Bad-Faith Myths

For example, in the 2006 Superior Court case of Condio v. Erie Insurance Exchange [2006 Pa. Super 92], the Pennsylvania Superior Court was asked to consider whether an insurer's conduct in disputing and defending against a claim by an insured for UM/UIM benefits constituted a violation of the Pennsylvania Bad-Faith Statute. In reversing a bad-faith judgment in favor of the insured, and continuing a trend in the case law, the Condio court afforded insurers more rights and latitudes in defending themselves. The Superior Court ruled that insurers have a right of legal self-defense in defending against UM/UIM claims, which included the following rights vis-?-vis their insureds, among others:

• The right to protect its own interests
• The right to express doubts regarding a claim based upon investigation
• The right to make low but reasonable settlement offers
• The right to treat insureds as an adversary in UM/UIM claims
• The right to employ counsel to act to protect their interests without committing bad faith
• The right to take reasonable amounts of time to investigate claims without being guilty of bad-faith delay

Furthermore, the Condio court held that the insurer does not have to submerge its own interests to those of its insured. The Superior Court went so far as to say that UM/UIM claims were an "adversarial" process, and that insured and insurer are each legally entitled to the right of self protection. Insurers, therefore, have a full and complete set of rights to defend themselves, including the right to defend themselves aggressively if necessary, notwithstanding any views to the contrary.

Myth # 2: Negligent claim handling is sufficient proof of bad faith.

Negligence has never been the measuring standard by which bad-faith conduct has been adjudicated in Pennsylvania. The appropriate analysis has always examined — and properly so — whether an insurer's conduct in adjusting a claim had a reasonable basis. An insurer acts in bad faith only if it lacks reasonable grounds for the denial or decision, and if it knows or recklessly disregards that lack of reasonable grounds. Insurance companies do not commit bad faith simply by investigating a claim or having an opinion on a value that differs from that of their insureds.

While plaintiffs are unlikely to concede it, Pennsylvania's bad-faith law not only gives insurers the right to be wrong, but it also provides a right to legal protection from liability resulting solely from negligence. In Jung v. Nationwide Mutual Fire Ins. Co. [949 F. Supp. 353, 7 (E.D.Pa. 1997)], Nationwide sought summary judgment in its favor after declining a vandalism loss claim by an insured and seeking to rescind the policy because of the insured's misrepresentations in obtaining it. In granting judgment in favor of Nationwide, the court held that insurers had a right to be wrong under the statute and that the requisite proof of bad faith under the statute required something beyond negligence, such as proof of "dishonest purpose or evil motive."

Furthermore, the analysis of whether an insurer has a reasonable basis to act has been ruled to be an objective one. Therefore, an insurer can successfully defend itself merely by pointing to any factors that could provide a reasonable basis for the insurer to have acted in that manner, even if those factors were not actually relied upon in the adjustment of the claim itself. This can be a powerful tool in defending against bad-faith claims.

Myth # 3: The insured needs only prove bad faith by a preponderance of evidence, rather than providing clear and conclusive evidence, to overcome summary judgment or to prevail at trial.

The requisite standard of proof is often mischaracterized or misunderstood by litigants as simply the preponderance threshold necessary in most civil cases. However, state and federal courts have long held that because the bad-faith statute is quasi-criminal and punitive in nature, the necessary proof of a bad-faith claim or even a summary judgment challenge must be clear and convincing evidence, reaching well beyond any preponderance of the evidence standard. O'Donnell v. Allstate Insurance Companies [1999 Pa. Super 161 (Pa. Super Ct. 1999)] provides one example of this holding.

This burden is no less difficult at the summary judgment stage. That is, the plaintiff must show under the peril of dismissal that a jury could find by "the stringent level of clear and convincing evidence" that the insurer lacked a reasonable basis for its handling of the claim and that it intentionally or recklessly disregarded its unreasonableness. In the Jung case, the court noted that the plaintiff's evidence must meet the "significant evidentiary burden at trial."

Myth # 4: An insurer's departure from its own claim-handling guidelines in the claim at issue, or of claim-handling regulations, is sufficient proof of bad faith.

This myth ignores appellate decisions that have specifically addressed the issue and ruled to the contrary. An insurer's departure from applicable claim-handling guidelines or regulations cannot in and of itself support a bad-faith case.

In Employers Mutual v. Loos [476 F. Supp. 2d 478, 2007 WL 665841 (W.D. Pa. Feb. 28, 2007)], a federal trial court was asked to determine whether a violation of the Pennsylvania Unfair Insurance Practices Act (UIPA) would allow recovery under the bad-faith statute. The court declined to do so, echoing the long-held premise that mere negligence or bad judgment, both of which can lead to a UIPA violation, was not sufficient to prove a bad-faith claim. In Employers Mutual v. Loos, the court observed that "a failure to comply may be equally consistent with a mistake as with bad faith." Essentially, mistakes can and will happen, but mere mistakes are not what the bad-faith statute was designed to address.

Myth # 5: An insurer's defense of itself in either litigating an underlying claim, or in a bad-faith claim itself, must be limited and constrained because litigation conduct can also serve as the basis for a bad-faith claim.

Unlike most of the others, the origin of this myth can almost singularly be traced to a misinterpretation of the earlier Superior Court holding in Hollock v. Erie Insurance Exchange. In that case, the Superior Court affirmed a multi-million dollar bad-faith award entered by a judge of the Luzerne County Court of Common Pleas, and held that the bad-faith conduct of an insurer could be used to establish a bad-faith case even if such conduct occurred after initiation of the bad-faith suit. This holding, however, has been misinterpreted and inaccurately portrayed so frequently that some have come to believe — wrongly — that Hollock stands for the proposition that all post-litigation conduct of an insurer can be used to support a bad-faith claim. It does not.

Hollock is not so broad even by its own terms, and even its self-limited holding has been openly called into question by several judges. An insurer's conduct as a litigant, apart from its conduct as an insurer, is not actionable under the bad-faith statute. Nor is the conduct of the insurer's lawyers in defending the insurer in litigation, even aggressively and contentiously. Hollock dealt only with the post-litigation conduct of an insurer as an insurer vis-?-vis the insurance claim, not with the insurer's exercise of the its legal due process rights, including through counsel, to defend itself.

Cases and commentators, including the chief justice of the Pennsylvania Supreme Court in the Hollock case itself, have recognized the grave danger of an overly broad reading of Hollock, most notably the chilling effect it would have on insurer representation and self defense, especially when there are other litigation-specific remedies already extant to address such concerns.

Myth # 6: Bad-faith cases are always limited to scrutiny of insurer conduct only; an insured need never worry about his own conduct or the conduct of agents relative to making the underlying claim.

It seems that insureds have nothing to lose by filing bad-faith claims, allowing them to "roll the dice" without fear of repercussion or consequence. While on the surface the terms of the Pennsylvania Bad-Faith Statute apply only to insurer conduct, a growing number of court decisions — along with existing statutory provisions allowing for recovery against an insured who makes or pursues a claim without reasonable basis to do so — suggest that an insured owes a corresponding obligation of good faith under the insuring agreement, and can therefore be liable for the consequences of breaching that obligation. Insureds can commit "reverse bad faith" either through their own conduct or that of authorized agents, subjecting themselves to liability for attorneys' fees, costs, and other extra-contractual damages.

In Leach v. Northwestern Mutual Insurance Company [2005 U.S. Lexis 39966 (E.D.Pa.)], a Northwestern Mutual insured was held liable for the insurer's attorneys' fees arising out of the insured's breach of its good-faith obligations. The court required the insured to reimburse the insurer for "reasonable fees," calculated under the traditional "lodestar" method. In that case, the court found that $250.00 per hour was a reasonable rate for an attorney to defend an insurer and awarded more than $225,000 to the insurer at the conclusion of the proceedings.

In addition to insured liability under the doctrine of reverse bad faith, the insured's agents, servants, or employees can be directly liable to insurers under certain circumstances. For example, in Trustees of Intern. Broth. of Elec. Workers Local 98 Pension Plan v. Aetna Cas. & Sur, Co. [1998 WL 614769 (E.D.Pa. Sept. 14, 1998), affirmed 225 F.3d 650 (3d Cir. Pa. 2000)], the court held that an attorney could be held liable under certain circumstances for tortious interference with the insurance contract.

On close inspection, then, it should appear that in bad-faith litigation, everyone has skin in the game, and through the exercise of insurer vigilance over its own rights, it can ensure that bad-faith claims are not the judicial lottery they once were. There are consequences to unscrupulous insureds who proceed without legal or reasonable basis to do so.

Peering Beyond Myth

When enforced and interpreted properly, the Pennsylvania Bad-Faith Statute provides a stringent standard that properly punishes insurers in cases of egregious behavior. It is not now, nor has it ever has been, a strict or absolute liability scheme, despite the best efforts of enterprising insureds and their counsel to capitalize on it as such. The damages and penalties to insurers under the bad-faith statute are high, so it makes legal and logical sense for the prosecution requirements of a bad-faith claim, especially standards of proof, to remain high.

Business enterprises, including insurers, should be allowed sufficient freedom and latitude within which to operate. The Pennsylvania Bad-Faith Statute, when properly applied and enforced, is no impediment to such freedom. When improperly enforced, however, it can carry a heavy burden, and run against the best interests of public policy, particularly when such cases drive up the cost of insurance premiums.

When insurers look beyond the facade of these six myths, they can both ensure their freedom to operate cost-effectively and provide benefits to not only themselves, but to those they insure as well.

C.J. Haddick is a director with the Pittsburgh law firm of Dickie, McCamey & Chilcote, P.C. in the firm's Harrisburg office. He can be reached at 717-731-4800, chaddick@dmclaw.com.