The Perpetual Evolution of Bad Faith Claims: Exploring Recent US Legislative Reforms

Navigating the complexities of bad faith claims is a critical piece of insurance coverage practice. Bad faith litigation presents significant challenges for insurers, particularly in states like Florida, Louisiana, Texas, Colorado, New Mexico, California and many others. Recent legislative reforms aimed at addressing these challenges seek to strike a balance between protecting policyholders and curbing abusive litigation practice.

Bad faith claims arise when an insurer allegedly engages in unfair claim practices and/or fails to effectuate a prompt, fair and equitable settlement. Bad faith litigation is particularly prevalent in Florida, where statutes like Fla. Stat. § 624.155 and Fla. Stat. § 626.9541 previously provided a robust framework for policyholders to pursue litigation against insurers. For examples, see:

Like Florida, Louisiana has traditionally seen excessive verdicts in first party litigation in recent years. This is a result of the statutes combined with recent unprecedented hurricane seasons. Until recently, the standard for violation of the Louisiana bad faith statutes was very low and the penalties were up to 50% of the amount recovered, exclusive of attorneys’ fees. Louisiana previously had two bad faith statutes: La. R.S. §§22:1892 and 22:1973. The reform repealed §22:1973 and revised §22:1892, including incorporating language from 1973 into 1892.

As a result of the excessive litigation and verdicts, insurers in Florida and Louisiana became insolvent and others stopped writing policies in the states. In response, several key legislative reforms have been introduced that aim to balance the rights of policyholders with the need to protect insurers from litigation abuse.

One of the most significant recent reforms involves the introduction of “safe harbour” provisions, which allow insurers to avoid bad faith liability if they make a reasonable settlement offer within a specified timeframe – typically 60 days after receiving notice of the claim. This reform provides a clear pathway for insurers to mitigate bad faith exposure by demonstrating good faith efforts to resolve claims promptly.

Reforms also sought to clarify the standards by which bad faith claims are judged. Previously, the vague “could and should have settled” standard allowed for broad interpretation, leading to increased litigation. Reforms have introduced more precise criteria for determining bad faith, such as requiring evidence that the insurer’s actions were not only negligent but also in reckless disregard of the policyholder’s rights.

To reduce the burden on courts and expedite claim resolution, legislative changes have emphasised the use of ADR methods, such as mediation and arbitration, in bad faith disputes. This shift offers an alternative to protracted litigation, allowing for quicker and often less costly resolutions.

The insured, the claimant or the representative of the insured or claimant has a duty of good faith and fair dealing when asserting a claim for coverage. The new law outlines what constitutes a breach of this duty, as follows:

For residential catastrophic losses, payment is due within 60 days of receipt of satisfactory written proof of loss. For commercial catastrophic losses, payment is due within 90 days of receipt of satisfactory written proof of loss. If a commercial policy covers multiple locations, the period may be extended by 30 days.

If the insurer pays within 60 days after receiving the cure period notice, they must provide the full amount alleged to be due in the notice. This includes any actual expenses incurred by the insured and claimed in the notice, such as attorneys’ fees. The total amount, including expenses, will not exceed 20% of the amount alleged to be due under the policy. Once the insurer has met these requirements, there will be no further cause of action pursuant to this Section regarding the noticed demand.

If a policyholder makes a partial payment within 60 days of the insurer receiving the cure period notice, the penalty that would normally be due on the amount paid by the insurer within 60 days of receiving the cure period notice will be reduced by half.

When a cure period notice is sent within the final 90 days before the prescription period ends, the prescriptive period for filing an action under this Section or for an action related to the underlying policy dispute is suspended. The suspension remains in effect until 30 days after the insurer sends its written response to the cure period notice.

To prevent premature suits, any lawsuit filed before the cure period notice is transmitted will automatically be put on hold until 60 days after the notice is received. Furthermore, the time for responding to a lawsuit will automatically be extended until 30 days after the end of the cure period.

Navigating the evolving landscape of bad faith claims requires a deep understanding of both the legal principles established by case law and the practical implications of recent legislative reforms. The expansion of bad faith liability over the past decades has placed increased pressure on insurers, making the role of outside coverage counsel more critical than ever.

The recent bad faith legislative reforms represent a critical turning point for the insurance industry. The reforms aim to strike a balance between protecting policyholders’ rights and reducing the burdens of litigation and excessive verdicts on insurers. As we continue to see more frequent natural disasters and convective storms, we expect to see continued legislative reforms around the United States.