Virginia has adopted a version of the UCSPA in addition to other claims-practices legislation. The statute defines unfair claim settlement practices as including:
4. Refusing arbitrarily and unreasonably to pay claims;
6. Not attempting in good faith to make prompt, fair and equitable settlements of claims in which liability has become reasonably clear;
7. Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;
8. Attempting to settle claims for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application;
11. Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;
13. Failing to promptly settle claims where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage;
14. Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.
The Unfair Claim Settlement Practices statute creates a cause of action only for the Insurance Commission, but the section states that it shall not “impair the right of any person to seek redress at law or equity for any conduct for which action may be brought.” In other words, it does not create a statutory cause of action, but the standards of conduct may be used to prove malfeasance by an insurer.
This provision has caused a number of problems. Traditionally, liability for bad faith is a matter of contract rather than tort law in Virginia. The underlying obligation arises from the agreement and extends only to situations connected therewith. As a result, the only recoverable damages are pecuniary damages for breach of contract, unless the breach of contract establishes the elements of “an independent, willful tort,” in which case punitive damages may be recoverable. “Viewed from this perspective, an ‘independent tort’ is one that is factually bound to the contractual breach but whose legal elements are distinct from it.”
However, one particularly vexatious line from the Virginia Supreme Court seems to have caused great strife in the common law interpretation of bad faith. In a 1997 case, the Virginia Supreme Court stated, “[I]n Virginia, when parties to a contract create valid and binding rights, an implied covenant of good faith and fair dealing is inapplicable to those rights. This is so under either the common law or the Uniform Commercial Code.” In the context of the Uniform Commercial Code, the Virginia Supreme Court had already stated that the failure to act in good faith “does not amount to an independent tort.”
Reading the plain language of these passages, it appears that there is no separate cause of action in tort for bad faith insurance practices, unless the insurer’s malfeasance crosses the line into another tortious act like fraud. However, if an insured initiates a declaratory action to determine what coverage exists under a policy, a statute empowers the court to award attorneys’ fees if it determines that the insurer is acting in bad faith. But much like the unfair claim settlement statute, this statute also states that it does not create an independent cause of action.
To determine whether the insurer acted in bad faith, the court applies a reasonableness standard and considers 1) whether reasonable minds could differ in the application of the policy terms; 2) whether the insurer makes a reasonable investigation of the facts and circumstances underlying the claim; 3) whether the evidence reasonably supports a denial of liability; 4) whether the insurer’s refusal to settle was used as a tool in settlement negotiations; and 5) whether the dispute involves an issue of first impression or a debatable question of law or fact.
Auto insurers are governed by a separate set of statutes which follow similar but not identical doctrines. Notably, if an auto insurer refuses or fails to pay a claim of more than $3,500 in excess of the deductible and a court finds that the insurer acted in bad faith, the insurer may be required to pay the full amount to the insured, plus double the standard interest on the amount from the date the claim was submitted to the insurer.
Although the law is not clear, it appears that a third-party beneficiary could theoretically bring a bad faith cause of action by showing that the parties, at the time of contracting, expressed a clear and definite intent to confer a benefit upon the third party.
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.