USA Law and Practice Contributed by: Christina Culver, Rhonda Thompson and L. Michael Brooks, Thompson, Coe, Cousins & Irons, LLP
bad-faith claims, and the remedies, which range from doubled benefits to punitive damages and attorneys’ fees, significantly increase litigation stakes. An insurer may incur bad-faith liability not only for denying pay- ment without justification but also for claim handling practices, such as unreasonable delays or inadequate investigations, provided the insurer lacks a reasonable basis for its conduct. However, legitimate disputes over coverage or fact do not necessarily constitute bad faith, especially when coverage issues are fairly debatable or there is reasonable cause for withholding payment. Importantly, an insured engaged in material fraud cannot pursue bad-faith claims. Punitive dam- ages require a showing of egregious conduct distinct from the contract breach itself, such as harm inde- pendent from the contract injury or oppressive tactics by the insurer. Common-law bad faith generally requires an insured to prove that the insurer acted without a reasonable basis for denying or delaying a claim. Bad-faith lia- bility may also arise from inadequate investigations, coercive tactics, and deceptive practices. The “cov- enant of good faith and fair dealing”, which is implied in insurance contracts and forms the basis for tort liability in bad faith, requires factual investigations, prompt claim evaluations, and fair negotiations. All 50 states and the District of Columbia have enact- ed versions of the Model Unfair Trade Practices Act and the Model Unfair Claims Settlement Practices Act, prohibiting conduct such as failing to promptly acknowledge and investigate claims and compelling insureds to litigate by offering substantially less than ultimately recoverable amounts. However, the states are split as to whether these statutes may provide a basis for a private right of action. Even in states where these statutes do not form the basis for a private right of action, insureds are frequently able to use evidence of wilful or repeated statutory violations as a basis for a common-law bad-faith claim. Not all claims delays are necessarily evidence of bad faith or unreasonable conduct. Delays due to the com- plexity of a claim are not necessarily bad faith, but delays stemming from reckless or malicious intent, or failure to investigate diligently, may establish lia- bility. Such conduct potentially exposes insurers to compensatory and punitive damages, reflecting the
courts’ increasing intolerance for dilatory or vexatious claim handling. In first-party claims (those where benefits are owed directly to the insured), there is frequently an addi- tional requirement that the insured must also prove that the insurer acted with knowledge or reckless dis- regard of that lack of basis for its conduct. In many jurisdictions, insureds suing insurers for bad faith in the context of liability insurance claims (eg, for breach of the duty to defend, indemnify, or settle a claim) need only show that the insurer unreasonably delayed or denied payment or otherwise acted unreasonably in connection with the claim) based on a standard equivalent to simple negligence. Colorado has enacted one of the more insured- friendly statutory frameworks. Under Colo. Rev. Stat. § 10-3-1115, an insurer “shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant”, and the delay or denial is unreasonable if made “without a reason- able basis”. Importantly, the statutory claim does not require a showing of subjective bad faith – only unrea- sonable conduct – while the common-law claim also requires objective unreasonableness. The Colorado statute allows a successful insured to recover twice the covered benefit, plus attorney’s fees and costs, in addition to contract benefits, based on a showing of simple negligence. In effect, this can result in an insured recovery treble benefit if the insured recov- ers on the breach-of-contract claim and the statutory claim. Other states have enacted similar statutory remedies to compliment or supplement traditional common-law remedies. 4.7 ESG and Climate-Related Coverage Environmental, social, and governance (ESG) issues have continued to develop in directors-and-officers (D&O) coverage disputes, with insureds sometimes facing claims alleging misrepresentations about cli- mate commitments, AI capabilities and data secu- rity practices. The insured-versus-insured exclusion remains a persistent area of disputes. Personal offic- er-and-directors’ coverage has become increasingly important as corporate indemnification becomes uncertain in large-scale derivative and government enforcement actions.
298 I NSURANCE L I T IGATI O N 2026
CHAMBERS.COM
Powered by FlippingBook