Court’s Treatment of After-the-Fact Claims May Prompt Attorneys to Include a Bad Faith Claim in Every First Party Action

When an insured decides to file a lawsuit against its carrier for denial of coverage or failure to settle, the attorney has to choose the types of claims to include in the complaint. In most cases the complaint will contain a claim for breach of contract or declaratory judgment. In addition to these standard claims, the attorney will have to decide whether to include a bad faith claim against the carrier. Bringing a bad faith claim is not a default position for a careful plaintiff’s attorney. While a successful bad faith claim can translate into a substantial increase in the case’s settlement value or damage award, the standard of proof is generally higher for a bad faith claim than for ordinary claims like breach of contract. A smart attorney knows that bringing a bad faith claim based upon scant or no evidence will only cause the court to look askance at the remainder of his or her client’s case.

However, a recent Connecticut Supreme Court ruling may prompt some plaintiffs’ attorneys to always include a bad faith claim in any first-party action as a matter of course, for fear of losing the opportunity to do so after the first action has been carried to judgment. In the case of Powell v. Infinity,1 two plaintiffs sued an automobile insurance carrier, asserting three claims, including bad faith. The high court ruled that because the plaintiffs had already pursued an uninsured motorist damages claim against the same carrier, and that prior claim had been tried to verdict, they were barred, under the doctrine of res judicata, from bringing the new lawsuit.

The plaintiffs in Powell were a driver and passenger involved in a highway accident caused by a hit-and-run driver. Following the accident, the driver and passenger submitted claims for their personal injuries sustained during the accident pursuant to the uninsured motorists coverage held by the passenger (and owner of the car). Coverage under the policy was limited to $20,000 per person. After the carrier declined offers from each plaintiff to settle the claims for the per-person policy limits, the plaintiffs brought a damages action. At the end of trial, the jury awarded the plaintiffs a combined total of over $700,000, which the trial court reduced to $20,000 per plaintiff plus interest. Once paid, the plaintiffs filed a satisfaction of judgment.

Approximately one year later, the plaintiffs returned to court to file a new action against the carrier. This time they asserted claims for bad faith and violation of Connecticut’s Unfair Trade Practices statute,2 in addition to a new breach of contract claim. The plaintiffs alleged that the carrier had acted in bad faith prior to, and during, the pendency of the first lawsuit, by (among other things): (a) refusing to settle for the policy limit even though the plaintiffs’ damages purportedly far exceeded that amount; (b) refusing to diligently process the plaintiffs’ claims; (c) subjecting the plaintiffs to an extensive investigation; and (d) pressuring the plaintiffs to accept a settlement sum that was lower than fairness would require. The trial court granted summary judgment for the carrier, and the plaintiffs appealed.

On appeal, the Connecticut Supreme Court upheld the trial court’s grant of summary judgment on the grounds that the new lawsuit was barred by the doctrine of res judicata. Under the doctrine, also known as “claim preclusion,” a plaintiff will be barred from litigating a second lawsuit based on claims that “aris[e] from the same transaction or series of transactions” as the first claim and “could have been – but [were] not – raised in the first suit.”3 The doctrine only applies where the first lawsuit proceeds to a final judgment on the merits.4 In the words of the Connecticut Supreme Court, the doctrine serves to “provide repose by preventing a person from being harassed by vexatious litigation.”5

In the high court’s view, application of res judicata was appropriate because the claims in the plaintiffs’ new lawsuit arose out of the same transaction as the original damages claims: they involved the same parties, the same accident, and the same type of coverage under the same policy. Furthermore, both lawsuits “turn[ed] essentially on the defendant’s refusal to pay in accordance with the terms of th[e] uninsured motorist policy.”6 Importantly, the evidence on which the plaintiffs based their new claims became known to them during the pendency of the first lawsuit. For that reason, the plaintiffs could have asserted their bad faith claims during the first litigation – either at the outset, or, as the evidence for the new claims manifested, by amending their complaint prior to trial.

Following the decision in Powell, both the plaintiffs’ and the defendant’s counsel issued the same prediction: that plaintiff’s attorneys initiating first-party automobile accident litigation in Connecticut will now routinely include a bad faith claim in every complaint. Defendant’s counsel remarked that the Powell decision “is an invitation to assert arguably frivolous, CYA claims,” because a plaintiff’s attorney who missed the opportunity to assert a bad faith claim could face a malpractice charge. Plaintiffs’ counsel agreed, predicting that the Powell decision is “going to open the floodgates.”8

If the predictions of the opposing counsel in Powell are correct, the effects may not be limited to automobile accident litigation. Logically, the reasoning in Powell should apply to any first-party insurance lawsuit. Such lawsuits would include those for health coverage, first party property damage, environmental claims for cleanup costs, and claims of homeowner’s policy holders bringing actions related to damage to their insured dwellings. In these examples, the factors that compelled the court’s decision in Powell would probably apply: any bad faith suit brought on behalf of such policy holder plaintiffs would likely involve the same parties, same occurrence, same policy, same coverage, and same carrier’s decisions as those in the underlying contract or damages action.

In contrast to first-party claims, the approaches of plaintiffs’ attorneys to third-party claims are unlikely to be affected by Powell. In those cases where an insured wishes to pursue a bad faith claim against its carrier based on the carrier’s handling of the insured’s defense, the doctrine of res judicata will not apply because the parties to the two suits will not be identical. In such circumstances, the underlying case involves a suit by the third party against the insured, who tenders the defense to (or seeks indemnity from) its carrier. A subsequent bad faith lawsuit, in contrast, would be brought against the carrier by the insured.

What of cases where the third party claimant brings the underlying suit against the carrier directly, and then desires to pursue a bad faith action? Would the concerns of the opposing counsel in Powell apply in that circumstance? A non-party to an insurance contract may sue the carrier, for example, to dispute the carrier’s denial of additional insured status to that non-party. However, the Powell decision will not lead to an increase in bad faith claims in such suits, because in Connecticut, as with most states,10 third parties do not have the right to pursue a bad faith action against an insurer. This is because bad faith claims are based on an alleged breach of the covenant of good faith and fair dealing that extends from the insurer to the insured. Third parties, as non-parties to the contract, are also non-parties to the covenant, and cannot sue for its breach.

In any event, it remains to be seen whether the predictions of opposing counsel in Powell will be realized. After all, the Connecticut Supreme Court’s decision was based in part on the Powell plaintiffs’ knowledge, prior to trial of the first action, of the facts on which their later bad faith claim was based. In the words of the Powell court, the plaintiffs “could have amended their complaint to include [the bad faith claim].”11 That option is presumably open to any plaintiff’s attorney who encounters evidence of bad faith during litigation. Still, where the opposing counsel to a hotly-contested insurance litigation are in agreement, their joint prediction merits attention.