Bad Faith Claims

Brien Roche

The concept of bad faith lawsuits became popular nearly 50 years ago.  There was a widespread problem with insurers denying claims as a matter of course.  Sometimes there was no investigation.  Sometimes there was no attempt to settle.  The insurer simply felt that they held the upper hand.  If the insured wanted their money then the insured needed to file a lawsuit alleging a breach of the insurance contract.  The insurers felt that their liability was limited.  After all the insurance policy was just a contract.  If they breached the contract, they paid contract damages.

Bad Faith Claims-Tort vs Contract

Bad faith litigation reared its head and converted insurance contracts into diving boards for tort claims.  The nature of the tort claim was bad faith.  Bad faith at its core is more than just negligence by the carrier. It probably comes close to being fraud.

Liability Claims

Liability carriers have an obligation to act in good faith in terms of protecting their insured. Exactly what constitutes good faith is not well defined. If the insured denies liability and there is indeed a factual basis for that, then the carrier may be justified in defending the case. If the insured admits liability, their defense counsel recommends a settlement and the carrier refuses to settle, that may constitute a lack of good faith i.e., bad faith. Aetna v. Price, 206 Va. 749 (1966)

The duty under Price must be established by clear and convincing evidence that the insurer acted in furtherance of its own interest with intentional disregard of the financial interest of the insured. State Farm v. Floyd, 235 Va. 136, 144 (1988)

In the context of an auto claim, bad faith may be a bit easier to show under Va. Code § 38.2-2206(K). Under that Code section, the liability carrier for the defendant can spare its insured from liability and from a subrogation claim if the defendant simply cooperates with the UIM carrier. A failure to settle under that circumstance, where liability exists, may be hard to defend.

Types of Fraud

The topic of fraud has been addressed elsewhere on this website.  Fraud falls into four (4) general categories.  Fraud in the inducement is luring someone into a contract to their detriment.  Promissory fraud is having the intent not to perform the contract when you enter into it.  Fraud in the factum is fraud in the performance of the contract.  For instance when the contract is entered into, the intent is to investigate claims.  The insurance company makes a conscious decision not to investigate but simply deny the claim.  That could be fraud in the factum. Finally there are different types of statutory fraud.  These vary from state to state and may be governed by a federal overlay.

Level the Field

The thrust of bad faith litigation is to try to level the playing field to make the insurer deal with the insured in a fair fashion.  To put it another way, the insurer must not put its interest above that of the insured.

Bad faith lawsuits may be brought either by an insured (first party) or a third party beneficiary.  The third party beneficiary is a party who has been injured, who is asserting a claim against the insured which is then covered by a liability policy.

Different factors may apply to third party claims as opposed to first party claims.  The problem with a third party claim is initially proving standing.  That is, does the third party have standing to sue the insurance company.  If they are an intended third party beneficiary, they probably do.

Factors

The general criteria to be looked at in determining whether or not there is bad faith or fraud are of course any of the basic elements of fraud.  In addition to that, factors that a court would look at in determining whether or not there is bad faith are:

Misrepresentation

• Any misrepresentation of pertinent facts.
• Attempting to steer the claimant away from legal services.
• Misleading the claimant as to the statute of limitations.
• Providing false information to any examining physicians who are rendering opinions about the claimant.
• Intentionally misconstruing terms within the policy.
• Reducing payments to claimants on a widespread basis with the idea of nickel and diming them.  This occurs in instances where the insurer believes that nobody will challenge these diminished payouts but on a large-scale basis the insurer can save a great deal of money.

Claims Investigation

• A failure to fully investigate the claim.
• Failing to have and use reasonable standards as far as investigation.
• Not accepting or denying the claim within a reasonable time

Negotiation

• Failing to settle under one portion of a policy where there clearly is coverage/liability in order to better the carrier’s position as to another portion of the policy.
• Failing to provide a reasonable statement as to the basis for denial.
• Not negotiating in good faith if in fact there is an obligation to negotiate.
• Forcing a plaintiff into arbitration when that is not mandatory.
• Failing to settle a liability claim where the liability of the insured is reasonably probable and some damages are reasonably probable.  The mere existence of a possibility of a liability defense or damage defense typically is not sufficient, especially where there is inadequate coverage.
• Failing to keep the insured informed of settlement offers so that the insured can then make an intelligent decision about contributing to a settlement.

Bad Faith Claims – Statute

The statute that governs bad faith claims is found at Virginia Code 38.2-209(A).  What it says is that an insured may recover costs and reasonable attorneys’ fees in certain cases.  This statute limits the claims to the insured i.e., first party claims.  Third party claims are not recognized under this statute.  The statute goes on to say that the court must first determine that the insurer was not acting in good faith in terms of denying coverage or failing or refusing to make payments.  If those elements are met, then the court can award costs and attorneys’ fees.

Cuna v. Norman, 237 Va. 33, 38 (1989) held that in evaluating whether to award attorneys’ fees, the trial court must consider a variety of different factors listed.

Va. Code § 38.2-510 defines unfair claims practices. This statute does not give rise to a private cause of action. A & E Supply Co. v. Nationwide, 798 F.2d 669 (4th Cir. 1986)

Va. Code § 8.01-66.1 also deals with bad faith claims in regards to motor vehicles where the claim is $3,500.00 or less.  It deals with both first party claims and third party claims and allows double recovery and attorneys’ fees. Look at 14 V.A.C. 5-400-10 et seq. for certain definitions that may apply and various standards that may be applied in terms of settlement practices.

Bad Faith Claims-Case Law

In REVI, LLC v. Chicago Title, 290 Va. 203 (2015) the court determined that it is a judge and not a jury that makes the decision on bad faith to justify an award of attorneys’ fees.

In Manu v. GEICO, 293 Va. 371 (2017) the court further determined that in uninsured motorist claims there is no basis for a bad faith claim until the statutory requirements are met.  One of those statutory requirements is the obtaining of a judgement.  Once the insured has obtained that judgment, then the UM carrier has an obligation to pay. In Manu, there was a requirement that a judgment be obtained. Some UIM policies however are worded a bit differently. They may state that there is an obligation to pay UIM benefits only after judgment or settlement with the underlying defendant. If that latter language is present, then there may be a basis for a bad faith claim.

Although a bad faith claim may be a remedy to hit the insurer in its pocketbook, another alternative may be injunctive relief. That is to compel the insurance carrier to comply with the terms of the policy.  Injunctions are also addressed on this website.

Excess Verdicts

In the case of an excess verdict there may arise an opportunity for the defendant to assign the bad faith claim to the plaintiff.  The danger of that is that if the consideration is that the defendant is thereby released, then you may have thereby released the bad faith claim.  The measure of damages in the bad faith claim is the defendant’s personal exposure.  If that personal exposure is eliminated, there may be no damage.  If no damage, then no claim.  As such it may be safer to simply assert a third party action based upon the plaintiff being an intended beneficiary.  If the defendant then joins in the bad faith claim, all the better.

Underinsured Motorist Claims

There may also be a potential basis for a bad faith claim under the underinsured motorist statute. Va. Code § 38.2-510 defines unfair claims settlement practices. It does not create a cause of action but it does recognize certain things that may constitute unfair claims practices. Likewise 14 VAC 5-400-70 identifies claims settlement standards that are applicable to all insurers. In particular, subsection D says that where there is no dispute as to coverage or liability an insurer shall offer to a first party claimant an amount that is fair and reasonable.

Even though this may not give rise to a cause of action, it certainly does give rise to the basis for a complaint with the Department of Insurance within the State Corporation Commission.

Brien Roche represents clients in all types of vehicle injury matters or accidents. Mr. Roche has secured compensation for clients involved in accidents involving trucks, cars and other vehicles. With over 40 years of trial experience, Brien Roche has garnered significant compensation for his clients. For a free consultation with an accident lawyer, complete the contact form on this page, or contact our office directly. Also for more info on bad faith claims see the Wikipedia pages.