This blog has analyzed issues involving insurance bad faith claims against carriers from a variety of perspectives.  The basic premise behind a bad faith claim against an insurance carrier involves seeking extra-contractual damages for the insurer’s failure to exercise good faith in executing its obligations under an insurance policy.  

A novel legal question that recently has been raised by insurance companies involves whether carriers have a reciprocal right to pursue an insurance bad faith claim against policyholders.  Although this is probably not a possibility contemplated by many policyholders, insurance companies in about a half dozen states have pursued bad faith claims against their insureds.  While states have uniformly rejected such claims, policyholders can benefit from understanding the basis for such claims and the reasoning of courts that have declined to recognize bad faith lawsuits against policyholders.

The fact pattern in the Kentucky case of State Auto v. Hargis provides a recent example of this emerging but unsuccessful strategy. The insured was involved in hiring someone to burn down her home.  After the fire, the insured submitted a claim for approximately $866,000 in losses related to damage to the home and personal possessions inside the home. The insurer sued and contended the policyholder was involved in intentionally burning down her own home.  She counterclaimed alleging statutory and common law bad faith claims.  The insured eventually amended its complaint to include a “reverse bad faith claim” against the policyholder.  Both the trial court and appellate court agreed that Kentucky does not recognize the right of an insurer to file a reverse bad faith claim against its policyholder.

The appellate court began by indicating that both statutory and common law bad faith claims in Kentucky involve the following elements to state a valid cause of action: (1) establish insurer liability for the claim; (2) no reasonable factual or legal basis for denying the claim; and (3) reckless or intentional disregard for the lack of a basis to deny the claim.  The court also noted that the insurer cannot be found to have acted in bad faith under the law of the state unless liability for the claim exists under the policy.

The court started by observing the state’s Supreme Court had acknowledged that reciprocity in terms of the right to bring specific claims does not necessarily exist for insurers and policyholders.  While an insured could pursue a claim under the state’s Unfair Claim Settlement Practices act, the state’s highest court had ruled insurers possess no comparable right of action.  The court reasoned the same principle should apply to common law bad faith theories because insurance carriers do not have the same need for protection as an individual policyholder.

The court highlighted the difference in financial and bargaining power between an insurer and insured while considering ruling from other states on this issue.  The states of California, Iowa, Ohio, and Oklahoma, and the Virgin Islands had all declined to recognize the right of an insurer to sue for reverse bad faith.  The court observed not a single state court had acknowledged such a right although Tennessee has a limited reverse bad faith statute that can result in recovery of a sum not to exceed 25 percent of the amount of the unfounded claim.

In following the lead of courts in these other jurisdictions, the court commented on the policy reasons for distinguishing between an insured and insurer in terms of the right to assert a bad faith legal claim.  The policyholder in this case was convicted of insurance fraud related offenses and ordered to pay restitution to the insurance company in the amount of $672,497, which the court considered an adequate punishment and deterrent.  Further, the insurer drafts the insurance contract and holds the power of the purse strings while the policyholder often will face dire financial hardships when pursuing a claim.  Insurers also have little need for a bad faith action because they can always deny the claim or pursue a civil or criminal claim for fraud if a claim is false or exaggerated.

While we believe this approach is fair given the enormous difference in bargaining power between a policyholder and an insurance carrier, the insurance industry will continue to look for innovative ways to increase profits at the expense of their customers. 

You can reach Miami Insurance Claims Lawyer J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email Attorney Gonzalez-Sirgo directly at [email protected].

J.P. Gonzalez-Sirgo
J.P. Gonzalez-Sirgo, P.A.
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