UNFAIR CLAIMS SETTLEMENT PRACTICES ACT
ARK. CODE ANN. § 23-66-206 (1959/2009).
While Arkansas courts have not directly confronted the issue of whether a bad faith claim may be brought against an insurer where there is no coverage, Arkansas law recognizes three elements in bringing a bad faith claim: 1) The insured sustained damages; 2) the insurer acted in bad faith in an attempt to avoid liability under its policy; and 3) the bad faith proximately caused damage to the insured. This formulation of bad faith leaves open the possibility of a bad faith action in the absence of coverage, as long as the insurer’s bad faith took place in an attempt to avoid coverage. “This court has stated that an insurance company may incur liability for the first party tort of bad faith when it affirmatively engages in dishonest, malicious, or oppressive conduct in order to avoid a just obligation to its insured.” Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 1084 (1996). “…[T]o constitute bad faith, the insurer’s “misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy.” Aetna Cas. & Sur. Co., 281 Ark. at 133 (1984). Ark. Model Jury Instr., Civil AMI 2304.
- Can insureds sue for bad faith (i.e., first party bad faith)? Yes.
- Can third parties sue for bad faith (i.e., third party bad faith)? Third parties cannot sue for bad faith at common law; however, Arkansas courts have not addressed the application of A.C.A. § 23-79-208(a)(1) to third party claims.
FIRST-PARTY BAD FAITH:
- Are there statutory grounds for the bad faith cause of action? If so, identify the source (i.e., an Unfair Claims Practices Act, or some other consumer protection statute) and its main provisions. Yes. A.C.A. § 23-79-208(a)(1) provides for a limited private cause of action where an insurer fails to pay the loss within the time specified in the policy after demand is made, and provides that the insurer “shall be liable to pay the holder of the policy or his or her assigns, in addition to the amount of the loss, twelve percent (12 percent) damages upon the amount of the loss, together with all reasonable attorney’s fees for the prosecution and collection of the loss.” Otherwise, the Arkansas Unfair Trade Practices Act, A.C.A. § 23-66-201 et seq., does not provide a private cause of action for violation of its terms. An insurer will be liable under the statute even if the insurer denied coverage in good faith. See, e.g., Home Mut. Fire Ins. Co. v. Jones, 63 Ark. App. 221, 977 S.W.2d 12 (1998). The statutory penalties will not be assessed if it was reasonably necessary for the insurer to continue its investigation beyond the time that payment was due. Silvey Co. v. Riley, 318 Ark. 788, 790, 888 S.W.2d 636, 638 (1994).
- Is there a common law/judicially created bad faith cause of action (i.e., the implied covenant of good faith)? If so, identify the major case(s) and language of the standards applicable to bad faith cases. Yes. See, e.g., Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463 (1984) (recognizing bad faith claim for failure to pay policy benefits); McCall v. Southern Farm Bureau Cas. Ins. Co., 255 Ark. 401, 501 S.W.2d 223 (1973) (recognizing bad faith claim for failure to settle a third-party claim under liability policy).
According to the Supreme Court of Arkansas: [B]ad faith must include affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. Such a claim cannot be based upon good faith denial, offers to compromise a claim or for other honest errors of judgment by the insurer. Neither can this type claim be based upon negligence or bad judgment so long as the insurer is acting in good faith… Bad faith may give rise to either first or third party claims. Aetna Cas. & Sur. Co., 281 Ark. at 133-4, 664 S.W.2d at 465.
- What are the applicable statutes of limitations? Five years, A.C.A. § 23-79-202 & A.C.A. § 16-56-111(b).
- What defenses are available to the bad faith cause of action (e.g., the "genuine dispute of fact" doctrine; "wrong but reasonable")? The cause of action cannot be asserted on a denial of liability, an offer to compromise a claim, or an error of judgment when such acts are grounded in good faith. Aetna Cas. & Sur. Co., 281 Ark. 128, 664 S.W.2d 463; see also Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 935 S.W.2d 556 (1996); Reynolds v. Shelter Mut. Ins. Co., 313 Ark. 145, 852 S.W.2d 799 (1993); Richison v. Boatmen's Ark., Inc., 64 Ark. App. 271, 981 S.W.2d 112 (1998); S. Pine Helicopters, Inc. v. Phoenix Aviation Managers, Inc., 320 F.3d 838 (8th Cir. 2003).
Mere refusal by the insurer to pay a claim when a valid controversy exists concerning liability does not support a bad faith claim. Stevenson v. Union Standard Ins. Co., 294 Ark. 651, 746 S.W.2d 39 (1988); Cato v. Ark. Mun. League Mun. Health Ben. Fund, 285 Ark. 419, 688 S.W.2d 720 (1985); Baker v. Safeco Ins. Co. of Am., 175 F.3d 618 (8th Cir.1999).
Even if a controversy over the existence of a claim is the result of negligence or gross ignorance by the insurer, bad faith is not present. First Marine Ins. Co. v. Booth, 317 Ark. 91, 876 S.W.2d 255 (1994).
Nor does confusion, delay in paying claims, or bureaucratic red tape demonstrate malice or constitute bad faith. Switzer v. Shelter Mut. Ins. Co., 362 Ark. 419, 208 S.W.3d 792 (2005); Unum Life Ins. Co. of Am. v. Edwards, 362 Ark. 624, 210 S.W.3d 84 (2005); State Auto Prop. & Cas. Ins. Co. v. Swaim, 338 Ark. 49, 991 S.W.2d 555 (1999); Am. Health Care Providers, Inc. v. O'Brien, 318 Ark. 438, 886 S.W.2d 588 (1994).
Some justices have indicated that the insurer’s conduct must be “outrageous.” See Employers Equitable Life Ins. Co. v. Williams, 282 Ark. 29, 34, 665 S.W.2d 873, 876 (1984) (concurring opinion by Hickman, J.).
- What are the recoverable damages for the bad faith cause of action? In addition to payment under the policy, that statutory remedy also provides for 12% penalty damages and attorney fees. A.C.A. § 23-79-208(a)(1). The statutory remedy does not preempt the first party tort of bad faith. Kay v. Econ. Fire & Cas. Co., 284 Ark. 11, 678 S.W.2d 365 (1984); Employers Equitable Life Ins. Co., 282 Ark. 29, 665 S.W.2d 873. Therefore, the insured has two remedies, one contractual and one tortious in nature. Damages may be awarded on both claims: statutory damages on the contract claim, and compensatory and punitive damages on the tort claim. Employers Equitable Life Ins. Co., 282 Ark. 29, 665 S.W.2d 873.
- Are punitive damages recoverable? If so, what is the standard that must be met to recover them? Yes. See, e.g., Cincinnati Life Ins. Co. v. Mickles, 85 Ark. App. 188, 148 S.W.3d 768 (2004); Columbia Nat. Ins. Co. v. Freeman, 347 Ark. 423, 64 S.W.3d 720 (2002); S. Farm Bureau Cas. Ins. Co. v. Allen, 326 Ark. 1023, 934 S.W.2d 527 (1996); Viking Ins. Co. of Wis. v. Jester, 310 Ark. 317, 836 S.W.2d 371 (1992); id.
An award of punitive damages is justified only where the evidence indicates that the defendant acted wantonly in causing the injury or with such a conscious indifference to the consequences that malice may be inferred. D'Arbonne Const. Co., Inc. v. Foster, 354 Ark. 304, 308, 123 S.W.3d 894, 898 (2003) (citing Stein v. Lukas, 308 Ark. 74, 823 S.W.2d 832 (1992); Mo. Pac. R.R. v. Mackey, 297 Ark. 137, 760 S.W.2d 59 (1988); Nat’l By-Products, Inc. v. Searcy House Moving Co., 292 Ark. 491, 731 S.W.2d 194 (1987)).
- Does the state require independent counsel when there is an insurer-insured conflict? This has not been addressed by Arkansas state appellate courts; however, in Union Ins. Co. v. Knife Co., 902 F. Supp. 877 (W.D. Ark. 1995), the District Court for the Western District of Arkansas held that a conflict of interest created in a trademark infringement case brought against the insured when the insurer assumed the duty to defend under a reservation of rights on the intentional infringement claim gave the insured the right, under Arkansas law, to name independent counsel of its own choosing.
THIRD PARTY BAD FAITH:
- Are there statutory grounds for the bad faith cause of action? If so, identify the source (i.e., an Unfair Claims Practices Act, or some other consumer protection statute) and its main provisions. Arkansas courts have not addressed the applicability of A.C.A. § 23-79-208(a)(1) to third party claims. See, e.g., Grubbs v. Credit General Ins. Co., 328 Ark. 142, 942 S.W.2d 249 (1997) (declining to address the issue).
- Is there a common law/judicially created bad faith cause of action (i.e., the implied covenant of good faith)? If so, identify the major case(s) and language of the standards applicable to bad faith cases. A third party may not bring a direct action for common law bad faith against an insurer, but may obtain an assignment of an insured’s right to bring such an action. See, e.g., Freeman v. Colonia Ins. Co., 319 Ark. 211, 890 S.W.2d 270 (Ark. 1995); RLI Ins. Co. v. Coe, 306 Ark. 337, 813 S.W.2d 783 (Ark. 1991).
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.