The Basics of Insurance Bad Faith Claims

There are two broad categories of bad faith claims which insureds can bring against their insurance carriers, i.e. first party claims and third party claims.

First Party Claims

First party claims pertain to situations where the insurance company has exercised bad faith toward its insured in failing to pay a claim or delaying in paying a claim.

There is a Pennsylvania statute which affords remedies to insureds when they are subjected to first party bad faith by their insurance carrier, i.e. 42 Pa.C.S. § 8371:

§ 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.

The statute provides no definition of bad faith and does not indicate what evidentiary standards are applied in adjudicating bad faith claims. However, Pennsylvania courts have ruled that, to succeed on a bad faith claim, the insured must present clear and convincing evidence to satisfy a two-part test: (1) the insurer did not have a reasonable basis for denying benefits under the policy, and (2) the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim. Terletsky v. Prudential Prop. and Cas. Ins. Co., 437 Pa.Super. 108, 649 A.2d 680, 688 (Pa. Super. 1994).

Third Party Claims

Third party claims pertain to situations where the insured faces a claim from a third party and the insurance carrier exercises bad faith in protecting its insured from the risk of incurring a judgment in favor of the third party which is  in excess of the insured’s policy limit, thereby subjecting the insured to personal liability for any amount in excess of the insurance policy limit. Pennsylvania courts have held that an insurer may be liable for the entire amount of a judgment secured by a third party against the insured, regardless of any limitation in the policy, if the insurer’s handling of the claim, including a failure to accept a proffered settlement, was done in such a manner as to evidence bad faith on the part of the insurer in the discharge of its contractual duty. Gray v. Nationwide Mutual Insurance Co., 422 Pa. 500, 223 A.2d 8 (1966).

Since Pennsylvania courts have held that  good faith “requires that the chance of a finding of nonliability be real and substantial and that the decision to litigate be made honestly”, and the decision to expose the insured to personal pecuniary loss must be based on a bona fide belief by the insurer, predicated upon all the circumstances of the case, that it has a good possibility of winning the suit”, where an insurer refuses to settle a claim that could have been resolved within policy limits without ‘a bona fide belief . . . that it has a good possibility of winning,’ it breaches its contractual duty to act in good faith and its fiduciary duty to its insured. Cowden v. Aetna Casualty and Surety Co ., 389 Pa. 459, 134 A.2d 223 (Pa. 1957).