At one point or another, we all have prematurely jumped to a wrong conclusion. When an insurance company goes down that path and ignores evidence during its investigation that may support a claim, it is committing bad faith.
In Bafford v. Travelers Casualty Insurance Company,1 a federal court in California denied the defendant insurer’s motion for summary judgment as to the insured’s claim for breach of the covenant of good faith and fair dealing, i.e., insurance bad faith. In that case, the insured’s auto repair shop was insured under a general business insurance policy that covered property theft. The insured alleged his business was burglarized and the insurer wrongfully refused to pay the claim. The insurer denied the claim asserting the insured made material misrepresentations. The insurer relied heavily on a statement by a witness from an adjacent business that he had observed the insured moving equipment out of the shop days prior to the loss. However, this information was not given to the insured until after litigation and discovery commenced. Based on e-mail exchanges between the claims adjuster and the investigator ("It would be nice to nail that guy"…"I just want to get this guy."), it was apparent that the insurer jumped to an early conclusion.
In denying the insurer’s motion, the court reiterated the rule in California for establishing bad faith. The insured must show that:
- benefits due under the insurance policy were withheld; and
- the insurer’s reason for withholding benefits was either unreasonable or without proper cause.
To avoid liability for bad faith, an insurer’s actions and position with respect to a claim must be founded on a basis that is reasonable under the circumstances. According to the court, when it comes to the investigation of a claim, the insurer must give at least as much consideration to the interests of the insured as it gives to its own interests. Importantly, the insurer may not ignore evidence which supports coverage.
In the above case, the court found the insurer never gave its insured a chance to explain why he removed equipment from his business two days before the alleged burglary (according to the insured, he took parts and scrap metal to recycling centers and had proof that he did so) but decided quite early in its investigation that the insured submitted a fraudulent claim and proceeded to seek information to confirm that position.
Indeed, an insurance company’s failure to fully investigate a loss and to take into account the insured’s evidence is the type of unreasonable conduct indicative of bad faith.