In last week’s post titled Does an Insured Have to Wait to Pursue Bad Faith? I explained the facts of Brethorst v. Allstate Property and Casualty Insurance Company. This week I will begin a discussion of the legal issues in this case.

The Supreme Court of Wisconsin began its analysis with the following principles:

[A] bad faith claim is separate and distinct from a breach of contract…Bad faith is not the same as breach of contract, which is a “failure to pay the claim in accordance with the policy” [citation omitted]. Rather, bad faith “is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.”

An insurance company may challenge a claim, as a matter of fact or law, when the claim is fairly debatable.

[T]o bring a bad faith claim, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” [citation omitted]. The knowing failure of an insurer to proceed in a manner that is honest and informed constitutes bad faith [citation omitted]. Thus, bad faith is an intentional tort….[A]n insurance company … may challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis.

The Court explained that this standard recognizes the intentional nature of the tort of bad faith. The standard applies an objective basis, quelling concerns that allowing bad faith claims will result in extortionate lawsuits. The Court also pointed to the standard civil jury instructions for first-party bad faith claims as set forth in “Bad Faith By Insurance Company: Assured’s Claim:”

To prove bad faith against (insurance company), the (plaintiff) must establish that there was no reasonable basis for the insurance company’s denying (plaintiff )’s claim for benefits under (his)(her) policy and that (insurance company), in denying the claim, either knew or recklessly failed to ascertain that the claim should have been paid.

Bad faith is the absence of honest, intelligent action or consideration of an insured’s claim.

Bad faith exists if, upon an examination of the facts found by you, you are able to conclude that (defendant) had no reasonable basis for denying (plaintiff)’s claim.

In answering this question, you may consider whether (plaintiff)’s claim was properly investigated and whether the results of the investigation were given a reasonable evaluation and review. If you find that (insurance company) either refused to consider the (plaintiff)’s claim for damages, made no investigation, or conducted its investigation in such a way as to prevent it from learning the true facts upon which the (plaintiff)’s claim is based, the insurance company can be found to have exercised bad faith. This is because you may infer from these facts a reckless disregard on the insurance company’s part to learn that there was no reasonable basis for it to deny (plaintiff)’s claim.

If, on the other hand, you find that the insurance company, after conducting a thorough investigation of the facts and circumstances giving rise to the (plaintiff)’s claim, reasonably concluded that the claim is debatable or questionable, then there is no bad faith even though it refused to pay the claim.

I will continue the discussion of this opinion next week.