Defenses to Bad Faith Insurance Claims

There are several defenses that an insurance company that is sued for bad faith may raise. Some of the more common defenses are discussed below. In addition to the defenses set forth below, some states have statutes governing bad faith actions that provide for specific defenses. If you have questions about the possible defenses available to the insurance company in your bad faith action, talk to an attorney.

Statute of Limitations: A statute of limitations is essentially a deadline before which a claim must be filed or it is lost. The length of the applicable statute of limitations depends on whether the state characterizes a bad faith claim as one based in contract or tort. In addition, if the policy includes a limitations period, some states hold that the policy’s limitations period applies.

Insured’s Breach of Contract: In a traditional breach of contract action, the plaintiff must prove that he or she performed all obligations under the contract. However, generally, an insured’s noncompliance with the contract is not a defense to a bad faith action.

Insured’s Bad Faith: Bad faith by the insured is an affirmative defense. Comparative bad faith is based on comparative fault principles from negligence cases and it seeks to apportion fault and damages depending on the harm that resulted from the bad faith of the insurer and any wrongful conduct on the part of the insured. California was the first state to adopt this defense, and it may not be available in all jurisdictions.

Lack of Coverage or Policy Defense: In third-party bad faith actions, a lack of coverage can be a defense because if there is no coverage, there generally cannot be bad faith. If an insurer mishandled a claim, but even proper handling would have resulted in the claim being denied because there is no coverage, the insured has suffered no harm.

Advice of Counsel: Some courts have allowed advice of counsel as a defense to a bad faith claim, while others have not permitted this defense. In states that do allow it, it is not a complete defense; rather courts have said that it is only one factor to consider in determining whether the insurer breached its duty to the insured. If the insurer does raise this as a defense, it waives the attorney-client privilege as to communications with lawyers on whose advice it claims to have relied.

Insured’s Failure to Mitigate: Normally, a plaintiff must make an effort to mitigate or minimize his or her damages if there has been a breach of contract. However, a failure to mitigate is not a strong defense in third-party bad faith cases because the insurer has the hard task of proving that the insured was able to avoid the harm he or she suffered.

Release: If an insurance company rejects a settlement offer, the insured may assign his or her bad faith claim to a third party in exchange for the third party’s release or agreement not to execute a judgment against any assets of the insured except for the insurance policy. In third-party bad faith cases, some courts have held that a release removes the cause of action against the insurer.

Election of remedies: In bad faith cases, insureds commonly include claims for breach of contract and bad faith in the same complaint. Insurers have tried to argue that by suing for breach of contract the insured has elected his or her remedy and thus waived a tort claim. Courts that have addressed this issue have held that a tort claim for bad faith is separate from a breach of contract claim and the plaintiff can proceed with both.

Conformity to Industry Standards: Generally, it is not permissible for an insurance company to argue that it complied with industry standards and that this should excuse its treatment of the insured.

Other defenses: Other defenses that a defendant may raise include failure to exhaust administrative remedies, waiver, that the claim is subject to compulsory arbitration, preemption, collateral estoppel and res judicata.

Conclusion

An attorney who is experienced in bad faith insurance cases can explain the above defenses in greater detail and help counter the insurer’s arguments in your bad faith case.

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