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AreYouInGoodHands?1:Balancing
ProtectionForInsurersandInsuredin
FirstPartyBadFaithClaimswitha
UniformStandard
CASSANDRAFEENEY*
ABSTRACT
Badfaithinsurancelitigationisontheriseduetoeconomicpressure
and the rising costs of services. Insurance companies are more likely to
deny legitimate claims, and policyholders are more inclined to bring
fraudulent claims. Because states regulate badfaith claims, inconsistent
jurisprudence for bathfaith litigation has developed. Specifically, states
varyonthedutyowedbyinsurancecompanies,thestandardofbadfaith,
and discovery procedures. Since these three aspects of litigation are
intertwined, altering one standard could dramatically impact the
procedureandpracticalityinbringingabadfaithclaimonastatebystate
basis.
A uniform procedural process can be developed that would better
servetheinterestsofinsurancecompanies,policyholders,andthejudicial
system.Statesshouldadoptatotalityofthecircumstancesstandard,along
withtheinsurerdutyofgoodfaithandfairdealing,todeterminewhether
badfaithhasoccurred.Further,whenaninsurancecompanyhasengaged
inbadfaithconduct,theclaimsfileshouldbediscoverablesimultaneously
with the contract claim. After more than forty years of state
experimentation,itistimeforstatestoadopttheproposedbrightlinerules
tocreateauniformprocedureinthisareaofinsurancelaw.
1ALLSTATEINS.COMPANY,http://www.allstate.com/(lastvisitedApr.23,2011).
* Candidate for Juris Doctor, New England School of Law (2011). B.A., Political Science,
magnacumlaude,UniversityofRhodeIsland(2007).IwouldliketothankSeanFeeneyand
Eva Mancuso for being incredible mentors; my Note editors, Matthew Hranitz and Jarret
Berg, for providing inspiration, guidance, and valuable suggestions throughout the writing
process;andmyfamilyandmyfriendsfortheircontinuedsupportandencouragement.
685
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INTRODUCTION
Y
ou consider yourself a prudent individual.2 All your life, you have
anticipated and planned for contingencies.3 Accordingly, you hold
automobile, home, and health insurance policies.4 You seek out a
dependableinsurancecompany,diligentlypayyourpremiums,andnever
fail to schedule an annual checkup.5 You think you have everything
covered.6Butareyoureallyprotected?7Weallrelyonaffordableinsurance
to live healthy.8 In 2009, Americans spent almost $809 billion on private
health insurance alone, which amounts to over seventeen percent of
Americans total spending.9 Every year, insurance premiums increase at
rates higher than inflation and wage raises, with the average increase of
fifteen percent in 2009 and ninetyseven percent from 2000 to 2008.10 In
early 2010, rates increased by doubledigit percentages in over twenty
statesAnthemBlueCrossandBlueShieldincreasedratesbyuptothirty
2SeegenerallyAndersonCooper360Degrees:InsuranceBattle(CNNtelevisionbroadcastOct.
againstthepossibilityofanautomobileaccident).
4See EUGENE R. ANDERSON ET AL., INSURANCE COVERAGE LITIGATION 11.01 n.6 (2d ed.
Supp. 2010) (listing some examples of firstparty insurance coverage, including health,
accident,life,disability,homeowners,fire,title,andpropertydamageinsurance).ThisNote
will discuss firstparty badfaith claims in general, which include health, home, and
automobile insurance disputes. See also infra notes 4247 (distinguishing firstparty claims
fromthirdpartyclaims).
5SeegenerallyInsuranceBattle,supranote2.
6See id. (suggesting that there is a reasonable expectation that purchasing insurance
automaticallyguaranteescoverageintheeventofanaccident).
7See
id. (detailing how insurance companies willingness to delay, deny, and dispute
insuredsclaimscallsintoquestionwhetherinsuredsarereallyprotected).
8SeeJamesR.Jebo,OvercomingAttorneyClientPrivilegeandWorkProductProtectioninBad
FaithCases,70DEF.COUNS.J.261,261(2003).
9ChristopherJ.Trufferetal.,HealthSpendingProjectionsThrough2019:TheRecessionsImpact
11News Release, U.S. Dept of Health & Human Servs., Sebelius Unveils New Report on
Requested Premium Increases in States Across the Country (Feb. 18, 2010), available at
http://www.hhs.gov/news/press/2010pres/02/20100218b.html.
12See, e.g., Egan v. Mut. of Omaha Ins. Co., 620 P.2d 141, 145 (Cal. 1979) (describing the
purposeofinsurancetoprovidepeaceofmindandsecurity).
13SeeDavidDietz&DarrellPreston,TheInsuranceHoax,BLOOMBERG MARKETS,Sept.2007,
at34,35.
14Seeid.
15Seeid.at36.
16Firstparty
claims are claims brought by a policyholder against their own insurance
company,seekingdirectcompensation.Seeinfranotes4247andaccompanyingtext(defining
afirstpartyclaimanddistinguishingitfromathirdpartyclaim).
17SeegenerallySTEPHEN S. ASHLEY, BAD FAITH ACTIONS 2:15(2ded.1997)(explainingthe
definitions of bad faith that each state has adopted); see also ROBERT H. JERRY, II,
UNDERSTANDING INSURANCE LAW 151 (2d ed. 1996) (Indeed, good faith and bad faith
remainelusiveconceptswithnouniversallyaccepteddefinition.Despitetheseuncertainties,
the useofgoodfaithandbadfaithasstandardstotesttheproprietyofinsurersconduct
gives courts and juries considerable flexibility in adjusting the relative interests of insurers
andinsureds.).
18MODEL UNFAIR CLAIMS SETTLEMENT PRACTICES ACT 4 (Natl Assn of Ins. Commrs
2008); see Victor E. Schwartz & Christopher E. Appel, CommonSense Construction of Unfair
Claims Settlement Statutes: Restoring the Good Faith in Bad Faith, 58 AM. U. L. REV. 1477, 1488
n.50 (2009) (listing the states that adopted NAICs model legislation). See generally David E.
Bordon, Unfair Claims Practices and Bad Faith: A Guide for Insurers, FIDELITY L. ASSN J., Nov.
1995, at 99, available at http://www.fidelitylaw.org/Publications/Journals/PDF/1995/__1995
bordon.pdf (discussing differences among the states unfair claims settlement practices
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statutesorregulations).
19SeeInsuranceCompanyGreed:AnIndustryPuttingProfitsOverPolicyholders,AM. ASSNFOR
Dingell who led the investigation of insurance insolvency cases, uncovered common
underlying badfaith conduct among insolvent companies, including mismanagement and
fraudulentactivity,falsereports,recklessmanagement,...fraud,greedandselfdealings.
Regulation Modernization, INS. INFO. INST. (Oct. 2010), http://www.iii.org/issue_updates/
RegulationModernization.html; see Reference Library, FIGHT BADFAITH INS. COS.,
http://www.badfaithinsurance.org/publications.html (last visited Apr. 23, 2011) (illustrating
that the increase of bad faith among insurance companies correlates with the recessionary
downturn).
21SeegenerallyRichardE.Stewart&BarbaraD.Stewart,TheLossoftheCertaintyEffect,RISK
MGMT. & INS. REV., Sept. 2001, at 29, 3034, available at http://www.badfaithinsurance.org/
media/RmirLossCertainty.pdf (discussing different economic changes and the influences on
theinsuranceindustry).
22Americans for Insurance Reform Mission Statement, AMERICANS FOR INS. REFORM,
http://www.insurancereform.org/mission.html(lastvisitedApr.23,2011).
23Badfaithinthefirstpartycontextgenerallymustestablish(1)theinsurersconductwas
unreasonableand(2)theinsurerkneworshouldhaveknowntheconductwasunreasonable.
See,e.g.,Turnerv.StateFarmFire&Cas.Cos.,614So.2d1029,1032(Ala.1993);Brownv.U.S.
Fid.&Guar.Co.,977P.2d807,815(Ariz.Ct.App.1998);Dalev.Guar.NatlIns.Co.,948P.2d
545, 551 (Colo. 1997); Sampson v. Am. Standard Ins. Co., 582 N.W.2d 146, 149 (Iowa 1998);
EmpireFire&MarineIns.Co.v.SimpsonvilleWreckerServ.,Inc.,880S.W.2d886,888(Ky.Ct.
App.1994);Lauzonv.StateFarmMut.Auto.Ins.Co.,674A.2d1246,1247(Vt.1995);Weissv.
UnitedFire&Cas.Co.,541N.W.2d753,757(Wis.1995);Ahrenholtzv.TimeIns.Co.,968P.2d
946,95051(Wyo.1998).
24See,e.g.,Gruenbergv.AetnaIns.Co.,510P.2d1032,1038(Cal.1973).
25SeeANDERSONETAL.,supranote4,11.01n.6(discussingexamplesoffirstpartyclaims).
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taxationbytheseveralStatesofthebusinessofinsuranceisinthepublicinterest....).
27SeeinfraPartI.CD.
28E.g., Hall v. City of Austin, 450 S.W.2d 836, 838 (Tex. 1970) (stating that, generally,
bifurcationleavesthelawsuitintactbutenablesthecourttohearanddetermineoneormore
issues without trying all controverted issues at the same hearing); see Gregory S. Clayton,
BifurcationofBreachofContractandBadFaithClaimsinFirstPartyInsuranceLitigation:Prosand
ConsforInsuranceCarriersandPolicyholders,21VT.B.J.&L.DIG.35,35(1995).
29RhodeIslandandTexasarethetwostatesthatseverclaims.SeeBartlettv.JohnHancock
Mut. Life Ins. Co., 538 A.2d 997, 1002 (R.I. 1988); Hall, 450 S.W.2d at 83738. Severance
dividesthelawsuitintotwoormoreseparateandindependentcauses,andajudgmentin
oneisfinalandappealable.Hall,450S.W.2dat83738.
30SeeinfraPartI.D.
31Gary Williams, Litigating the Bad Faith Case, ARE YOU COVERED? (1998),
http://areyoucovered.com/BFLit.htm;seealsoBrownv.SuperiorCourt,670P.2d725,734(Ariz.
1983) (en banc) (The claims file is a unique, contemporaneously prepared history of the
companyshandlingoftheclaim;inanactionsuchasthistheneedfortheinformationinthe
file is not only substantial, but overwhelming.); Escalante v. Sentry Ins., 743 P.2d 832, 842
n.10 (Wash. Ct. App. 1987) (In general, the relevancy objections raised . . . are meritless
becausetheverynatureofmostbadfaithactionsmakesmost,ifnotall,oftheinsurersclaim
filerelevant.).
32See Bad Faith Claim Practices Defined, FIGHT BADFAITH INS. COS., http://www.badfaith
insurance.org/definitions.html(lastvisitedApr.23,2011);RegulationModernization,supranote
20.
33Allstate,StateFarm,OtherBadFaithInsuranceCompaniesRackupRecordProfitsbyCheating
34Richard Hazleton, The Tort Monster that Ate Dow Corning, WALL ST. J., May 17, 1995, at
A21.
35Schwartz & Appel,supranote18,at1479& n.6(quotingWhitev. W.TitleIns.Co.,710
P.2d309,328n.2(Cal.1985)(Kaus,J.,concurringanddissenting)(Itseems...thatattorneys
whohandlepolicyclaimsagainstinsurancecompaniesarenolongerinterestedincollecting
on those claims, but spend their wits and energies trying to maneuver the insurers into
committingactswhichtheinsuredscanlatertrotoutasevidenceofbadfaith.)).
36See Campbell v. State Farm Mut. Auto. Ins. Co., 2001 UT 89, 12, 69, 65 P.3d 1134,
114041,1155(awardingpunitivedamagesforabadfaithclaimwheretheinsurancecompany
contested liability and refused to settle the suit brought against its insured, who was
responsibleforanunsafedrivingmaneuverthatkilledonepersonandpermanentlydisabled
another),revd538U.S.408,418(2003)(findingthatthepunitivedamagesawardviolatedthe
FourteenthAmendment).
37SeeinfraPartII.AC.
38SeeinfraPartII.
39SeeinfraPartIII.
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I. TheDevelopmentofFirstPartyBadFaithClaims
jurisdictionshaverecognizedthemorestringentfiduciarydutyfrominsurancecompaniesto
thepolicyholder.SeeinfraPartI.B.
41SeeCraigv.IowaKemperMut.Ins.Co.,565S.W.2d716,722(Mo.Ct.App.1978);ROBERT
H.JERRY,II&DOUGLASR.RICHMOND,UNDERSTANDINGINSURANCELAW180(4thed.2007).
42See Mark J. Browne et al., The Effect of BadFaith Laws on FirstParty Insurance Claims
Decisions,33J.LEGALSTUD.355,356n.1(2004).
43SeeANDERSONETAL.,supranote4,11.01.
44Seeid.11.03.
45SeeComunalev.Traders&Gen.Ins.Co.,328P.2d198,202(Cal.1958).
46SeeANDERSONETAL.,supranote4,11.01n.6.
47SeeBrowneetal.,supranote42,at356.
48For example, some states provide a cause of action under the states unfair claims
settlementpracticesactforfirstpartyclaimsbutnotthirdpartyclaims.See,e.g.,W.VA. CODE
ANN. 33114a(a) (LexisNexis 2006) (where thirdparty claimants cannot recover under the
unfairclaimssettlementpracticesact,whichprovidesacauseofactionandextracontractual
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A. HistoryofFirstPartyBadFaithClaims
reliefinthecontextoffirstpartybadfaithclaims).
49SeeNicholsv.StateFarmMut.Auto.Ins.Co.,306S.E.2d616,619(S.C.1983)(explaining
thatinsurerscouldarbitrarilydenyclaimsiftherewasnothreatofpossiblebadfaithclaims).
50RogerC.Henderson,TheTortofBadFaithinFirstPartyInsuranceTransactions:Refiningthe
83 U.S. (1 Wall.) 378,386 (1872) (finding the damages could not exceed the insurance policy
agreementplusinterest)).
52For
the commonly recognized commonlaw rule that limited damages to those
contemplatedbythecontract,seeHadleyv.Baxendale,156Eng.Rep.145,151(Ex.1854).
53Schwartz& Appel,supranote18,at1483&n.24(citingHenderson,supranote50, at13
(explainingthatmoststatesdidnotproviderecoveryforattorneysfeesandpenalties)).
54Gruenbergv.AetnaIns.Co.,510P.2d1032,1040,1042(Cal.1973);seeSchwartz&Appel,
supra note 18, at 148586 & n.43 (listing various cases that adopted the badfaith tort in the
1970sandearly1980s).
55SeeAndersonv.ContlIns.Co.,271N.W.2d368,37576(Wis.1978);seealsoEganv.Mut.
of Omaha Ins. Co., 620 P.2d 141, 146 (Cal. 1979) (discussing the public policy reasons for
allowingthetortofbadfaith).
56Egan,620P.2dat146.
57Id.
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58Id.;seeAnderson,271N.W.2dat374.
59SeeEgan,620P.2dat146.
60Browne et al., supra note 42, at 35556; Douglas R. Richmond, An Overview of Insurance
BadFaithLawandLitigation,25SETONHALLL.REV.74,7980(1994).
61Schwartz&Appel,supranote18,at148586&n.43(listingAlabama,Alaska,Arkansas,
PracticesAct(MUTPA)fromthe1950s,whentheActwastoregulatemarketingpractices,
to 1972 when the MUTPA was amended to include regulations regarding unfair claims
settlement practices). All the states have adopted the NAIC model statute, except South
Carolina,SouthDakota,andMississippi.SeeASHLEY,supranote17,9:02&n.22.In1990,the
NAIC amended the Model Act, which was adopted by a few states, including Georgia,
Illinois,Louisiana,Missouri,Nebraska,Oklahoma,andRhodeIsland.Id.,9:14&n.68.
63Schwartz& Appel, supra note 18, at 1488; see IDAHO CODE ANN. 411329 (2010)
(adoptingthemodellegislationwithoutsignificantmodification).
64Schwartz&Appel,supranote18,at1488.
65See generally JOYCE C. WANG ET AL., CARLSON, CALLADINE & PETERSON LLP, BAD FAITH
bad faith exists sidebyside with statutory law, and each provides a
different cause of action and recovery.66 For example, the commonlaw
badfaith claims typically only cover policyholders and thirdparty
beneficiaries, while the statutes provide wider protections for more
potential plaintiffs and recovery beyond that provided by common law,
suchasattorneysfees.67Evenwhenthelawthatgovernsabadfaithclaim
is determined, issues continue to emerge.68 Questions arise regarding the
duty owed by the insurance company, the standard that must be met to
showbadfaith,andthetimingofdiscoveryforabadfaithclaim.69
B. DutyOwedbyanInsuranceCompany
So.2d55,5859(Fla.1995)(notingthatwhilethereexistsastatutorybasisforfirstpartybad
faithclaims,therewasnoactionatcommonlaw).
67See, e.g., Knasel
v. Ins. Co. of Ill., 627 N.E.2d 137, 140 (Ill. App. Ct. 1993); Daney v.
Haynes, 630 So. 2d 949, 95455 (La. Ct. App. 1993). For example, Nevada allows for two
separatecausesofaction:oneundertheUnfairPracticesinSettlingClaimsActthatsetsforth
thestandardforwhichaninsureristoprocessclaimsandprovidesaprivaterightofaction,
andthesecondundercommonlawthatprovidesanimpliedcovenantofgoodfaithandfair
dealing in every contract. NEV. REV. STAT. 686A.310(1) (2009); Pemberton v. Farmers Ins.
Exch.,858P.2d380,382(Nev.1993).Undertheselaws,thirdpartyclaimantshavenostanding
tosueforbadfaithsincethereisnoprivityofcontract,whichisrequiredforacommonlaw
cause of action. Gunny v. Allstate Ins. Co., 830 P.2d 1335, 133536 (Nev. 1992). For further
examples,seeASHLEY,supranote17,9:02.
68SeeinfraPartI.BD.
69SeeinfraPartI.BD.
70SeeSchwartz&Appel,supranote18,at1487&n.47(listingtheunfairinsuranceclaims
settlementpracticesstatutesofeachstate).
71Seesourcescitedinfranotes7475.
72See,e.g.,Craigv.IowaKemperMut.Ins.Co.,565S.W.2d716,722(Mo.Ct.App.1978).
73DouglasR.Richmond,TrustMe:InsurersAreNotFiduciariestoTheirInsureds,88KY. L.J.1,
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C. StandardstoDetermineBadFaith
1(1999).
74Inanarmslengthbusinesstransactions,thereisnodutytoprotectorbenefittheother
party or to disclose facts that the other party could, by its own diligence, discover. John F.
Marianietal.,UnderstandingFiduciaryDuty,FLA. B.J., Mar.2010,at 20, 26 & n.73; seePeterv.
SchumacherEnters.,Inc.,22P.3d481,48587(Alaska2001)(notingthatinsurerpolicyholderis
not a fiduciary relationship, but recognizing four exceptions when the fiduciary principles
may apply); Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 494 (Colo. 1998) (en
banc)(describingaquasifiduciarydutyowedtotheinsured);seealsoRawlingsv.Apodaca,
726P.2d565,571(Ariz.1986)(enbanc)(notingthatthereisnofiduciaryduty,butrecognizing
insurershavesomedutiesofafiduciarynature,includingequalconsideration,fairnessand
honesty);FarmersGrp.,Inc.v.Trimble,691P.2d1138,1141(Colo.1984)(enbanc)(explaining
the different insurerpolicyholder duties among jurisdictions); Trouten v. Heritage Mut. Ins.
Co., 2001 SD 106, 32, 632 N.W.2d 856, 864 (finding an insurerpolicyholder relationship is
similar to a fiduciary since an insurer must give at least as much consideration to the
insureds interest as it does to its own); Safeco Ins. Co. of Am. v. Butler, 823 P.2d 499, 503
(Wash.1992)(enbanc).
75See,e.g.,Frommoethelydov.FireIns.Exch.,721P.2d41,47(Cal.1986);Eganv.Mut.of
OmahaIns.Co.,620P.2d141,146(Cal.1979);FiremansFundIns.Co.v.ContlIns.Co.,519
A.2d202,204(Md.1987);Grewellv.StateFarmMut.Auto.Ins.Co.,162S.W.3d503,509(Mo.
Ct. App. 2005); Freeman v. Leader Natl Ins. Co., 58 S.W.3d 590, 598 (Mo. Ct. App. 2001);
Myersv.AmbassadorIns.Co.,508A.2d689,691(Vt.1986).SeegenerallyRichmond,supranote
73, at 3 n.12 (listing cases in Colorado, Illinois, Kansas, Louisiana, Montana, Nevada, New
Jersey,NewMexico,NewYork,Ohio,Pennsylvania,RhodeIsland,Vermont,andWisconsin
thathaverecognizedafiduciaryrelationship).
76SeeRichmond,supranote73,at1920(suggestingthatimposingafiduciarydutyisill
suited for the insurerpolicyholder relationship, especially considering the impact on the
standardforbadfaith).
77Seeid.at2021.
78ThisNotewillfocusonthreemainstandardsadoptedamongstates,althoughthereare
someotherstandardsadoptedbyafewstates,suchasunreasonableness,maliciousconduct,
grossnegligence,andstrictliability.See,e.g.,AetnaCas.&Sur.Co.v.BroadwayArmsCorp.,
664 S.W.2d 463, 465 (Ark. 1984) (malice); Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1038
(Cal.1973)(unreasonableness);AetnaCas.&Sur.Co.v.Day,487So.2d830,832(Miss.1986)
(malice,grossnegligence,orrecklessdisregard);Jessenv.NatlExcessIns.Co.,776P.2d1244,
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threemainapproachesdiscussedinthisNoteincludethedirectedverdict
standard, the fairly debatable standard, and the totalityofthe
circumstancesstandard.79
1. TheDirectedVerdictStandard
1247(N.M.1989)(grossnegligence);Hayseeds,Inc.v.StateFarmFire&Cas.,352S.E.2d73,80
(W. Va. 1986) (malice). For a discussion of these standards not discussed in this Note, see
Dominick C. Capozzola, Note, FirstParty Bad Faith: The Search for a Uniform Standard of
Culpability,52HASTINGSL.J.181,196201(2000).
79SeediscussioninfraPartsI.C.13,II.B.
80SeeSkalingv.AetnaIns.Co.,799A.2d997,1004(R.I.2002)(rejectingthedirectedverdict
standardinrecognizingtheheavyburdenplacedonpolicyholders).
81SeeNatlSav.LifeIns.Co.v.Dutton,419So.2d1357,1362(Ala.1982).
82A directed verdict means that a reasonable jury would not have a legally sufficient
evidentiary basis to find for the party on a particular issue. FED. R. CIV. P. 50(a)(1). This
meansthepolicyholdermustshowthatadefendantsdefensetothecontractclaimisdevoid
ofanytriableissueoffactorreasonablyarguablequestionoflaw.SafecoIns.Co.ofAm.v.
Sims,435So.2d1219,1225(Ala.1983).
83Dutton,419So.2dat1362.
84Id.at1362.
85SeeinfraPartII.B.1.
86For example, in Skaling, the Rhode Island Supreme Court recognized factual disputes
cannot be determined as a matter of law, thereby making the directed verdict standard of
proof unworkable and unjust in this context. Skaling v. Aetna Ins. Co., 799 A.2d 997, 1003,
1008 (R.I. 2002) (If the claims examiners testimony is untruthful and rejected by the jury,
plaintiff has established a breach of the insurance contract; however, because the issue was
resolved by a finder of fact and not the trial justice at the close of evidence, the insurer is
insulated from bad faith, notwithstanding its reckless conduct and oppressive tactics.); cf.
Zilischv.StateFarmMut.Auto.Ins.Co.,995P.2d276,27980(Ariz.2000);Brewerv.Am.&
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2. TheFairlyDebatableStandard
Theintermediateapproach,adoptedbymanyjurisdictions,isthefairly
debatablestandard,whichrequiresinsurerstoshow[1]theabsenceofa
reasonablebasisfordenyingbenefitsofthepolicyand[2]thedefendants
knowledge or reckless disregard of the lack of a reasonable basis for
denyingtheclaim.87Therootsofthefairlydebatablestandardflowfrom
Andersonv.ContinentalInsuranceCo.,wheretheWisconsinSupremeCourt
held insurers could contest a fairly debatable claim as a matter of fact or
law.88Underthefairlydebatablestandard,insurersmayarguetherewasa
reasonablebasistobelievethepolicyholderwasnotcoveredandthat,even
intheeventofanerroneousdenial,therewasnobadfaith.89Iftheinsurer
cannot show it was reasonable in denying the claim, then the badfaith
claimistriedbeforethejury.90Iftheinsurercanprovethatnobenefitswere
owedunderthepolicy,thentheinsurercouldnothaveactedinbadfaith
in its relationship with its policyholder.91 The fairly debatable approach,
however, ignores any wrongful conduct by the insurer outside of the
contractclaim,suchasthosefactorssetoutintheNAICmodellegislation,
including misconduct in investigation, denial, or litigation.92 Rather, this
approachsolelyfocusesonthereasonablenessoftheinsurerindenyingthe
claim.93
3. TheTotalityoftheCircumstancesStandard
Themostliberalapproach,adoptedbyaminorityofstates,allowsthe
badfaith claim to be heard even if the plaintiff does not prevail on the
breachofcontract claim.94 Under this standard, insurers are entitled to
challenge claims that are fairly debatable; however, this does not provide
anabsolutedefensetothebadfaithclaims.95Rather,theinsurersbeliefin
ForeignIns.Co.,837P.2d236,238(Colo.Ct.App.1992);Robinsonv.StateFarmFire&Cas.
Co.,583So.2d1063,1066(Fla.Dist.Ct.App.1991).
87Anderson v. Contl Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978). Some jurisdictions
recognizeasimilarstandard,inwhichagenuinedisputeastowhethercoverageexistedisa
defensetoabadfaithclaim.See, e.g.,ChateauChamberayHomeownersAssnv. Associated
IntlIns.Co.,108Cal.Rptr.2d776,78485(Cal.Ct.App.2001).
88Anderson,271N.W.2dat376.
89See,e.g.,Skaling,799A.2dat1011.
90SeeAnderson,271N.W.2dat37677.
91Barlettv.JohnHancockMut.Life.Ins.Co.,538A.2d997,1000(R.I.1988).
92Seesourcescitedsupranote18andaccompanyingtext.
93Anderson,271N.W.2dat376.
94See, e.g., Zilisch v. State Farm Mut. Auto. Ins. Co., 995 P.2d 276, 28081 (Ariz. 2000);
FarmlandMut.Ins.Co.v.Johnson,36S.W.3d368,375(Ky.2000).
95Zilisch,995P.2dat279.
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fair debatability of the claim is a question of fact for the jury.96 The
appropriate inquiry is whether there is sufficient evidence from which
reasonablejurorscouldconcludethatintheinvestigation,evaluation,and
processingoftheclaim,theinsureractedunreasonablyandeitherknewor
wasconsciousofthefactthatitsconductwasunreasonable.97
The totalityofthecircumstances standard considers all the
circumstancesinvolvedindenialofcoveragewhenevaluatingtheinsurers
liabilityforbadfaith.98Someofthesefactorsinclude:
[1] efforts or measures taken by the insurer to resolve the
coverage dispute promptly or in such a way as to limit any
potential prejudice to the insureds; [2] the substance of the
coveragedisputeortheweightoflegalauthorityonthecoverage
issue; [3] the insurers diligence and thoroughness in
investigating the facts specifically pertinent to coverage; and [4]
effortsmadebytheinsurertosettletheliabilityclaimintheface
ofthecoveragedispute.99
Iftherearedisputesovermaterialfactsrelatingtoanyofthesefactors,the
courtmustsubmitthebadfaithclaimtothejury.100
States that adopt this approach view the fairly debatable standard by
itself as too narrow and impose on insurance companies a duty to
investigate, negotiate, and attempt to settle the claim in a fair and
reasonable manner.101 Further, these states hold that the insurer can
breach the duty owed to the policyholder, even if there was no policy
coveragefortheloss.102Thisstandardrecognizesthatpolicyholdersrelyon
insurance companies and that insurance companies can cause harm to
policyholdersbeyondthelossofrecoveryunderthecontract.103
96Id.
97Id.at280.
98John J. Jerue Truck Broker, Inc. v. Ins. Co. of N. Am., 646 So. 2d 780, 783 (Fla. Dist. Ct.
App.1994).
99StateFarmMut.Auto.Ins.Co.v.Laforet,658So.2d55,6263(Fla.1995).Whilethiscase
listsfivefactorstoconsiderinevaluatingthirdpartyclaims,thefourlistedapplytofirstparty
claims.SeeRobinsonv.StateFarmFire&Cas.Co.,583So.2d1063,106668(Fla.Dist.Ct.App.
1991).
100JohnJ.JerueTruckBroker,Inc.,646So.2dat783.
101FarmlandMut.Ins.Co.v.Johnson,36S.W.3d368,375(Ky.2000).
102SeeLightv.AllstateIns.Co.,506S.E.2d64,71&n.15(W.Va.1998)(citingexamplesof
states that hold whether or not to bifurcate and stay a firstparty bad faith claim is a
discretionarydeterminationforthetrialcourt);Hatchv.StateFarmFire&Cas.Co.,842P.2d
1089,1099(Wyo.1992).
103See,e.g.,Johnson,36S.W.3dat37576.
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
D. ProceduralProblemswithBadFaithClaimDiscovery
1. SimultaneousDiscoveryoftheBreachofContractandBad
FaithClaims
Somestatesallowsimultaneousdiscoverybasedontheoverwhelming
need for the information in the claims file.109 These states analogize the
badfaithactionstothosebyaclientagainstanattorney,whichcanonlybe
proven by showing exactly how the company processed the claim, how
thoroughly it was considered and why the company took the action it
did.110 For example, in Brown v. Superior Court Arizona rejected the
argumentthattheclaimsfileisprotectedbyaprivilegeandthatdiscovery
should be stayed.111 The Arizona Supreme Court held if a policyholder is
injured, an insurance company could not automatically assume that
litigation will result, as this construes Federal Rule of Civil Procedure
26(b)(3) too broadly.112 Rather, simultaneous discovery furthers judicial
economy in a number of ways, including: eliminating duplicative
discovery, allowing the badfaith portion of the trial to commence
immediatelyafterthecontractclaim,andavoidingdiscoverydisputesover
104Wolfv.GeicoIns.Co.,682F.Supp.2d197,199200(D.R.I.2010)(discussingthedebate
betweenallowingsimultaneousdiscoveryorstayingdiscovery).
105Seesourcescitedsupranote31andaccompanyingtext.
106See,e.g.,Skalingv.AetnaIns.Co.,799A.2d997,1010(R.I.2002);InreAllstateCnty.Mut.
Ins.Co.,209S.W.3d742,74647(Tex.App.2006).
107Seeinfranotes11419andaccompanyingtext.
108SeeWolf,682F.Supp.2dat199200.
109Seesourcescitedsupranote31.
110Brownv.SuperiorCourt,670P.2d725,734(Ariz.1983).
111Id.at73435.
112Id.at732.
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whatrelatestothebadfaithclaim.113
Mostjurisdictionsbifurcatethecontractclaimandthebadfaithclaim
toavoidprejudicetotheinsurer.114Bifurcationleavesthelawsuitintactbut
allows the court to determine the issues without trying all controverted
issues simultaneously.115 The policy behind this approach is to avoid
prejudice to the insurer in cases where the badfaith claim could
improperlyinfluencethejurywithinflammatoryevidence.116Forexample,
prejudice could arise where the insurance company made an offer of
settlement.117 If evidence of the settlement offer is introduced in the
contract portion of the trial, the jury may conclude that the insurance
companyconcededliabilityunderthecontract.118Ifthereisnoevidenceof
the settlement offer, then this deprives the insurance company an
opportunitytoshowtheyactedreasonably.119
113Wolf,682F.Supp.2dat199.
114See, e.g., Brown v. Gen. Motors Corp., 407 P.2d 461, 46364 (Wash. 1965); see also Dan
Cytryn, Bifurcation in Personal Injury Cases: Should Judges Be Allowed to Use the B Word?, 26
NOVA L. REV. 249, 25354 (2001) (explaining that twentyfour states allow bifurcation on a
discretionary basis; ten states allow bifurcation in extraordinary situations, which includes
avoiding prejudice to the insurer; thirteen states have not taken a firm position, including
Alaska, Hawaii, Idaho, Kentucky, Mississippi, Missouri, Montana, New Hampshire, Rhode
Island, Utah, Vermont, Wisconsin, and Wyoming; New York mandates bifurcation in most
personalinjurycases;andIllinoisandTexasdonotallowbifurcation).ButseeLightv.Allstate
Ins. Co., 506 S.E.2d 64, 71 n.15 (W. Va. 1998) (citing cases in Montana, Idaho, Texas, and
Illinois, along with other states, that provide the trial court has discretion to bifurcate and
state a firstparty bad faith claim). Federal Rule of Civil Procedure 42(b) provides the legal
basisforbifurcation,whichgivescourtsdiscretionarypowertoseparateissues,butcautions
thatthisruleshouldnotbeexercisedliberallyorindiscriminately.FED.R.CIV.P.42(b).
115Hallv.CityofAustin,450S.W.2d836,83738(Tex.1970).
116RICHARD L. MCMONIGLE & MICHAEL J. FARRELL, UM/UIM SEVERANCE ISSUESINA POST
Therealproblemintryingalloftheseclaimstogetherisaninternal
conflict which may unfairly force the insurer to choose between 1)
insisting on its right to exclude evidence of settlement negotiations and
coveragedeterminations(therebylosingtheadvantageofshowingthatit
wasattemptingtobereasonableindefenseofthebadfaithclaims)and2)
putting on such evidence and risking a prejudicial inference that it has
admittedliabilityonthecontractaction.
Id.
118Id.
119Id.
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
2. StayingDiscoveryontheBadFaithClaims
II. ProposedBrightLineRulesStatesShouldAdopttoHarmonizeFirst
PartyBadFaithLitigation
Statesmustadoptaclear,unifiedapproachwhenfacedwithbreachof
contractandbadfaithclaims.125Policyholdersneedprotectionfromunfair
treatment and excessive rates, especially since there is a fundamental
economic conflict between the insurer and the policyholderthe
insurancecompanydoesnotwanttopayandthepolicyholderwantstobe
completelyreimbursed.126Ontheotherhand,insurancecompaniesmustbe
protectedagainstfraudulentclaimstopreservesolvency.127Abalancemust
be struck between these two seemingly conflicting concerns for fairness
120SeeWolfv.GeicoIns.Co.,682F.Supp.2d197,199(D.R.I.2010)(citingcasesthatstayed
discoverybasedonattorneyclientprivilege,judicialeconomy,andavoidingprejudicetothe
insurance company); Skaling v. Aetna Ins. Co., 799 A.2d 997, 1010 (R.I. 2002) (noting the
significantproceduralprotectionsforinsurersinstayingdiscovery).
121Wolf,682F.Supp.2dat199.
122See,e.g.,Bartlettv.JohnHancockMut.LifeIns.Co.,538A.2d997,1002(R.I.1988);Hall
v.CityofAustin,450S.W.2d836,83738(Tex.1970).
123Clayton,supranote28,at35.
124SeeinfraPartII.B.
125Cf.Stewart&Stewart,supranote21,at43(arguingformorecertaintyintheinsurance
industry).
126Dietz & Preston, supra note 13 (quoting California Lieutenant Governor John
Garamendi,whowasCaliforniasInsuranceCommissionerfrom2002to2006).
127SeeSharonTennyson&WilliamJ.Warfel, TheLawandEconomicsofFirstPartyInsurance
Bad Faith Liability, 16 CONN. INS. L.J. 203, 21718 (2008); Insurance Fraud, INS. INFO. INST.,
http://www.iii.org/media/hottopics/insurance/fraud/(lastvisitedApr.23,2011).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
A. Responsibility.WhatsYourPolicy?130:InsuranceCompaniesOwe
TheirPolicyholdersaDutyofGoodFaithandFairDealing.
128SeeinfraPartII.AC(analyzingthedifferentlitigationapproaches).
129SeeinfraPartII.AC.
130LIBERTY MUTUAL INS. CO., http://www.libertymutual.com/ (last visited Apr. 23, 2011)
(statingLibertyMutualInsuranceCompanysslogan).
131U.C.C.1304(2004);RESTATEMENT (SECOND)OF CONTRACTS205(1981);seesupraPart
I.B;supranote40andaccompanyingtext.
132SeeCraigv.IowaKemperMut.Ins.Co.,565S.W.2d716,722(Mo.Ct.App.1978);supra
textaccompanyingnote72.
133VanNoyv.StateFarmMut.Auto.Ins.Co.,16P.3d574,579n.2(Wash.2001).
134Eganv.Mut.ofOmahaIns.Co.,620P.2d141,146(Cal.1979).
135Dolanv.AidIns.Co.,431N.W.2d790,792(Iowa1988).
136William M. Goodman & Thom Greenfield Seaton, Foreword, Ripe for Decision, Internal
WorkingsandCurrentConcernsoftheCaliforniaSupremeCourt,62CAL.L.REV.309,34647(1974).
137Rawlings v. Apodaca,726P.2d565,570(Ariz.1986)(Theinsurerevaluates theclaim,
determineswhetheritfallswithinthecoverageprovided,assessesitsmonetaryvalue,decides
onitsvalidityandpassesuponpayment.).
138SeeANDERSONETAL.,supranote4,11.06(discussinghowinsurerswillarguethereisa
fiduciarydutywhenitisfavorableforthemtodoso,suchastoshiftresponsibility);Eugene
R. Anderson & James J. Fournier, Why Courts Enforce Insurance Policyholders Objectively
Reasonable Expectations of Insurance Coverage, 5 CONN. INS. L.J. 335, 38591 & nn.15063 (1998)
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
theadvertisementsbyinsurancecompaniespromoteafeelingofsafetyand
protection in customers, with insurers promis[ing] to the insured to
simplifyhislife,toputhimingoodhands,tobackhimupwithapiece
oftherockortobeonhisside,suggestingtheinsurerwillnotabandon
thepolicyholderduringthetimeofneed.140
Insurance contracts are also unique because policyholders are not
seeking a commercial advantage through coverage from an insurance
company,aswouldbethecaseinothercontractsintheordinarycourseof
business.141 Rather, policyholders are hiring the insurer to act in the
policyholders best interest in advising on risk management as well as
processing,litigating,andmonitoring claims.142 In thisway, the insurer is
anagentofthepolicyholder.143Underagencylaw,anagentowesfiduciary
dutiesofundividedloyaltytoitsprincipalandmustplacetheprincipals
interestsparamounttoitsowninterests.144Underthisview,theclaimsfile
isanalogoustothefileofaclientheldbyanattorney,andtheclienthasa
(citing court documents from Fireman Fund, Continental Casualty, Continental Insurance
Company, Nation Union, Liberty Mutual, Home, St. Paul Fire and Casualty, and Hartford
arguing they owe their policyholders a fiduciary duty to look after the interests of the
policyholder,dueinparttotheinsurersexpertiseinthebusiness).
1391JAMES J. LORIMER ET AL., THE LEGAL ENVIRONMENT OF INSURANCE3738(3ded.1987)
(While an insurance policy does represent a contractual commitment, the attitudes of the
general public, the legislatures, and the courts make clear that the insurance agreement is
viewedashavingbroaderramificationsthanamerecontract.).
140DAmbrosiov.Pa.NatlMut. Cas.Ins. Co.,396A.2d780,786(Pa.Super.Ct.1978);see
StateFarmFire&Cas.Co.v.Nicholson,777P.2d1152,1156n.6(Alaska1989);C&JFertilizer,
Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 178 (Iowa 1975) (We would be derelict in our
dutytoadministerjusticeifwewerenottojudiciallyknowthatmoderninsurancecompanies
haveturnedtomassadvertisingtosellprotection.);seealsoMarcS.Mayerson,FirstParty
InsuranceBadFaithClaims:MooringProceduretoSubstance,38TORT TRIAL & INS. PRAC. L.J.861,
866(2003).
141Crisciv.Sec.Ins.Co.,426P.2d173,179(Cal.1967)([P]laintiffdidnotseek...toobtain
acommercialadvantagebuttoprotectherselfagainsttherisksofaccidentallosses,including
the mental distress which might follow from the losses. Among the considerations in
purchasingliabilityinsurance...isthepeaceofmindandsecurityitwillprovideintheevent
of an accidental loss ....); McCorkle v. Great Atl. Ins. Co., 637 P.2d 583, 588 (Okla. 1981)
([O]ne of the primary reasons a consumer purchases any type of insurance (and the
insuranceindustryknowsthis)isthepeaceofmindandsecuritythatitprovidesintheevent
ofloss.).
142See Matthew D. Schultz, Bad Faith or No Faith? Finding a Place for Wrongful Refusal to
DefendinFloridasBadFaithJurisprudence,29FLA.ST.U.L.REV.1389,1428(2002).
143See Craig v. Iowa Kemper Mut. Ins. Co., 565 S.W.2d 716, 72324 (Mo. Ct. App. 1978)
(discussingagencylawandtheensuingfiduciaryduties).
144Comm.onChildrensTelevision,Inc.v.Gen.FoodsCorp.,673P.2d660,676(Cal.1983);
RESTATEMENT (THIRD) OF AGENCY 1.01 (2006); see also RESTATEMENT (SECOND) OF TRUSTS
170(1)&cmts.a,q(1959).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
right of access to the claims file since it belongs to the client.145 Courts
haveexplainedthatthenatureofanattorneysresponsibilitytotheclient
creates a fiduciary relationship, and because an insurer is entrusted to
defendaclaimonbehalfoftheinsured,itseemsapparentthataninsurer
actsinafiduciarycapacity.146
While there is strong support to impose a fiduciary duty on insurers,
statesshouldnotgoasfarastorequirethisonerousduty.147Imposingthis
duty creates numerous practical issues for insurers in always putting
policyholdersinterestsbeforetheirown.148Insurerswouldhaveadifficult
time protecting themselves.149 In particular, insurers could not conduct
fraudinvestigation,whichwouldotherwiseservetoreducelitigationcosts
andpremiums.150Further,businesstransactionswouldbeseverelylimited
ifafiduciarydutywereimposedbecausetheinsurerwouldhavetouse
the utmost good faith and, if [the insurer gained] profits from the
transaction, the law presumes the agreement was entered into by the
beneficiary without sufficient consideration and under undue
influence.151Finally,ifafiduciarydutywereimposed,aninsurerwould
notabletochallengebadfaithclaims.152Insurerswouldnotbeabletofully
investigateclaimsanddenypayment,eveniftheyhadreasonablegrounds
to dispute.153 This is because any decision adverse to the policyholder
would be an actionable tort.154 Since good faith and fair dealing should
remainthedutyowedbyinsurerstopolicyholders,thenextissueisfixing
145Grewellv.StateFarmMut.Auto.Ins.Co.,102S.W.3d33,37(Mo.2003).
146Grewellv.StateFarmMut.Auto.Ins.Co.,162S.W.3d503,50809(Mo.Ct.App.2005).
147SeeRichmond,supranote73,at24(presentingsomeofthedifficultieswithimposinga
fiduciaryduty).
148Seeid.
149Seeid.
150See Time Ins. Co. v. Burger, 712 So. 2d 389, 393 (Fla. 1998) (Payment of illegitimate
claimsraisesthecostofinsuranceforallpolicyholders.);UniverseLifeIns.Co.v.Giles,950
S.W.2d 48, 60 (Tex. 1997) (Hecht, J., concurring) (Indeed, from a competitive viewpoint, an
insurer must pay only valid claims and must deny invalid claims to keep premiums to
customersataminimum.).
151Comm.onChildrensTelevisionv.Gen.Foods Corp.,673P.2d660,676(Cal.1983);see
also McCollough v. Rogers, 431 So. 2d 1246, 1248 (Ala. 1983) (explaining presumption of
undue influence); Prueter v. Bork, 435 N.E.2d 109, 112 (Ill. App. Ct. 1981) (describing a
rebuttable presumption that a transaction in which the trustee benefits is fraudulent); Von
Hakev.Thomas,705P.2d766,769(Utah1985)(explainingthatifaconfidentialrelationship
exists,anytransactionfromwhichthetrusteebenefitsispresumedfraudulent).
152SeeRichmond,supranote73,at24.
153Seeid.
(1989).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
afairstandardfordeterminingifaninsurerengagedinbadfaith.155
B. TheTotalityoftheCircumstancesStandardShouldBetheStandard
forDeterminingBadFaith.
1. TheDirectedVerdictRuleIsTooRestrictivefor
Policyholders.
Ifthestandardtodenyabadfaithclaimissetsolowthatmereambiguity
createsafactissue,whichcausesthetortclaimtoautomaticallyfail,asitis
under the directedverdict standard, bad faith would no longer serve its
155SeeinfraPartII.B.
156SeesupraPartI.C.13.
157SeediscussioninfraPartII.B.3.
158SeediscussioninfraPartII.B.3.
159SeediscussioninfraPartII.B.3.
160Cf.Skalingv.AetnaIns.Co.,799A.2d997,1004(R.I.2002)(discussinghowthedirected
verdictisaheavyburdenonpolicyholders).
161SeeMurrayv.StateFarmFire&Cas.Co.,268Cal.Rptr.33,37(Ct.App.1990);seealso
Skaling,799A.2dat1005.
162Skaling,799A.2dat1005;seecasescitedsupranote86.
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purposeofdeterringunreasonableconductbyaninsurer.163
Manystatesfindthedirectedverdictruleabsurdandunfair,inthatan
insurersclaimsadjustercouldprecludeadirectedverdictonthecontract
action by dishonestly disputing facts and thus preventing the badfaith
claim.164Indeed,theRhodeIslandSupremeCourtexplainedthatallowing
aninsurertoavoidabadfaithclaimbyfeigningignoranceoftheclaimor
misrepresenting the content of oral or written communications would
frustrate the purpose of the bad faith action.165 States that continue to
follow the directedverdict standard have had to establish rules that the
insurersthemselvescannotpresenttheevidencetocausethedisputedfact;
however, this exception essentially swallows the directedverdict rule.166
Thedevelopingtrendisforstatestoabandonthedirectedverdictruledue
totheunworkableandunfairpracticalaspects,includingAlabamawhere
the directedverdict standard was first implemented.167 It is clear the
directedverdictruleisnotadequateandmustberetired.168
2. TheFairlyDebatableStandardDoesNotProvideEnough
ProtectionforPolicyholders.
163SeeWolfv.PrudentialIns.Co.ofAm.,50F.3d793,800(10thCir.1995).
164Skaling,799A.2dat1008;see,e.g.,Wolf,50F.3dat800([A]ninsurercouldintentionally
insert an ambiguous term into a policy and continually deny coverage based on that term,
....[andtheinsurer]wouldneverfaceabadfaithclaimbecauseitsambiguoustermwould
createalegitimatedispute.).
165Skaling,799A.2dat1008;seecasescitedsupranote86.
166See, e.g., Jones v. Ala. Farm Bureau Mut. Cas. Co., 507 So. 2d 396, 401 (Ala. 1986)
(holding the directed verdict rule does not defeat a badfaith claim when the insurers own
agentcreatedthefactualdisputeovercoverage);seealsoStephenD.Heninger&NicholasW.
Woodfield, A Practitioners Guide to Alabamas Tort of Bad Faith, 57 ALA. LAW. 277, 281 (1996)
(quotingLoyalAm.LifeIns.Co.v.Mattiace,679So.2d229,238(Ala.1996))(discussinghow
theexceptionshaveswallowedtherulefordirectedverdictsinceinsurerscouldnotrelyon
its chosen method of subjective underwriting to create its own legitimate reason for
denyingaclaim).
167CompareNatlSav.LifeIns.Co.v.Dutton,419So.2d1357,1362(Ala.1982)(origination
ofthedirectedverdictrule),withStateFarmFire&Cas.Co.v.Slade,747So.2d293,30506
(Ala.1999)(effectivelyabrogatingthedirectedverdictrule).
168Seesourcescitedsupranote166.
169SeeKranscov.Am.EmpireSurplusLinesIns.Co.,2P.3d1,12(Cal.2000);GrandSheet
MetalProds.Co.v.Prot.Mut.Ins.Co.,375A.2d428,430(Conn.Super.Ct.1977)(discussing
how the economic imbalance between insurers and policyholder is a paramount
consideration[]forthefirstpartybadfaithremedy).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
for denying benefits of the policy and [2] the defendants knowledge or
reckless disregard of the lack of a reasonable basis for denying the
claim.170Policyholdersareprotectedbecauseinsurerscannotdenyaclaim
inarecklessoroppressivemanner.171Further,policyholdersareprotected
because the fairly debatable standard addresses the underlying policy to
deterandpunishintentionallyrecklessoroppressiveclaimdenialsthrough
extracontractual damages.172 Insurers are protected because they have an
opportunity to challenge claims they feel are debatable, and the intent
element protects against policyholders scaring insurers into paying
questionable claims because of the threat of a bad faith suit.173 A lax
standard, such as one that only considers reasonableness, would
potentiallyincreasefraudulentclaims.174
The problem with this approach, however, is that it does not address
problems when the insurer engages in wrongful conduct during the
investigations and negotiations of the claims.175 There are multiple
circumstances in which bad faith can occur and cause harm to
policyholders, such as during investigation or negotiations, but the fairly
debatable standard only covers aspects of applying the facts of a case to
coverage under the policy and denials, and policyholders are left
unprotected if insurers engage in wrongful conduct.176 Further, under the
fairlydebatablestandard,ifajuryfindstheclaimwasfairlydebatable,the
badfaithclaimfailsasamatteroflaw.177Thebetterpolicyisforcourtsto
gobeyondonlyholdinganinsurerliableforunreasonableinterpretationof
the policy coverage.178 Courts should allow for recovery for wrongful
conductandrecognizethatthedutyofgoodfaithandfairdealingapplies
totheinsurersbehavior.179
170Anderson v. Contl Ins. Co., 271 N.W.2d 368, 376 (Wis. 1978). Other jurisdictions
recognizeadefensetothebadfaithclaimunderasimilarstandardwhenthereisagenuine
issue as to whether coverage existed. See, e.g., Chateau Chamberay Homeowners Assn v.
AssociatedIntlIns.Co.,108Cal.2d776,784(Ct.App.2001).
171SeeAnderson,271N.W.2dat377.
172SeeCapozzola,supranote78,at20103.
173SeeAnderson,271N.W.2dat377.
174Cf.Skalingv.AetnaIns.Co.,799A.2d997,1010(R.I.2002)(decliningtoadoptthefairly
debatablestandard).
175SeeJohnN.Ellisonetal., BadFaithandPunitiveDamages:ThePolicyholdersGuidetoBad
Faith Insurance Coverage Litigation; Understanding the Available Recovery Tools, in COURSE OF
STUDY: ENVIRONMENTAL INSURANCE 295, 347 n.129 (Am. Law Inst.Am. Bar Assn 2006)
(listingwrongfulconductbyinsurancecompaniesininvestigation,denial,andlitigation).
176Seeinfranotes18489andaccompanyingtext.
177Seecasescitedsupranotes8991andaccompanyingtext.
178SeeinfraPartII.B.3.
179SeeinfraPartII.B.3.
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3. TheTotalityoftheCircumstancesStandardProvidesthe
BestBalance.
Thetotalityofthecircumstancesstandardprovidesthebestapproach
in adopting the fairly debatable standard, while also recognizing insurers
should be liable for wrongful conduct.180 States should recognize a
separate intentional wrong, which results from a breach of duty imposed
as a consequence of the relationship established by contract.181 This
approach would refocus insurers on their overarching duty to pay for
claims where it would be reasonable, while best serving the interests of
bothinsurersandpolicyholders.182
Thetotalityofthecircumstancesstandardprotectspolicyholdersfrom
insurersbadfaithconductthatcan,insomecircumstances,extendbeyond
coverage.183 For example, in Hatch v. State Farm Fire & Casualty Co., the
WyomingSupremeCourtfoundtheinsurancecompanycouldbeliablefor
investigatorymisconduct,eventhoughsummaryjudgmentwasgrantedon
the badfaith claim.184 Specifically, the wrongful conduct by the insurance
companyincludedrequestingmoreinformationthanreasonablynecessary
todecidetheclaim.185Also,duringthefirstcontact,theinsurancecompany
representative told the plaintiff that he was not going to get what [he
thought he was] going to get and that he would regret retaining an
180Cf. Ellison et al., supra note 175, at 347 n.129 (discussing wrongful conduct common
amonginsurancecompanies).
181Andersonv.ContlIns.Co.,271N.W.2d368,374(Wis.1978).
182SeeFlemingv.SafecoIns.Co.ofAm.,206Cal.Rptr.313,318(Ct.App.1984)([T]hefirst
and primary duty of the insurer is to pay a claim to its insured if such payment would be
reasonableunderallofthecircumstances....).
183See, e.g., Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 109394, 109799 (Wyo.
1992).InHatch,thecourtfoundthattheplaintiff,whowasacquittedonanarsoncharge,did
notprovideevidencetoshowtheinsurancecompanysexpertwasmanipulatedinconcluding
thehousefirewasnotaccidental,resultinginagrantofsummaryjudgmentofthebadfaith
claimunderthefairlydebatablestandard;however,thecourtdidfindtheinsurancecompany
liable for violating the implied covenant of good faith and fair dealing by investigation
misconduct.Seeid.
184Seeid.at109798(quotingGlennE.Smith,UnderstandingtheNewTortofFirstPartyBad
186Id.
187Id.
188SeeEllisonetal.,supranote175,at347n.129.
189Seesupranotes17273andaccompanyingtext.
190Bartlettv.JohnHancockMut.LifeIns.Co.,538A.2d997,1002(R.I.1988).
191See News Release: NAIC Cites Top Insurance Complaints for 2008, NATL ASSN OF INS.
193See,e.g.,Andersonv.ContlIns.Co.,271N.W.2d368,37677(Wis.1978).
194Hummelv.ContlCas.Ins.Co.,254F.Supp.2d1183,1191(D.Nev.2003).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
195SeeMills,449N.W.2dat297.
196SeeJebo,supranote8,at26162.
197SeeComunalev.Traders&Gen.Ins.Co.,328P.2d198,200(Cal.1958).
198Murrayv.StateFarmFire&Cas.Co.,268Cal.Rptr.33,37n.5(Ct.App.1990);seeEllison
etal.,supranote175,at347n.129(providingadditionalexamplesofwrongfulconduct).
199Seesupranotes19498andaccompanyingtext.
200See,e.g.,Skalingv.AetnaIns.Co.,799A.2d997,1012(R.I.2002).
201Seeid.
202Id.;Andersonv.ContlIns.Co.,271N.W.2d368,37677(Wis.1978).
203SeeComunalev.Traders&Gen.Ins.Co.,328P.2d198,20001(Cal.1958)(Thereisan
implied covenant of good faith and fair dealing in every contract that neither party will do
anythingwhichwillinjuretherightoftheothertoreceivethebenefitsoftheagreement....
[T]he implied obligation of good faith and fair dealing requires the insurer to settle in an
appropriatecasealthoughtheexpresstermsofthepolicydonotimposesuchaduty.).
204SeeAnderson,271N.W.2dat376.
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C. SimultaneousDiscoveryAvoidstheProceduralNightmareThat
OccurswhenDiscoveryIsStayed.
Iftheinsurancecompanydoesnotmeetthebadfaithstandardunder
thetotalityofthecircumstances,issuesoverthediscoveryofthebadfaith
claimmustbeconsidered.209Inrecognizingaspecialrelationshipbetween
insurers and policyholders under the duty of good faith and fair dealing,
withoutgoingasfarasimposingafiduciaryduty,policyholdersshouldbe
allowedaccesstotheclaimsfileuptothepointintimebeforetheclaimis
denied.210 Further, discovery of the badfaith claim should take place
simultaneously with the breachofcontract claim even if the claims are
bifurcatedfortrial.211
1. DiscoveryoftheClaimsFileShouldBeAllowedUntilthe
PointofDenial.
205Seeid.at37677.
206Seeid.at377.
207Seesupranotes192206andaccompanyingtext.
208Seesupranotes192206andaccompanyingtext.
209SeesupraPartI.D.
210SeediscussionsupraPartII.A.
211SeeinfraPartII.C.12.
212See Thomas E. Workman, Plaintiffs Right to the Claim File, Other Claim Files and Related
Information: The Ticket to the Gold Mine, 24 TORT & INS. L.J. 137, 14344, 15253 (1988) (citing
casesandhighlightingthatasubstantialamountofcaselawsupportsdiscoveryoftheclaims
fileinbadfaithactions).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
couldpotentiallybeusedprejudicially.213Asdiscussedabove,insurersand
policyholders have a mutuality of interests, similar to a fiduciary duty,214
and so insurers must act in the policyholders best interest in processing
andlitigatingtheunderlyingcontractclaim.215Sincethefiduciarynatureof
insurers to policyholders lies in the mutuality of interests, this makes the
claims file discoverable up until the point where the underlying contract
claim is denied, which then places the insurer and policyholder in
adversarialpositions.216
Also, in recognizing the fiduciary nature between an insurer and a
policyholder,workproductimmunityorattorneyclientprivilegedoesnot
apply to the insurers files.217 Insurers argue allowing discovery of the
material with a blanket allegation of bad faith ignores the principle[]
behindtheworkproductdoctrine,whichistoallowopencommunication
with the attorney.218 However, insurers would still be protected by the
workproduct doctrine and attorneyclient privilege, but only in the
information subsequent to the denial.219 The Ohio Supreme Court
addressed this issue in Boone v. Vanliner Insurance Co. and held that
materials prior to denial of coverage showing the lack of a good faith
effort to settle were undeserving of protection.220 This lack of privilege
protection was expanded by the Ohio Court of Appeals in Garg v. State
AutomobileMutualInsuranceCo.andUnklesbayv.Fenwicktoanyclaimsfile
material showing lack of good faith in processing,evaluating, or refusing
213SeegenerallyM.ElizabethMedagliaetal.,Privilege,WorkProduct,andDiscoveryIssuesin
BadFaithLitigation,32TORT&INS.L.J.1,1719(1996)(discussingstrategiesforassertingwork
productandattorneyclientprivilegeinbadfaithlitigation).
214SeesupraPartII.A.
215SeeSchultz,supranote142,at1428&n.222(citingDunnv.NatlSec.Fire&Cas.Co.,631
So. 2d 1103, 1109 (Fla. Dist. Ct. App. 1993) (permitting discovery over work product
objections); Stone v. Travelers Ins. Co., 326 So. 2d 241, 243 (Fla. Dist. Ct. App. 1976) (In
defendingpersonalinjurylitigation,aninsurancecompanyparticipatesnotonlyonbehalfof
itself,butalsoonbehalfofitsinsured.)).
216Cf.Garnerv.Wolfinbarger,430F.2d1093,110102(5thCir.1970)(describingafiduciary
relationship that can become adverserial in the context of stockholders and corporate
management).
217Seesourcescitedsupranote215.
218Jebo,supranote8,at262.
219SeeSkalingv.AetnaIns.Co.,799A.2d997,1010(R.I.2002)(statingthattheinsurerhas
aresponsibilitytoassembleallthefactsnecessaryforafairandcomprehensiveinvestigation
before it refuses to pay a claim and may not base a defense to bad faith on later acquired
information,andthereforeinformationafterdenialoftheclaimisnotrelevantasevidenceto
thebadfaithaction);seealsoIns.Co.ofN.Am.v.CitizensbankofThomasville,491So.2d880,
883(Ala.1986)([I]nformationreceivedbytheinsurerafterthedateofthedenialisirrelevant
tothedeterminationofwhethertheinsurerdeniedatthatdateinbadfaith.).
220744N.E.2d154,157(Ohio2001).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
topayaclaim.221
Allowing discovery of the claims file best serves the interests of
policyholders since they would have access to the unique claims file that
contains information that is overwhelmingly necessary for their case
[e]veryone involved in bad faith litigation knows the claim file is the
case.222Insurersinterestswouldbeservedsincetheclaimsfilecouldstill
beprotectedafterthepointofthedenial,andinsurersalsowouldhavethe
chance to defeat a badfaith claim under the fairly debatable standard as
longastheywereactingreasonably.223Finally,judicialeconomyisserved
sincethedebateoverwhethertheclaimsfilematerialisprivilegedwould
beavoided.224
2. BadFaithClaimDiscoveryShouldBeSimultaneouswith
theContractClaim.
221See Unklesbay v. Fenwick, 167 Ohio App. 3d 408, 2006Ohio2630, 855 N.E.2d 516, at
16;Gargv.StateAuto.Mut.Ins.Co.,155OhioApp.3d258,2003Ohio5960,800N.E.2d757,
at 2124. But see OHIO REV. CODE ANN. 2317.02(A)(2) (West Supp. 2010) (requiring the
policyholdertoshowprimafaciebadfaithratherthanautomaticallygivinguppredeclination
claimfilematerialonamereassertionofbadfaith).
222Seesourcescitedsupranote31.
223SeesupraPartII.B.3
224SeeinfraPartIII.
225SeesupraPartII.C.1.
226MCMONIGLE&FARRELL,supranote116,at4.
227Seeid.at5.
228SeeInreAllstateCnty.Mut.Ins.Co.,209S.W.3d742,74647(Tex.App.2006)(explaining
how bifurcation eliminates the need to conduct discovery a second time in the event the
insuredprevailsonitscontractualclaim,therebyreducingthedelayinadjudicatingallofthe
insuredsclaimsandfacilitatesthetrialcourtsdutytoexpeditiouslydisposeofthecaseson
itsdocket).
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
III. FittingthePiecesTogether:HowStatesCanImplementaUniform
andClearApproachtoFirstPartyBadFaithLitigation
229See,e.g.,PeaceLakeTowers,Inc.v.IndianHarborIns.Co.,Nos.064522,065136,2007
WL925845,at*3(E.D.La.Mar.23,2007).
230See,e.g.,Gaffneyv.Fed.Ins.Co.,No.5:08CV76,2008WL3980069,at*23(N.D.Ohio
Aug.21,2008).
231SeeWolfv.GeicoIns.Co.,682F.Supp.2d197,199(D.R.I.2010).
232See,e.g.,Cookv.UnitedServs.Auto.Assn,169F.R.D.359,362(D.Nev.1996).
233See,e.g.,Skalingv.AetnaIns.Co.,799A.2d997,1010(R.I.2002)(notingthesignificant
proceduralprotectionsforinsurersinstayingdiscovery).
234See,e.g.,Cook,169F.R.D.at362.
235SeeGunnv.Auto.Ins.Co.,971A.2d505,510(Pa.Super.Ct.2009)([A]trialofthebad
faithclaimheldimmediatelyafter...islikelytobethemostefficientandfairestmethod...
becauseitavoidsduplicatetestimonyandpermitsthejudgetomakehisorherdecisionwhen
thejudgebestrecollectstherelevantevidence.).
236SeeRichmond,supranote73,at2324;seealsoBarkeretal.,supranote154,at67.
237SeeStewart&Stewart,supranote21,at43.
238SeeBarkeretal.,supranote154,at8.
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bargainingpoweroverpolicyholderssinceinsurerscanmitigatelitigation
costs with higher premiums.239 Also, insurance companies are litigation
savvythedominantinsurancecompanieshaveovertensofthousandsof
briefs across the country in various contexts against policyholders and
enoughfundingtolitigatecases.240
Insurers and policyholders would both benefit from clear standards,
whichwouldreducetheneedforextensivediscoverylitigationandallow
insurancecompaniestochallengebadfaithclaimsthattheyfindarefairly
debatable, while providing policyholders with recovery against wrongful
conduct.241 It is important for insurers to have certainty, such as that
resulting from a uniform standard, since an insurer accepts many risks
thatmayleadtolosses.242Withclearproceduralrules,insurerswouldbe
able to evaluate risk and spread losses more accurately, which would be
beneficialtoinsurerswhofacecyclicalprofitsandlosses.243Insurerswould
also be able to understand the potential availability of tort damages in a
badfaithsuit,whichwouldprovideanincentivetoreasonablyinvestigate
claims before denial.244 Deterring insurers from arbitrarily denying claims
would promote protection of policyholders from unfair handling of
claims.245 Also, policyholders would have a clearer and more easily
understoodexpectationoftheirinsurers.246Ultimately,therewouldbeless
litigationsincetherewouldbefewercontroversiesoverwhatconstitutesa
policyviolation,whichwouldprovidemorecontroltoinsurerscostsand
premiumrates.247
In addition to setting a uniform standard for bad faith, a clear
approach to discovery would smooth the litigation process.248
Policyholders interests would be served because they would be able to
gain access to the essential piece to make their case for bad faiththe
239SeeJebo,supranote8,at261.
240SeeAnderson&Fournier,supranote138,at383.
241SeediscussionsupraPartII.B.3.
242DavidR.Anderson&JohnW.Dunfee,NoHarm,NoFoul:WhyaBadFaithClaimShould
FailWhenanInsurerPaystheExcessVerdict,33TORT&INS.J.L.1001,1006(1998).
243See Financial and Market Conditions, INS. INFO. INST., http://www.iii.org/media/
hottopics/insurance/financialmar/ (last visited Apr. 23, 2011) (discussing some of the many
forces that influence the price of insurance, both external, such as the economy, natural
disasters,theamountoflitigation,orregulatoryactivities,andinternal,suchasmanagement
andcompetition).
244SeeAnderson&Dunfee,supranote243,at1006.
245Seeid.
246Seeid.
247SeePaulTetrault,BadFaithBillsAreBadIdeas,AM.AGENT&BROKER,Apr.2009,at50,50.
248SeediscussionsupraPartII.C.
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claimsfile.249Insurancecompanieswouldbeprotectedbecausetheycould
stillchallengepotentiallyprejudicialevidencefrombeingheardduringthe
breachofcontractportionofabifurcatedtrial.250Finally,judicialeconomy
wouldbepromotedbecausetherewouldbefewerdisputesoverwhether
theclaimsfilewasprotectedbyprivilegeortheworkproductdoctrineup
to the point of denial.251 Together, a clear standard for bad faith and a
smootherdiscoveryprocesswouldreducetheamountofresourcestiedup
inbadfaithclaims.252
CONCLUSION
249SeesupraPartII.B.2.
250See,e.g.,Cookv.UnitedServs.Auto.Assn,169F.R.D.359,362(D.Nev.1996).
251SeeJebo,supranote8,at26162.
252Seeid.at261.
253SeesupraPartII.
254SeesupraPartIII.
255Seesupranotes76,113,123andaccompanyingtext.
256SeesupraPartI.B.
257Seesupranotes14854andaccompanyingtext.
258SeeCapozzola,supranote78,at20103.
259Seesupranotes14954andaccompanyingtext.
260SeesupraPartI.C.
FEENEYFINAL_685717.DOC(DONOTDELETE) 4/27/20118:24:17AM
261SeesupraPartII.B.1.
262SeesupraPartII.B.2.
263SeesupraPartII.B.3.
264SeesupraPartII.C.12.
265SeediscussionsupraPartIII.
266SeesupraPartsIIIII.
267SeesupraPartII.
268SeesupraPartIII.