The Coming Boom In "Bad Faith" Litigation
The Time To Repair The Roof Is When The Sun Is Shining:
Here Comes The Bad Faith Storm
By Lawrence N. Rogak
In February 2008, the Court of Appeals created a new precedent in a case called Bi-Economy Market v. Harleysville Ins. Co., which did not exactly create a new cause of action for first-party bad faith claims against insurance companies (which technically exists, but the standard is almost impossibly high, requiring proof of actual malice), but which, for the first time, permitted claims for consequential damages which an insured incurs due to a denial of first party benefits which is deemed to be a breach of the duties of good faith and fair dealing.
What is the difference between "bad faith," and a breach of the duties of good faith and fair dealing? Nobody knows. But what the Court did, in my opinion, was the equivalent of when John Marshall found those first few flecks of gold at Sutter's Mill in 1848: it started the Gold Rush, with tens of thousands of prospectors packing their Conestoga wagons and heading West to seek their fortunes. A few got very rich; many got moderately better off; and many made a living catering to the material needs of the hopeful prospectors. Many others got nothing.
The first Bi-Economy prospectors began panning in 2008, and the early results came out in the past couple of days (see The Rogak Reports of 16 and 17 April 2009). The assays of their pannings and diggings did not produce any gold, but they produced something almost as good: they produced hope for the other prospectors.
The Savino and Grinshpun decisions both denied the defendant-insurers' motions to dismiss the suits of first-party claimants: no-fault claims, in Savino, and SUM claims, in Grinshpun. Both decisions permitted the plaintiffs to go ahead and conduct discovery to see if they could prove their claims.
Suriving a motion to dismiss is not the same as winning. But it means that the plaintiff-prospector has every reason to keep digging. And the insurer faces the cost -- and risk -- of litigation. Which also means that at the end of the litigation day, a jury will have the opportunity to decide whether the insurer's denial of first-party benefits was -- what? Fair? Reasonable? According to what standard?
And if those six sage jurors do find, that according to their deep understanding of insurance industry claims practices, that the denial of claims violated the blurry standards of good faith and fair dealing, what are the damages? According to Bi-Economy, only "consequential" damages should be awarded. To my mind that means "economic" damages -- dollars and cents. But what if a plaintiff testifies that due to the denial of no-fault benefits for some medical treatment, she had to suffer many more weeks and months of pain and suffering than she would have otherwise? Isn't that pain and suffering a "consequence" of the denial of benefits. You can bet that some judges will say it is, even though that requires a complete re-definition of the term "consequential damages."
But in American society today, every word and phrase is subject to re-definition. If we can re-define "marriage," we can re-define any word.
What this all means is that every single denial of a no-fault claim, UM/SUM claim, even property claim, carries with it the possibility of a bad faith lawsuit -- one which will survive a pre-answer motion to dismiss, and will require discovery (limited, for the time being, to just the details of the plaintiff's claim and not all the other claims against that insurer). Adjusters will be hauled into depositions to testify about how they arrived at their decisions to deny the bills or benefits at issue.
How much do insurers have to lose? Remember this: the rule of Bi-Economy is that consequential damages are not limited by the policy limits. That means potentially unlimited exposure in every bad faith suit. Panning for gold didn't offer as much incentive as this.
Who will insurance companies retain to defend the coming flood of first-party bad faith litigation? They can't use the same law firms they use to defend liability suits -- that will inevitably lead to a conflict of interest, because these firms are retained to represent the insureds as well.
Will the insurers use the law firms they now use to defend their no-fault and UM claims? At first blush, that seems all right because such attorneys are always on the side of the insurer against the insured -- no conflict there. But how many of those attorneys understand coverage litigation and/or bad faith litigation? I'll give you a hint: not many. If you don't believe me, call your favorite no-fault defense attorney and ask him/her to tell you everything they know about bad faith litigation. It will be a short conversation. Not that that will prevent some of them from getting bad faith cases assigned to them, if they are willing to work cheaply enough. As one claims manager told me when I pitched him for business, "All insurance defense attorneys are the same, so I might as well use the one who will work for the least money."
As bad faith litigation snowballs, there are going to be many expensive mistakes made by some insurance companies as they try to defend these lawsuits using attorneys who think that "bad faith" is when you swear with your fingers crossed behind your back.
Here is some free advice to every insurance company out there: President John F. Kennedy once said, "The time to repair the roof is when the sun is shining." I forecast torrential rains coming.