Defenses to the Tort of Bad Faith
The Genuine Dispute & Fairly Debatable Doctrines
Insurers in states where the tort of bad faith exists (almost every state) who deny fraudulent insurance claims with fear and trembling. The specter of punitive damages has worked to make multi-millionaires of many insurance criminals who convince insurers to settle rather than take a chance on a trial of a suit alleging the insurer acted in bad faith.
Insurers pay claims they believe they do not owe because they are fearful – regardless of the merits of their position – of being assessed punitive damages in a bad faith action. The fear is not well placed if the suspected fraudulent claim or non-covered loss is denied based upon a fair and thorough investigation, an intelligent review of the facts as they relate to the policy wording and a reasonable application of the law of the jurisdiction. If, after a fair and thorough investigation, an insurer believes that a fraud is being attempted or that the policy wording does not cover the loss, the dispute between the insurer and the insured is one of fact, not tort, and the insured is limited to recovery of contract damages.
The Tort of Bad Faith
The tort was first created in the 1950’s by the California Supreme Court. The courts that created the tort did so because they believed that insurers were wrongfully taking advantage of people they insured causing severe damage to the persons insured. Failure to act fairly put insureds into bankruptcy, falsely accused them of fraud, caused improper arrests for the crimes of insurance fraud and arson.
Essentially, to cure the abuse, the courts created a tort out of a breach of the terms and conditions of a contract of insurance. Although there is in every insurance contract an implied in law covenant of good faith and fair dealing breach of that covenant had, until the 1950’s, allowed the insured the right only to the benefits promised by the contract. After the courts created the tort of bad faith insureds who were upset about the way their claim was handled could sue the insurer seeking, in addition to the contract damages, tort damages, including exemplary or punitive damages.
Judgments in multiple millions of dollars were assessed against insurers who failed to pay small claims. One $40 dollar claim resulted in a $5 million judgment. Bad faith claims became abusive and the fact that both parties to the contract of insurance owed the same duty of good faith to the insurer. It had been, since at least 1766 that neither party to the contract of insurance should do nothing that would deprive the other of the benefits of the contract of insurance.
A determination of the tort of bad faith requires a two-part test. To demonstrate that an insurance company has committed a tortious bad faith refusal to honor a claim of an insured, a plaintiff must show (1) the absence of a reasonable basis for denying benefits of the policy and (2) the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. The absence of a reasonable basis for denying a claim exists when the claim is not fairly debatable. [Trinity Evangelical Lutheran Church & Sch.-Freistadt v. Tower Ins. Co., 2003 WI 46, ¶ 33, 261 Wis.2d 333, 347, 661 N.W.2d 789, 795.] In other words, the analysis under both the breach of contract and the bad faith claims will involve a determination of whether the claim was “fairly debatable. [Demirchyan v. Safeco Ins. Co. of Ill. (E.D. Wis. 2022)]
An insurance claim is not “fairly debatable” where there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable. [Nyborg v. State Farm Mut. Auto. Ins. Co. (D. Colo. 2022)]
To establish an insurer’s bad faith, the insured must demonstrate that coverage was so clear that it was not “fairly debatable.” Put differently, a plaintiff must show the lack of a reasonable basis for denying the claim or unreasonably delaying its processing, and the insurer’s knowledge or reckless disregard that it was acting unreasonably. [Wacker-Ciocco v. Gov’t Emp. Ins. Co., 439 N.J. Super. 603, 110 A.3d 962, 968 (N.J. Sup. Ct. App. Div. 2015); BSD-360, LLC v. Phila. Indem. Ins. Co., 580 F.Supp.3d 92 (E.D. Pa. 2022)]
The Genuine Dispute or Fairly Debatable Defenses to Tort of Bad Faith
If the insurer has done its work properly before denying a claim it should never be held liable for breach of the covenant of good faith and fair dealing. Tort and punitive damages should be eliminated as a matter of law before trial by motions for summary judgment.
To defeat a summary judgment motion to eliminate claims of the tort of bad faith the non-moving party must do more than simply show that there is some metaphysical doubt as to the material facts and may not rely on conclusory allegations or unsubstantiated speculation. [F.D.I.C. v. Great Am. Ins. Co., 607 F.3d 288, 292 (2d Cir. 2010) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998); Drennen v. Certain Underwriters At Lloyds of London (In re Residential Capital, LLC) (Bankr. S.D.N.Y. 2022)]
It is now settled law in California that an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith even though it might be liable for breach of contract. In California, an insurer who delays payment of policy benefits because of a “genuine dispute with its insured as to . . . the amount of the insured’s coverage claim is not liable in bad faith.” [Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co., 90 Cal.App.4th 335, 347 (2001); see also Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001)
The California Court of Appeals, in Chateau Chambrey Homeowners Association v. Associated International Insurance Company, 90 Cal.App.4th 335, 108 Cal.Rptr.2d 776 (2001) extended the “genuine dispute doctrine” to a factual claim dispute. Fraud is a factual dispute that includes legal concepts.
The Wisconsin Supreme Court adopted the view that if a particular claim is “fairly debatable,” the insurer is entitled to debate that claim regardless of whether the debate concerns a matter of fact or one of law. [Davis v. Allstate Insurance Co., 101 Wis.2d 1, 303 N.W.2d 596 (1981); and Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978).]
In Drake v. Milwaukee Mutual Insurance Co., 70 Wis.2d 977, 236 N.W.2d 204 (1975), the Wisconsin Supreme Court adopted the concept of a “fairly debatable” claim that avoided the tort of bad faith. In Drake, the insurer refused to pay the insured’s claim because there was a genuine dispute over the status of Wisconsin law respecting whether “uninsured motorist coverage was unavailable when another insured party was potentially liable” for the insured’s damages. As the Drake court viewed the matter; because there was a genuine dispute over the status of the law when the insured’s claim was denied, the court was precluded from finding that the insured’s claim was not fairly debatable, and the company could not be adjudged liable for a bad faith refusal to pay the claim. [see also Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Service, Inc., 880 S.W.2d 886 (Ky. Ct. App. 1994)]
Although an insurer’s bad faith is ordinarily a question of fact to be determined by a jury by considering evidence of motive, intent and state of mind, the question becomes one of law when there are no conflicting inferences, and a court concludes reasonable minds could not differ. [Walbrook Ins. Co. v. Liberty Mutual Ins. Co. (1992) 5 Cal.App.4th 1445, 1454-1455.] Thus, the issue of bad faith may, in specific instances, be treated as an issue of law and disposed of with a motion to dismiss or a motion for summary judgment.
The Ninth Circuit Court of Appeal in Guebara v. Allstate Insurance Co., 237 F.3d 987 (9th Cir. 2001) found no bad faith in a case where Allstate believed, from its investigation that Guebara had attempted fraud. The Ninth Circuit opined:
The genuine dispute in this case was not purely factual. The genuine dispute as to the contents claims was based on factual evidence – three expert opinions, inconsistent testimony by Guebara and her witnesses, and desperate financial circumstances. The genuine dispute as to the structure claim, however, was based on the fraud language in the policy and on an unsettled issue in California insurance law. … The ‘genuine dispute’ defense has been adopted across the U.S. ‘The essence of the question as to whether the dispute is merely contractual or whether there are tortious elements justifying an award of punitive damages depends first on whether there is proof of bad faith and next whether the proof is sufficient for the jury to conclude that there was ‘conduct that is outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.’ Restatement (Second) Torts, Sec. 909(2) (1979), as quoted and applied in Horton v. Union Light, Heat and Power Co., [] 690 S.W.2d 382, 388-90 ([Ky.] 1985).’ Federal Kemper, [] 711 S.W.2d at 848. [First National Bank of Louisville v. Lustig, 96 F.3d 1554 (5th Cir. 09/30/1996) applying Kentucky law]
Across the United States, including in Idaho and Wisconsin an insured may recover in tort where its insurer unreasonably and in bad faith denies or withholds payment of a valid claim. [Roper v. State Farm Mut. Automobile Ins. Co., 131 Idaho 459, 461, 958 P.2d 1145, 1148 (1998); White v. Unigard Mut. Ins. Co., 112 Idaho 94, 96, 730 P.2d 1014, 1016 (1986).]
In addition, an insured asserting a claim of bad faith must show that the claim was not fairly debatable; that the denial or failure to pay was not the result of a good faith mistake; and that the resulting harm is not fully compensable by contract damages. [Simper v. Farm Bureau Mut. Ins. Co. of Idaho, 132 Idaho 471, 474, 974 P.2d 1110, 1103 (1999); Lucas v. State Farm Fire & Cas. Co., 131 Idaho 674, 677, 963 P.2d 357, 360 (1998); Anderson v. Farmers Ins. Co. of Idaho, 120 Idaho 755, 759, 947 P.2d 1003, 1007 (1997)]
It is becoming axiomatic to most courts that an insurer does not act in bad faith if it challenges the validity of a “fairly debatable” claim. When a claim is fairly debatable, the insurer is entitled to dispute the claim and will not be deemed liable for failure to pay the claim. [Green v. Truck Ins. Exchange, 114 Idaho 63, 753 P.2d 274 (Ct. App. 1988) and Drake v. Milwaukee Mutual Ins. Co., 236 N.W.2d 204, 208 (Wis. 1974) (insurer is entitled to debate a fairly debatable claim, whether the debate concerns a matter of fact or law).
There are two ways in Kentucky, for example, in which a claim may be fairly debatable:
• if the issue is one of first impression in Kentucky and authorities from other jurisdictions support the insurer’s position and
• if a dispute over relevant facts related to coverage exists. [Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv., Inc., 880 S.W.2d 886, 890 (Ky. Ct. App. 1994).]
Iowa also sets up as a defense to the tort of “bad faith” the “fairly debatable” standard. The Iowa Supreme Court first recognized the intentional tort of first-party bad faith in Dolan v. Aid Insurance Co., 431 N.W.2d 790 (Iowa 1988). The Iowa Supreme Court held:
To establish first-party bad faith, an insured must show that: (1) the insurer had no reasonable basis for denying benefits under the policy; and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. The court explained that when ‘a claim is ‘fairly debatable,’ the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.’ Id. (citing M-Z Enterprises v. Hawkeye Security Ins. Co., 318 N.W.2d 408, 415 (Iowa 1982)).
If the insurer has an ‘objectively reasonable’ explanation for its denial, the insurer may be entitled to summary judgment or a directed verdict on a bad faith claim. In such a case, the reasons supporting the insurer’s denial cannot be the subject of a genuine factual dispute. [Chadima v. National Fidelity Life Insurance Co., 55 F.3d 345 (8th Cir. 04/26/1995)]
A bad faith tort action is known in Wyoming as “the tort of violation of the duty of good faith and fair dealing.” [Herrig v. Herrig, 844 P.2d 487, 490 (Wyo. 1992)]. In order to prevail, the insured must prove that the denial of his claim by the insurer was not ‘fairly debatable,’ which is an objective standard. Further, the insured must prove that there is no reasonable basis for denying the benefits of the policy, and that the insurer knew of or recklessly disregarded the lack of a reasonable basis for the denial.
A claim is “fairly debatable” when it is open to dispute on any logical basis. If reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable. The fact that the insurer’s position is ultimately found to lack merit is not sufficient by itself to establish a bad faith claim. For example, Thompson v. U.S. Fid. & Guar. Co., 559 N.W.2d 288, 292 (Iowa 1997) held as a matter of law that the insurer had a reasonable basis for asserting an intoxication defense, even though the defense was unsuccessful.
Whether a claim is fairly debatable can generally be decided as a matter of law by the court. When there is evidence, the insurer had a reasonable basis for denying coverage, it generally follows that the insured’s claim was fairly debatable. The mere denial of a plaintiff’s motion for a directed verdict automatically establishes that the issue is “fairly debatable”. The objective element of a bad faith claim is especially amenable to resolution by a court when the “pivotal issue” behind the underlying insurance claim is “purely one of law.”
The prudent insurer must complete a thorough investigation and seek advice of a fully informed and experienced insurance coverage lawyer. By so doing, by relying on the advice and counsel of an experienced insurance coverage lawyer, or other expert in insurance, investigation, or causes of loss, will find it has established a genuine dispute.
In North Dakota, the Supreme Court stated in Fetch v. Guam, 2001 N.D. 48, 623 N.W.2d 357 (N.D., 2001):
The district court held, as a matter of law, an insurance company is not guilty of bad faith for denying a claim when the claim is fairly debatable or if there is a reasonable basis for denying the claim or delaying payment. The court found that over the years American Hardware had made offers of settlement in line with the verdict. In addition, the court determined Fetch did not present any information suggesting American Hardware improperly denied coverage, investigated in bad faith, or fraudulently induced Fetch to delay filing a motion for default judgment against Guam; moreover, the trial court noted, those arguments were anticipated by American Hardware and effectively refuted.
The North Dakota Supreme Court stated clearly and unambiguously “an insurer does not act in bad faith by reasonably refusing to settle a claim, which is fairly debatable as to liability, for amounts demanded by an insured which are not supported by facts regarding damages. [Hanson v. Cincinnati Life Ins. Co., 1997 ND 230, ¶ 29, 571 N.W.2d 363]
The Alabama Supreme Court in State Farm Fire & Casualty Company v. Slade, 747 So.2d 293 (Ala. 1999) stated the standard in the negative, by stating that “when the claim is not fairly debatable, refusal to pay will be bad faith and, under appropriate facts, give rise to an action for tortious refusal to honor the claim. [Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978).] When a claim is “fairly debatable,” the insurer is entitled to debate it, whether the debate concerns a matter of fact or law. Bad faith, in Alabama is not simply bad judgment or negligence. To prove “bad faith” the insured must show a dishonest purpose and a breach of a known duty, that is, the duty of good faith and fair dealing, through some motive of self-interest or ill will.
The Fifth Circuit, in First National Bank of Louisville v. Lustig, 96 F.3d 1554 (5th Cir., 1996) applying the law of Kentucky, stated the rule:
[I]t is clear that an insurer may challenge a claim which is fairly debatable on its law or facts. Federal Kemper, 711 S.W.2d at 846- 849 (Leibson, J., Dissenting); Curry, 784 S.W.2d at 178; and see Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv., Inc., 880 S.W.2d 886, 890 (Ky. Ct. App. 1994). …
At the conclusion of the coverage phase of the trial, the jury determined that coverage existed. On appeal, the parties do not dispute that the Sureties are obligated to pay the claim under the terms of the policy and, therefore, the parties do not contest the first factor under the bad faith analysis. … Although coverage was found under a banker’s bond the court concluded there was no bad faith and that the dispute was ‘fairly debatable’ because Kentucky has not yet defined ‘manifest intent’ and because of the lack of certainty in this case concerning whether manifest intent was based on the subjective intent of the bank officer or the objective result of his conduct. The court held that the Sureties possessed a legally debatable basis for denying FNBL’s claim and a factual basis upon which to contest FNBL’s claim based on the bank officer’s refusal to admit to intending to harm the bank.
The Seventh Circuit, in Duir v. John Alden Life Insurance Co., 754 F.2d 245 (7th Cir. 1985), applied the “fairly debatable” measure to a bad faith claim and stated, applying Wisconsin law:
In order to prove a claim of bad faith, an insured must show: (1) the absence of any reasonable basis by the insurer for denying the benefits of the policy to the insured; and (2) the insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. … However, when an insurer exercises its duty of ordinary care and reasonable diligence in investigating and evaluating claims and determines that a claim is ‘fairly debatable,’ the insurer is entitled to debate and/or litigate the claim if it feels that there is a question of law or fact which must be decided before the insurer, in good faith, is required to pay. … Benke v. Mukwonago-Vernon, 110 Wis.2d at 364- 65, 329 N.W.2d at 248. [Italics added]
Applying Alabama law in State Farm Fire and Casualty Co. v. Balmer, 891 F.2d 874 (11th Cir., 1990) the Eleventh Circuit held:
[H]owever recklessly an insurer conducts its investigation, a bad faith claim cannot succeed where the insurer had an arguably lawful basis for denying the claim. ‘When a claim is ‘fairly debatable,’ the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.’ National Sec. Fire & Casualty Co. v. Bowen, 417 So.2d 179, 183 (Ala. 1982) (citation omitted).
The State Farm v. Balmer, supra. court found that State Farm’s investigation was far from ideal. State Farm did not use purchase verification forms or sift the debris to verify the contents destroyed in the fire. There was also evidence suggesting that State Farm failed to follow in-house rules concerning the investigation of fire losses and failed to perform all of the steps in a proper fire investigation. Regardless, the court found that Alabama law is clear that the imperfections of State Farm’s investigation, the existence of a debatable reason for denying the claim at the time the claim was denied defeats a bad faith failure to pay claim. The Balmers represented via sworn statements that the contents destroyed in the fire had a total value of $159,000, and that within a year before the fire more than $23,000 of these contents was purchased and more than $9,000 was received as gifts. The Balmers’ tax returns for the two years preceding the fire reported their annual income as falling between $6,000 and $10,000. A report by two State Farm representatives who visited the site of the house the day after the fire indicated that there appeared to be a small amount of contents for a two-story house. A State Farm special investigator learned that the Balmers were $50,774.11 in arrears on loans and mortgages secured by the farm property. That information was found to be sufficient to conclude that the decision to deny the claim was fairly debatable and the insured could not maintain a bad faith cause of action.
The Washington Supreme Court in Ellwein v. Hartford Accident And Indemnity Co., 142 Wash.2d 766, 15 P.3d 640 (Wash. 2001) held that the “fairly debatable” standard for determining bad faith, as it is commonly called, is followed in the vast majority of jurisdictions. In Washington the “fairly debatable” standard is a simple matter of fairness. All persons, including insurance companies, should have the right to their day in court. The price of losing a trial should not be millions of dollars in punitive damages. The national trend permitting dismissal of bad faith claims as a matter of law coincides with an increased willingness on the part of courts to use summary judgment as a means to curtail the unwarranted consumption of public and private resources in lawsuits that seek wealth rather than indemnity. As authority for its position in Ellwein the Supreme Court cited multiple authorities, including Douglas G. Houser, Good Faith as a Matter of Law: The Insurance Company’s Right to Be Wrong, 27 Tort & Ins. L.J. 665, 669 (1992) (36 states follow a ‘fairly debatable’-type standard for bad faith claims).
A genuine dispute exists about whether Plaintiff’s claim was legitimate that precludes a finding of bad faith. Since the insurer was found to have reasonably relied on the opinion of outside counsel in reaching its decision to deny Plaintiff’s claim, bad faith did not lie. [Ayala v. Infinity Ins. Co., 713 F.Supp.2d 984 (C.D. Cal. 2010)]
In Freidline v. Shelby Insurance Co., 774 N.E.2d 37 (Ind. 2002), the Indiana Supreme Court, faced with a denial of a claim under the “absolute pollution exclusion” that was found not to apply, determined that there was insufficient evidence to maintain an action for bad faith and stated:
The scope of the pollution exclusion is an evolving area of law, subject to differing interpretations. The pollution exclusion is one of the most frequently litigated exceptions found in a staple insurance industry product – the comprehensive general liability policy. Tri-Town Corp., 863 F. Supp. at 38; see also Madison Constr. Co., 735 A.2d at 106. This is also evident in the trial court’s grant of summary judgment in favor of Shelby. … Inasmuch as we find there is a rational basis for Shelby’s actions, and Shelby supports its position with good faith legal argument, the Freidlines have failed to establish by clear and convincing evidence that Shelby breached its duty to act in good faith. Thus, the trial court correctly entered summary judgment in favor of Shelby on this issue.
Relevant to the objective inquiry about the tort of bad faith is whether the insurer’s justification for denying policy benefits or delaying payment is “fairly debatable.” This factor tests whether reasonable minds could disagree about whether a policy covers a claim. This is because Colorado law permits an insurer to challenge a claim that is fairly debatable. An insurer is under no obligation to negotiate a settlement when there is a genuine disagreement as to the amount of compensable damages payable under the terms of an insurance policy. The insurer’s mere mistaken belief that its insured’s claim is not compensable does not indicate bad faith nor does the mere fact that the insurer ultimately loses on the merits. The defense of fair debatability applies against both versions of the bad faith cause of action. [Meiman v. Am. Family Mut. Ins. Co. (D. Colo. 2022)]
The insurer is not liable for bad faith for being incorrect about policy coverage as long as the insurer had a reasonable basis to take the position that it did. Generally, a bad-faith claim is subject to summary judgment if the defendant demonstrates that there was a genuine dispute as to coverage, because if the insurer had a reasonable basis to deny coverage, the insurer is unlikely to know it was acting unreasonably. Where the undisputed evidence shows that the insurer had some reasonable basis for acting as it did, there is no bad faith. [Igartua v. Mid-Century Ins. Co., 262 F.Supp.3d. 1050, 1054 (D. Nev. 2017)]. As explained, Evans has failed to present evidence showing that Travelers acted in bad faith, and Travelers has demonstrated that there was a genuine dispute as to coverage. Therefore, summary judgment for the bad faith claim was granted in favor of Travelers. [Evans v. The Standard Fire Ins. Co. (D. Nev. 2022)]
In order to prevail on a bad faith claim in Nevada, plaintiffs must show “the absence of a reasonable basis for denying benefits and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Because bad faith requires the defendant to be objectively and subjectively unreasonable, the genuine dispute doctrine provides that “the insurer is not liable for bad faith for being incorrect about policy coverage as long as the insurer had a reasonable basis to take the position that it did.” [Pioneer Chlor Alkali Co. v. Nat’l Union Fire Ins. Co., 863 F.Supp. 1237, 1242 (D. Nev. 1994); citing Am. Excess Ins. Co. v. MGM Grand Hotels, Inc., 729 P.2d 1352, 1355 (Nev. 1986)]. The Ninth Circuit has unambiguously held that, “because the key to a bad faith claim is whether denial of a claim was reasonable, a bad faith claim should be dismissed on summary judgment if the defendant demonstrates that there was ‘a genuine dispute as to coverage.’” [Feldman v. Allstate Ins. Co., 322 F.3d 660, 669 (9th Cir. 2003) (emphasis added); Basu v. Mass. Mut. Life Ins. Co. (D. Nev. 2022)]
To be Certain a Claim Denial is Based on a Genuine Dispute or is Fairly Debatable Insurers Must Thoroughly Train Their Personnel
Insurers must recognize, of course, that trial courts review the actions of an insurer when deciding a bad faith claim, with 20/20 hindsight. The evidence, therefore, available to the insurer to call into play the “fairly debatable” measure of good faith or the “genuine dispute doctrine” must be close to overwhelming and must be convincing.
An insurer’s Special Investigative Unit (SIU) should be trained to investigate every potential fraudulent claim thoroughly, fairly and intelligently. The SIU’s investigation must be well documented and the decision to deny must be made in good faith with the advice and counsel of an experienced coverage lawyer. If the investigation is thorough, in good faith, and survives the analysis of experienced insurance coverage counsel the genuine dispute doctrine should defeat any suit for bad faith.
An insurer’s claims department must be trained to thoroughly investigate every claim where a question of coverage exists, fairly, intelligently and in good faith. The claims department’s investigation must be well documented and the decision to deny must be made in after completing a thorough and good faith investigation.
A Jury May Find Bad Faith
The standard to be employed by a jury in evaluating the insured’s argument that the claim was not “fairly debatable” is that of a reasonable insurer – i.e., would a reasonable insurer under the circumstances have denied or delayed payment?
The reasonably clear standard found in the Insurance Code and common law standard for what constitutes bad faith is the same. The issue of bad faith does not focus on whether the claim was valid, but on the reasonableness of the insurer’s conduct in rejecting the claim. [Lyons v. Miller Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex. 1993).] Texas courts have repeatedly held that “evidence showing only a bona fide coverage dispute does not, standing alone, demonstrate bad faith.” [State Farm Lloyds v. Nicolau, 951 S.W.2d 444, 448 (Tex. 1997).] If an insurer fails to conduct a reasonable investigation, it cannot assert that a bona fide coverage dispute exists. [State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42, 44 (Tex. 1998).]
Reasonableness is determined using an objective standard of whether a reasonable insurer under similar circumstances would have delayed or denied payment of the claim. [Aranda v. Insurance Co. of N. Am., 748 S.W.2d 210, 213 (Tex. 1988), overruled on other grounds by Tex. Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430 (Tex. 2012); and Arthur v. Liberty Mut. Pers. Ins. Co. (W.D. Tex. 2022)]
It is the duty of a claims person who decides that a loss or defense must be denied because sufficient evidence that establishes that the denial of the claim was “fairly debatable.” The evidence must be clear and unambiguous so that a trier of fact (a judge or jury) would conclude that a reasonable and prudent insurer would have made the same decision.
Applying Colorado law, the Tenth Circuit stated in Marathon Ashland Pipe Line LLC v. Maryland Casualty Company, 243 F.3d 1232 (10th Cir. 2001):
As we have pointed out, however, a bad faith claim requires an entirely separate analysis from a contractual claim. Bad faith claims are a species of tort law, not of contract law. They constitute a violation of the insurer’s separate, non-contractual, ‘duty to process claims fairly and in good faith.’ 46A C.J.S. Ins. § 1342. Under Wyoming law, a bad faith claim is an independent tort action based on the theory that insurers owe a duty of good faith to policyholders not to unreasonably deny a claim for benefits under the policy. See McCullough v. Golden Rule Ins. Co., 789 P.2d 855, 857-58 (Wyo. 1990); see also 46A C.J.S. Ins. § 1580.
The Marathon Ashland Pipe Line LLC v. Maryland Casualty case found a basis for bad faith existed because of the failure of the insurer to promptly communicate with the insured. It stated:
Marathon’s second bad faith argument concerns Maryland Casualty’s ‘oppressive or intimidating claims practices.’ Marathon asserts that Maryland Casualty’s failure to respond to Marathon’s repeated requests for a copy of the insurance policy and for a defense in the Berg suit forced Marathon to file suit against both SSI and Maryland Casualty. It is undisputed that Maryland Casualty failed to respond in writing to Marathon’s tender until after Marathon filed suit. … Wyoming law plainly requires insurers to either accept and pay or reject an insured’s claim within 45 days of receipt as we have said.
Note Travelers Indem. Co. v. Armstrong, 565 S.W.3d 550, 568 (Ky. 2018) (quoting Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Serv., Inc., 880 S.W.2d 886, 890 (Ky. App. 1994)) If a genuine dispute does exist as to the status of the law governing the coverage question, the insured’s claim is fairly debatable, and the tort claim for bad faith based upon the insurer’s refusal to pay the claim may not be maintained. [Belt v. Cincinnati Ins. Co. (Ky. 2022)]
Contents of A Claim File Needed to Establish the “Genuine Dispute”
To establish the genuine dispute defense every claims, SIU and underwriting file where a claim is denied must contain, to establish that the insurer complied with the “genuine dispute” or “fairly debatable” standard, the following:
• The loss notice.
• The wording of the policy.
• A detailed recorded statement of:
• The insured.
• If a third party claim, the claimant(s).
• Every independent witness to the events.
• The insurance agent or broker who placed the insurance to verify the accuracy of statements made in the application for insurance.
• If a coverage issue is involved, the underwriter who made the decision to insure or not insure who can establish the materiality of representations or concealments of material fact.
• Testimony of the insured(s) at examination under oath.
• All available documentary evidence including, as needed, accounting documents, tax returns, medical reports, police reports, fire reports, deeds, trust deeds, bankruptcy filings, and any other relevant document.
• Detailed photographs of the scene.
• The advice and counsel of independent experts whose expertise relates to the facts of the loss.
• The advice and counsel of an experienced insurance coverage lawyer experienced in the issues raised by the claim.
With a thorough and complete investigation, the advice and counsel of experts and lawyers familiar with the subject matter, even if the decision made by the insurer is incorrect, the insured will not be able to establish a bad faith cause of action. The “fairly debatable” or “genuine dispute” standard is merely a means of objectively establishing that the insurer treated the insured fairly and in good faith. The insurer with a well-trained, intelligent and thorough claims department or SIU will avoid charges of bad faith and, even when charged, will defeat the charges by proving beyond a preponderance of the available evidence, that the claim denial was based upon a well-reasoned decision where the insurer is allowed to dispute and debate a genuine dispute between it and the insured as to the applicability of coverage.
Insurers who fail to thoroughly investigate will be charged with bad faith and find they must pay tort damages and possibly punitive damages to the insured.
Insurers who do not require its staff to conduct a fair and thorough investigation of every claim, including the advice of relevant experts and insurance coverage counsel, must stop giving insureds, claimants and their counsel the rope that will be used to hang the insurer with a bad faith judgment requiring the insurer to pay tort and exemplary damages.
The key to avoiding suits claiming the tort of bad faith is a professional, well trained, experienced and fair minded claims personnel and SIU investigators. If an insurer decides to deny a claim for intentional misrepresentation, concealment, false swearing or fraud it must collect and be able to present to a court evidence that establishes its decision to refuse to pay the claim was fairly debatable or was the result of a genuine dispute over coverage. A cursory investigation or no investigation at all will never suffice.