Litigating the Bad Faith Case

This paper was presented in 1998 at a King County Bar Association insurance law seminar.  It is a basic primer about prosecuting an insurance bad faith case in Washington. 


Bad faith is a good opportunity to direct litigation against those who deserve it. Insurers can hide behind their insureds in liability cases, but must put a human face on the company in a bad faith trial. Any plaintiff’s lawyer should relish the opportunity to litigate a bad faith case.

First party insurance and bad faith litigation is rewarding, particularly for plaintiff’s counsel who want to see the inner workings of a claim department. A bad faith case, however, presents new and unfamiliar issues. Federal removal jurisdiction, bifurcation of coverage and bad faith claims, and discovery of the claims file are intimidating issues to counsel unaccustomed to handling them. This paper provides an introduction to those issues, and a framework for tactical analysis.

A. Forum and Jurisdiction

Whether to file in State or Federal court, availability of mandatory arbitration or district court -- these issues can determine the course and outcome of your case. Reasonable, objective evaluation of the case must precede the filing decision.

1. State Court: Do you have more than $25,000 or $35,000 in provable damages? If not, consider district court or mandatory arbitration. Bad faith litigation is hotly contested; insurers think nothing of spending more than the case is worth to win. Although the insurer may have treated your client like dirt, actual damages need to be proved. See, e.g., Physicians Insurance Exchange v. Fisons Corp., 122 Wn.2d 299, 858 P.2d 1054 (1993), holding that general damages for emotional distress are not recoverable under the Consumer Protection Act. If your client has solid damages within the jurisdictional limits of district court or mandatory arbitration, that is where you need to be. Superior court discovery will wear you out if the case doesn’t warrant the work and expense required.

2. Federal Court: If more than $75,000 is at issue, and you have a foreign insurer as defendant, you may elect Federal Court. Although this is the favored forum for defendants, few plaintiff lawyers elect a Federal forum. You are more apt to see Federal court after the insurer removes the case.

Removal is available to a defendant who resides in a state other than Washington. 28 U.S.C. § 1332 to 1352 provide that a civil case is removable if there is more than $75,000 at issue, complete diversity of parties (all plaintiffs are citizens of diverse states from all defendants), and the case is removed within 30 days of notice to defendant that it is removable.

Removal can be defeated if citizens of the same state appear on both sides of the case. Thus, if the insured plaintiff is a citizen of Washington, and the carrier defendant is a citizen of Oregon, the case is removable. If, however, an adjuster, agent, or other entity who resides in Washington is a co-defendant, the case is not removable. See, Williams v. LaFayette Ins., 640 F. Supp. 686 (N.D. Miss. 1986), for a discussion of adjuster as defendant issues.

Adding a Washington resident as defendant simply to prevent removal is seldom wise. If the court finds the additional defendant was sued only to prevent removal, plaintiff’s position is in jeopardy, as is counsel’s pocketbook. On the other hand, if you have a valid claim against an agent of the insurer, you may wish to add the agent as a defendant.

3. Removal Phobia: Most plaintiff’s lawyers suffer from removal phobia, a disease characterized by rapid heartbeat and queasy stomach. The symptoms come on when the removal pleadings are served. Federal court is an unknown -- a vast wasteland of unfamiliar rules and inflexible people. Won’t it involve a lot of extra work? How can we possibly be successful there?

But wait, aren‘t there some advantages to Federal court? Consider these:

Early trial dates, often within a year of filing.
Available courtrooms when the trial date arrives.
No oral argument on most motions. (I always take a Friday afternoon off and go fishing, just to take full advantage of this one.)
Longer briefing periods for motions.
Good judges willing to read your brief and research the issues.
Good judges willing to levy terms against defense lawyers who avoid discovery or other duties.
Small jury (often seven or eight jurors) unafraid to award large sums ("It’s a Federal case, after all").

Against these, balance the disadvantages:

Unfamiliar territory.
Some of the judges are conservative (just like in state court).

The message is clear. If your case is removed, don’t worry about it. Put the local rules in the bathroom, and read those instead of the jokes in the Bar News. You’ll do just fine in Federal court.

B. Bifurcation

How many trials? Usually, the carrier will move to bifurcate coverage and bad faith issues, pursuant to CR 42(b), which provides:

The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim, cross claim, counterclaim, or third party claim, or of any separate issue . . . always preserving inviolate the right to trial by jury.

No firm rules govern bifurcation of insurance coverage and bad faith claims. The trial court may exercise its discretion in resolving this issue. Coggle v. Snow, 56 Wn. App. 499, 507, 784 P.2d 554 (1990). In some cases, courts have tried coverage actions and bad faith claims together. See, e.g., Mutual of Enumclaw v. Cox, 110 Wn.2d 643, 757 P.2d 499 (1988); Industrial Indemnity v. Kallevig, 114 Wn.2d 907, 792 P.2d 520 (1990). In other cases, courts have tried the issues separately. See, e.g., Safeco Ins. Co. v. JMG Restaurants, 37 Wn. App. 1, 680 P.2d 409 (1984). Generally, courts handle the issue of bifurcation on a case by case basis.

The carrier must prove prejudice from a consolidated trial, not an easy task. Most carriers try to argue that prejudice should be presumed, or that it just stands to reason that prejudice will result from a consolidated trial. You win if you argue that the carrier must show actual prejudice.

For example, assume the insured passed a polygraph test on a key issue. That could be admissible on the bad faith case. Why didn’t the carrier consider that? Clearly, however, it would be inadmissable in the coverage case. Consolidation, then, could prejudice the insurer. Absent, however, some specific item of evidence that would prejudice the jury against the insurer, why bifurcate?

Bifurcation can be a great time-waster. Federal cases applying FRCP 42 encourage consolidation of cases, e.g., Weitort v. A.H. Bull Co., 192 F. Supp. 165 (Pa. 1961), and consistently hold that courts should not order separate, piecemeal trial of issues, except to avoid delay, undue expense, prejudice to the parties or injustice. Zenith Radio Corp. v. Radio Corp. of America, 106 F. Supp. 561 (Del. 1952). As Moore says:

. . . a single trial generally tends to lessen the delay, expense and inconvenience to all concerned, and the courts have emphasized that separate trials should not be ordered unless such a disposition is clearly necessary.

Moore's Federal Practice, vol. v, § 42.03(1). Our Supreme Court characterizes CR 42(b) as follows:

This rule, as its language indicates, vests the trial court with discretionary power to order a separate submission of issues in a trial of any claim for relief. It is not, however, a rule that calls for or properly lends itself to a liberal or indiscriminate application. It should be carefully and cautiously applied and be utilized only in a case and at a juncture where informed judgment impels the court to conclude that application of the rule will manifestly promote convenience and/or actually avoid prejudice. Piecemeal litigation is not to be encouraged.

Brown v. General Motors Corp., 67 Wn. 2d 278, 282, 407 P.2d 461 (1965). See also, Maki v. Aluminum Bldg. Prods., 73 Wn.2d 23, 25, 436 P.2d 186 (1968) (courts should not liberally apply bifurcation.).

All this makes bifurcation sound like evil incarnate. It can, however, be the plaintiff’s best friend. The trouble with consolidation is that some judges will allow almost anything into evidence. Rumors, hearsay statements, and the suspicions of ex-spouses should not be admissible in any circumstance, yet bad faith cases feed on them. If some piece of potential evidence in the bad faith claim can poison the well, plaintiff should move for bifurcation. And, as with removal, don’t assume bifurcation is a bad thing just because the insurer moves for it. Consider the options, and act accordingly.

C. Discovering the Claim File

To the plaintiff in a bad faith case, discovery means obtaining a copy of the entire claim file. The carrier will do everything possible to prevent discovery, although it knows the file is discoverable. All or part of it will be withheld, under claims of irrelevance, privilege, work product, or preparation in anticipation of litigation. None of those excuses are valid. See, Escalante v. Sentry Insurance, 49 Wn. App. 375, 743 P.2d 832 (1987), where the court said:

In general, the relevancy objections raised by Sentry with respect to this and other discovery requests are meritless because the very nature of most bad faith actions makes most, if not all, of the insurer's claim file relevant. In re Bergeson, 112 F.R.D. 692 (D. Mont. 1986); Brown v. Superior Court, 137 Ariz. 327, 670 P.2d 725 (1983).

Escalante, fn. 10, at 49 Wn. App. 303. The entire opinion merits close reading, as the court discusses work product, mental impressions, and anticipation of litigation principles as they apply to claim file production. The opinions in Brown and Bergeson are also helpful.

All the favorable case law in the world, however, will not protect you from crooks. Many claims adjusters and supervisors believe it is standard practice to "clean up" a claim file prior to disclosure. The defense lawyer may not know the file was sanitized in the claim office. What can you do about it? The following list may help.

1. Find multiple copies. Did a copy of the claim file get to the Commissioner as a result of your client’s complaint? You can get it with a Freedom of Information Act request. How many claim files does the insurer maintain? There are usually at least two, often three. Cover this in depositions.

2. Determine what is missing. Is a scheduled meeting not documented? Are activity log pages misnumbered? Make a chronology, then look for holes.

3. Demand everything. Demand all electronic communication of any kind. Get billing records from investigators and contractors of any kind. What phone calls and meetings show up? Are they documented in the claim file? Remember this from WAC 284-30-340:

The insurer's claim files shall be subject to examination by the commissioner or by his duly appointed designees. Such files shall contain all notes and work papers pertaining to the claim in such detail that pertinent events and the dates of such events can be reconstructed.

4. Depose someone about the file. The handling adjuster may not be the best source of information on the carrier’s claim files. Try a CR 30 (b) 6 deposition devoted only to the file.

5. Insist on a log of withheld documents. In your production request, ask for a list of withheld documents, along with reasons they were not produced. If counsel stalls, swiftly get an order requiring counsel to list every document withheld and the reasons for nondisclosure. You cannot move to compel production of documents you don’t know exist.

Once you have the full, complete claim file, you have your basic discovery done. If you wish, you can march through depositions of the various adjusters, supervisors, and home office claims personnel. I prefer to spend a few days with the claim file, meeting some of the claim people at trial.

Everyone involved in bad faith litigation knows the claim file is the case. If you are unreasonably deterred from obtaining the entire file, move for sanctions. If you catch counsel or claims people sanitizing a file, go to the court, the Bar Association, and the Insurance Commissioner. Don’t play softball with crooks.

D. Advice of Counsel

Often, the insurer has counsel involved in the claim months before litigation begins. Counsel will conduct examinations under oath, oversee experts involved in the investigation, and provide advice and counsel to the carrier. When suit is filed, that counsel’s role becomes an issue.

Will the carrier say it relied on the advice of counsel in denying the claim? Will it claim it acted reasonably by following legal advice? If so, does that reliance constitute good faith? Will counsel testify for the carrier?

Typically, if the insurer claims the advice defense, it will retain new counsel for trial of the bad faith claim. Discovery is wide open as to the advising counsel. The role of counsel becomes more interesting, however, when original counsel intends to stay on for trial, because the carrier is not explicitly pleading the advice defense.

The kneejerk reaction is to move to disqualify counsel. Throw the bums out!

Think, though, about whether you want the bums to testify, as fact and expert witnesses, or whether it would be more fun to watch them squirm as trial counsel. Nothing is more upsetting to trial counsel than to get personally involved in the evidence. If trial counsel for the carrier was so involved in the handling of the claim that she should withdraw, can you get an advantage if she doesn’t?

On the other hand, if new counsel enters the case, settlement is more likely. Seldom will original counsel, in the claim from the beginning, tell the insurer it committed bad faith as a result of the legal advice given. It is always easier to blame prior counsel for the course of the claim, so settlement is much more likely with new counsel.

E. Jury Instructions, Trial Brief

See Appendix for a few key instructions. These are presented to give you some examples of instructions which have been given in bad faith cases. Very little firm guidance exists in the cases, so creativity is allowed. A new set of proposed WPI pattern instructions allegedly contains some bad faith instructions, so you may want to look for that.

The trial brief is very important in a bad faith case. Many judges have limited knowledge and experience in this area, so a well-written, honestly argued trial brief can help. It should include these headings:

1. Facts to be proven at trial. Briefly outline key facts and how you will prove them. Include a list of your witnesses, so the court can ask if jurors know them.

2. Discussion of carrier’s bad faith. Here you combine the facts with the law to demonstrate liability. If this section of the brief is persuasive, you have a leg up with the judge. If the judge thinks you should win, you usually will.

3. Damages. What they are and where the law allows them.

4. Evidentiary issues. Why your evidence comes in and theirs stays out. Exhibits can be discussed here, as well as testamentary issues.

5. Jury instructions. Your proposed instructions, and the law supporting them.

The trial brief is the crown jewel of pretrial preparation and litigation. It will not only focus the judge on key issues, but will give your opponent a look at your preparation and understanding of the case. If it is good, why not give counsel an extra copy for the claim manager? Maybe you will get to go home early.

F. Conclusion

Bad faith cases are different, but nothing to fear. If your client has valid claims, and the carrier treated her unfairly, you have a case. Certainly, issues like removal jurisdiction, bifurcation, and discovery of the claim file are likely to require some attention. The rewards of successfully litigating a first party bad faith claim, however, are well worth the extra effort.





Copyright © 2001 Gary Williams. All rights reserved.

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