HOW DO "BAD FAITH" CLAIMS AGAINST AN INSURANCE COMPANY WORK?

Insurance companies exist to make money. They accomplish this by taking in more premiums than they pay out in claims. It should be an honest and straightforward business and most of the time it is. Unfortunately, some insurance companies don’t play fair, they either refuse to pay valid claims or refuse to pay a fair amount when someone is injured. Most of the time you won’t know if your insurance company operates this way until it is too late and that could lead to financial ruin for you and your family.

If someone alleges you caused injury to another and your insurance company either refused to pay when they should have or refused to pay an adequate amount to fairly compensate the injured party they are acting in bad faith. When insurance companies act in bad faith and don’t resolve a case against you when they should then the insurance company is risking your financial future. When an insurance company needlessly puts your financial security at risk you can pursue a claim against that insurance company for acting in bad faith. State law regulates bad faith claims. Each state handles these claims differently.

Bad Faith Claims In Missouri

Missouri only has one claim against insurance companies with the language “bad faith” in it. However, Missouri allows for three types of claims an insured can bring against their insurer: failure to defend, bad faith failure to settle, and vexatious refusal to pay a claim. Failure to defend claims are contractual: they arise when the insurance company fails to do something required by the insurance contract. Failure to settle is a tort action based on the insurance company’s alleged bad faith. Vexatious refusal to pay is a claim that comes from a statute. All three of these claims are penal, or intended to punish, so they are allowed only under very rare circumstances.

Failure To DefendInsurance companies have the duty to defend their insured when their insured is sued for claims that possibly fall within the limits of the policy. The insured may bring a declaratory judgment claim against the insurance company before the trial or a breach of contract action to compel the company to comply with their duty to defend. Derived from cases Allen v. Continental Western Ins. Co. and Moore v. Commercial Union Ins. Co., the insured should show: 1) he has been issued a liability insurance policy, 2) while he is covered by the policy, he is involved in an issue possibly covered by the policy, 3) he is sued by a third party for that occurrence, and 4) his insurance company refuses his demand to provide a defense. In addition, an insured should provide notice of the facts or claims filed against the insured. This is demonstrated in Stark Liquidation Company v. Florists Mutual Insurance Company and is also usually a term in insurance contracts.

According to Zipkin v. Freeman, this duty to defend is limited to claims that arise from facts either 1) alleged in the petition against their insured client, 2) that the insurance company knows at the beginning of the case against their client, or 3) that are reasonably apparent to the insurance company at the beginning of the case against their client. The court looks at these facts and compares them to the language of the insurance policy to see if the duty to defend arises in that particular case. For example in Moore v. Commercial Union Ins. Co., although the insurance company had a duty to defend the insured, it was limited in the policy to claims arising from occurrences “for that location.” When the insured was being sued for occurrences the petition said were next door to the insured property, the insurance company did not have a duty to defend the insured for that claim.

An insurance company may decide to defend their client, but with a “reservation of rights.” This means that the insurance company agrees to defend the client’s claim but reserves the right to later deny their client coverage based on specified grounds. State ex rel. Mid-Century Ins. Co., Inc. v. McKelvey states that the insurance company cannot force its client to accept this reservation of rights. However, this reservation or rights is not considered a refusal to defend.

Based on Whitehead v. Lakeside Hosp. Ass’n, the effect of an insurance company’s failure to defend is that the insured is relieved of his duty to settle the claim with the insurance company’s consent. He can settle the claim without losing his right to recover from the insurance company based on the policy. Based on failure to defend, an insurance company is liable for the damages that could be reasonably traced to the refusal. Although more may be available, usually this includes just the cost of defense and amount of any settlement or judgment. Punitive damages are not available.

Based on Spalding v. Steward Title Guaranty Company, the statute of limitations for failure to defend a claim is likely five years, as set out in Mo. Rev. Stat. 516.120.1.

Bad Faith Failure To SettleUnder certain types of insurance policies, an insured has an action against their insurer if the insurer refuses fraudulently or in bad faith to settle a claim a third party has made against the insured within the limits of the policy. According to Zumwalt v. Utilities Ins. Co., the elements of the action are: 1) an insurance policy has been issued to the plaintiff, 2) the policy gives the insurer the exclusive right to deal contest or settle any claim under the policy, 3) the policy prohibits the plaintiff from contesting or settling any claims without the insurer’s consent, 4) a claim has been asserted by a third party against the plaintiff, 5) the insurer refuses to settle the claim within the limits of the policy, 6) the insurer’s refusal was based on fraud or bad faith, and 7) the judgment or settlement against the insured ends up to be more than the policy limits.

Zumwalt defines bad faith: where the insurance company has intentionally ignored the financial interests of the plaintiff in the hope that the insurance company can escape its responsibility under the policy. Again according to Zumwalt, even though bad faith is a state of mind, it can be demonstrated by circumstances and acts. For example, Scottsdale Insurance Company v. Addison Insurance Company shows that although its not necessary for the plaintiff to prove that he made a demand to the insurance company to settle his claim within the policy limits, proving such may help him to show the insurer’s bad faith.

The case Johnson v. Allstate Ins. Co. provides some examples of evidence that might demonstrate bad faith. Examples include: evidence that shows insurer didn’t fully investigate the third party’s injuries, evidence that the insurer did not recognize how bad the third party’s injuries were and because of the severity its likely a verdict will be beyond the policy limits, evidence that the insurer refused to even consider a settlement offer, or evidence that the insurer didn’t let the plaintiff know about settlement offers or the potential of a judgment against plaintiff that would be in excess of the policy limit. Other helpful evidence may include expert testimony, the insurer’s manual or training materials, or evidence that the insurer has mishandled other similar cases.

Rinehart v. Shelter General Ins. Co. explains that generally, damages available for this cause of action include whatever money the insured had to pay because of the bad faith settlement or judgment. Damages for emotional distress and attorney’s fees may also be available. Punitive damages may be available if the plaintiff can show that the insurance company’s conduct was especially bad (wanton, willful, reckless, or outrageous), says Johnson v. Allstate Ins. Co.

Based on Missouri statute 516.120.1, the statute of limitations within which someone can bring this claim is five years.

Vexatious Refusal To Pay A ClaimVexatious refusal to pay a claim occurs when an insurance company refuses to pay a claim without a good reason. In Missouri, this is a cause of action created by statutes Mo. Rev. Stat. 375.420[14] and Mo. Rev. Stat. 375.296. Vexatious refusal to pay preempts claims in tort for punitive damages based on intentional or negligent breaches of the insurance contract.

The elements of the claim are 1) issuance of an insurance policy within the scope of Mo. Rev. Stat. 375.420 to a Missouri resident, 2) insured sustains a loss and makes claim against the insurer, and 3) claim is denied without reasonable cause or excuse. Important to note for the first element, the statute excludes claims based on automobile liability insurance policies. On a successful claim, the insured is entitled to breach of contract damages and additional penalties based on the insurer’s “vexatious” conduct.

What constitutes “vexatious refusal” varies from case to case, says Fohn v. Title Ins. Corp. of St. Louis. For example, in Hensley v. Shelter Mutual Ins. Co., the insurance company’s failure to even investigate the claim before denying it constituted vexatious refusal. In Victor v. Manhattan Life Ins. Co., an eighteen-month delay in paying life insurance policy proceeds was vexatious when the insurance company knew who to pay and where they lived. Mo. Rev. Stat. 375.296 says that without any evidence to the contrary, an insurance company’s failure to even appear and defend a claim is vexatious refusal.

The statute of limitations for vexatious refusal claims may be either five years under Mo. Rev. Stat. 516.120.1 or ten years under Mo. Rev. Stat. 516.110.1[20] based on the basis of the claim for damages. Rolwing v. Nestle Holdings, Inc. says the ten-year statute of limitations applies when the plaintiff is suing for money damages based on a written promise in the contract to pay money. The five-year statute of limitations applies to an action that seeks money damages not based on a promise in the contract, such as interest.

Damages for vexatious refusal claims are capped by statute to no more than twenty percent of the first $1,500 of the loss and ten percent of the loss in excess of $1,500. These damages are allowed in addition to reasonable attorney’s fees and the amount of recovery owed under the policy.

Bad Faith Claims In Kansas

According to Spencer v. Aetna Life & Casualty, Kansas does not recognize a tort action for bad faith against an insurance company. Although Kansas has adopted a Uniform Trade Practices Act which includes a section identifying and prohibiting unfair claim settlement practices, this Act does not give individuals a private action to enforce it. Bonnell v. Bank of America, makes it clear that only the Kansas Insurance Commissioner can enforce the Act. An individual’s only recourse related to this Act is to report the insurance company to the Insurance Commissioner.

In Kansas, the ability of an insured to sue her insurance company based on bad faith is determined by the difference between first-party claims and third-party claims. First party claims are claims based on the insurance contract between the insured and the insurer. Third party claims are claims against the insurer by a third party (not the insured). Usually these are based on the third party’s claim that the insured is liable for some sort of damage, and thus the insured’s insurance company should pay the third party.

First-Party ClaimsBased on a first-party claim, there is no tort action an insured can bring against her insurance company for bad faith. Instead, in a first-party claim, an insured’s action against her insurance company is limited to claims listed in Kansas statutes. Spencer v. Aetna Life and Cas. Ins. Co. lists the relevant Kansas statutes: K.S.A. 40-256, providing the insurance company must pay attorneys’ fees for an insured where the company refused to pay the full amount of loss “without just cause or excuse”; K.S.A 40-908, providing that a plaintiff may recover attorneys’ fees where judgment is rendered against a company on a policy insuring property against certain losses; and K.S.A. 1979 Supp. 40-3111, providing attorneys’ fees for an insured if the insurer unreasonably delayed or refused to pay overdue personal injury protection benefits. These statutes detail the remedies based on a first-party claim, but they are not exclusive to first-party claims.

Determination of whether the refusal was “without just cause or excuse” based on K.S.A. 40-256 is based on the facts and circumstances of each case. According to Evans v. Provident Life & Accident Ins. Co.,  “[i]f there is a bona fide and reasonable factual ground for contesting the insured’s claim, there is no failure to pay without just cause or excuse.” O’Donoghue v. Farm Bureau Mut. Ins. Co.  elaborates, “[w]hen an insurance controversy involves an issue of first impression, the award of attorney fees is inappropriate.” The presence of an issue raised in good faith bars an award of attorney fees under K.S.A. 40-256. 

Third-Party ClaimsAn insurance company can be liable for bad faith or negligence in a third-party claim. For example, Glenn v. Fleming demonstrates that an insurance company can be liable for an amount in excess of its policy limits if it fails to act in good faith and without negligence in settling claims for its insured. Failure to act in good faith and without negligence means that the insurance company must give at least the same consideration to the interests of its insured as it would to its own interests.

Damages And LimitationsGenerally damages for first-party claims based on breach of contract are limited to the money losses sustained. According to Guarantee Abstract & Title Co., Inc. v. Interstate Fire & Cas. Co., Inc., punitive damages are unavailable unless there is an independent tort indicating the presence of malice, fraud, or wanton disregard for the rights of others. Attorneys’ fees are recoverable for both first-party and third-party claims based on the statutes listed above. Consequential damages, such as an award of lost income or lost profits, may be available if an insurer failed to pay without just cause or excuse. Finally, if the insured can show that the acts of the insurer were wanton or reckless and caused bodily harm, the insured may be able to recover damages for emotional distress.

Claims against insurer based on breach of contract are subject to a five-year statute of limitations, according to K.S.A. 60-511. If the claim against the insurer is based on an independent tort, the statute of limitations is two years, according to K.S.A. 60-513.