“Bad faith” is the legal term for the situation where an insurance company ignores what it promised in its policy and instead acts in its own best interest instead of protecting its customer.
When an insurance company issues a policy, every state’s laws require the company to act “in good faith” to protect its customer, who pays the insurance company money in exchange for promises to be protected. All those advertising slogans we constantly hear are designed to get us to believe that the insurance company is going to live up to all our expectations, and that they’ll be there for us when we need them:
“You’re in good hands with Allstate”
“Like a good neighbor, State Farm is there”
“Let Prudential be your rock.”
“Nationwide is on your side.”
“Responsibility. What’s your policy?” (Liberty Mutual)
“Helping People Live Healthier Lives.” (UnitedHealth)
“The Company You Keep.” (New York Life Insurance Company)
That’s what these insurance companies are promising. These companies are saying:
“When you buy a policy from us and something bad happens, we’ll live up to our promises and do the right thing to fully protect you, up to the amount of insurance you purchased.”
Sometimes, though, insurance companies don’t live up to these promises, and instead of protecting their customer, they try to protect themselves instead. When that happens, the insurance company is said to be acting “in bad faith.”
The Missouri Supreme Court recently issued a decision in a case called Scottsdale v. Addison Insurance Company that analyzed insurance companies’ obligations. The Supreme Court stated that bad faith is “the intentional disregard of the financial interests of the insured in the hope of escaping the responsibility imposed upon the insurer by its policy.”
Here’s a simple hypothetical example of one way an insurance company can break its promises. John Policyholder walks into his insurance agent’s office and tells him that he wants to buy a car insurance policy. The agent asks how much insurance he wants to buy, and adds that Missouri law requires at least $25,000 in liability coverage on a car. Mr. Policyholder says “OK, I want a $25,000 policy.” The agent sells him a policy issued by XYZ Insurance Company.
XYZ then mails Mr. Policyholder his policy. Most people never read their policies, because not only are they incredibly difficult to understand (even if you’re a lawyer), but the language is non-negotiable anyway. It’s not like you can call up the insurance company and try to negotiate a better phrasing if you don’t like the wording in the policy.
To put it in really simple terms, pretty much every liability insurance basically says the same thing:
• We will fully protect you if a claim against you can be settled for $X or less;
• If a claim against you can’t be settled for $X or less, then any amount over $X is your problem; and
• If a claim is made against you, you have no authority to settle it, and only we can settle claims.
In Mr. Policyholder’s policy, the number $25,000 is inserted everywhere it says $X above. So if a claim can be settled for $25,000 or less, the insurance company is supposed to fully pay the claim and protect him. If a claim cannot be settled for $25,000 or less, the insurance company is only going to pay the first $25,000 of any verdict issued against Mr. Policyholder.
Six months go by. Mr. Policyholder makes every monthly payment right on time, and the full amount that the insurance company asked him to pay. Mr. Policyholder lived up to every single one of his promises to the insurance company.
Then one day, Mr. Policyholder runs a red light and hits a car driven by Mr. Smith. Months after the crash, a lawyer for Mr. Smith submits a claim to XYZ Insurance Company, saying that Mr. Smith hurt his spine in this crash. The lawyer sends XYZ Insurance Company medical records showing that two months after the crash Mr. Smith had spinal surgery. Mr. Smith offers to settle all of his claims against Mr. Policyholder for the full policy limits of Mr. Policyholder’s insurance policy limits (which in this case is $25,000), but says that he’s only willing to settle for that amount if the check is delivered within the next 60 days.
What XYZ would really like to do is drag the claim out for a year or two, while they do a thorough background check and investigation. They would like to get all of Mr. Smith’s old medical records going back 20 years to see if he ever complained about back problems before this crash. They’d like to send a surveillance team out to follow Mr. Smith around for a few weeks to see if they can catch him on videotape bending over, so that they can argue that he isn’t really hurt. They’d like to put Mr. Smith under oath and have their attorney ask him all kinds of questions about his background, his prior jobs, prior injuries, etc. they also want to drag it out because they know that the longer they can drag it out the more desperate Mr. Smith will become. And they want to do all that because they want to try to save themselves some money.
But they don’t have time to do all that, because Mr. Smith has said the offer to settle for the policy limits is only open for a limited time. So they have to decide. If they reject the offer to settle for $25,000 and instead successfully dispute the claim and settle it later for only $10,000, then XYZ has successfully saved itself $15,000. XYZ gets to keep the whole $15,000, and their profits increase.
On the other hand, if XYZ rejects the offer to settle for $25,000 in hopes that they’ll unearth some good evidence to use against Mr. Smith, but their search for evidence like that is unsuccessful, they run the risk that a jury might give Mr. Smith a verdict for a whole lot more than the $25,000 he currently seeks. Of course, if that happens, XYZ will only pay $25,000 and will tell Mr. Policyholder that he needs to pay the rest of the verdict out of his own pocket.
In other words, XYZ is in a position where it can gamble with Mr. Policyholder’s assets instead of its own. All of the upside goes to XYZ, and all of the downside is on Mr. Policyholder.
So what is an insurance company to do?
Well, if they really are a good insurance company, they’ll comply with the law requiring them to put Mr. Policyholder’s interests above their own interests, and take full responsibility for the case. It’s okay for the insurance company to reject the offer to settle in that situation, as long as they fully and completely protect Mr. Policyholder from whatever the verdict against him later might be, whether it’s $2,000 or $200,000. If they’re going to reject the offer to settle, they have to tell Mr. Policyholder in writing in advance that XYZ is going to pay 100% of the verdict, no matter how big it is, and that the policy limits don’t matter anymore.
But not all insurance companies do that. Some insurance companies are very happy to gamble with their customer’s money instead of their own. Those companies will simply reject the settlement offer, and happily put their customer at risk.
And the fact is that most times they get away with it. The simple truth is that the average customer never really knows what’s going on with their claims and doesn’t really understand that the insurance company is shifting all the risk onto them.
This risk-shifting really only becomes clear to the customer when the whole thing blows up and a jury verdict comes in against Mr. Policyholder for an amount way more than the $25,000 policy limits. At that point, a bad insurance company will mail a $25,000 check to Mr. Smith’s lawyer and tell them to go chase down Mr. Policyholder for the rest of the verdict. Mr. Policyholder is then shocked to find out that his personal assets are on the hook for the rest of the judgment amount. XYZ tells Mr. Policyholder that it’s all his problem, not theirs, because he didn’t buy enough insurance.
So what does the law say should happen when an insurance company does this?
Let’s go back and think about just exactly what XYZ promised Mr. Policyholder. The policy says that if a claim can be settled for $25,000 or less, the company will pay it. And in this case, it could have been settled for $25,000. That’s the key. That necessarily means that Mr. Policyholder did buy enough insurance and that XYZ acted in bad faith.
The insurance law in Missouri and most other states says that if this happens, Mr. Policyholder can force XYZ to pay 100% of the amount of the verdict against Mr. Policyholder. Additionally, Mr. Policyholder may get damages from XYZ for what XYZ put him through by acting in bad faith, including attorney’s fees that he may have spent suing XYZ to get them to do what they were supposed to do, the embarrassment of having his wages and bank account garnished, car re-possessed, etc.
This is just one example of how an insurance company can act in bad faith, but there are many others. This is actually a particularly complicated area of law.
If you need help with a situation where an insurance company has not lived up to its promises, please call us at 417-823-7500 or visit our website at www.CurranLawFirm.com.