INSURANCE & "BAD FAITH"

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Insurance Claims: Auto accidents; insurance claims; bad faith denial of claims; personal injury; wrongful death.

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Courts Nip at Insurance Industry's Heels

On September 16, 2008, the California Court of Appeal covering Los Angeles County decided that 21st Century Insurance could be sued for "bad faith" breach of the covenant of good faith and fair dealing if it hired an expert to "tell them what they wanted to hear." Expanding upon its ruling of 2007, the same court held that an insurer could not rely upon the doctrine of "Genuine Dispute" by pointing to a hired gun's opinion that its insureds were not seriously injured in an auto accident. The decision in Brehm v. 21st Century Insurance was yet another reminder of the 1999 legislative effort to revive "bad faith" laws against the insurance industry.

In late 1999, California’s legislature passed, and the governor signed, a law addressing insurance company conduct. Several of the biggest insurance companies got two referendums placed on the ballot. They even got Mothers Against Drunk Driving on their bandwagon. Not to be outdone, the trial lawyers went out and got the California Teacher’s Association to be on the other side. But really, it was the same old two at it again, Insurance Companies vs. Trial Lawyers. Like so many kids in a sandlot.

Focus of Bad Faith Laws

“Insurance Bad Faith” laws are designed to prevent abuses in claims handling. When you buy a bottle of soda pop and it’s carbonated, one of the reasons that the pressure doesn’t force the bottle to explode, cutting and possibly blinding you, is that the glass is extra thick. Bad publicity isn’t the only thing which comes from a one-eyed customer; so does a lawsuit. You might think that if you file a lawsuit and the other person has insurance, they spend their money and hire a lawyer. Usually not.

Insurance companies sell policies which state that they will both “defend” and “indemnify” lawsuits. This means that the insurance company hires a lawyer and pays the full judgment if both the conduct and the amount of the claim fall within the terms and limits of the policy. With a few exceptions, like medical malpractice policies, the insurance company gets to make all of the decisions regarding the case. All means all. First, they hire a lawyer which they pick. Next, the insurance company, and only the insurance company, decides whether anything will be offered by way of settlement.

The Problem

Have you ever been involved in an auto accident and felt “sorry” for injured people in the other car? Don’t worry, “sorry” isn’t a word used much in high stakes litigation. Bad Faith laws address this, but only from hindsight. After the case is over, these laws look at what the case was about, and how it should have been handled. Insurance companies aren’t “cash cows,” and nobody expects them to be. If their insured didn’t do anything wrong, they have nothing to worry about when they force the party making the claim to “take the case to court.” If they made a prompt and fair offer to settle a case where fault is obvious, they are similarly insulated.

Nobody knows lawsuits like insurance companies. Insurance company claims managers follow jury awards like soccer fans follow the World Cup; except that the insurance people are more fanatic.

On balance, claims supervisors know precisely what’s going to happen as a lawsuit progresses. They make it their business to evaluate both the people presenting claims (maintaining a nationwide index by name) and the capability of attorneys representing them. As such, they have a pretty good sense for both “how much” it will take to settle and “what” a probable verdict will be if they don’t. Examples of the kinds of conduct which they can’t engage in are set out in California’s Bad Faith Laws. Not making any offer, or a ridiculously low one, knowing that if the claimant proceeds to trial, the defendant will clearly lose and owe much more. Dragging their feet only because the person making the claim is old, and they hope he’ll die while waiting for trial. Requiring that useless information be sent to them, just to “make it hard” and dissuade the claimant from proceeding. If they engage in these types of conduct, and they later lose the case, the insurance company can be held accountable. Problem is, by whom?

The Covenant of Good Faith & Fair Dealing

Every contract of insurance carries an implied promise, a covenant. It says that if you make a claim the insurance company will deal with you, their customer, in “good faith;” they promise to deal with you fairly. Obviously, if they don’t, they’ve “breached” their contract with you…and you can sue them. The typical efforts to apply these “bad faith” laws to people who weren’t the insurance company’s “client,” so-called third parties who are indirect beneficiaries of these contracts, have given rise to countless hours of legal wrangling, and millions of dollars in TV advertising. These third parties are the people who got hurt. They’re often innocent victims of something that happened, and they want the culpable person’s insurance company to “pay.” If they’re not paid, they have no recourse other than to sue. If it turned out that they’d been right all along, and the insurance company knew it, they wanted the right to bring a lawsuit against the insurance company, just like the named “insured” customer could. This, in turn, gave rise to changes in 3rd Party Bad Faith laws.

It All Came Down to Money

The industry didn’t like the law because it would have forced them to behave a certain way in their handling of claims. As proposed, the law would have allowed insurance companies to be sued after the person who made the claim beat them in court. Several major insurance companies complained then, and complain now, that while such laws seem fine on their face, such a scheme isn’t fair. They’ve always pointed out that California maintains Insurance Code section 790.03. That law already allows punishment for “bad faith,” just that the person able to bring the action would be the California Insurance Commissioner not the person who filed suit in the underlying claim.

For their part, personal injury trial lawyers stood to make a financial killing. It isn’t so much the specter of a “second lawsuit” that would prove to be a windfall. After all, there wouldn’t be a “second lawsuit” against the people causing the accident. The insurance companies called it a “second lawsuit” because they are the ones involved twice.

So why would the lawyers care so much? The real windfall would be that insurance companies would end up paying “a little extra” on every case as kind of a hedge against being accused of misconduct later on.

In 2000, California voters stopped the proposed new law from taking effect. Million dollar television ad campaigns, on both sides, spent little time discussing the issues but ogles of time dealing with hyperbole, emotions, and exaggerated fables.

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