Institutional Bad Faith: The Darth Vader of Extra-Contractual Litigation[dagger]

FDCC Quarterly, Winter 2007 by Varner, James A Sr, Drust, Tiffany R, Herron, Debra T

I.

INTRODUCTION

Institutional bad faith is the "Ebola" virus of extra contractual litigation. Darth Vader manages the field hospital and it is completely run by plaintiffs. It can be seemingly innocuous at first and hard to recognize, but it can grow explosively and wreck not only litigation management budgets, but can also seriously deplete corporate equity and shareholder value. If properly conducted in the hands of a skilled plaintiff's attorney, it can create "bet the company" exposure, for all but the healthiest of insurance carriers. It rarely reaches the trial phase because of the exposures and the discovery aspect which is a key component. The typical case will start with fairly routine discovery, including interrogatories and requests for production, but will rapidly escalate into more aggressive requests for more and more information from not only claims handling, underwriting, and in house legal departments, but also high ranking executives and even board members. The purpose, of course, is to cast the insurance industry as an "evil empire" operating without conscience and calculated to destroy the hope of legitimate claimants. When one strips away the facade of righteousness that the plaintiffs' bar tries to create, one finds a naked effort to put the entire industry on trial and dramatically increase the punitive damage awards accordingly. Novel damage theories are forthcoming and are discussed in more detail hereafter.

Decisions regarding the potential bad faith liability of insurance carriers routinely emanate from the West Virginia Supreme Court of Appeals. In some respects, these decisions are unique; yet, in other facets, the decisions have followed the majority of other jurisdictions, usually with some modification or expansion. Despite that, no institutional bad faith case has been reviewed by this activist court. The closest related was a hybrid case regarding infant summary proceedings against every insurance carrier ever to conduct business and effectuate an infant settlement in West Virginia for a twenty year period preceding the filing of the complaints.1 This, of course, is explained by the infant's rights to challenge said settlements upon reaching the age of majority and for a period of two years thereafter. Although the term "institutional bad faith" is not mentioned as such in the various appellate decisions arising out of this litigation that is precisely what it was: an attack on the entire industry. Interestingly, the defense prevailed for all but one insurance carrier, and even though the settlement amount with that carrier is confidential, it is thought to be in the tens of millions of dollars, if not higher.

Obviously, this is not litigation for the faint hearted, especially on the plaintiff's side, as this litigation is time consuming and very expensive. Because the early warning signals are sometimes very difficult to read, missteps in the discovery process at an early stage can create enormous openings for extensive discovery into all phases of corporate activity, including the financial division. The nature and scope of such risk is too broad and detailed for this article.

II.

CLASS ACTIONS OR "MERE" MULTI-PLAINTIFF CASES

A very activist plaintiffs' bar in West Virginia is constantly probing for areas to expand insurance bad faith claims. It is worthy of note that bad faith is a cause of action the plaintiff's attorney can actually create after signing up the underlying tort claim. Thus, what started as a small, focused attack on the insurance industry is growing to include virtually every plaintiffs' firm with a personal injury base. Upon discovery of a common theme, discovery demands are then filed for "other claims" files. The fairly recent United States Supreme Court decision in State Farm Mutual Automobile Insurance Co. v. Campbell,2 has placed significant barriers in the path of plaintiffs' attorneys seeking "other claims" discovery. The realistic problem is that many courts interpret Campbell in different ways, but, at a minimum, the discovery of other claims files should be limited to a single state. The aforementioned hybrid case involved a very capable plaintiff's attorney who had been retained to represent a minor and his mother regarding an infant settlement that had been secured without obtaining court approval through a summary proceeding and prior to retention of counsel, when the plaintiffs had no representation. The plaintiffs' counsel initially maintained that obtaining a settlement of the infant claim from the mother without the use of a summary proceeding violated the West Virginia Unfair Claims Settlement Practices Act.3 In its first opportunity to address this case, the West Virginia Supreme Court of Appeals held that "W. Va. Code, 44-10-14 [1929] does not require court approval of all claims where a guardian executes a settlement agreement on behalf of minor who has been injured in his or her person or property."4 Unfortunately, a footnote in Karl I left open other areas of pursuit.5