Insurance Bad Faith and Related Topics


Bad faith is a hybrid tort similar to, yet different and distinct from, an action for breach of contract. In fact, bad faith was developed in common law because contract remedies were inadequate to deal with types of inappropriate, oppressive and unfair behavior. The use of bad faith is not limited to insurance contracts alone, but when applied in the insurance context, it offers the best consumer remedy to individual insureds whose insurance claims are not handled fairly.

Underlying each bad faith case, there must be a claim against an insurance policy. Insurance bad faith torts are classified in two types: (1) first party claims where the claimant is an insured protected by an insurance policy for coverage such as homeowners, UM, UIM, auto med pay or collision, life insurance, etc.; and (2) third party claims where an insured is sued by a claimant who is a "third party" to the insurance contract.

The disclaimer: This paper is not a comprehensive survey of all the law of bad faith in North Carolina. Hopefully, the authority selected will peak the reader's curiosity and imagination.

The law in this area is far from settled. The common law comes largely from the North Carolina Court of Appeals - many issues have not been raised, much less decided, and some of the opinions appear to be in conflict. This is a legal frontier with opportunities for pioneers with creativity who are willing to work hard.

One must recognize that most acts of insurance carriers which are maddening or heavy-handed are not bad faith. Bad faith does not occur in each case where there is a disagreement between a claimant and an insurance company, nor does it occur in each case where the insurance company takes a "hard-nosed" approach to a claim. There is no viable claim for bad faith either: (1) when an insurance company acts based upon language in an insurance contract; (2) when an insurance company acts based upon language contained in a statute; (3) when an insurance company acts based upon the holding of an appellate court; or (4) when an insurance company acts based upon a legitimate question which has not been settled by an appellate decision.

Counsel analyzing potential bad faith cases should exercise extreme caution before accepting a case. It has been the author's experience in answering numerous inquiries from other counsel who believe they have "certain" bad faith cases that the facts often do not satisfy the elements of bad faith or the potential of the case does not justify the high costs that these suits entail. Before taking a bad faith case, one should examine the insurance contract in question in its entirety, conduct a careful study of the statutes, conduct legal research, interview and evaluate witnesses, and examine all documents and correspondence relating to the underlying claim and its handling.

No cases are handled more aggressively by insurance companies than bad faith cases. Since the company is "the" defendant, it is personal. These cases are automatically referred to upper level management for oversight regardless of the size of the original claim underlying the suit. Since bad faith claims call into question general procedures and operations of an insurance company and threaten company' profits, bad faith claims are not likely to settle easily.

Plaintiffs' counsel handling bad faith cases should expect: requests for extensions of time for all pleadings and discovery; motions to test the sufficiency of pleading; objections to all discovery, forcing motions to compel; summary judgment motions; and trials and appeals through the appellate court of last resort. Insurance companies defending bad faith cases look for every opportunity to seek sanctions under Rule 11. The prosecution of these cases requires special efforts by counsel and special clients who are able to understand and put up with all imaginable tactics.

Bad faith claims are usually paired with Chapter 75 unfair trade practice claims. Therefore, the paper concludes with a brief discussion of the application of Chapter 75 to these claims.

I. STATUTES AND LAW RELATED TO BAD FAITH

The first stop in the General Statutes when analyzing a bad faith claim should be N.C. Gen. Stat. §58-63-15, entitled "Unfair Methods of Competition and Unfair or Deceptive Acts or Practices." This statute was amended and renumbered, so earlier appellate decisions refer to the predecessor statute, N.C. Gen. Stat. § 58-54.4. There are thirteen sub-parts to the statute, but two of the sub-parts, (1) and (11), are particularly important. Subsections (1) and (11) are excerpted and attached in the Appendix.

Section (11), entitled "Unfair Claim Settlement Practices", sets forth fourteen specifically described prohibited practices, lettered a. - n. Those fourteen prohibited practices are a verbatim copy of a model act which has been adopted by a majority of states and specifically included in the training materials of all major insurance carriers. This is not a list of all possible bad faith practices, but it is quite a thorough list from which to start. Despite the limiting language at the beginning of Section (11) that no violation "shall of itself" create a cause of action for anyone but the Insurance Commissioner, evidence showing violations of these prohibited practices has been relied on by the North Carolina Court of Appeals in upholding plaintiffs' pleadings and verdicts in bad faith cases. While an individual insured cannot enforce the statute, evidence of a violation of one of the statutory prohibitions can satisfy an element of the bad faith tort as it has been formulated. Since these definitions of prohibited practices have been adopted by insurance companies, the list may be relied upon by expert witnesses testifying on behalf of plaintiffs in bad faith cases and facts falling within these definitions will be impossible for insurers to explain away.

Section (1) is not utilized as frequently as Section (11), but it has great utility especially when used in conjunction with the Chapter 75 claim. Statements and correspondence from carriers regarding claims frequently include misrepresentations or mischaracterizations of policy language, and such statements are made to induce policyholders to take less or no benefits. Silence when there is a duty to speak has been construed as a misrepresentation. There are no references in Section (1) to "frequency" or to the Commissioner of Insurance.

The object of a bad faith claim is an award of punitive damages. Since it is now January 2000, Chapter 1D probably controls all bad faith cases which are not already in suit. The provisions of Chapter 1D are not a hindrance to the cause of action itself. The aggravation element necessary for a bad faith cause of action will probably be characterized as either fraud, malice, or willful or wanton conduct. N.C. Gen. Stat. §1D-15(a). The requirement that in order to justify punitive damages aggravation must be proven by "clear and convincing evidence", set forth in N.C. Gen. Stat. §1D-15(b), should not be a deterrent because a bad faith case without clear and convincing evidence would neither be worth taking nor strong enough to warrant a jury's imposition of punitive damages. Insurance companies have so many levels of authority and so many internal audit procedures that tracing acts and omissions from the front line to supervisors usually is not difficult. N.C. Gen. Stat. §1D-15(c) Bad faith is a tort, and it is not warranted for a simple, aggravated breach of contract.

The $250,000 cap set forth at N.C. Gen. Stat. §1D-25 may well come into play in cases where bad faith acts and omissions were used handling small insurance claims. A strong bad faith case may offer a particularly good vehicle for a constitutional challenge to the punitive damages' cap. With their immense wealth and power, insurance companies are unlikely to be deterred by punitive damage awards which are capped at $250,000. An individual policyholder who obtains a large punitive damage verdict may well be denied equal protection and other constitutional guarantees.

In pleading bad faith claims, counsel should be aware of Rule 9(k) of the Rules of Civil Procedure which requires specificity in pleading claims for punitive damages. Counsel should also strongly consider using a verified complaint when representing a policyholder. There is a Pattern Jury Instruction applicable to punitive damages for bad faith refusal to settle. N.C.P.I. - Civil 810.00 B. The headnote to that instruction indicates that it should not be applied to claims arising after January 1, 1996 and that N.C.P.I. - Civil 801.05 should be substituted to post 1/1/96 claims. Both instructions are included in the Appendix, and it seems that since 810.05 is not specific to bad faith that if one is preparing instructions for a bad faith charge, the two instructions should be merged.

Two sections of the North Carolina Administrative Code are of particular interest in considering the topic of bad faith. Ethical standards applicable to insurance employees, 11 N.C.A.C. 4.0423, requires claims professionals to conduct themselves "in such a manner as to inspire confidence by fair and honorable dealings" and further provides that claims professionals can not "intimidate or discourage any claimant from seeking legal advice and counsel by withdrawing and reducing a settlement offer previously tendered to the claimant or threatening to do so if the claimant seeks legal advice or counsel." The standards for finalizing claims by payment are set forth at 11 N.C.A.C. 4.0421. Both sections are included in the Appendix.

If counsel has represented a policyholder or third-party claimant through initial negotiations with an insurance company, potential ethical problems will probably arise if the same counsel handles the bad faith suit. There may be conflicts of interest or situations in which the client's best interest would definitely be served by having the lawyer testify. No general rules can be formulated that would apply in all situations, but counsel should be on the lookout for problems. Rules 1.7 and 3.7 of the Revised Rules of Professional Conduct appear in the Appendix as well as RPC 207, an opinion which addresses some issues regarding representation in a bad faith case.

II. FIRST-PARTY BAD FAITH CLAIMS' DECISIONS1

The bad faith insurance tort was first recognized in a 1976 North Carolina Supreme Court decision. Newton v. The Standard Fire Ins. Co., infra. In fact, the tort of bad faith was created earlier in 1976 in a property lease case which had nothing to do with insurance.

In Oestreicher v. American National Stores, Inc., 290 NC 118, 225 S.E.2d 797 (1976), the North Carolina Supreme Court first acknowledged that a party might recover both compensatory and punitive damages for acts arising from a breach of contract2. The court decided that punitive damages should be available in either of two limited instances: (1) if the breach is accompanied by some aggravating, tortious conduct, or (2) if the breach itself is tortious.

Oestreicher, a property lessor, brought a claim for a breach of contract which he asserted was accompanied by fraud. He alleged that the lessee had purposely and fraudulently understated its sales in order to pay less rent. The Court determined that punitive damages should be available in addition to compensatory damage for some contract breaches for the following reasons:

It seems to us that in view of the purpose for which punitive damages are assessed the plaintiff has established a proper cause of action. In the so-called breach of contract actions that smack of tort because of fraud and deceit involved, we do not think it is enough just to permit defendant to pay that which the lease contract required him to pay in the first place. If this were the law, the defendant has all to gain and nothing to lose. If he is not caught in his fraudulent scheme, then he is able to retain the resulting dishonest profits. If he is caught, he has only to pay back that which he should have paid in the first place. (citation omitted).

We believe that in this type of contract case with substantial tort overtones emanating from the fraud and deceit the better rule would require that defendant be punished by permitting plaintiff to recover punitive damages. By virtue of such punishment, plaintiff could at least receive expenses he incurred in the litigation.
Id. at 136.

Insurance bad faith was first discussed in dictum in a decision decided later in 1976, Newton v. The Standard Fire Ins. Co., 291 NC 105, 229 S.E.2d 297 (1976). Newton owned a furniture store which was insured by The Standard Fire Insurance Company. There was a burglary at the store, and Newton made a claim for payment under his insurance policy. His claim was denied, and Newton filed a lawsuit alleging breach of contract and seeking compensatory and punitive damages. The trial court dismissed the punitive damages claim, and Newton appealed. The Supreme Court affirmed the dismissal because the complaint neither specified a cognizable bad faith claim nor did it specify facts which would allow a finding of bad faith. The opinion, however, devoted several pages to the insurance bad faith tort.

In Newton, Justice (later Chief Justice) Exum relied heavily on the law of the Oestreicher case, and wrote that an insurer could be held liable for bad faith and subject to pay punitive damages if the insurer either: (1) had enough information to determine that a claim was valid yet nevertheless refused to pay; or (2) altogether refused to conduct an investigation and process a claim. Significantly, the decision noted that this bad faith tort could either: (a) accompany or (b) constitute the contract breach. To be liable for punitive damages, the insurance company's conduct would have to be "accompanied by or partake of some element of aggravation." Id. at 112. Aggravation might be proven by either evidence of fraud, malice, or negligence showing reckless indifference, oppression, insult, rudeness, caprice or willfulness.

Newton noted that insurance companies are responsible for protecting the public interest and therefore subject to regulation. Insurance carriers were analogized to utilities and common carriers; thus, they owe a high duty to the consuming public. Insurance companies have tremendous financial resources which create a "great disparity" of power and bargaining ability between the companies and claimants. These "facts of life" led the court to "recognize the wisdom of a rule which would deter refusals on the part of insurers to pay valid claims when the refusals are both unjustified and in bad faith". Id. at 116.

Since Newton v. The Standard Fire Ins. Co., the North Carolina Supreme Court has not rendered an opinion dealing with the insurance bad faith cause of action. However, numerous decisions of the North Carolina Court of Appeals have addressed the pleading and proof requirements of the tort, and bad faith has continued to evolve through those opinions. In Dailey v. Integon General Ins. Corp., 57 N.C. App. 346, 291 S.E.2d 331 (1982) [hereinafter "Dailey I"], the Court of Appeals reversed a 12(b)(6) dismissal of an insurance bad faith claim. The court examined the minimum pleading requirements for bad faith. In order to withstand 12(b)(6), a complaint must allege a specific tortious act (either the breach of contract or some accompanying tort) and facts constituting aggravated conduct. The case centered on a first-party claim in which the plaintiff was seeking to recover for a fire loss which the insurer refused to negotiate and settle in good faith.

Payne v. N.C. Farm Bureau Mutual Ins. Co., 67 N.C. App. 692, 313 S.E.2d 912 (1984), was another case reversing dismissal of a bad faith complaint. In Payne, a first-party claim was made under a homeowner's policy for a theft loss. The allegations recognized by the court to sufficiently state a bad faith claim were: (1) that an insurance carrier advanced a pattern of excuses for refusing to pay a claim and represented that those excuses were company requirements; and (2) that the carrier misrepresented its coverage by claiming that a policy provided coverage and then discouraging payment of claims.

Dailey v. Integon General Ins. Corp., 75 N.C. App. 387, 331 S.E.2d 148, discretionary review denied, 314 N.C. 664, 336 S.E.2d 399 (1985) [hereinafter "Dailey II"], held that a plaintiff must not prove a "separate identifiable tort" unrelated to the breach of an insurance contract in order to sustain a bad faith verdict. The court relied on Newton for the proposition that the breach of contract and tort can be identical. Dailey II restored a punitive damage verdict in favor of the claimant; as such, it was the first decision actually upholding a punitive damage award for bad faith. Dailey II marked the first time that a North Carolina appellate court acknowledged that there was a distinct, identifiable tort named "bad faith refusal to settle". Id. at 396. (Emphasis added) The court wrote:

That (the insurer) breached the contract has been set at rest and was established by evidence mainly to the effect that its failure to pay plaintiff's loss was not excused by any provision in the policy. That this breach was accomplished in bad faith as indicated by the great volume of evidence which tends to show that defendant's refusal to pay or settlement plaintiff's claim on any reasonable basis was not based on honest disagreement or innocent mistake. (citations omitted) And the record is replete with evidence of defendant's malice, oppression, willfulness and reckless indifference to consequences. (citation omitted)
75 N.C. App. at 396. (emphasis added). Evidence of aggravation included the insurer's acts of forcing the claimant to obtain documents and estimates which "defendant had no intention of considering" and "inordinately delaying both the settlement and plaintiff's return to his usual comforts and amenities of life." 75 N.C. App. at 397.

Olive v. Great American Ins. Co., 76 N.C. App. 180, 333 S.E.2d 41, discretionary review denied, 314 N.C. 668, 336 S.E.2d 400 (1985), affirmed summary judgment in favor of a homeowner's insurer. If an insurance carrier denies a claim based upon a reasonable interpretation of the language in the insurance policy there is no bad faith tort claim. This holding is consistent with decisions defining bad faith as something other than an "honest disagreement". The insurance claim made by the Olives involved very unusual facts. The Olives owned a large tract of land on which an old farmhouse was located. The old farmhouse was insured by a Nationwide fire insurance policy. The Olives began construction of a new home and obtained a homeowners insurance policy from Great American. Prior to completion of the new house, the family was living in the old farmhouse, and the old farmhouse burned. Nationwide paid its limit under the fire insurance policy which insured the old house, but the plaintiffs were underinsured and sought an additional recovery from Great American. Great American conducted an investigation and denied the claim in reliance on the terms of the Great American homeowners policy.

The Olive decision is sometimes cited by insurance company defendants for the proposition that if an underlying claim has been promptly denied, there can be no bad faith. Such an argument is inaccurate, illogical, and over broad. If non-payment of claims was a valid bad faith defense, insurance companies would be able to avoid bad faith regardless of their tactics by simply denying all claims. If confronted with this argument, one should rely upon the Robinson case cited below.

In Hornby v. Pennsylvania National Mutual Casualty Ins. Co., 77 N.C. at 475, 335 S.E.2d 335 (1985), discretionary review denied, 316 N.C. 193, 341 S.E.2d 570 (1986), the Court of Appeals vacated a punitive damage award in favor of a plaintiff in a case involving fire insurance. Plaintiffs maintained that the carrier should be liable for punitive damage because it dragged its feet processing policy applications. The jury decided issues of negligence, compensatory damages, and punitive damages in plaintiff's favor. The court held that there was no evidence of aggravated conduct so there could be no punitive damages. The court affirmed the jury award of compensatory damage based on negligence.

Summary judgment in favor of an insurance company on a bad faith claim was reversed in Robinson v. N.C. Farm Bureau Ins. Co., 86 N.C. App. 44, 356 S.E.2d 392, discretionary review allowed, 320 N.C. 633, 360 S.E.2d 93 (1987), discretionary review dismissed, 321 N.C. 592, 364 S.E.2d 140 (1988). In Robinson, the insurer and insured disagreed on the extent of a fire loss; the damage amount was resolved by an arbitration procedure set forth in the policy. The carrier paid the claim within three weeks of the umpire's decision (less than seven months after the fire) and prior to institution of the bad faith action. The court held that the claim payment did not bar the bad faith claim and rejected Farm Bureau's argument that there must be an unresolved breach of contract claim to sustain the bad faith tort claim. There was a jury issue on bad faith alone because the evidence taken in the light most favorable to the plaintiffs created an issue of fact that the insurance company had committed three specific violations of the prohibited claims settlement practices described in N.C. Gen. Stat. §58-54.4(11) [the predecessor to present N.C. Gen. Stat. §58-63-15(11)].

In Smith v. Nationwide Mutual Fire Ins. Co., 96 N.C. App. 215, 385 S.E.2d 152 (1989), discretionary review denied, 326 N.C. 265, 389 S.E.2d 816 (1990), the North Carolina Court of Appeals reversed dismissal of a bad faith claim. The case arose from the handling of a claim for damage to the plaintiff's mobile home. The day the mobile home was damaged, Nationwide promised to engage a repair company to estimate the damage; yet Nationwide never obtained an estimate. Nationwide raised additional obstacles which delayed adjustment of the claim; none of those "requirements" was based on provisions of Nationwide's policy. The Smith court held that the plaintiff's allegations of three violations of N.C. Gen. Stat. §58-54.4(11) satisfied the aggravation element of the bad faith tort. Additional facts alleged in support of the aggravation element included a five month passage of time between the adjuster's initial contact and issuance of a claim check; extended negotiations with little progress towards resolution; and large differences between plaintiff's estimates and Nationwide's estimates. The Smith court also endorsed the holding from Payne, supra, that aggravated conduct could be shown by a pattern of excuses raised by an insurance company for refusing to pay a claim.

Lovell v. Nationwide, 108 N.C. App. 416, 424 S.E.2d 181, aff'd in part, discretionary rev. improvidently allowed in part, 334 N.C. 682, 435 S.E.2d 71 (1993), was an extremely significant decision. Both the Court of Appeals and the Supreme Court affirmed a $225,000 punitive damages award against Nationwide in a case involving Nationwide's bad faith refusal to pay a $2,000 med pay claim. The Court of Appeals' opinion contains a retrospective analysis of the state of the tort and clear listings of the requisites of a bad faith claim for refusal to settle. The Supreme Court accepted the case for review, but then reconsidered and declined to address the bad faith issues.

The Lovells' daughter was killed while riding in a car insured by Nationwide. Nationwide's policy provided med pay coverage; therefore the daughter was an "insured" for med pay purposes and a claimant for liability purposes. Plaintiffs submitted bills for funeral expenses under the med pay coverage, but the bills had not been paid at the time the bad faith lawsuit was filed a little over nine months later. In contrast, funeral bills submitted on behalf of the driver of the car, also an insured, were paid promptly two or three weeks after they were received by Nationwide. This disparate claims' handling treatment was of note to the court. Nationwide maintained there was no bad faith for two reasons - - first, Nationwide "just plumb forget" to pay the med pay claim; and second, plaintiff failed to make a formal written demand for med pay.

The Lovell decision characterized a claim for bad faith refusal to settle as being comprised of three elements:

  1. refusal to pay a valid, recognizable claim;
  2. bad faith; and
  3. aggravated or outrageous conduct 3.
The court noted that there was no requirement in Nationwide's policy that a formal written demand be made. Nationwide also contended that the med pay claim had never been denied or refused -- it was just delayed. That contention was rejected, and the court adopted plaintiff's characterization that Nationwide's failure to pay the med pay claim for nine months (up to the time the bad faith action was filed) was tantamount to a refusal to pay.

The Lovell court relied upon, quoted, and reiterated the definition of bad faith first enunciated in Dailey II that "bad faith means 'not based on honest disagreement or innocent mistake'." 108 N.C. App. at 4214. Bad faith could be proven by evidence of a pattern of excuses for nonpayment -- a standard first recognized in Payne v. N.C. Farm Bureau Mutual Ins. Co., supra.

In a subsection of the Lovell opinion entitled "Aggravated Conduct", numerous cases were cited for the proposition that evidence of specific violations of N.C. Gen. Stat. § 58-63-15(11) establishes the aggravation element of the bad faith tort. In addition to such statutory violations, other evidence of aggravation or outrageous conduct may be considered. For example in Lovell, aggravation was demonstrated by Nationwide's failure to conduct a timely investigation of a claim under the liability coverage and delay in paying med pay in order to affect a lower settlement of the pending liability claim.

In Miller v. Nationwide Mutual Ins. Co.,112 N.C. App. 295, 435 S.E.2d 537 (1993); discretionary review denied, 335 N.C. 770, 442 S.E.2d 519 (1994), the Court of Appeals reversed dismissal of a bad faith claim. A punitive damages claim should have been allowed to proceed since the complaint included allegations that Nationwide either: (1) continued to refuse payment after obtaining all documents requested to determine the extent of the claim; (2) refused to pay a claim in an effort to coerce the relinquishment of an additional claim (there were UIM claims being made by the plaintiff who was an "insured" under two different Nationwide policies); (3) failed to cite any law to support its refusal to pay a claim; or (4) disregarded its own insurance policy provisions. "These allegations of plaintiffs complaint, if proven, are sufficient to support an award of damages, including punitive damages, based upon a bad faith refusal to pay plaintiff's claim." 112 N.C. App. at 306.

III. THIRD-PARTY BAD FAITH CLAIMS' DECISIONS

There are two duties that a liability insurance company owes to an insured when a claim is made against that insured. First, there is a duty to defend; second, there is a duty to settle. These obligations are usually specified in the liability insuring agreement of an insurance policy, but one should study the entire policy because general conditions or endorsements may modify the duties. In the context of automobile insurance, the Financial Responsibility Act specifically addresses an insurance company's right to settle and contemplates that the insurance company should exercise that right subject to a standard of good faith. N.C. Gen. Stat. §20-279.21 (f)(3).

An insured has the right to bring an action against its liability insurer if the carrier breaches either the duty to defend or the duty to settle. The North Carolina Supreme Court seems to have adopted different legal standards for measuring the carriers' performance with respect to the duty to defend and the duty to settle. The duty, or right, to settle must be exercised in good faith (a higher standard), and the duty to defend is subject to a lower negligence standard. Wynnewood Lumber Company v. The Travelers Ins. Co., 173 N.C. 269, 91 S.E.2d 946 (1917). There is some uncertainty or confusion regarding the legal standard applicable to the duty to defend. One decision since Wynnewood appears to have raised the duty to defend standard from negligence to bad faith. Connor v. State Farm Mutual Automobile Ins. Co., 265 N.C. 188, 143 S.E.2d 98 (1965).

The definitive case spelling out the test used to determine when a liability carrier has to defend a case is Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 340 S.E.2d 374, rehearing denied, 316 N.C. 386, 346 S.E.2d 143 (1986). North Carolina adopted the "comparison test" which is accomplished by comparing the allegations of the complaint with the language of the insurance policy. Thus, the duty to defend is broader than the ultimate duty to indemnify (or pay a judgment) because the allegations of the complaint are assumed to be true when the "comparison test" is applied; conversely, the evidence proven at trial may not support recovery under the terms of the policy.

The breadth of the duty to defend is measured by the terms of the insurance contract, and depending on the policy language the duty to defend may not be extinguished by payment of policy limits. Brown v. Lumbermen's Mutual Casualty Co., 326 N.C. 387, 390 S.E.2d 150 (1990).

If one is interested in the obligations a carrier might have after refusing to provide a defense, Duke University v. St. Paul Fire and Marine Ins. Co. is instructive. 96 N.C. App. 635, 386 S.E.2d 762 (1990). In that case, summary judgment for the insured was affirmed, and the carrier was required to pay the full amount the insured paid to settle plus expenses including attorneys' fees for obtaining the settlement. For another analysis of the rights of an insured to recover costs in a case where coverage was in dispute, see Collins & Aikman Products, Inc. v. Hartford, 125 N.C. App. 5412, 481 S.E.2d 96, petition for discretionary review denied, 345 N.C. 752, 485 S.E.2d 51 (1997) [umbrella insurer not responsible for attorneys' fees in legitimate coverage dispute where there was no bad faith].

Plaintiffs' counsel should be attuned to the potential obligation an insurance carrier might have to pay a judgment in excess of liability insurance limits. As previously stated, the North Carolina courts have consistently held that a carrier's duty or right to settle is measured by the standard of good faith.

Subsequent to Wynnewood ,it has consistently been held that there is a good faith standard applicable to the duty to settle. See for example, Alford v. Textile Ins. Co., 248 N.C. 224, 103 S.E.2d 8 (1958) [a decision in which the court observed that an insurer owes a duty to act diligently and in good faith to make settlements up to policy limits, and "if necessary to accomplish that purpose, to pay the full amount of the policy"].

One noteworthy case held that there was a jury issue whether a carrier exercised good faith with respect to settlement and therefore whether the carrier could be made to pay an excess judgment. Abernathey v. Utica Mutual Ins. Co., 373 F.2d 565 (4th Cir. 1967). Abernathy owned a vehicle which was insured by Utica Mutual. There was a wreck in which four of Abernathey's passengers was killed and one was seriously injured. Separate death and personal injury actions were filed. Two death claims and the injury claim were resolved. The last two death cases were tried, and there was a verdict in excess of the remaining liability coverage limit. Abernathey then brought an action against Utica Mutual to pay the entire judgment including the amount in excess of Utica's liability coverage. The trial court entered judgment in favor of Utica at the conclusion of Abernathey's evidence, and the case was appealed. The Fourth Circuit reversed the directed verdict and determined there was a jury issue whether Utica acted in good faith. The court observed that when deciding whether a carrier exercised good faith a jury must be allowed to consider whether the insurance company acted in both the best interest of the insured and the best interest of the insurance carrier. There was evidence that the jury was entitled to weigh and decide whether Utica had flatly refused to negotiate or whether Utica's defense counsel had failed to communicate with Utica regarding the evidence offered during the wrongful death trial. When one is handling a case in which an excess judgment is a possibility, steps should be taken to "set up" the carrier for potential liability to pay the entire judgment. A sample "set up" letter is included in the Appendix. The letter should be sent to the carrier, or if there is suit, to the defense counsel by certified mail. A duplicate original should be included to be sent to the insured. If the carrier is the recipient, press to get a written response from the carrier even if the initial response is by telephone; the written response will make a good exhibit in the bad faith suit.

There is no question that an insured covered by liability insurance is entitled to bring an action against the insured's own carrier for breach of the duty to defend or duty to settle. The rights of injured third parties to seek recovery from the insurance carriers covering tortfeasors are not so clear. The timing of the injured plaintiff's claim is important - the injured plaintiff will have a better chance if a judgment has been obtained prior to pursuing the carrier. It is also important whether the injured plaintiff is limiting her claim to the insurance policy limit or whether she is pursuing amounts in excess of the limit.

A plaintiff who has succeeded in obtaining a judgment against a tortfeasor can bring an action against the insurance carrier to collect the liability policy limit; that right is well established. Hall v. Harleysville Mutual Casualty Co., 233 N.C. 339, 340, 64 S.E.2d 160 (1951). "The injured party in an automobile accident is an intended third-party beneficiary to the insurance contract between insurer and the tortfeasor/insured party." Murray v. Nationwide Mutual Ins. Co., 123 N.C. App. 1, 15, 472 S.E.2d 358 (1996), petition for discretionary review denied, 345 N.C. 344, 483 S.E.2d 172 (1997).

The North Carolina Supreme Court has held that plaintiffs could not collect a consent judgment which was in excess of the policy limit in a subsequent action directly against a tortfeasor's insurance company. In Wilson v. State Farm Mutual Automobile Ins. Co., 327 N.C. 419, 394 S.E.2d 807 (1990). The plaintiffs contended they should be able to collect damages in excess of the policy limit because of the liability carrier's failure to defend its insured driver was in bad faith. The Supreme Court rejected that argument noting that the plaintiffs probably had an easier time getting the judgment since no defense was interposed; the Court held that the liability insurer would be liable for payment up to its policy limit but for no amount in excess of that limit.

Whatever rights an injured party might have to pursue a direct action against a tortfeasor's insurance carrier, it appears that the injured party must wait until there is some resolution of the case. An innovative effort to roll a tort claim for auto negligence together with bad faith and Chapter 75 claims against the liability carrier in the same action was unsuccessful in Wilson v. Wilson and Nationwide, 121 N.C. App. 662, 468 S.E.2d 495 (1996). Mrs. Wilson was a passenger in a car operated by her husband. Disappointed with the liability carrier's settlement offer, she filed a negligence action against her husband and included Chapter 75 and punitive damages claims against Nationwide in the same suit. The Court of Appeals affirmed a 12(b)(6) dismissal of the claims against the carrier. Careful reading of the decision reveals that the plaintiff did not rely upon her status as an intended third-party beneficiary of the automobile insurance contract, but it is doubtful that argument would have saved her extracontractual claim.

The majority of jurisdictions in the country apparently allow an insured to assign his third-party bad faith claim to a successful claimant, but two North Carolina Court of Appeals' decisions reject that as a means for third parties to assert bad faith and Chapter 75 claims. Horton v. New South Ins. Co., 122 N.C. App. 265, 268, 468 S.E.2d 856, petition for discretionary review denied, 343 N.C. 511, 472 S.E.2d 8 (1996), held that an unfair and deceptive trade practice claim was not assignable and that a bad faith claim was a personal tort claim which was not assignable as against public policy and assignment would promote champerty. Terrell v. Lawyers Mutual Liability Ins. Co., 131 N.C. App. 655, 507 S.E.2d 923 (1998) relied on Horton, supra, to reject defendant attorney's effort to assign a bad faith claim against his malpractice liability carrier to a creditor with a confession of judgment. The attempt to assign in Terrell was unlikely to succeed because the insurance policy contained a provision prohibiting an assignment.

So is it impossible for a third-party claimant to recover extracontractual damages from a tortfeasor's liability carrier in excess of the liability limit? Apparently not! Murray v. Nationwide Mutual Ins. Co., 123 N.C. App. 1, 15, 472 S.E.2d 358 (1996), petition for discretionary review denied, 345 N.C. 344, 483 S.E.2d 172 (1997) reversed summary judgment for two liability carriers (tortfeasor's primary and excess carriers) thus allowing plaintiff to proceed on unfair trade practice claims even though the carriers had paid their respective policy limits following an excess judgment in the underlying auto case. Crucial to the decision was the court's recognition that the injured party was an intended third-party beneficiary of the liability contracts. 123 N.C. App. at 15. The Murray case is also important because summary judgment for the plaintiff's own UIM carrier (a third carrier) was reversed for both unfair trade practice and bad faith claims. Read Murray!

IV. UNFAIR TRADE PRACTICES

Unfair methods of competition and unfair or deceptive trade practices in the field of insurance are set forth in N.C. Gen. Stat. §58-63-15 . Sections (1) and (11) are frequently relied upon in making insurance tort claims. As previously noted, those sections of the statute appear in the Appendix.

It is beyond the scope of this paper to completely discuss Chapter 75. A Chapter 75 claim may be used as an alternative to, or in conjunction with, a claim for bad faith. Successful use of Chapter 75 may provide a greater remedy, treble damages, and an avenue for receiving attorneys' fees than a bad faith tort claim alone.

Pearce v. American Defender Life Ins. Co. held that a violation of the predecessor statute to N.C. Gen. Stat. §58-63-15 (N.C. Gen. Stat. §58-54.4) "as a matter of law constitutes an unfair or deceptive trade practice in violation of N.C. Gen. Stat. §75-1.1." 316 N.C. 461, 470, 348 S.E.2d 174 (1986). Pearce recognized the obvious - - that insurance is a business which affects commerce. The plaintiff in Pearce was a widow seeking to recover double indemnity benefits for her husband's death in a 1979 airplane crash. She maintained that the carrier had misrepresented the policy benefits in a 1971 letter. The policy was issued in 1968.

Since Pearce, it has been held that a violation of N.C. Gen. Stat. §58-63-15 constitutes an unfair and deceptive trade practice as a matter of law. Bentley v. N.C. Insurance Guaranty Association, 107 N.C. App. 1, 418 S.E.2d 705 (1992); Kron Medical Corp. v. Collier Cobb & Associates, 107 N.C. App. 331, 420 S.E.2d 192, discretionary review denied, 333 N.C. 168, 424 S.E.2d 920 (1992), reconsideration dismissed, 333 N.C. 345, 426 S.E.2d 706 (1993). Accord, Miller v. Nationwide Mutual Ins. Co., 112 N.C. App. 295, 435 S.E.2d 537, discretionary review denied, 335 N.C. 770, 442 S.E.2d 519 (1993).

Pearce, supra, and Kron Medical, supra, establish that N.C. Gen. Stat. §75.1.1, provides a remedy which is a private action for a violation of the more specific insurance unfair trade practice statute, N.C. Gen. Stat. §58-63-15. According to Pearce, noted that N.C. Gen. Stat. §75-16 mandates treble damages once a violation was proven. Kron held that silence when there is a duty to speak constituted a misrepresentation prohibited by N.C. Gen. Stat. §58-63-15(1); that "silent misrepresentation" entitled plaintiff to proceed under Chapter 75.

In Miller v. Nationwide Mutual Ins. Co., supra, the court enumerated several principles applicable to insurance unfair trade practice claims:

To prevail on a claim for unfair and deceptive trade practices, one must show: (1) an unfair or deceptive act or practice, or unfair method of competition, (2) in or affecting commerce, and (3) which proximately caused actual injury to the plaintiff or his business. (citation omitted) A practice is unfair when it offends established public policy and when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. (citation omitted) "If a party engages in conduct that results in an inequitable assertion of his power or position, he has committed an unfair act or practice." (citation omitted) Evidence of negligence, good faith, or lack of intent or not defenses to an action under G.S. §75-1.1 (citation omitted)

The insurance business is definitely one "in commerce" as an "exchange of value" occurs when a consumer purchases a policy (citation omitted). Unfair or deceptive trade practices in the insurance industry are governed by G.S. §58-63-15. (citation omitted) A violation of G.S. §58-63-15 constitutes an unfair and deceptive trade practice in violation of G.S. §75-1.1 as a matter of law. (citations omitted) "The relationship between the insurance statute and the more general unfair or deceptive practice statutes is that the latter provide a remedy in the nature of a private action for the former." (citations omitted)
112 N.C. App. at 301-302. (emphasis added).

The Court of Appeals has held that the damage element necessary to prevail with an unfair and deceptive trade practice claim may be satisfied by "potential damages" such as punitive damages or treble damages potentially available in an unfair and deceptive trade practice claim. Murray v. Nationwide Mut. Ins. Co., supra, 123 N.C. App. at 13, 16-17.

In Jefferson Pilot Life Insurance Company v. Spencer, 336 N.C. 49, 442 S.E.2d 316 (1994), the Supreme Court addressed Chapter 75 and its interaction with N.C. Gen. Stat. §58-63-15(1). In Spencer there was a dispute whether a life insurer would pay benefits to a decedent's wife or the decedent's business; however, the insurer did not dispute that it would pay full policy limits to one party or the other. The Supreme Court in Spencer distinguished Pearce v. American Defender Life Ins. Co., supra, and held that N.C. Gen. Stat. §58-63-15(1) only applied to the sale of insurance policies. This distinction is difficult to reconcile with the language of the statute, which refers to policies "issued", or with the facts in Pearce where the misrepresentation occurred three years after the policy was issued. Perhaps the cases can be distinguished because in Pearce, the insurer was seeking to avoid paying benefits whereas in Spencer the carrier agreed that it was prepared to pay policy limits.

As discussed in the prior section, it appears that a Chapter 75 claim is personal and therefore not assignable. Wilson v. Wilson and Nationwide, supra; Horton v. New South Ins. Co., supra. Contrast an injured claimant's rights when she exercises her status as an intended third-party beneficiary of an automobile liability insurance contract. Murray v. Nationwide Mutual Ins. Co., supra.

When pleading a Chapter 75 insurance claim, particular care should be taken to allege that violations of N.C. Gen. Stat. §58-63-15(11) occur with frequency to indicate that they are a "general business practice". That technical failure provided the basis for a reversal in a recent case where the trial court found in favor of a first party claimant seeking recovery for hurricane damage to a motel. Gray v. N.C. Insurance Underwriting Association, 132 N.C. App. 63, 510 S.E.2d 396 (1999). In Gray there was only proof that there was one other similar incident. Interestingly, the first party insureds in Gray apparently failed to make a bad faith claim. The frequency evidence can be established by repeated violations in the handling of the same claim even if that claim is the subject of the Chapter 75 suit. Murray v. Nationwide, supra, 123 N.C. App. at 12.

Anyone interested in pursuing a Chapter 75 claim should read United Laboratories, Inc. v. Kuykendall, 335 N.C. 183, 437 S.E.2d 374 (1993). That decision does not involve an insurance contract, but it exhaustively examines the interplay between punitive damages claims and Chapter 75 claims. Of particular note is the holding that punitive damages and attorneys' fees pursuant to N.C. Gen. Stat. §75-16.1 serve different interests and are therefore both recoverable. With respect to the attorneys' fee, the court remanded the case for findings of fact regarding the reasonableness of the fees. From a practical standpoint, one would be well advised to keep detailed time and expense records whenever handling a Chapter 75 claim because those records can be converted instantly to an affidavit to support findings of fact for an award of attorneys' fees.


1There are two lengthy law review comments regarding bad faith which are quite thorough. "Bad Faith Refusal to Pay First-Party Insurance Claims: A Growing Recognition of Extra-Contract Damages," 64 N.C.L. Rev. 1421 (1986); "North Carolina's Cautious Approach Toward the Imposition of Extracontract Liability for Bad Faith," 21 Wake Forest L. Rev. 957 (1986).

2 Prior decisions recognized that a party to a contract could marry, could recover punitive damages for breach, but those cases were so specialized that Oestreicher was radical.

3This formulation was adopted in N.C.P.I. - Civil 810.00B.

4That definition was adopted in N.C.P.I. - Civil 810.00B



APPENDIX

SUGGESTED TOPICS
OF DISCOVERY IN BAD FAITH ACTIONS

  • Claim file for underlying action (at least prior to initiation of bad faith suit)
  • Certified copy of all insurance policies potentially applicable to claim, including declarations pages and endorsements
  • Audits analyzing the underlying claim (including all reserves set on claim)
  • Identity of all people who have handled the underlying claim or the bad faith action (include inside counsel, home office personnel and outside counsel)
  • Personnel files of each adjuster, supervisor or other employee who handled the claim (include performance evaluations and descriptions of training)
  • Reinsurance information regarding the claim or underlying policy
  • Annual reports of the insurance company
  • Specific identity of the particular company within the insurance corporate structure which wrote the insurance and handled the claim
  • Memos regarding the particular coverages at issue, including memos used to train claims people and memos circulated within claims departments
  • Memos regarding insurers' procedures for bad faith/good faith handling of claims
  • All training materials for people handling claims similar to the underlying claim
  • Policy and procedure guides and manuals utilized in the claims department by both adjusters and supervisors or managers
  • All complaints made to the North Carolina Department of Insurance regarding alleged improper handling of claims similar to the underlying claim
  • Information regarding all suits alleging bad faith against the carrier
  • Raw data regarding the number of insureds, policies, premium volume, claims made and claims paid by the insurer in North Carolina for the particular coverage at issue in the underlying case
  • Information describing the methods used by the carrier to count claims
  • Data regarding the profit/loss by the carrier for the particular coverage at issue in the underlying case
  • Samples of all advertisements or solicitations utilized by the carrier in North Carolina
  • Annotated insurance policies utilized by the claims/legal department
  • Information regarding the criteria for reporting to regional and/or home offices regarding claims, settlement authority, and oversight of claims
  • All filings made with the North Carolina Department of Insurance regarding income, solvency or rate changes
  • Admissions regarding the "status" of the particular plaintiff (will the carrier admit that the plaintiff was an "insured" ?)
  • Admissions that the claimant met all conditions precedent to coverage
  • A verbatim explanation of each and every provision in the policy relied upon by the carrier for denying or delaying payment of a claim
  • The identity of all records' custodians within the insurance company
  • Identity of all experts
  • Information regarding the particular claimant's or policyholder's past claims and their policy history (Index reports on the claimant obtained prior to initiation of the bad faith suit)
  • Admission whether the particular carrier has adopted the Uniform Fair Claims Handling Act
  • All computer based training materials used to train or update claims personnel
  • Data regarding the amount and beneficiaries of all political contributions made by the carrier
  • Information regarding the carrier's relation to the agent who sold the underlying policy or handled notice of claims
  • Establish that all personnel handling the claim were acting as agents of the company
  • All e-mail regarding the claim's handling prior to initiation of the bad faith suit

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.