Bad Faith Claims Against Insurers

Most state law on bad faith by insurers is strong on liability, but weak on the award of damages.

Each state has decisional law establishing that an insurance company owes a duty of good faith with respect to evaluating claims. Most states also embrace the proposition that in fulfilling its duty, an insurance company cannot place its own financial interests ahead of its insureds, particularly when considering settlement demands within the limits of a policy.

The evidence required to demonstrate that an insurer has acted in bad faith varies widely. In some instances misconduct handling one claim is sufficient. In others, bad faith by the insurer can be shown only if the policyholder can demonstrate a “pattern and practice” of conduct.

While insurers generally are not concerned about a finding of bad faith liability against them, they are concerned about the assertion of a bad faith claim if it will lead to immediate or broad discovery obligations.

Assuming the policyholder has sufficient facts to establish bad faith, the next hurdle it faces is quantifying the damages that resulted. Often, it is difficult to quantify damages over and above the amount of the claim and attorney fees incurred in connection with pursuing coverage. Corporate policyholders must think creatively about how to capture lost opportunity costs, lost time value of money and other indirect costs.