Bad Faith — Collecting More Than Policy Limits

If you’ve been injured by a person who doesn’t have enough liability insurance to cover your damages, most of the time you are out of luck. The sad truth is that most people with inadequate insurance won’t have the ability to pay any damages out of pocket, so there is no point in suing them if their insurer has tendered its policy limits. In auto accident cases, you can protect yourself from this by buying UM insurance. However, sometimes even your UM coverage won’t be enough. In cases where the only liability insurance available will fall short of your damages, your only hope for being fully compensated is if the liability insurer acted in “bad faith.” If an insurer acts in bad faith, it exposes itself to all of your damages, regardless of its insured’s policy limits.

When Does an Insurer Act in Bad Faith?

Put simply, a liability insurer acts in bad faith if it could and should have settled a claim or lawsuit within its policy limits and failed to do so. This is bad faith because the insurer is exposing its own insured to an excess judgment (a judgment that exceeds policy limits). It is not bad faith towards you which creates the claim, but bad faith towards its own insured, to whom the insurer owes a fiduciary duty.

Put yourself in the shoes of the tortfeasor. You negligently injured someone else and you hope that your insurance company will make the case go away. Your insurance company gets an offer to settle the case for your full policy limits, which is actually a good deal because the person you hurt has injuries that far exceed those limits. If your insurer doesn’t pay, and you get sued, you will be personally liable for all of the plaintiff’s damages beyond your policy limits. The unthinkable occurs. Your insurer either drops the ball and doesn’t accept the settlement offer in time, or it acts stupidly and rejects the offer. It has just exposed you personally to a huge judgment, while all it has to pay is its policy limits. Or does it?

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In screwing you over, the insurer has breached its fiduciary duty to you, allowing you to sue it for all the damages you have to pay out of pocket through a “bad faith” lawsuit. However, this doesn’t get you off the hook for paying the plaintiff right now. If only there were some way to give your claim against the insurance company to the plaintiff in exchange for the plaintiff agreeing not to execute its judgment against you. . .

Why It is Called ‘Third Party Bad Faith’

Putting you back in your own shoes, you just received an offer from the defendant to assign you his bad faith lawsuit against his insurer in exchange for you not executing on your judgment against him. Because the defendant personally has no means to satisfy the excess judgment, you jump on the chance turn your uncollectible judgment against him into a very collectible judgment against his insurer. You step into a third party’s (the defendant’s) shoes to sue his insurer, which is why this is commonly known as a “third party bad faith claim.” In some states, where “direct action” against a third party liability insurer is allowed, the plaintiff can sue a liability insurer for bad faith without the need for the tortfeasor to assign his claim.

There is such a thing as a first party bad faith claim (where you sue your own insurer), but as a plaintiff this is usually enabled by a statute (third party bad faith is a common law claim) and has nothing to do with the type of claim covered in this article.

Did the Defendant’s Insurer Act in Bad Faith?

Before you start thinking that all lawsuits that result in an excess judgment are bad faith lawsuits — they aren’t. The key to a bad faith lawsuit lies in two words: could and should. Could the insurer have settled the case within policy limits? Did you make an offer to settle your claim for policy limits and give the insurer a reasonable amount of time to accept the offer? In Florida, courts have rejected bad faith claims where the plaintiff’s attorney put a 10-day time limit on a demand for policy limits. However, 30-day time limits were found to be adequate, which is why almost all Florida plaintiff’s attorneys place a 30-day limit on demands for policy limits. If the insurer delivers the settlement check on day 31, you can reject it and still preserve your bad faith lawsuit. Reasonable deadlines will be a matter of state common law, so this can vary from state to state.

If the insurer could have settled within policy limits, the question then becomes whether it should have. This will be viewed in light of the information available to the insurer at the time it failed to settle. So, if your case suddenly became more valuable after the settlement offer expired, that new information won’t support a bad faith case unless the insurer had the opportunity to settle for policy limits after that information became known. The question of “should” comes down to a “reasonableness” test: would a reasonable person have settled the case for policy limits with the information available at the time.

In some cases, the “should” question is clear cut. For example, it’s obvious that an insurer should settle a claim with $10,000.00 limits where its insured was clearly at fault and the plaintiff’s accident-related medical bills alone will exceed $30,000.00.

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In other cases, the “should” issue is less clear, such as cases involving disputed fault or causation. Because a finding of “no liability” or “no causation” completely negates a plaintiff’s damages, reasonableness involves a more complicated risk-reward analysis. If the defendant has a 50% chance of getting a defense verdict, but the verdict would likely be $75,000.00 if the plaintiff wins, should the insurer settle the case for policy limits of $50,000.00? In other words, it can get pretty complicated.

As a plaintiff’s lawyer, I’ll always argue that an insurer shouldn’t expose its insured to an excess judgment under any circumstances. However, be aware that bad faith cases are not slam dunks just because you won at trial and got an excess judgment. Reasonableness is a jury issue (in the bad faith lawsuit). Luckily, most juries hate insurance companies.

Things That Can Go Wrong In Bad Faith Cases

Aside from the problems mentioned above, other things can go wrong when bringing a bad faith case. If the defendant doesn’t want to assign you his bad faith claim (for whatever reason) or bring one on his own, you would have to force him into bankruptcy and then try to get the bankruptcy trustee to assign you his right to sue the insurer. That carries no guarantees and is a royal pain in the ass.

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Your attorney could make an error in the assignment/no-execution agreement between you and the defendant. Mistakes in these types of agreements can inadvertently release the insurer from bad faith liability. It may pay to bring in an attorney who specializes in “bad faith” cases if you need to bring this type of claim. Discuss this possibility with your lawyer once you know that you have a possible bad faith situation.

If, after making your initial offer to settle for policy limits you make a subsequent offer for less than policy limits, you may have ruined your bad faith case. The whole basis for a bad faith case is your position that the insurer should have known that the case was worth more than policy limits. Your own demand for less than policy limits undermines this argument.

Will an Insurer Settle a Case for More Than Policy Limits?

If an insurer faces exposure to a bad faith lawsuit, it may offer you more than policy limits to try to settle your underlying lawsuit. This is more likely to occur in cases where the insurer’s failure to pay policy limits results from an adjuster missing a settlement deadline. If the insurer really wanted to settle for policy limits, and just made an error in not getting you the check in time, it likely knows that it screwed up and it will want to avoid picking a fight it can’t win. If, however, the insurer actually evaluated your case as not being worth policy limits, odds are that it will not offer more than policy limits before you get an excess judgment.

Should I Always Pursue a Bad Faith Case When It’s Available?

The answer to this question really boils down to how much your possible bad faith case will be worth. If it will only slightly exceed policy limits, you may wind up losing money by incurring (1) the additional cost of a trial in your underlying case and possibly (2) the cost of a second trial on the bad faith issue. An early settlement for policy limits may be your best deal if the additional cost of pursuing the bad faith case outweighs the potential extra recovery. If you expect to receive a judgment which greatly exceeds policy limits, it’s almost always worth pursuing.

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