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Litigation Conduct: Removing the 'Bad Faith' Trap

By Sheila R. Caudle and Jonathan Cohen

Pure self-interest seemingly motivates parties in the adversarial system; but insurance presents a twist on that common understanding when it comes to litigation over coverage. That is because courts have held that a coverage action does not terminate certain obligations existing between an insured and its insurer ' even with respect to the particular claim at issue in the coverage dispute. With increasing frequency, aggressive attorneys representing policyholders argue that, despite traditional common law or statutory litigation and settlement privileges and protections, an insurer's conduct during a coverage lawsuit should be scrutinized with the aim of identifying evidence of 'bad faith' that can be used against the insurer.

The law in this area is still developing, but a body of case law is being generated that presents a principled, 'bright-line' rule that distinguishes between an insurer's conduct as a litigant seeking a judicial declaration on coverage and the insurer's conduct purely as an insurer making a coverage decision. These cases recognize that a coverage dispute that is in litigation should not provide a springboard for policyholders to generate 'bad faith' allegations as a litigation strategy. These courts reason that when coverage is in dispute, an insurer has a right to bring or defend against a coverage action. They view evidence of post-litigation conduct as irrelevant or, if not, of limited probative value at best. These courts also recognize that procedural and ethical rules are the proper means to address inappropriate litigation conduct. As a result, insureds are not permitted to use even improper litigation behavior as evidence of 'bad faith.'

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