insurance claims

What is a bad faith claim?

by John T. Everett | February 26th, 2018

A third party bad faith claim arises when an injured person obtains a judgment against a negligent driver that exceeds the negligent driver’s liability insurance limits (i.e., an “excess verdict”).

Example #1:

  • Driver A runs a red light and crashes into Driver B.
  • Driver A has a GEICO insurance policy with $100,000 in liability coverage.
  • Driver B files a lawsuit for his injuries.
  • Driver B offers to settle his case for the policy limits, but GEICO refuses.
  • Driver B obtains a jury verdict for $150,000.
  • GEICO pays the $100,000 under the policy.
  • Driver A personally owes Driver B the excess $50,000.

Driver A has a bad faith claim against his own insurance company because GEICO failed to negotiate and settle the case within the policy limits of $100,000. GEICO did not have their customer’s best interests at heart when they gambled at trial in an attempt to save money. As a result, Driver A is personally responsible for the excess verdict and may have his wages garnished or assets seized. Driver A can assign the right to pursue the $50,000 bad faith claim back to Driver B in exchange for an agreement to not pursue his personal assets. The assignment procedure is outlined in Medical Mut. Liab. Ins. v. Evans, 330 Md. 1 (1993).

Test for Bad Faith

An excess verdict alone does not establish bad faith. The Maryland Court of Appeals has established the following 6-factor test to help determine whether an insurance company has acted in bad faith towards their insured:

  1. The severity of the plaintiff’s injuries indicates the likelihood of a verdict greatly in excess of the policy limits.
  2. Lack of proper and adequate investigation of the circumstances surrounding the accident.
  3. Lack of skillful evaluation of plaintiff’s disability.
  4. Failure of the insurer to inform the insured of a compromise offer within or near policy limits.
  5. Pressure on the insured to make a contribution to settlement within policy limits, as inducement to settle.
  6. Actions which demonstrate a greater concern for the insurer’s monetary interests than the financial risk to the insured.

State Farm v. White, 248 Md. 324 (1967); Allstate v. Campbell, 334 Md. 381 (1994).

Additionally, the insurance company has a duty to keep their insured fully informed on the progress of the claim. Schlossberg v. Epstein, 73 Md. App. 415 (1988). The insured also has the right to hire their own counsel outside of the insurance company’s lawyers due to the conflict of interest. Finally, the bad faith claim arises in tort and not contract. Kremen v. Maryland Automobile Insurance Fund, 363 Md. 663, 674 (2001).

What’s the value of the bad faith claim?

Once the bad faith claim is established, the measure of damages is the difference between the liability policy limits and the verdict. Medical Mut. Liab. Ins. v. Evans, 330 Md. 1, 25 (1993). So, going back to example #1, the value of that bad faith claim is $50,000. The insured or their assignee cannot collect additional damages for emotional distress or punitive damages unless they can demonstrate “actual malice” on the part of the insurance company. Owens-Illinois v. Zenobia, 325 Md. 420 (1992).

The bad faith claim is subject to the collateral source rule and is NOT reduced by payments from the uninsured or underinsured motorist insurance (UIM) carrier.

Example #2:

  • Driver A strikes Driver B.
  • Driver A has liability coverage of $30,000.
  • Driver B has UIM coverage of $50,000.
  • Driver B obtains a jury verdict for $75,000

The value of this bad faith claim is $45,000 (the difference between the verdict and liability coverage). The liability carrier does not get a credit for payments made under UIM. See Kremen at 675. So here, Driver B may collect a total of $95,000 ($30,000 liability, $20,000 UIM, $45,000 bad faith).

Bad Faith Survives

Bankruptcy does not extinguish a third party bad faith claim. If a negligent driver incurs an excess verdict and files for bankruptcy, his debts are discharged. The defendant may not have to pay the excess verdict, but the bad faith claim against the insurance company survives. Kremen v. Maryland Automobile Insurance Fund, 363 Md. 663 (2001).

As of the time of this article, the Maryland courts have not addressed whether the death of a negligent driver extinguishes the bad faith claim. The issue was raised in Mesmer v. Maryland Automobile Insurance Fund; however, the Court decided the case on other grounds. 353 Md. 241 (1999).

What Actually Happens

In practice, ChasenBoscolo has obtained many verdicts in excess of the negligent driver’s policy limits, and the insurance companies have always paid the excess. In fact, many insurance companies tell their negligent drivers, “Don’t worry. We’ll pay the verdict. No matter what.” State Farm ironically calls this their “good neighbor” policy.

Why does bad faith matter if the carriers pay the excess verdict?

The potential for a bad faith claim creates benefits for the injured person beyond the simple satisfaction of sticking it to the insurance company and their lawyers.

Initially, it is important to understand the motivation. The insurance companies and their adjusters evaluate each claim and set aside money from their other investments to pay the claim. This amount is called The Reserve. The adjuster then moves money from The Reserve back into the investment pool as they learn more about the value of the claim or as the injured person lowers their settlement demand during negotiations. An excess verdict exceeds the amount of policy and The Reserve. This reflects poorly on the adjuster who misevaluated the case, and their lawyer who lost at trial. Ultimately, the insurance company loses money beyond their original budget for the claim, invites additional litigation of the excess verdict, and risks bad publicity.

The injured person benefits because the potential of a bad faith claim puts pressure on the insurance company to offer their maximum policy limits or risk the additional costs of an excess verdict.

Example #3:

  • Driver A runs a red light and crashes into Driver B.
  • Driver A has a GEICO insurance policy with $100,000 in liability coverage.
  • Driver B has a back injury, goes to the hospital, gets physical therapy, receives pain management, misses six weeks of work, and has some residual back pain. His medical expenses and lost wages are $30,000.

We believe that Driver B’s case value exceeds the $100,000 policy limits and demand $100,000 to settle the case. GEICO is motivated to offer the policy limits because they do not want to incur a bad faith claim or exceed The Reserve.

The Bad Faith Letter

The bad faith letter is another tool in the arsenal to apply pressure on the insurance company and force a policy limits offer. Typically, we send a letter to the insurance company during the course of litigation that addresses a number of key issues. The letter emphasizes the strengths of our case including the defendant’s violation of community safety rules, the significant injuries caused by his or her violations, the medical expenses incurred, time lost from work, and the overall impact on the victim.

The letter clearly states that our client’s case value exceeds the insured’s policy limits. Therefore, failing to offer the policy limits and settle the case to protect their insured demonstrates bad faith. Ultimately, this letter will become evidence in the subsequent bad faith claim when evaluating the 6-factor test established by the Maryland Court of Appeals.

Oftentimes, there is an information gap between the insurance company and their insured. The insurance lawyer has told his carrier or his client that he is doing a great job and that everything is going well. The insured does not know that his personal assets and wages are at risk. Therefore, we state that our letter must be shared with the insured and enclose extra copies via certified mail.

Beyond the bad faith letter, there are other opportunities to communicate the risk of an excess verdict to the negligent driver. During depositions, we will mark the bad faith letter as an exhibit and ask the negligent driver to review the contents. At mediation, we may remind the defense attorney and his client what will happen after an excess verdict, which can include notices of wage garnishment to their employer or lien on their nice new home.

Bottom Line: Bad faith can be a weapon for the injured and allows us to obtain maximum policy limits results for our clients.