This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 20, #4 (June 2006).
[Editors note: Steve Rawls is a partner with the law firm of Butler Weihmuller Katz Craig LLP in Tampa, Florida. He devotes his practice to third party bad faith, liability coverage and liability defense. Dennis M. Hudson, Jr. is a senior associate attorney in the Tampa, Florida office of Butler Weihmuller Katz Craig LLP. He works in the firm’s third party bad faith, liability coverage, and liability defense departments. Commentary, other than the quoted material, are the authors’ opinions, not their law firm’s, and not Mealey Publications’. Copyright © 2006 by the authors. Responses are welcome.]
Under liability insurance policies, insurance companies assume the obligation of defending their insureds.[FN1] In so doing, carriers can settle and foreclose their insured’s exposure or refuse to settle, leaving the insured potentially exposed to damages that exceed the policy limits.[FN2] Most courts find that this obligation places insurers and insureds in a fiduciary (or fiduciary-type) relationship.[FN3] Accordingly, courts recognize that an insurer owes a duty to the insured to refrain from acting solely on the basis of the insurer’s own interests in settlement.[FN4] This duty extends to situations where an insurer has an opportunity to settle a third-party liability claim against its insured within policy limits and requires an insurer to pay an excess judgement against an insured, where the carrier in good faith should have settled.[FN5]
Courts use different standards to evaluate whether an insurer acted in bad faith in failing to settle a third-party claim. These standards include “shifting-burden,”[FN6] negligence, “bad faith,” “equal consideration” and “disregard the limits.”[FN7] At least one court uses a “totality of the circumstance” test that encompasses consideration of several factors to evaluate whether the insurer acted in bad faith by failing to settle a liability claim against its insured.[FN8] Some jurisdictions use standards that combine these approaches while other jurisdictions use standards unique to that jurisdiction.[FN9]
These standards contain common themes consistently used by many jurisdictions to determine if a carriers acts or omissions constitute bad faith. Many of these “different” standards coalesce into similar considerations of the insurer’s conduct. This article presents a brief survey of selected standards used to determine an insurer’s bad faith for failure to settle.
Under Alabama law, a liability insurer may be held liable for an excess judgment under two circumstances: negligence and bad faith.[FN11] Negligence occurs where the insurer neglects to exercise ordinary diligence in ascertaining the facts and as a proximate result of such neglect fails to make a settlement “which is available, when such knowledge would have caused a reasonably prudent person to do so,” and an excess judgment is rendered against the insured.[FN11] Bad faith is the intentional failure to settle a claim.[FN12] Alabama uses the same factors in determining whether an insurer negligently failed to settle or acted in bad faith.[FN13] Accordingly, under Alabama law, a decision not to settle must be thoroughly honest, intelligent and objective, and it must be realistic when tested by the assumed expertise of the insurance company.[FN14] Factors to consider include: 1) the view of the carrier or its attorney as to liability; 2) consideration of the anticipated range of a verdict, should it be adverse; 3) the strengths and weaknesses of all the evidence to be presented on both sides, so far as known; 4) the history, the particular geographic and cases of similar nature; and 5) the relative appearance, persuasiveness and likely appeal of any claimant, the insured and other witnesses at trial.[FN15]
In addition to those factors the Northern District of Alabama instructed a jury to consider the following factors when deciding whether the liability insurer acted in bad faith:
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1) |
Was there a full investigation of the facts of the case? |
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2) |
Was there an incompetent or dishonest evaluation of the underlying case? |
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3) |
Did the insurer properly analyze the strength of the insured’s position in the underlying case from both the liability and damages standpoint? |
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4) |
Did the insurer place its interest ahead of the interest of the insured? |
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5) |
Was the refusal related in any way to the existence of reinsurance? |
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6) |
Did the insurer establish appropriate reserves to settle the case? |
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7) |
Did the insurer fail to respond to settlement offers; delay responding to settlement offers; or, fail to explore settlement possibilities when it would have been prudent to do so? |
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8) |
Did an opportunity exist to settle the case within policy limits? |
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9) |
Did the insured request settlement within the policy limits? |
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10) |
Did the insurer fail to keep the insured advised of relevant facts and developments? |
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11) |
Was the amount of risk to the insured disproportionately large compared to the risk to the insurer? |
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12) |
Did the insurer heed or listen to its own counsel’s advice? |
| 13) |
Did the insurer act in an arbitrary and flexible manner indifferent to the consequences to the insured? |
| 14) |
Did the insurer properly react to adverse developments? |
| 15) |
Was the insured negligent in failing to settle the case? |
| 16) |
Did the insurer request a third party to contribute to the settlement before it offered its own policy limits? |
| 17) |
Was the insurer defending the insured under a reservation of rights? and, |
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Any other factors exist tending to establish or disprove bad faith or negligence on the part of the insurer?[FN16] |
The standard of proof for demonstrating negligent or bad faith failure to settle under Alabama law is a preponderance of the evidence.[FN17]
Under Alaska law, where a plaintiff makes a policy limit demands and “there exists a substantial likelihood that a verdict will be rendered against the insured in excess of the coverage provided” by the insurance policy, the insurer has a duty to tender the policy.[FN18] An insurer has a duty to determine “the amount of a money judgment which might be rendered against its insured and to tender in settlement that portion of the projected money judgment which [the insurer] contractually agreed to pay.”[FN19] The covenant of good faith and fair dealing obligates an insurer to 1) inform the insured of all settlement offers; and 2) to inform the insured of the possibility the injured claimant may recover a judgment in excess of the policy limits.[FN20]
Alaska courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Arizona uses the “equal consideration” standard. Under Arizona law, the duty of good faith requires that an insurer give equal consideration to the interests of the insured when deciding whether to accept a settlement offer.[FN21] The factors to be considered by the trier of fact include: 1) the strength of the injured claimant’s case on the issue of liability and damages; 2) attempts by the insurer to induce the insured to contribute to a settlement; 3) failure of the insurer to properly investigate the claim so as to ascertain the evidence against its insured; 4) the insurer’s rejection of the advice of its own attorney or agent; 5) the insurer’s failure to inform the insured of a settlement offer; 6) the amount of financial risk to which each party is exposed in the event of a refusal to settle; 7) the fault of the insured in inducing the insurer’s rejection of the compromise offer by misleading it as to facts; and 8) any other factors tending to establish or negate bad faith on the insurer’s part.[FN22]
The standard of proof for demonstrating negligent or bad faith failure to settle under Arizona law is preponderance of the evidence.[FN23]
California uses a negligence standard in cases involving bad faith refusal to settle within policy limits. The test for determining whether a liability insurer has acted in bad faith by refusing a settlement offer is “whether a prudent insurer without policy limits would have accepted the settlement offer.”[FN24] The absence of evidence “showing actual dishonesty, fraud or concealment is not fatal to the cause of action.”[FN25] When there is “great risk of a recovery over policy limits so that the most reasonable outcome is a settlement within policy limits, good faith consideration of the insured’s interests requires the insurer to settle the claim.”[FN26] “The ‘reasonableness’ of an insurer’s disposition of the claim is measured chiefly in relation to the estimated risk of the claimant’s recovery beyond the policy limits.”[FN27]
In considering whether an insurance company acted in good faith or bad faith in rejecting an offer of settlement, California juries should consider all evidence which tends to establish either good or bad faith including evidence of the following factors: 1) the strength or weakness of the third-party’s claim on the issues of liability and damages; 2) whether the insurance company properly investigated the claim so as to discovery any evidence unfavorable to the insured person; 3) whether the insurance company rejected advice of its own attorney or agent; 4) whether the insurance company informed the insured person of the opportunities for settlement; 5) the extent of the financial risk to which the insurance company and insured person were exposed in the event of a refusal to settle; and 6) whether the insured person caused the insurance company’s rejection of a compromise offer by misleading the company as to the facts.[FN28]
The standard of proof for demonstrating negligent or bad faith failure to settle under California law is a clear and convincing evidence.[FN29]
Under Florida law, an insurer must investigate the facts, give fair consideration to a reasonable settlement offer and settle if possible, “where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.” Florida has expressly rejected the “fairly debatable” standard and instead, uses the “totality of the circumstances” standard.[F30] Under this standard, the Florida Supreme Court has determined that at least five factors should be taken into account: 1) whether the insurer was able to obtain a reservation of right to deny coverage if a defense was provided; 2) efforts or measures taken by the insurer to resolve the coverage dispute promptly or in such a way as to limit any potential prejudice to the insureds; 3) the substance of the coverage dispute or the weight of the legal authority on the coverage issues; 4) the insurer’s diligence and thoroughness in investigating the facts specifically pertinent to coverage; and 5) efforts made by the insurer to settle the liability claim in the face of the coverage dispute.[FN31]
The standard of proof for demonstrating negligent or bad faith failure to settle under Florida law is a clear and convincing evidence.[FN32]
Georgia uses a negligence standard. Under Georgia law, an insurer is judged by the standard of an ordinarily prudent insurer and the insurer is negligent for failing to settle a claim if the ordinarily prudent insurer would consider that choosing to try a case created an unreasonable risk.[FN33]
The standard of proof for demonstrating negligent or bad faith failure to settle under Georgia law is a preponderance of the evidence.[FN34]
Idaho uses the “equal consideration” standard. This requires the insurer to give equal consideration to the interest of the insured when deciding whether to accept a settlement offer.[FN35] The Idaho Supreme Court listed several factors to consider when analyzing third-party bad faith failure to settle within policy limits; however, the Idaho Supreme Court identified two factors that it considered to be the most important in relation to what it considered lesser factors. The most important factor to the Idaho Supreme Court was whether the insurer failed to communicate with the insured, particularly informing the insured of any settlement offers.[FN36]
At a minimum, under Idaho law an insurer must make a diligent effort to ascertain the facts and communicate the results of such investigation to the insured and inform the insured of any settlement offers which may affect him so that the insured may take the proper steps to protect his own interest.[FN37] The second primary factor enunciated by the Idaho Supreme Court was the amount of financial risk to which of the parties will be exposed in the event settlement offer is refused.[FN38] The trier fact is not simply to compare the respective financial strength of the parties, but must determine the impact on the relative financial well-being of each party should there be an unsuccessful settlement.[FN39] In addition to considering communication between the insurer and insured, and analyzing the financial risk to each of the parties, lesser factors under Idaho law include: 1) the strength of the injured claimant’s case on issues of liability and damages; 2) whether the insurer has thoroughly investigated the claims; 3) failure of the insured to follow the legal advise of its own attorneys; 4) any misrepresentations by the insured which have misled the insurer in its settlement negotiations; and 5) any other factors which weigh towards establishing or negating insurer bad faith.[FN40]
Idaho courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Illinois uses the “equal consideration” standard. Illinois courts look at seven factors in the assessment of third-party bad faith failure to settle within policy limits: 1) the advice of the insurance company’s adjusters; 2) a refusal to negotiate; 3) the advice of defense counsel; 4) communication with the insured; keeping them fully aware of settlement offers; 5) an inadequate investigation and defense; 6) substantial prospect of an adverse verdict; and 7) the potential for damages to exceed policy limits.[FN41]
The standard of proof for demonstrating negligent or bad faith failure to settle under Illinois law is manifest weight of the evidence.[FN42]
Iowa uses a “reasonable basis” standard.[FN43] This standard is similar to the “fairly debatable” standard so that an insurance company may reject settlement demands if it has a reasonable basis to believe the demands are not reasonable.[FN44] The question of reasonableness must be judged from “the point of view of the one who is exposed to the entire risk.”[FN45] Plaintiffs in excess judgment cases have burden to show bad faith by the preponderance of evidence.[FN46]
Iowa courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Louisiana uses a “bad faith” standard. Under Louisiana law, an insurer may be liable for an excess judgment where the insurer’s refusal to settle within policy limits is found to be “arbitrary or in bad faith.”[FN47] Louisiana courts use the following factors in determining liability of an insurer for failure to settle a claim against its insured: 1) the probability of the insured’s liability; 2) the adequacy of the insurer’s investigation of the claim; 3) the extent of damages recoverable in excess of the policy limits; 4) rejection of settlement offers after trial; 5) the extent of the insured’s exposure as compared to that of the insurer; and 6) nondisclosure of relevant factors by the insured or the insurer.[FN48]
Louisiana courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Massachusetts uses a negligence standard in determining an insurer’s bad faith failure to settle the claim within policy limits.[FN49] The test under Massachusetts law is “whether no reasonable insurer would have failed to settle the case within the policy limits.”[FN50] This test requires an insured to prove that 1) the plaintiff in the underlying action would have settled within policy limits; and 2) assuming an insurer’s unlimited exposure (viewed from the standpoint of the insured) no reasonable insurer would have refused the settlement offer or refused to respond to that offer.[FN51] Bad faith under Massachusetts law must be supported by competent and credible evidence.[FN52]
Massachusetts courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Michigan follows the “bad faith” standard and defines bad faith as the arbitrary, reckless, indifferent, or intentional disregard of the insured’s interest to which [an insurer] owes a duty.[FN53] Michigan’s nonexclusive factors which the fact-finder may take into account when determining whether an insurer acted in bad faith with respect to failure to settle within the policy limits include: 1) failure to keep the insured fully informed of all developments in the claim or suit that could reasonably affect the insured’s interest; 2) failure to inform the insured of all settlement offers not falling within policy limits; 3) failure to solicit a settlement offer or initiate settlement negotiations when warranted; 4) failure to accept a reasonable settlement offer when the facts of the case or claim indicate obvious liability and serious injury; 5) rejection of a reasonable settlement offer within policy limits; 6) undue delay in the acceptance of a reasonable offer to settle a potentially dangerous case within policy limits with a high verdict potential; 7) any attempts by the insured to coerce or obtain an involuntary contribution from the insured in order to settle within policy limits; 8) failure to make a proper investigation prior to refusing the settlement offer with policy limits; 9) disregarding the advice or recommendations of the adjuster or attorney; 10) serious and recurrent negligence by the insurer; 11) failure to settle a case within policy limits following an excessive verdict where the chances of reversal on appeal are slight or doubtful; and 12) failure to take an appeal following an excess verdict where reasonable grounds exist for such an appeal especially where it recommended by trial counsel.[FN54]
The standard of proof for demonstrating negligent or bad faith failure to settle under Michigan law is a clear weight of the evidence.[FN55]
Minnesota uses a combination of the “equal consideration” standard and the “disregard the limits” rule. Under Minnesota law, an insurer owes a fiduciary duty to the insured to represent the insured’s best interest.[FN56] The duty to exercise good faith under Minnesota law includes the insurer’s obligation to view the situation as if there were no applicable policy limits to the claim and to give equal consideration to the insured’s financial exposure.[FN57] When declining an offer of settlement, good faith exists 1) if the insurer in good faith believes the insured was not liable; and 2) even if liability of the insured was certain, the insured believed in good faith that the proposed settlement figure was greater than the amount the jury would award as damages.[FN58]
Other indicators of bad faith include failure to communicate a settlement offer to the insured[FN59] and failure to properly evaluate the claim.[FN60] Bad faith must be shown and a mere mistake in judgment by the insurer is not sufficient.[FN61] Other factors include 1) whether the insurer made a prompt and complete investigation of the claim; 2) whether the insurer informed the insured of the offer and the possibilities of an excess verdict; 3) whether the insurer in good faith believed the insured was not liable or that the proposed settlement was greater than the amount the jury would have awarded as damages; and 4) whether an objective assessment of the evidence justifies a position adopted by the insurer.[FN62]
Minnesota courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Mississippi appears to use the “equal consideration” standard. Under Mississippi law, an insurer “has a fiduciary duty to look after the insured’s interest at least to the same extent as its own, and also to make a knowledgeable, honest and intelligent evaluation of the claim commensurate with its ability to do so.”[FN63] The factors to consider under Mississippi in determining an insurer’s liability for failure to settle a claim include: 1) the probability of the insured’s liability; 2) the adequacy of the insurer’s investigation of the claim; 3) the extent of damages recoverable in excess of policy coverage; 4) rejection of offers and settlement after trial; 5) the extent of the insured’s exposure as compared to that of the insurer; and 6) the non-disclosure of any relevant factors by the insured or insurer.[FN64]
The standard of proof for demonstrating negligent or bad faith failure to settle under Mississippi law is a preponderance of the evidence.[FN65]
Montana uses the “equal consideration” standard and lists the following factors to be considered in determining whether third-party bad faith failure to settle exists: 1) whether by reason of the severity of the plaintiff’s injury any verdict is likely to be greatly in excess of the policy limits; 2) whether the facts in the case indicate that a defendant’s verdict on the issue of liability is doubtful; 3) whether the company has given due regard to the recommendation of its attorney; 4) whether the insured has been informed of all settlement demands and offers; 5) whether the insured has demanded that the insurer settle within policy limits; and ) whether the company has given due consideration to any contribution offer made by the insured.[FN66] No one factor is decisive, but all must be considered in determining whether the insurer acted in good faith.[FN67]
The standard of proof for demonstrating negligent or bad faith failure to settle under Montana law is a preponderance of the evidence.[FN68]
New Jersey uses a “disregard the limits” standard. The New Jersey Supreme Court has stated that the interests of the insured and those of the insurer can be served justly “only if the insurer treats any settlement offer as if it had full coverage for whatever verdict might be recovered, regardless of policy limits, and makes its decision to settle or go to trial on that basis.”[FN69] Under New Jersey law, a decision not to settle must be honest, intelligent and objective.[FN70] The factors to consider include: 1) the view of the carrier or its attorney as to liability; 2) a good faith evaluation; 3) anticipated range of a verdict, should it be adverse; 4) strength and weaknesses of all the evidence to be presented on either side so far as known; 5) the history of the particular geographic area in cases of similar nature; and 6) the relative appearance, persuasiveness, and likely appeal of the claimant, the insured and the witness at trial.[FN71]
New Jersey courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Under New York law, the insurer’s conduct must constitute a “gross disregard” of the insured’s interest – a deliberate or reckless failure to place on equal footing the interest of its insured with its own interest when considering a settlement offer.[FN72] Courts use the following nonexclusive factors in determining whether an insurer committed bad faith in failing to settle: 1) failure to communicate the status of settlement offers and negotiations; 2) plaintiff’s likelihood of success on the liability issue in the underlying action; 3) the potential magnitude of damages and the financial burden each party may be exposed to as a result of a refusal to settle; 4) the insurer’s failure to properly investigate the claim and any potential defenses, and the information available to the insurer at the time the demand for settlement is made; and 5) any other evidence which tends to establish or negate the insurer’s bad faith in refusing to settle.[FN73]
New York courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Oregon uses a hybrid between the negligence standard and what it refers to as the “no limits” rule (the disregard the limits rule). Specifically, the insurer must use such care “as would have been used by an ordinarily prudent insurer with no policy limit applicable to the claim.”[FN74] An insurer commits negligence in failing to settle where an opportunity to settle exists and choosing not to settle would be taking an unreasonable risk, namely a risk that would involve chances of unfavorable results out of a reasonable proportion to the chances of favorable results.[FN75]
Oregon courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Pennsylvania uses a “disregard the limits” standard. Under Pennsylvania law, “the fairest method of balancing the interest [of the insurer and the insured] is for the insurer to treat the claim as if it were a loan liable for the entire amount.”[FN76] “The insurer must accord the interest of its insured the same faithful consideration it gives its own interest.”[FN77] This does not mean that the insurer is bound to submerge its own interests in order to make the insured’s interest paramount.[FN78] This simply means that, when there is “little possibility of a verdict or settlement within policy limits, the decision to expose the insured to personal pecuniary loss must be based on a bonafide belief by the insurer, based on all the circumstances of the case, that it has a good possibility of winning the suit.”[FN79] This “good faith” requires that the chance of finding non liability against the insured be real and substantial and that the decision to litigate be made honestly.[FN80] A decision not to settle must be thoroughly honest, intelligent and objective, as well as realistic when tested against the assumed expertise of the insurer.[FN81]
The following factors are used by Pennsylvania courts to determine an insurer’s bad faith in its refusal to settle a liability claim within the policy includes a good faith evaluation and consideration of: 1) the view of the carrier or its attorney as to liability; 2) the anticipated range of the verdict, should it be adverse; 3) the strengths and weaknesses of all the evidence to be presented by both sides so far as known 4) the history of the particular geographic area in cases of similar nature; and, 4) the relative appearance, persuasiveness and likely appeal of the claimant, the insured, and other witnesses at trial.[FN82] Bad faith in a third-party failure to settle case must be proven by clear and convincing evidence under Pennsylvania law.[FN83]
Pennsylvania courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Rhode Island uses a “burden-shifting” approach to an insurer’s bad faith failure to settle the claim within policy limits. The Rhode Island Supreme Court has held that an insurance company has a fiduciary obligation to act in the best interest of its insured to protect the insured from excess liability and to refrain from acts that demonstrate greater concern for the insurer’s monetary interest than the financial risk attended to the insured’s situation.[FN84] This fiduciary obligation includes a duty to seriously consider a plaintiff’s reasonable offer to settle within policy limits.[FN85] “If the insured declines to settle the case within policy limits, it does so at its peril in the event that a trial results in a judgment that exceeds the policy limits, including interest.”[FN86] Accordingly, the insurer is liable for the amount that exceeds the policy limits unless it can demonstrate the insured was unwilling to accept the settlement offer.[FN87] “Even if the insurer believes in good faith that it has a legitimate defense against the third party, it must assume the risk of miscalculation if the ultimate judgment should exceed the policy limits.”[FN88]
Rhode Island courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
At common law, Texas holds insurers to a degree of care and diligence which an ordinarily prudent insurer would exercise in the management of their own business.[FN89] If an ordinarily prudent insurer in the exercise of ordinary care as viewed from the standpoint of the insured would have settled a claim, and failed or refused to do so, then the insurer should respond in damages.[FN90] Often called a Stowers’ duty, this duty is activated by a settlement demand when three prerequisites are met: 1) claim against the insured is within the scope of coverage; 2) the demand is within policy limits; 3) the terms of the demand are such that an ordinarily prudent insurer would accept it, considering the likelihood and degree of the insured’s potential exposure to an excess judgment.[FN91]
Under Texas’ bad faith statute, which designates as an unfair settlement practice the failure of an insurer to attempt in good faith to effectuate a prompt fair and equitable settlement of a claim “with respect to which the insurer’s liability has become increasingly clear, the insurer’s statutory duty is triggered to reasonably attempt settlement where 1) the policy covers the claim; and 2) the insurer’s liability to the third party is reasonably clear.”[FN92]
Texas courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Virginia utilizes the “bad faith” standard in determining an insurer’s liability for failure to settle within policy limits. Specifically, an insured must prove by clear and convincing evidence that the insurer acted in furtherance of its own interest with intentional disregard of the financial interest of the insured.[FN93]
Virginia courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Washington uses the “no limit” test as the best means to determine whether the insurer has given equal consideration to its interest and the insured’s interest.[FN94] This rule is applied whether the insurer is being evaluated under a negligence or good faith standard.[FN95] The factors under Washington law to determine whether an insurer breached its affirmative duty to make a good faith effort to settle whether negligently or in bad faith include, but are not limited to: 1) strength of the injured claimant’s case on the issue of liability and damages; 2) the adequacy of the insurer’s investigation and evaluation; 3) the adequacy of the insured’s policy limits and the consequent risk to which each party is exposed in the event of a refusal to settle; 4) willingness or refusal to negotiate and the resulting “climate for settlement;” 5) any other action by the insurer demonstrating a greater concern for the insurer’s monetary interest than for the financial risk attendant to the insured’s situation.[FN96]
Washington courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
West Virginia’s uses a unique standard for determining third-party bad faith failure to settle.[FN97] “Wherever there is a failure on the part of an insurer to settle within policy limits where there exists an opportunity to so settle and where such settlement within policy limits would release the insured from any and all personal liability, that insurer has prima facie failed to act in its insured’s best interest” and that such failure constitutes prima facie bad faith towards the insured.[FN98] Thereafter an insurer has the burden of proving by clear and convincing evidence that 1) it attempted in good faith to negotiate a settlement; 2) that any failure to enter into a settlement where the opportunity to do so existed was based on reasonable and substantial grounds; and 3) that it accorded the interest and rights of the insured as least a great a respect as its own.[FN99] To determine whether the attempts at settlement were reasonable, the trial court should consider: 1) whether there was an appropriate investigation and evaluation of the claim based upon objective and cogent information; 2) whether the insurer had a reasonable basis to conclude that there was a genuine and substantial issue as to liability of its insured; and 3) whether there was potential for substantial recovery of an excess verdict against its insured.[FN100]
West Virginia courts have not explicitly stated the standard of proof necessary to sustain a claim for third-party bad faith failure to settle.
Courts have attempted to clarify the insurer’s duty by declaring how an insurer should balance the parties’ interest and identifying factors to consider whether an insurer breached its legal duty.[FN101] However, regardless of the standard adopted, courts tend to strike the same or similar balances between the parties’ interests and to identify many similar factors to review conduct by the insurer.[FN102] Often the distinction between these standards appear more rhetorical than real.[FN103]
Endnotes
FN1. State Farm Mut. Auto. Ins. Co. v. Laforet, 658 So. 2d 55, 58 (Fla. 1995) (citing Roger C. Henderson, The Tort of Bad Faith and First-Party Insurance Transactions: Refining the Standards of Culpability and Reformulating the Remedies by Statute, 26 U. Mich. J. L. Reform 1 (Fall 1992)).
FN2. Id.
FN3. Id.
FN4. Id.
FN5. Id.
FN6. Also described as a “strict liability” standard. See infra, note 7.
FN7. Shamblin v. Nationwide Mut. Ins. Co., 396 S.E. 2d 776, 773—74 (W. Va. 1990); see also Thomas C. Cady et al., The Law of Insurance Company Claim Misconduct in West Virginia, 101 W. Va. L. Rev 1, 61—62 (Fall 1998).
FN8. See Laforet, supra.
FN9. With respect to the “burden shifting” standard (also described by at least one court as a strict liability standard. See Shamblin, supra, note 7.), insurers who fail to settle within policy limits do so at their own risk and if a denial is later found to be wrongful, the insurer is liable for the full amount of the excess judgment. Shamblin, 396 S.E. 2d at 773. The negligence standard generally involves an analysis of whether the insurer acted reasonably under the circumstances, and in particular whether there was a reasonable basis for failing to settle the claim within policy limits. Id. at 774. The “bad faith” standard imposes liability for an excess verdict on an insurer where the insurer’s conduct rises above negligence and amounts to arbitrary, reckless, indifferent or intentional disregard of the insured’s interest. Id. Under the “equal consideration” standard an insurer must give equal consideration to the interest of the insured the same amount of consideration that it gives its own interests. Steven S. Ashley, Bad Faith Actions Liability & Damages, § 3:18 (2005). Under the “disregard the limits” rule, an insurance company must make its decision as if there were no policy limits applicable to the claim. Cady et al, supra note 7 at 62. See also, Ashley, in at § 3:19. Also, some courts apply hybrids of the above standards such the bad faith and negligence standards requiring an insurer to show the absence of a reasonable basis for denying the benefits and the insurer’s knowledge of or a reckless disregard for the lack of a reasonable basis for denying the claim. Id. Still other courts simply identify standards that do not necessarily fall into any specific category.
FN10. Waters v. American Cas. Co. of Reading, PA, 73 So. 2d 524, 528 (Ala. 1954).
FN11. Waters, 73 So. 2d at 531—32.
FN12. State Farm Mut. Auto. Ins. Co. v. Hollis, 554 So. 2d 387, 392 (Ala. 1989).
FN13. Id. at 391, n.2.
FN14. Id. at 390.
FN15. Id. at 391 (citing Shearer v. Reed, 428 A.2d 635, 638—39 (Pa. Super. Ct. 1981)).
FN16. Carrier Express, Inc. v. Home Indem. Co., 860 F. Supp. 1465, 1479—80 (N.D. Ala. 1994).
FN17. Id. at 1480.
FN18. Schultz v. Travelers Indem. Co., 754 P.2d 265, 266—67 (Alaska 1988).
FN19. Jackson v. American Equity Ins. Co., 90 P.3d 136, 142 (Alaska 2004).
FN20. Id.
FN21. Clearwater v. State Farm Mut. Auto. Ins. Co., 792 P.2d 719, 722 (Ariz. 1990).
FN22. General Accident Fire & Life Assurance Corp. v. Little, 443 P.2d 690, 694 (Ariz. 1968).
FN23. American Pepper Supply Co. v. Federal Ins. Co., 93 P.3d 507 (Ariz. 2004).
FN24. Crisci v. Security Ins. Co. of New Haven, Conn., 426 P.2d 173, 176 (Cal. 1967).
FN25. Id. at 177.
FN26. Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198 (Cal. 1958).
FN27. Camelot by the Bay Condo. Owners Assoc., Inc. v. Scottsdale Ins. Co., 27 Cal. App. 4th 33, 46 (Cal. Ct. App. 1994).
FN28. Cal. Jury Instr. – Civ. 12.98 (2006).
FN29. PPG Indus. Inc. v. Transamerica Inc. Co., 975 P.2d 652 (Cal. 1999).
FN30. Laforet, 658 So. 2d at 63—64. In instances where an insurer fails to timely respond to a civil remedy notice under Florida’s bad faith statute, an insurer’s bad faith is determined by a burden-shifting standard. See Fla. Stat. § 624.155 (2005).
FN31. Id.
FN32. Beck v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 429 F.2d 813 (5th Cir. 1970).
FN33. Cotton States Mut. Ins. Co. v. Brightman, 580 S.E.2d 519, 521 (Ga. 2003).
FN34. Lancaster v. USAA Cas. Ins. Co., 502 S.E.2d 752 (Ga. Ct. App. 1998).
FN35. Truck Ins. Exch. v. Bishara, 916 P.2d 1275, 1279 (Idaho 1996).
FN36. Id. at 1280.
FN37. Id.
FN38. Id.
FN39. Id.
FN40. Id.
FN41. O’Neill v. Gallant Ins. Co., 769 N.E.2d 100, 106—109 (Ill. App. Ct. 2002).
FN42. Lynch v. Mid-America Fire & Marine Ins. Co., 418 N.E.2d 421 (Ill. App. Ct. 1981).
FN43. Johnson v. American Family Mut. Ins. Co., 674 N.W.2d 88, 90 (Iowa. 2004).
FN44. Id.
FN45. Id. at 91.
FN46. Kohlstedt v. Farm Bureau Mut. Ins. Co., 139 N.W.2d 184 (Iowa 1965).
FN47. Cousins v. State Farm Mut. Auto. Ins. Co., 294 So. 2d 272, 275 (La. Ct. App. 1974).
FN48. Id.; see also, Keith v. Comco Ins. Co., 574 So. 2d 1270, 1278 (La. Ct. App. 1991).
FN49. Hartford Cas. Ins. Co. v. New Hampshire Ins. Co., 628 N.E 2d 14, 17—18 (Mass. 1994).
FN50. Id. at 18.
FN51. Id.
FN52. Continental Ins. Co. v. Bahnan, 216 F.3d 150 (1st Cir. 2000).
FN53. Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 393 N.W.2d 161, 164 (Mich. 1986).
FN54. Id. at 165—166.
FN55. Drouillard v. Metropolitan Life Ins. Co., 310 N.W.2d 15 (Mich. App. 1981).
FN56. Short v. Dairyland Ins. Co., 334 N.W.2d 384, 387 (Minn. 1983).
FN57. Id. at 387—88.
FN58. Id. at 388.
FN59. Lange v. Fidelity & Cas. Co. of N.Y., 185 N.W.2d 881, 885—86 (Minn. 1971).
FN60. Boerger v. American Gen. Ins. Co. of Minn., 100 N.W.2d 133, 136—47 (Minn. 1959).
FN61. Peterson v. American Family Mut. Ins. Co., 160 N.W 2d 541, 544 (Minn. 1968).
FN62. Capital Indem. Corp. v. St. Paul Fire & Marine Ins. Co., 357 F. Supp. 399, 414 (W.D. Wis. 1972) (applying Minnesota law).
FN63. Hartford Accident & Indem. Co. v. Foster, 528 So. 2d 255, 265 (Miss. 1988).
FN64. Id.
FN65. Stewart v. Gulf Guar. Life Ins. Co., 2002 WL 1874826 (Miss. 2002).
FN66. Jessen v. O’Daniel, 210 F. Supp. 317, 326 (D. Mont. 1962).
FN67. Id.; See also, Fetter Livestock Co. v. National Farmers Union Prop. & Cas. Co., 257 F. Supp. 4, 10 (D. Mont. 1966); Gibson v. Western Fire Ins. Co., 682 P.2d 725 (Mont. 1984).
FN68. Dees v. American Nat’l Fire Ins. Co., 861 P.2d 141 (Mont. 1993).
FN69. Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 323 A.2d 495, 502 (N.J. 1974).
FN70. Id. at 503.
FN71. Id. at 503—04.
FN72. Pavia v. State Farm Mut. Auto. Ins. Co., 626 N.E.2d 24, 28 (N.Y. 1993).
FN73. Smith v. General Accident Ins. Co., 697 N.E.2d 168, 171 (N.Y. 1998).
FN74. Maine Bonding & Cas. Co. v. Centennial Ins. Co., 693 P.2d 1296, 1299 (Or. 1985).
FN75. Id.
FN76. Cowden v. Aetna Cas. & Sur. Co., 134 A.2d 223, 228 (Pa. 1957).
FN77. Id.
FN78. Id.
FN79. Id.
FN80. Id.
FN81. Shearer v. Reed, 428 A.2d 635, 638 (Pa. 1981).
FN82. Id.
FN83. Cowden, 134 A.2d at 229.
FN84. Asermely v. Allstate Ins. Co., 728 A.2d 461, 464 (R.I. 1999).
FN85. Id.
F86. Id.
N87. Id.
FN88. Id.
FN89. G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 545, 547 (Tex. Comm’n App. 1929, holding approved).
FN90. Id.
FN91. American Physicians Ins. Exch. v. Garcia, 876 S.W. 2d 842, 849 (Tex. 1994).
FN92. Rocor Int’l, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 77 S.W. 3d 253, 261 (Tex. 2002); see also, Tex. Ins. Code Ann. art. 21.21 § 2(b)(4) (2002).
FN93. State Farm Mut. Auto. Ins. Co. v. Floyd, 366 S.E 2d 93, 97—98 (Va. 1988).
FN94. Tyler v. Grange Ins. Ass’n., 473 P.2d 193, 200 (Wash. Ct. App.1970).
FN95. Id.
FN96. Smith v. Safeco Ins. Co., 50 P.3d 277, 281 (Wash. Ct. App. 2002), rev’d on other grounds, 78 P.3d 1274 (Wash. 2003).
FN97. Shamblin, 396 N.E.2d at 776.
FN98. Id.
FN99. Id.
FN100. Id.
FN101. Ashely, at § 2:6.
FN102. Id.
FN103. Id.