Where's the Line Between Good Faith and Bad Faith?

We all know that insurance adjusters can be difficult, because that's mostly what their job involves.  But at what point does the law step in to regulate adjuster conduct?

We all know that insurance adjusters can be difficult, because that's mostly what their job involves.  But at what point does the law step in to regulate adjuster conduct?

Bad faith?  Good faith?  What does that all mean?

A good number of my clients are folks who have started out handling their own claims, get fed up dealing with the adjuster assigned to the claim, and ultimately end up seeking me out to deal with the adjuster on the client's behalf.  One client in particular once made the admirably succinct assertion that insurance adjusters are like any customer service representative you'll ever deal with; at first blush, they're really nice and really helpful, but at the end of the day, the adjuster's job is to protect the interests of the liability carrier.  They work for the insurance company, not for you.  It follows that you have to exercise extreme caution in the things that you say and the things that you take away from your conversations with adjusters.

Clearly, I get a lot of complaints about adjusters.  Many of them, particularly the experienced ones, have an arsenal of little tricks and games that they pull out as a method of obscuring the issues, frustrating the claim, and ultimately devaluing the claimant's recovery.  For instance, it's common for the adjuster to call the injured party within 24 hours after the accident, offering a meager amount for full and final settlement of the (impending) claim.  Because most people haven't contacted an attorney by then, and because they don't know any better, it's common to see folks accept a $500 offer for what could end up being a much more valuable claim.

But that's just the tip of the iceberg.  I've heard many times about adjusters asking for recorded statements that they aren't entitled to, making claimants wait for months on relatively simple claims, inventing farcical "statutes of limitation" that don't have any basis in law, and otherwise making outlandish demands of claimants that don't appear anywhere in the policy language.  Clients complain to me all the time that these kinds of shenanigans are unfair, and I agree.  It amounts to insurance professionals wielding inequitable influence over laypersons who never deal with insurance, and it's antithetical to the insurance industry's very reason for existence.

So where's the line between good faith and bad faith?

 Fortunately, North Carolina law recognizes the problem and takes some measures to address it.  If you look at Chapter 58 of the North Carolina General Statutes, you'll see about a thousand pages of statutory language regulating the insurance industry at large.  Article 63, titled "Unfair Trade Practices," is particularly helpful for our purposes.  If you look at § 58-63-15, "Unfair methods of competition and unfair or deceptive acts or practices defined," you'll see a long list of insurance practices that North Carolina law deems to be unfair.  This list includes things like false advertising, coercion, and discrimination, but subsection (11) also narrows down a list of 14 items that specifically implicate the claims settlement process.  This list includes misrepresenting pertinent facts or policy provisions, refusing to pay claims without conducting an investigation, forcing litigation without attempting to settle in good faith, and a host of other no-no's.  To use the legal term, of course.  Suffice it to say that when an insurance company commits one of these enumerated acts, they become guilty of "bad faith."

Hold up.  Does anyone else see a problem here?

Okay, so there are actual two problems.  First, this section appears to only prohibit insurance carriers from committing said no-no's "with such frequency as to indicate a general business practice ... "  Second, the last sentence of § 58-63-15(11) states, "Provided, however, that no violation of this subsection shall of itself create any cause of action in favor of any person other than the Commissioner."  So under Chapter 58, you have to establish that the insurance company misbehaves on a regular basis, and then if you do, only the Insurance Commissioner can pursue an investigation against the insurance company.  Which, of course, does you exactly zero good.

But wait!

Way back in 2000, the North Carolina Supreme Court handed down an extremely important opinion in the case Gray v. North Carolina Ins. Underwriting Ass'n, 352 N.C. 61.  In its opinion, the Supreme Court held that a violation of Chapter 58 supports a violation of Chapter 75 of the North Carolina General Statutes, which generally prohibits "unfair and deceptive trade practices."  So what does that do for you?  Well, it gives you a private cause of action to bring against the insurance company without having to involve the Commission, and it gives you access to treble (meaning triple) damages under § 75-16.  So while Chapter 58 spells out the parameters for insurance claim settlement practices, Chapter 75 provides the teeth.  You can imagine that the adjuster's boss will not be happy if the carrier is threatened with a viable Chapter 75 lawsuit.

Has there been any judicial guidance on this?

There has, but it's been somewhat limited so far.  With regard to Unfair and Deceptive Trade Practices in general under Chapter 75, there's a vast amount of case law, but it doesn't really give us any "bright line" rule to go by.  What we end up with is a sort of dot graph indicating that a, b, and c are unfair and deceptive, while d, e, and f are not.  So unless your particular case is substantially identical to a case that has already been decided, all you can really do is file your lawsuit, plead your case, and hope for the best.  Your cost-benefit analysis is going to be skewed big-time by the treble damages factor, but the unpredictability remains nonetheless.

With regard to insurance practices in particular, we have a handful of cases that have been decided both ways.  Plaintiffs have been successful in cases where an adjuster mistakenly gave the insured the wrong information regarding coverage, where a carrier refused to settle a claim without performing a proper investigation, and where the carrier opted to close its file rather than respond at all to the claimant's demand.  

On the other hand, carriers have come out on top in cases where the parties disagreed over whether or not the lower floor of the plaintiff's house was a basement, where the parties disagreed over the source of damage to the foundation of the plaintiff's house, and where the carrier requested multiple examinations under oath of the same plaintiff (keeping in mind that the subsequent examinations did not contemplate the same information as the original).  

As you can see, the line between good faith and bad faith is thin and difficult to define.  If you're handling your case on your own, you can likely expect the adjuster to play "fast and loose" with your claim, assuming that you aren't familiar with the rules of the game.  If that's your experience, and if you play it carefully, the "bad faith" card can often get the adjuster's attention and let them know that you're serious.