Bad Faith: When You Can Sue Your Own Insurance Company (Zoppo v. Homestead)

Published December 12, 2017 · Injury Law Basics

You paid for uninsured and underinsured motorist coverage for fifteen years. Then a driver with a minimum-limits policy ran a stop sign in Kettering and left you with a fused neck, and your own insurance company, the one whose commercials talk about being there for you, has spent eight months "evaluating" your underinsured motorist claim. It has asked for the same records three times, offered a fraction of what the claim is worth, and never explained why.

Most people assume they have no choice but to wait. They do have a choice. Ohio law has recognized for decades that an insurance company owes its own policyholder a duty of good faith, and that a company which breaks that duty can be sued for more than the policy limits. This post explains where that duty comes from, the standard the Supreme Court of Ohio uses to judge it, what bad faith looks like in practice, and what an injured policyholder can recover.

The duty comes from the relationship, not the contract

An insurance policy is a contract, and ordinarily breaking a contract is not a tort. Insurance is different. In Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272 (1983), the Supreme Court held that because of the relationship between an insurer and its insured, including the disparity in bargaining power and the fact that a policyholder making a claim "may be in dire financial straits," an insurer has a duty to act in good faith in the handling and payment of its insured's claims. Breaching that duty is a tort in its own right, separate from the breach of contract.

The duty runs to the company's own insured. That is why this post is about first-party claims: uninsured and underinsured motorist coverage, medical payments coverage, collision, homeowner's and fire claims, and disability or life benefits. The other driver's insurer owes you no duty of good faith at all. It can lowball you, stall you, and deny you, and your remedy is to sue its insured, not the company.

The standard: "reasonable justification"

The Supreme Court settled the test for bad faith in Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552 (1994). Ralph Zoppo's bar burned down. His fire insurer, Homestead, focused its investigation almost entirely on him, despite evidence that men he had thrown out of the bar had threatened to burn it, had tried once before, and had bragged afterward about setting the fire. Investigators did not locate key suspects, verify alibis, or follow up with witnesses, and when they interviewed the men who had made the threats they asked little more than whether they did it. Homestead denied the claim.

A jury found bad faith and awarded punitive damages. An earlier Supreme Court decision had suggested that bad faith required proof the insurer intentionally refused to pay, and the court of appeals reversed on that basis. The Supreme Court overruled its earlier decision and restored the rule that had governed since 1949: an insurer acts in bad faith when its refusal to pay is "not predicated upon circumstances that furnish reasonable justification therefor." As the Court put it, "Intent is not and has never been an element of the reasonable justification standard."

In plain English: the question is not whether the adjuster meant to cheat you. The question is whether the company had a reasonable basis, grounded in a real investigation, for denying or delaying your claim. A company that did not look, or looked only for reasons to say no, cannot claim reasonable justification.

What bad faith looks like

The Hoskins court was careful to say that "Mere refusal to pay insurance is not, in itself, conclusive of bad faith." Insurers are allowed to disagree about value and to deny claims they reasonably believe are not covered. Bad faith is about how the company reached its position. In our experience, the patterns that support a claim include:

• A one-sided investigation, like Homestead's: interviewing only the witnesses who help the company, ignoring leads that help the insured, or hiring an "independent" medical examiner who has never found a claim legitimate.
• Unexplained delay. Repeated requests for records already provided, months of silence, or a file passed among adjusters so no one is responsible.
• Lowball offers untethered to the evidence. Offering a few thousand dollars on an underinsured motorist claim with documented surgery and permanent restrictions, with no explanation of how the number was reached.
• Misstating the policy. Telling a policyholder that coverage does not exist, or that a deadline has passed, when the policy says otherwise.
• Treating the insured as the adversary. Demanding recorded statements, examinations under oath, and years of unrelated records as conditions of payment, with no legitimate need for them.

An underinsured motorist claim is the setting where we see this most often, because the company knows that once the other driver's limits are exhausted, it is the only source of money left and the policyholder is tired. Our UM/UIM practice page explains how those claims are supposed to work; a company that handles them in the ways listed above is inviting a bad-faith claim.

What you can recover

A bad-faith claim changes the economics of a stalled insurance claim in three ways.

First, the insurer becomes liable for the compensatory damages caused by its bad faith, which are not limited to the policy amount. Under Zoppo, an insurer that acts in bad faith is liable for the damages flowing from that conduct, which can include the financial harm of going unpaid, such as lost interest, collection activity, and the consequences of delayed treatment.

Second, punitive damages are available on proof of actual malice, which the Supreme Court has defined to include "a conscious disregard for the rights and safety of other persons that has a great probability of causing substantial harm." Homestead's "one-sided inquiry" and failure to follow up on leads were enough. Ohio's tort-reform statute, R.C. 2315.21, now places limits on punitive awards in most cases, but even a capped award is a multiple of the compensatory damages.

Third, attorney fees. Ordinarily each side pays its own lawyer. In Zoppo the Court reaffirmed that "Attorney fees may be awarded as an element of compensatory damages where the jury finds that punitive damages are warranted." For a policyholder, that means the insurer, not the recovery, pays the cost of forcing the company to do what it should have done in the first place. A Dayton-area jury's $10 million bad-faith verdict against an auto insurer, which we discussed in the Bigler case, shows how seriously juries take this.

Two traps to avoid

A bad-faith claim requires an underlying claim that was handled properly on your end. The Supreme Court has held that a policyholder generally must present a claim to the insurer before suing, a rule we explained in the claim-first rule from Kincaid v. Erie. And most policies contain their own deadlines for UM/UIM claims and suits, often shorter than the statute of limitations, as we warned in the three-year UM/UIM trap. An insurer that has stalled you past your own contractual deadline will argue that the delay is your problem. Do not let a claim age into that argument.

Finally, document everything. Keep every letter, note the date and substance of every call, and send records by a method that proves delivery. The Zoppo jury had a clear picture of what Homestead did and did not do. Your bad-faith claim will be only as strong as the paper trail that shows what your insurer did with yours.

What this means for you

Your own insurance company is a business with a financial interest in paying you as little as possible, as late as possible. Ohio law gives you a remedy when that interest crosses the line from hard bargaining into a denial or delay with no reasonable justification. If your uninsured motorist, underinsured motorist, or medical payments claim has stalled, as the no-contact claim in our phantom driver post so often does, the stall itself may be evidence. The sooner a lawyer reviews the file, the sooner the company learns that the usual tactics will cost it more than paying the claim.