United States: Bad Faith: Easy To Plead - Hard To Prove

Nancy made a left turn in front of Jason’s speeding vehicle. She spent two months in the hospital. The eyewitnesses could not agree on who had the red light and who had the green light.

Nancy settled with Jason for $100,000. She then demanded policy limits under a UIM policy purchased by her employer. The limits were $1  million. Based on its investigation, the UIM carrier was of the view that Nancy caused the collision.

Nancy demanded arbitration. The UIM carrier offered $300,000, and then $400,000 at the arbitration. Nancy never came off her million dollar demand.

The UIM arbitrator awarded $929,803.29. Nancy sued for bad faith. She dismissed that. But a year later, sued again. The trial resulted in a hung jury. Prior to a second trial, the court dismissed Nancy’s claim on summary judgment.

The Court of Appeals affirmed, finding that the settlement offers were reasonable, that there was no bad faith in this UIM claim, and that the destruction of the home office claim file after Nancy first dismissed her case was not spoliation. The court also said that the "enhanced obligation" considerations were not applicable. UIM coverage is by nature adversarial and at arm’s length. An inevitable conflict exists between a UIM carrier and a UIM insured due to the unique nature of UIM coverage.

Now, notwithstanding that the Court of Appeals had written a super out- of- this- world opinion (See XXIII WASHINGTON I NSURANCE LAW LETTER, What Summer? 1999, p. 28), the Supreme Court granted Nancy’s petition for review. The case was argued in May 2000, and the opinion came out in January 2001.

The opinion represents a very surprising effort by the court to level the litigation playing field. In a unanimous opinion, written by the former WSTLA judge of the year, the court made it crystal clear that while bad faith may be alleged by a policyholder as a knee- jerk reaction to every disagreement with a company, the policyholder will have a damn tough time withstanding a motion for summary judgment unless the policyholder shows that there was no reasonable basis for the company’s conduct.

1. A company should not be liable for extra- contractual damages where there is a legitimate controversy as to whether benefits are due or the amount of such benefits.
2. Claims of bad faith are not easy to establish. Policyholders must meet a "heavy burden."
3. Policyholders must prove bad faith as a matter of law.
4. If the evidence produced by either side creates a fact issue with regard to the validity of the claim and, thus, the legitimacy of the denial thereof, the tort claim must fail.
5. To establish the tort of bad faith, the policyholder must prove as a matter of law that the insurer’s conduct was unreasonable, frivolous, or unfounded.
6. A company is ordinarily entitled to summary judgment of dismissal of a bad faith claim unless the insured shows there was no reasonable basis for the company’s actions.
7. Where there is no real dispute that an insurer had a reasonable basis for its actions, dismissal of the bad faith claim on summary judgment is appropriate.
8. The relationship between a UIM insurer and its insured is by nature adversarial and at arm’s length.
9. Tank’s "enhanced obligation" rule is simply unworkable in the UIM context.
10. However, the duty of good faith does not simply disappear when a UIM claim is made.

Clearly the most significant insurance opinion since the court introduced the concept of "enhanced obligation" back in Tank v. State Farm, 105 Wn. 2d 381, 715 P. 2d 1133 (1986)

Ellwein v. Hartford Accident & Indemnity Co., 142 Wn. 2d 766,15 P. 3d 640 (2001) affirming in part, reversing in part, 95 Wn. App. 419, 976 P. 2d 138 (1999).