Certain aspects of insurance bad faith are well known, particularly to insurance coverage practitioners. For instance, it is widely understood that an insurer commits bad faith if it fails to pay upon or otherwise honor a claim without reasonable justification for its refusal. It is, conversely, generally understood that an insurer cannot be liable for bad faith failure to pay a claim if it obtains a judgment that the claim is not covered. What is less understood, and sometimes overlooked, is that a policyholder may successfully assert a bad faith claim against its insurer, even in regard to a policy claim that is determined ultimately not to be covered, if the insurer commits bad faith in its handling of the claim. In other words, there are two types of bad faith—bad faith denial and bad faith claim handling, and the latter type is actionable regardless of whether the policy claim is covered.
Underlying this dichotomy are two fundamental principles of insurance law. First, an insurer owes its policyholder a duty of good faith and fair dealing, and this duty arises from the nature of the relationship between the two. The duty exists in regard to every claim the policyholder presents, regardless of whether the claim ultimately is determined to be covered. An insurer is not obligated to honor every claim presented to it, but it is obligated to timely, adequately, and properly investigate every claim and to make and communicate a timely determination on each, regardless of whether the determination ultimately is one of acceptance or denial.
Second, bad faith is a tort. An insurer’s bad faith liability, therefore, can exist independently of any contractual liability it may have under its policy. Although a determination that an insurer has no contractual obligation to pay on a claim may, correspondingly, serve to exonerate that insurer from a claim of bad faith failure to pay, such a determination would be immaterial to a claim against the insurer for bad faith claim handling. An insurer has a duty to handle claims submitted to it in good faith, regardless of whether the claims are covered.
The law on these matters is well developed in many jurisdictions, including Ohio. In Staff Builders, Inc. v. Armstrong, 37 Ohio St. 3d 298, syllabus 1 (Ohio 1988), the Supreme Court of Ohio made clear that bad faith is an independent tort:
An insurer has a duty to act in good faith in the processing and payment of the claims of its insured. A breach of this duty will give rise to a cause of action in tort against the insurer irrespective of any liability arising from breach of contract.
The Court later echoed these concepts in Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552, syllabus 1, (Ohio 1994): “An insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefore.” In finding that the insurer engaged in bad faith, the Court focused on the insurer’s failure to adequately investigate the fire loss claim at issue. Other Ohio courts have followed suit. For instance, in Furr v. State Farm Mut. Auto Ins. Co., 128 Ohio App. 3d 607, 623-626 (Ohio Ct. App. 1998), the Court found bad faith in the handling of an uninsured motorists claim when the insurer conducted a delayed and superficial examination of the claim, and, further, found the claim handling to be sufficiently egregious to support an award of punitive damages. In addition, an insurer’s duty of good faith continues even during the pendency of coverage litigation, and insurers have been found liable for bad faith based upon their conduct in initiating litigation and following the commencement of litigation. (See, e.g., Nationwide Mut. Fire Ins. Co. v. Masseria, 1999 WL 1313637 (Ohio Ct. App. 1999); Zaychek v. Nationwide Mut. Ins. Co., 2007-Ohio-3297 (Ohio Ct. App. 2007)).
As noted above, these concepts are not limited to Ohio. In a recent decision, the Texas Supreme Court echoed many of them. In USAA Texas Lloyds Co. v. Menchaca, 2018 WL 1866041 (Texas 2018), the Court considered bad faith claims made against a homeowner’s insurer. Although it ultimately remanded the case back to the trial court for a new trial based upon irregularities in the initial trial, the Court took the opportunity to articulate various points of insurance bad faith law. It stated that bad faith is a tort that is “distinct” and “independent” from contractual claims under insurance policies. Id. at *5. It noted that bad faith may be predicated upon an insurer misrepresenting a policy’s coverage or engaging in conduct that causes a policyholder to lose policy rights that it otherwise would have had. Id. at *12. It further noted that an insurer’s violation of statutory requirements for insurer conduct, such as exist in many states, under certain circumstances can result in a recovery for the policyholder, even if the policy would not otherwise cover the claim. Id. at *14. Perhaps most generally, it stated, “[I]f an insurer’s statutory violation causes an injury independent of the loss of policy benefits, the insured may recover damages for that injury even if the policy does not grant the insured the right to benefits.” Id. at *5.
These legal principles make clear that insurers should be timely, thorough, and professional in their handling of claims. If they fail to properly fulfill their duties in this regard, they can be liable for bad faith, even in regard to claims that ultimately are not determined to be covered. Policyholders, for their part, should consider whether their insurers have fulfilled both the duty of good faith in regard to claim payment, if the claims are covered, and the duty of good faith in regard to claim handling, regardless of whether the claims are covered. The analysis is incomplete if bad faith in regard to claim payment is analyzed but the “other” type of bad faith is not considered.