August 03, 2020


Lessons in Bad Faith

Recent court decisions offer warnings to claims and litigation professionals

There is a saying that to understand the things that lie ahead, sometimes you have to look back. With that in mind, here are a few lessons that can be taken from recent bad-faith cases. Similar issues often will cut across lines of insurance, whether property or other first-party insurance or casualty (third-party, liability) insurance.

Evaluating Conditions Without Asking

In the case of King v. GEICO (2012), a federal court almost granted GEICO’s motion for summary judgment on a bad-faith action, saying that it “presents a strong argument that it acted in good faith.” However, the judge denied GEICO’s motion and held that the case presented questions of fact that should be answered by a jury.

The judge in that case outlined some of the actions any insurance carrier can take in any case that will keep a bad-faith “failure to investigate” claim away from a jury:

  • Take a statement from (“statementize”) the injured claimant under oath.
  • Obtain the injured person’s medical authorization for access to providers.
  • Set up a compulsory medical examination (“IME”).
  • Retain a physician or other medical practitioner to review the claimant’s medical records.
  • Retain outside counsel to provide an objective opinion as to the claim’s value in the court system.

Lesson: This bad-faith case is going to a jury in August 2013 largely because the carrier’s claims representatives took none of the above actions. The court said, “In sum, make demonstrable efforts to investigate the claim beyond review of the demand package, either at the time of the initial settlement offer or upon receipt of the civil remedy notice of insurer violation.”

In other words, practice objectively verifiable good faith. Ask questions when you know you do not have the answers, only assumptions.

Making Reasonable Requests

A case against a liability insurer was made due to accusations that the insurer did not initiate settlement negotiations sooner and that, if it had, there would have been a settlement and not an excess verdict. These are the steps that convinced the Ninth Circuit Court of Appeals in Yan Fang Du v. Allstate Insurance Co. (2012) that the carrier complied with applicable California law in that case:

  • The carrier could not make an earlier settlement offer because it had only the claimant’s and her attorney’s representations about the claimant’s injuries and medical bills, which were not corroborated by proof.
  • The claimant sustained her injuries in an automobile accident involving several people. The carrier had no proof of the injuries and extent of damages to the other persons before it offered policy limits.
  • The carrier asked the claimant’s lawyer for the missing medical information, which the claimant’s lawyer promised to provide. However, the medical information was not provided for some time, during which the carrier documented that it repeatedly tried to get the information.
  • Shortly after the medical information was provided, the carrier determined that the information supported the claims, and the carrier made a $100,000 policy limits offer at that time, which was rejected.

Lesson: This is a simple one, but not necessarily easy to do in all cases. Investigation must lead to evaluation or your company will face a strong possibility of exposure to bad-faith damages.

Arbitrary Deadlines

In McGuire v. Nationwide Assurance Co. (2012), a settlement demand was made for payment of policy limits within 20 days. At her deposition, McGuire testified that she did not know why there was a 20-day time limit. Ultimately, the court granted the carrier’s motion for summary judgment in the case. The judge wrote that the “settlement demand was an artificial deadline with no real purpose, other than to help ‘create’ a bad-faith claim.”

Having said that, the court also was careful to observe that it is the conduct of the insurer that is the focus of any bad-faith claim, and that the claimant’s attorney’s conduct was not the reason for granting the carrier’s motion for summary judgment.

“However, the actions of the claimant and his or her attorney can be relevant to the issue of whether there was any realistic possibility of settlement,” the judge wrote in words that can apply to many other bad-faith cases in many jurisdictions.

Lesson: You and a bad-faith claimant are equally entitled to set the stage of what happened and when. In scenarios like McGuire, ask the claimant why her claim was presented with a time limit. Make sure that both the question and the answer are in the record that a jury would consider in a bad-faith case if things go that far. This will be known alike to the claimant, the carrier, and their counsel.

Understanding Reasonableness

In the case of Bafford v. Travelers Casualty Insurance Co. of America (2012), the court considered Travelers’ motion for partial summary judgment on a bad-faith claim arising out of the carrier’s handling of a burglary claim. The claim was made by an insured under an auto repair shop owner’s property insurance policy. Travelers denied all coverage.

A trial court denied Travelers’ motion, causing the carrier to attend a court-ordered settlement conference in April 2013. An order was entered on the parties’ stipulation that the case be dismissed with prejudice accordingly on May 14, 2013.

When the court started this whole chain of events by denying Travelers’ motion for partial summary judgment on the bad-faith claim, it followed a legal rule that is followed in most U.S. jurisdictions: “Reasonableness” is measured by an objective standard.

The court followed another majority view in bad-faith cases, third-party and first-party alike: A reasonable investigation does not have a subjectively predetermined outcome, such as a pretextual investigation where the carrier has already decided what the outcome should be and visibly investigates but fails to consider the additional evidence it unearths about the claim along the way.

In this case, the court denied Travelers’ motion in part because “the evidence suggests that Travelers concluded quite early in the investigation that Bafford had submitted a fraudulent claim and proceeded to seek information confirming that position.”

Lesson: In all cases, it is a best practice as it were to behave with objectively verifiable good faith. In no case is it ever a best practice to behave in what a judge or jury can reasonably perceive as the opposite.

Settlement Negotiations

Where liability is probable and damages are great, some courts follow the rule that a liability carrier should initiate settlement negotiations. The focus in these jurisdictions is whether the claimant against the insured would have settled the underlying case, not on whether the claimant could have settled.

To put it another way, courts in these jurisdictions make their decisions much more often based on facts than on legal questions when deciding whether or not an alleged bad-faith case should be decided by a jury.

The case Goheagan v. American Vehicle Insurance Co. (2012) is a good example of this. The ruling stated, “If in fact Goheagan had retained an attorney, the assistance of the attorney may have been necessary to finalize a settlement but would not have precluded an offer. With the catastrophic injuries, clear liability, and the limited available liability limits of $10,000, a jury could decide that there was not much to negotiate; and the representation by an attorney would not have been an impediment to at least make an offer to settle.”

Lesson: If good claims-handling practices indicate or dictate the making of a settlement offer when the insured faces a likelihood of liability and high damages, then it doesn’t matter if the claimant is in a coma and does not have anyone legally capable of accepting an offer on her behalf. That is a legal question, one for lawyers to answer. Claims adjusters have only to answer whether or not an offer should be made based on liability and damages.

Consequential Damages

Most jurisdictions follow the established rule that a party injured by a breach of contract may recover consequential damages. Let’s consider the ruling in Rockford Mutual Insurance Co. v. Pirtle (2010). “Consequential damages may be awarded when the non-breaching party’s loss flows naturally and probably from the breach and was contemplated by the parties when the contract was made.”

Sometimes the damages that “naturally and probably flow from the breach” and were “contemplated by the parties when the contract was made” are too obvious to leave to the lawyers. Sometimes they are totally within the predictive capabilities of ordinary people—such as those who serve on juries. For example, when a carrier denies an insured’s business interruption claim, the consequential damages claim of business losses will probably go to a jury to determine.

From time to time, a liability carrier’s refusal to settle an underlying case may result in a judgment against an insured for which coverage is not available as a matter of public policy. An example is punitive damages. In Seldon v. Allstate Insurance Co. (2013), which affirmed summary judgment in favor of the carrier, it was held that these sorts of damages are not recoverable simply as consequential damages that may have resulted from the insurer’s bad-faith failure to settle.

Lesson: A little knowledge of the applicable law often comes with experience, and it can go a long way. When legal issues determine the outcome of factual investigations, you may want to retain an attorney to assist you in an investigation in a given case.

Demanding EUOs

In one of many en banc decisions in recent times, the Washington Supreme Court was of the opinion, which may or may not represent the majority view in the future, that if an examination under oath (EUO) is not material to the claim, it provides no defense to the insurance carrier in a bad-faith case if the insured does not provide one.

In the case Staples v. Allstate Insurance Co. (2013), the ruling states, “Given the quasi-fiduciary nature of the insurance relationship, we hold that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it.”

Lesson: Be careful when asking for a policyholder’s or other insured’s records, statements, or cooperation. If you limit your requests to lines of investigation that are clearly material to the claim, you should be safe from bad-faith claims based on your requests.

The lessons suggested here are only a few that may be drawn from recent bad-faith cases. Similar issues will often cut across lines of insurance, whether first-party or third-party (liability). The lessons offered by recent bad-faith cases and the issues they present are left now to each person’s and each company’s evaluation of best practices in claims handling.

No health insurance blog would be complete without a free-flowing, comprehensive discussion on the health insurance industry, and Wendell Potter knows where all the bodies are buried (pun intended).