This is one of a series of articles originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 22, #8 (August 28, 2008).
[Editor’s Note: Alan J. Nisberg, Esq., is a partner with the law firm of Butler Weihmuller Katz Craig LLP with offices in Florida, North Carolina and Alabama. He is an experienced trial and appellate lawyer, active in the firm’s extra-contractual, coverage and class action departments. This commentary, other than the quoted material, are the author’s opinions – not the opinions of Butler Weihmuller Katz Craig LLP nor Mealey’s Publications. Copyright © 2008 by the author. Responses are welcome.]
The responsibility of caring for a child is not one to be taken lightly. Our society demands vigilance from those who bring new life into rld, and rightly so. We are held to a higher standard in dealing with our offspring than with others. The special relationship between a parent and a child is built upon trust and an expectation that one (the parent) will give security to the other (the child). So too is the bond between insurer and insured.1
|A.||Providing Security (“Mommy and Daddy Will Protect Me”)|
An insurance policy is a contract between two (or more) parties for indemnification. On one side of this commercial transaction is the insurance company – a business entity willing to indemnify others for losses that may occur in the future. The business model is designed to base decisions on actuarial and statistical risk analysis, marketing and price competition, and superior customer service. On the consumer, willing to pay a reasonable premium for protection against the risk of loss, with the expectation of security in the event a loss occurs. This contractual bond between insurer and insured is undoubtedly a business transaction. The insurer-insured relationship is one selected based on a meeting of the minds between the parties for their mutual best interest. However, it is inescapable that the insurance company takes on responsibilities to its insureds, similar to the responsibilities of a parent to a child.
The insureds’ expectations of an insurer start with the insurance policy, but do not end there. Social responsibility in the United States calls for good faith claim handling, whereby the insurer is not permitted to place its own best interest above the interests of its insured. Every legal action alleging “bad faith” by an insurance company is a reflection of the heightened responsibilities arising out of the special relationship between the insurer and its insured.
B. Social Responsibility (“Caring for Your Child”)
For more than 100 years, our judicial system has recognized that contractual commitments are accompanied by a duty to perform the contract in good faith.2 The evolution of insurance in the United States marked a shift from simple commercial contracts to something more. Traditional indemnity policies required insureds to defend themselves and to control all decisions regarding litigation and settlement. 3 Indemnity policies did nothing more than require the insurance company to pay policy benefits.4 Today, by contrast, modern liability insurance policies shift to the insurance company the responsibility of defending the insured, negotiating a resolution with the claimant, and preventing excess exposure to the insured whenever possible.5
For example, the Supreme Court of Florida identified the following responsibilities of a modern day liability insurer:
An insurer, in handling the defense of claim against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. For when the insured has surrendered to the insurer all control over the handling of the claim, including all decisions with regard to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with a due regard for the interests of the insured. This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.6
Even in the context of first-party insurance contracts, where the insurance company is not vested with the responsibility of protecting its insured against the claims of others, most jurisdictions now recognize a duty of insurance companies to settle claims in good faith and refrain from acting solely in their best interests.7
Thus, like the responsibilities of a parent caring for his or her own child, American tort jurisprudence now generally recognizes in both first-party and third-party insurance claims, an insurer’s obligation to act not only in its self interest, but equally in the interests of its insureds.
C. Bad Faith and Independent Torts (“Child Abuse”)
“Denying the problem will only make the situation worse, allowing the abuse to continue unchecked and decreasing the child’s chance for a full recovery.”8
When an insurance company acts as a responsible corporate citizen, its obligation is limited to the terms of the insurance contract. If not controlled, however, insurance companies wield the power for abuse. In response, society has permitted extra-contractual remedies where an insurer is shown to have acted in bad faith or committed some other independent tort beyond breach of the insurance contract.9 Insureds often allege intentional delay or denial of claims without justification, exploitation of the insured’s vulnerable emotional and financial position, deceptive investigation techniques, false accusations of an insured of intentionally causing the loss, coercion of an insured into settling a claim for less than its true value, and even outright fraud.10
An insurance company may be held liable for “bad faith” in failing to exercise its good faith responsibilities that arise out of the insurance relationship. Insureds generally can seek relief when the insurance company fails to attempt in good faith to promptly, fairly and equitably settle the insured’s claim when the insurance company’s obligation becomes reasonably clear.11 In a “bad faith” action, the recovery goes well beyond the insurance contract to include extra-contractual compensatory and punitive damages.12
Moreover, even when an action for insurer “bad faith” is not available, it has been universally recognized that an insured could still sue an insurer for independent torts such as fraud,13 intentional infliction of emotional distress,14 exploitation of the elderly,15 deceptive and unfair trade practices,16 and other forms of duress and coercion.17 Other independent torts may also be available such as defamation,18 tortious interference with business relations,19 or civil theft.20 The difference between the tort of bad faith and these independent torts, is that the independent torts are applicable to everyone, and are not derived from the special relationship between an insurance company and its insured.
|II.||Playing Games With Litigation (“Forcing A Square Peg Into A Round Hole”)|
Tort law is our social conscience reflected in the writings of our legislative and judicial branches of government. The remedy for disappointed expectations of insured consumers — to the extent those expectations go beyond policy benefits — is best left to the law of tort, not contract. However, insureds continue to sue for breach of contract to recover extra-contractual damages, and to allege independent torts against insurers that are nothing more than veiled allegations of insurer bad faith. The reasons for this are discussed below.
|A.||Breach of Contract Before Bad Faith (“Learn to Crawl Before You Walk”)|
In any action in which the plaintiff is permitted to sling mud at the insurer, alleging “bad faith” misconduct in the claim handling, it is inevitable that the jury will be swayed in favor of a verdict requiring payment of insurance policy limits. For this reason, an action for bad faith should be delayed until the resolution of the underlying insurance coverage issue is resolved.21 This is true both in the context of liability actions brought against the insured by a third-party, as well as first-party actions brought by an insured directly against the insurance company. In a third-party liability situation, an action that proceeds simultaneously against the insured and his or her liability insurer is more likely result in a verdict against the insured defendant – even if he or she was not at fault. The jury’s knowledge of liability insurance coverage will prejudice the action against the insured (particularly if the limits of coverage are substantial and the injuries to the other party are serious). Non-joinder statutes are intended to remedy this situation by preventing the insurer and insured from being pursued in the same action.22 In the first-party context, a similar problem exists. To allow an insured to sue on the underlying coverage issue together with allegations of extra-contractual misconduct by the insurer will more likely lead to a jury verdict finding a breach of contract, even if there was none. As a result, some jurisdictions prohibit a first-party bad faith action until resolution of the underlying coverage dispute.23
If the bad faith action is not permitted to proceed with the insurance coverage issue, then how can a plaintiff secure an unfair advantage in litigation?
|B.||Tortious Breach of Contract (“Goo Goo Ga Ga”)|
One attempt to create an imbalance of the playing field in favor of the insured is to blur the distinction between the contractual duties of an insurer and its extra-contractual duties imposed by society.24 The damages recoverable in a breach of contact action should be limited by the terms of the contract itself.25 Extra-contractual damages (and discovery) are available only in tort actions.26 Nonetheless, using terminology often misunderstood in scholarly writings, insureds often file lawsuits alleging “breach an implied covenant of good faith and fair dealing” or “tortious breach of contract” in a breach of contract action, demanding recovery of extra-contractual damages .27 In truth, breach of the implied covenant of good faith and fair dealing can only be viewed as one of two things: (1) the exercise of discretion given under a contract, the breach of which permits only recovery of contract damages; or (2) the tort of “bad faith”which allows for recovery of extra-contractual damages. Simply alleging breach of the insurance contract based on an insurer’s failure to act in good faith in the performance of its contractual duties should not entitle a plaintiff to recover extra-contractual damages.28
C. =Litigation Extortion (“Temper Tantrums”)
“Temper Tantrums are not fun…. You may wonder where you’ve gone wrong as a parent to produce such a miserable child. Rest assured, you are not responsible for this behavior ….” 29
While “independent torts” should be used to punish the misconduct of all corporate and private citizens alike, including insurance companies, no one should acquiesce to baseless accusations. Since false accusations cannot be ignored, it helps to understand the reasons behind them so that insurers know how to properly respond.
1. Extra-Contractual and Punitive damages
Independent torts may be asserted with a coverage action principally for two reasons:
(1) exposure; and (2) expense. Extra-contractual and punitive damages are generally not available in the absence of egregious behavior amounting to an independent tort.30 Insureds forced to wait for resolution of the coverage issues are therefore limited in the remedies available. Some may attempt to sue for “bad faith” inappropriately disguised as one or more “independent torts” to avail themselves of extra-contractual and punitive damages. This obviously presents more potential exposure of the insurance company at the outset of litigation, and is often an effective tool used to extort settlements on frivolous claims.
Additionally, discovery in a bad faith case is different (and more intrusive) than discovery in a contract action. In a bad faith case, the insured will demand disclosure of the insurer’s litigation file, claim file, claim handling manuals, training materials, and other institutional corporate documents. Discovery of these materials is improper in the insurance coverage case.31 Even work product objections may be unavailing to protect the insurance company’s records in the bad faith case.32
One question that remains unresolved, at least in Florida, is whether work product which is required to be disclosed in a bad faith case is also discoverable in a case involving other independent torts.33 Recognizing the opportunity to force an insurer into expensive, distracting and frustrating litigation, some insureds will intentionally allege independent torts and demand responses to intrusive and extremely burdensome discovery to test the patience of the insurance company defendant. This is simply another avenue of extortion through litigation.
“Remember, it’s never okay to shake, throw, or hit your baby. If you feel as though you could lose control … [t]ake a deep breath and count to ten.”34
The best way to ensure security for both the insured and the insurer is patient vigilance.
Care: Careful screening and hiring of personnel, implementation of high standards, proper training to ensure compliance with the standards set, comprehensive guidelines for them to follow in executing their job responsibilities, adequate supervision to prevent inadvertent misconduct of inexperienced employees and intentional misconduct of rogue or disgruntled employees, and appropriate incentives to promote quality claim handling, will minimize exposure where wrongful conduct is alleged.
Discipline: Even with due care, some insureds will file frivolous lawsuits. Just as a parent gives “tough love” to a defiant child, only proper discipline will minimize the impact of the rancor of a bitter insured’s ranting. Refuse to give in to extortion. Remember, the plaintiff’s bar learns from the example you set.
An insurer, like a parent, will be held to a higher standard. Be a good role model. Be caring and strong. Be patient, but firm. Choose your battles. Above all, be ever aware that the way you conduct your own affairs will have great influence on the choices of those who look to you for guidance.
Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. 1854), established that contract damages are those contemplated by the parties when the contract was made, or which flow naturally from the breach. Traditionally, such damages were limited to the monetary value of the contract, had it been performed.”)