BAD FAITH

Rough Notes, Jul 2004 by Utschig, LeRoy H

In the eyes of the courts, there are many "definitions" of bad faith. Here are several that could have been used in the above case:

1. Examination of the facts indicates that there is no reasonable basis for denying the claim.

2. Was there a proper investigation of the claim and were the results of the investigation given a reasonable evaluation and review?

3. In denying the claim, the insurer either knew or recklessly failed to ascertain that the claim should have been paid.

In many bad faith cases, both the insurance agent and insurer will be named in the bad faith action. Also, an errors and omissions action may be brought against an insurance agent for the same situation out of which the bad faith action stems. There are times when it is difficult to tell the difference between an errors and omissions action and a bad faith action. From a practical standpoint, we need to know how to avoid a problem with either one.

Conflicting forms

In a loss involving Juliss Prince and Suddenly Sober, Suddenly was at fault in an auto accident-having hit Juliss. Nameless Coverage, Ltd., Suddenly's insurer, paid the policy limits to Juliss. Unfortunately, the cost of Juliss's injuries far exceeded the amount of insurance that Suddenly had on his car. Juliss presented an underinsured motorist claim against her insurer, Friendly Insurer, Inc. Friendly said it would honor juliss's claim. However, the amount it would pay would be reduced by the amount of money she had received from Nameless Coverage. At the time of this personal auto loss, few insurers were using an offset clause.

Juliss made a second claim against Friendly Insurer. In this claim, she stated that she deserved coverage because neither Friendly Insurer nor its agent had told her about the offset clause, nor given her the option to buy it back.

Among other allegations, juliss included the words "bad faith." Her request for legal action included naming both Friendly Insurer and its agent.

Bad faith allegations can result from a wide range of situations. Agents should check to be sure their umbrella or errors and omissions policies provide coverage for bad faith actions.

By LeRoy H. Utschig, CPCU, ARM

The author

LeRoy H. Utschig, CPCU, ARM, is a Wisconsin-based insurance educator, consultant and expert witness.