20 Insurance Bad Faith

• Library: Elements of Civil Causes of Action (SCBar) (2015 Ed.)

20 Insurance Bad Faith¹

A. Definition

A bad faith action against an insurer is a tort cause of action² separate from any contract action the plaintiff may have.³ Liability is not dependent on breach of an express contractual provision,⁴ but derives from breach of an implied duty of good faith and fair dealing in the performance of the obligations undertaken by the insurer for the insured.⁵ The duty to protect the insured's interest in a third party action and to treat the insured fairly in a first party situation are two different aspects of the same duty.⁶

South Carolina does not extend the common law bad faith tort action against indemnity insurers to sureties.⁷

B. Elements

(1) a mutually binding contract of insurance
(2) refusal by the insurer to pay benefits due under the contract
(3) the refusal resulted from the insurer's bad faith or unreasonable action in breach of an implied covenant of good faith and fair dealing arising on the contract
(4) damage to the insured⁸

C. Elements Defined

1. A Mutually Binding Contract of Insurance

There must be a mutually binding contract for the insured to recover in a cause of action for bad faith.⁹ The ordinary principles of contract law, the requirement of offer and acceptance accompanied by valuable consideration, govern the formation of a contract of insurance.¹⁰ The status of an application for insurance is frequently a contested issue. An application is considered an offer, and no contract exists until it is accepted.¹¹ Negligent delay in acting on the application or notifying an applicant of rejection may be a basis for liability.¹² Submitting a voided check and bank draft authorization as part of the application process is generally insufficient, without actual payment of a premium, to form a contract of insurance. ¹³And where the insured pays a premium with the application, the insured is justified in assuming immediate protection.¹⁴ Where a policy was properly canceled, no valid insurance contract existed at the time of an automobile accident for which the insurer refused to represent the plaintiff, and the plaintiff therefore, failed to establish the existence of a mutually binding contract of insurance.¹⁵ Plaintiffs who were not first-party insureds had no right to pursue a claim for bad faith failure to pay first-party benefits.¹⁶

If the insurer wishes to reserve the determination of insurability it must do so by clear and unequivocal language that evidences an intent to limit temporary coverage.¹⁷

2. Refusal by the Insurer to Pay Benefits Due Under the Contract

The refusal of the insurer to pay benefits under the contract is a necessary element of the cause of action.¹⁸ Where that refusal is justified as a matter of law because for example, the insured has not complied with a condition precedent in the policy,¹⁹ or has no insurable interest,²⁰ the element is not met and the cause of action fails.²¹

An insurer who in fact had no duty to defend will generally not be liable for bad faith because it provided an incorrect reason for refusing to defend.²²

3. The Refusal Resulted from the Insurer's Bad Faith or Unreasonable Action in Breach of an Implied Covenant of Good Faith and Fair Dealing Arising on the Contract

The plaintiff must prove there was no reasonable basis to support the defendant's decision to deny benefits.²³ There is no bad faith if there is a reasonable ground for contesting a claim, and if there is a reasonable ground for offering less than the full amount demanded there is also no bad faith in negotiations.²⁴An insurer who in fact had no duty to defend will generally not be liable for bad faith because it provided an incorrect reason for refusing to defend.²⁵ Even though the insurer argues its investigation revealed a reasonable basis to deny a claim, a jury question on bad faith is still presented when the insured has produced evidence of bad faith. ²⁶ The determination of whether there was bad faith is judged by the evidence before the company existing when the claim was denied.²⁷ Factors which have been identified to aid in determining bad faith include:

a. The presence or absence of an investigation of the claim by the insurance company;
b. The presence or absence of communication between the insurance company and the insured;
c. The presence or absence of attempts to compromise or settle the claim;
d. The reasonableness of the insurance company's conduct in light of the totality of the circumstances;
e. How the matter appeared to the insurance company as judged by a reasonable and prudent [person] seeking to determine the facts of the controversy which it was [that person's] duty, in good faith, to investigate.²⁸

When an insurer refuses a claim by wrongfully denying the existence of a contract of insurance, the obligation of good faith and fair dealing has been breached just as much as where the contract is admitted but the insurer refuses to pay the claim.²⁹

If the carrier is a UIM insurer, good faith may take on a particular meaning. When a UIM insured begins a claim for liability against the allegedly at-fault driver, the insurer then — and apparently only then — has a duty to act in good faith towards the insured, although that duty does not necessarily entail a duty to make a settlement offer.³⁰

4. Damage to the Insured

In a tort action generally the plaintiff must show the breach of duty was the proximate cause of the injury. The South Carolina Supreme Court has said:

Proximate cause requires proof of: (1) causation in fact and (2) legal cause.
Causation in fact is proved by establishing the injury would not have occurred "but for" the defendant's negligence. [citation omitted] Legal cause is proved by establishing foreseeability. [citation omitted] Although foreseeability of some injury from an act or omission is a prerequisite to establishing proximate cause, the plaintiff need not prove that the actor should have contemplated the particular event which occurred. The defendant may be held liable for anything which appears to have been a natural and probable consequence of his negligence. [citation omitted] A plaintiff therefore proves legal cause by establishing the injury in question occurred as a natural and probable consequence of the defendant's negligence.³¹

Unless the evidence shows reasonable persons could not disagree, the question of proximate cause is one for the jury.³²

D. Defenses

The statute of limitations applicable to actions for insurance bad faith is three years for actions arising on or after April 5, 1988, and six years for those arising before that date.³³

The South Carolina Tort Claims Act³⁴ is applicable to governmental self-insurance agencies.³⁵ It waives the immunity of the State, its agencies, political subdivisions, and governmental entities from liability in tort. It contains, however, many limitations on liability and damages which may preclude or restrict a plaintiff's cause of action.³⁶ The Act is the exclusive and sole remedy for any tort committed by an employee of a governmental entity while acting within the scope of his or her official duty and must be liberally construed in favor of limiting the liability of the governmental entity.³⁷

Since insurance bad faith is considered a tort action,³⁸ the defendant's negligence should be a defense, however the question has not been directly determined by the courts of South Carolina.³⁹ Generally, contributory negligence is a defense in a negligence action that requires the defendant show the plaintiff was negligent⁴⁰ and that the negligence was the proximate cause of the injuries.⁴¹ Traditionally, contributory negligence was a total defense to the cause of action; however, South Carolina has adopted comparative negligence under which the plaintiff may recover if his or her negligence is not greater than the defendant's in which case the plaintiff's recovery is reduced in proportion to his or her negligence.⁴²Punitive damages, however, are not reduced by the proportion of the plaintiff's negligence under comparative negligence.⁴³

In Duncan v. Provident Mutual Life Insurance Co. of Philadelphia,⁴⁴ the South Carolina Supreme Court concluded that it is "... bound by ERISA and federal law to hold that the tort created by Nichols is expressly preempted when the bad faith claim arises under an employee benefit plan."⁴⁵

E. Damages

Where the plaintiff insured pleads and proves the elements of the action the remedy is not limited to the face amount of the contract.⁴⁶ The insured may recover consequential damages without regard to the policy limits.⁴⁷ To be awarded consequential damages plaintiff must prove bad faith or unreasonable action by the insurer.⁴⁸ Consequential damages are recoverable if a reasonable person in insurer's position with its knowledge could reasonably have foreseen the additional damages resulting from refusal to pay a claim.⁴⁹ The plaintiff must specially plead and prove consequential losses flowing from the insurer's breach.⁵⁰ Punitive damages⁵¹ may be awarded if the insured can demonstrate the insurer's actions were willful or in reckless disregard of the insured's rights.⁵² There must be actual damages before punitive damages may be recovered.⁵³

A statute provides for attorney's fees in bad faith actions:

In the event of a claim, loss, or damage which is covered by a policy of insurance ... and the refusal of the insurer ... to pay the claim within ninety days after a demand has been made by the holder of the policy or contract and a finding on suit of the contract made by the trial judge that the refusal was without reasonable cause or in bad faith, the insurer ... is liable to pay the holder, in addition to any sum or any amount otherwise recoverable, all reasonable attorneys' fees ... The amount of the attorneys' fees may not exceed one-third of the amount of the judgment.⁵⁴

STATE OF SOUTH CAROLINA COUNTY OF __________

__________, Plaintiff(s),

vs.

__________, Defendant(s).

IN THE COURT OF COMMON PLEAS

[Bad Faith - Tyger River]

CO...