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Mealey's Litigation Report

Willful and Wanton

By John J. Pappas

This is one of a series of articles under the by line “Butler Pappas on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 19, #6 (July 19, 2005). © Copyright Butler Pappas 2005.



A first-party “bad-faith” case is an intense microscopic examination of a single insurance claim that presumably has already been determined was not sufficiently paid by the insurer. Although its stated attempt is to ascertain the truth, like all litigation, by definition it is a distortion of reality.

Claim handling is not a science. It is at best a craft, and more likely a trade. No claim is handled perfectly. Certainly no claim that is complicated enough to result in a determination that the insurer owed more than it paid has been handled perfectly. There is no such thing as a perfectly handled insurance claim. It would be like suggesting there is such a thing as a perfectly written judicial opinion. There is simply no such thing.

There is always room for improvement. For example, an adjuster can always have responded sooner, and payments could always have been more and swifter. When dealing with a “bad-faith” case where it has already been determined, right or wrong, that the insurer owed more than it paid, by definition this microscopic scrutiny of this single claim must result in evidence of less than “perfect” claims handling.

Of course the plaintiffs would want such evidence to be the focus of its massive, intrusive, and abusive “bad-faith” discovery, so it may paint the insurer as, at best, buffoons. They hope they can extort and embarrass the insurer into a profitable settlement. If not, they intend to parade the insurer's imperfections before a jury of policyholders who they hope respond emotionally to such “evidence” of human fallibility. This is where our Courts must take control. As a matter of law, negligent claims handling is not “bad-faith.”


I.  An Intentional Tort

“Bad-faith” is an intentional tort. This is a fundamental fact of a “bad-faith” claim. Hence, the vernacular: “bad-faith.” If it was a reasonable or innocent error it cannot be “bad-faith.” Mere negligence is not “bad-faith.” Breaching an insurance contract is not “bad-faith.” Failing to pay an insured all insurance proceeds owed under the insurance contract is not “bad-faith.” “Bad-faith” requires intent – intent to do wrong.

Certainly to be in “bad-faith” an insurer must have breached the insurance contract by failing to pay all that the insurer owed the insured under the terms of that contract. If it is subsequently decided by a judge, a jury, appraisers, or by the insurer itself that it should have paid more, although such is a prerequisite to a claim of “bad-faith,” such alone does not constitute “bad-faith.”

No doubt there are some who would like the mere fact that an insurer is deemed to owe more insurance proceeds than the insurer actually paid be “bad-faith.” This would mean that any breach of an insurance contract for failing to pay the insured all insurance proceeds subsequently deemed owed to the insured constitutes “bad-faith.” And, according to these proponents, any consequential damages as a result of “bad-faith” should be paid, as well as punitive damages. The insurer, according to some, should be punished for its negligent breach of contract. Certainly, if this were the law everyone should be on notice of such.

In fact, however, the law of every state in America holds to the contrary – “bad-faith” is not a mere breach of contract or even negligent claim handling. “Bad-faith” requires an insurer to intentionally refuse to pay its insured insurance proceeds that it knows it owes. The fact that appraisers, an arbitrator, a judge, a jury, an appellate court, or even the insurer itself subsequently declares that the insurer indeed owed the insured more than it paid does not constitute “bad-faith.” The insurer must have known that it owed and still refused to pay. The conduct must be “bad,” not erroneous.

II.  “Fairly Debatable” to “Frivolous and Unfounded”

The Alabama Supreme Court has stated that it has consistently refused to recognize the cause of action for the negligent handling of insurance claims and it will not recognize the cause of action for alleged wanton handling of insurance claims. Kervin v. Southern Guaranty Ins. Co., 667 So. 2d 704 (Ala. 1995). In Peachtree Cas. Ins. Co., Inc. v. Sharpton, 2001 W.L. 286919 (U.S. Dist. Ct. Md. Ala. 2001), a Federal Court applying Alabama law held that an insured may demonstrate bad-faith refusal to pay by proving either (1) no lawful basis for the refusal coupled with the insurer's actual knowledge of that fact, or (2) intentional failure to determine whether or not there was any lawful basis for such refusal. The Court went on to state that the insured must prove the following elements: an insurance contract between the parties and a breach thereof by the defendant, an intentional refusal to pay the insured's claim, the absence of any reasonably legitimate arguable reason for the refusal (the absence of a debatable reason), the insurer's actual knowledge of the absence of any legitimate reason, or the intentional failure to determine the existence of a lawful basis (quoting Nat'l Sec Fire & Cas. Co. v. Bowen, 417 So. 2d 179, 193 (Ala. 1982)). The Sharpton Federal Court noted that the Alabama Supreme Court has interpreted these requirements as follows:

Plaintiff must go beyond a mere showing of nonpayment and prove a bad-faith non-payment. A nonpayment without any reasonable ground for dispute or, stated differently, the plaintiff must show that the insurance company had no legal or factual defense to the insurance claim. The “debatable reason” under (c) above means an arguable reason, one that is open to dispute a question.

The Sharpton Federal Court stated that the Alabama Supreme Court “has made it abundantly clear that an action for 'bad-faith' lies only where the insurer has acted with an 'intent to injure.'”

In Sharpton, the Federal Court held that the insurers ultimate conclusion may have been mistaken, but the insureds could not demonstrate that the insurer intentionally or recklessly failed to investigate their claim or failed to properly subject it to cognitive review. This “fairly debatable” standard means that even if the insurer was wrong, if it thought it was right and such belief was “fairly debatable” it cannot be liable for “bad-faith.” The “intent to injure” does not exist.

Cook v. Allstate Ins. Co., 336 F. Supp. 2d 1206 (U.S. Dist. Ct. Cal. 2004), a Federal Court applying California law, held that the insureds must show that the conduct of the insurer, whether or not it also constituted a breach of a contract, demonstrates a failure or refusal to discharge contractual responsibility, prompted not by an honest mistake, poor judgment or negligence, but rather by a “conscious and deliberate act.” Even California requires a knowing denial of claim dollars owed.

“Willful-and-Wanton” breach of contract is one that is “intentional and without legal justification or excuse,” states the Colorado Supreme Court in the case of Giampapa v. American Family Mut. Ins. Co., 64 P.3d 230 (Col. 2003). In Hans Construction Co., Inc. v. Phoenix Assurance Co. of New York, 995 F.2d 53 (U.S. Ct. App. 5th Cir. 1993), a Federal Appellate Court, in interpreting Mississippi law, found that “an arguable reason, therefore, shields the insurance company from liability for both punitive damages and extra-contractual damages.”

In Sloan v. State Farm Mut. Auto Ins. Co., 85 P.3d 230 (N. Mex. 2004), the New Mexico Supreme Court stated that an insurer who fails to pay a first party claim has acted in “bad-faith” where its reasons for denying or delaying payment of the claim are “frivolous or unfounded.” The Court defined “frivolous or unfounded” as meaning an arbitrary or baseless refusal to pay, lacking any support in the wording of the insurance policy or the circumstances surrounding the claim. “Unfounded” in this context does not mean “erroneous” or “incorrect;” it means essentially the same thing as “reckless disregard,” in which the insurer utterly fails to exercise care for the interests of the insured in denying or delaying payment on an insurance policy. “It means an utter or total lack of foundation for an assertion of non-liability – an arbitrary or baseless refusal to pay, lacking any arguable support in the wording of the insurance policy or the circumstances surrounding the claim. It is synonymous with the word with which it is coupled: frivolous.” Such language requires knowledge and intent. The Supreme Court of New Mexico is saying that knowledge and intent is deduced from the “frivolous and unfounded” refusal to pay. Knowledgeable intent to do wrong or to injure the insured can be deduced from a refusal to pay that is “unfounded and frivolous.” Nevertheless, intentional wrongdoing is still an element of a “bad-faith” cause of action, even though it may be proven through the absence of a reasonable basis.

In the Ohio Supreme Court case of Motorist Mut. Ins. Co. v. Said, 590 N.E.2d 1228 (Ohio 1992), the Court stated that whenever an insurance company denies a claim of its insured, it will not automatically expose itself to an action in tort [for bad-faith]. Mere refusal to pay insurance is not, in itself, conclusive of “bad-faith.” This Ohio high Court stated that even though arguments are advanced to the contrary, there is no precedential authority from any decision of this Court that supports the view that “bad-faith” imports negligent behavior by the insurer in handling claims of its insured. Mere negligent settling or refusing to settle a claim of its insured would be insufficient to pose liability on the insurer. In order to demonstrate the tort of “bad-faith,” some form of wrongful intent must be proven. A finding of “bad-faith” involves an inquiry into the insurer's state of mind. It is not enough that the insurance company exercised poor judgment in withholding coverage; the insurer must, through its actions, or inactions, intentionally refuse to satisfy the insured's claim.

Griffin v. Allstate Ins. Co., 29 P.3d 777 (Ct. App. Wash. 2001), a Washington Appellate Court case, held that as long as the insurance company acts with honesty, bases its decision on adequate information, and does not overemphasize its own interests, an insured is not entitled to base a “bad-faith” claim against its insurer on the basis of a good faith mistake. Mistakes do not constitute “bad-faith.”

III.  Knowing Intent

The insurer must have knowledge that its failure to pay its insured more insurance proceeds is wrong. Absent such knowledge the insurer cannot be found to have committed “bad-faith.” In other words, an insurer may have “wrongfully” denied coverage or “wrongfully” refused to pay more insurance proceeds; however, for such “wrongful” conduct the insurer is legally culpable for breach of contract – not “bad-faith.” More is required for that “wrongful” failure to pay contract proceeds to constitute “bad-faith” – that “more” is knowledge and intent: knowledge that the insurer owes more than it pays and intent to pay less than it knows it owes. All these appellate decisions recognize this need for scienter. Whether the language used is “fairly debatable,” “reasonable justification,” “unfounded and frivolous,” “reckless disregard,” or “willful and wanton,” these semantical constructs require “knowing intent.” 

IV.  “Clear and Convincing”

In communicating this legal standard of “bad-faith” to a jury we should be realistic. All jurors are policyholders who pay premiums and have had or may have insurance claims. No juror owns any insurance company, runs an insurance company, or is an employee of an insurance company – not in an insurance “bad-faith” trial. At the very least, if we are going to allow such perspectively skewed juries to consider the “bad-faith” of an insurer, they should be instructed that the burden of proof is greater than a mere preponderance of the evidence. They should be instructed that the burden of proof is by “clear and convincing” evidence. Or, we should shift the burden of proving the insurer did not commit “bad-faith” upon the insurance company and have the insurance company carry that burden by “clear and convincing” evidence – but have all jurors be insurance company adjusters. I think I have made my point.

The jury charge should be clear. It should read:

The insurer has committed “bad-faith” toward its insured if under the totality of circumstances it knew it should pay more insurance proceeds to its insured but intentionally refused to pay such insurance proceeds. Mere negligence, incompetence, error, or mistake does not constitute “bad-faith.”



Courts must be vigilant against lowering the standard of “bad-faith.” The marketplace, not our legal system, punishes insurers for incompetence. Legal liability for “bad-faith” should be reserved for those few insurers and those few claims where such an insurer did wrong with knowledge and intent to do wrong. If “bad-faith” is to be broader than this, then all consumers of insurance will be asked to subsidize the costs for overpayment of insurance claims and unwarranted extra-contractual damages. This is if the consumer can even afford to buy the insurance.