Topic:
INSURANCE (GENERAL);
Location:
INSURANCE;

OLR Research Report


March 17, 2004

 

2004-R-0280

INSURANCE BAD FAITH AND TREBLE DAMAGES

By: Janet Brierton, Associate Legislative Attorney

You asked what options a constituent has if he believes an insurance company acted in bad faith and what conditions are needed for a court to award treble damages.

The Office of Legislative Research is not authorized to give legal opinions and this report should not be interpreted as such.

SUMMARY

If a constituent believes that his insurance company acted in bad faith, he can file a complaint with the Insurance Department. He can also file a civil lawsuit alleging a breach of the implied duty of good faith and fair dealing or tortious bad faith.

If a court decides a case under contract law, remedies are limited to consequential damages, meaning those damages that were foreseeable at the time of contracting. By claiming the tort of bad faith, a court can consider not only consequential damages, but also damages for mental anguish and punitive damages. A claim for punitive damages needs to be based on a specific statute or common law requirements. According to case law, punitive damages will only be awarded if the evidence shows reckless indifference or disregard of others' rights, or an intentional or wanton violation of those rights.

In cases that involve an insured employee benefit plan, the federal Employee Retirement Income Security Act (ERISA) preempts certain state common law tort and contract claims, including bad faith. In such cases, ERISA's remedies are exclusive. ERISA remedies include the benefits due, enforcement of rights under the plan, and clarification of future benefits under the plan. Bad faith claims concerning insurance that is not part of an employee benefit plan can still be made.

In Connecticut, a person also has a private right of action for damages for alleged unfair trade practices by an insurer if an administrative remedy is not applicable. Under the Connecticut Unfair Insurer Practices Act, alleged unfair actions must be “committed or performed with such a frequency as to indicate a general business practice” (CGS 38a-816).

The federal Racketeer Influenced and Corrupt Organizations (RICO) law provides both criminal penalties and civil remedies for violations of its provisions. Civil RICO defendants can be subject to treble damages and attorney's fees. To prove a RICO violation, one must show conduct of an enterprise through a pattern of racketeering activity (18 U.S.C. 1962). RICO is not limited to organized crime, but has been applied in a wide range of scenarios. In Humana, Inc. v. Forsyth, the Supreme Court ruled that a RICO claim could be brought against an insurer that was overcharging insureds for medical copayments by not passing on negotiated provider discounts (525 U.S. 299 (1999)). The federal claim did not conflict with or impair Nevada's law, which authorized a private right of action, but added to the available remedies (i.e., RICO treble damages).

INSURANCE COMPLAINT

The Insurance Department encourages consumers who have a concern or complaint against an insurance company to submit a written description of their issue to the Department's Consumer Affairs Division. The address is as follows: State of Connecticut Insurance Department, Consumer Affairs, P.O. Box 816, Hartford, CT 06142-0816.

The department will send an acknowledgment that the complaint has been received and is under review. At the same time, the department will send a copy of the complaint to the insurance company involved to obtain their response to the situation. After a response is received from the company, the department will determine how the complaint can best be resolved.

BAD FAITH

About half of the states recognize the tort of bad faith where insurers can be held liable in tort for bad faith performance of their duties to insureds. This tort has strong connections to the implied duty of good faith and fair dealing in contracts. The federal Uniform Commercial Code (UCC) defines “good faith” as honesty in fact and the observance of reasonable commercial standards of fair dealing (UCC 1-201(20)). Similarly, Connecticut's UCC defines “good faith” as honesty in fact in the conduct or transaction concerned (CGS 42a-1-201(19)). Good faith “excludes a variety of types of conduct characterized as 'bad faith' because they violate community standards of decency, fairness or reasonableness” (R.2d Contracts 205).

Some courts have found that bad faith sounds in both contracts and torts, which is important in determining available damages. Remedies for a breach of contract are limited to consequential damages, meaning those damages that were foreseeable at the time of contracting. If a court looks at bad faith solely as a breach of the implied covenant of good faith and fair dealing that has been found in all contracts, then damages can be very limited. However, if a court accepts a claim of bad faith as a tortious action, this opens up a range of possible damages, including damages for mental anguish and punitive damages. Such extra-contractual damages are thought to have a deterrence factor, giving companies incentives not to act in bad faith.

Standard of Conduct

Courts have held that mere negligence is not enough to find bad faith. Although there is no uniform definition of bad faith, courts have generally held that negligence with something else may be sufficient (e.g., gross negligence, reckless negligence). Jurisdictions also vary in what type of behavior is needed to award punitive damages in bad faith actions. However, certain themes have emerged: arbitrary, reckless, intentional, malicious, fraudulent.

Connecticut recognizes the implied covenant of good faith and fair dealing as well as the tort of bad faith (Zieba v. Middlesex Mut. Assurance Co., 549 F. Supp. 1318 (D. Conn. 1982), Hawley Enterprises, Inc. v. Reliance Ins. Co., 621 F. Supp. 190 (D. Conn. 1985), aff'd, 788 F.2d 5 (2d Cir. 1986)). Connecticut also allows punitive damages to be awarded if common law requirements are met or a specific statute permits. Punitive damages will be awarded if the evidence shows reckless indifference or disregard of others' rights, or an intentional or wanton violation of those rights (Vandersluis v. Weil, 407 A.2d 982 (Conn. 1978), Seymour v. Carcia, 589 A.2d 7 (Conn. App. 1991)). The standard of proof for a punitive damages award is the preponderance of the evidence (Freeman v. Alamo Management Co., 607 A.2d 370 (Conn. 1992)).

ERISA

The Supreme Court has held that ERISA preempts certain state common law tort and contract claims when an insured employee benefit plan is involved, and makes the ERISA remedies exclusive (Pilot Life Ins. Co. v. Dedeaux, 107 S.Ct. 1549 (1987), which held that ERISA preempts a state common law bad faith claim alleging improper claim handling under an employee benefit plan). As a result, insurers providing such plans may not be sued for bad faith. Bad faith claims regarding insurance that is not part of an employee benefit plan may still be made (e.g., property casualty insurance, personal lines).

The Court in Pilot Life held that bad faith sounded in tort and contract, not in the regulation of insurance. As a result, damages for mental anguish and punitive damages were not available. Instead, ERISA remedies were the exclusive scheme for claims against employee benefit plans. Under 502(a) of ERISA, the remedies allowed include a recovery of benefits due (e.g., claim reprocessing), enforcement of rights under the plan, and clarification of future rights under the plan.

RICO

The federal Racketeer Influenced and Corrupt Organizations (RICO) law provides both criminal penalties and civil remedies for violations of its provisions. Civil RICO defendants can be subject to treble damages and attorney's fees. To prove a RICO violation, one must show conduct of an enterprise, legitimate or illegitimate, through a pattern of racketeering activity (18 U.S.C. 1962).

The Supreme Court has determined that to prove a pattern of racketeering activity under RICO, a plaintiff must show at least two racketeering acts that are related and that amount to or pose a threat of continued criminal activity (H.J. Inc. v. Northwestern Bell Telephone Co., 109 S.Ct. 2893 (1989)). In addition, to sue for treble damages, a plaintiff must show that a defendant's violation was the proximate cause of the plaintiff's injury, meaning the plaintiff must have suffered a direct injury that was foreseeable (Holmes v. Securities Investor Protection Corp., 112 S. Ct. 1311 (1992)).

RICO is not limited to organized crime, but has been applied in a wide range of scenarios. In Humana, Inc. v. Forsyth, the Supreme Court ruled that a RICO claim could be brought against an insurer that was overcharging insureds for medical copayments by not passing on negotiated provider discounts (525 U.S. 299 (1999)). The plaintiff claimed that Humana, a group insurer, negotiated discounts for hospital services that it neither disclosed nor passed onto policy beneficiaries. The Court found that the federal lawsuit did not conflict with or impair Nevada's law, which authorized a private right of action, despite differences in the available remedies (i.e., RICO treble damages). The Court said that RICO's private right of action and treble damages complemented Nevada's statutory and common law claims for relief.

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