“Bad faith.” If these words were uttered in a pleading in La.,Miss., or any other Gulf state prior to the arrival of the nowinfamous 2004 Florida hurricanes—as well as the 2005 monsters, Katrina and Rita,in Miss. and La.—then the lawyer filing this rare claim in alawsuit usually made sure he or she had an egregious set of factsto substantiate the claims in the lawsuit.

Further, regardless of how egregious the facts, a defenseattorney would, in most cases, read the words “badfaith,” and promptly jump out of his or her chair, picking upthe phone immediately to have a nice little conversation with theplaintiff's lawyer.

Unfortunately, the days of a rarity of bad faith allegations ina lawsuit vanished just as innocuously as the 2004 and 2005hurricanes. Instead, these hurricanes popularized the words “badfaith” and empowered plaintiffs' lawyers, making bad faithallegations the “rule” in Gulf lawsuits more than the “exception.”So much so, in fact that a client recently asked me why aplaintiff's lawyer did not ask for bad faith damages in afirst-party claim. Have we really reached a point where defendantsare surprised when wrongdoing is not alleged in a first-partylawsuit? Are we now living in a “Commercial Claims BizzaroWorld¹” come true?

This article briefly addresses some trends in bad faithlitigation, tactics that have been used to defend such claims overthe past 6 to 7 years, examples of negative ramifications, andwhether the days of jumping out of one's chair when “bad faith” isuttered are indeed over.  ACritique of Current Tactics

Let us assume for the moment (no comments about what “assume”means, please) that insurers are not very fond of being sued forbad faith. It is clear that insurers continue to dispute theseclaims and defend against them, and yet the claims keep on coming.Consider the staggering impact of these bad faith claims in lightof the fact that 3 years after Hurricane Katrina, it was “estimated that between 27,000 and30,000 hurricane insurance suits were filed in southern Louisianaalone².”

To combat the 2004 and 2005 claims and the additional cases fromsubsequent events such as Hurricanes Gustav, Ike, and generalfirst-party claims, defendants in these Gulf lawsuits havevaliantly filed their motions to dismiss³, motions forsummary judgment, motions in limine, and any procedural vehicleavailable to have these bad faith allegations dismissed.Unfortunately, it is rare when these claims are dismissed prior totrial and or settlement. Thus, these tactics do not seem to be adeterrent, and insurers continue to spend their ever-important andever-scrutinized defense dollars defending theseclaims⁴. 

Worse yet, these bad faith claims have additional, adverseconsequences and ramifications to defendants in commercial claims.Not only are the defendants spending the almighty defense dollar tofight the bad faith allegations, but the allegations also spawn thepotential for additional defense dollars spent. The following arejust a few examples. “Raising theCeiling” in Settlement Negotiations

The insured and savvy insured's attorney may have alleged badfaith to “raise the ceiling” in its settlement negotiations.“Raising the ceiling” is a negotiation tactic used by plaintiffs toincrease the defendants “worst case scenario” settlement amount(“ceiling”).

To illustrate the application of these strategies in a bad faithallegation scenario, let us consider a first-party fire losslawsuit by an insured against its insurer. In this fact pattern,the insured has filed a lawsuit for an additional $500,000 to whichhe or she believes to be entitled in order to repair his or herbuilding and for bad faith damages—as the insurer was arbitrary andcapricious for not paying (in a timely fashion) what the insuredbelieves he or she was owed. The insured believes he or she hastendered funds for all undisputed covered damages. Moreover, inthis fact pattern, assume that the insurer is correct and it wasnot arbitrary and capricious, tendered the amounts owed timely. Assuch, there is no bad faith.

The insurer files all of its potential motions to dismiss, yetthe judge refuses to dismiss the bad faith claims because there are“facts” in dispute (painful words to defending insurers and theirlawyers). Thus, as a majority of all lawsuits settle prior to trial at mediation, both the insurerand insured agree to mediate their disputes. However, the insurerhas now been put in a precarious position. No longer does it justhave to defend against the damage estimates of the insured and knowthat its worst case scenario is $500,000 (the old ceiling).Instead, even if it has no intension of paying one cent of badfaith damages at mediation, the ceiling has still risen, as thereis a chance that $500,000 is no longer the worst case scenario.

Thus, without some way to deter plaintiffs from filing these badfaith claims, defendants will be subject to these higher ceilings. Bad Faith Claims Subsequent to AppraisalAwards

To say that Fla. is also a “hot spot” for bad faith litigationwould be quite an understatement. Add to that the growing bad faithlitigation in Florida involving appraisal awards, and you have asubject for another article entirely.  

Briefly stated, in Fla., if an insurer attends an appraisal with its first-partyinsured pursuant to the terms of its insurance contract and theinsured is awarded funds in addition to the undisputed tender, thendepending on the amount in excess of the undisputed tender,insureds have been claiming bad faith and filing bad faithlawsuits. Thus, the defendant now faces the potential of an adverseaward at appraisal and a bad faith claim to boot based on the factthat the award was granted, which results in spending more money ondefense costs and the awards.   

This example alone suggests that bad faith litigation isbeginning to spawn added areas of concern for commercialdefendants. Chairs Must FallAgain

As you can see from just these few areas, commercial defendantsare facing bad faith claims that are increasing and expanding, andit does not appear that the current defense, tactics areworking. 

There needs to be a collective defense effort to bring back thedays of being shocked when bad faith damages are alleged, and so“chairs must fall once again.” Defendants cannot allow thesecommercial bad faith claims to be the rule, rather than theexception, any longer.

Insurers need to do more than merely defend these claims; theymust go on the offensive, taking measures to slow down or reversethese costly trends. This may entail pushing for legislation thatpenalizes the plaintiff for the filing of bad faithclaims⁵, or moving early for sanctions as the bad faithclaims and allegations are without merit and frivolous.

Simply put, the trends may not stop or reverse unless theplaintiff is forced to think long and hard before filing a badfaith claim just to raise the ceiling, as the filing of that claimhas a good chance of backfiring.

Footnotes

1 “The Bizarro World (also known as Htrae) is a fictional planetin the DC Comics universe, introduced in the early 1960s.

2 Martin, Chris. “Hurricane Ike Litigation; Will it be as bad asKatrina?” (November 17, 2008) National Insurance Law Forum (visitedApril 18, 2011); http://www.insurancelawforum.com/2008/11/articles/bad-faithextra-contractual/hurricane-ike-insurance-litigation-will-it-be-as-bad-as-katrina.

3 Called “Exceptions of No Cause of Action” and “No Right ofAction” in the Napoleonic Code of La.

4 Believe it or not, almost 6 years post-Katrina and Rita inLa., bad-faith decisions from Hurricanes Katrina and Rita are stillbeing decided by the courts. Wegener v. Lafayette Insurance Co.,2011 WL 880339, 2010-0810 (La. 3/15/11).

5 This is not unprecedented, as the La. legislature has adoptedstatutes that include remedies for the “bad faith” filing ofclaims: Louisiana Revised State 23:967(D), “If suit or complaint isbrought in bad faith or if it should be determined by a court thatthe employer's act or practice was not in violation of the law,then the employer may be entitled to reasonable attorney fees andcourt costs from the employee.”