SDV Insights

As a policyholder, you may have heard the term “bad faith” in the context of litigation against your insurer. Bad faith in the insurance context is a catch-all term for a broad category of claims that can be brought against your insurer. Bad faith claims are common in insurance coverage litigation, and they can be a powerful tool in a policyholder’s arsenal. This post will serve as an introduction to some basic concepts surrounding bad faith litigation.

Table of Contents

• Bad Faith Defined:
  • Statutory vs. Common Law Bad Faith Claims
  • Breach of Contract vs. Tort Bad Faith Claims
  • Substantive vs. Procedural Bad Faith Claims
• Best Practices Throughout the Claims Process:
• Involve an Experienced Coverage Attorney
• Conclusion

Bad Faith Defined
A traditional understanding of bad faith is conduct that stems from an insurer’s breach of the common law covenant of good faith and fair dealing, which is implied in the contractual relationship between the insurer and the policyholder. However, this definition is a bit amorphous, and like many areas of the law, what constitutes bad faith “depends”— oftentimes, jurisdiction-specific law delineates the boundaries for these claims.

Bad faith claims can either be “first-party” claims or “third-party” claims. In first-party bad faith claims, a policyholder typically will allege that the insurer refused to pay a covered claim or failed to properly investigate. Third-party bad faith claims, on the other hand, concern an allegation that an insurer did not reasonably defend or settle another party’s claim against the policyholder.

A policyholder should be aware of certain practices that may indicate bad faith behavior by your insurer. Some examples include but are not limited to: an inadequate or delayed investigation of a claim; misrepresentations by your insurer regarding your policy and its coverage; a refusal to pay or unjustified delay in settling a claim that ought to be paid; or a lack of adequate communication and candor from your insurer.

Statutory vs. Common Law Bad Faith Claims
While many bad faith claims stem from established case law in a jurisdiction, some states have specifically enacted laws to protect policyholders and establish standards that insurers must follow when handling claims. A violation of these statutes, in some cases, can lead to a right of action by a policyholder against their insurer as outlined in the statute itself. These types of bad faith claims are “statutory” bad faith claims (as opposed to “common law” bad faith claims, predicated on case law).

Breach of Contract vs. Tort Bad Faith Claims
Another distinction in this area is whether the bad faith claim itself is brought as a breach of contract or tort cause of action. This is an important distinction for policyholders— not just attorneys — as contract claims are limited to the dollar amount of the contract. In contrast, tort claims allow for the recovery of additional damages, including punitive damages, attorneys’ fees, and other damages a court may find appropriate. This distinction is also crucial because a jurisdiction’s statute of limitations for the two different causes of action can differ.

Substantive vs. Procedural Bad Faith Claims
Yet another distinction in the world of bad faith claims is that between “substantive” (or “traditional”) bad faith claims and “procedural” bad faith claims. Substantive bad faith claims center around an insurer’s unreasonable refusal to provide coverage for a loss that should be covered. Procedural bad faith, however, is broader and encompasses the ways in which an insurer provides coverage. These claims typically surround inappropriate conduct by the insurer during the claims handling process, and, depending on the jurisdiction, these claims may be successful regardless of whether there is coverage for the underlying claim. In some cases, procedural bad faith claims can even consider an insurer’s behavior before a claim’s submission.

Best Practices Throughout the Claims Process
Throughout the claims process, it is important that you, as a policyholder, cooperate with your insurer’s reasonable requests and maintain detailed records of the claims process and communications with your insurer. This will help maintain a well-ordered claims process. In addition, reasonable behavior on your end and comprehensive records will be important in the event of subsequent coverage or bad faith litigation if it were to arise.

Involve an Experienced Coverage Attorney
If it becomes apparent that bad faith may be implicated in your situation, it is important that you involve an attorney who has experience in this area. Insurance coverage litigation can be quite complex. An attorney with experience in assisting policyholders can make litigation easier for you and your organization.

Conclusion
As a policyholder, your insurer owes you a wide variety of duties. It is essential that you are aware of these duties throughout the claims process. Unfortunately, it often falls upon a policyholder to ensure that their carrier lives up to the standards imposed on them by the insurance contract and state law.

Please do not hesitate to reach out to the policyholder coverage attorneys at Saxe Doernberger & Vita, P.C. if you have any questions or concerns about bad faith or any other matters surrounding insurance coverage. 

For more information, please contact Stacy M. Manobianca at SManobianca@sdvlaw.com.

*Special thanks to Oliver Stallmach, Law Clerk, for contributing to this blog post.