There are three basic categories of damages a policyholder can recover if she wins a bad faith case.  Bad faith cases can be worth significant amounts of money.  In fact, a meritorious bad faith case can result in far more money being paid to the policyholder than what she was entitled to recover under the insurance policy in the first place.

The first category of damages a policyholder can recover is “contract” damages.  This is the amount of money the insurance company should have paid the policyholder under the insurance contract (the insurance policy) in the first place if it had not acted in bad faith.  For example, if the insurance company properly owed its policyholder the policy limits of $25,000.00, but denied the claim in bad faith, the insured is entitled to recover the $25,000.00.

The second category of damages is “compensatory damages for bad faith” or “bad faith damages.”  The policyholder who can prove bad faith is entitled under Oklahoma law to recover money from the insurance company, above and beyond the “contract” damages under the policy.  These damages are to compensate the policyholder for the harm done to them as a result of the insurance company’s  bad faith conduct.  If the evidence supports it, the jury in a bad faith case is allowed to award the policyholder monetary damages for things like:  financial losses, embarrassment and loss of reputation, and mental pain and suffering.  (See Oklahoma Uniform Jury Instruction No. 22.4 – it should be noted the Comment to this OUJI allows it to be altered by the trial court to fit the evidence of the policyholder’s damages).   If the claim denial by the insurance company caused, for example, the policyholder to lose money in their business, have their credit adversely affected and suffer mental upset, the jury may award the policyholder money for these things at trial.

The third category of damages is “punitive damages.”  Punitive damages are designed to punish a defendant in a lawsuit, if the defendant’s conduct is deemed sufficiently improper.  These damages are not designed to compensate the policyholder, but instead to deter the defendant and others from engaging in the punishable conduct in the future.  In a bad faith case, punitive damages may be awarded by the jury to make an example of the defendant insurance company so that they refrain from the same bad faith conduct in the future, and to send a message to the insurance industry that the bad faith conduct being punished is unacceptable.  Punitive damages can be awarded in addition to “contract” damages and “compensatory damages for bad faith.”

In theory, the law on damages in a bad faith case serves as a check against insurance companies denying claims without properly investigating, evaluating and paying them fairly, if owed.  If there was no monetary remedy for compensatory damages (and, in the right circumstances, punitive damages), insurance companies could deny claims in bad faith with the only downside to them being the policyholder recovering what was owed under the policy in the first place.

Not all bad faith cases filed are meritorious.  However, the ones that are can serve the valuable function of leveling the playing field between policyholders and the insurance industry.

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.

Not every denial of an insurance claim is an act of bad faith by an insurance company.  In fact, the law in Oklahoma provides an insurance company has a right to be wrong about a decision on a claim without automatically being in bad faith.  However, not every dispute is “legitimate.”  If every claim denial amounted to a “legitimate dispute,” there would never be a bad faith case.  Instead, the insurance company would simply claim they legitimately thought they were on the right side of the dispute with the policyholder and seek to insulate itself from all bad faith liability.

Clearly, this is not the way the system works.  The real inquiry is whether the insurance company had a good faith basis for its claim decision.  If it did, then there is no bad faith liability.  However, under the law, an insurance company is not allowed to manufacture a dispute where none should exist.  An insurance company cannot use biased experts (like biased doctors or engineers, for example) against its insured.  It cannot investigate the claim only to find reasons to deny the claim while ignoring facts indicating the claim should be paid.  It cannot unreasonably and unfairly interpret policy language against an insured in an effort to avoid coverage.

The “legitimate dispute” defense is raised as a defense in almost every bad faith case.  The insurance company and its lawyers attempt to focus on whatever evidence might exist to support a claim denial, and argue a legitimate dispute exists.  On the other hand, the policyholder and her lawyer hammer away at the weaknesses in the insurance company’s investigation of the claim and reasoning for the denial, arguing whatever dispute exists about the claim is unfounded and manufactured in a bad faith.  Policyholders and their lawyers often claim the insurance company’s denial was not based on a fair evaluation of the evidence, but on a desire by the insurance company to avoid paying a legitimate claim.

When an insurance company raises the “legitimate dispute” defense in response to a bad faith case, the company’s investigation and decision-making process are placed directly in the crosshairs of the policyholder’s lawyer’s attack.  Bad faith cases are won or lost based on the quality of the adjusters’ work, their ability to defend their positions under cross-examination, and the relative skill of the lawyers on both sides of the case.  This is definitely true when the “legitimate dispute” defense is in play.

This story appeared recently in Claims Journal indicating Farmers Insurance is beginning to use drones to inspect homeowners’ roof damage claims.  Other companies are sure to follow (if they haven’t already).  The idea appears to be that adjusters have been trained to fly drones over a policyholder’s house after a storm damage loss to determine whether the house has been damaged and the extent of any such damage.  In theory, this would allow the adjuster to “see” the roof without being required to climb on top of the house to look. Before this new approach (and other aerial photography methods), adjusters would climb ladders and inspect roof damage to a policyholder’s home with their own two eyes.  This same approach has traditionally been taken by roofing contractors who are hired to repair damaged roofs.  Experienced adjusters and roofers can look at a roof and see damage from, for instance, hail stones striking the shingles.  Using drones to do this work will undoubtedly change the game.

Certainly, insurance companies are like other businesses in that they are looking for ways to apply new technologies in an effort to operate more efficiently and cost-effectively.   The insurance industry has likely concluded that inspecting roofs with drones can be done more quickly and cheaply than the old way.  In this context, using drones may also protect adjusters from climbing up ladders onto sometimes steep or slippery roofs.  This may turn out to be especially useful in “catastrophe” situations where dozens or even hundreds of houses are damaged in the same storm event (like the tornadoes and major hail storms we have become all too familiar with here in Oklahoma).

Innovation in the insurance industry can be a good thing, as long as the insurance companies keep in mind their basic mission is to handle claims in good faith.  Insurance companies must resist the temptation to implement technological “solutions” in a way to trim or cut fair claim payments to insureds.  It will be interesting to see whether drones as the “eyes” of the adjuster lead to quicker, more accurate claim payments or whether the drone program leads to increased disputes between insurance companies, their policyholders and the roofing contractors hired to repair storm-damaged roofs.  Ultimately, the duty of good faith applies to claim handling practices, whether the insurance company has decided to use technology to assist in adjusting the claim or not.

As noted in a previous post, there is no comprehensive list of acts of bad faith by an insurance company under Oklahoma law.  Further, the legal definition of bad faith leaves a lot of gray area to be filled in based on the facts of each case.  As a result, the question of whether an insurance company committed bad faith with regard to any particular claim is, from a practical standpoint, answered by applying the “smell test.”

In other words, it often happens that a policyholder believes his insurance company has acted in bad faith in handling a claim, while on the other hand the insurance company believes it acted in good faith.  In these situations, there is often no clear cut rule in the law that says the insurance company’s conduct was bad faith or not.  When this happens, the lawyers representing the policyholder and the insurance company attempt to cast the facts of the case in the light most favorable to their respective clients.

Oftentimes, the definition of bad faith found in Badillo v. Mid-Century (discussed in a previous post) must be applied to facts that lend themselves to interpretation by both sides.  Therefore, whether the insurance company acted in bad faith is most times left to a jury to decide.  A jury in a bad faith case, as in all civil cases, is made up of citizens of the venue where the case is being tried who have been called to jury duty.  They represent the collective wisdom of the community in which they live.  When it gets right down to it, the jury must weigh the evidence and determine if they believe the insurance company’s conduct amounted to more than “simple negligence” (or an honest mistake).  They do not have to decide the insurance company’s conduct rose to the level of “reckless.”

How does a jury of regular people decide this?  The apply their fundamental sense of fairness and their knowledge of the difference between right and wrong.  In other words, the “smell test.”

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.

A trend is developing in the insurance industry with regard to the use of “artificial intelligence” throughout an insurance company’s business operation, including handling claims submitted by policyholders.  A recent survey of insurance executives revealed that many of them believe artificial intelligence will revolutionize their companies and the insurance industry at large in the next handful of years.

I suppose I could buy the idea that an insurance company could improve its efficiencies in various areas like underwriting risk or streamlining the process for soliciting, selling and issuing policies and the like.  On the other hand, the idea of artificial intelligence (basically a computer program developed by the insurance company or one of its vendors) investigating, evaluating and deciding on claims submitted by policyholders is deeply concerning.

In Oklahoma, an insurance company owes a duty of good faith and fair dealing to its policyholder. That means when a policyholder makes a claim, the insurance company has to act reasonably, fairly and in good faith with regard to the specific facts and circumstances surrounding that policyholder’s claim. If the policyholder’s claim involves, for example, a personal injury suffered in an accident, how can a computer possibly take into account the human elements involved with such an injury and place a fair value on it? What about a claim that requires an evaluation of the truthfulness/credibity of an eyewitness account of an incident?  Only a properly trained, experienced, unbiased human being can do these things in good faith.

Why would an insurance company replace the judgment of its adjusters with a computer program’s judgment? Because insurance executives believe doing so saves their companies money.  Where does this savings come from? From lower claim payments. Who pays the price for lower claim payments?  Policyholders.  Is this good faith? The lawsuits that are sure to follow such a move by the insurance industry will tell the tale.

This story appeared recently in the New York Times relating the story of Benjamin Poehling, a former finance director at United Health Group, one of the largest health insurers in the country.  Mr. Poehling is now a whistleblower who says the major insurance companies have been engaged in a scheme to bilk Medicare out of billions of dollars.

The New York Times story says:  “When Medicare was facing an impossible $13 trillion funding gap, Congress opted for a bold fix: it handed over part of the program to insurance companies, expecting them to provide better care at a lower cost. The new program was named Medicare Advantage… But now a whistleblower…asserts that the big insurance companies have been systematically bilking Medicare Advantage for years, reaping billions of taxpayer dollars from the program by gaming the payment system.”  The Times story goes on to say that Mr. Poehling “described in detail how his company and others like it – in his view – gamed the system: Finance directors like him monitored projects that United Health had designed to make patients looks sicker than they were, by scouring the patients’ health records electronically and finding ways to goose the diagnosis codes. The sicker the patient the more United Health was paid by Medicare Advantage – and the bigger the bonuses people earned…”

When insurance company executives allow their own financial interests to be placed ahead of those of everyone else, including the American taxpayer, something has gone wrong at the heart of the industry. Placing profits and personal bonuses ahead of all other considerations, including honesty, fairness, the health and welfare of policyholders and the tax dollars of all Americans is the act of a company run amok.

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.