Reprinted with permission from the Spring 2001 issue of the Journal of Insurance
Coverage. Copyright Aspen Law and Business
The File on Trial:
Bad Faith
LAURA A. FOGGAN
Laura A. Foggan is a partner in the Washington, DC law firm of Wiley, Rein & Fielding,
practicing principally in the insurance law field. She directs major litigation on behalf of
insurance industry clients, including claims under general liability, product liability,
property and professional liability policies. Substantial contributions to this article were
made by Dale Hausman, Marilyn Kerst, Clifford Sloan and Christopher Hardee.
LEGAL STANDARDS DEFINING THE INSURER’S DUTY
If an insurer is found to have wrongfully failed to settle a claim within limits, then
it generally will be liable for the full amount of the subsequent judgment or settlement,
notwithstanding policy limits.1 The insurer's duty to settle is defined in several ways
throughout the country. The differing definitions of the duty potentially affect what
factors an insurer may consider in deciding whether to settle, as well as the type of
insurer conduct that may give rise to liability above limits.
The majority of courts state that, when determining whether to settle within
limits, the insurer must take into account the interest of the insured and give it at least as
much consideration as it gives its own interest.2 A small number of courts state,
however, that the insurer must consider the interest of the insured as paramount when an
offer to settle is made.3 Other courts state that the insurer must evaluate settlement as
though only the insurer would be responsible to satisfy it without regard to any policy
limits.4
In applying these formulations, states differ in the type of conduct required to
establish the insurer's liability. The majority of states apply a reasonableness standard in
1
See, e.g., Cowden v. Aetna Casualty & Sur. Co., 134 A.2d 223, 227 (Pa. 1957).
2
See, e.g., Hartford Accident & Indem. Co. v. Foster, 528 So.2d 255, 265 (Miss. 1988); Beck v.
Pennsylvania Nat'l Mut. Cas. Ins. Co., 429 F.2d 813, 819 (5th Cir. 1970) (Pennsylvania law); Young
v. American Cas. Co., 416 F.2d 906, 910 (2d Cir. 1969), cert. dismissed, 396 US 997 (1970) (New York
law); Commercial Union Assurance Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 610 P.2d 1038, 164
Cal. Rptr. 709, 712 (1980).
3
See, e.g., Domangue v. Henry, 394 So. 2d 638, 640 (La. Ct. App. 1980); but see National Serv.
Indus. v. Hartford Accident & Indem. Co., 661 F.2d 458, 461 (5th Cir. 1981) (Georgia law) (rejecting
argument that insurer is required to "give paramount consideration to the interest of the insured");
Adduci v. Vigilant Ins. Co., 98 Ill. App. 3d 472, 424 N.E.2d 645, 650 (1981) (rejecting standard as
minority viewpoint).
4
See, e.g., Bohemia, Inc. v. Home Ins. Co., 725 F.2d 506, 512 (9th Cir. 1984) (applying Oregon law);
Betts v. Allstate Ins. Co., 154 Cal. App.3d 688, 706, 201 Cal. Rptr. 528, 538 (1984).
determining whether an insurer is liable for a judgment above policy limits if it fails to
settle within policy limits.5 A significant minority of states applies a bad faith standard. In
these states, some courts apply a true bad faith standard, for example, the insurer would
be liable only if its failure to settle was done with an intentional and/or gross disregard of
the insured's interests.6 Other courts, although using the "bad faith" nomenclature,
nevertheless apply a reasonableness standard.7
Deciding Whether To Settle Within Limits
As an initial matter, the insurer generally is required to undertake a timely and
reasonable investigation into the insured's potential exposure.8 Assuming that an
adequate investigation has been made, an insurer's exposure to liability for failure to
settle within limits will generally depend upon its reasonableness in assessing the
insured's potential liability for a covered claim and the magnitude of potential damages
for the covered claim, in relation to the potential that the policyholder will face liability
above the applicable policy limits.9
One of the most significant issues facing an insurer in the settlement context is
whether it may also consider its coverage defenses in deciding whether to settle a claim
within limits. If an insurer decides not to settle within limits because it erroneously
believes that there is no coverage, the question arises as to whether the insurer can rely
on a good faith belief in non-coverage, in avoiding liability for failure to settle within
limits.
Numerous courts have held that an insurer may consider coverage defenses as a
factor in determining whether to settle a case within limits.10 The slight majority of
decisions, however, have held that an insurer is precluded from considering coverage
5
See, e.g., Davis v. Cincinnati Ins. Co., 160 Ga. App. 813, 288 S.E.2d 233, 237-238 (1982); Maine
Bonding & Cas. Co. v. Centennial Ins. Co., 693 P.2d 1296, 1299 (Or. 1985); Crisci v. Security Ins. Co.,
66 Cal. 2d 425, 426 P.2d 173, 177, 58 Cal. Rptr. 13 (1967); Green v. J.C. Penney Auto. Ins. Co., 806
F.2d 759, 763-64 (7th Cir. 1986) (Illinois law).
6
See, e.g., State Farm Mut. Auto. Ins. Co. v. Floyd, 235 Va. 136, 366 S.E.2d 93, 97 (1988); Pavia v.
State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 626 N.E.2d 24, 26 (1993).
7
See, e.g., Hartford Accident & Indem. Co. v. Foster, 528 So. 2d 255, 267 (Miss. 1988).
8
See, e.g., Brown v. United States Fidelity & Guar. Co., 314 F.2d 675, 679 (2d Cir. 1963) (New York
law); Stanton v. Continental Cas. Co., 197 Cal. App. 3d 821, 243 Cal. Rptr. 147, 150 (1988); Radio
Taxi Serv. V. Lincoln Mut. Ins. Co., 31 NJ 299, 157 A.2d 319, 322 (1960).
9
See, e.g., Smith v. Audubon Ins. Co., 679 So. 2d 372, 377 (La. 1996); American Physicians Ins.
Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994); Brown v. United Fidelity & Guar. Co., 314 F.2d 675,
678-679 (2d Cir. 1963) (New York law).
10
Courts in the following cases have concluded that the insurer may consider coverage defenses in
deciding whether to settle a claim within limits: Florida: State Farm Mut. Auto. Ins. Co. v. La Foret,
658 So.2d 55, 62-63 (Fla. 1995); Massachusetts: DiMarzo v. American Mut. Ins. Co., 389 Mass. 85,
449 N.E.2d 1189, 1198 (1983); Pennsylvania: Beck v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 429 F.2d
813, 819 (5th Cir. 1970) (interpreting Pennsylvania law); Oklahoma: State Farm Auto. Ins. Co. v.
Skaggs, 251 F.2d 356, 359 (10th Cir. 1957); Oregon: Warren v. Farmers Ins. Co., 115 Or. App. 319,
838 P.2d 620, 623-24 (1992); Wisconsin: Mowry v. Badger State Mut. Cas. Co., 129 Wis. 2d 496, 385
N.W.2d 171, 180 (1986).
defenses in deciding whether to settle within limits, that is, if an insurer bases its rejection
of a settlement demand upon a good faith but erroneous belief in non-coverage, it is not
insulated from liability for a judgment above limits.11 The courts of many jurisdictions
have not ruled on this issue, and courts in certain jurisdictions have issued conflicting
rulings on it.12
Instruction Not To Settle
Most courts hold that if the insured requests that the insurer not settle and the
insurer accedes to that request, then the insurer should not be held liable to the insured
for any excess judgment.13 One court has suggested, however, that a claimant can
recover from an insurer for breach of its duty to settle despite the fact that the insurer
refused to settle on the instruction of the insured.14 In addition, the insurer may have to
show that it fully informed the insured of the risk being taken by not agreeing to a
settlement.15
Absent an express policy provision that the insurer cannot settle without the
insured's consent (as in certain professional liability policies), the act of settling without
the insured's consent should not constitute bad faith. The insurer, however, is still
required to act in good faith in reaching and structuring a settlement.16
11
Courts in the following cases have concluded that the insurer may not consider coverage
defenses in deciding whether to settle a claim within limits: Arizona: Parsons v. Continental Nat'l
Am. Group, 113 Ariz. 223, 550 P.2d 94, 100 (1976); California: Johansen v. California State Auto.
Ass'n Inter-Insurance Bureau, 15 Cal. 3d 9, 538 P.2d 744, 748, 123 Cal. Rptr. 288 (1975); Consolidated
Am. Ins. Co. v. Mike Soper Marine Servs., 951 F.2d 186, 190 (9th Cir. 1991); District of Columbia:
Central Armature Works, Inc. v. American Motorists Ins. Co., 520 F. Supp. 283, 288 (D.D.C. 1981);
Kentucky: Eskridge v. Educ. & Exec. Insurers, Inc., 677 S.W.2d 887, 889-890 (Ky. 1984); South
Carolina: Smith v. Maryland Cas. Co., 742 F.2d 167, 168-70 (4th Cir. 1984); South Dakota: Luke v.
American Family Mut. Ins. Co., 476 F.2d 1015, 1023 (8th Cir. 1973); Virgin Islands: Buntin v.
Continental Ins. Co., 525 F. Supp. 1077, 1082-83 (D.V.I. 1981).
12
Conflicting decisions have been issued from courts applying the law of the following states:
Kansas: compare Associated Wholesale Grocers, Inc. v. Americold Corp., 261 Kan. 806, 934 P.2d
65, 89-92 (1997) and Snodgrass v. State Farm Mut. Auto. Ins. Co., 15 Kan. App. 2d 153, 804 P.2d
1012, 1022 (1991) with Coleman v. Holecek, 542 F.2d 532, 537 (10th Cir. 1976); Missouri: compare
Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d 554, 561 (Mo. Ct. App. 1990) with Western Cas. &
Sur. Co. v. Herman, 405 F.2d 121, 124 (8th Cir. 1968); Landie v. Century Indem. Co., 390 S.W.2d 558,
566 (Mo. Ct. App. 1965); New York: compare Affiliated F.M. Ins. Co. v. Hartford Accident & Indem.
Co., 226 A.D.2d 292, 642 N.Y.S.2d 211, 212 (1st Dep't 1996) with United States Fidelity & Guar. Co.
v. Copfer, 48 N.Y.2d 871, 400 N.E.2d 298, 424 N.Y.S.2d 356 (1979).
13
See, e.g., Puritan Ins. Co. v. Canadian Universal Ins. Co., 775 F.2d 76, 80 (3d Cir., 1985)
(Pennsylvania law); Eklund v. Safeco Ins. Co. of Am., 41 Colo. App. 96, 579 P.2d 1185, 1187 (1978);
Peterson v. American Family Mut. Ins. Co., 280 Minn. 482, 160 N.W.2d 541, 544 (1968).
14
Edwins v. General Cas. Co., 78 Ill. App. 3d 965, 397 N.E.2d 1231, 1233 (1979).
15
See, e.g., Insurance Co. of N. Am. v. Medical Protective Co., 768 F.2d 315, 319-320 (10th Cir. 1985)
(Kansas law).
16
See Commerce & Indus. Ins. Co. v. North Shore Towers Management, 162 Misc. 2d 778, 617
N.Y.S.2d 632, 634 (Civ. Ct. 1994); Bleday v. OUM Group, 645 A.2d 1358, 1361-63 (Pa. Super. 1994);
Mitchum v. Hudgens, 533 So. 2d 194, 197 (Ala. 1988); Shuster v. South Broward Hosp., 591 So.2d
174, 176-177 (Fla. 1992).
Liability For Failure To Settle If Insurer Disclaims Defense
Cases from certain jurisdictions hold that wrongful failure to defend and failure
to settle within limits are separate types of claims, each with distinct remedies.17 In these
jurisdictions, an insurer held to be in bad faith in failing to defend may be subject to
consequential damages, statutory penalties, attorney fees and punitive damages.18 On
the other hand, the relief for negligent or bad faith failure to settle within limits is to hold
the insurer liable for an entire judgment, notwithstanding policy limits. The basis for
liability for failure to settle within limits is that the insurer has assumed the defense and
owes a fiduciary duty to the insured.19 Theoretically, in these jurisdictions, if an insurer
refuses to defend, then it may be subject to the damages associated with that claim, but
it should not also be liable for a judgment above limits.20
Courts in numerous cases, however, have held that damages for bad faith failure
to defend include liability for a judgment above limits, asserting that an insurer should not
be "better off" by failing to defend than by providing a defense.21
Duty To Pursue Settlement
A significant issue facing claims personnel is whether the insurer's duty is limited
to responding to demands within limits, or whether an insurer has the duty to
affirmatively pursue settlement. It is highly important for claims personnel to be aware of
the standard, or lack of any standard, in the relevant jurisdiction because inaction by the
insurer may form the basis for liability for failure to settle.
Courts nationwide are in equipoise as to whether the insurer's duty is triggered
only by a demand within limits22 or whether the insurer has an affirmative duty to pursue
settlement, even where no settlement demand has been made.23 The courts of many
17
See, e.g., American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 847 (Tex. 1994); Maryland
Ins. Co. v. Head Indus. Coating and Services, Inc., 938 S.W.2d 27, 28 (Tex. 1996).
18
See MGA Ins. Co. v. Bates, 699 A.2d 751, 754 (Pa. Super. 1997).
19
See Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 227 (Pa. 1957).
20
See Fidelity & Casualty Co. of New York v. Gault, 196 F.2d 329, 330 (5th Cir. 1952).
21
See Western Cas. & Sur. Co. v. Herman, 405 F.2d 121, 124 (8th Cir. 1968) (Missouri law); Luke v.
American Family Mut. Ins. Co., 476 F.2d 1015, 1023 (8th Cir. 1973) (South Dakota law); Buntin v.
Continental Ins. Co., 525 F. Supp. 1077, 1082-83 (D.V.I. 1981): State Farm Auto. Ins. Co. v. Civil
Service Employees Ins. Co., 19 Ariz. 594, 509 P.2d 725, 733 (1973); Warren v. Farmers Ins. Co., 115
Or. App. 319, 838 P.2d 620, 623-24 (1992).
22
Courts in the following cases have concluded that the insurer's duty is triggered only by a
demand within limits: Iowa: Wierck v. Grinnell Mut. Reins. Co., 456 N.W.2d 191, 195 (Iowa 1990);
Kentucky: Davis v. Home Indem. Co., 659 S.W.2d 185, 189 (Ky. 1983); Missouri: Bonner v.
Automobile Club Inter-Insurance Exch., 899 S.W.2d 925, 928 (Mo. App. 1995); New York: Pavia v.
State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 626 N.E.2d 24, 28 (1993); Texas: American Physicians
Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994). See also Continental Cas. Co. v. United States
Fidelity & Guar. Co., 516 F. Supp. 384, 390 (N.D. Cal. 1981) (insurer's duty includes making
reasonable counter-offers to settlement demands).
23
Courts in the following cases have concluded that an insurer has an affirmative duty to pursue
jurisdictions have not ruled on this issue, and courts of certain jurisdictions have issued
conflicting rulings on this issue.24
Demand Above Limits
A relatively old line of cases held that, in certain circumstances, an insurer may
face liability even if the initial demand is above its limits.25 Many courts have held that an
insurer has a duty to inform the insured of all settlement demands, including demands
above limits, and to advise the insured of the consequences if the matter is not settled.
Failure to do so could result in liability for a judgment without regard to policy limits.26 If
the insured advises the insurer that it will pay the amount above policy limits, then the
insurer's duty to settle within limits may be triggered.27 This is a minority view, but
should not be disregarded.
Effect of Excess Coverage
Although the insurer's liability for failure to settle within limits is premised on the
insurer’s unreasonably exposing the insured to personal liability, the existence of excess
coverage will not insulate the primary insurer from liability. Rather, many courts have
held that an excess insurer may be subrogated to the insured with regard to a claim
settlement: Arizona: Fulton v. Woodford, 26 Ariz. App. 17, 545 P.2d 979, 984 (1976); Michigan:
Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127, 393 N.W.2d 161 (1986); New
Jersey: Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974); West
Virginia: Daniels v. Horace Mann Mut. Ins. Co., 422 F.2d 87, 89 (4th Cir. 1970); Shamblin v.
Nationwide Mut. Ins. Co., 183 W. Va. 585, 396 S.E.2d 766 (1990); Wisconsin: Alt v. American Family
Mut. Ins. Co., 71 Wis. 2d 340, 237 N.W.2d 706, 713 (1976); Moutsopoulos v. American Mut. Ins.
Co., 607 F.2d 1185, 1188 (7th Cir. 1979).
24
Note that conflicting decisions have been issued from courts applying the law of the following
states: California: compare Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 110 Cal. Rptr. 511, 523-
524 (1973) with Gibbs v. State Farm Mut. Ins. Co., 544 F.2d 423, 427 (9th Cir. 1976); Florida: compare
Seward v. State Farm Mut. Auto. Ins. Co., 392 F.2d 723, 727 (5th Cir. 1968) and Davis v. Nationwide
Mut. Fire Ins. Co., 370 So. 2d 1162, 1163 (Fla. Dist. Ct. App. 1979); with Self v. Allstate Ins. Co., 345
F. Supp. 191, 197 (N.D. Fla. 1972) and General Accident Fire & Life Assur. Corp. v. American Cas.
Co., 390 So. 2d 761, 765 (Fla. Dist. Ct. App. 1980); Kansas: compare Heinson v. Porter, 244 Kan. 667,
772 P.2d 778, 785 (1989) and George R. Winchell, Inc. v. Norris, 633 P.2d 1174, 1176 (Kan. Ct. App.
1981) with Guarantee Abstract & Title Co. v. Interstate Fire & Cas. Co., 228 Kan. 532, 618 P.2d 1195,
1199 (1980); Coleman v. Holecek, 542 F.2d 532, 534 (10th Cir. 1976); Oregon: compare Kriz v.
Government Employees Ins. Co., 42 Or. App. 339, 600 P.2d 496, 500-01 (1979) with Maine Bonding
& Cas. Co. v. Centennial Ins. Co., 64 Or. App. 97, 667 P.2d 548, 550-51 (1983), aff'd, 693 P.2d 1296,
1299 (Or. 1985).
25
See Bell v. Commercial Ins. Co., 280 F.2d 514, 516 (3d Cir. 1960) (Pennsylvania law); Young v.
American Cas. Co., 416 F.2d 906, 910-911 (2d Cir. 1969), cert. dismissed, 396 US 997 (1970) (New
York law). But see Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 626 N.E.2d 24, 28 (1993)
(insurer's duty triggered only by demand within limits).
26
See Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 36 (Iowa 1981); Insurance Co. of N.
Am. v. Medical Protective Co., 570 F. Supp. 964, 972-973 (D. Kan. 1983); Roberie v. Southern Farm
Bureau Cas. Ins. Co., 250 La. 105, 194 So. 2d 713, 716 (1967).
27
See Continental Cas. Co. v. United States Fidelity & Guar. Co., 516 F. Supp. 384, 388 (N.D. Cal.
1981).
against the primary insurer for failure to settle within limits.28 A minority of courts has
held that a primary insurer owes the excess insurer the same duty to settle that it owes
to the insured.29
Multiple Insureds
A perplexing area of the law regarding an insurer's duty to settle within limits is
in instances where there are multiple insureds involved in a single claim. In this context,
the insurer may be faced with conflicting obligations. Unfortunately, the law is unsettled
in this context.
On the one hand, the insurer owes the settlement duties described previously
with regard to settling within limits to each of its insureds. On the other hand, certain
courts have held that an insurer cannot prefer the interests of one insured to the
detriment of another insured.30 Some courts have suggested that an insurer cannot settle
on behalf of fewer than all insureds for the sole purpose of exhausting limits and
terminating the defense to the remaining insureds.31 However, other courts have
suggested that an insurer may settle claims against fewer than all insureds, if the
settlement is reasonable and/or is not made in bad faith.32
Settling Only Covered Claim
Courts generally hold that an insurer must defend until it can confine the claim to
a recovery that the policy does not cover.33 One court has suggested, however, that
good faith ordinarily requires an insurer to obtain a general release for its insured when
settling claims, rather than tailoring the release to the scope of coverage.34
BAD FAITH REMEDIES
Claims handlers not only need to be aware of what situations may give rise to
bad faith claims and recognize a bad faith setup, they also need to understand the
28
See, e.g., American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 482-483 (Tex. 1992);
Commercial Union Assurance Cos. V. Safeway Stores, 26 Cal. 3d 912, 610 P.2d 1038, 164 Cal. Rptr.
709, 712 (1980); Twin City Fire. Ins. Co. v. County Mut. Ins. Co., 23 F.3d 1175, 1180-81 (7th Cir. 1994)
(Illinois law).
29
See, e.g., National Union Fire Ins. Co. v. Liberty Mut. Ins. Co., 696 F. Supp. 1099, 1101 (E.D. La.
1988); Dairyland Mut. Inc. Co. v. Andersen, 102 Ariz. 515, 433 P.2d 963, 968 (1967).
30
See Shell Oil Co. v. National Union Fire Ins. Co., 44 Cal. App. 4th 1633, 52 Cal. Rptr. 2d 580, 587-
588 (1996); Smoral v. Hanover Ins. Co., 37 A.D.2d 23, 322 N.Y.S.2d 12, 14 (1971).
31
See Auman v. Federal Ins. Co., 81 Mich. App. 740, 266 N.W.2d 457, 458 (1978); Simmons v.
Farmers Ins. Group, 877 P.2d 1255, 1258-1259 (Utah Ct. App. 1994).
32
See Anglo-American Ins. Co. v. Molin, 670 A.2d 194, 198-199 (Pa. Commw. Ct. 1995); Homsy v.
Floyd, 51 F.3d 530, 537 (5th Cir. 1995) (Texas law).
33
See D'Auria v. Zurich Ins. Co., 507 A.2d 857, 859 (Pa. Super. 1986).
34
See Levenfeld v. Clinton, 674 F. Supp. 255, 259-260 (N.D. Ill. 1987).
magnitude of the company's potential exposure.35 Generally, courts seek to balance the
goals of punishing and deterring bad faith conduct by insurers against the undesirable
consequence of creating an undeserved windfall for a policyholder or group of
policyholders. Certain indicia of the reasonableness of punitive damages awards were
recently set forth by the United States Supreme Court.36 The measures of damages and
factors courts use--either in reviewing damages awards or in instructing juries, include
the following:
• The degree of reprehensibleness of the insurer's conduct.37
• The insurer's financial condition--whether of an entire corporate group or
only of the entity that wrote the policy.38
• The amount of profit gained from the practice in question.39
• A percentage of the insurer's profits, receipts, policyholder surplus, or
unassigned funds.40
• A multiple of the compensatory damages award.41
• The amount of profit or harm that is related to the state whose law is being
applied.42
35
The emphasis in this section of the article is on verdicts as they are rendered in the first place--
the raw numbers juries put up in different types of fact situations-- regardless of whether the
insurance company in a particular case is later able to get the verdict overturned or reduced by
post-trial motions or on appeal.
36
See, BMW of N. Am. v. Gore, 517 U.S. 559, 574 ff, 116 S. Ct. 1589 (1996) (awards should be based
only on insurer's conduct in state; indicia of reasonableness appear from the "degree of
reprehensibility," the "ratio [of punitive damages] to the actual harm inflicted," and "comparing the
punitive damages award and the civil or criminal penalties...for comparable misconduct.") (Stevens,
J.)
37
See, e.g., Alfa Mut. Fire Ins. Co. v. Thomas, Nos. 1970389, 1970390, 1999 Ala. LEXIS 105 (Ala.
1999) (Alabama Supreme Court found punitive damages appropriate where insurer's conduct was
"inexcusable, flagrant or shameful").
38
See, e.g., Liberty Mut. Ins. Co. v. Petersen, No. 774379 (Cal. Super. Ct., Orange Co.) (insurer's $5.2
billion net worth required a substantial award to act as punishment; therefore $2.6 million award
was appropriate); Goodrich v. Aetna U.S. Healthcare of Calif., Inc., No. RCV 20499 (Cal. Super. Ct.,
San Bernardino Co.) ($120.5 million awarded not excessive, given HMO's net worth); Lugo v.
Allstate Ins. Co., No. 96 AS 03475 (Cal. Super. Ct., Sacramento Co.) (policyholders allowed to
introduce evidence of insurer's 1997 after-tax earnings and of its net worth of $13.1 billion to jury
that awarded $3 million in punitive damages).
39
See, e.g., Davis v. Mid-Century Ins. Co., No. CIV-96-2070T (W.D. Okla.) ($17 million jury award
based on evidence presented that insurer had profited in that amount from pattern and practice of
wrongful deductions from actual cash value claims).
40
See, e.g., Fisher v. Aetna Life Ins. Co., No. 3AN97-291) (Alaska Super. Ct., 3d Jud. Dist.) (judge
deemed punitive damages award reasonable, constituting 0.4 percent of insurer's 1997 surplus,
about 1 percent of its 1997 dividends and 0.3 percent of the dividends and surplus continued).
41
See, e.g., Liberty Mut. Ins. Co. v. Petersen, No. 774379 (Cal. Super. Ct., Orange Co.) (25-to-1 ratio
of punitive damages to compensatory damages was not excessive); Albert H. Wohlers & Co. v.
Bartgis, 969 P.2d 949 (Nev. 1999) (Nevada Supreme Court reduced punitive award from $8 million to
$3.7 million, finding award of 30 times compensatory damage excessive).
42
See, e.g., Diamond v. General American Life Ins. Co., No. CV 96-02277 (Ariz. Super. Ct., Maricopa
Co.) (court reduced $58 million jury award to $3 million, based on amount of insurer's wrongful
• Comparative bad faith or negligence on the part of the policyholder43
The states that recognize a bad faith cause of action vary widely in the types of
remedies they allow. These can range from simple contract damages within policy limits
to estoppel to deny coverage, recovery of attorney fees or premiums paid, treble
damages, and punitive damages.
1. Contractual Damages
Most states allow contractual damages in excess of policy limits, including
economic damages such as lost profits, to compensate the policyholder for any harm
that resulted from the insurer's conduct. Liability insurers' responsibility for damages
awards in excess of policy limits, where they have refused to settle an underlying action
within policy limits, can be a form of consequential damages. The key is that these
damages are compensatory, designed to make the policyholder whole for harm suffered
as a consequence of the insurer's conduct. The policyholder must show that if the
insurer had fulfilled its obligations under the policy, the policyholder would not have
suffered the harms for which it seeks to be compensated.44
2. Coverage by Estoppel
In some jurisdictions, an insurer's wrongful refusal to defend can estop it from
asserting its policy defenses. In these circumstances, the penalty for a wrongful failure
to defend is, inter alia, full responsibility for indemnity of any liability faced by the
policyholder.
3. Declaratory Judgment Fees
Other jurisdictions allow recovery of an insured's attorney fees and costs.45
conduct within Arizona).
43
See, e.g., Pomerantz v. Pero, No. BC 138799 (Cal. Super. Ct., Los Angeles Co.) (compensatory
damages award to earthquake victims reduced by 20 percent for policyholders' comparative
negligence; $12 million punitive damages award not reduced by court); Findley v. Farmers Ins.
Exch., No. 614236-8 (Cal. Super. Ct., Fresno Co.) (policyholders' award against fire insurer reduced
by 20 percent for their negligence in tearing down, rather than repairing or replacing, structure).
44
See, e.g., Earth Scientists Sciences (Petro Services), Ltd. v. U.S. Fid. & Guar. Co., 619 F. Supp.
1468, 1475 (D. Kan. 1985) (allowing recovery of lost profits that "arose. . . directly from the
defendant's failure to pay on the policy"); Gourley v. Prudential Prop. & Cas. Ins. Co., 734 So. 2d
940 (La. Ct. App., 1st Cir. 1999) (appellate court increased jury's award that was lower than excess
judgment rendered against insured, where jury had found the insurer liable for bad faith failure to
settle); Berges v. Dixie Ins. Co., No. 96-2817 (Fla. Cir. Ct., Hillsborough Co.) (jury awarded
policyholder $1.9 million for insurer's refusal to settle wrongful death action within policy limits).
45
See, e.g., Case Corp. v. Aetna Cas. & Sur. Co., No. 93-C-1181 (E.D. Wis. March 29, 1999) (court
awarded policyholder $1 million in attorneys fees, upholding jury's consequential damages award
but vacating jury's bad faith and punitive damages awards); Rubenstein v. Royal Ins. Co., 429
Most states do not permit recovery of attorneys fees in coverage declaratory judgment
actions, but this rule is being eroded in some situations, particularly where bad faith is
shown.
4. Refund of Premiums
Some courts have allowed the policyholder to recover the premiums it has
46
paid.
5. Prejudgment Interest
Prejudgment interest awards on compensatory damages can be quite large.47
This exposure can equal or dwarf other liabilities of the insurer, particularly where an
award comes after years of protracted litigation.
6. Tort Recoveries
Tort theories of recovery are based on the idea that not only has the insurer
deprived the policyholder of the benefit of its bargain, but the insurer's conduct has also
been wrongful. The insurer has breached not only a private contract but also a legally
created duty to a policyholder. Usually, courts permitting recovery in tort find that
issuance of an insurance policy gives rise to an implicit duty of good faith and fair dealing
or a special relationship between the insurance and policyholder.
In some jurisdictions, tort damages are not available unless there is actually
coverage under the policy. 48 Other jurisdictions allow tort damages, even where there is
no coverage, on the theory that an insurer's wrongful conduct by itself can harm the
policyholder.49
Mass. 355, 708 N.E.2d 639 (1999) (insured is entitled to recover attorneys fees in declaratory
judgment action whenever it establishes that the insurer violated its duty to defend).
46
See, e.g., Weatherbee v. United Ins. Co., 265 Cal. App.2d 921, 930 (1968) (allowing recovery of
premiums paid over period of five and one-half years for coverage that was "not as represented").
47
See, e.g., United Technologies Corp. v. American Home Assur. Co., 989 F. Supp. 128 (D. Conn.
1997) (court awarded $9,337,179 in prejudgment interest on $16.3 million in compensatory damages
for wrongfully disclaiming coverage for environmental action); Case Corp. v. Aetna Cas. & Sur.
Co., No. 93-C-1181 (E.D. Wis. March 29, 1999) (court awarded $2.3 million in prejudgment interest
on compensatory damages of $4.1 million).
48
See, e.g., State Farm Fire & Cas. Co. v. Slade, Nos. 1961769 and 1961770 1999 Ala. Lexis 231 (Ala.
1999) (court ordered new trial where jury had reached inconsistent verdict, finding bad faith but no
breach of contract); Waller v. Truck Ins. Exch., 900 P.2d 619, 44 Cal. Rptr. 2d 370 (1995) (no bad faith
tort where there is no coverage).
49
Vining v. Enterprise Financial Group, Inc., 148 F.3d 1206, 1214 (10th Cir. 1998) (applying Oklahoma
law) (evidence of insurer's "systematic, bad faith scheme of canceling policies without determining
whether it had good cause to do so" gave rise to bad faith claim, regardless of whether insurer had
legitimate coverage defense); Coventry Assocs. v. American States Ins. Co., 136 Wash.2d 269, 961
P.2d 933, 938 (Wash. 1998) ("An insurer's duty of good faith is separate from its duty to indemnify
if coverage exists").
7. Statutory Relief
Statutory damages or penalties may also be available, especially where a
pattern of conduct by the insurer can be shown. In some states, violation of Unfair
Trade Practices or Unfair Claims Handling statutes does not give rise to a private right
of action, but instead can result only in regulatory action against the insurer. Other states
have created private rights of action under which policyholders can sue for elevated,
statutory damages.50
Ordinarily, causes of action and remedies against insurance companies are
governed by state, rather than federal, law under the McCarran-Ferguson Act.51 The
Supreme Court, however, has recently held that the federal Racketeering Influenced
and Corrupt Organizations Act (RICO), which allows recovery of treble damages, can
be used by a policyholder against an insurer, where it can be applied "in harmony with"
state law. 52
8. Punitive Damages
Exemplary or punitive damages are awarded specifically with the intent to make
an example of, or punish, the party found liable. For this reason, if a jury greatly
disapproves of an insurer's conduct, exemplary or punitive damages can be
astronomical.53
KEY BAD FAITH SCENARIOS
How can insurers avoid the situations that lead to large bad faith awards?
Particular jurisdictions, especially California, generate large awards. For most insurers,
however, the desire to avoid large bad faith awards would not drive them to forgo a
huge market like California.
Most of the recent large bad faith awards have come in personal lines and
reflect the handling of a fairly routine claim that has somehow gone awry. The claim
presents a particularly poignant fact situation that is made worse by the claim handler's
actions. Juries do not like to see gravely ill people denied the treatment they request;
policyholders who lose their homes or livelihoods; or claims handlers who deny claims
50
See, e.g., McLelland v. United Wisconsin Life Ins. Co., 980 P.2d 865 (N.M. App. 1999) (appellate
court vacated punitive damages award for violation of New Mexico's Unfair Practices Act and
remanded for trial court to determine whether statutory treble damages should be awarded).
51
15 U.S.C. Section 1011 et seq.
52
Humana v. Forsyth, 525 U.S. 299, 119 S.Ct. 710, 714 (1999).
53
Teague-Strebeck Motors v. Chrysler Ins. Co., No. 18,684, 1999 N.M. App. LEXIS 80 (N.M.
App.1999), cert. denied, 981 P.2d 1209 (punitive damages require aggravated conduct with an "evil
nature or other culpable mental state," which is beyond what is necessary to establish bad faith).
based on suspicion, rather than factual information. Interestingly, it does not appear that
situations in which a liability policyholder assigns a claim to the underlying claimant are
responsible for many of the large awards. High awards are especially likely where an
insurer has corporate claims-handling policies that can be portrayed as putting "profits
before people."
Bad faith exposures also crop up on the sales end of the business. Overly rosy
estimates of how a life insurance policy can eventually pay for itself or inflated premium
calculations can result in large damages awards either to individual plaintiffs or to classes
of plaintiffs.
Avoidance of the big damages awards is a difficult enterprise involving
corporate culture from top to bottom. Even a company that carefully scrutinizes hiring,
training, and incentive programs for its claims and sales staff in order to minimize its bad
faith exposure will still face some claims, and may even be tagged with the occasional
large award if it did not pick up a bad faith exposure on its radar.54
Although policyholders sometimes assign their bad faith claims against their
insurers to the underlying claimants, this practice does not appear to result in significant
numbers of large bad faith awards. Often, it is the underlying claimant, not the
policyholder which presents the gripping fact situation involving obvious emotional
distress.
One reason assignment of claims does not appear to be a factor in most of the
recent large awards may be that an assignment to the claimant serves as a "wake-up
call" to the insurer. Such a heightened focus by the insurer may well result in settlements
or litigation strategies that head off the big verdicts.
Another reason is that some courts have begun to look with disfavor on
assignments of bad faith claims.55 Thus, courts themselves may be cramping the style of
claimants seeking bad faith damages against insurers. Also, in some jurisdictions, bad
faith claims are not assignable.
54
Some recent large verdicts include Humana Health Plan, Inc. v. Johnson, No. 1999-CA-000166
(Ky. App.) (pending) (jury below awarded $13 million against health plan whose utilization review
panel refused to fund hysterectomy, rather than less extensive procedure, for pre-cancerous
condition); Alfa Mut. Fire Ins. Co. v. Thomas, Nos. 197039, 1970390, 1999 Ala. LEXIS 105 (Ala.
1999) (jury had awarded $325,000 in punitive damages to barely literate, elderly widow who had
been misled into buying homeowner's policy covering fire only; Alabama Supreme Court ordered
remittitur or new trial, finding punitive award excessive); Goodrich v. Aetna U.S. Healthcare of
Calif., Inc., No. RCV 20499 (Cal. Super. Ct., San Bernardino Co.) (jury awarded $120.5 million in
punitive damages to widow of stomach cancer victim who brought wrongful death action against
insurer that had delayed and refused approval of treatments for the deceased); Campbell v. State
Farm Mut. Auto. Ins. Co., No. 90162 (Okla. Civ. App. Nov. 24, 1998) (appeals court reversed and
remanded for new trial jury award of $20 million in punitive damages for insurer's failure to pay
accident victim's medical bills, resulting in lien on her property); Lugo v. Allstate Ins. Co., No. 96
AS 03475 (Cal. Super. Ct., Sacramento Co.) (jury awarded $3 million in punitive damages and
$180,000 in emotional distress damages to couple suspected of arson, who alleged insurer's
conduct forced them to default on mortgage and lose their home).
55
See, e.g., State Farm Fire & Cas. Co. v. Grandy, 925 S.W.2d 696, 710 (Tex. 1995) (holding Mary
Carter agreements void as promoting "unethical collusion among nominal adversaries," against
public policy).
In California, where a claimant had no cause of action for bad faith against an
insurer under Moradi-Shalal v. Fireman's Fund Ins. Cos.,56 the legislature has passed
a bill giving automobile and general liability claimants that right, which they earlier had
under Royal Globe Ins. Co. v. Superior Court.57 The "Fair Insurance Responsibility
Act of 2000" allows a consumer to sue a third-party insurer for damages sustained on
or after January 1, 2000 for bad faith in the handling, processing, or settlement of claims
made by a party after obtaining a favorable court judgment or arbitration award.
Finally, courts and juries may simply be responding to the fact that it is the
policyholder, not the claimant, who was exposed to whatever insurer conduct gave rise
to the bad faith claim.
Large bad faith awards have resulted recently from inadequate claims handling
or supervision that allows an inference of malice, fraud, oppression on the insurer's part,
or simply an inference of the insurer's knowledge that it is being unfair. Especially large
awards may result where the policyholder is able to introduce evidence of a pattern and
practice on the insurer's part.
Specific practices that have resulted in recent large awards include:
• "Low balling"58
• Deficient, intrusive, or apparently biased investigation59
• Alteration, loss or destruction of evidence60
56
Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287 (1988).
57
Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880, 592 P.2d 329 (1979).
58
Recent verdicts include: Davis v. Mid-Century Ins. Co., No. CIV-96-2070T (W.D. Okla.) (jury
awarded homeowner $17 million in punitive damages, where insurer had applied 50 percent
depreciation factor not only to replacement cost of damaged roof, but also to labor and debris
removal costs, under corporate "Bring Back a Billion" campaign to reduce claim overpayments);
City of Hobbs v. Hartford Fire Ins. Co., Civ. 95-0079 PK/LFG (D. N. M.) (jury awarded $2.5 million in
punitive damages against insurer that failed to offer more than $50,000 to settle wrongful death
action arising from fatal shooting by police officer); Busch v. New York Central Mut. Fire Ins. Co.,
No. 11996-2952 (NY Super. Ct., Erie Co.) ($2 million in bad faith damages awarded to automobile
accident victim to whom policyholder had assigned claim arising from insurer's offer to settle for
less than victim's medical expenses); Olson v. State Farm Mut. Auto. Ins. Co., No. CV-96-06105
(Ariz. Super. Ct., Maricopa Co.) ($5 million in punitive damages and $1 million in compensatory
damages awarded against insurer on damaged automobile claim; evidence was presented to jury
regarding practice of using salvaged parts for automobile repairs and of Vice President's statement
in training manual that he wanted claims division to be profitable); Patrick v. UNUM Life Ins. Co. of
Am., No. 388506 (Cal. Super. Ct., San Mateo Co.) (court awarded $1.2 million in attorneys' fees, plus
back benefits and future benefits, where it found that disability insurer had a practice, already
condemned in an earlier judgment, of offering "low-ball" settlements to policyholders with
extended claim histories); Mack v. 20th Century Ins. Co., No. BC 164183 (Cal. Super. Ct., Los
Angeles Co.) ($3.3 million in damages, of which $2.6 million was punitive damages, awarded against
insurer that "low-balled" Northridge earthquake victims' damage claims).
59
Mirahmadi v. New York Life Ins. Co., No. CV 96-5527 TJH (C.D. Cal. 1998) (awarding summary
judgment to policyholder on bad faith claim arising from disability insurer's invasive investigation
that included following the insured to church, as well as termination of disability benefits despite
independent medical team's confirmation of mental disability).
• Failure to retract an erroneous coverage position61
• Failure to provide an adequate defense62
• Cancellation of policy or termination of benefits63
• Outrageous conduct64
60
Powers v. United Services Automobile Assn., 979 P.2d 1286 (1999) (Nevada Supreme Court
denied review of $5.4 million bad faith, breach of fiduciary duty, and punitive damages award
against insurer that was found to have manufactured evidence to support denial of boat owner's
claim and to have submitted false evidence to the FBI, leading to policyholder's indictment and
eventual acquittal).
61
Pomerantz v. Pero, No. BC 138799 (Cal. Super. Ct., Los Angeles Co.) (jury awarded earthquake
claimants $12 million in punitive damages, where policyholder alleged a pattern and practice of
seeking advice of counsel after denying claims in order to avoid punitive damages awards); Findley
v. Farmers Ins. Exch., No. 614236-8 (Cal. Super. Ct., Fresno Co.) (jury awarded $1.75 million in
punitive damages against insurer that went against case law and its own internal directive
regarding interpretation of replacement costs); Partnership Placements, Inc. v. Landmark Ins. Co.,
No. BC 144143 (Cal. App., 2d Dist.) (pending) (jury below awarded $12.4 million upon finding that
the insurer, which refused to defend the policyholder, had concealed that it had been found to
have a duty to defend a related case).
62
See, e.g., Industrial Indemnity Co. v. Apple Computer, Inc., 71 Cal. App. 4th 452 (Cal. App., 1st
Dist. 1999), as modified, 199 Cal. App. LEXIS 483, review granted, 981 P.2d 41 (Cal. 1999) ($17
million verdict that had been based on insurer's refusal to defend breach of trademark suit reversed
by intermediate appellate court, on grounds of no coverage); Hillery v. Connecticut Indemnity Co.,
No. 98-01505 (Fla. Cir. Ct., Hillsborough Co.) (insurer settled bad faith action for $4.5 million after
court held that insurer was required to tell policyholder of settlement offer, to allow policyholder to
avoid excess judgment by paying uncovered portion of settlement out of his own funds); Vann v.
Travelers Indemnity Co., 39 Cal. App. 4th 1610 (Cal. App. 1995) (upholding $26.1 million bad faith
verdict for erroneous denial of environmental coverage claim); Pershing Park Villas v. United Pacific
Ins. Co., NO. 95-1918-S (S.D. Cal. March 2, 1998) ($27 million verdict against insurer found to have
refused to provide Cumis counsel for the insured, then instructed its panel counsel to withdraw
less than 60 days before trial, resulting in default judgment, bankruptcy and "financial ruin" for
policyholders); Campbell v. State Farm Mut. Auto. Ins. Co., 193 Utah 840 P.2d 130 (Utah App. 1992)
(judge reduced jury's award of $147.6 million to $26 million; insurer was found to have acted in bad
faith for rejection of settlement offers regarding motor vehicle claim).
63
See, e.g.,Diamond v. General American Life Ins. Co., No. CV 96-02277 (Ariz. Super. Ct., Maricopa
Co.) (jury awarded $58 million in punitive damages to disabled dentist placed on "hit list" of
claimants targeted for reduction of claims and subjected to early termination of benefits; verdict
later reduced to $3 million); Case Corp. v. Aetna Cas. and Sur. Co., No. 93-C-1181 (E.D. Wis. March
29, 1999) (judge vacated jury's $11 million in bad faith and punitive damages but upheld $4.18
million breach of contract award on claim that insurer had cut off payment on excess loss coverage
for extended warranties on tractors sold by policyholder, based on policyholder's reporting errors);
Patrick v. UNUM Life Ins. Co. of Am., NO. 388506 (Cal. Super. Ct., San Mateo Co.) ($1.2 million in
attorneys' fees plus back benefits and future benefits awarded against disability insurer that had
terminated hearing-impaired policyholder's benefits without investigating whether any other jobs
were available to claimant, given physician's requirement of low workplace decibel levels); Trent v.
Prudential Ins. Co. of Am., No. TC003556 (Cal. Super. Ct., Los Angeles Co.) (jury awarded $6 million
verdict, finding that life insurer had refused to produce the policyholder's copy of the policy, then
canceled coverage based on insured's withholding of premiums until copy of policy was produced,
and then misrepresented that policyholder's blood tests precluded reinstatement).
64
See, e.g., Crum & Forster, Inc. v. Monsanto Co., 887 S.W. 2d 103 (Tex. App., 6th Dist. 1994),
vacated, 1995 Tex. App. LEXIS 3673 (1995) (affirming $71 million award against insurer found to
have taken over plaintiffs' case against its own policyholder, under a Mary Carter agreement, and
pursued financial recovery against policyholder); Travelers Ins. Co. v. Smith, 338 Ark. 81, 991
• Inadequate claim personnel or procedures65
Class actions also have the potential for large bad faith awards, for example, for
deceptive sales practices claims, "redlining," and other practices that may have a
relatively small impact on each policyholder but that affect large numbers of
policyholders. Whether a class is certified in the first instance, or whether class
certification is upheld on appeal, is an extremely important factor in the insurer's
exposure to a large damages award.66
A relatively new type of bad faith claim, alleging that an insurer wrongfully
charged excessive premiums for the coverage in question, has resulted in some recent
large awards.67
S.W.2d 591 (Ark. 1999) (upholding jury's award of $235,000 where insurer refused to pay deceased's
funeral expenses until autopsy was conducted but made no arrangements to conduct autopsy);
Eckis v. State Farm Mut. Auto. Ins. Co., No. 96CV279 (Colo. Dist., El Paso Co.) (jury awarded
$485,734 against insurer whose adjusters pressured physicians to stop treating policyholder
injured in car accident by threatening to refuse payment for further care).
65
Fisher v. Aetna Life Ins. Co., No. 3AN97-291) (Alaska Super. Ct., 3d Jud. Dist.) ($8.69 million
awarded against long-term disability insurer that denied claim without interviewing insured,
gathering medical records or reviewing records); United Technologies Corp. v. American Home
Assur. Co., NO. 292cv00267 (JBA) (D. Conn.) (jury awarded policyholder $21 million in bad faith
damages, finding that insurer had failed to adopt reasonable standards for prompt investigation of
environmental claims and had disclaimed coverage without conducting a reasonable investigation);
Allsup's Convenience Stores v. North River Ins. Co., 127 N.M. 1, 976 P.2d 1 (N.M. 1999) (upholding
$4 million punitive damages award against insurer that had failed to terminate or supervise
inadequate out-sourced claims handling function); Robinson v. State Farm Mut. Auto. Ins. Co., No.
CVOC 94-98099D (Ida. 4th Dist., Ada Co.) (jury awarded $9.5 million in punitive damages against
insurer found to have used false reports generated by a "paper review" company to deny full
coverage for back injury claim); Ace v. Aetna Life Ins. Co., 139 F.3d 1241 (9th Cir. 1998) (applying
Alaska law), cert. denied, 142 L. Ed. 2d 279, 119 S. Ct. 1998) (Jury awarded $16.5 million in punitive
damages, based on claim that insurer denied long-term disability claim without examining medical
records; trial court vacated punitive damages award and granted new trial; appeals court reversed
and remanded for determination of appropriate amount of punitive damages).
66
See, e.g., Banks v. New York Life Ins. Co., No. 98-C-0551, 1999 La. LEXIS 1928 (La. July 2, 1999)
(decertifying class of policyholders who alleged the insurer misled them about universal life
policies, on grounds that common issues did not predominate); Ex parte Government Employees
Ins. Co., 729 So.2d 299 (Ala. 1999) (decertifying class action against automobile insurer on grounds
that class representatives' claims regarding application of setoffs against uninsured motorist
coverage lacked typicality); White v. Allstate Ins. Co. (Ct. Super. Ct. New London Dist.) (class
action filed, alleging insurer's "Do I Need An Attorney?" brochure and claims personnel's efforts to
discourage accident victims from hiring attorneys are designed to mislead victims into low-value
settlements); Snyder v. Nationwide Mut. Ins. Co., No. 97-0633 (N.Y. Sup. Ct., Onondaga Co.),
reprinted in Mealey's Litigation Report: Bad faith, Vol. 12, #11 (October 6, 1998) at 8-9 (insurer
settled class action alleging deceptive tactics in sale of life insurance policies, agreeing to potential
payout that court reach approximately $100 million); Home v. Nationwide Ins. Co., LB 2704 (Va. Cir.
Ct., Richmond Co.) (jury awarded $100 million in punitive damages to an equal housing group on
claim that insurer had "redlined" minority neighborhoods); Frank v. Allstate Ins. Co., No. BC187659
(Cal. Super. Ct., Los Angeles Co.), reprinted in Mealey's Litigation Report: Bad faith, Vol. 12, #13
(Nov. 3, 1998) at 11 (insurer settled bad faith class action alleging practice of altering engineers'
reports of earthquake damage, setting aside $60 million to pay claims).
67
See, e.g., Lance Camper Mfg. v. Republic Indemnity Co. of Am., No. BC 063097 (Cal. Super. Ct.,
A POST-VERDICT FOCUS
Raising and preserving legal and evidentiary grounds for challenging a bad faith
award in pre-trial motions, the pre-trial order, and at trial is critical. The post-verdict
phase is a defendant's last opportunity to avoid bad faith liability in the trial court and,
likewise, is the defendant's last opportunity to shape the record for appeal. While it may
not always be possible to raise issues that have not been raised earlier, or to present
evidence not presented at trial, courts have an obligation to ensure that a punitive award
does not violate constitutional standards and, therefore, will often allow a defendant
latitude in challenging such an award, including latitude in presenting evidence and in
presenting arguments not previously raised. The following are the motions and
arguments that can be presented to challenge such an award, and the types of evidence
that may be introduced in connection with such a post-verdict challenge in the trial
court.
Post-Verdict Motions
The following is a checklist of the potential legal bases for challenging a bad faith
or punitive award, and the motions by which such arguments should be presented in the
trial court.
o Motions For A New Trial And/Or Remittitur
• Erroneous Instructions on the Standard for Awarding Bad Faith or
Punitive Damages. In many cases, it may be possible to argue that the
court's instructions set forth an erroneous standard for awarding
damages for bad faith or for an award of punitive damages. As previous
presentations have shown, the proper standard for an award of bad
faith damages is uncertain in many states. Moreover, often juries are not
properly instructed on the factors that must be considered in awarding
punitive damages. Where the standard is unclear, or the trial court has
failed properly to lay out the constitutional factors that limit the jury's
ability to award punitive damages, the jury instructions may be
vulnerable to attack by way of a motion for a new trial.68
Los Angeles Co.) ($6.32 million verdict against workers' compensation carrier for over-reserving,
claim mishandling and destruction of files); Liberty Mut. Ins. Co. v. Petersen, No. 774379 (Cal.
Super. Ct., Orange Co.) (jury awarded $2.6 million in punitive damages against workers'
compensation carrier for over-inflated payroll audit, failure to pay dividend, and commencing
collection action against policyholders).
68
See, e.g., Farmers Ins. Exchange v. Shirley, 958 P.2d 1040 (Wyo. 1998) (reversing bad faith
punitive awards for failure properly to instruct jury on requirement of knowledge or reckless
disregard, and for failure to instruct the jury on "objective standards for the imposition of punitive
• Passion or Prejudice on the Part of the Jury. Passion or prejudice
on
the part of the jury may be grounds for a new trial on the entire verdict
under state or federal law. Trial courts have discretion to grant a new
trial unconditionally or to condition a grant of a new trial on the verdict
winner's refusal to agree to a reduction in the award (remittitur).69
Federal courts, however, have repeatedly held that "a verdict based on
jury prejudice cannot be sustained even when punitive damages are
warranted,"70 and that "a new trial, and not remittitur, is required when
an award is the result of passion and prejudice, because the prejudice
may have infected the verdict itself."71 New trial motions on the basis of
passion or prejudice are often successful in cases where the damages
award is excessive and there is evidence of improper appeals to
prejudice by plaintiff's counsel.
• Excessiveness of Punitive Damages under State Law and/or
Federal
Constitutional Standards. The excessiveness of a bad faith award is
properly addressed in a motion for a new trial. As indicated previously,
state and federal trial courts have discretion to order a new trial or
remittitur where a damages award is excessive. In cases involving
federal constitutional challenges to large punitive awards, federal trial
and appellate courts commonly order remittitur to reduce such awards
to constitutionally acceptable amounts.72 It is important to preserve any
constitutional challenge through a motion for a new trial or judgment
notwithstanding the verdict (JNOV), or the arguments may be waived
for purposes of appeal.
• Inconsistent Verdicts. A motion for a new trial is appropriate where
the jury verdicts are inconsistent, for example, where the jury
determines that there was no duty to defend but rewards bad faith
damages" consistent with constitutional standards).
69
See, e.g., Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 433 (1996).
70
Curtis Publishing Co. v. Butts, 388 US 130, 160 (1967).
71
Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442, 1448 (7th Cir. 1992).
72
See, e.g., Ace v. Aetna Life Ins. Co., 139 F.3d 1241 (9th Cir. 1998) (determining that $16.5 million
punitive award was unconstitutionally excessive where compensatory damages were $127,000,
remanding for determination of appropriate punitive damages by the trial court); Notricia v. State
Compensation Ins. Fund, 83 Cal. Rptr.2d 89 (Cal. App. 2d Dist. 1999) (reducing punitive award from
$20 million to $5 million in case involving alleged unfair claims handling practices); Albert H.
Wohlers and Co. v. Bartgis, 969 P.2d 949 (Nev. 1998) (determining that punitive damages of $7.5
million were excessive in case involving unfair claims practices allegations against medical insurer
where compensatory damages amounted to $275,000, reducing punitive damages to $3.75 million);
Guaranty Nat. Ins. Co. v. Potter, 912 P.2d 267 (Nev. 1996) (reducing punitive award from $1 million
to $250,000 in case involved alleged bad-faith delay in paying for independent medical
examinations).
damages, a motion for a new trial is appropriate.73 In a situation where
a breach of contract is necessary for an award of bad faith damages,
the jury's finding of no breach of contract may also serve as a basis for
judgment as a matter of law (JMOL).
• Evidentiary Issues/Improper Testimony. Bad faith cases may present
a range of evidentiary questions that may render the jury verdict
vulnerable to attach by way of a motion for a new trial. The frequent use
of so-called "bad faith" experts is one such area. The use of such
experts may be challenged under state and federal evidentiary standards
that limit the use of such purported expert testimony.74
o Judgment as a Matter of Law
• Evidence Fails to Support a Finding of Bad Faith and/or Punitive
Damages Under State Law. Insufficiency of the evidence can be
raised in a motion for JMOL will preclude a new trial if sustained on
appeal. It will often be advisable to argue both for a new trial and for
JMOL. In many cases it will be possible to argue that the insurer's
decision to deny coverage was reasonable as a matter of law, for
example, where the law was unclear as to the coverage issues, and thus
cannot give rise to bad faith liability.75 A trial court has wider latitude to
grant a new trial; such a ruling is reviewed for abuse of discretion, but a
JMOL ruling is reviewed de novo on appeal. 76
• No Cause of Action for Bad Faith or Punitive Damages Under
State Law. In many states, as has been pointed out previously, there is
continuing uncertainty about whether a cause of action exists for first-
party bad faith under state common law or statutory standards. Even in
states that have recognized a common law cause of action for first-party
bad faith, serious questions remain regarding whether the damages
sound in contract or tort, and whether punitive damages are available.
Thus, it will often be possible to argue either that there is no cause of
action at all or that, while a cause of action may exist for consequential
73
See, e.g., State Farm Fire & Cas. Co. v. Slade, 1999 Ala. Lexis 231 (Ala. 1999) (ordering new trial
where jury reached inconsistent verdict, finding bad faith but no breach of contract); Hoy v. United
Services Automobile Ass'n, No. 77803 (Calif. Super Ct. Jan. 5, 1999) (granting JNOV where jury
found that insurer properly canceled policy, but nonetheless awarded compensatory and bad faith
damages).
74
See, e.g., Jensen-Kelly Corp. v. Allianz Ins. Co., No. BC-069-018 (Calif. Super. Ct. 1999)
(precluding proposed expert testimony on the meaning of contractual language as invading the
province of the court on matters of contract interpretation). Reliance on experts and alleged
evidence of improper claims practices has also been rejected where the insurer's denial of coverage
was "fairly debatable" as a matter of law./x See, e.g., Zilisch v. State Farm Automobile Ins. Co., 977
P.2d 134 (Az. 1999).
75
See, e.g., H&H Brokerage v. Vanliner Ins. Co., 168 F.3d 1124 (8th Cir. 1999) (reversing bad faith
judgment where the insured denied claim based on reasonable interpretation of ambiguous policy
language); Zilisch, supra.
76
See, e.g., Gasperini, 518 US at 433.
damages, exemplary damages are unavailable. Where state law is
unsettled, a favorable standard should be forcefully argued by way of a
motion for JMOL.
• Evidence Fails to Support Punitive Damages Under Federal
Constitutional Standards. While the excessiveness of punitive
damages is usually the subject of a motion for a new trial and/or
remittitur, in some cases it may be possible to argue that punitive
damages cannot be awarded consistent with the Constitution. Where
the insurer's conduct is not egregious, where no similar damages have
been previously awarded for similar conduct, where the underlying
contractual damages are not great, and where the jury considered
improper factors, it may be possible to have the punitive award set
aside outright.
• Other Legal Issues. It is impossible to predict the entire range of legal
issues that may present valid arguments for a directed verdict. Such
issues include the availability of attorney fees for the policyholder's
prosecution or defense of a declaratory judgment action on coverage,
where the insurer refuses to defend; whether a wrongful refusal to
defend automatically entitles the policyholder to coverage; whether the
policyholder can recover alleged "excessive" premiums under a fraud or
bad faith theory; the availability and extent of prejudgment interest; and
procedural issues, including whether punitive damages and
compensatory damages phases of a trial must be bifurcated to avoid
prejudice to the insurer.
In addition, policyholders may assert novel causes of action against insurers
under a range of statutory theories, such as theories under RICO. Numerous legal
issues may be presented by such theories, under RICO, for example, whether the
theory states that the insurer "conducts" a valid RICO "enterprise," alleges a "pattern of
racketeering activity," and whether the policyholder adequately alleges a RICO
"predicate act" of mail fraud, wire fraud, or the like.
Plaintiff's attorneys are increasingly class actions, including class actions
asserting RICO theories, in the auto and health care insurance areas. Such attempted
class actions may raise numerous valid bases for attacking class certification, in addition
to strong arguments against the applicability of the underlying causes of action.
In any post-verdict analysis, the full range of issues under the relevant state and
federal law must be examined in determining which issues are most susceptible to
successful challenge in the trial court and, ultimately, on appeal.
Post-Verdict Considerations
Two major post-verdict considerations are whether to employ new or
additional counsel and preserving and supplementing the record for purposes of appeal.
In the event a large bad faith verdict hits a defendant, employing additional
counsel to evaluate post-verdict arguments and strategies is often advisable. Additional
counsel may bring a fresh perspective to the case, and the appearance of new counsel
will emphasize to the court that the defendant is taking the award very seriously and that
it merits the court's careful consideration. Because the post-verdict phase is so
important to preserving the record for appeal, if an appeal is considered it is advisable
to bring appellate counsel into the case at the trial court post-verdict phase. The role of
new counsel can range from handling all phases of post-verdict motions to advising trial
counsel of post-verdict strategies and procedures. New counsel with expertise in bad
faith litigation will also bring an important perspective to any negotiations regarding
settlement of the bad faith award.
Where state law is unsettled, or the award raises important constitutional
questions, it may be possible to involve amici to assist in challenging the bad faith
award. Amicus participation is often important to grab the appellate court's attention,
and to focus the court on the fact that the appeal raises important questions that need to
be examined carefully. Experienced appellate counsel will be able to identify potential
amici and to coordinate an effective amicus strategy.
It also may be possible to introduce relevant evidence at the post-verdict phase
to challenge the punitive award. Such evidence may be introduced in connection with a
due process challenge to the award and may include evidence that the conduct is not
egregious compared to conduct in similar cases with lesser or no punitive awards,
including cases in the same state involving similar allegations against the defendant;
relevant statutory penalties for similar harm in the state; and any changes in corporate
policy, or other factors, not presented to the jury before the verdict that should be
considered in determining whether the award is necessary for deterrence.77
Attacking A Bad Faith Award on Appeal
There are a number of legal strategies to consider when attacking a bad faith
award in an appellate court.
If the decision is made to pursue an appeal, state law will often present strong
arguments that the award is invalid. Experience with state standards relating to bad faith
and punitive damages is critical. Where state bad faith law is unsettled, as is the case in
many jurisdictions, strong arguments may be made that punitive damages for bad faith
are not available under state law, or that the trial court applied an inappropriate
standard in sustaining the bad faith award. Appellate counsel can assist in identifying the
purely legal issues that are most likely to succeed on appeal, and realistically evaluating
the fact-based rulings that are less likely to be reversed on appeal.
In addition to satisfying state common law and statutory standards, state and
federal constitutional standards must be satisfied, if punitive damages are awarded.
77
See, e.g., BMW of N. Am. v. Gore, 517 U.S. 559 (1996) (considering such evidence, which had
been presented in post-trial motions).
Because the constitutional arguments are reviewed as a matter of law on appeal, there is
no deference to the lower court's refusal to set aside the awards, as there would be if
the trial court refused to set aside an award on the grounds of passion or prejudice.
Substantive Grounds
1. Attacking Punitive Damages Under State Law
There is still significant room to shape bad faith law in many states. Accordingly,
bad faith awards will often raise unresolved legal questions that present pure questions
of law for appeal, and provide an opportunity not only to obtain a favorable result in an
individual case but to shape bad faith law generally.
In certain states, the availability of exemplary damages for bad faith is still
unsettled. For example, in New Jersey, while some lower courts have allowed punitive
damages for third-party bad faith refusals to defend,78 there is no New Jersey Supreme
Court precedent allowing exemplary damages in such cases. Arguably, exemplary
damages are only available in such a case if an insurer's conduct amounts to an
established independent tort, such as intentional infliction of emotional distress.79
Otherwise, a bad faith claim only authorizes the policyholder to recover amounts it paid
to resolve a claim in excess of policy limits. The application of that standard to the third-
party duty-to-defend context presents numerous unresolved issues.
In other states, the threshold for an award of bad faith damages, whether the
conduct must be willful, or merely unreasonable and without proper cause, is still an
unresolved issue. Even in the minority of states that have adopted a broad
reasonableness standard, there may be room for effective argument in the state high
courts to adopt a more favorable standard.80 Further, the law of many states is still
unresolved as to whether a wrongful refusal to defend results in automatic indemnity,
irrespective of the contractual language.81
Numerous other issues may be raised under state bad faith law, including the
scope of an insurer's duty to settle and whether bad faith liability can be imposed for
activities that occur during litigation. In such states, where the standards are unclear and
still developing, investing resources in a well-coordinated appellate effort to shape future
law may be advisable.
78
See, e.g., Princeton Gamma-Tech, Inc. v. Hartford Ins. Group, No. SOM-L-1289-91 (N.J. Super. Ct.,
Law Div., Somerset Cty. June 5, 1998).
79
See, e.g., Pickett v. Lloyd's, 621 A.2d 445 (N.J. 1993) (first-party standard).
80
See, e.g., Stephen S. Ashley, Amato v. Mercury Casualty Co.: Liability for Damages for Bad Faith
Breach of the Duty to Defend, Bad Faith Law Report, p. 4 (Feb. 1997) (noting California's existing
broad definition of bad faith, and predicting that "the California Supreme Court will one day bring
California into line with the majority of jurisdictions by holding that proof of bad faith requires
establishing that the insurer denied a claim knowing that it had no reasonable basis for doing so").
81
See, e.g., Virginia Elec. and Power Co. v. Northbrook Property & Cas. Ins. Co., 475 S.E.2d 264 (Va.
1996) (stating that an insurer refuses to defend "at its own risk" of breaching the duty to defend,
without outlining consequences of a breach of the duty to defend).
The standard for awarding punitive damages in bad faith actions, and other
areas of the law, is also unsettled in many jurisdictions. Again, using New Jersey as an
example, a 1995 statute codified punitive damages standards, and case law interpreting
the statute is relatively undeveloped. Under these standards, it will often be possible to
argue, as a matter of law, that the conduct proved in the trial court does not warrant a
punitive award. States are also continuing to revisit state constitutional and procedural
law relating to the review of punitive awards in the aftermath of BMW.82
2. Attacking Punitive Damages Under Federal Law
In BMW of N. Am. v. Gore,83 the US Supreme Court explained that, to
comport with due process, an award of punitive damages must reflect "the degree of
reprehensibility of the defendant's conduct"; "some wrongs are more blameworthy than
others." The degree of reprehensibility is "the most important indicium of the
reasonableness of [the] punitive award." Based on these federal constitutional
standards, not every finding of wrongdoing will merit a punitive award. Where the state
has not demonstrated a consistent, legitimate interest in punishing a certain kind of
conduct, it will often be possible to argue that exacting punishment for lesser or similar
wrongdoing is arbitrary and unjustifiable. This is also an argument for reducing the size
of a punitive award.
BMW established several rules for determining the excessiveness of a punitive
award. Among them are the following:
• The award cannot be based on wrongful conduct in other states; and
• The award cannot be "grossly excessive," in light of the reprehensibility of the
conduct, the ratio between punitive damages and compensatory damages, and
state statutory penalties for similar conduct
According to these standards, it will often be possible to argue that, based on
similar awards for similar conduct, the punitive award cannot be justified. Defendants
facing large punitive awards have been extremely successful in substantially reducing the
awards on due process grounds, in the state and federal appellate courts.84
82
See, e.g., Baker v. National State Bank,--- A.2d----, 1999 WL 605720 (N.J. Aug. 10, 1999) (noting
standards of 1995 Punitive Damages Act, which were not applicable to the case, which was filed
before the Act's effective date, and reversing $4 million punitive award for failure to comply with
federal constitutional standards).
83
BMW of N. Am. v. Gore, 517 U.S. 559 (1996).
84
See, e.g., Ace v. Aetna Life Ins. Co., 139 F.3d 1241 (9th Cir. 1998) (determining that $16.5 million
punitive award was unconstitutionally excessive where compensatory damages were $127,000,
remanding for determination of appropriate punitive damages by the trial court); Albert H. Wohlers
and Co. v. Bartgis, 969 P.2d 949 (Nev. 1998) (determining that punitive damages of $7.5 million were
excessive in case involving unfair claims practices allegations against medical insurer where
compensatory damages amounted to $275,000, reducing punitive damages to $3.75 million);
Notricia v. State Compensation Ins. Fund, 83 Cal. Rptr.2d 89 (Cal. App. 2d Dist. 1999) (reducing $20
Accordingly, appealing a large punitive exaction will often be justified.
3. Attacking “Experts” Under State and Federal Law
State and federal evidentiary standards may present strong arguments for
excluding expert testimony. Efforts to exclude such testimony should follow the steps
outlined in previous presentations. Although under the federal rules the Supreme Court
has held that trial court rulings relating to the admissibility of expert testimony are
reviewed on appeal for abuse of discretion, 85 in reality the standard of review in the
appellate courts has been far more strict. Numerous appellate decisions have set aside
verdicts based on the improper admission of expert testimony. 86
Moreover, under state-law standards, insurers recently have success in
excluding purported bad faith expert testimony where the policyholder had proposed a
bad faith expert to testify primarily about the meaning of supposedly ambiguous terms in
an insurance contract.87 The court rejected the testimony regarding drafting history and
the meaning of insurance policy language as impermissibly intruding upon the province of
the court as the exclusive arbiter of insurance policy language. Although the case did not
involve a post-verdict challenge, it illustrates the potential success of purely legal
arguments, which can be presented just as well at the appellate level, against the use of
experts in the bad faith context.88
CONCLUSION
million punitive award to $5 million, in case involving workers compensation claims handling
practices and compensatory damages of $478,606); but see Vann v. Travelers Cos. (Cal. App. 1st
Dist. 1998) (affirming a trial court's award of $1,460,000 in compensatory damages and $25 million
dollars in punitive damages to a policyholder in an action brought against an insurer for bad faith.
The Court of Appeal - by 2-1 majority - rejected several assignments of error based on instructions
given and not given to the jury, upheld the compensatory damage award as supported by
substantial evidence, and held that, in view of the relative status of the parties and evidence
suggesting that the insurer refused to abide by the law and its own claims handling policies, the
punitive damage award was not so excessive as to violate either California law or constitutional due
process); Richard Fisher v. Aetna Life Ins. Co., No. 3AN97-291 (Alaska Super. Ct., 3rd Jud. Dist.,
Aug. 21, 1998) (rejecting post-trial motions to set aside $8.69 million bad faith award, including
constitutional challenges and passion and prejudice arguments).
85
See General Electric Co. v. Joiner, 111 S. Ct. 512, 515 (1997).
86
See, e.g., Weisgram v. Marley Co., 169 F.3d 514 (8th Cir. 1999), cert. granted, 1999 WL 552788
(U.S. Sept. 28, 1999); Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183 (7th Cir. 1993).
87
See Jensen-Kelly Corp. v. Allianz Ins. Co., No. BC-069-018 (Calif. Super. Ct. 1999).
88
See, e.g., Minasian v. Standard Chartered Bank, PLC, 109 F.3d 1212 (7th Cir. 1997) (affirming
exclusion of proposed expert witness, under federal rules, who was offered to testify about the
commercial reasonableness of defendant's banking practices, where expert's affidavit offered "legal
analysis in the guise of banking expertise" and was "devoid of analysis," concluding that the
defendant was entitled to enforce its contracts "according to the terms they contain, rather than
according to terms an expert (or judge) thinks they ought to have contained").
A large punitive award sometimes comes out of the blue, requiring careful
consideration of post-verdict strategies and appellate issues. While it is best to be
prepared and to anticipate bad faith liability, a carefully executed post-verdict strategy in
the trial court will often enable a defendant to overturn such an award or to scale it back
considerably. Moreover, constitutional punitive damages standards are being enforced
by both state and federal appellate courts. Counsel with experience in this area of the
law can make an invaluable contribution, in both evaluating settlement options and
preparing an effective challenge of a bad-faith verdict.