Chart Presents State-by-State Policy With Case Citations

This chart indicates which of the fifty states and the District of Columbia recognizes the tort of bad faith in first-party claims against insurers.

The states' positions on the tort of bad faith in first-party claims against insurers are not set; positions may be overturned by subsequent rulings. The chart is based on the most recent information available.

The Tort of Bad Faith

Insurance is considered a business of the utmost good faith. The principle of utmost good faith (uberrima fides), as first stated in the British House of Lords by Lord Mansfield in 1766, is that the duty of good faith rests upon both the insured and the insurer. [Carter v. Boehm, 3 Burr 1905 (1766)] It is still the law followed in England and was adopted by California and other states that recognize the covenant of good faith. Imposing a duty to deal with each other in good faith in all insurance transactions requires that the duty exists during the negotiation for the contract and throughout the term of the contract. The breach of the implied covenant of good faith originally resulted in the imposition of contract damages, not tort damages.

The courts of many states have created a tort called bad faith conduct of insurance contract requirements (the tort of bad faith). The duty imposed by the contract is defined as follows: “In every insurance contract there is an implied covenant of good faith and fair dealing that neither party will do anything which will injure the right of the other to receive the benefits of the agreement.”

In California, the courts began the transformation of the breach of the doctrine of good faith and fair dealing from a contract to a tort remedy, primarily through six cases spanning a twenty-one-year period.

Good or bad faith is a question of fact in each case. Every suit against an insurance company alleging a bad faith refusal to settle necessarily results from a breakdown of settlement negotiations followed by disposition of the personal injury claim at the hands of jury or judge. Failure to settle may occur late or early in the game. Sometimes negotiations are held open almost to the time the jury returns with its verdict; sometimes the contending sides agree to disagree even before the accident suit is filed. Certainly, the extent of negotiations preceding the breakdown, the timing of the insurer's rejection in relationship to the sequence of accident, commencement of suit and trial are elements in the fact trier's individualized adjudication of good or bad faith. That rejection of the compromise offer happened early rather than late, that it preceded judgment or trial or even commencement of suit, does not preclude a finding of bad faith. Assuming bad faith, the breach of the insurer's obligation occurs at the time when it indulges in the unwarranted rejection of a reasonable compromise offer within the policy limits. In determining whether an insurer has given consideration to the interests of the insured, the test is whether a prudent insurer without policy limits would have accepted the settlement offer.

Since an insured acquires insurance to protect against the risks of accidental losses, including the mental distress that might follow from the losses. Among the considerations in purchasing liability insurance, as insurers are well aware, is the peace of mind and security it will provide in the event of an accidental loss, and recovery of damages for mental suffering has been permitted for breach of contracts which directly concern the comfort, happiness or personal esteem of one of the parties. Refusal to provide an insured the peace of mind purchased was the reason courts decided it was necessary to create a tort of bad faith because contract damages would be inadequate to indemnify an insured who was treated badly by his or her insurer.

Reverse Bad Faith Information

The tort of bad faith was created as a one-way street. Courts concluded that insureds needed protection against insurers who did not keep their promises but that insurers did not need protection against insureds who did not keep their promises.

Although the covenant of good faith and fair dealing devolves equally upon the insured and the insurer, the tort of bad faith, in its application, is only available to the insured in an action against the insurer. Some insurers have sought to establish a tort of reverse bad faith, or the tortious breach of the covenant of good faith and fair dealing by the insured. Mostly their efforts have failed.

While insureds and third parties may bring bad faith actions against insurers, insurers in most jurisdictions do not have the same opportunity. Some insurers have sought to establish a tort of reverse bad faith, or the tortious breach of the covenant of good faith and fair dealing by the insured.

Although the Oklahoma Supreme Court refused to recognize a tort of reverse bad faith, it described the doctrine as an “independent tort allowing insurers to seek affirmative relief for an insured's breach of the duty of good faith and fair dealing. The approach draws from the principle that an insurer should not be subjected to bad-faith liability if the insured (a) procured the policy through fraud, (b) breached contractual obligations, or (c) engaged in other misconduct.” First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland, 928 P.2d 298 (Okla. 1996).

In 3 Law and Prac. of Ins. Coverage Litig. §28:38, the authors list courts that have considered and rejected claims of reverse bad faith, including Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995); First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland, supra.; Parker v. D'Avolio, 664 N.E.2d 858 (Mass. App. 1996); In re Tutu Water Wells Contamination Litigation, 78 F. Supp. 2d 436 (D.V.I. 1999); and Snap-on Tools Corp. v. First State Ins. Co., 502 N.W.2d 282 (Wis. Ct. App. 1993).

In addition, courts have specifically declined to recognize the tort of reverse bad faith. See Johnson v. Farm Bureau Mutual Ins. Co., 533 N.W.2d 203 (Iowa 1995); Tokles & Sons, Inc. v. Midwestern Indem. Co., 605 N.E.2d 936 (Ohio 1992); Wailua Associates v. Aetna Cas. and Sur. Co., 183 F.R.D. 550 (D.Hawaii, 1998); and Lewis v. Aetna Ins. Co., 78 F. Supp.2d 1202 (N.D. Okla. 1999).

There is some authority that insurers may recover against insureds under the terms of a penalty statute for the lesser of the amount of the insurer's actual loss or the statute's stated penalty. In Adams v. Tennessee Farmers Mut. Ins. Co., 898 S.W.2d 216 (Tenn. Ct. App. 1994), the court determined that a policyholder who filed a complaint against his insurer alleging bad faith in rejecting his claim for a loss in connection with a house fire would be subjected to a statutory penalty for not bringing the lawsuit in good faith and would not be permitted to avoid a penalty on the basis that the policy was void ab initio due to material misrepresentations in policy application. According to the court, such an argument would render the statute, which provided a penalty of up to 25 percent of amount of the loss claimed, a nullity.

However, the court held that the statute provided the amount awarded to be measured by additional expense, loss, or injury inflicted on the defendant by reason of suit, and, accordingly, the insurer's recovery would be limited to the amount which represented 25 percent statutory ceiling and which had been awarded by the trial court.

Of course it is unfair that an insurer can be held liable for the tort of bad faith but cannot be the victim of the same tort. All litigants are supposed to be equal in the courts of the United States, but in this situation, the insured is more equal than the insurer.

Even though the tort of reverse bad faith is not recognized, when an insured acts in bad faith it is usually by misrepresenting a material fact, concealing a material fact, or doing something inimicable to the rights of the insurer. The insurer is, therefore, not without a remedy when an insured acts to deprive the insurer of the benefits of the contract of insurance.

It may, if there is evidence of misrepresentation or concealment of material fact an insurer can sue its insured for damages caused by fraud.

Insurance fraud is a tort, a civil wrong. Black's Law Dictionary, 6th Edition, defines fraud as follows:

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

In simple language, fraud can be defined as a lie told for the purpose of obtaining some value from another who mistakenly believes the lie to be true.

If evidence exists to establish the elements of fraud an insurer can effectively sue the insured for damages. Those elements require that an insured

• makes a representation to the insurer that the insured knows is false;

• conceals from the insurer a fact he knows is material to the insurer;

• makes a promise he does not intend to keep; and

• makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.