In routine personal injury cases, there is a limit to how much money can be recovered. Insurance policies have “policy limits”. If the car that hit you has a $50,000 insurance policy, that’s the maximum that can usually be won in a lawsuit or settlement. The insurance company will not settle with the injured person for more than the policy, and any settlement will have to release the driver and owner from further liability. While it is possible to go after the owner and/or driver, this is usually much more difficult and is extremely rare.
In bad faith cases these limits can be exceeded. Bad faith occurs when the insurance company does something wrong, leading to a verdict of more than the policy limit and exposing the insured to personal liability.
For starters, let’s be clear on the insurance relationship. You pay car insurance. The car insurance company then owes you certain duties. If you have an accident, they are supposed to investigate and take care of claims that come out of that accident. If you get sued, they have to provide you with a lawyer to defend you. And if you lose the lawsuit, they have to pay the amount awarded, up to the policy limit. One of the most important duties they have is to negotiate in good faith. If it’s clearly your fault and the person is really hurt, then they have to consider the situation, evaluate it, and try to settle the claim within the policy limits. There’s more, but that’s a good beginning.
Imagine if you hit someone in a crosswalk and they suffer a broken hip. You tell your insurance company that it was your fault and plead guilty to a traffic violation. It’s your fault. The injured person ends up getting hip replacement surgery two weeks after the accident. They were really hurt.
An attorney contacts your insurance company and demands $50K – the limit. He tells them, in a letter, that if they don’t pay up within three months, he’s going to sue you and will no longer accept the $50K. If that happens, you could be on the hook for anything over $50K, and that might be $50K or more with an injury like that.
In most cases, insurance companies will settle that kind of case quickly, probably even before the three-month demand. We settled one vaguely simliar case with a $50K policy after sending only a couple of letters. From the insurance company’s perspective, these cases should settle quickly.
But there are times when insurance companies don’t do so well. In some situations the person assigned to the case is inexperienced, incompetent, or both. In others the company’s home office adopts an unrealistic policy that doesn’t work in the field. And sometimes they just drop the ball and there’s no explanation.
Personal injury lawyers who know what they’re doing will make a record of the bad faith. This means sending letters documenting the efforts to settle and the insurance company’s failures to act in good faith. It may mean an appearance in Court and having a settlement conference with the judge, recorded by a court reporter (also known as a stenographer).
Typically the plaintiff’s attorney will set a deadline to settle the case. If the insurance company comes around after that deadline, and offers the policy limits, the injured person will have to make a decision. Either take the money now or take the long road and try to get more through a bad faith claim. This decision depends on the risks faced and the potential gain. If it’s a $100K policy, the injury is worth an estimated $150K, and there is a substantial risk of a verdict below $100K, then it may make sense to take the money. If it’s a $10K policy and a million dollar injury, there’s not much to lose in the bad faith route and a lot to be gained.
From personal injury to bad faith
If the case doesn’t settle and the verdict is larger than the policy (an excess verdict), the personal injury case is now over and the bad faith part of the case is about to begin. It’s important to understand that the “bad faith” is not how the insurance company treats the injured person – it’s how they treat their own customer. The duties discussed above are duties the company owes to its customer – the one who paid for the insurance policy.
The questions in a bad faith case turn mainly on how the insurance company dealt with its customer, and its contractual duties. Did the insurance company investigate the claim properly? Did it keep the customer informed about the status of settlement negotiations? Did it defend the case to its fullest? If they didn’t settle, did they have a good reason? If they breached any of these contractual duties to their customer, then the customer has a claim against the insurance company, for the amount of the verdict in excess of the policy.
If there’s a $50K policy and a $150K verdict, the insurance company pays the injured person $50K. Now the injured person files a judgment against the person who hit them (the insurance customer) for $100K. The customer now owes the plaintiff money and risks losing their house, other assets, having their wages garnished, and suffering a major hit to their credit rating.
At this point, the injured person and the customer will typically make a deal. I won’t go after your assets and in exchange for that, you assign me your claim against the insurance company. The injured person generally does not have a direct claim against the insurer in personal injury cases. Now, effectively, they have bought the customer’s claim against the insurance company.
The personal injury lawyer would then commence a whole new lawsuit. The first suit was against the insurance customer, the person that caused the accident. The new suit is against the insurance company for bad faith. After the process works its way through, a judge and/or jury will decide whether the insurance company breached its duties to its customer, and if so, require the insurance company to pay the excess to the injured person.
The modern reality of bad faith cases is that it’s a hard road. In many states judges just don’t like these cases. From a plaintiff’s perspective, there appears to be a bias in favor of protecting insurance companies and limiting claims to the policy limits. In my opinion these decisions mistreat the customer. Bad faith claims should be treated for what they are, simple breach of contract cases. If the insurance company breached the contract, then they have to pay the consequential damages – they should have to clear the judgment that has been filed against their insured. Since the courts do not follow this path, insurance companies have been emboldened. They are more prone to breach duties to their customers in order to save a buck here and there, adding up to millions a year in extra profits. The end result is that more of the costs get passed onto the injured person and settlements are delayed for no good reason, other than for insurance companies to earn more interest while they hold the cash. The insurance customer suffers too, as the case that should have been resolved hangs over their head indefinitely.