Guide for Causes of Action for Bad Faith Claims

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Last Updated
July 20, 2021

Ind. Code § 27-4-1-4(1983/1987) and Common Law:

Indiana Statute provides that insurers shall not engage in unfair and deceptive acts and practices.[1] Insurers are in violation of the statute when they “commit or perform, with such frequency as to indicate a general practice, unfair claim settlement practices.”[2] Unfair claims settlement practices include “. . . (6) [n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”[3]

An insured may directly assert a claim against an insurer for breach of duty of good faith.[4] “Indiana follows the Direct Action Rule, prohibiting a third party or judgment creditor from directly suing a judgment debtor’s insurance carrier to recover an excess judgment.”[5] However, insureds may voluntarily assign their claims to a third party.[6]

Indiana law imposes a duty on insurance companies to deal in good faith with their insureds.[7] The insurer’s duty of good faith and fair dealing “includes the duty to act in good faith when attempting to settle claims against an insured.[8] “To prove bad faith, the plaintiff must establish, with clear and convincing evidence that the insurer had knowledge that there was no legitimate basis for denying liability.”[9]

Indiana common law has adopted the “Judgment Rule” which states that “an insurer may be held liable for the entire excess judgment in instances of bad faith.”[10] The rationale behind allowing full recovery to an insured who has not paid the excess judgment is to prevent bad-faith practices in the insurance industry by eliminating the insurer’s ability to hide behind the financial status of its insured.[11] In Indiana, an insurer is liable to its insured for a judgment that exceeds policy limits when the insurer refuses, in bad faith, to settle within the policy limits.[12]


[1] Ind. Code § 27-4-1-4.

[2] Ind. Code § 27-4-1-4(16).

[3] Ind. Code § 27-4-1-4.5.

[4] Erie Ins. Co. v. Smith ex. Rel. Hickman, 622 N.E.2d 515, 519 (Ind. 1993).

[5] City of South Bend v. Century Indem. Co., 821 N.E.2d 5,9-10 (Ind. Ct. App.2005).

[6] State Farm Mut. Auto. Ins. Co. v. Estep, 873 N.E.2d 1021, 1034 (Ind. 2007).

[7] Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 518 (Ind. 1993).

[8] Economy Fire & Casualty Co. v. Collins, 643 N.E.2d 382 (Ind. Ct. App. 1994).

[9] Freidline v. Shelby Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002).

[10] 385.

[11] Id.

[12] 386.

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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.