INSTITUTIONAL BAD FAITH: POLICIES AND PRACTICES THAT HARM INSURANCE POLICYHOLDERS
By Mike Abourezk
There are two different types of evidence in bad faith claims. The first type involves only the actions of the claims personnel and seeks to show that their actions were outrageous and caused damage to the plaintiff. The second type of evidence is called "institutional bad faith." "Institutional bad faith" is a corporate philosophy, implemented in a series of procedures, that emphasizes minimizing insurance claims to the detriment of policyholders.
In a law review article tracing the evolution of bad faith law in South Dakota, Professor Baron of the University of South Dakota School of Law discussed "institutional bad faith." He "noted that a larger sphere of 'institutional bad faith' appears to be evolving-situations where insurers can invoke broad policy decisions (such as knocking off a few extra dollars for charges being in excess of 'reasonable and customary' charges) and those insurers remain relatively secure in generating significant across-the-board gains in the bottom line, without ramification or adverse litigation." Rodger M. Baron, When Insurance Companies Do Bad Things: The Evolution of the "Bad Faith" Causes of Action in South Dakota, 44 S.D. L.Rev. 471, 491 (1998/1999).
Institutional Bad Faith Case
Hawkins v. Allstate Insurance Co., 733 P.2d 1073 (Ariz. 1987), is an example of an institutional bad faith case. In Hawkins, the Arizona Supreme Court upheld a $3.5 million punitive damage verdict in a bad faith action against Allstate. In that case, the actual damages to the individual plaintiff were less than a few thousand dollars. In fact, the punitive damage award was based largely on actual damages of $35.00.
The proof in Hawkins involved evidence that, in every case of "total loss" to an automobile, Allstate had instructed its claims adjustors to deduct $35.00 from the payment of the claim as a "cleaning fee." The cleaning fee was taken regardless of whether a car was clean or not. The company taught adjustors that deductions like this would rarely be contested by individual customers because it was such a small amount of money. Taking the cleaning fee over and over again in thousands of claims generated millions of dollars to Allstate.
Underlying Policies and Practices That Create Institutional Bad Faith
In order to understand Hawkins and cases like it, it is helpful to examine the underlying insurer policies and practices that create institutional bad faith. An insurance company sets various types of financial goals for the payment of claims and devises ways of tracking these goals. Then the company tracks what percentage of claims are successfully denied or closed without payment. Insurer goals are expressed in a number of ways:
(1.) In the reporting of financial information such as combined loss ratios of claims that are closed without payment;
(2.) In communications between the home office, regional and other staff that discuss goals;
(3.) In performance evaluations that measure employees' achievement of company goals, rewarding them when goals are met with bonuses, promotions or salary increases;
(4.) In reports from supervisors to their employees; and
(5.) In company training materials, newsletters, videotapes, and other publications distributed to help employees achieve these goals.
Rule of Equal Consideration
Of course, there is nothing illicit in the setting of financial goals and strategies in the context of ordinary business management. However, a problem occurs when these strategies are used by companies handling fiduciary-like transactions-insurance transactions. Fiduciary transactions are governed by different rules. The first rule of conduct governing insurance transactions is that a company will give at least equal consideration to the interests of the claimant. Kunkel v. United Security Ins. Co. of New Jersey, 168 N.W. 2d 723, 726 (S.D. 1969). When an insurance company knowingly communicates goals to its employees that conditions them to deny or minimize claims, that violates the equal consideration rule.
Courts have condemned the setting of insurance company goals when they affect the payment of claims. For instance, in Zilisch v. State Farm Mutual Auto. Ins. Co., 995 P.2d. 276 (Ariz. 2000), the plaintiff produced evidence at trial that State Farm set arbitrary claim payment goals for its claims personnel. Promotions and salary increases for claims personnel were based on reaching these goals. On appeal, the Arizona Supreme Court upheld a punitive damages award against State Farm saying, "Thus, 'an insurer may be held liable in a first-party case when it seeks to gain unfair financial advantage of its insured through conduct that invades the insured's right to honest and fair treatment' " Id. at 279-80, quoting Rawlings v. Apodaca, 151 Ariz. 149, 156, 726 P.2d 565, 572 (1986). See also Albert H. Wohlers and Co. v. Bartgis, 969 P.2d 949 (Nev.1999)(In bad faith action, policy administrator exposed to bad faith liability because it had a direct pecuniary interest in optimizing insurer's financial condition by keeping claims costs down.)
Overcoming Insurer "Mistake" Defense
Of course, even when there are clear acts of institutional misconduct, the habitual defense is that the insurer "made a mistake" or "did not mean to wrongfully deny the claim." To rebut this kind of defense, a plaintiff must show either: (1.) a pattern of misconduct-that it happens all the time or (2.) that the insurer's conduct demonstrated an overarching intent that focused on denying or minimizing claims payments. Generally, discovery in a bad faith action will explore the insurer's policies or practices that involve institutional bad faith
Relevance of Insurer's Underlying Policies And Practices
Generally, evidence of an insurer's policies and practices is useful in rebutting an insurer mistake defense. This kind of evidence helps prove that the insurer intentionally injured the plaintiff. Discovery of underlying policies or practices may establish a pattern or practice of wrongful conduct and lack of mistake. For instance, in Colonial Life & Accident Ins. Co. v. Superior Court, 647 P.2d 86 (Ca. 1982), the California Supreme Court allowed discovery of other claims handling incidents by the same insurance adjustor that handled the plaintiff's claim. In that case, the Court said:
While proof of a knowing violation will make plaintiff's job that much easier, in cases where a knowing violation is difficult to establish, knowledge can be proved circumstantially. Discovery aimed at determining the frequency of alleged unfair settlement practices is therefore likely to produce evidence directly relevant to the action.
Id. at 90 (emphasis added). See also Vining on Behalf of Vining v. Enterprise Financial Group. Inc., 148 F.3d 1206, 1218-19 (10th Cir. 1998) (Tenth Circuit upheld admission of other claim evidence holding that it was clearly relevant to the question of how the defendant acted in that case and that FRE 406 (habit) clearly provided for its admission); Hawkins v. Allstate Ins. Co., 733 P.2d 1073 (Ariz. 1987) (whether the defendant intended to injure the plaintiff or consciously disregarded the plaintiff's rights may be suggested by a pattern of similar unfair practices); Moore v. American United Life Ins. Co., 197 Cal. Rptr. 878 (Cal. App. 1984)(Court held that the claim handling of another insured was admissible to show a pattern and practice of unreasonable actions by the insurer.)
Moreover, evidence of wrongful policies and practices will help prove plaintiff's entitlement to punitive damages by establishing reprehensibility and recidivism. This evidence will assist the jury in calculating appropriate punitive damages.
In South Dakota, this evidence is even more crucial because our Supreme Court has specifically ruled that evidence that wrongdoing is part of a company policy or practice is a crucial factor in supporting a punitive damages award. See Roth v. Farner-Bocken Co., 667 N.W.2d 651 52. (SD 2003) (South Dakota Supreme Court remanded invasion of privacy case for new trial on punitive damages because there was no evidence that the conduct reflected a company policy or practice.) Thus, Roth makes discovery of company policies or practices highly relevant in proving punitive damages.