Let us assume for the moment (no comments about what “assume” means, please) that insurers are not very fond of being sued for bad faith. It is clear that insurers continue to dispute these claims and defend against them, and yet the claims keep on coming. Consider the staggering impact of these bad faith claims in light of the fact that 3 years after Hurricane Katrina, it was “estimated that between 27,000 and 30,000 hurricane insurance suits were filed in southern Louisiana alone².”

To combat the 2004 and 2005 claims and the additional cases from subsequent events such as Hurricanes Gustav, Ike, and general first-party claims, defendants in these Gulf lawsuits have valiantly filed their motions to dismiss³, motions for summary judgment, motions in limine, and any procedural vehicle available to have these bad faith allegations dismissed. Unfortunately, it is rare when these claims are dismissed prior to trial and or settlement. Thus, these tactics do not seem to be a deterrent, and insurers continue to spend their ever-important and ever-scrutinized defense dollars defending these claims⁴. 

Worse yet, these bad faith claims have additional, adverse consequences and ramifications to defendants in commercial claims. Not only are the defendants spending the almighty defense dollar to fight the bad faith allegations, but the allegations also spawn the potential for additional defense dollars spent. The following are just a few examples. “Raising the Ceiling” in Settlement Negotiations

The insured and savvy insured's attorney may have alleged bad faith to “raise the ceiling” in its settlement negotiations. “Raising the ceiling” is a negotiation tactic used by plaintiffs to increase the defendants “worst case scenario” settlement amount (“ceiling”).

To illustrate the application of these strategies in a bad faith allegation scenario, let us consider a first-party fire loss lawsuit by an insured against its insurer. In this fact pattern, the insured has filed a lawsuit for an additional $500,000 to which he or she believes to be entitled in order to repair his or her building and for bad faith damages—as the insurer was arbitrary and capricious for not paying (in a timely fashion) what the insured believes he or she was owed. The insured believes he or she has tendered funds for all undisputed covered damages. Moreover, in this fact pattern, assume that the insurer is correct and it was not arbitrary and capricious, tendered the amounts owed timely. As such, there is no bad faith.

The insurer files all of its potential motions to dismiss, yet the judge refuses to dismiss the bad faith claims because there are “facts” in dispute (painful words to defending insurers and their lawyers). Thus, as a majority of all lawsuits settle prior to trial at mediation, both the insurer and insured agree to mediate their disputes. However, the insurer has now been put in a precarious position. No longer does it just have to defend against the damage estimates of the insured and know that its worst case scenario is $500,000 (the old ceiling). Instead, even if it has no intension of paying one cent of bad faith damages at mediation, the ceiling has still risen, as there is a chance that $500,000 is no longer the worst case scenario.

Thus, without some way to deter plaintiffs from filing these bad faith claims, defendants will be subject to these higher ceilings. Bad Faith Claims Subsequent to Appraisal Awards

To say that Fla. is also a “hot spot” for bad faith litigation would be quite an understatement. Add to that the growing bad faith litigation in Florida involving appraisal awards, and you have a subject for another article entirely.  

Briefly stated, in Fla., if an insurer attends an appraisal with its first-party insured pursuant to the terms of its insurance contract and the insured is awarded funds in addition to the undisputed tender, then depending on the amount in excess of the undisputed tender, insureds have been claiming bad faith and filing bad faith lawsuits. Thus, the defendant now faces the potential of an adverse award at appraisal and a bad faith claim to boot based on the fact that the award was granted, which results in spending more money on defense costs and the awards.   

This example alone suggests that bad faith litigation is beginning to spawn added areas of concern for commercial defendants. Chairs Must Fall Again

As you can see from just these few areas, commercial defendants are facing bad faith claims that are increasing and expanding, and it does not appear that the current defense, tactics are working. 

There needs to be a collective defense effort to bring back the days of being shocked when bad faith damages are alleged, and so “chairs must fall once again.” Defendants cannot allow these commercial bad faith claims to be the rule, rather than the exception, any longer.

Insurers need to do more than merely defend these claims; they must go on the offensive, taking measures to slow down or reverse these costly trends. This may entail pushing for legislation that penalizes the plaintiff for the filing of bad faith claims⁵, or moving early for sanctions as the bad faith claims and allegations are without merit and frivolous.

Simply put, the trends may not stop or reverse unless the plaintiff is forced to think long and hard before filing a bad faith claim just to raise the ceiling, as the filing of that claim has a good chance of backfiring.

Footnotes

1 “The Bizarro World (also known as Htrae) is a fictional planet in the DC Comics universe, introduced in the early 1960s.

2 Martin, Chris. “Hurricane Ike Litigation; Will it be as bad as Katrina?” (November 17, 2008) National Insurance Law Forum (visited April 18, 2011); http://www.insurancelawforum.com/2008/11/articles/bad-faithextra-contractual/hurricane-ike-insurance-litigation-will-it-be-as-bad-as-katrina.

3 Called “Exceptions of No Cause of Action” and “No Right of Action” in the Napoleonic Code of La.

4 Believe it or not, almost 6 years post-Katrina and Rita in La., bad-faith decisions from Hurricanes Katrina and Rita are still being decided by the courts. Wegener v. Lafayette Insurance Co., 2011 WL 880339, 2010-0810 (La. 3/15/11).

5 This is not unprecedented, as the La. legislature has adopted statutes that include remedies for the “bad faith” filing of claims: Louisiana Revised State 23:967(D), “If suit or complaint is brought in bad faith or if it should be determined by a court that the employer's act or practice was not in violation of the law, then the employer may be entitled to reasonable attorney fees and court costs from the employee.”