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Absence of Malice: The United States Grapples with the Proper Standards for Imposing Bad Faith Liability in Insurance Cases

Since the late 1960s and early 1970s, the United States has seen the growth of direct actions against insurance companies in what have colloquially been termed "Bad Faith" actions. These actions have arisen from states adopting what are known as the common law action of a breach of the duty of good faith and fair dealing, and allowing a private cause of action under a state's Unfair Claims Settlement Practices Act. Most states allow either the common law cause of action or the statutory cause of action. Many states allow both. Bad faith, as a recent development, however, was always understood to be a special tort or indeed a "con-tort", a tort cause of action based upon an insurance contract that would allow the recovery of "extra-contractual" damages separate and apart from a carrier's policy coverage, based upon a carrier's poor claims handling or decision making regarding a particular claim. Bad Faith did not arise from age old concepts of personal injury or contractual damage. It was an extraordinary remedy, based on relatively new concepts of consequential damages.

As part of its unique nature, Bad Faith, it was understood, also required intent. There needed to be a degree of intentional conduct or indeed, actual malice before there could be a finding of a breach of the common law duty of good faith. Under the statutory provision, the Unfair Claims Settlement Practices Act, a carrier would, for the most part, need to have been found to have acted "knowingly" before damages could be assessed if there was a violation.

Now, two recent United States decisions, both issued by federal circuit courts, have caused this well-established idea to be called into question. This article examines these decisions and notes while they are presently aberrations, unfortunately they could start a trend, because of Courts that do not understand the historical underpinnings of bad faith.

Negligence as the Bad Faith Standard

On July 7, 2017, in Camacho v. Nationwide Ins. Co1, the Eleventh Circuit Court of Appeals sitting in Atlanta, Georgia, affirmed an $8,000,000 bad faith award against Nationwide Insurance ("Nationwide") over Nationwide's failure to settle claims against a policyholder who was hit with an excess policy judgment in litigation over a fatal car crash. It is fair to say that Camacho has sent shock waves throughout the insurance industry. Much of the debate about Camacho has revolved around the fact that it has been seen as a "set-up" case in which the Plaintiff made a deal with the policyholder agreeing that if the jury returned a verdict in excess of the policy limits, the Plaintiff would not seek to recover against the policyholder but instead would accept an assignment from the policyholder of any potential bad faith claim against the carrier. That is not the aspect of Camacho that is concerning here.

In Camacho the jury was instructed that they could award damages above the policy limit based either upon Nationwide's negligence or bad faith. This instruction was in accord with a little-known Georgia case with some loose language that was considered dicta. Still, the Trial Court held that, based on this case, improper claims handling could be the subject of a negligence action. The Court noted that Georgia law was ambiguous on the subject. Given this lower standard, the jury in Camacho returned a verdict for the insured finding that Nationwide "acted negligently or in bad faith in failing to settle the claims."

Many believe that no such ambiguity existed, or if it did exist, that the decision should be made that negligence could not simply be part of a bad faith calculation. One Amicus Curiae brief filed by the Georgia Chamber of Commerce noted that a bad faith finding should not be based on as little as "simple misjudgment." In fact, allowing negligence as a predicate for an extra-contractual award equates negligence with intentional conduct. Nevertheless, the Eleventh Circuit

found the trial court's reasoning persuasive and allowed the verdict to stand in an unpublished two paragraph opinion.

Thus, for now, until cooler heads prevail, negligence in excess policy cases can be the basis for bad faith causes of action in Georgia. This is simply wrong, and most states say otherwise. For example, Alabama, which neighbors Georgia, states that intentional conduct is required for an imposition of bad faith. Arkansas states that bad faith has to consist of malicious, dishonest, or oppressive attempts to avoid liability. Other states such as California, Pennsylvania and New York define Bad faith in the negative by stating Bad Faith is not mere negligence or mistakes. Perhaps Ohio says it best, by saying that while bad faith has no concrete definition, it must embrace more than bad judgment or negligence. Georgia, through the ruling by the Eleventh Circuit, stands alone. Yet the very fact that Camacho was affirmed, in such a cavalier manner, is troubling.

The Assault on the "Fairly Debatable" Standard

In addition to a heightened standard requiring more than negligence over the past four decades, American Courts have adopted several tests to determine whether a bad faith cause of action can even be submitted to a jury. Over the years, many U.S. jurisdictions adopted the "fairly debatable" defense also known as the "genuine dispute" defense in some states, such that a carrier could defeat a first party bad faith claim as a matter of law when the insured's coverage determination was "fairly debatable" or "reasonable" or when the coverage issue presented a genuine dispute. For example, if there was a coverage dispute where the court could not find as a matter of law for the Plaintiff, and decided that the issue had to be decided by a jury, then it followed that there was a legitimate dispute and there could be no bad faith. In the 1990s, the noted insurance attorney, Doug Houser, wrote an article entitled Good Faith as a Matter of Law: The Insurance Company's Right to Be Wrong2 in which he spoke of the fairly debatable standard or what is also known as the reasonable basis defense, stating that even if a jury or a court concluded that a carrier's coverage position was wrong, then that did not necessarily mean that a carrier had acted in bad faith. If the carrier had a reasonable basis to deny a claim or if it was fairly debatable that there was an issue regarding coverage then there could be no bad faith, even if a trier of fact ultimately disagreed with the carrier's position. Many states, such as Wyoming and Texas, adopted this standard. It still has wide acceptance and indeed in 2016 New Jersey reaffirmed the fairly debatable standard in that state.

Yet in 2016, in the Home Loan Investment Company v. St. Paul American Insurance Company3, the Tenth Circuit Court of Appeals, interpreting Colorado law, rejected the fairly debatable standard as a threshold inquiry to determine the reasonableness of a claims denial.

In Home Loan Investment, Home Loan, a bank that held a mortgage on a property known as White Hall, worked with the owner to sell the property rather than foreclosing on the property. After White Hall was destroyed by fire, Travelers, (which had acquired St Paul) determined that Home Loan had not initiated foreclosing proceedings on White Hall. Since Travelers only covered foreclosed property, Travelers denied the claim. After a jury found against Travelers, Travelers appealed the Bad Faith award on the basis that it had acted reasonably in denying the claim and could not be liable. Travelers further pointed out that much of the evidence at trial focused on Travelers' underwriting coverage for White Hall.

In upholding the Bad Faith award, the Tenth Circuit made a statement that could be seen as somewhat incredible. It held that the denial of a "fairly debatable" claim is not per se reasonable. What the court held was that if a claim was fairly debatable, it was only one factor to consider in judging an insurer's conduct and that in the light of other circumstances the insurer could still be liable for bad faith. In other words, the fact that the claim was fairly debatable was not outcome determinative. This is consistent with California and Washington where, even if there is a genuine dispute concerning coverage, an insurer may still be liable for bad faith claims handling or bad faith underwriting. However, in other states that have the reasonable basis or fairly debatable standard, it is outcome determinative.

The Tenth Circuit was attempting to reconcile some conflicting Colorado Court of Appeals' cases. In doing so, however, it ignored the basic principle that Bad Faith requires that a carrier must have acted unreasonably, and the converse of that is that it cannot be Bad Faith when a carrier acts reasonably even though it is later adjudged to be wrong. Reasonableness is not just one factor to be considered – it is all that must be considered.


Camacho and Home Loan indicate a current level of confusion in some Courts analysis of Bad Faith law. Hopefully, this confusion will be cleared when other Courts reach back to well-established principles and realize those principles mean that Bad Faith has to be based upon a heightened standard and the absence of a reasonable basis for a denial by a carrier. Bad faith cannot be based upon the standards of care found in other torts because Bad Faith is not just another tort.

Stephen Pate is a member in the Houston office of Cozen O'Connor. Valerie Rojas is a member of Cozen O'Connor in the Los Angeles office.

  1. Camacho v. Nationwide Mutual Insurance Co., ___Fed Appx. ___, 2017 WL 2889470 (11th Cir. 2017)
  2. 27 Tort and Ins. L.J. 3, 665 (1992)
  3. Home Loan Investment Company v. St. Paul American Insurance Company, 827 F.3d 1256 (2016)