What is Bad Faith?

Every insurer has an implied duty to act in good faith and fair dealing with their insured and when handling claims made against the insured by third parties. A duty to timely and properly investigate an insurance claim is intrinsic to an insurer’s contractual duty to timely pay a valid claim. Breach of this duty constitutes bad faith and for such breach courts have imposed liability against the insurer for amounts in excess of policy limits. According to 36 O.S. § 1250.5, not attempting in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear constitutes an unfair claim settlement practice and could result in liability for bad faith. Bad-faith actions have also been based upon an insurer’s failure to follow judicial construction of insurance contracts or available applicable law, as well as upon duties that are necessary for an insurer’s timely determination of a claim. Brown v Patel 157 P3d 117.

Each insurer must exercise good faith toward the insured in determining whether an offer of compromise and settlement within the limits of its policy shall be accepted or rejected. In determining whether such an offer shall be accepted or rejected, it may properly give appropriate consideration to its own interest. It must also give equal consideration to the interests of the insured; and its failure to do so constitutes bad faith which renders it liable to the insured for any resulting damage if the judgment against the insured exceeds the amount of the insurance.

While this rule would not deter an insurance company from refusing payment on a claim that it had reasonable cause to believe was factually or legally insufficient, it does express the intent of our legislature to impose upon insurance companies an obligation to pay a valid claim on a policy promptly. The tort of bad faith does not, however, prevent the insurer from resisting payment or resorting to a judicial forum to resolve a legitimate dispute. Skinner v. John Deere Ins. Co., 2000 OK 18, ¶ 16, 998 P.2d 1219, 1223.

Bad faith sounds in both tort and contract law. Regarding tort law, as a matter of policy and in the interest of protecting their citizens, states have imposed a statutory duty upon insurance companies to act in good faith and deal fairly with their insured’s. Upon a showing of clear and convincing evidence that an insurer either threatened to withhold or actually withheld payments, maliciously and without probable cause, or for the purpose of injuring its insured by depriving him of the benefits of the policy, an insurer may be found liable for breach of that statutory duty and be required to pay punitive damages. The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim, i.e., would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances.

Regarding contract law, there is an implied covenant of good faith and fair dealing in every contract (including insurance policies) that neither party will do anything which will injure the right of the other to receive the benefits of the agreement. Insurer’s have a contractual duty to timely pay a valid claim. An insurer’s breach of its contractual duty to pay a claim may also result in a finding of bad faith and subject it to liability. Should a court find that an insurer has in fact breached its contractual duty to its insured, the Plaintiff insured may recover consequential and in a proper case, punitive damages.

A central issue in any analysis determining whether breach has occurred is gauging whether the insurer had a good faith belief in some justifiable reason for the actions it took or omitted to take that are claimed violative of the duty of good faith and fair dealing.

What does bad faith entail?

A. Elements
The elements of a bad faith claim against an insurer for delay in payment of first-party coverage are:

(1) claimant was entitled to coverage under the insurance policy at issue;
(2) the insurer had no reasonable basis for delaying payment;
(3) the insurer did not deal fairly and in good faith with the claimant; and
(4) the insurer’s violation of its duty of good faith and fair dealing was the direct cause of the claimant’s injury.

The absence of any one of these elements defeats a bad faith claim. An insurer’s good faith belief is measured by facts known, or relied on, by the insurer at the time of the conduct challenged as showing bad faith on the part of the insurer. To determine the validity of the claim, the insurer must conduct an investigation reasonably appropriate under the circumstances. The knowledge and belief of the insurer during the time period the claim is being reviewed is the focus of a bad-faith claim.

B. Standard of Proof
The standard of proof in a bad faith case, according to is a showing to the jury by clear and convincing evidence, that an insurer has recklessly disregarded its duty to deal fairly and act in good faith with its insured or an insurer has intentionally and with malice breached said duty.

“Before the issue of an insurer’s alleged bad faith may be submitted to the jury, the trial court must first determine as a matter of law, under the facts most favorably construed against the insurer, whether the insurer’s conduct may be reasonably perceived as tortious.”

In a case involving an insurer’s alleged breach of the implied duty of good faith and fair dealing, summary judgment for the insurer has been held proper even where a legitimate dispute existed between the parties as to the value of the insured’s claim.

To establish the tort of bad faith, the minimum level of culpability necessary for liability against an insurer to attach is more than simple negligence, but less than the reckless conduct necessary to sanction a punitive damage award against [the insurer].”

(“Insurers are free to make legitimate business decisions (and mistakes) regarding payment, as long as they act reasonably and deal fairly and in good faith with their insureds.”).

C. Damages
The standard damages available for a finding of bad faith on the part of the insurer are the insurance proceeds, emotional distress, excessive awards, punitive damages or a combination of them all. These damages are available because, according to the courts, the very risks insured against presuppose that if and when a claim is made, the insured will be disabled and in strait financial circumstances and, therefore, particularly vulnerable to oppressive tactics on the part of an economically powerful entity.

The availability of a punitive damage award in a bad-faith case is not automatic, but rather is governed by the standard applicable in other tort cases. The plaintiff must show that the defendant acted with oppression, malice, fraud or gross negligence or wantonness. Because such damages are awarded to punish the wrongdoer for the wrong committed upon society, Oklahoma does not require the amount of punitive damages to be in a particular ratio to the amount of actual damages. Instead, the focus is the harm caused to society by the defendant’s wrongful actions.

CONCLUSION

In this case, if able to show that (1) claimant was entitled to coverage under the insurance policy at issue; (2) the insurer had no reasonable basis for delaying payment; (3) the insurer did not deal fairly and in good faith with the claimant; and (4) the insurer’s violation of its duty of good faith and fair dealing was the direct cause of the claimant’s injury, then a finding of bad faith would be proper. However, if any of these elements are lacking, any claim for the tort of bad faith is defeated.

The second and fourth elements of the test appear to be the most problematic in Shea David Pletcher’s case. Reasonableness is determined by an objective standard and it could very well be argued that another insurance company in Allstate’s position may have taken a similar amount of time to investigate and issue payment in a case like Mr. Pletcher’s. The fact that an advance payment for the medical portion of Mr. Pletcher’s claim was issued and now, an offer for the remainder of the policy limits has been made, it could be perceived that Allstate did indeed make timely payments and there was no legitimate delay in payment. However, if there are other facts, perhaps emails and/or correspondence, that indicate an unreasonable delay in payment on Allstate’s part, such evidence might bolster a bad faith argument. Regarding the fourth prong of the test, it might be difficult to say, in this case, that Allstate’s alleged delay in payment was the direct cause of Mr. Pletcher’s back injury.

Even if the elements for the tort of bad faith may not be met, remedies for a contractual breach of duty remain available. Mr. Pletcher would have to prove that certain contractual obligations under his policy with Allstate were not met. Every insurer has a contractual duty to timely pay a valid claim and to not do anything which might injure the right of its policyholder to receive payments. If Mr. Pletcher argues facts sufficient to support a finding of Allstate’s failure to meet its specific contractual obligations, a bad faith judgment would be proper.

Ultimately, Allstate has a duty to Mr. Pletcher, to ensure that coverage for which premiums have been received is readily available. Unreasonable delay in payments does support a finding of bad faith. If Mr. Pletcher is able to either meet the requisite elements of the tort or bad faith or show specific contractual language which Allstate has breached, his bad faith claim is likely to succeed.