaining position in modern society. In 1979, the insurance industry collected roughly $150 Billion in insurance premiums, an amount that represented approximately one-eight (1/8th) of the total disposable income of all Americans! It goes without saying that those figures have increased considerably in recent years. The insurance industry is quite fond of pointing to the relatively few million dollar verdicts as an indication of how it is being abused by greedy lawyers and an unfair system. To this end, frequent reference is made to the recent case involving a patron of McDonald’s restaurant to spilled hot coffee in her crotch and recovered several million dollars. What the insurance industry doesn’t want you to know is the fact that the jury only awarded the large verdict after hearing testimony that McDonald’s had received over 300 complaints from patrons who had received burns from the scolding hot coffee and that McDonald’s had deliberately refused to change its policy or adjust the temperature strictly for economic reasons. The jury felt it was important to sent a message to McDonald’s and, possibly others, that such a deliberate refusal to remedy a hazardous condition based upon financial concerns was not to be tolerated…but the insurance industry wants you to focus on the seemingly excessive judgment obtained by a few greedy lawyers and their over-reaching clients. This position completely ignores the fact that the few large verdicts that are periodically awarded are based upon the judgment of a jury comprised of men and women like you and me after hearing all the facts of the particular case. The insurance companies would like nothing more than to take the power of awarding punitive damages for outrageous conduct (like the State Farm Insurance case cited above) out of the hands of the American citizen who sits as a jury. The insurance industry also conveniently overlooks the fact that it has grown exponentially in recent decades, owns hotels, casinos and office buildings all around the world, controls vast portions of the stock market and this country’s economy, and pays its executives enormous salaries, bonuses and stock options! I dare say that not a single insurance company has failed to turn an enormous profit despite the few relatively insignificant judgments they have suffered at the hands of those plaintiffs’ lawyers. The insurance industry controls the law-makers and law-enforcers with election contributions and it is unlikely that they will be called to answer by those they influence economically. The plaintiff’s lawyer is one of the very few checks and balances that remains against the insurance industry and the insurance companies are working hard to eliminate this “irritant” to its “bottom line.”

Because of the insurance industry’s size, mass production of policies, the unequal bargaining position between the insurer and insureds, and the public importance of insurance, special rules recognizing the peculiar nature of insurance contracts necessarily developed. The tort of “bad-faith” has evolved because of the need to regulate the insurance industry and to protect consumers against the profit motive of the insurance industry.

The tort of “bad-faith” has grown out of an appreciation of the fact that an insurance contract is not an ordinary agreement and that principles of contract law are totally inadequate in protecting the consumer from the wrongful denial of insurance claims or the failure of an insurer to provide other benefits conferred by the policy, such as the defense of third party lawsuits under a liability insurance policy. In an effort to deter dilatory, unconscionable, or unfair claims practices, many jurisdictions have relied on the vitality of contemporary tort law in imposing a duty on insurance companies to deal fairly and in “good-faith” with policy holders in various situations. These courts have used the resilience and flexibility of American tort law to accomplish desirable social goals. In particular, they have allowed the policy holder to obtain the benefits of the insurance agreement without limitation to the more rigid principles of contract law, while providing an impetus of deterring future wrongs by the insurance industry in the form of punitive damages.

In the United States, courts have held insurance companies to stricter standards and higher levels of legal responsibility than private parties engaged in purely private contractual relations.
There are several reasons for this, which include:

1. The fact that the insurance industry affects the public interest more than other businesses and thus requires greater regulation.
2. Insurance contracts are not bargained for at arms-length and are generally contracts of adhesion which require the consumer to adhere to them or reject them.
3. Insurance contracts are complex and most policy holders are not familiar with their term or the body of case law interpreting those terms.
4. An insured is often in a desperate financial or personal situation after a loss and the disparity of bargaining power is even greater.
5. Insurance contracts are mass produced and there is no bargaining power on the part of the consumer.
6. The insurance industry represents itself to the public and to consumers as a service industry working for the benefit of insureds. Courts have recognized that, in purchasing these contracts, there is an expectation on the part of the insureds which often requires the courts to look beyond the specific language of the contract itself for protection of the insured’s interests.

The following generally represents situations involving “bad-faith.” If you have experienced conduct by your insurance company which meets this criteria, you may have been subjected to “unfair or deceptive” claims handling practices.

A. Incompetent evaluation of a third-party claim. An insurance company cannot reject a settlement offer without an informed evaluation of the third party’s case. A finding that an insurance carrier has been guilty of an inadequate investigation or of failing to obtain necessary information to evaluate the claim can easily result in a finding of “bad-faith” against the insurance carrier.

B. Failure to inform the insured. The failure to inform an insured regarding a settlement offer has been held to amount to evidence of “bad-faith.” The courts have said that first, the insurance company must thoroughly investigate the cause of the insured’s accident and the nature and severity of the plaintiff’s injuries. Second, it must retain competent defense counsel for the insured. Both retained defense counsel and the insurer must understand that only the insured is the client. Third, the insurance company has the responsibility for fully informing the insured not only of the reservation of rights defense itself, but of all developments relevant to the policy coverage and the progress of the lawsuit. Information regarding the progress of the lawsuit includes disclosure of all settlement offers made by the company. Finally, an insurance company must refrain from engaging in any action which would demonstrate a greater concern for the insurer’s monetary interest than for the insured’s financial risk.

C. Failure to defend. Generally, an insurance carrier has a duty to defend its insured if there are any facts that would fall within the pleadings (i.e. complaint) that might conceivably come within the insurance coverage of the applicable policy. The insurance company has an obligation to accept a properly tendered defense and, having accepted a defense, the insurance company, even where there is a reservation of rights, must properly represent the insured or refrain from acting negligently once the defense has been assumed.

D. Failure to retain competent counsel. It is important to note that the insurance company itself has one set of duties and obligations, which in a most general sense can be delineated as the duty to properly investigate the claim and after investigating it, to properly assess the strengths and weaknesses of a plaintiff’s claim. The duties of the insurance carrier’s attorney to defend the insured are more complex, but generally speaking, the attorney’s first duty is to the insured as opposed to the insurance carrier hiring and paying the attorney for such representation. The duty to hire competent counsel to defend the insured is a separate duty of the insurance carrier; that attorney is hired to assist the insured, not necessarily the insurance carrier.

E. Failure to pay claims. Only a handful of Washington cases have dealt with “bad-faith” in the context of failure to pay or settle claims. There are at least five elements in assessing whether or not an insurance carrier has committed an act amounting to “bad-faith” in this context:

1. Inexcusable delay in payment of policy benefits.
2. Deception with respect to benefits the insured is entitled to receive or deception with respect to policy provisions.
3. Negligent, or even intentional, misrepresentation of policy provisions or entitlement to policy benefits.
4. Conditioning payment of an undisputed portion of the policy on settlement of a disputed portion.
5. Encouraging the filing of claims with other insurance carriers to avoid coverage under the insured’s policy.
6. The following have been defined by Washington law as unfair methods of competition and unfair or deceptive acts or practices in the business of insurance, specifically applicable to the settlement of claims:

1. Misrepresenting pertinent facts or insurance policy provisions.
2. Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.
3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies.
4. Refusing to pay claims without conducting a reasonable investigation.
5. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed.
6. Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. In particular, this includes an obligation to effectuate prompt payment of property damage claims to innocent third parties in clear liability situations. If two or more insurers are involved, they should arrange to make such payment, leaving to themselves the burden of apportioning it.
7. Compelling insureds to institute or submit to litigation, arbitration, or appraisal to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in such actions or proceedings.
8. Attempting to settle a claim for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made part of an application.
9. Making claims payments to insureds or beneficiaries not accompanied by a statement setting forth the coverage under which the payments are being made.
10. Asserting to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.
11. Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either to submit a preliminary claim report and then requiring subsequent submissions which contain substantially the same information.
12. Failing to promptly settle claims, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.
13. Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.
14. Unfairly discriminating against claimants because they are represented by a public adjuster.
15. Failure to expeditiously honor drafts given in settlement of claims. A failure to honor a draft within three working days of notice of receipt by the payor bank will constitute a violation of this provision. Dishonor of any such draft for valid reasons related to the settlement of the claim will not constitute a violation of this provision.
16. Failure to adopt and implement reasonable standards for the processing and payment of claims once the obligation to pay has been established. Except as to those instances where the time for payment is governed by statute or rule or is set forth in an applicable contract, procedures which are not designed to deliver a check or draft to the payee in payment of a settled claim within fifteen business days after receipt by the insurer or its attorney of properly executed releases or other settlement documents are not acceptable. Where the insurer is obligated to furnish an appropriate release or settlement document to an insured or claimant, it shall do so within twenty working days after a settlement has been reached.
17. Delaying appraisals or adding to their cost under insurance policy appraisal provisions through the use of appraisers from outside of the loss area. The use of appraisers from outside the loss area is appropriate only where the unique nature of the loss or a lack of competent local appraisers make the use of out-of-area appraisers necessary.
18. Failing to make a good faith effort to settle a claim before exercising a contract right to an appraisal.
19. Negotiating or settling a claim directly with any claimant known to be represented by an attorney without the attorney’s knowledge and consent. This does not prohibit routine inquiries to an insured claimant to identify the claimant or to obtain details concerning the claim.

There are a number of additional circumstances that constitute “bad-faith” conduct by an insurance company. If you have any questions in this regard, or if you believe you may have been the victim of an insurance company’s “bad-faith,” please feel free to contact our office to discuss the matter further, without oblation or charge. Or, simply fill out an online Consultation Request Form.