Bad Faith in the Commonwealth of Pennsylvania
Insurance companies are required by law to meet certain obligations to their clients. In Pennsylvania, and across the U.S., insurance companies must investigate claims in a timely fashion, they have a responsibility to settle claims quickly, and clear explanation must accompany any claim denial or settlement. Failure of an insurance company to meet any of its obligations is considered “bad faith.” There are many instances where an insurance company can be said to be dealing in bad faith, or unfairly, with its clients. The most prevalent among these include:
1. Unreasonably low offer to compensate for damages.
2. Delay or Denial of a claim without reason.
3. Ambiguous policy wording.
4. Failure to investigate or perform due diligence.
5. Failure to act within a reasonable time.
6. Delay in payment while waiting on a settlement with a third-party insurer.
7. Intentional deception and fraud.
8. Refusing a settlement offer and then losing in court for an amount larger than is provided for in the policy.
In many cases, we are able to recover the full amount of the claim plus additional punitive damages where appropriate and allowed by law. Bad Faith insurance claims can affect individuals (home insurance, auto, casualty, medical, et al) and businesses (product liability insurance, workplace accident, third-party liability). There are generally two types of bad faith in Pennsylvania.
“Third-party” Bad Faith
Insurance companies have a duty to act in good faith in their settlement or defense of claims against their insureds and may be liable for excess verdicts beyond their policy limits in the event that duty is breached. In the “third-party” bad faith context, an insurer does not demonstrate good faith merely by showing that it acted with sincerity. Nor is it automatically liable for an excess verdict merely because the outcome is adverse. Nor does it have an absolute duty to settle simply because it is possible that a verdict might exceed its policy limits. However, an insurer’s contractual right to settle or defend is not a right to risk the insured’s financial well-being unless there is a real and substantial chance of a finding of non-liability and an insurer will be liable for an excess verdict if it unreasonably refuses an offer of settlement. An insurer’s decision to litigate rather than settle must be based upon a reasonable assessment of the circumstances and a real and substantial chance of a verdict in favor of the insured. The critical standard (and, admittedly, a movable one,) is that of reasonableness.
“First-party” Bad Faith
The Pennsylvania Courts have held that there is no common law right of action on the part of an insured against his or her insurer based upon its alleged bad faith handling of a first-party claim. The Pennsylvania Legislature enacted the current bad faith statute, appearing at 42 Pa.C.S.A. §8371, effective July 1, 1990, which provides as follows: § 8371. Actions on insurance policies In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions: (1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%. (2) Award punitive damages against the insurer. (3) Assess court costs and attorney fees against the insurer.
What is “Bad Faith”?
The courts have generally defined the term “bad faith” as referring to a “frivolous and unfounded” refusal to pay policy proceeds, involving “conduct which imports a dishonest purpose” and involves the breach of the insurer’s known duty of good faith and fair dealing through “some motive of self-interest or ill will.” To establish bad faith, the courts have held that a plaintiff must show by “clear and convincing evidence” that the defendant insurer (1) lacked a reasonable basis for its denial of coverage or benefits, and (2) that the insurer either knew, or recklessly disregarded its lack of a reasonable basis in denying the claim.