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, #24, p. 32 (April 16, 2003). © Copyright Butler 2003.
In most every jurisdiction, the basis for a claim of insurer bad faith is the recognition of a duty of good faith and fair dealing inherent in any contract of insurance. See, e.g., Boston Old Colony v. Gutierrez, 386 So. 2d 783 (Fla. 1980). The focus in such cases is usually the question of whether or not the insurer has violated that duty. Inevitably, the question arises as to whether or not the actions of the insured can be considered bad faith and, if so, whether such actions can be raised as an affirmative defense to a claim of insurer bad faith. Most jurisdictions recognize comparative fault in the negligence arena. So why not allow the jury to apportion fault when deciding a bad faith claim, especially in jurisdictions that admit evidence of negligence by the insured in determining whether the insurer is guilty of bad faith?
There are numerous instances when insurers would deem it appropriate to assert the bad faith of the insured as a defense. For example, insureds may make impossible settlement demands in an effort to “set up” the insurer for bad faith. They may be guilty of failure to cooperate, failure to give proper notice of a claim, impairment of subrogation rights or outright fraud and misrepresentation. While many of these actions on the part of an insured may constitute a defense to coverage under the policy or even an independent tort, that does not necessarily mean they can be asserted as an affirmative defense in bad faith litigation. A jury can only be asked to offset the insured’s extracontractual liability for damages in those jurisdictions which recognize comparative bad faith as an affirmative defense.
The concept of an affirmative defense of comparative bad faith, that is, a defense which can be asserted to reduce an insurer’s liability based on the bad faith of the insured, was first recognized in California. California Casualty General Ins. Co. v. Superior Court, 173 Cal. App. 3d 274 (1985). In that case, the insurer defended a bad faith claim on the grounds that the insured unduly delayed submitting information to process her claim, which resulted in the insurer’s failure to settle. Id. at 283. The court began its analysis with the premise that the claim for bad faith sounded in tort, i.e., it was based upon the breach of a duty (the duty of good faith and fair dealing). Id. Because the claim was based in tort, the California Casualty court reasoned that tort principles should apply, including the principle of comparative fault. Id. In applying that generally recognized tort doctrine, the court concluded that the insured’s recovery should be limited to the insurer’s percentage of fault in failing to pay the claim. Id. Stated another way, the insurer’s obligation to pay the bad faith claim would be reduced by the percentage of fault placed upon the insured, and thus comparative bad faith constituted an affirmative defense.
Much of the commentary written over the years concerning comparative bad faith is based directly upon California Casualty.(1) In 2000, however, the California Supreme Court undermined the defense by abrogating California Casualty in Kransco v. American Empire Surplus Lines Ins. Co., 23 Cal. 4th 390 (2000). Kransco involved the failure of an insurer to settle a products liability claim which resulted in the paraplegia of the plaintiff. The insured in that case had submitted false interrogatory answers in which it had asserted there had been no prior cervical spine injuries involving its product (the “Slip-n-Slide” water toy). Although the insured amended its answers to reveal two prior such injuries (one of which resulted in death and the other in paralysis), the plaintiff’s attorney successfully used the false answers at trial to paint Kransco as deceptive and untruthful, resulting in a compensatory damage award of $2.5 million and a punitive damage award of $10 million. In the bad faith case, the jury was permitted to consider comparative fault under then-prevailing California law. The insurer argued that Kransco’s false interrogatory answers were as much the cause of the excess verdict as the insurer’s failure to settle. The jury found the insurer to be in bad faith for failing to settle the claim, however it found the insured, Kransco, to be 90% at fault in causing the excess verdict. This resulted in a reduction of the insurer’s excess liability to 10% of the amount of the verdict over the available insurance coverage.
On appeal, the California Supreme Court determined that comparative fault principles should no longer be applied in bad faith cases. The Court specifically determined that California Casualty was decided upon a faulty premise: that the duties of the insurer and the insured are reciprocal tort duties. Instead, the Kransco Court determined that, while the duty of good faith and fair dealing is a tort duty as applied to the insurer, it is a contract duty as applied to the insured. The duties of an insurer include duties to provide a defense and indemnify, while the duties of an insured require the payment of premiums, provision of proper notice and cooperation. The Court also pointed out that the relationship between the insured and the insurer is inherently unequal, with the insurer’s responsibilities under the insurance contract “predicated upon special policy factors inapplicable to the insured.” Id. at 162. Because the duty of the insured is not the same as the duty of the insurer under an insurance policy, the Court reasoned that it would not be equitable or fair to offset the parties’ respective liability by comparative fault. Therefore, juries in bad faith claims are not permitted to reduce an insurer’s liability by the insured’s percentage of fault. The affirmative defense of comparative bad faith, then, no longer exists in California.
Most jurisdictions which have considered the application of comparative fault in bad faith cases have rejected the concept in line with Kransco. Since California Casualty, a significant number of courts have flatly rejected the concept. States rejecting the defense include Florida (Nationwide Property & Casualty Ins. Co. v. King, 568 So. 2d 990 (Fla. 4th DCA 1990); Oregon (Stumpf v. Continental Casualty Co., 794 P.2d 1228 (App. Ore. 1990); Montana (Stephens v. Safeco Ins. Co. Of America, 852 P.2d 565 (Mont. 1993); Oklahoma (First Bank of Turley v. Fidelity and Deposit Ins. Co. Of Maryland, 928 P.2d 298 (Okla. 1996); Hawaii (Wailua Assoc. v. Aetna Casualty and Surety Co., 183 F.R.D. 550 (D. Hawaii 1998); the U.S. Virgin Islands (In re: Tutu Water Wells Contamination Litigation, 78 F. Supp. 2d 436 (D.V.I. 1999); and Rhode Island (Skaling v. Aetna Ins. Co., 799 A.2d 997 (R.I. 2002).
It should be noted, however, that the rejection of the affirmative defense of comparative bad faith does not necessarily render the actions of the insured irrelevant in a bad faith claim. Many jurisdictions apply a “totality of the circumstances” standard in bad faith cases which requires the fact finder to analyze the insurer’s failure to settle in light of all of the factors surrounding the underlying claim. As the Rhode Island Supreme Court noted in Skaling, “comparative negligence by the insured does not conclusively defeat a claim for bad faith, rather it is a factor that may give rise to a reasonable basis to deny benefits.” 799 A.2d at 1014—15. Thus, although an insurer may not be able to argue that the insured’s conduct requires a reduction of extracontractual liability, any bad faith on the part of the insured can be used to explain the insurer’s failure to settle and possibly convince the jury that the insurer’s actions were, under the circumstances, in good faith.(2)
Although comparative bad faith existed as a viable defense in California from 1985 to 2000, very few other jurisdictions ever recognized it. For a brief period, the Texas courts seemed to support the defense. In State Farm Fire & Casualty Co. v. Gandy, 880 S.W.2d 129 (Tex. App. 1994), a Texas appeals court held that it was error for the trial judge to refuse to give a comparative fault instruction in a bad faith case. Two years later, however, the same court flatly rejected the applicability of the defense of comparative bad faith in Southland and Lloyd’s Ins. Co. v. Tomberlain, 919 S.W.2d 822 (Tex. App. 1996). In a footnote in that case, the Court stated:
On appeal, Southland urges this court to recognize a new defense in bad faith insurance cases, which it calls “comparative bad faith.” Southland likens this defense to that of comparative negligence. It suggests no authority to support our adopting such a doctrine, and we decline to do so.
Id. at 832, n.5. Oddly enough, the court did not cite to Gandy when making this holding, despite the fact that it cited to Gandy for a different proposition earlier in the opinion. Id. at 826. Although the two cases appear conflicting, one must conclude that Texas does not recognize the defense because Tomberlain was decided after Gandy and is quite clear in its rejection of the concept.(3)
Another case appearing to support the defense is Carpenter v. Automobile Club Ins. Exchange, 58 F.3d 1296 (8th Cir. 1995). Carpenter is a federal case applying Arkansas law, and it held that, in a bad faith case, “contributory fault” was a proper defense to a bad faith claim. The court held, however, that the defense could not be sustained in that particular case because there was insufficient evidence to support the contention that the insured was at fault. Notably, Carpenter cites no Arkansas law in support of its proposition. Instead, it relies upon Worden v. Tri-State Ins. Co., 347 F.2d 336 (10th Cir. 1965), a federal case applying Kansas law. A reading of Worden indicates that it was a case for “negligent” failure to settle a liability claim. Applying basic principles of negligence, the Worden court determines that comparative negligence was an appropriate jury issue. Worden (which, incidentally, predates California Casualty) does not purport to be a “bad faith” claim as we presently understand it, nor does it discuss insurer bad faith. Further weakening the holding of Carpenter is the fact that, although it recognizes that “contributory fault” is a defense to bad faith, it expressly declined to decide whether such fault could be used to “comparatively offset” the insurer’s liability, since it determined the defense was not factually supported in that case. 58 F.3d at 1304, n.2. Accordingly, Carpenter does not represent strong authority for assertion of the defense.
The strength of the comparative bad faith defense rose and fell with California law. The California Supreme Court’s decision in Kransco not only repealed the defense in that state; it made it less likely to be recognized in most other states. The concept of unequal duties of good faith and fair dealing between the insurer and the insured seems to be the prevailing state of the law. This inequality will likely prevent any further acceptance of the concept of comparative bad faith, as unequal duties cannot offset each other. This is not, however, the most equitable result, because it creates an “all or nothing” situation where cases in which the insured is guilty of bad faith leave the jury with deciding only whether or not the insurer was in bad faith. There is no room for “close cases” in which the insured should receive some relief, but perhaps not the full measure of damages. Under the current state of the law, however, insurers need to expect that any fault on the part of the insured in claim handling decisions will not absolve them of extracontractual liability, except in those cases where the insured’s fault is such that, under the circumstances, the insurer’s actions do not constitute bad faith. The days of comparative bad faith seem to have ended with Kransco.