In this episode of “In the Know,” Alexander B. Corson of Lowenstein’s Insurance Recovery Group discusses bad faith
in the context of insurance claims handling. Corson explains that
bad faith is heavily reliant on context and lists fact patterns
that are more likely to give rise to bad faith claims.
Speakers:
Alexander B. Corson,
Associate, Insurance Recovery
READ THE TRANSCRIPT
Alexander B. Corson: Hi, I’m Alex Corson,
associate in Lowenstein Sandler’s Insurance Recovery Group.
Welcome to “In The Know.”
Today we’re going to discuss the meaning of bad faith in the
context of insurance claims handling.
Implicit in every insurance policy is the duty of good faith and
fair dealing. As a matter of contract law, this means no party
shall do anything that would undermine the purpose of their
agreement.
Courts recognize that this flexible standard has no prescribed
meaning and depends heavily on context.
In the insurance context, certain fact patterns may be more
likely to give rise to bad faith claims than others.
- First, insurance companies have a duty to
settle claims. When faced with a third-party demand that is within
the available policy limits, an insurer might prefer to hold out
for a better result so that they have to pay less under the policy.
However, it is now well settled that an insurance company may not
place its own financial interests above that of its insured, and an
insurer’s failure to resolve a claim within the policy limits
may ultimately result in liability above that policy limit,
including the entirety of any excess verdict caused by their
failure to settle. - Second, insurance companies have a duty to
investigate. Both courts and state legislative bodies have made
clear that when presented with a claim, insurance companies must
diligently seek to understand the relevant facts and circumstances
underlying that claim. Insurance companies must timely inform their
insureds of potential policy terms or exclusions that would impact
coverage and may not delay by issuing repetitive requests for
duplicative, irrelevant, or unnecessary information.
An insurer that engages in bad faith delay tactics may
ultimately be liable for consequential damages above their policy
limits, and they may waive their right to assert coverage defenses
that the thorough investigation they should have conducted would
have uncovered at the outset.
- Third, insurance companies must deal fairly
with their insureds. Insurers may not take coverage positions that
are unreasonable or would undermine their policyholders’
reasonable expectations to coverage.
When an insurer chooses to take a hyper-aggressive coverage
position or uses the judicial system to place pressure on their
insured, courts may hold that insurer liable for consequential
damages above the limits of the policy.
For example, in some states, insurers that cast their
policyholder in a defensive posture by filing preemptive strike
coverage litigation may ultimately be responsible for the entirety
of their insurance court costs, and attorney’s fees if they
don’t prevail.
We hope this episode is helpful to policyholders wondering if
their insurers’ conduct rises to the level of bad faith.
Thank you for joining us, and we look forward to seeing you next
time on “In The Know.”
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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