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What are the elements of a “bad faith” claim against an insurance company?

If an insurance company intentionally disregards the financial interests of their insured and fails to settle a claim within the policy limits resulting in a judgment exceeding those policy limits then it may be liable for the excess judgment under Virginia law.

 

Given the risks, complexities and costs of litigation, it may be appropriate to make a demand for settlement within the insurance policy limits providing coverage for each, some or all of the defendants in a case.

 

Under Virginia law, a demand up to or within the policy limits imposes a duty upon the insurance company that may create liability to it should it fail “IN BAD FAITH” to settle the claim to protect its insured against the risk of a judgment in excess of the policy limits.  Horace Mann Ins. Co. v. GEICO, 231 Va. 426, 429, 344 S.E.2d 906 (1986) (“Bad faith may arise when an insurer unjustifiably refuses to settle a claim within the insurer’s coverage limits, thereby exposing its insured to liability in excess of the policy limits.”); Bettius & Sanderson v. Nat. Union Fire Ins., 839 F.2d 1009 (4th Cir. 1987) (“[I]f an insurer in bad faith refuses to settle a third-party claim within policy limits or otherwise in bad faith mishandles disposition of the claim, and the claimant obtains a judgment in excess of the policy, the insurer must pay the judgment.”); A & E Supply Co. v. Nationwide Mut. Fire Ins., 798 F.2d 669 (4th Cir. 1986) (“[A] liability insurer must answer for a judgment in excess of the promised coverage if the insurer has in bad faith refused to settle within the policy limits on a claim against its insured.”)

 

Virginia courts do not require a showing of fraud, deceit, dishonesty, malice, or ill-will, subjective factors that are inevitably difficult to prove. The Virginia courts state that the insurance company as a contracting party is merely under the obligation to exercise good faith in the conduct of a business relationship.  The Virginia Supreme Court explained “We conclude that an insured, in order to recover for an excess judgment on the ground that the insurer failed to take advantage of an opportunity to settle within the policy limits, is required to show that the insurer acted in furtherance of its own interest, with intentional disregard of the financial interest of the insured.” State Farm Mut. Auto. Ins. Co. v. Floyd, 235 Va. 136, 143-44, 366 S.E.2d 93, 97 (1988)(emphasis added). The insurer has the right to protect its own interest along with that of the insured. It is that factor which prevents the development of a fiduciary relationship between insurer and insured. A fiduciary owes total fidelity to the interests of his principal. While the relationship continues, he may engage in no self-dealing which may have any adverse effect on the interests of his principal. See Va. Real Estate Comm. v. Bias, 226 Va. 264, 269, 308 S.E.2d 123, 125-26 (1983); Bruce’s Ex’x. v. Bibb’s Ex’x., 129 Va. 45, 49-50, 105 S.E. 570, 572 (1921). That duty of unswerving fidelity is inconsistent with the right of an insurer, pursuant to a contract, to protect its own interest along with that of its insured. The creation of a fiduciary relationship in this context would impose a standard even more favorable to the insured than the negligence standard which we rejected in Price. State Farm Mut. Auto. Ins. Co. v. Floyd, 235 Va. 136, 143, 366 S.E.2d 93, 97 (1988).

 

The practical way that this is leveraged in Virginia by a plaintiff, is first to make the demand within policy limits and then to send a “bad faith” letter outlining the manner in which the insurer is exposing its insured to substantial liability in excess of the policy limits, given the evidence of liability and evidence of loss explaining how failure to settle amounts to an intentional disregard of the insured’s financial interest, again extending the demand to settle within the policy limits of the insured.

 

Any settlement should expressly limit the settlement to the insurance company and their insured, reserving all claims against other defendants.  However, if a judgment is obtained against the other defendants, they may be entitled to reduce the judgment amount by the settlement obtained.   The bad faith is weighed looking at the legitimate interest of the insurance company.

 

CAUTION

NOTHING CONTAINED HEREIN SHALL BE DEEMED TO CREATE AN ATTORNEY CLIENT RELATIONSHIP.  NOTHING HEREIN SHALL BE DEEMED TO BE LEGAL ADVICE TO YOUR PARTICULAR CIRCUMSTANCES!  EVERY PERSON APPEARING OR FILING ANYTHING IN COURT MAY BE SUBJECT TO SANCTIONS UNDER VA CODE § 8.01-271.1

Thomas H. Roberts, Esq.
Thomas H. Roberts & Associates, PC
105 S 1st Street
Richmond, VA 23219
804-783-2000