"Bad Faith" Claims Against Insurance Companies

One of the countless magazines, journals, newsletters, and assorted other periodicals I slog through on a regular basis is Fire & Arson Investigator, a quarterly journal published by the International Association of Arson Investigators. The current issue contains two pieces that I found interesting.

The first article concerns the severing of "bad faith" claims against insurance companies. The article, by the way, discusses the Canadian courts' handing of the matter, but, by and large, the same arguments apply on this side of the border.

Generally, a "bad faith" claim is included in a suit against an insurer when the plaintiff (usually the owner of the damaged or destroyed property) feels that the company acted in bad faith in denying a claim under an existing policy. Such claims have been raised against many insurers in the Gulf Coast region after Hurricane Katrina.

Author Havelock Madill, Q.C.*, asserts that an insurance company faced with a "bad faith" claim connected to a suit involving the loss of insured property may want to sever the bad faith claim from the rest of the suit for several reasons:

• "[The] severing of the insurance contractual claim for initial determination will result in a judgment for or against the insured. If the determination on the contractual claim is against the insured, then the action ends there and there is no need to consider the bad faith claim. On the other hand, if the determination of the contractual claim is favourable to the insured, then the insured will have a judgment for the amount payable under the policy, and what remains is a determination of whether it is also entitled to punitive or exemplary damages arising from the insurer’s conduct in respect to the handling of the contractual claim."
• "[The] possibility that the insurer may be required to waive legal privilege in order to defend itself with respect to the bad faith claim. If the insurer would not have been required to waive legal privilege over communications but for the existence of the bad faith claim, then the insurer will have been prejudiced by the bad faith claim being conjoined with the contractual claim."
• "[The] insurer’s legal counsel may be required to be a witness in the proceedings in respect to the bad faith claims. In such circumstances, the Professional Codes of Conduct in most, if not all, of the Canadian provinces would require that the legal counsel step down from their representation of the insurer. This, too, can be the primary purpose of the insured’s bad faith allegations."

I am far from being an attorney, especially a Canadian attorney, but there are some points I feel Madill overlooked.

Perhaps Canadian insurance companies are more honest in dealing with their customers, but here in the US, I think it's a foregone conclusion that insurance companies view income (premiums received) as their God-given right, and disbursements (claims paid) as an insufferable burden.

We have all seen, heard, or read of instances where insurance companies in the Gulf region denied claims arising from Hurricanes Katrina and Rita, claiming that the damage to the property was caused by floodwaters (not covered under a homeowners policy), despite clear evidence to the contrary (e.g., a roof blown off, or a tree through the house). We’ve seen medical insurers deny claims on the flimsiest of pretexts, often leaving a family with catastrophic medical expenses that they can’t possibly pay. We’ve seen adjustors for automobile insurance companies demand access for repeated inspections, and then using a simple missed appointment as a pretext for denying a claim.

Let’s look at Madill’s points in order.

"[The] severing of the insurance contractual claim for initial determination will result in a judgment for or against the insured. If the determination on the contractual claim is against the insured, then the action ends there and there is no need to consider the bad faith claim.”

Madill is absolutely correct in this assertion, and there is no valid reason I can think of for pursuing a bad faith claim under these circumstances.

“On the other hand, if the determination of the contractual claim is favourable to the insured, then the insured will have a judgment for the amount payable under the policy, and what remains is a determination of whether it is also entitled to punitive or exemplary damages arising from the insurer’s conduct in respect to the handling of the contractual claim."

This is also correct, but I believe Madill has glossed over the fact that a second action – for punitive or exemplary damages – also means additional costs for the plaintiff. Remember, the insurance company will almost invariably file an appeal to a judgment against its interests, leaving the plaintiff with no money and steadily rising legal bills (which the insurance company simply passes on to policyholders; the plaintiff doesn’t have that luxury). Also, depending on the nature of the original decision, the insurance company – if its actions have been particularly egregious – may see the writing on the wall and pressure the plaintiff to accept a settlement for a nominal amount, rather than risk a jury’s sympathy. Additionally, separating the claims enables the defense – the insurance company – to file additional requests for delays, dragging the case out until the plaintiff has no further resources with which to pursue his claim.

"[The] possibility that the insurer may be required to waive legal privilege in order to defend itself with respect to the bad faith claim.”

Madill explains, “the insurer will likely be required to di­vulge communications and/or work product in order to defend itself in respect to the allegations,” and that, “allegations allow the insured an opportu­nity to gain insight into the strengths and weaknesses of the insurer’s position by becoming privy to legal opinions and other communica­tions that would be protected from required disclosure in the defence of the contractual claim but are relevant to the bad faith claim, and therefore open to examination by the insured.” This means that the insurance company, in attempting to show it did not act in bad faith, would have to reveal materials it would not otherwise be forced to disclose. While Madill has a valid point, the fact remains that bad faith claims continue to be filed because the insurance companies continue to shaft their policyholders. If they did actually conduct all their business in good faith, no one would want to see the notes of private meetings.

“If the insurer would not have been required to waive legal privilege over communications but for the existence of the bad faith claim, then the insurer will have been prejudiced by the bad faith claim being conjoined with the contractual claim."

At the risk of sounding like Malkin or Coulter, well, boo-frickin-hoo. If the insurance industry treated policyholders with respect, honesty, courtesy, and dignity, it wouldn’t have to worry about juries being prejudiced against it. The sanctimonious bastards brought it upon themselves.

"[The] insurer’s legal counsel may be required to be a witness in the proceedings in respect to the bad faith claims. In such circumstances, the Professional Codes of Conduct in most, if not all, of the Canadian provinces would require that the legal counsel step down from their representation of the insurer. This, too, can be the primary purpose of the insured’s bad faith allegations."

The reason the lawyer would be called, of course, would be to testify that all proceedings were handled in good faith, in a prompt manner, in accordance with generally accepted professional standards. This would not happen, if the insurance companies didn’t have such a track record.

Again, boo-frickin-hoo.

Madill notes that courts in Eastern Canada have been less willing to grant requests for severance than have those in Western Canada, and that it is a “basic right” to have all issues in a case tried at the same time.

Madill makes another interesting comment:

There must then be a compelling case made that the delay that will be experienced if the subsequent issue(s) needs to be determined is justified and is more than off-set by the expenses that may be avoided if it develops that the subsequent issue(s) does not need to proceed.

Madill fails to mention that the delay and expense work in favor of the insurance companies:

• Most individuals will not be able to devote the time to a case that an insurance company can. The individual must arrange housing, or transportation, or medical care, or whatever it is the companies have refused to pay. If nothing else, the plaintiff must continue to work, to earn an income, to pay for the necessities of life, rather than spending months or years in a courtroom. Additionally, witnesses may die, move away, or their memories of the incident may fade. The incentive here is for the company to extend the process as long as possible.
• Insurance companies have attorneys on staff on a permanent basis; they do not have to pay hourly the way the plaintiff must. The insurance company attorneys get paid whether or not they’re working on a particular case. Plaintiff’s attorneys, on the other hand, even those working on a contingency basis, cannot afford to put in countless hours without compensation. The advantage falls to the insurance companies.
• Furthermore, the insurance companies know that if they can drag out the proceedings long enough, the plaintiff will eventually drop the action, either through bankruptcy or frustration at the snail’s pace of litigation.

So, while Madill has some very valid points, the most important factor has been ignored:

It is the long history of the insurance industry’s abuses of its policyholders that has led to the increasing number of bad faith claims.

It is not the “poor helpless little monolithic insurance company” against the “big, evil policyholder,” as the article would have you believe.


* Queen's Counsel, are lawyers appointed by letters patent to be one of "Her Majesty's Counsel learned in the law"; the position exists in various Commonwealth countries around the world. They do not constitute a separate order or degree of lawyers. They are, however, more than merely a professional rank, as their status is conferred by the Crown and recognised by the courts. In order to become one of Her Majesty's Counsel one generally has to serve as a barrister or a Scottish advocate for at least 10 years. [Source: Wikipedia]