Chapter 5-3 Insurance Bad Faith
| Jurisdiction | United States |
5-3 Insurance Bad Faith
5-3:1 Overview
An insurer's breach of its duty of good faith and fair dealing is a cause of action that sounds in tort and is distinct from a contract action for the breach of the terms of the underlying insurance policy.73
5-3:1.1 Related Causes of Action
Breach of Contract, Breach of Stowers Duty, Late Payment of Claims, DTPA, Deceptive Trade Practices
5-3:2 Elements
(1) A contract between insurer and insured giving rise to the duty of good faith and fair dealing.74
An insurer owes a duty of good faith and fair dealing to the insured because of the special relationship arising out of the insurance contract.75(2) An insurer violates its duty of good faith and fair dealing by denying or delaying payment of claim if insurer knew or should have known that it was reasonably clear that claim was covered.77
An insurer's duty of good faith and fair dealing does not extend to third party claimants.76
(3) The insurer's breach was the proximate cause of the insured's damages.78
5-3:3 Damages and Remedies
5-3:3.1 Actual Damages
5-3:3.1a Mental Anguish
Mental anguish damages are recoverable upon a showing that the denial or delay in payment of a claim seriously disrupted the insured's life; they are not available in all cases.79 See Chapter 11, Section 11-9:3.
5-3:3.1b Loss of Credit Reputation
Loss of credit reputation is recoverable as actual damages in a suit where damage to credit was the necessary and usual result of the defendant's actions.80 The amount of damages need only be established with the degree of certainty to which it is susceptible.81 See Chapter 11, Section 11-9:1.
5-3:3.1c Increased Business Costs
Increased business costs may be recoverable as actual damages.82 See Chapter 11, Section 11-3.
5-3:3.2 Exemplary Damages
Exemplary damages are only available in exceptional bad faith cases.83 The plaintiff must show that the insurer's conduct rose to the level of malicious, intentional, fraudulent, or grossly negligent conduct to receive exemplary damages.84 Therefore, the plaintiff must show that the insurer was actually aware that its action would probably result in extraordinary harm not ordinarily associated with breach of contract or bad faith denial of a claim—such as death, grievous physical injury, or financial ruin.85
Exemplary damage awards serve to punish the wrongdoer and set a public example to prevent the repetition of the act.86 The punishment imposed through exemplary damages is to be directed at the wrongdoer, and an award of exemplary damages must be specific as to each defendant.87 A defendant's liability for exemplary damages is limited based on the conduct of employees, agents, and associates.88 See Chapter 11, Section 11-2.
5-3:3.3 Interest
A party may recover prejudgment and post-judgment interest on an award in an insurance bad faith claim.89 Prejudgment interest is compensation allowed by law for the lost use of the money due as damages during the time between the accrual of the claim and the judgment date.90 If no statute requires prejudgment interest, then the trial court generally has discretion whether to award prejudgment interest.91 For a recovery of interest to be sustained it must have a basis in the pleadings; interest must be asked for specifically or be embraced in the aggregate amount laid as damages.92
A money judgment that provides for interest or time price differential within its terms earns post-judgment interest at a rate equal to the lesser of the rate specified in the contract and 18%.93 Prejudgment interest...
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