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Institutional Bad Faith: Individual Or Class Action Litigation (All For One? – Or – One For All?)

February 19, 2003

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report:  Insurance Bad Faith, Vol. 16, #20, p. 17 (February 19, 2003). © Copyright Butler 2003.

Institutional Bad Faith: Individual Or Class Action Litigation

I.   An Introduction

A.   The Literary, Historical Perspective — Times Have Changed

In 1844, Alexandre Dumas, one of the most famous French writers of the nineteenth century, shared his vision of comradery and unified ambition. In his classic, The Three Musketeers, set under the seventeenth century rule of Louis XIII, a small association of elite combatants swore their allegiance to a common purpose . . . and to each other: All for one, and one for all! Is this sense of nobility and uniformity present in the battle cry of plaintiff lawyers brandishing their swords in modern day litigation against the insurance industry?

B.   A “Noble” Cause?

In an effort to control, punish, and deter inappropriate conduct by the most powerful and influential in our society, our judicial system has been used by plaintiff lawyers to shape the behavior of various industries. In difficult economic times, the insurance industry comes under particularly strict scrutiny. In their efforts to champion the cause of the “little guy,” a small contingent of elite legal combatants have organized to fight the inappropriate business practices of insurers. As with every just cause, there are those who manipulate and exploit justice for power, money, and false prestige.

Of course, widespread abuse of our current legal system is highly criticized. Litigants filing multi-million dollar lawsuits based on tenuous legal theories have been accused of unethical methods of coercing significant settlements through extortion. Lawyers have been accused of bringing such frivolous actions primarily to enhance their own personal wealth. This plague has afflicted all influential, well-capitalized industries. The insurance industry is hardly immune to the spreading of this disease.

C.   An Evolution

In their efforts (whether noble or self-serving) to question the good faith practices of insurance companies, plaintiff lawyers have contributed to the evolution of rules, statutes, and decisional law that regulate insurers’ company-wide behavior. Two distinct fields of law have evolved, each molded by the legal acumen of litigation experts specializing in very different law practices. Two specialists (seemingly oblivious to the impact and strides of the other) march onward toward a common goal — to call into question the general business practices of the insurance industry. Today, an individual is empowered with a choice between two strategic legal theories for bringing an insurance company to bear for its corporate decisions: (1) an individual institutional bad faith action; or (2) a class action. Both insurance class actions and individual “institutional bad faith” actions have yielded verdicts in excess of $100,000,000. Either kind of action presents a very serious threat to insurers. This article explains the similarities and the critical distinctions of the two.

II.   A Comparison

A.   What is an Institutional Bad Faith Action?

Institutional bad faith is improper conduct that is embedded and/or embodied in company policies and procedures. Institutional bad faith often begins with the repetitive way in which a claim may be handled poorly. However, institutional bad faith is quite a bit more.

Institutional bad faith is more than a frequent business practice. Institutional bad faith is where the corporate insurer facilitates bad faith claims handling. Although typically intent is an element to prove bad faith claims handling, or at least to recover punitive damages, arguably corporate intent that its infrastructure actually results in bad faith claims handling may not be required. One succinct definition of institutional bad faith would be: “When corporate structure or policies encourage bad faith claims handling.”(1)

By comparison to simple bad faith, institutional bad faith is interwoven into the very fiber of the corporate entity. An isolated instance of bad faith where a rogue adjuster acts maliciously is not of the institutional sort. Nor is the line adjuster who is too inexperienced to properly handle a file and makes innocent mistakes along the way.

Institutional bad faith is something discovered below the surface. Even the well intentioned, very experienced adjuster will face the pressures of institutional bad faith. It festers when middle or top management asks the adjusters to handle claims in a manner they believe to be inconsistent with their ethical “good-faith” responsibilities to the insureds. This pressure may be exerted by insurance company professionals knowing that they are asking their personnel to compromise on ethics. More often, however, institutional bad faith surfaces innocently through the exercise of an insurance company’s responsibilities to be efficient and profitable for its shareholders; not an intentional or reckless disregard of its independent “good faith” responsibilities to its insureds. For example, the very corporate mandates that are devised to prevent overpayment of claims will be used by the institutional bad faith plaintiff’s bar as evidence that claim handlers are provided incentives to “low ball” claims.(2),(3)

The target of an institutional bad faith plaintiff is company-wide incentives, plans, goals, guidelines, policies, procedures and mandates. As such, multiple individual claimants would be aggrieved by the allegedly inappropriate standardized conduct. Institutional bad faith claims have been described as “essentially class action lawsuits without the necessity of certifying a class.”(4) In many respects, this is accurate. One aspect of the institutional bad faith claim is that it occurs with such frequency as to indicate a general business practice of the insurance company. Frequent occurrence of less-than-enviable conduct is the first bit of anecdotal evidence the plaintiff’s bar will promote to convince juries that the insurance company (or perhaps even the entire insurance industry) is an “evil empire” that should be brought down in a single, powerful blow. Sound like a class action?

B.   What is a Class Action?

A class action is a lawsuit brought by an individual on behalf of an entire class of similarly situated individuals. Since the vast majority of class members are represented by the individual, the class members need not be directly involved in the litigation. The theory behind permitting a class action is an equitable matter — the fair and efficient adjudication of justice. A class action is appropriate “when the question is of common or general interest to. . . persons. . . .  so numerous as to make it impracticable to bring them all before the court. . . .”(5) In a well respected treatise on this body of law, class actions are viewed as controversial for the influence they wield:

Because class suits can have far-reaching effects to bring about institutional or governmental change, to internalize substantial environmental costs that the public would otherwise pay, or to disgorge significant profits arising from unlawful or tortious conduct, class actions are controversial.(6)

Proponents argue that class actions are the most effective tool to assure consumer protection.(7) Critics, on the other hand, have labeled class actions to be “legalized blackmail.”(8)


C.   Similarities Between Individual Institutional Bad Faith Actions and Class Actions

1.   The Powerful Pen — Policing the Industry

Class actions aggregate the power of an entire group of people into the hands of a single representative. Similarly, actions initiated against an insurance company for failing to act in good faith on an institution-wide basis may empower the individual to seek punitive damages against such an institution to deter bad faith conduct against others similarly situated. Either legal weapon may be perceived by a jury to be the sling in the hands of a young Israeli boy named David, facing a Philistine giant named Goliath.

Unquestionably, either legal tool is an effective means of preventing wrongful conduct. Indeed, the plaintiff’s bar has essentially been given the legal authority to effectively regulate the insurance industry with such actions. In the context of class actions, our high court has said:

For better or worse, the financial incentive that class actions offer to the legal profession is a natural outgrowth of the increasing reliance on the “private attorney general” for the vindication of legal rights. . . .

The aggregation of individual claims in the context of a class-wide suit is an evolutionary response to the existence of injuries unremedied by the regulatory action of government.(9)

The same can be said in the context of individual actions seeking punitive damages for wrongful, institutional behavior. Whether by aggregating the compensatory damages of a multitude of class members, or by allowing an individual to seek punitive damages for conduct condoned through the insurers’ policies, the lawyers bringing such suits have an effective strategy for sculpting insurer behavior.

2.   Efficiency: The Only Suit You’ll Ever Have To Wear

Although there are differences between a class action and an institutional bad faith proceeding in this context, a single action may very well bring about the relief sought using either legal vehicle. For example, in either action punitive damages could be sought for the institutionalization of improper behavior. A request for declaratory judgment in either action may settle issues that would impact the dispute involving an entire class of persons. Injunctive relief likewise could preclude conduct on a company-wide basis. However, the class action is more conclusive. The individual institutional bad faith action is portable and elusive. This is discussed further below.

D.   Dissimilarities Between Institutional Bad Faith and Class Actions

1.   Practical Concerns

Both the insurer and the individual initiating a lawsuit have practical implications to consider.

From the plaintiff’s perspective, it is more difficult to manage a class action. The law firm must be adequately skilled and funded to handle a class-wide action. Conflicts of interest may be more prevalent. The institutional bad faith claimant may not have to worry about these matters if he or she seeks only individual relief.

On the other hand, the individual’s claim may be too small to proceed alone, when compared to the cost of litigation. One of the most significant justifications for class action litigation is to encourage even the modestly aggrieved to bring legal action to remedy a wrong.

From the standpoint of the insurer defending a class action, practical considerations include the impact on regulatory requirements that the lawsuit may have, disclosure requirements if the insurer is publicly traded, the source of funding for defense and settlement of the action, and the coordination of handling other similar actions (some of which may already be pending) that may be impacted by the pendency and outcome of the litigation.

In the context of an individual institutional bad faith case, insurers should, but often do not, coordinate the handling of the action (litigation, strategy, document management, corporate depositions, etc.). This is often overlooked because the “institutional” nature of the bad faith action is not evident from the outset.

2.   Strategic Considerations

a.   Procedural Aspects (How Tough Will the Fight Be?)

In a class action, the class representative must establish various prerequisites to maintain class representation: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation.(10) Essentially, a class representative must proffer evidence establishing that joinder of all members of the class is impractical; that the class members have common issues of law or fact that govern the outcome of the litigation; that the individual class representative has a grievance that is typical of the other class members; and that both the class representative and class counsel have the personal characteristics and integrity to be a fiduciary to the class with no conflict of interest. This presents a higher threshold for the class action plaintiff at the outset of the litigation. In addition, class representatives will have to prove that the issues of law or fact are common to the class and predominate over the individual issues personal to each class member. The class representative will have to prove that the class action is superior for judicial efficiency, uniformity of result, and fairness.

On the other hand, an institutional bad faith proceeding brought by a single plaintiff (not representing a class) does not face these obstacles. Other procedural prerequisites may apply.(11) The prerequisites in an isolated institutional bad faith action are specific to the individual claimant.

As the litigation continues, additional procedural requirements govern the class action more so than the individual bad faith case. Notice must be given to class members with an opportunity to opt out of the class, to object to any settlement, to join in the proceedings, etc. In addition, any class action settlement must be scrutinized by the court at a fairness hearing. Unless the plaintiff is representing a class, the institutional bad faith case begins and ends with an individual’s rights, so these additional safeguards to protect others who are similarly situated are not necessary.

Discovery may also be different. In a class action, the defendant may request bifurcation of the class allegations from the substantive merits of the case. This method of defense to class treatment may be minimal or highly involved. Either way, this aspect of the litigation may slow the progress of the case.

Similarly, the insurer will likely challenge the propriety of class treatment by defending against plaintiff’s motion to certify the class. This may involve a contest to the standing of the individual class representative, the adequacy of class representation, the predominance of individual issues over issues that are common to the class, or any of the other prerequisites established in the rules. Inevitably, this will also slow the pace of litigation. This may also render the initial efforts of the plaintiff’s lawyer to be both unproductive and unprofitable. If the class is not maintainable, then the time and costs of all the initial legal gymnastics will likely be absorbed by the plaintiff’s lawyer.

b.   Recoverable Relief (Payday!)

The flip side to the risks imposed on the class action lawyer is the potential return on his or her investment. The plaintiff will carefully consider the compensable damages available by each legal vehicle when deciding which action to bring. For compensatory damages, the plaintiff in an individual bad faith action would be limited to his or her own loss. By contrast, the class representative would be seeking aggregated compensatory damages on a class-wide basis. The pressure of aggregated damages exposure for the insurer is significant. While punitive damages may be available in either action, one can only imagine the magnitude of damages someday awarded against an insurance company for aggregated compensatory and punitive damages in an institutional bad faith class action.

c.   Finality of Litigation (The End?)

The conclusiveness of the outcome of litigation may also be something to consider for both plaintiff and insurer.

Resolution of the class action will impose res judicata and collateral estoppel upon all class members who have not opted out. It will settle all issues for the insurer as to all class members.

However, the individual action based on institutional bad faith is portable.(12) With each new individual action brought against the insurer for institutional bad faith, the insurer will be forced to defend its conduct. Res judicata and collateral estoppel will not apply because the action is filed by a new plaintiff. Generally, there are limitations preventing the imposition of redundant punitive damages in consecutive bad faith lawsuits for the same inappropriate behavior. However, each institutional bad faith action levied against the insurer would be accompanied by allegations of new sanctionable conduct, as well as the potential exposure for additional attorney’s fees and costs in re-litigating the same issues. Therefore, an insurer may actually prefer to litigate (and win or settle) a class action!

III.   The Future: Insurers Under Attack (History Repeats Itself)

Whether institutional bad faith claims and class actions continue on their divergent paths is uncertain. Class action attorneys have stumbled into the bad faith arena, but without a sense of “togetherness.” Insurance bad faith lawyers are becoming well organized on institutional attacks, but seem to fear and avoid class action litigation.

This writer’s crystal ball suggests an evolution among plaintiff attorneys who are pursuing the insurance industry. The class action has long existed in a world of its own. That era will end soon. The institutional bad faith action has its history of evolution. Initially, the dispute was simply a disagreement over coverage under the insurance contract. From this contractual basis of recovery grew the implied duty of good-faith, which became known as the individual bad faith action. As the plaintiff’s bar has become better coordinated in handling bad faith actions, more and more institutional bad faith claims have surfaced. Eventually, the old “bad faith” dinosaur will sprout its wings and take flight. The individual claim of institutional bad faith will be overcome by class action litigation involving the same company policies and procedures. In its most formidable configuration, the class-wide institutional bad faith action will emerge . . . and the plaintiff’s bar will echo the battle cry: “All for one and one for all.”

IV.   A Resolution

Wherever legitimate claims of institutional bad faith exist, the only cure for an insurance company is self scrutiny. Indeed, even where the claims of institutional bad faith are concocted from twisted facts, the cure is from within. Insurers must look at their own internal guidelines, incentives, practices and procedures from the view of an insured — or even from the view of a plaintiff’s lawyer! Great care should be taken to avoid even the appearance of impropriety. And, when defending an insurer’s legitimate practices, the coordination of litigation strategies and corporate testimony is the key to avoiding inconsistencies, inaccuracies and misapprehension. Ultimately, it will be the insurance industry professionals who must live up to Alexander Dumas’ code of honor. Nobility and uniformity is the insurance industry’s own call to arms.


  1. John , Institutional Bad Faith Claims, DRI Seminar (September 17, 1998), C—8.
  2. Tony Doris, “Balking at Low-Balls,” Florida Lawyers, May 2002, p. 3.
  3. John , “Institutional Bad Faith: The Exponential Exposure of Portability and the Mother Standard,” Mealey’s Litigation Report: Insurance Bad Faith (Vol. 16, #8 August 21, 2002, p. 24).
  4. John , “Institutional Bad Faith Claims,” DRI Seminar (September 17, 1998), P. C—7.
  5. Newberg on Class Actions, Section 1.01, p. 1—3, citing Equity Rule 38, 33 Sup. Ct. XXIX (1912), Quoted in Supreme Tribe of Ben Hur v. Cauble, 255 U.S. 356 (1921).
  6. Newberg on Class Actions (3d. Ed.) § 1.01, p. 1—3, and authority cited therein.
  7. Id.
  8. Id.
  9. Deposit Guar. Nat. Bank, Jackson, Miss. v. Roper, 445 U.S. 326, 100 S. Ct. 1166, 63 L. Ed. 2d 427 (1980).
  10. Federal Rules of Civil Procedure, § 23(a). Each state has its own similar rule of civil procedure. See e.g., Fla. R. Civ. P. 1.220(a).
  11. For example, Florida Statutes, § 624.155 requires that a first party bad faith action does not accrue until notice of the violation is provided to the Department of Insurance, and the insurer is given an opportunity to resolve the dispute within 60 days following service of the notice. Talat Enterprises, Inc. v. Aetna Casualty and Surety Company, 753 So. 2d 1278 (11th Cir. 2000).
  12. See generally John , “Institutional Bad Faith: The Exponential Exposure of Portability and the Mother Standard,” Mealey’s Litigation Report: Insurance Bad Faith (Vol. 16, #8 August 21, 2002).