Since the late 1960s and early 1970s, the United States has seen the growth of direct actions against insurance companies in what have colloquially been termed “bad faith” actions. These actions have arisen from states adopting the common law action of a breach of the duty of good faith and fair dealing and from states allowing a private cause of action under the Uniform Unfair Claims Settlement Practices Act. Executive SummaryMake no mistake: Bad faith has returned, according to two members of Cozen O’Connor’s insurance practice, Stephen Pate and Karl Schulz. In this two-part article, the authors note that recent hurricane and catastrophe claims and alleged poor claims handling associated with those events are one factor, as courts have started wearing away at “fairly debatable” and “reasonable” standards that protected insurers from bad faith in prior years.
In this article, they review the history of bad faith litigation and recent cases in New Jersey and Colorado eroding the “fairly debatable” defense.
In Part II, they review more troubling decisions that have held that negligence can be the basis for bad faith causes of action.
Most states allow either the common law cause of action or the statutory cause of action. Many states allow both. Bad faith, as a relatively recent development, however, has always been understood to be a special tort or indeed a “con-tort”—a cause of action based upon an insurance contract that would allow the tort recovery of “extra-contractual” damages separate and apart from a carrier’s policy coverage, based upon a carrier’s poor claims handling or decision-making regarding a particular claim.
Bad faith did not arise from age-old concepts of personal injury or contractual damage. It was an extraordinary remedy, based on relatively new concepts of consequential damages. Thus, as part of its unique nature, bad faith, it was understood, also required intent. In other words, there needed to be a degree of intentional conduct or actual malice before there could be a finding of a breach of the common law duty of good faith. Under the statutory provision, the Uniform Unfair Claims Settlement Practices Act, a carrier would, for the most part, need to have been found to have acted “knowingly” before damages could be assessed if there was a violation. Bad faith was not mere negligence or poor judgment.