“Institutional bad faith” in the context of wrongful claims practice litigation can be defined as improper claims handling conduct that is embedded in an insurance company’s policies, procedures, corporate structure, or general business practices rather than being an isolated instance of misconduct by an individual adjuster. It involves systemic, company-wide unfair claims handling practices that are part of the insurer’s standard operating procedures, not just a single adjuster’s misconduct. This type of conduct often results from an insurer’s efforts to maximize profits by minimizing claims payments through policies and incentives that encourage improper claims handling as a general business practice. Policyholders alleging institutional bad faith seek extensive discovery into the insurer’s policies, procedures, training, incentives, and other business practices to show the misconduct is widespread.

Mike Abourezk
Mike Abourezk

Mike Abourezk is one of the best trial attorneys in the United States. He is a member of the Inner Circle of Trial Advocates. I have had the pleasure of meeting and spending time with Mike, discussing the challenges of modern insurance claims practice litigation. I have learned a lot from Mike by listening to him and reading about his cases. If you want to learn a little more about Mike, I suggest reading an attached bad faith expert report discussing Abourezk’s settlement and litigation mannerisms.

Mike Abourezk and Alicia Garcia published The Lawyers Guide to Insurance Bad Faith Claims: Bad Faith Insurance Law In South Dakota. It has a section about “institutional bad faith:”


  1. Generally

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 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).

  1. 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, where 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.

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 from the payment of the claim as a ‘cleaning fee,’ without regard to whether the car was clean to begin with. The company taught the adjustors that deductions like this would rarely be contested by individual customers, because it was such a small amount of money, but that taking this deduction over and over again in thousands of claims would generate millions of dollars to the company. The Arizona Supreme Court upheld the jury verdict of $3.5 million in punitive damages.

  1. Insurer Policies and Practices

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.

  1. 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. As explained above, 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 at 726.

Courts have condemned the setting of insurance company goals when they affect the payment of claims. For instance, in Albert H. Wohlers and Co. v. Bartgis, 969 P.2d 949(Nev. 1999), the Nevada Supreme Court upheld a finding of bad faith because of a direct pecuniary interest in optimizing the insurer’s financial condition by keeping claims costs down. When an insurer knowingly communicates goals to its employees that conditions them to minimize claims, that violates the rule requiring an insurer to give equal consideration to an insured’s interests. Evidence of insurer goals that adversely affect the payment of claims establishes knowledge in a bad faith action.

  1. Overcoming Insurer “Mistake” Defense

Of course, even when there are clear acts of institutional misconduct, the habitual insurer response is that the insurer ‘made a mistake’ or ‘did not mean to wrongfully deny the claim.’ To rebut these claims, 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.

An example of wrongful companywide claims procedures was Allstate’s Claims Core Process Redesign Program, which I  discussed in Insurance and Insurance Claims Handling Involves the Public Trust. In Claims Management Practices, I noted how an insurance industry insider discussed how much performance stress claims incentive programs and goals place upon claims management. Last year, in Insurance Company Claims Adjuster Bonus Programs and Criteria, I noted:

Our firm closely follows case decisions about claims department bonus programs. We do this because if these programs don’t promote full and prompt recovery for the insurance customer, they often encourage delays and underpayments.

Insurance company executive management does not set claims department performance goals tied with financial incentives for claims managers because doing so does not work. Peter Drucker introduced the concept of “management by objectives” (MBO), where employees agree on a set of goals with their manager and work towards achieving those objectives. According to Drucker, the goals should align with the overall strategic priorities of the organization. I have yet to see a claims management goal aligned with compensation where claims managers are rewarded for fully paying their policyholders as fast as possible.

Thought For The Day

In the first place, do not pay too much; in the second, pay for performance.
—Peter Drucker