Procedural Bad Faith

It may sound like risk without reward, but an insurer with a policy that does not provide coverage may still be vulnerable for paying out on a bad faith claim. There is a long-held assumption in the insurance industry that a valid claim for bad faith against an insurer must be predicated on a covered claim that was wrongfully denied or mishandled. This misperception is not unfounded ' it stems from a long line of well-reasoned opinions and, quite frankly, a common-sense understanding of the contractual relationship between an insurer and its insured. However, it is critical for insurance companies to be aware of the somewhat arcane yet increasingly popular common law tort often referred to as “procedural” (as opposed to “substantive”) “bad faith.” Unlike substantive bad faith, which is, in basic terms, the failure by an insurer to pay a meritorious claim, procedural bad faith is a vehicle for an insured to seek damages based on an insurer's alleged bad faith handling of any claim, meritorious or otherwise. See United Technologies Corp. v. Am. Home Assurance Co., 118 F.Supp.2d 181, 188-89 (D.Conn. 2000), mod. after recon. on other grounds, 237 F.Supp.2d 168 (D.Conn. 2001). Simply stated: An insurer can be required to pay bad faith damages related to a non-covered claim for which the insurer has no coverage obligations under an insurance policy if the insurer handled the investigation or denial of the non-covered claim in a purportedly unfair manner.