Third-Party v. First-Party Bad Faith
Third-party bad faith occurs when an insurance company fails to defend or pay a claim asserted by a third party against a person insured by the company. For example:
A third party operating a motor vehicle was stopped at a light and was rear-ended by your client. The value of the third party’s injury claim far exceeds your client’s policy limits, but your client’s insurance carrier fails to tender those limits in a timely manner. Litigation ensues and the third party obtains a judgment against your client in excess of the policy limits. At that point your client sues his or her own insurance company in order to collect the amount of the excess judgment, alleging breach of fiduciary duty, breach of contract, violation of an unfair claims practice act, bad faith, and any other theory that may be allowed in your jurisdiction. Once collected, the funds are then used to pay the third party to satisfy the judgment in the underlying case.
First-party bad faith occurs when an insurance company fails to pay its own injured insured under a form of first-party coverage. For example:
Your client was operating a motor vehicle and was rear-ended by another party who has a policy that has inadequate coverage to satisfy your client’s claim. The other person’s insurance carrier tenders its full policy coverage in a timely fashion and there is no further likelihood of a recovery against the other person. Your client then has an uninsured motorist claim or an underinsured motorist claim (in many jurisdictions, the terms uninsured and underinsured are synonymous) on his or her own policy. You file this claim on behalf of your client but your client’s insurer fails to tender its policy limits, despite the fact that you’ve provided it with more than enough documentation to prove that the value of the claim is in excess of the limits. Your client may then sue his or her insurance company for bad faith for failing to honor the coverage under the uninsured and/or underinsured policy.
Negotiating a Bad Faith Insurance Claim
Insurance carriers are difficult to negotiate with in bad faith claims because they have not collected a premium for the money that they have to pay that’s in excess of their policy limits. That excess money comes out of the insurance company’s profits and does not fit in with their actuarial analysis and business model.
Try to convince the insurance carrier that it is best to settle sooner than later. The insurance carrier needs to understand that its exposure is more than just the excess judgment. There are all the extra-contractual damages that your client may suffer, including attorney fees, the interest accruing on the judgment, the damage to his or her credit rating, and the loss of an opportunity (e.g., to purchase a home or go into a business). There is also the possibility of punitive damages.
Furthermore, there are the expenses that the insurance carrier has to pay to their defense attorneys and the costs for the filing of a supersedes bond.
When you are negotiating a bad faith claim, consider preparing an economic chart that demonstrates what the carrier’s ultimate exposure will be if it tries the case to conclusion as opposed to settling the claim early and avoiding the risk of further exposure.
Excerpted from the free eGuide Handling Insurance Bad Faith Claims, by Joseph L. Vaccaro. Download the full eGuide for tactics and tools to help you with your bad faith insurance claim, including forms and samples covering topics such as damages and discovery requests.
Joseph Vaccaro has spent over 40 years handling insurance claims. He is also the author of Negotiating With Insurance Companies, designed to help you with every facet of negotiating an insurance claim.