The “legitimate dispute” defense is asserted in many, if not most, bad faith cases.  As noted in a previous post, using this defense, insurance companies often argue there is a “legitimate dispute” with the policyholder about the insurance claim in question, and there can therefore be no bad faith liability.  Policyholders often argue in response that the dispute is not “legitimate” but instead based on an improper investigation, skewed evaluation of the issues, biased expert analysis, etc.

In the recent case of Falcone v. Liberty Mutual Insurance Co., the Oklahoma Supreme Court took on the “legitimate dispute” issue in the context of an uninsured motorist (“UM”) claim.  In Falcone, the policyholder, Malinda Falcone, was injured in an automobile accident when an uninsured driver ran a stop sign and crashed into the vehicle in which she was riding.  Ms. Falcone was taken to the emergency room at OU Medical Center.  There, the ER doctors transferred her to the “Level 2” trauma center at the ER.  The total medical bill from OU Medical Center submitted to the UM carrier (Liberty Mutual) was $47,203.00 (including $24,420.25 for the Level 2 ER).  The total medical bills from all providers were $67,098.23.  Ms. Falcone had $100,000.00 in UM coverage available to her.

Liberty Mutual took issue with the amount of the ER bill, and had the medical records reviewed by two out-of-state “utilization review” doctors, both of whom gave the opinion that Ms. Falcone did not need to go to the Level 2 trauma ER.  The doctors also took issue with specific treatment, including CT scans.  Liberty Mutual then offered significantly less than its UM limits to settle the claim.  Ms. Falcone refused to settle for less than her policy limits and filed a bad faith lawsuit against Liberty Mutual.

After the suit was filed, Liberty Mutual paid its $100,000.00 policy limits.  Then, Liberty Mutual moved for summary judgment, asking the trial judge to find as a matter of law there was no bad faith.  The trial judge granted that motion, and Ms. Falcone appealed.  The Oklahoma Supreme Court unanimously overturned the summary judgment in favor of Liberty Mutual, finding it is up to the jury to determine “whether a lack of good faith is shown” by Liberty Mutual’s conduct.

Justice Gurich wrote a separate concurring opinion (with Justice Reif joining her) stating in her opinion Liberty Mutual committed bad faith as a matter of law.  Justice Gurich opined the case should be remanded to the trial court with instructions to submit the case to the jury only for a determination of whether Ms. Falcone was entitled to actual and punitive damages.  The concurring opinion was critical of Liberty Mutual’s reading of its policy language.  Further, the concurring opinion also stated:  “The very act of using the utlization reviewers as pretext to deny payment of the emergency room bill in this case is bad faith.  Liberty Mutual had no justifiable reason for withholding payment under the policy.”

By way of this opinion, the Oklahoma Supreme Court has reinforced the principle that a bad faith case in which the insurance company relies on the “legitimate dispute” defense should be decided, at least in most cases, by a jury – not on summary judgment.  As a result, lay juries will continue to most often be the arbiters of whether an insurance company’s adverse claim position constitutes a “legitimate dispute” or not.  Policyholders and their lawyers are likely pleased with this result.

As a young lawyer starting to work on bad faith cases, I was anxious to do the legal research necessary to find a list of acts by an insurance company that qualified as “bad faith.”  I began looking in the law books (we didn’t use computerized research much back in the stone ages).  I quickly learned there is no one place to find a laundry list of things the law deems to be acts of bad faith.

This was a little frustrating.  I felt like there ought to be clear guidance to insurance companies, policyholders and lawyers handling bad faith cases as to what constitutes bad faith.  While there are some Oklahoma court decisions that hold certain factual scenarios presented in individual cases either are or are not bad faith, there is no case that sets forth a comprehensive list.

As far as statutes go, Oklahoma has its version of the Unfair Claims Settlement Practices Act (the “UCSPA”).  That statute provides some guidance by defining actions by insurers that are deemed “unfair claims settlement practices.”  But the UCSPA does not allow for a “private cause of action” when an insurance company violates the Act.  This means a policyholder can’t sue an insurance company and base her claim on a violation of the UCSPA.  Certainly, the UCSPA helps define industry standard claim practices and it can be relevant in many ways in a bad faith case, but it is not exactly what I was looking for as a young lawyer.  In reality, nobody with much experience in bad faith cases would believe it contains a comprehensive list of actions that constitute bad faith.

The answer to the question:  “What is bad faith?,” like so many questions people pose about the law, is:  “it depends on the facts of the case.”  Perhaps the best way to understand this somewhat unsatisfying state of affairs is to refer to the seminal case of Badillo v. Mid-Century.  The Oklahoma Supreme Court was called upon to define bad faith in that case, and along those lines stated:

“. . .[T]he minimum level of culpability necessary for [bad faith] liability against an insurer to attach is more than simple negligence, but less than the reckless conduct necessary to sanction a punitive damage award against said insurer.”

In effect, Oklahoma law requires an insurance company to do more than make an honest mistake in order to be held liable for bad faith.  But, an insurance company does not have to engage in conduct that rises to the level of recklessness to be in bad faith either.  So, in light of this, when people ask me what bad faith conduct is, I tell them it requires more than the equivalent of running a stop sign, but less than running a stop sign at 80 mph while driving drunk.  There is a lot of space between simple negligence and recklessness and that is where the tort of bad faith begins.  The facts of each case must be evaluated to determine if the insurer’s conduct arises to the level of bad faith.

The truth is, from a practical standpoint, bad faith is often best identified by the “smell test.”  Later posts will address how this “test” is applied to real examples.

An insurance policy is a contract. The contract basically provides the policyholder will pay the agreed amount of premiums to the insurance company in exchange for the insurance company’s promise to pay covered claims.  The law in Oklahoma has long recognized that an insurance contract is different than other kinds of contracts.

In 1977, the Oklahoma Supreme Court decided Christian v. American Home.  In that landmark case, the Court recognized the “special relationship” between an insurance company and its policyholder. The Court noted several reasons for this “special relationship,” including:

  • The policyholder “has no bargaining power and no means of protecting himself” from an abusive insurance company
  • The “quasi-public” nature of the insurance industry, which comes from the fact that it involves the public interest and is largely governmentally regulated
  • Everyone knows that when a claim is made “the insured will be disabled and in strait financial circumstances and, therefore, particularly vulnerable to oppressive tactics on the part of an economically powerful entity.”

In another landmark Oklahoma Supreme Court decision, Badillo v. Mid-Century Insurance Co., a concurring opinion in which three justices joined stated:

“Insurance companies, like other companies seeking to increase their market and customer base, have turned to mass marketing of liability insurance policies just as other companies market soap and cars. Through its advertising, the insurance company beckons the consumer to do business with it based upon slogans that suggest the liability insurance company will look after its customer’s best interest. The insurance company promises the customer will be in good hands and treated with carrying and neighborly concern. Soothing and comforting music place in the background of these advertisements. Based on these advertisements, it is only reasonable for customers to rely on the insurance company to handle claims with care and concern for the customer’s financial and legal interests.”

Many insurance companies and claim adjusters act in accordance with these long-standing principles. However, all too often, an insurance company loses sight of the duty of good faith and fair dealing and a policyholder pays the price.