What Is Bad Faith?


1. Inadequate Investigation
The insurer has a duty to properly and adequately investigate the claim submitted by its insured and breach of this duty shows a lack of good faith. The insurer cannot merely gather those facts necessary to support its position and then stop looking. Rather, it has an affirmative duty to investigate all reasonably available sources of information. In Zoppo, the Ohio Supreme Court affirmed a bad faith verdict since "There was ample evidence to support the jury's finding that Homestead failed to conduct an adequate investigation and was not reasonably justified in denying Zoppo's claim." In Staff Builders, the court found "ample evidence to sustain the jury findings of bad faith in the processing of the insurance claim of appellee. It is abundantly clear that information relevant to the claim was either reviewed by persons unskilled in its evaluation or disregarded by those who possessed such skills." See also, Netzley v. Nationwide Mutual Insurance Co. (1971), 34 Ohio App.2d 65, 296 N.E.2d 56 in which the court said that one fact indicative of the insurer's bad faith was when "the insurer fails to properly investigate the claim so as to be able to intelligently assess all of the probabilities of the case."

2. Exploitation of Insured's Vulnerable Position
An insured is often most vulnerable financially when he submits his insurance claim. He may be injured, disabled, and have no means of income to support himself and his family other than the expected insurance benefits. An insurer who takes advantage of the insured's vulnerable position in order to force him to accept an unfair settlement of his claim is guilty of bad faith. In Ali v. Jefferson Insurance Co. (1982), 5 Ohio App.3d 105, 449 N.E.2d 495, the court stated: Considering the foregoing, we find that appellant, by virtue of its superior bargaining position, and with knowledge of appellee's economic vulnerability, unreasonably delayed settling this case and acted in a manner so oppressive as to constitute a willful breach of its duty to perform its contractual obligations in good faith.

In the leading California bad faith case of Neal v. Farmer's Insurance Exchange, 148 Cal. Rptr. 389, 582 P.2d 980 (1978), the court held:

[The] evidence, in brief, indicated that Farmer's refusal to accept (Mrs. Neal's attorney's) offer of settlement, and its subsequent submission of the matter to its attorney for opinion, were all part of a conscious course of conduct, firmly grounded in established company policy, designed to utilize the lamentable circumstances in which Mrs. Neal and her family found themselves, and the exigent financial situation resulting from it, as a lever to force a settlement more favorable to the company than the facts would otherwise have warranted.

In order to prove that the insurer was attempting to exploit the insured's vulnerable position, the Neal court held that the insured may introduce evidence of what the insurer knew about the insured's financial situation: Thus, in determining whether Farmer's, in breaching its duty to the insured to make a reasonable settlement, did so in a spirit of oppression, the jury was clearly entitled to consider the evidence of the situation of the insured at the time of the proffered settlement insofar and might be considered to have motivated its actions.

3. Delay
An insurer that fails to promptly pay an undisputed insurance claim may be guilty of bad faith. The court stated in Craft v. Economy Fire & Casualty, 572 F.2d 565 (7th Cir 1978):

It is certainly a reasonable expectation of the insured that if the insurer had no honest doubts concerning its liability, it will promptly pay over the amount owing.

4. Misinterpretation to Avoid Coverage
An insurance company does not act in good faith when it deliberately misinterprets the insurance policy for the purpose of defeating or restricting coverage. Timmons v. Royal Globe Insurance Co., 563 P.2d 907 (Okla. 1982), (insurer denied claim based on deleted exclusion provision); Fletcher v. Western National Life Insurance Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (1970), (adjuster misinterpreted policy and medical reports in concluding that the insured qualified for payment only under two year "sickness" definition but not under thirty year "disability" definition.) A deliberate misinterpretation of controlling precedent to avoid paying a claim will likewise subject an insurer to liability for bad faith, and ignorance of recent controlling court decisions is no defense. Cole v. Detroit Automobile Inter-Insurance Exchange, 137 Mich. App. 603, 357 N.W.2d 898 (1984).

5. Expert Testimony is Admissible To Prove Bad Faith
Expert evidence is admissible to prove that an insurer acted in bad faith in denying a claim without reasonable justification. Richardson v. Employers Liability Assurance Corp., 25 Cal. App.3d 232, 102 Cal. Rptr. 389, 582 P.2d 9809 (1978). In Neal, the court stated:

We can conceive of many ways in which a lay jury, in assessing the conduct and motives of an insurance company in denying coverage under its policy, could benefit from the opinion of one who, by profession and experience, was peculiarly equipped to evaluate such matters in the context of similar disputes.

Similarly, the Court in Zoppo noted and approved of the expert testimony of a claims consultant on the issue of the insurer's lack of good faith.



1. Emotional Distress
Zoppo held that "an insurer who acts in bad faith is liable for those compensatory damages flowing from the bad faith conduct of the insurer and caused by the insurer's breach of contract." The bad faith award in the Zoppo case was based on testimony of Zoppo's emotional distress following the denial of his insurance claim. The trial court allowed this evidence and charged the jury that it could consider emotional distress in setting the amount of the bad faith award. The court of appeals reversed the jury award, stating that "Ohio does not recognize emotional distress as a damage element in bad faith cases". The Ohio Supreme Court reinstated the bad faith award entered by the jury, explicitly endorsing the awarding of bad faith damages for emotional distress.

Earlier bad faith cases decided in Ohio had agreed that bad faith damages included mental distress. In Eastham v. Nationwide Mutual Ins. Co. (1990), 66 Ohio App.3d 843, 586 N.E. 2d 1131, the court of appeals affirmed a jury verdict which awarded $425,000 in compensatory damages for bad faith based on the insured's humiliation, embarrassment, nervousness, and loss of self-worth while being harassed by collectors about bills that they were unable to pay."

In LeForge v. Nationwide Mutual Fire Ins. Co. (1992), 82 Ohio App.3d 692, 612 N.E. 2d 1318, the court of appeals affirmed an award of $60,000 for the bad faith denial of a fire insurance claim. The trial court had instructed the jury that it could award "reasonable compensation for the mental anguish and inconvenience caused by the lack of insurance benefits".

Ohio's rule allowing the victim of insurance company bad faith to recover damages for emotional distress is the majority rule. See Ashley, Bad Faith Actions § 8.04:

The victim of insurance company bad faith may generally recover damages for emotional distress caused by the insurer's misconduct, whether in a first-party or third-party context.

Both Eastman and LeForge noted that an insured's own testimony was sufficient to establish his entitlement to damages for emotional distress since such consequences were within the common knowledge of jurors. This is also the majority rule throughout the country. See Tan Jay v. Canadian Indemnity Co., 243 Cal. Rptr. 907 (1988); Jones v. Benefit Trust Life Ins. Co. 800, F2d 1397 (5th Cir. 1986); General Life and Accident Ins. Co. v. Handy, 786 S.W. 2d 370 (Tex Ct. App. 1990). Recovery of damages for emotional distress does not require a physical manifestation of the plaintiff's distress. Automobile Ins. Co. v. Davila, 805 S.W. 2d 897 (Tex. App. Ct. 1991). Nor must there be proof that the distress was severe or debilitating. Gruenberg v. Aetna Ins. Co. 108 Cal Rptr. 480, 510 P.2d 1032 (1973); Farr v. Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 699 P.2d 376 (1984); Farmers Group Inc. v. Trimble, 768 P.2d 1243 (Colo. Ct. App. 1988).

The standard is not one of severe and debilitating emotional distress or disease, as those terms are used in Paugh v. Hanks (1983), 6 Ohio St. 3d 72, 451 N.E. 2d 759 and Yeager v. Local Union 20 (1983), 6 Ohio St. 3d 369, 453 N.E. 2d 666. These are not bad faith cases. Paugh is a case on negligent infliction of serious emotional distress and Yeager is a case on intentional infliction of serious emotional distress. These are separate torts in which no harm has been done to the plaintiff's person or property. Farr, supra, contrasted the difference between the damages recoverable in these types of cases and bad faith cases.

The [insurers] also argued that since there was no intentional infliction of emotional distress and no outrageous conduct, the [insureds] were not entitled to an instruction on emotional distress. By referring to the separate tort of intentional infliction of emotional distress, where outrageous conduct is required, the appellants have confused the standard for damages recoverable in a claim for bad faith. [at 382]

2. Economic Damage
Recovery is allowed in bad faith cases for all economic harm caused by the insurer's conduct. Economic harm includes compensation for lost profits, loss of a business, lost rents and loss of the use of property. Asmaro v. Jefferson Ins. Co. (1989), 62 Ohio App.3d 110, 574 N.E. 2d 1118. Cases outside of Ohio have held that economic harm includes compensation for lost profits, loss of a business, lost rents, loss of the use of property, and the cost of obtaining high risk insurance on a fire damaged building. Chicago HMO v. Trans Pacific Life Ins. Co. 622 F. Supp 489 (N.D. Ill 1985); Lawton v. Great Southwest Fire Ins. Co. 118 N.H. 607, 392 A.2d 576 (1978); Olson v. Rugulski, 277 N.W. 2d 385 (Minn. 1979), (damages for lost profits in excess of policy limits recoverable for breach of policy); Farmers Ins. Exchange v. Henderson, 82 Ariz. 335, 3133 P.2d 404 (1957); Crisci v. Security Ins. Co. 58 Cal. Rptr. 13, 426 P. 2d 173 (1967).

3. Interest
Zoppo held that pre-judgment interest is recoverable pursuant to the statutory procedures set forth in R.C. 1343.03. Under R.C. 1343.03(A), a creditor is entitled to interest when money becomes due and payable on any instrument of writing. This has been held to include an insurance contract. See Clevenger v. Westfield Companies (1978), 60 Ohio App.2d 1, 395 N.E.2d 377. R.C. 1343.03(C) and LeForge, which affirmed the award of prejudgment interest under this provision of the statute. Since the basis of any bad faith suit is the delay in paying policy proceeds rightfully due the insured, it logically follows that interest on the amount wrongfully withheld should be awarded upon proof that the insurer acted in bad faith. Delos v. Farmers Insurance Exchange, 93 Cal. App. 3d 642, 155 Cal. Rptr. 843 (1979); Bibeault v. Hanover Ins. Co., 417 A.2d 313 (R.I. 1980). This rule is consistent with the general Ohio rule which allows interest to be recovered whenever personal property, in this case insurance proceeds, is converted or withheld. 30 O.Jur. 3d, Damages § 103. Interest is also generally allowable in Ohio for breach of a contract to pay money, which clearly would include an insurance contract. 30 O.Jur.3d, Damages § 99.

4. Loss of Credit Reputation
Damage due to loss of the insured's credit reputation is recoverable upon proof of bad faith. McDowell v. Union Mutual Ins. Co., 404 F. Supp. 136 (Cal. 1975); Farmers Group v. Trimble, 658 P.2d 1370 (Colo. 1982); State Farm Mutual Ins. Co. v. Smoot, 381 F.2d 3331 (5th Cir. 1967); Lawton v. Great Southwest Fire Ins. Co., 118 N.H. 607, 392 A.2d 576 (1978).

5. Cost of the Lawsuit.
In Spadofore v. Blue Shield (1985), 21 Ohio App.3d 201, 486 N.E.2d 1201, the court allowed the plaintiff to recover as part of compensatory damages all costs of the lawsuit brought to effect recovery of his claim. In White v. Western Title Insurance Co., 221 Cal. Rptr. 509, 710 P.2d 309, (1985), the court held that "the same reasoning supports inclusion of witness fees and other litigation expenses as an element of damage."

Spadafore and White reflect the majority view. See also McCarthy, Recovery of Damages for Bad Faith, Section 1.57, which states the rule as follows: Presumably all expenses incurred by the insured in pursuing a valid claim for benefits in the face of the insurers bad faith refusal to honor the claim are recoverable, such as fees paid to expert witnesses to testify at trial and other litigation expenses not included in a cost bill following judgment.

6. Attorney Fees.
Attorneys' fees are not generally recoverable by the prevailing party in a lawsuit. However, attorney's fees may be awarded when the losing party has acted in bad faith. See Durkin v. Ungaro (1988), 39 Ohio St.3d 191, 529 N.E. 2d 1268 and Krasny-Kaplan vs. Flo-Tork, Inc. (1993), 66 Ohio St. 3d 75, 609 N.E. 2d 152 which held: [A] finding that one of the codefendants to litigation has acted in bad faith may result in that defendant being forced to pay the defense costs of the other defendant, in the same way that a finding of bad faith against a party to pay the attorney fees of the prevailing party.

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