Bad Faith Insurance - An Overview

There is an implied covenant of good faith and fair dealing in every insurance contract that requires an insurance company to act fairly and in good faith when evaluating a claim. When an insured’s (the person covered by the insurance policy) claim is wrongfully denied by an insurer (the entity issuing the insurance), it is considered bad faith. Examples of bad faith include the failure to promptly or thoroughly investigate a claim, inadequate claims processing, unreasonable denial of payment, delay in payment, failure to settle an underlying suit against the insured and failure to defend a suit against the insured. All types of insurance policies, including disability, life, homeowner, automobile and accidental death policies require that the insurer act in good faith. If you believe that your insurance company has acted in bad faith in handling your claim, talk to an experienced attorney about your situation.

Why Insurers Act in Bad Faith

There is a substantial economic incentive for insurers to act in bad faith. Insurers receive thousands of claims every day. Very few insured parties contest claim decisions, and insurance companies save large amounts of money on claims that would logically be approved. For example, an insurance company wrongfully denies 100 claims. Ninety-five are undisputed, and five are disputed by the insureds. Upon review, the company reverses its denial on four of the claims and pays the amount due. Even if the remaining disputed claim results in a bad faith lawsuit and the insured collects millions of dollars, the company has saved additional millions by denying 95 of 100 claims.

Types of Bad Faith

First-Party Bad Faith: About one-half of the states recognize a cause of action for an insurer’s bad faith in first-party insurance claims. Most of these states follow the more narrow approach of the Wisconsin Supreme Court in Anderson v. Continental Insurance Co., 271 N.W.2d 368 (Wis. 1978), which requires the plaintiff to show the insurer acted unreasonably in denying the claim and the insurer’s “knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” The remaining states follow the approach set forth by the California Supreme Court in Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973), which only requires that the plaintiff show unreasonableness in denying a claim.

Third-Party Bad Faith: Liability insurance policies, such as automobile and homeowner insurance policies, apply to claims against the insured by third parties, including third parties who were injured in accidents caused by insureds. Liability insurance is also known as third-party coverage. A liability policy generally state the insurer’s duties under the policy, which typically include paying covered claims, investigating claims and defending the insured in claims that fall within the scope of the policy. A third-party bad faith claim usually relates to an insurer’s failure to settle an underlying suit (for example, by an injured party) against the insured; the insurer’s wrongful failure to defend a suit against the insured; or the insurer’s bad faith or negligence in defending the insured.

Damages

If an insured’s bad faith claim is successful, he or she can generally recover the benefits of the policy, as well as consequential losses and damages suffered due to claim denial. A plaintiff can also recover emotional distress damages caused by the insurer’s misconduct in first-party or third-party bad faith cases. Depending on the state, a successful plaintiff may be able to recover attorneys’ fees and/or prejudgment interest. Again, depending on the state, punitive damages may be available in cases of extreme misconduct by the insurer. In determining punitive damages, the following factors may be relevant: the culpability of the insurer, the insurer’s wealth and the ratio of punitive damages to compensatory damages.

Conclusion

If you believe you have been wrongfully denied an insurance payment for a covered loss, you have a right to seek compensation for bad faith. If you wish to review your options, talk to an experienced insurance lawyer as soon as possible. The law imposes a statute of limitations, which varies from state to state, giving you a limited time in which to pursue your claim. Contact an experienced insurance attorney to discuss your options.

Top

FAQs About Business Litigation

What is involved when litigating a business issue?

This depends on the issue. The business owner would follow the same process for business litigation as he or she would for any civil lawsuit, including usually obtaining an attorney, pretrial matters such as motions, possible settlement negotiations, trial, and possibly appeal.

What are some alternatives to litigation?

Businesses often use Alternative Dispute Resolution (ADR) methods. The ADR process usually utilizes arbitration or mediation. These alternatives are attractive because they are often less expensive and more efficient than traditional litigation.

What is the difference between mediation and arbitration?

Mediation is a cooperative process and uses a neutral third party (a mediator) to facilitate consensus building and discussion, in order to reach a mutually satisfactory resolution. Arbitration also employs a neutral third party (an arbitrator), who listens to both sides and makes a decision, which is usually binding.

Is the result of mediation or arbitration binding?

The judgment in arbitration is usually binding on the parties. Often the parties decide prior to the arbitration proceeding that the findings of the arbitrator will be final and legally binding. This agreement is usually formalized by a contract signed by all parties involved. Much less commonly, parties may agree to nonbinding arbitration, viewed as a negotiation technique. Mediation is not binding and the parties, if dissatisfied with the result, can move on to a courtroom proceeding.

Can results from mediation or arbitration be appealed?

Because the result of mediation is nonbinding, the parties can still bring their issues before a judge, although this is not technically an appeal. In the case of binding arbitration, an appeals process may take place if the parties have agreed, before the arbitration begins, to allow one. Generally, the decision of the arbitrator is final and the appellate process is not available.

What is a class-action lawsuit?

A class action is a judicial proceeding where usually one or two named plaintiffs represent a much larger group of plaintiffs. Often, the issue is one where there has been an injury to a large enough group of people that individual litigation would be inefficient.

Can business entities participate in a class action?

Yes. If a business entity has an injury in common with a greater group of plaintiffs that have formed a class, then the business may qualify as a class member.

What is the legal fee arrangement for a class action?

Lawyers are normally paid on a contingency-fee basis in class actions. This means that the lawyer only collects a legal fee if a positive judgment for the plaintiffs is reached. Due to the high costs of class-action lawsuits, generally contingency-fee arrangements are the best option.

Top

Class Action Lawsuits

Class action lawsuits are brought by named plaintiffs, usually one or two, whose alleged injuries are the same as those of a large number of other parties. The plaintiffs do not have to be individuals; businesses may also be class plaintiffs. The purpose of a class action is to combine many similar causes of action. The cause of the common injury could be from any number of sources, such as from violations of federal regulations, product defects, securities fraud, or environmental issues. When multiple plaintiffs with similar claims are involved, litigating each case individually would be expensive and time consuming. A class action suit allows for a combined effort, potentially saving litigation costs and time spent in preparation for and in court.

A class is initiated by the named plaintiffs and others in a similar situation. A public notification takes place to identify additional plaintiffs who may be eligible for inclusion in the class. The notification is usually accomplished via mailings, newspaper, and/or the Internet, and includes instructions on how to become a plaintiff. The class action itself begins like any other trial; there are initial proceedings, motion hearings, and pretrial conferences with the judge. However, the unique part of a class action is the motion to certify the class, usually filed either with the initial complaint or shortly thereafter.

A plaintiff eligible for membership in the class is not required to join, and may choose to opt out of the class and any future settlement or award. Occasionally, plaintiffs will opt out of a class in order to pursue the case on their own, believing that a better result could be obtained separately from the class action. Any judgment in the class action is binding on both the named plaintiff and all others included in the class.

Securities Class Actions

Although there is no specific business class action category (a business could be a plaintiff or defendant in a class action), securities class actions have gained prominence in recent years. A securities class action usually involves a lawsuit brought by investor-plaintiffs who have suffered economic loss from the devaluation of a stock or security. The loss in the stock or security’s value typically results from the artificial inflation of its value. If individuals purchased stock during a period when the value of the stock was fraudulently inflated, then they are likely eligible to be class plaintiffs.

Legal Fees

Class-action lawyers work on contingency, which means that they will not receive payment unless there is recovery from the defendant. Legal costs in class actions can be quite high, and under a contingency fee arrangement, the plaintiffs’ attorneys usually cover the costs until conclusion of the suit. The cost of class actions suits is higher because the amount of preparation, research, and investigation required is ordinarily much higher than in an individual lawsuit.

Southern California Class Action Lawsuit Attorneys

If your business is facing a legal issue that other similarly situated plaintiffs face, class action may be a more efficient route than individual litigation. Class actions are very complex matters and consultation with an attorney experienced in class action lawsuits is advisable. The attorneys of Stolpman, Krissman, Elber & Silver, LLP are experienced litigators offering legal services throughout California.  Contact our Long Beach law offices today for a free consultation.

Top

Types of Bad Faith Insurance Claims

A bad faith denial of an insurance claim is a breach of the insurer’s duty to exercise good faith and fair dealing, which is implied in every insurance contract. There are a number of ways an insurance company may act in bad faith. For more information about bad faith claims, talk to an experienced lawyer.

First-Party Bad Faith

The following acts by an insurer are examples of first-party bad faith:

Inadequate Claim Processing — A failure to properly process a claim can constitute bad faith. Generally, the following steps should be taken by an insurer when processing a claim:

  • Verify the insured’s proof of loss
  • Investigate the claim and inspect site of the loss
  • Determine the coverage (including limits and exclusions)
  • Appraise the amount of the loss
  • Pay or deny the claim

Improper/Inadequate Claim Investigation — A failure to sufficiently investigate a claim or an improper investigation can give rise to a bad faith claim. For example, an insurer closes the file without investigating a homeowner’s claim for water damage due to a burst pipe because it believes the homeowner association, not the homeowner, is the insured party. In this situation, the insurer should have determined which party was actually covered. In addition, an insurer’s overzealous or intrusive investigation can amount to bad faith.

Delay in Payment — If an insurer delays paying a legitimate claim, it may constitute bad faith. For example, a one-year delay between investigation of a fire in an insured’s home and denial of the claim, where there was evidence about the cause of the fire available earlier and the insured cooperated in the investigation, could be considered bad faith.

Unreasonable Denial of Claim — If the insurer acts unreasonably when denying a claim, it will likely be considered bad faith.

Third-Party Bad Faith

The following acts by an insurer are examples of third-party bad faith:

Failure to Settle — An insurer’s failure to settle an underlying suit against the insured can constitute bad faith. A good number of bad faith claims arise from the situation in which the insurer has failed to settle an underlying claim against the insured within policy limits, which then subjects the insured to excess liability. Courts have generally imposed an obligation on the insurer to take the interests of the insured into account when engaging in settlement negotiations. A failure to tell an insured about settlement demands may also be considered bad faith.

Failure to Defend — Many insurance policies include provisions that require an insurer to defend an insured in an underlying action by a third party. If the insurer wrongfully fails to defend the insured, it may be considered bad faith.

Bad Faith/Negligent Handling of the Defense — An insurer who undertakes the defense of an insured, but handles that defense negligently, may be liable for bad faith. For example, an insurer may be negligent by failing to hire appropriate counsel to defend the insured.

Conclusion

If you are wrongfully denied payment on a covered insurance loss, you have a right to seek recovery based on the legal concept of bad faith. Talk to an experienced insurance attorney about your legal options.

Top

Alternative Dispute Resolution (ADR)

In some instances, a business may want to avoid a complicated and expensive courtroom battle by using instead an alternative dispute resolution (ADR) method. ADR is a way to resolve legal issues without going to court. The two most frequently used forms of ADR, described below, are arbitration and mediation.

If your business is facing a legal battle, contact us to discuss using ADR as an alternative to a traditional lawsuit.

Arbitration

Arbitration employs a neutral third party (an arbitrator) or an arbitration panel to listen to both sides and makes a decision, which is usually binding. The general purpose of arbitration is to provide a forum to resolve issues without having to go to court. The arbitrator acts in a capacity similar to that of a judge.

When two parties enter into a contract, there will often be an arbitration provision requiring that any legal issues arising from the agreement will be resolved in a binding arbitration proceeding rather than litigated in court. These arbitration agreements commonly appear in a variety of contracts, including sales contracts and employment contracts.

Once the arbitrator makes a decision, the parties ordinarily cannot appeal to a higher judicial body. On some occasions, an appeals process may take place if the parties have agreed upon it in the initial arbitration agreement. However, the lack of an appeals process is generally seen as an attractive aspect of binding arbitration.

Arbitration can be either binding or nonbinding. Binding arbitration means that the result has the same legal effect as a court judgment – it is final and legally binding. Nonbinding arbitration means that the results are merely advisory opinions that might aid in the settlement negotiation process. After nonbinding arbitration, each party could still choose to pursue action in court.

Mediation

Mediation is another alternative to resolving civil disputes outside of traditional litigation. The mediation process is less formal than arbitration proceedings or trials. The process of mediation is attractive to businesses because they can avoid court and are able to discuss issues without the procedural constraints of litigation. Mediation functions through dialogue, facilitated by a neutral mediator. The process begins with opening statements and progresses through discussions and private caucuses. At the end of the proceeding, joint negotiations take place, with the mediator offering his or her opinion on the best way to resolve the issues. The opinion, unlike that of the arbitrator, is not legally binding.

Most mediation sessions last no longer than a day. The cost is limited to any charges for the mediator’s service. Many cities have mediation centers, which typically deal with personal and business disputes and provide low-cost services.

Los Angeles – Southern California Business Litigation Attorneys

Rising court costs and time management make alternatives to court attractive for many companies. Through arbitration and mediation agreements, a business can require that issues arising out of a contractual relationship be resolved by an alternative dispute resolution method.

If you are involved in a dispute regarding a business transaction or any aspect of your business, it is best to consult an experienced business attorney to address your particular situation. The attorneys of Stolpman, Krissman, Elber & Silver, LLP, are an excellent resource for information regarding business litigation and can explain your legal options.  Contact us today for advice from one of our experience California business law attorneys.

FAQs About Business Litigation in California

Top