Bad Faith in Disability Claims under Indiana Law

952313_gavel.jpg Indiana law has long recognized that there is a legal duty implied in all insurance contracts that an insurance company must deal in good faith with its insured. Vernon Fire & Cas. Co. v. Sharp, 349 N.E.2d 173 (1976). The Indiana Supreme Court in Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993) expressly acknowledged the breach of this duty as an independent cause of action under Indiana law. The Court in Erie recognized that a special relationship exists between an insurance company and its insured because of the unique character of an insurance contract, specifically, the insurance company acts as a fiduciary to the insured. “Easily foreseeable is the harm that proximately results to an insured, who has a valid claim and is in need of insurance proceeds after a loss, if good faith is not exercised in determining whether to honor that claim.” The Court in Erie held that “[A]n insured who believes that an insurance claim has been wrongly denied may have available two distinct legal theories, one in contract and one in tort, each with separate although often overlapping, elements, defenses and recoveries.” The Court in Erie explained that a cause of action for the tortious breach of an insurer’s duty to deal with its insured in good faith arises when the insurer:

  1. makes an unfounded refusal to pay policy proceeds;
  2. causes an unfounded delay in making policy payments;
  3. deceives the insured;
  4. exercises an unfair advantage to pressure the insured into settling a claim.

Since the Indiana Supreme Court’s decision in Erie, bad faith has been recognized in Indiana as an independent cause of action. Besides the Erie factors, Indiana Code Section 27-4-1-4.5 provides a list of unfair claims settlement practices any one of which may be considered as evidence of the duty of good faith and fair dealing:

  1. Misrepresenting pertinent facts or insurance policy provisions relating to coverage at issue;
  2. Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;
  3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;
  4. Refusing to pay claim without conducting a reasonable investigation based upon all available information;
  5. Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed.
  6. Not attempting in good faith to effectuate 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 a claim for less than the amount to which a reasonable person would have believed they were entitled to by reference to written or printed advertising material accompanying or made part of an application.

Ansert v. Adams, 678 N.E.2d 839, 842 (Ind.Ct.App. 1997); transf. denied. 678 N.E.2d 839 (Ind. 1997).

In order to prove bad faith, the plaintiff must show by a preponderance of the evidence that the insurance company breached the covenant of good faith and fair dealing. Lummis v. State Farm Fire and Cas. Co., 2005 WL 1875771 at *1 (S.D. Ind. Aug. 8, 2005). Some confusion has arisen regarding the standard for proving bad faith due to the fact that oftentimes plaintiffs asserting a claim of bad faith also seek punitive damages. The burden of proof for damages arising from bad faith is separate and distinct from the burden of proof to recover punitive damages, as explained by Chief Judge Hamilton: “In Erie, the Supreme Court of Indiana explained that “in most instances, tort damages for the breach of the duty to exercise good faith will likely be coterminous with those recoverable in a breach of contract action.” 622 N.E.2d at 519.

Oftentimes, however, plaintiffs will seek punitive damages on the bad faith claim in addition to tort damages. In Indiana, “the mere finding by a preponderance of the evidence that the insurer committed the tort will not, standing alone, justify the imposition of punitive damages.” Erie, 622 N.D.2d at 520. Punitive damages on a bad faith claim require “clear and convincing evidence that the insurer knew there was no legitimate basis for the denial.” Freidline v. Shelby Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002); see also Erie, 622 N.D.2d at 520 (stating that proof of bad faith by “clear and convincing evidence” is needed to support punitive damages); McLaughlin v. State Farm Mut. Auto Ins. Co., 30 F.3d 861, 870 (7th Cir. 1994) (reversing jury award of punitive damages where evidence of bad faith was insufficient to meet clear and convincing standard of proof, but noting that “[t]he jury could, on the other hand, have found that the denial of coverage was unreasonable and therefore tortious”). Lummis v. State Farm Fire and Cas. Co., 2005 WL 1417053, *6 (S.D.Ind June 16, 2005).

Following Judge Hamilton’s entry in Lummis I, the plaintiff moved to reconsider and the defendant moved for clarification, both of which were denied by Judge Hamilton in Lummis v. State Farm Fire and Cas. Co., 2005 WL 1875771 (S.D.Ind.) (“Lummis II”). In Lummis II, Judge Hamilton affirmed: “[T]he court concluded that different standards of proof applied to whether an insurer acted in bad faith (a preponderance of the evidence is sufficient), and whether an insured can win punitive damages for bad faith (clear and convincing evidence is required). This distinction is clear in Erie…”

In Lummis II, the defendant suggested that language from Friedline raised the standard of proof for the bad faith tort (apart from the issue of punitive damages) to “clear and convincing evidence.” The court rejected this argument and unequivocally held “This court did not and does not read Freidline as having silently modified Erie in this respect. First, Freidline did not directly address any contested issue concerning the standard of proof. Second, Freidline cited Plummer Power Mower to support the key sentence. The cited discussion from Plummer Power Mower was a discussion of punitive damages (and the case was decided before the Supreme Court decided Erie). See 590 N.E.2d at 1093. Third, when the Indiana Supreme Court intends to modify its prior holdings, it ordinarily does so explicitly. Erie addressed the question of burden of proof directly and separately for the bad faith tort and the additional relief of punitive damages.”

Accordingly, a plaintiff need not meet the “clear and convincing” standard required for the imposition of punitive damages in order to recover damages on a bad faith claim. The jury in a bad faith case need only find by a preponderance of the evidence that the insurance company’s denial of coverage was unfounded in order for an insured to recover damages for bad faith. McLaughlin v v. State Farm Mut. Auto Ins. Co., 30 F.3d 861, 870 (7th Cir. 1994); Lummis II, 2005 WL 1875771 at *1; see also Sieveking v. Reliastar Life Ins. Co., 2009 WL 1795090, *1 (S.D.Ind.) (Following the standard in Erie for bad faith, Judge Hamilton found that “an insured may recover for the tort of bad faith upon a showing that the insurer engaged in practices such as ‘(1) making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an insured into a settlement of [her] claim. “) .

The O’Ryan Law firm has successfully represented numerous plaintiffs in bad faith actions against insurance companies for wrongfully denying disability benefits including the case of Combs v. Lumbermans where the jury awarded $1,500,000 in bad faith damages against Lumbermens for wrongfully terminating Combs’ disability benefits.