An insurance policy is a contract between an insured and an insurance company (insurer).
A liability policy buys two important things for the insured. It requires the insurer to provide a defense against a claim or lawsuit (hire a lawyer for the insured) and indemnity. Indemnity means that the insurance company will pay a settlement on behalf of the insured or pay any judgement against the insured.
The language of the insurance policy determines what sort of events will trigger the insurer’s obligation to defend and indemnify. The policy also sets the maximum limit of how much the insurer must pay to indemnify the insured.
For example, if an insured purchased an automobile policy with liability limits of $100,000 but got into a car wreck and negligently caused damages of $1,000,000, the insurance company would only be contractually obligated to pay the $100,000 policy limits purchased by the insured.
In Missouri, the insurer is said to have a fiduciary duty to act in good faith towards its insured. A fiduciary duty requires that the insurance company must place its insured’s interests over its own. In other words, if the insurance company’s interest conflict with its insured, the insurer is obligated to sacrifice its own interests in order to protect its insured.
When an insurance company fails to protect its insured, it has acted in bad faith. Bad faith is a tort, which means that the insurance company is potentially responsible for all the damages caused or suffered by its insured, not just the contractual liability limits. In the example above, if the insurance company had acted in bad faith, it could very well be obligated to pay the $1,000,000 in damages instead of the contractual limits of $100,000.
Bad Faith cases typically come in two varieties. Bad Faith Failure to Settle (BFFS) or Bad Faith Failure to Defend (BFFD).
BFFS occurs when an insurer has an opportunity to settle a claim against its insured for an amount within the policy limits but fails to do so. An important component of the opportunity to settle the claim within the limits is that the insured is given a complete release of all liability. If the insurer fails to act reasonably to protect its insured and exposes the insured to a judgment in excess of the policy limits it has acted in bad faith.
Courts have found the following factors to be indicative of bad faith in BFFS cases
- Failing to investigate fully a claimant’s injuries or recognize the severity of such injuries.
- Ignoring that a verdict could exceed the policy limits.
- Refusing to consider a settlement offer.
- Failing to keep an insured informed of settlement offers.
- Failing to inform the insured of the insured’s potential exposure to excess liability.
- Failing to inform the insured of the right to personal counsel in cases involving excess exposure or potential coverage issues.
- Failing to adhere to the company’s own manuals or processes for claims handling.
Bad faith failure to defend, BFFD, occurs when an insurer takes the position that its policy doesn’t offer coverage for a specific loss. In such a case the insurer generally refuses to provide a defense and also refuses to provide indemnity to the insured. If it is later determined that the insurer was incorrect about its coverage position, it acted in bad faith.
Courts have found the following factors to be indicative of bad faith in BFFD cases:
- Performing a results-oriented investigation in an effort to deny coverage.
- Limiting the investigation solely to the issue of coverage.
- Beginning an investigation with the presumption of no coverage.
- Making a coverage denial prior to a complete investigation.
Bad faith cases are complex and fact intensive and insurance companies defend them vigorously. If you believe that an insurance company has committed bad faith, contact The Pottenger Law Firm.
