Defending Institutional Bad Faith Claims, Part I – A Primer On Institutional Bad Faith

Broadly speaking, there are two types of bad faith claims that may be alleged against an insurance company—traditional or non-institutional bad faith, and institutional bad faith. For the former, a policyholder would seek to hold an insurer liable for its acts or omissions that directly and adversely affected the policyholder. For example, in the third-party context, a policyholder may file a bad faith claim against its insurer if the insurer failed to settle a lawsuit against the policyholder within policy limits and a judgment is entered against the policyholder in excess of policy limits.

Institutional bad faith, in contrast, goes beyond a single policyholder. In claims of institutional bad faith, the plaintiff or plaintiffs will attempt to demonstrate a company plan and culture that denies policyholders the reasonable benefits of their insurance policies. A classic example would be where an insurer creates an incentive structure that encourages its adjusters to deny, delay or underpay claims.

The differences between traditional and institutional bad faith manifest in the costs of discovery and the cost of an adverse verdict. Stated simply, institutional bad faith claims are expensive and time consuming to defend. Because institutional bad faith claims pertain to the practices of the insurer or its claims department at a macro level, plaintiffs will seek voluminous company documents and high-level depositions. Plaintiffs may seek copies of the insurer's policies and procedures, department bulletins, training manuals, compensation programs, and audits and statistics, to name just a few. Given the breadth and expense of e-discovery, institutional bad faith claims pose significant costs.

Further, in any state that has adopted the Unfair Claims Settlement Practices Act, plaintiffs are likely to allege a defendant insurer commits unfair claims practices "with such frequency as to indicate a general business practice." See, e.g., Fla. Stat. 626.95411; Nev. Rev. Stat. § 686A.310; N.C. Gen. Stat. § 58-63-15;2 Conn. Gen. Stat. § 38a-816. In Florida, for example, Florida Statutes § 624.155(5) permits punitive damages where the conduct giving rise to the violation occurs with such frequency as to constitute a general business practice, and is either willful, wanton or malicious, or with reckless disregard of the rights insured.

To minimize the risk of institutional bad faith claims, we recommend the following practices:

Always be mindful that it is...