BY: Thomas J. Okoneski
Last month this newsletter discussed the illusive task of making a bad faith claim against an insurance company in Minnesota. It wasn’t a pleasant discussion, but we have to work with what we’ve got. The same holds true for this month’s discussion of asserting a bad faith claim in Wisconsin. Minnesota and Wisconsin are separated only by a river, but the law differs greatly between the two.
In Minnesota, establishing a bad faith claim against an insurance company is grounded in a statute. This means the legislature has spoken (albeit sometimes being influenced by a lobbyist first), made a statute, and now it is the courts’ job to interpret that statute. Wisconsin is different. In Wisconsin, bad faith law is grounded in the common law. This means the law is determined by what has been decided in the courts on cases with similar circumstances.
Bad faith claims were fully recognized in Wisconsin in 1931. The purpose of finding bad faith by the courts is to differentiate a breach of an insurance contract from intentional wrongdoing. Think of this as a bigger and badder breach. When you enter into an insurance policy, you are creating a legally binding contract between you and the insurance company. Under this contract, you are obligated to pay your premiums and the insurance company is supposed to pay your claims covered by your policy. However, the truth of the matter is insurance companies don’t make money by paying out large claims. In some cases, insurance companies have engaged in several methods to limit the amount of money they pay on claims such as: delaying investigations, intentional underpayment, failure to indemnify, wrongful denial of coverage, and deceptive practices. Because of such instances, courts have come to recognize the existence of bad faith in the insurance contract setting. Thus, the law in this area has developed over time to protect consumers and reduce the losses suffered as a result of insurance companies not fulfilling their end of the bargain.
Claiming that an insurance company acted in bad faith is different than claiming it breached the insurance policy. A “breach” can be found for many reasons. But to prove bad faith there has to be a factual showing that the denial of coverage had no reasonable basis, the insurance company knew of this lack of reasonable basis, and/or showed reckless disregard in their delay or denial. Basically this means, the insurance company flat out just didn’t want to pay the claim and did everything it could to avoid payment.
The court will look at the insurance company’s actions and compare them to what a reasonable insurance company would have done in a similar situation. If the court finds the insurance company acted in a manner consistent with how a reasonable insurance company is expected to act, then there is no basis for a bad faith claim. However, if the insurance company does not have reasonable basis and the insurance company was aware of the lack of a reasonable basis, then they may be guilty of bad faith.
Essentially, this is a two part test. The first part concerns the reasoning for the denial of a claim and whether there was a reasonable basis for the denial. Would a reasonable insurer under the circumstances have denied the claim?
The second part of the test concerns the knowledge of the insurance company and whether it had knowledge of and/or acted with reckless disregard in denying the claim. Did the insurance company know that there wasn’t a reason to deny the claim?
If both of these elements are found, the insurance company is guilty of bad faith and will have to pay the insured’s actual damages and punitive damages. Actual damages is the money that will get the property repaired and recover the insured’s out of pocket expenses, including attorneys fees. Punitive damages, on the other hand, are to “punish” the insurer so that it and others in the industry are deterred from continuing the offending behavior. We are not talking chump change here. In Minnesota, the legislature has limited the punitive damages to $250,000 and made it very hard to get this. In Wisconsin, the test is the amount of money the jury or court feels will make a significant point to a wealthy insurance company. So, if you have to get hosed by your insurance company, it’s better to be a Packer fan than a Viking fan. Cheers.
Rachael Holthaus (soon to be a graduate of William Mitchell College of Law) contributed to this article.