New Rulings Demonstrate Difficulty of Pursuing Bad Faith Claims Against Insurers

November 12, 2010

Policyholders seeking insurance coverage routinely pursue bad faith claims against their insurers. Liability for bad faith on the part of the insurer can open the door for the policyholder to obtain payment of their attorneys’ fees and coverage for damages in the underlying case above the policy limits. Inclusion of such claims will also get the insurers’ attention, but you can expect a harder fight for coverage to be sure.

Two recent cases illustrate the difficulty in prevailing on a bad faith claim. A federal district judge recently ruled on a summary judgment motion that the evidence did not warrant a finding of bad faith against Continental Casualty Company. McNeill & Associates, LLC v. Continental Casualty Co., 2010 U.S. Dist. LEXIS 115687 (D. Conn. Nov. 1, 2010). In this case, a law firm sought a defense from its malpractice insurer. Continental Casualty denied coverage based on a “prior knowledge exclusion.”

In short, the insurer asserted that one of the lawyers was aware of the claim by the client before the policy was issued. The firm pursued coverage in federal court, and included a bad faith claim for the denial of a defense. The court noted, “. . . evidence of ‘mere negligence’ is insufficient on its own to support a claim for bad faith.” The court went on to note that where the duty to defend is fairly debatable then additional evidence is required to support the bad faith claim.

In Walker v. Progressive Direct Ins. Co., 2010 U.S. Dist. LEXIS 116597 (D. Okla. Oct. 29, 2010), the insured’s Chevy Tahoe was stolen while they were away on vacation. The vehicle had been parked in a public lot with a “for sale” sign in the window. Progressive suspected insurance fraud and turned the matter over to its Special Investigations Unit under a reservation of rights.

The suspected fraud was based on insurance “red flags” including: (a) the vehicle is for sale at the time of loss; (b) the vehicle is a “gas guzzler;” (c) the steering column is not compromised; and (d) all keys are in the possession of the insured. Ultimately, Progressive Insurance ruled out fraud and agreed to pay on the claim. The insureds filed a lawsuit alleging bad faith in the handling of the claim as untimely and improper.

The district court noted that “[e]very insurance contract carries with it the duty to act fairly and in good faith in discharging its contractual responsibilities,” which extends to claims investigations. The court went on to state that the central issue “is whether the insurer had a good faith belief in some justifiable reason for the actions it took or omitted to take that are alleged to be violative of the duty of good faith and fair dealing.”

In applying the facts to the standard for bad faith, the court ruled against the insureds. In reviewing the facts of the investigation and the insureds’ contentions as to how it was botched, the court held that “an insurer’s investigation need only be reasonable, not perfect.” See Roberts v. State Farm Mut. Auto. Insur. Co., 2003 U.S. App. LEXIS 5830 (10th Cir. March 26, 2003).

Asserting a claim for bad faith incorporates a higher degree of difficulty into insurance coverage litigation. The burden of proof is generally higher, and it requires a deeper degree of discovery to support the claim. Policyholders need to be especially prepared for the extra effort required in successfully prevailing on a claim for bad faith against their insurers.

For more information on this issue and how McGuireWoods assists policyholders in protecting and recovering their insurance rights, please contact the author.