Source: https://corporate.findlaw.com/corporate-governance/insurance-bad-faith-and-related-topics.html
Timestamp: 2019-04-24 23:53:14+00:00

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Bad faith is a hybrid tort similar to, yet different and distinct from, an action for breach of contract. In fact, bad faith was developed in common law because contract remedies were inadequate to deal with types of inappropriate, oppressive and unfair behavior. The use of bad faith is not limited to insurance contracts alone, but when applied in the insurance context, it offers the best consumer remedy to individual insureds whose insurance claims are not handled fairly.
third party claims where an insured is sued by a claimant who is a "third party" to the insurance contract.
when an insurance company acts based upon a legitimate question which has not been settled by an appellate decision.
Bad faith claims are usually paired with Chapter 75 unfair trade practice claims. Therefore, this article concludes with a brief discussion of the application of Chapter 75 to these claims.
The first stop in the General Statutes, when analyzing a bad faith claim, should be N.C. Gen. Stat. §58-63-15 , entitled "Unfair Methods of Competition and Unfair or Deceptive Acts or Practices." This statute was amended and renumbered, so earlier appellate decisions refer to the predecessor statute, N.C. Gen. Stat. § 58-54.4. There are thirteen sub-parts to the statute, but two of the sub-parts, (1) and (11), are particularly important.
Section (11), entitled "Unfair Claim Settlement Practices", sets forth fourteen specifically described prohibited practices, lettered a. - n. Those fourteen prohibited practices are a verbatim copy of a model act which has been adopted by a majority of states and specifically included in the training materials of all major insurance carriers.
This is not a list of all possible bad faith practices, but it is quite a thorough list from which to start. Despite the limiting language at the beginning of Section (11) that no violation "shall of itself" create a cause of action for anyone but the Insurance Commissioner, evidence showing violations of these prohibited practices has been relied on by the North Carolina Court of Appeals in upholding plaintiffs' pleadings and verdicts in bad faith cases.
Section (1) is not utilized as frequently as Section (11), but it has great utility especially when used in conjunction with the Chapter 75 claim. Statements and correspondence from carriers regarding claims frequently include misrepresentations or mischaracterizations of policy language, and such statements are made to induce policyholders to take less or no benefits. Silence when there is a duty to speak has been construed as a misrepresentation. There are no references in Section (1) to "frequency" or to the Commissioner of Insurance.
The object of a bad faith claim is an award of punitive damages. In pleading bad faith claims, counsel should be aware of Rule 9(k) of the Rules of Civil Procedure which requires specificity in pleading claims for punitive damages.
North Carolina General Statutes, Chapter 1D controls all bad faith cases which are not already in suit. The provisions of Chapter 1D are not a hindrance to the cause of action itself. The aggravation element necessary for a bad faith cause of action will probably be characterized as either fraud, malice, or willful or wanton conduct. N.C. Gen. Stat. §1D-15(a).
The requirement that, in order to justify punitive damages, aggravation must be proven by "clear and convincing evidence", set forth in N.C. Gen. Stat. §1D-15(b), should not be a deterrent because a bad faith case without clear and convincing evidence would neither be worth taking nor strong enough to warrant a jury's imposition of punitive damages.
Insurance companies have so many levels of authority and so many internal audit procedures that tracing acts and omissions from the front line to supervisors usually is not difficult. N.C. Gen. Stat. §1D-15(c) Bad faith is a tort, and it is not warranted for a simple, aggravated breach of contract.
The $250,000 cap set forth at N.C. Gen. Stat. §1D-25 may well come into play in cases where bad faith acts and omissions were used in handling small insurance claims. A strong bad faith case may offer a particularly good vehicle for a constitutional challenge to the punitive damages' cap. With their immense wealth and power, insurance companies are unlikely to be deterred by punitive damage awards which are capped at $250,000. An individual policyholder who obtains a large punitive damage verdict may be able to argue that they will be denied equal protection and other constitutional guarantees, if the punitive damages are capped.
if the breach itself is tortious.
Insurance bad faith was first discussed in dictum in a decision decided later in 1976, Newton v. The Standard Fire Ins. Co., 291 NC 105, 229 S.E.2d 297 (1976). Newton owned a furniture store which was insured by The Standard Fire Insurance Company. There was a burglary at the store, and Newton made a claim for payment under his insurance policy. His claim was denied, and Newton filed a lawsuit alleging breach of contract and seeking compensatory and punitive damages.
The trial court dismissed the punitive damages claim, and Newton appealed. The Supreme Court affirmed the dismissal because the complaint neither specified a cognizable bad faith claim nor did it specify facts which would allow a finding of bad faith. The opinion, however, devoted several pages to the insurance bad faith tort.
Newton noted that insurance companies are responsible for protecting the public interest and therefore subject to regulation. Insurance carriers were analogized to utilities and common carriers; thus, they owe a high duty to the consuming public. Insurance companies have tremendous financial resources which create a "great disparity" of power and bargaining ability between the companies and claimants.
These "facts of life" led the court to "recognize the wisdom of a rule which would deter refusals on the part of insurers to pay valid claims when the refusals are both unjustified and in bad faith". Id. at 116.
Since Newton v. The Standard Fire Ins. Co ., the North Carolina Supreme Court has not rendered an opinion dealing with the insurance bad faith cause of action. However, numerous decisions of the North Carolina Court of Appeals have addressed the pleading and proof requirements of the tort, and bad faith has continued to evolve through those opinions.
In Dailey v. Integon General Ins. Corp., 57 N.C. App. 346, 291 S.E.2d 331 (1982) [hereinafter "Dailey I"], the Court of Appeals reversed a 12(b)(6) dismissal of an insurance bad faith claim. The court examined the minimum pleading requirements for bad faith. In order to withstand 12(b)(6), a complaint must allege a specific tortious act (either the breach of contract or some accompanying tort) and facts constituting aggravated conduct. The case centered on a first-party claim in which the plaintiff was seeking to recover for a fire loss which the insurer refused to negotiate and settle in good faith.
that the carrier misrepresented its coverage by claiming that a policy provided coverage and then discouraging payment of claims.
The Olive v. Great American Ins. Co., 76 N.C. App. 180, 333 S.E.2d 41, discretionary review denied, 314 N.C. 668, 336 S.E.2d 400 (1985), case affirmed summary judgment in favor of a homeowner's insurer. If an insurance carrier denies a claim based upon a reasonable interpretation of the language in the insurance policy there is no bad faith tort claim. This holding is consistent with decisions defining bad faith as something other than an "honest disagreement".
In Hornby v. Pennsylvania National Mutual Casualty Ins. Co., 77 N.C. at 475, 335 S.E.2d 335 (1985), discretionary review denied, 316 N.C. 193, 341 S.E.2d 570 (1986), the Court of Appeals vacated a punitive damage award in favor of a plaintiff in a case involving fire insurance. Plaintiffs maintained that the carrier should be liable for punitive damage because it dragged its feet processing policy applications.
The jury decided issues of negligence, compensatory damages, and punitive damages in plaintiff's favor. The court held that there was no evidence of aggravated conduct so there could be no punitive damages. The court affirmed the jury award of compensatory damage based on negligence.
Summary judgment in favor of an insurance company on a bad faith claim was reversed in Robinson v. N.C. Farm Bureau Ins. Co., 86 N.C. App. 44, 356 S.E.2d 392, discretionary review allowed, 320 N.C. 633, 360 S.E.2d 93 (1987), discretionary review dismissed, 321 N.C. 592, 364 S.E.2d 140 (1988). In Robinson , the insurer and insured disagreed on the extent of a fire loss; the damage amount was resolved by an arbitration procedure set forth in the policy. The carrier paid the claim within three weeks of the umpire's decision (less than seven months after the fire) and prior to institution of the bad faith action.
The court held that the claim payment did not bar the bad faith claim and rejected Farm Bureau's argument that there must be an unresolved breach of contract claim to sustain the bad faith tort claim. There was a jury issue on bad faith alone because the evidence taken in the light most favorable to the plaintiffs created an issue of fact that the insurance company had committed three specific violations of the prohibited claims settlement practices described in N.C. Gen. Stat. §58-54.4(11) [the predecessor to present N.C. Gen. Stat. §58-63-15(11)].
In Smith v. Nationwide Mutual Fire Ins. Co., 96 N.C. App. 215, 385 S.E.2d 152 (1989), discretionary review denied, 326 N.C. 265, 389 S.E.2d 816 (1990), the North Carolina Court of Appeals reversed dismissal of a bad faith claim. The case arose from the handling of a claim for damage to the plaintiff's mobile home. The day the mobile home was damaged, Nationwide promised to engage a repair company to estimate the damage; yet Nationwide never obtained an estimate. Nationwide raised additional obstacles which delayed adjustment of the claim; none of those "requirements" was based on provisions of Nationwide's policy.
The Smith court held that the plaintiff's allegations of three violations of N.C. Gen. Stat. §58-54.4(11) satisfied the aggravation element of the bad faith tort. Additional facts alleged in support of the aggravation element included a five month passage of time between the adjuster's initial contact and issuance of a claim check; extended negotiations with little progress towards resolution; and large differences between plaintiff's estimates and Nationwide's estimates. The Smith court also endorsed the holding from Payne , supra, that aggravated conduct could be shown by a pattern of excuses raised by an insurance company for refusing to pay a claim.
In Lovell v. Nationwide, 108 N.C. App. 416, 424 S.E.2d 181, aff'd in part, discretionary rev. improvidently allowed in part, 334 N.C. 682, 435 S.E.2d 71 (1993), was an extremely significant decision. Both the Court of Appeals and the Supreme Court affirmed a $225,000 punitive damages award against Nationwide in a case involving Nationwide's bad faith refusal to pay a $2,000 med pay claim. The Court of Appeals' opinion contains a retrospective analysis of the state of the tort and clear listings of the requisites of a bad faith claim for refusal to settle. The Supreme Court accepted the case for review, but then reconsidered and declined to address the bad faith issues.
The Lovells' daughter was killed while riding in a car insured by Nationwide. Nationwide's policy provided med pay coverage; therefore the daughter was an "insured" for med pay purposes and a claimant for liability purposes. Plaintiffs submitted bills for funeral expenses under the med pay coverage, but the bills had not been paid at the time the bad faith lawsuit was filed a little over nine months later.
In contrast, funeral bills submitted on behalf of the driver of the car, also an insured, were paid promptly two or three weeks after they were received by Nationwide. This disparate claims' handling treatment was of note to the court. Nationwide maintained there was no bad faith for two reasons - - first, Nationwide "just plumb forget" to pay the med pay claim; and second, plaintiff failed to make a formal written demand for med pay.
The court noted that there was no requirement in Nationwide's policy that a formal written demand be made. Nationwide also contended that the med pay claim had never been denied or refused -- it was just delayed. That contention was rejected, and the court adopted plaintiff's characterization that Nationwide's failure to pay the med pay claim for nine months (up to the time the bad faith action was filed) was tantamount to a refusal to pay.
The Lovell court relied upon, quoted, and reiterated the definition of bad faith first enunciated in Dailey II that "bad faith means 'not based on honest disagreement or innocent mistake'." 108 N.C. App. at 4214. Bad faith could be proven by evidence of a pattern of excuses for nonpayment -- a standard first recognized in Payne v. N.C. Farm Bureau Mutual Ins. Co ., supra.
In a subsection of the Lovell opinion entitled "Aggravated Conduct", numerous cases were cited for the proposition that evidence of specific violations of N.C. Gen. Stat. § 58-63-15(11) establishes the aggravation element of the bad faith tort. In addition to such statutory violations, other evidence of aggravation or outrageous conduct may be considered. For example in Lovell, aggravation was demonstrated by Nationwide's failure to conduct a timely investigation of a claim under the liability coverage and delay in paying med pay in order to affect a lower settlement of the pending liability claim.
disregarded its own insurance policy provisions.
"These allegations of plaintiffs complaint, if proven, are sufficient to support an award of damages, including punitive damages, based upon a bad faith refusal to pay plaintiff's claim." 112 N.C. App. at 306.
There are two duties that a liability insurance company owes to an insured when a claim is made against that insured. First, there is a duty to defend; second, there is a duty to settle. These obligations are usually specified in the liability insuring agreement of an insurance policy, but one should study the entire policy because general conditions or endorsements may modify the duties. In the context of automobile insurance, the Financial Responsibility Act specifically addresses an insurance company's right to settle and contemplates that the insurance company should exercise that right subject to a standard of good faith. N.C. Gen. Stat. §20-279.21 (f)(3).
An insured has the right to bring an action against its liability insurer if the carrier breaches either the duty to defend or the duty to settle. The North Carolina Supreme Court seems to have adopted different legal standards for measuring the carriers' performance with respect to the duty to defend and the duty to settle.
The duty, or right, to settle must be exercised in good faith (a higher standard), and the duty to defend is subject to a lower negligence standard. Wynnewood Lumber Company v. The Travelers Ins. Co., 173 N.C. 269, 91 S.E.2d 946 (1917). There is some uncertainty or confusion regarding the legal standard applicable to the duty to defend. One decision since Wynnewood appears to have raised the duty to defend standard from negligence to bad faith. Connor v. State Farm Mutual Automobile Ins. Co ., 265 N.C. 188, 143 S.E.2d 98 (1965).
The definitive case spelling out the test used to determine when a liability carrier has to defend a case is Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 340 S.E.2d 374, rehearing denied, 316 N.C. 386, 346 S.E.2d 143 (1986). North Carolina adopted the "comparison test" which is accomplished by comparing the allegations of the complaint with the language of the insurance policy. Thus, the duty to defend is broader than the ultimate duty to indemnify (or pay a judgment) because the allegations of the complaint are assumed to be true when the "comparison test" is applied; conversely, the evidence proven at trial may not support recovery under the terms of the policy.
The breadth of the duty to defend is measured by the terms of the insurance contract, and depending on the policy language the duty to defend may not be extinguished by payment of policy limits. Brown v. Lumbermen's Mutual Casualty Co ., 326 N.C. 387, 390 S.E.2d 150 (1990).
If one is interested in the obligations a carrier might have after refusing to provide a defense, Duke University v. St. Paul Fire and Marine Ins. Co. is instructive. 96 N.C. App. 635, 386 S.E.2d 762 (1990). In that case, summary judgment for the insured was affirmed, and the carrier was required to pay the full amount the insured paid to settle plus expenses including attorneys' fees for obtaining the settlement.
For another analysis of the rights of an insured to recover costs in a case where coverage was in dispute, see Collins & Aikman Products, Inc. v. Hartford , 125 N.C. App. 5412, 481 S.E.2d 96, petition for discretionary review denied, 345 N.C. 752, 485 S.E.2d 51 (1997) [umbrella insurer not responsible for attorneys' fees in legitimate coverage dispute where there was no bad faith].
Plaintiffs' counsel should be attuned to the potential obligation an insurance carrier might have to pay a judgment in excess of liability insurance limits. As previously stated, the North Carolina courts have consistently held that a carrier's duty or right to settle is measured by the standard of good faith.
Subsequent to Wynnewood , it has consistently been held that there is a good faith standard applicable to the duty to settle. See for example, Alford v. Textile Ins. Co., 248 N.C. 224, 103 S.E.2d 8 (1958) [a decision in which the court observed that an insurer owes a duty to act diligently and in good faith to make settlements up to policy limits, and "if necessary to accomplish that purpose, to pay the full amount of the policy"].
One noteworthy case held that there was a jury issue whether a carrier exercised good faith with respect to settlement and therefore whether the carrier could be made to pay an excess judgment. Abernathey v. Utica Mutual Ins. Co., 373 F.2d 565 (4th Cir. 1967). Abernathy owned a vehicle which was insured by Utica Mutual. There was a wreck in which four of Abernathey's passengers was killed and one was seriously injured. Separate death and personal injury actions were filed. Two death claims and the injury claim were resolved. The last two death cases were tried, and there was a verdict in excess of the remaining liability coverage limit. Abernathey then brought an action against Utica Mutual to pay the entire judgment including the amount in excess of Utica's liability coverage.
The trial court entered judgment in favor of Utica at the conclusion of Abernathey's evidence, and the case was appealed. The Fourth Circuit reversed the directed verdict and determined there was a jury issue whether Utica acted in good faith. The court observed that when deciding whether a carrier exercised good faith a jury must be allowed to consider whether the insurance company acted in both the best interest of the insured and the best interest of the insurance carrier. There was evidence that the jury was entitled to weigh and decide whether Utica had flatly refused to negotiate or whether Utica's defense counsel had failed to communicate with Utica regarding the evidence offered during the wrongful death trial.
There is no question that an insured covered by liability insurance is entitled to bring an action against the insured's own carrier for breach of the duty to defend or duty to settle. The rights of injured third parties to seek recovery from the insurance carriers covering tortfeasors are not so clear.
A plaintiff who has succeeded in obtaining a judgment against a tortfeasor can bring an action against the insurance carrier to collect the liability policy limit; that right is well established. Hall v. Harleysville Mutual Casualty Co., 233 N.C. 339, 340, 64 S.E.2d 160 (1951). "The injured party in an automobile accident is an intended third-party beneficiary to the insurance contract between insurer and the tortfeasor/insured party." Murray v. Nationwide Mutual Ins. Co ., 123 N.C. App. 1, 15, 472 S.E.2d 358 (1996), petition for discretionary review denied, 345 N.C. 344, 483 S.E.2d 172 (1997).
The North Carolina Supreme Court has held that plaintiffs could not collect a consent judgment which was in excess of the policy limit in a subsequent action directly against a tortfeasor's insurance company. In Wilson v. State Farm Mutual Automobile Ins. Co ., 327 N.C. 419, 394 S.E.2d 807 (1990). The plaintiffs contended they should be able to collect damages in excess of the policy limit because of the liability carrier's failure to defend its insured driver was in bad faith. The Supreme Court rejected that argument noting that the plaintiffs probably had an easier time getting the judgment since no defense was interposed; the Court held that the liability insurer would be liable for payment up to its policy limit but for no amount in excess of that limit.
Whatever rights an injured party might have to pursue a direct action against a tortfeasor's insurance carrier, it appears that the injured party must wait until there is some resolution of the case. An innovative effort to roll a tort claim for auto negligence together with bad faith and Chapter 75 claims against the liability carrier in the same action was unsuccessful in Wilson v. Wilson and Nationwide , 121 N.C. App. 662, 468 S.E.2d 495 (1996).
Mrs. Wilson was a passenger in a car operated by her husband. Disappointed with the liability carrier's settlement offer, she filed a negligence action against her husband and included Chapter 75 and punitive damages claims against Nationwide in the same suit. The Court of Appeals affirmed a 12(b)(6) dismissal of the claims against the carrier. Careful reading of the decision reveals that the plaintiff did not rely upon her status as an intended third-party beneficiary of the automobile insurance contract, but it is doubtful that argument would have saved her extracontractual claim.
The majority of jurisdictions in the country apparently allow an insured to assign his third-party bad faith claim to a successful claimant, but two North Carolina Court of Appeals' decisions reject that as a means for third parties to assert bad faith and Chapter 75 claims. Horton v. New South Ins. Co., 122 N.C. App. 265, 268, 468 S.E.2d 856, petition for discretionary review denied, 343 N.C. 511, 472 S.E.2d 8 (1996), held that an unfair and deceptive trade practice claim was not assignable and that a bad faith claim was a personal tort claim which was not assignable as against public policy and assignment would promote champerty. Terrell v. Lawyers Mutual Liability Ins. Co., 131 N.C. App. 655, 507 S.E.2d 923 (1998) relied on Horton, supra , to reject defendant attorney's effort to assign a bad faith claim against his malpractice liability carrier to a creditor with a confession of judgment. The attempt to assign in Terrell was unlikely to succeed because the insurance policy contained a provision prohibiting an assignment.
So is it impossible for a third-party claimant to recover extracontractual damages from a tortfeasor's liability carrier in excess of the liability limit? Apparently not! Murray v. Nationwide Mutual Ins. Co., 123 N.C. App. 1, 15, 472 S.E.2d 358 (1996), petition for discretionary review denied, 345 N.C. 344, 483 S.E.2d 172 (1997) reversed summary judgment for two liability carriers (tortfeasor's primary and excess carriers) thus allowing plaintiff to proceed on unfair trade practice claims even though the carriers had paid their respective policy limits following an excess judgment in the underlying auto case.
Crucial to the decision was the court's recognition that the injured party was an intended third-party beneficiary of the liability contracts. 123 N.C. App. at 15. The Murray case is also important because summary judgment for the plaintiff's own UIM carrier (a third carrier) was reversed for both unfair trade practice and bad faith claims.
Unfair methods of competition and unfair or deceptive trade practices in the field of insurance are set forth in N.C. Gen. Stat. §58-63-15 . Sections (1) and (11) are frequently relied upon in making insurance tort claims.
It is beyond the scope of this paper to completely discuss Chapter 75. A Chapter 75 claim may be used as an alternative to, or in conjunction with, a claim for bad faith. Successful use of Chapter 75 may provide a greater remedy, treble damages, and an avenue for receiving attorneys' fees than a bad faith tort claim alone.
The Pearce v. American Defender Life Ins. Co., 343 SE 2d 174, NC Sup. Ct. 1986, case held that a violation of the predecessor statute to N.C. Gen. Stat. §58-63-15 (N.C. Gen. Stat. §58-54.4) "as a matter of law constitutes an unfair or deceptive trade practice in violation of N.C. Gen. Stat. §75-1.1." 316 N.C. 461, 470, 348 S.E.2d 174 (1986). Pearce recognized the obvious - - that insurance is a business which affects commerce.
Since Pearce, it has been held that a violation of N.C. Gen. Stat. §58-63-15 constitutes an unfair and deceptive trade practice as a matter of law. Bentley v. N.C. Insurance Guaranty Association, 107 N.C. App. 1, 418 S.E.2d 705 (1992); Kron Medical Corp. v. Collier Cobb & Associates, 107 N.C. App. 331, 420 S.E.2d 192, discretionary review denied, 333 N.C. 168, 424 S.E.2d 920 (1992), reconsideration dismissed, 333 N.C. 345, 426 S.E.2d 706 (1993). Accord, Miller v. Nationwide Mutual Ins. Co ., 112 N.C. App. 295, 435 S.E.2d 537, discretionary review denied, 335 N.C. 770, 442 S.E.2d 519 (1993).
Pearce, supra, and Kron Medical, supra, establish that N.C. Gen. Stat. §75.1.1 , provides a remedy which is a private action for a violation of the more specific insurance unfair trade practice statute, N.C. Gen. Stat. §58-63-15. According to Pearce, noted that N.C. Gen. Stat. §75-16 mandates treble damages once a violation was proven. Kron held that silence when there is a duty to speak constituted a misrepresentation prohibited by N.C. Gen. Stat. §58-63-15(1); that "silent misrepresentation" entitled plaintiff to proceed under Chapter 75.
The Court of Appeals has held that the damage element necessary to prevail with an unfair and deceptive trade practice claim may be satisfied by "potential damages" such as punitive damages or treble damages potentially available in an unfair and deceptive trade practice claim. Murray v. Nationwide Mut. Ins. Co ., supra, 123 N.C. App. at 13, 16-17.
A bad faith claim against an insurance carrier for both first-party and third-party claims are possible. However, they are not easy as an insurance carrier will aggressively defend a bad faith case. Therefore, counsel analyzing potential bad faith cases should exercise extreme caution before accepting a case. Numerous potential bad faith cases often have facts often do not satisfy the elements of bad faith or the potential of the case does not justify the high costs that these suits entail.
Before taking a bad faith case, one should examine the insurance contract in question in its entirety, conduct a careful study of the statutes, conduct legal research, interview and evaluate witnesses, and examine all documents and correspondence relating to the underlying claim and its handling. Even if an action for bad faith cannot be justified, counsel should consider an action under the unfair or deceptive trade practices statutes.

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