The Silent Clause in Every Contract

Every contract incorporates an implied “back stop” provision – the covenant of good faith and fair dealing, that prevents one party from depriving the other of the benefits of the contract (even if the offending party’s conduct does not violate an express contract provision).  Under most circumstances, a claim that the contracting counterparty breached this implied covenant—i.e., acted in bad faith—is treated like a contract provision, meaning a plaintiff can only recover contract damages, e.g., the amounts owed under the contract.  If there is no prevailing party attorneys’ fee provision in the contract, the successful plaintiff in these cases does not get to recover their attorneys’ fees, or punitive damages.

The Special Case of Insurance Bad Faith

Numerous states, including California, have created an exception to the general rule that bad faith actions sound in contract, for claims against your insurance carrier.  In these states, when your insurer wrongly and unreasonably denies a claim, forcing you to sue the insurer to obtain the coverage you are entitled to, you can recover your attorneys’ fees from the suit.  And, under certain circumstances, because an insurer’s bad faith conduct is considered akin to a tort, you can recover punitive damages and other tort damages (like emotional distress damages and foreseeable consequential damages) as well.

Not all disputes with your insurance carrier over whether it is required to cover your claim are automatically questions of bad faith.  It is only when the carrier’s position is unreasonable that you can bring a claim for bad faith and seek to recover your attorneys’ fees and, potentially, punitive damages.  When it’s a tough call whether a claim is covered by insurance, your insurer will not be liable for bad faith just for being wrong.

In some states, like Pennsylvania, you need to prove bad faith by a heightened “clear and convincing evidence” standard, meaning the evidence of the insurer’s misconduct was unreasonable is overwhelming.  Pennsylvania also requires the plaintiff to prove that the insurer knew or recklessly disregarded the risk that its conduct was unreasonable.  In other jurisdictions, like California, the standard is the same as most in most civil cases, “preponderance of the evidence,” meaning the jury determines it is more likely than not that the insurer’s conduct was unreasonable.

When Is an Insurer’s Conduct Unreasonable?

The law on bad faith varies from state to state.  Some jurisdictions only allow for bad faith tort claims in the first-party insurance context, i.e., where you seek coverage from your carrier for damages/bodily injury to yourself or your property, often because of harm from a natural disaster or an automobile accident involving an uninsured driver.  Other states also allow you to assert bad faith tort claims in the third-party context, i.e., where you are the insured, someone is suing you, and you seek coverage from your carrier to defend the claim and indemnify you for liability.

The following are examples of conduct that potentially gives rise to bad faith in many jurisdictions:

In the first-party context, the insurer must investigate your claim promptly, pay any amount that is not in dispute, and then, if there are disagreements as to what is covered and what isn’t, they must lay out their positions clearly and answer any questions you have about their coverage decisions.  Unreasonably denying your claim or refusing to justify coverage decisions can be the basis for a bad faith claim.  Making unreasonable demands for proof of loss or unreasonable delays in resolving a first-party claim can also be examples of insurance bad faith.

In the third-party context, a carrier refusing to defend you in a claim that is potentially covered without justification or explanation is clearly improper.  Upon investigating your claim, if the plaintiff has made an allegation that falls within your insurance coverage, your insurer must mount a defense on your behalf by hiring and paying for competent counsel (subject to any deductibles or self-insured retentions).  That counsel then has a duty to provide you – the insured – with a zealous defense, even though the lawyer is being paid by the insurance carrier, not you.

It is also improper for a carrier to refuse to accept a reasonable settlement offer within the policy limits when the insured’s liability is reasonably established, or for the insurer to demand the insured to contribute to the settlement of the claim when the insured is not legally obligated to do so.

What Is Recoverable? 

In addition to providing you with the policy benefits you were wrongly denied, a verdict in your favor may also include interest on the amounts improperly withheld, reasonably foreseeable consequential damages, attorneys’ fees and costs, emotional damages, and punitive damages.  The damages available vary from state to state.  In California, for example, under Brandt v. Superior Court, you can recover attorneys’ fees reasonably incurred to recover the improperly withheld payments under a policy.  And if the insurer acted with fraud, malice, or oppression in denying your policy benefits, you can receive punitive damages in the form of a multiple of your tort damages (typically your attorneys’ fees and potentially emotional harm damages, when the plaintiff is a natural person, not a corporate entity).  Other states have different rules about what is and is not recoverable in first- and third-party insurance bad faith claims.

To Maximize Recovery, Hire an Aggressive, Experienced Advocate 

Insurance bad faith is a complex area of law, with different rules and requirements in each jurisdiction.  You need counsel experienced in litigating bad faith claims, familiar with these differences, to successfully prosecute your claim and prepare it for trial, if necessary.  With seasoned litigators and trial lawyers, we have handled numerous bad faith cases to successful resolutions, on behalf of both insureds and insurers.  Our deep expertise allows us to hit the ground running in bad faith cases, regardless of which side we are representing, or which jurisdiction your case is in.