An Insurer’s Duty of Good Faith in the Context of Litigation

Randy Papetti – November 24, 2011

Application of the Duty and Tort Doctrine to an Insurer’s Postfiling Conduct

A growing number of cases address the issue of post‐filing conduct. Interestingly, nearly all the decisions appear to conclude that the duty of good faith and fair dealing that an insurance company owes does not end with the commencement of litigation and thus continues through trial. See, e.g., Parsons ex rel. Parsons v. Allstate Ins. Co., 165 P.3d 809, 815 (Colo. App. 2006) (the tort of bad faith breach of an insurance contract encompasses “all of the dealings between the parties, including conduct occurring after the arbitration procedure”); Knotts v. Zurich Ins. Co., 197 S.W.3d 512, 517 (Ky. 2006) (insurer is obligated to deal in good faith in both pre‐ and post‐litigation activities); O’Donnell v. Allstate Ins. Co., 734 A.2d 901, 906 (Pa. Super. Ct. 1999) (bad faith suits are not restricted to the denial of claims, but, rather, may extend to the misconduct of an insurer during the pendency of litigation). Courts, however, have differed greatly regarding the relevance and admissibility of various types of post‐filing conduct.

The national trend at this point appears to be that “actions taken after an insured files suit are at best marginally probative of the insurer’s decision to deny coverage.” Palmer v. Farmers Ins. Exchange, 861 P.2d 895, 915 (Mont. 1993) (citing Papetti, supra, at 1972); accord Dakota, Minnesota & Eastern R.R. Corp. v. Acuity, 771 N.W.2d 623, 635‐36 (S.D. 2009). For example, the Tenth Circuit recognized that “[i]n general, an insurer’s litigation tactics and strategy in defending a claim are not relevant to the insurer’s decision to deny coverage . . . [o]nce litigation has commenced, the actions taken in its defense are not . . . probative of whether [an insurer] in bad faith denied the contractual lawsuit.” Timberlake Construction Co. v. U.S. Fidelity and Guaranty Co., 71 F.3d 335, 340 (10th Cir. 1995) (quotations omitted). The cases, however, are by no means uniform.

In any event, this Newsletter should provide counsel to any one analyzing issues associated with an insurer’s duty of good faith and fair dealing in the context of litigation, and we thought the most useful format would be to just collect all the case law on a state‐by‐state basis.

State Overview: Good Faith in the Context of Litigation

Arkansas

• Litigation Conduct Inadmissible. Where the insured attempted to introduce evidence of his insurer’s coverage litigation conduct to support his bad faith claim, including positions taken in pleadings, briefs, affidavits, and depositions of the insurer’s employees, the court held that conduct of the insurer following the filing of the coverage litigation could not provide a basis for a bad faith claim. The bad faith cause of action “must exist and be complete at the time that action is commenced.” Thus, the court precluded consideration of any aspect of an insurer’s conduct in coverage litigation. Parker v. Southern Farm Bureau Casualty Ins. Co., 935 S.W.2d 556 (Ark. 1996).

Arizona

• Litigation Privilege Did Not Bar Bad Faith Claim. Where during the course of a declaratory judgment action, the insured amended its complaint to state a bad faith claim against the insurers for engaging in misconduct during the declaratory judgment action, and the insurers moved to dismiss, arguing that the alleged misconduct did not constitute bad faith and that, if it did, it was absolutely privileged under Arizona law, the court of appeals reversed the trial court and rejected the argument that the litigation privilege barred the bad faith claim. The court reasoned that insured’s bad faith claim was not a communication. Rather, the alleged bad faith was a course of conduct in which they failed to perform their duties fairly and in good faith. State Farm Tucson Airport Auth. v. Certain Underwriters at Lloyd’s, London, 186 Ariz. 45, 918 P.2d 1063 (App. 1996).
• Discovery Misconduct Not Admissible to Prove Bad Faith Claim. Where the plaintiff based his claim for bad faith, in part, on the actions of the defendant insurers and their counsel during discovery in the same lawsuit and the insurers filed a motion for judgment on the pleadings, the court held that Tucson Airport Auth. did not stand for the proposition that evidence of alleged discovery misconduct is admissible to prove a bad faith claim because the case did not address the issue of discovery. The court held that Arizona rules do not provide juries with any authority to consider or pass judgment on a litigant’s or its counsels’ discovery practices. Thus, the court granted the defendants’ motion for judgment on the pleadings. Schwam v. Farmers Ins. Co. of Arizona, No. C20040437, 2008 WL 6494888 (trial order) (Ariz. Super. Dec. 9, 2008).
• Bad Faith Claim Can Be Based on Failure to Investigate Pending Declaratory Judgment Action. Where the insurers sought summary judgment on a bad faith claim which was based on their disregard of their claims‐handling responsibility during the pendency of a declaratory judgment action regarding a coverage issue, the court held that the insured introduced evidence concerning the insurers’ claims handling which created a genuine issue of material fact as to whether the insurers breached the covenant of good faith and fair dealing. The court noted that an insured may suffer injury when an insurer sues over the meaning of a disputed policy term and effectively ignores an obligation to reasonably investigate the claim during the ensuing protracted legal proceeding. Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 256 P.3d 635, 642 (App. 2011).

California

• Evidence of Settlement Offers Admissible to Prove Bad Faith. Where an insured sued an insurance company for breach of contract, negligence and breach of the covenant of good faith and fair dealing, the court ruled that evidence of settlement offers were admissible where admitted to prove the title company’s bad faith, not to prove liability for the underlying loss. The court concluded that the contractual relationship does not terminate with commencement of the litigation. Thus, conduct inconsistent with the duty of good faith and fair dealing is evidence of bad faith. White v. Western Title Ins. Co., 710 P.2d 309 (Cal. 1985).
• California Appellate Courts Have Limited White’s Application. Since White, California appellate courts have narrowed its holding. See Palmer v. Ted Stevens Honda, Inc.,238 Cal. Rptr. 363, 368 (Cal. Ct. App. 1987) (rejecting “the suggestion White be extended beyond the insurance setting,” and stating “once litigation has commenced, the actions taken in its defense are not, in our view, probative of whether defendant in bad faith denied the contractual obligation prior to the lawsuit”); Nies v. National Auto. Casualty Ins. Co., 245 Cal. Rptr. 518, 520 (Cal. Ct. App. 1988) (stating that White simply held that the onset of litigation does not necessarily render conduct inadmissible but did not specify what post‐filing conduct was relevant and admissible; holding that the use of defensive pleadings to show bad faith in the previous failure to promptly pay the claim was inappropriate and prejudicial); Cal. Physicians’ Serv. v. Superior Court, 12 Cal.Rptr.2d 95, 100 (Cal. Ct. App. 1992) (concluding that “White stands for the proposition that [only] ridiculously low statutory offers of settlement may be introduced in a bifurcated trial, after liability has been established, as bearing on the issue of bad faith of the insurance company”); Tomaselli v. Transamerica Ins. Co., 31 Cal. Rptr. 2d 224 (Cal. Ct. App. 1994) (claim for bad faith cannot be based on an insurer’s appeal from an adverse judgment).

Colorado

• Litigation Conduct Admissible to Show Habitual Pattern of Bad Faith. Where evidence of postfiling conduct was admitted as evidence of bad faith, the court held that it was not an abuse of discretion to admit the evidence because the evidence helped establish insurer’s habitual pattern of dealing with plaintiff. Southerland v. Argonaut Ins. Co., 794 P.2d 1102, 1106 (Colo. App. 1990).
• Settlement Posture by Insurer Throughout Litigation Inadmissible to Prove Bad Faith. Where the insured sought leave to file a supplemental complaint to include a claim of bad faith based on insurer’s settlement posture throughout the litigation and particularly during a court‐supervised settlement conference, the court denied the motion because low settlement offers are not presumptive evidence of bad faith. The court noted that settlement strategies are fraught with the potential of mis-perception and not necessarily evidence of bad faith. In addition, the court concluded that admitting evidence of settlement negotiations creates a real potential of unfair prejudice and jury confusion which outweighs the probative value of the evidence. Southwest Nurseries, LLC v. Florists Mut. Ins., Inc., 266 F. Supp. 2d 1253 (D. Colo. 2003)
• Litigation Conduct Admissible if Conduct Shows Extraordinary Facts. Where the trial court ruled that evidence of the conduct of an insurer’s attorney during discovery was not admissible and the plaintiff appealed, the court held that the trial court did not err in finding the conduct inadmissible. Applying a balancing test, the court concluded that the conduct must show “extraordinary facts” found only in “rare circumstances” that would justify allowing the jury to consider an attorney’s litigation conduct as part of a bad faith claim. The conduct complained of: filing an answer denying all responsibility, refusing to allow discovery to proceed until a case management order was entered, declining to sign a case management order, asking the court to vacate the default judgment hearing, not making himself available for the hearing, and refusing to be deposed, were all actions which could have legitimate reasons.Parsons v. Allstate Ins. Co., 165 P.3d 809, 816‐19 (Colo. App. 2006).
• Insurer’s Position in Motion for Summary Judgment and Allegation that Insurer Refused to Provide Contact Information Not Admissible to Prove Bad Faith. Where the plaintiff sought to introduce evidence that the insurer took a position in its motion for summary judgment that was incorrect and that counsel for the insurer refused to provide contact information for the title officer who issued the title as evidence of bad faith, the court ruled that the evidence was inadmissible under the Parson standard. The court noted that the conduct plaintiff sought to introduce was less egregious then what the court in Parson refused to admit. Scott v. Chicago Title Ins. Co., No. 08 CV 3899, 2010 WL 3823452 (D. Colo. May 3, 2010) (trial order).
• Refusing to Rule on Whether Post‐litigation Conduct Would be Admissible Until Closer to Trial. Where the defendant, in a summary judgment motion, sought to exclude evidence of postlitigation conduct on grounds that it was unduly prejudicial and irrelevant, the court noted that in Parsons the Colorado Court of Appeals explained that litigation conduct after an insurance claim is denied or payment is delayed may be of limited relevance but that it may be relevant in some circumstances. The court declined to resolve what post‐litigation conduct was properly relevant until closer to trial when it became clear what post-litigation conduct plaintiff sought to introduce at trial. Warren v. Liberty Mut. Fire Ins. Co., No. 05–cv–01891–PAB–MEH, 2011 WL 1103160, 12 (D. Colo. March 24, 2011).
• Evidence of Continued Evaluation of Claim Post‐litigation Admissible but Not Litigation Conduct Related to Discovery and Affirmative Defense. Where the insurer sought a motion in limine seeking to exclude evidence related to the insurer’s post‐litigation conduct, particularly the evaluation and adjustment of the insured’s uninsured motorist claim after litigation commenced by the insurer’s attorney, the attorney’s attestation to discovery responses, and the attorney’s approval of the Answer asserting a comparative negligence affirmative defense, the court denied the motion and allowed the introduction of the attorney’s pos-litigation conduct to the extent it involved activities as a claims adjuster rather than as an attorney and granted the exclusion of the discovery responses and asserting of the defense because they had limited value as evidence suggesting bad faith. Fiechtner v. American Family Mut. Ins. Co., 2011 WL 4087296, 1‐3 (D. Colo. Sept. 13, 2011).

Florida

• Predicting That Under Florida Law Litigation Conduct Admissible. Applying Florida law, the Eleventh Circuit held that evidence of the insurer’s litigation conduct was admissible, relevant evidence: “Certainly the litigation conduct of [the insurer] was relevant to the claim that [the insurer] or those acting on its behalf dealt dishonestly with [insured].” T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1527 (11th Cir. 1985) (applying Florida law).
• Litigation Conduct Admissible under Florida Law. Where the plaintiff was permitted to introduce evidence of insurer’s pleadings as well as the insurer’s failure to answer a request for admissions as evidence of bad faith, the appellate court concurred with Shelby Mut. and held that the admission was proper: “[I]n a bad faith case . . . the insurance company’s litigation conduct was admissible, relevant evidence.” Home Ins. Co. v. Owens, 573 So.2d 343, 344 (Fla. Dist. Ct. App. 1990).
• Litigation Conduct Inadmissible Because Litigation Privilege Applies to All Causes of Action. Where the plaintiff’s complaint sought to allege a cause of action for bad faith based on litigation conduct, the court granted the motion to dismiss this claim because the Florida cases have held that conduct during the course of a judicial proceeding is subject to absolute immunity. Thus, the court concluded that the conduct could not be used to prove bad faith. TheSands on the Ocean v. QBE Ins. Corp., No. 56 2009 CA 003605, 2011 WL 400096 (Fla. Cir. Ct. Feb. 2, 2011) (trial order).

Georgia

• After Commencement of Litigation Insurer has Continued Duty to Investigate Claim. Where the insurer claimed that the trial court erred by denying its motion for directed verdict on the insured’s bad faith claim, the court held that the trial court did not err because the insurer did not have reasonable grounds to exclude coverage based upon a claim that was not completely investigated, even after commencement of litigation. United Servs. Auto. Ass’n v. Carroll, 486 S.E.2d 613, 616 (Ga. App. 1997).

Illinois

• Under Totality of Circumstances Litigation Conduct Admissible. Where the trial court admitted evidence of settlement offers made by the insurer before and after litigation commenced and the insurer’s failure to accept offers made by the policyholder, the court held that the trial court did not err because, considering the totality of the circumstances, the evidence was relevant. Fassola v. Montgomery Ward Ins. Co., 433 N.E.2d 378, 381‐82 (Ill. App. Ct. 1982).
• Letters Written after Insurer Denied Claim Relevant and Admissible to Show Bad Faith. Where the defendant insurer argued that the trial court committed error by allowing the insured to introduce certain letters and memoranda written subsequent to the date of declination as proof of bad faith, the court held there was no error because the post‐declination letters were relevant and admissible under the authority of the court to look at the totality of the circumstances in determining whether the insurer committed bad faith. Norman v. American Nat. Fire Ins. Co., 555 N.E.2d 1087 (Ill. App. Ct. 1990).
• Duty to Settle in Good Faith with Insured Exists Before and After Suit is Filed. Where the trial court granted the insurer’s motion to dismiss, finding that it had no duty to settle prior to the filing of a lawsuit against its policyholder, the court reversed and held that an insurance company had a duty to act in good faith in settling a claim against its policyholder in a timely manner both before and after suit is filed. Haddick v. Valor Ins., 735 N.E.2d 132, 133 (Ill. App. Ct. 2000).

Indiana

• Conduct that Occurs before the Insured Filed the Bad Faith Claim is Relevant, but Conduct after the Claim Was Filed is Not Relevant. Where the trial court entered summary judgment in favor of the insurer, the court held that the trial court erred because evidence of post‐filing conduct, specifically evidence that the insurer intentionally refused to further investigate a matter brought to its attention in order to give its counsel the factual predicate upon which to rest its motion to dismiss, could be a basis for a bad faith claim, especially because it occurred before the plaintiff amended its complaint to state a claim for bad faith. Gooch v. State Farm Mut. Auto Ins. Co., 712 N.E.2d 38 (Ind. Ct. App. 1999).
• Litigation Position Not Sufficient to Show Bad Faith. Where the plaintiff claimed that the insurer committed bad faith in refusing to pay actual damages, taking conflicting positions regarding mitigation and spoliation, accusing the plaintiff of spoliation after it initiated repairs, and forcing the plaintiff to negotiate for a period of 18 months, and the insurer sought summary judgment, the court granted the insurer’s summary judgment motion because the actions the plaintiff identified revolve around the insurer’s litigation position and are irrelevant for purposes of bad faith. KK, LLC v. U.S. Aviation Underwriters, Inc., No. 1:02CV1992‐TAB‐RLY, 2005 WL 1115864, 7 (S.D. Ind. May 6, 2005).

Kentucky

• Insurer’s Post‐Complaint Conduct as to Its Defense of the Underlying Claims Discoverable Even Though It May Ultimately Be Inadmissible. Where the plaintiffs sought discovery of the insurer’s post‐complaint conduct for their bad faith claim, the court held that the evidence of the insurer’s post‐complaint conduct as to its defense of the underlying claims, but not as to its defense of the bad faith claim itself, was discoverable. The court noted that because an insurer’s duty of good faith continued past the filing of a bad faith claim, there may be evidence of postfiling conduct that is relevant to the bad faith claim. The court noted that the evidence is discoverable even though it may ultimately be found to be inadmissible. Graham v. Gallant Ins. Group, 60 F. Supp. 2d 632, 635 (W.D. Ky. 1999).
• Only Settlement Conduct and Not Litigation Conduct Admissible. Where the plaintiff attempted to prove bad faith by introducing evidence of the insurer’s litigation conduct in the underlying tort case and subsequent appeal, the Kentucky Supreme Court held that admitting an insurer’s conduct in coverage litigation is absolutely prohibited because the Federal Rules of Civil Procedure provided the remedy for challenging an insurer’s conduct in coverage litigation. The court, however, held that settlement conduct could be introduced as evidence of bad faith because there was no mechanism to complain about settlement offers. Knotts v. Zurich Ins. Co., 197 S.W. 3d 512, 522‐23 (Ky. 2006).
• Insurer’s Refusal to Comply with Judgment Unless Plaintiff Executed Release Was Inadmissible Litigation Conduct and Not Admissible Settlement Conduct Under Knotts Standard. Where the parties settled at mediation but the insurer refused to comply with the judgment unless the plaintiff executed an agreement releasing a broad array of claims and the plaintiff moved the court for a writ of execution to force the insurer to pay the judgment, the court held that the refusal of the insurer to pay the settlement was inadmissible because there was a remedy available pursuant to the Civil Rules. The court noted that at first glance the complained-of conduct appeared to be settlement behavior, but using Knott’s requirement that the court use the Rules of Civil Procedure as the litmus test for inadmissible litigation conduct leads to the conclusion that the insurer’s failure to pay the judgment is litigation conduct, which Knotts deemed inadmissible to prove bad faith. Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 535 (6th Cir. 2006).
• Insurer’s Claims Handling Process after Filing of Action is Discoverable. Where the insured sought to limit discovery to its pre‐litigation claims handling process and, specifically, sought the entry of an order which stated that in assessing the viability of the bad faith claims the only relevant time frame was prior to the commencement of the litigation, the court denied the motion. Looking to Knotts, the court noted that Knotts did not address discoverability and Knotts declined to suggest a blanket rule of inadmissibility of litigation strategy. The court held that defendant’s claims handling process after filing of the action was discoverable. Jones v. Liberty Mut. Fire Ins. Co., No. 3:04‐CV‐137‐MO, 2008 WL 490584 (W.D. Ky. Feb. 20, 2008).
• Not Attempting in Good Faith to Effectuate a Settlement After Liability Becomes Clear Admissible Evidence of Bad Faith. Where the insured brought a bad faith claim against the insurer for refusing to settle an underinsured motorist claim after liability had become reasonably clear, the court held that this is settlement behavior admissible under Kentucky law to prove bad faith. The court noted that the insured’s filing of a motion for summary judgment as well as the insurer’s policy defenses as litigation conduct and thus inadmissible but that not attempting in good faith to effectuate a prompt, fair and equitable settlement of claims in which liability has become reasonably clear is settlement behavior. Budde v. State Farm Mut. Auto. Ins. Co., No. 5:09‐CV‐00053‐TBR, 2009 WL 3483951 (W.D. Ky. Oct. 22, 2009).
• Bad Faith Claim Can Be Sustained Based on Evidence that Insurer Made Unreasonable Initial Settlement Offer. Where the insurer sought summary judgment on the insured’s bad faith claim, the court denied the motion because there was sufficient evidence that the insurer committed bad faith in its failure to settle the insurance claim. The court noted that given the same information in August 2006 and in June 2008, a jury could plausibly find that the insurer lacked a reasonable basis for the initial offer of only $5,000 when it ultimately settled for over $20,000 and there was evidence that the insured’s medical bills amounted to $10,500 and that he claimed pain and suffering. Nevels v. Deerbook Ins. Co., No. 10–83–ART, 2011 WL 3903209, 1‐4 (E.D. Ky. Sept. 6, 2011).

Louisiana

• Bad Faith Claim Not Limited to Conduct Which Occurs Before Litigation. Where trial court awarded damages for bad faith based on insurer’s failure to pay a settlement within 30 days after an agreement is reduced to writing and the insurer appealed, the court held that bad faith can be based on post litigation conduct. The court noted that “nowhere in either statute is there an express distinction limiting the application to the pre‐litigation conduct of the insurer…. [W]e believe that it is clear that the statute was enacted to impose a requirement of good faith and fair dealing on the insurer, requirements that are no less important after litigation has begun as before.” Harris v. Fontenot, 606 So.2d 72, 74 (La. Ct. App. 1992).
• Statutorily Imposed Duty of Insurer to Bargain in Good Faith with Claimant did not Apply Once Litigation had Commenced. The court in Premium Finance determined that the purpose of the Louisiana bad faith statute was to provide an incentive to insurance companies to quickly resolve claims and avoid litigation costs. It stated that it would be duplicative for the statute to apply once litigation is commenced, since “any party to a lawsuit will have an incentive to settle the suit, namely, the desire to avoid litigation costs.” The court called the opposite interpretation “absurd.”Premium Finance Co., Inc. v. Employers Reinsurance Corp., 761 F. Supp. 450, 452‐53 (W.D. La. 1991).
• Statutes Imposing a Duty of Good Faith and Fair Dealing on the Insurer Apply to Post-Litigation Conduct. Where plaintiffs sought damages based on the insurer’s failure to pay a settlement within 30 days after an agreement is reduced in writing pursuant to a bad faith statute, the court ruled that the statute applied to post-litigation conduct by an insurer. The court disagreed with Premium’s interpretation of a similar statute as applying only to pre‐litigation conduct. The court stated that it is “clear that the statute imposes a requirement of good faith and fair dealing on the insurer, requirements that are no less important after litigation has begun as before.” Harris v. Fontenot, 606 So.2d 72, 74 (La. Ct. App. 1992).
• Other Louisiana Courts Have Followed Harris’ Lead. See, Defazio v. City of Baton Rouge, 625 So. 2d 733 (La. Ct. App. 1993) (bad‐faith statute applies to post‐litigation settlements.); Theriot v. Midland Risk Ins. Co.,664 So.2d 547 (La. Ct. App. 1996) (duty of good faith and fair dealing continues during litigation); Sher v. Lafayette Ins. Co., 988 So.2d 186, 198 (La.2008) (Louisiana Supreme Court, in dicta, approvingly cited to cases holding that “the duties of good faith and fair dealing imposed on insurers by [these statutes] are continuing duties that do not end during litigation”); Dagiumol v. State Farm Fire and Cas. Co., NO. CIV.A. 06‐5679, 2007 WL 2228158, at *1 (E.D. La. 2007).

Mississippi

• Post‐Filing Conduct May Constitute Bad Faith. Where the circuit judge never considered the insurer’s conduct following filing of the complaint and the insurer failed to promptly pay a legitimate claim, the court held that the circuit judge committed error and remanding the case to determine whether the insurer’s post-filing conduct constituted bad faith. Gregory v. Continental Ins. Co., 575 So.2d 534, 541 (Miss. 1990).
• Post-Denial Conduct Can Be Relevant for Claim for Bad Faith but Discovery Violations Not Sufficient to Show Bad Faith. Where the plaintiff sought to introduce evidence of the insurer’s alleged inadequate discovery responses as evidence of bad faith, the court noted that evidence of an insurer’s post‐denial conduct can be relevant to a claim for bad faith denial of insurance coverage but that in this case the allegations were insufficient to show bad faith. The court also noted that submitting the plaintiff’s bad faith claim to the jury solely on the basis of the insurer’s alleged discovery violations would be a disproportionate sanction. Tipton v. Nationwide Mut. Fire Ins. Co., 381 F.Supp.2d 572, 580 (S.D. Miss. 2004).

Missouri

• Uncooperative Discovery Behavior Not Bad Faith. Where the plaintiff contended a defendant insurer’s uncooperative behavior in discovery was relevant to a bad faith claim, the court rejected the plaintiff’s argument and stated that “a defendant has the right to defend an action with all the weapons at its disposal and so long as it has reasonable grounds to believe its defense is meritorious.” Morris v. J.C. Penney Life Ins. Co., 895 S.W.2d 73, 78 (Mo. Ct. App. 1995).

Montana

• Admissibility of Litigation Conduct Based on Balancing Test. Where an insured sought to introduce evidence of the insurer’s litigation conduct and strategy, the Supreme Court of Montana held that an insurer’s duty to deal fairly with its insured continues when an insured files a complaint against it; however, the court concluded that this continuing duty “does not necessarily render evidence of an insurer’s post-filing conduct admissible.” In determining when post-litigation conduct can be used as evidence of bad faith, the court devised a balancing test: “When the insurer’s post‐filing conduct has some relevance, the court must weigh its probative value against the inherently high prejudicial effect of such evidence, keeping in mind the insurer’s fundamental right to defend itself.” Palmer v. Farmers Ins. Exch., 861 P.2d 895, 915 (Mont. 1993). See also Safeco Ins. Co. v. Ellinghouse, 725 P.2d 217, 223‐25 (Mont. 1986) (upholding admission of post‐filing correspondence which included references to settlement offers); Federated Mut. Ins. Co. v. Anderson, 991 P.2d 915 (Mont. 1999) (insurer’s frivolous appeal on coverage may be offered in evidence to show that its claim handling was malicious).

New Mexico

• Failure to Meet Discovery Obligations Sufficient to State Bad Faith Claim. Where plaintiffs sought to amend their complaint to include statutory and bad faith tort claims based on the insurer’s failure to meet certain discovery obligations, the court permitted the amendment, holding that the allegations where sufficient to state a claim. Journal Pub. Co. v. American Home Assur. Co., 771 F. Supp. 632, 635, 637 (S.D.N.Y 1991) (applying New Mexico law).

New York

• Alleged Discovery Violations Not a Basis for Bad Faith Claim. Where the plaintiff sought to amend its counterclaim to add a claim that the insurer engaged in bad faith during the course of the litigation by asserting a coverage position inconsistent with the insurer’s own expert and improperly obtaining discovery, the court denied the motion. After calling the request “untimely,” the Court also noted that the insured could have petitioned the court for sanctions at the time of the alleged violations. Zurich Am. Ins. Co. v. ABM Indus., 265 F. Supp. 2d 302, 310 (S.D.N.Y. 2003), rev’d in part on other grounds, 397 F.3d 158 (2d Cir. 2005).

North Dakota

• Post-Filing Letter Admissible to Show Bad Faith. Where the trial court admitted evidence of a letter written by an insurer to its counsel after the policyholder filed suit, proposing that counsel counterclaim against the policyholder’s attorney for abuse of process, and the insured appealed the admission of this evidence, the court upheld the admission because the letter was relevant to the insurer’s obligation to deal fairly and in good faith with the insured.Smith v. American Family Mut. Ins. Co., 294 N.W.2d 751, 764 (N.D. 1980).
• Insurer’s Answers as Evidence of Bad Faith. Where the insurer alleged that the trial court had erroneously allowed testimony that the insurer’s pleadings and legal strategies evidenced bad faith, the court held that no error was committed because “[a]n insurer’s unreasonable defense may evidence bad faith.” Ingalls v. Paul Revere Life Ins. Group, 561 N.W.2d 273, 280 (N.D. 1997).
• Untimely Motion for Summary Judgment Not Evidence of Bad Faith. Where the insured claimed that the insurer breached its duty of good faith and fair dealing by untimely serving a motion for summary judgment, the court held that the motion was not filed in bad faith because it did not violate any court order, but only proposed scheduling orders of the parties, and the motion was filed sufficiently in advance of trial to allow the insured reasonable time to respond. Fetch v. Quam, 623 N.W.2d 357, 366 (N.D. 2001).

Ohio

• Post-Filing Conduct is Relevant as Evidence of Bad Faith. Where the plaintiff‐appellant sought to submit post‐filing conduct as evidence of bad faith, the court held that “evidence of the breach of the insurer’s duty to exercise good faith occurring after the time of filing suit is relevant so long as the evidence related to the bad faith or handling or refusal to pay the claim.” Spadafore v. Blue Shield, 486 N.E.2d 1201, 1204 (Ohio Ct. App. 1985).

Oklahoma

• Admissibility of Litigation Conduct is “Rare.” Where the insured attempted to introduce evidence of a letter from the insurer’s counsel to the insurance adjuster, the fact that the insurer filed a counterclaim against the insured seeking to recover the monies paid pursuant to a nonwaiver agreement, and the fact that the insurer made a motion to join a third‐party in the insured’s suit as a necessary party, the court held that the conduct of the insurer’s counsel during coverage litigation could not be used as evidence of bad faith. The court stopped short of holding that there should be an absolute bar to evidence of an insurer’s litigation conduct in the course of coverage litigation to demonstrate bad faith. Nevertheless, the court stated that litigation conduct would “generally be inadmissible, as it lacks probative value and carries a high risk of prejudice,” and emphasized that instances where such evidence might be admissible were “rare.” Timberlake Const. Co. v. U.S. Fidelity and Guar. Co., 71 F.3d 335, 339‐341 (10th Cir. 1995) (applying Oklahoma law).
• Insurer’s Alleged Litigation Conduct of Disputing the Amount of the Insured’s Damages Was Not Bad Faith. Where the insureds attempted to introduce evidence of the following litigation actions on the part of the insurer: treating the insureds as adversaries, filing motions to dismiss, objecting to discovery, misdocketing meetings, failing to agree to deposition times offered by the insureds, and rejecting the insureds’ request for mediation, the court held that the conduct could not be the basis of a bad faith claim against the insurer. The court specifically adopting the rule announced by the Timberlake court. Sims v. Travelers Insurance Co., 16 P.3d 468, 471 (Okla. Civ. App. 2000).
• Post-Litigation Conduct Had No Relevance to Bad Faith Claim. Where plaintiff introduced evidence of the insurer’s post‐litigation conduct, specifically a post-rescission reservation of rights letter, reinstatement of a professional liability policy and an offer of a tail policy, the court held that the conduct was irrelevant to the question of whether the insurer acted in bad faith under Oklahoma law in initially rescinding the policy. It further concluded that even if the post-litigation conduct is considered, it is not evidence of bad faith because the letter was sent by mistake and the reinstatement of the policy was done for legitimate reasons. Roesler v. TIG Ins. Co., No. 05‐7055, 2007 WL 2981366 (10th Cir. Oct. 12, 2007) (applying Oklahoma law).

Pennsylvania

• Implicit Indication that Bad Faith Statute Covers Conduct in Litigation. In Kauffman, the court noted that “this case presents an unusual situation in that plaintiffs allege bad faith, not in the pre‐litigation handling of their claim, but in conduct that occurred during the pendency of litigation, at a stage when Aetna’s declaratory judgment action was before the Third Circuit.” The insureds alleged three acts of bad faith: (1) Aetna’s insistence on proceeding to arbitration, rather than paying the proceeds, (2) Aetna’s opposition to the insureds’ motion to confirm the arbitration award in a state court, and (3) Aetna’s refusal to pay the remaining amount of the arbitration award until the Third Circuit rendered a decision on Aetna’s appeal. The court’s discussion of the insureds’ claims on their merits, even though it ruled that Aetna did not act in bad faith, provides an indication, albeit implicit, that the Pennsylvania bad faith statute covers post-denial of claim conduct in the litigation arena. Kauffman v. Aetna Casualty & Surety Co., 794 F. Supp. 137 (E.D. Pa. 1992).
• Federal Sanction Rules Do Not Preempt Bad Faith Claims Based on Conduct of Insurers. Where the insurer sought a Motion In Limine to exclude the insured’s bad faith claim because the date of denial occurred before the Pennsylvania bad faith statute’s effective date of July 1, 1990, the court ruled against the insurer because the insured alleged bad faith conduct during the litigation (after the statute’s effective date). Furthermore, the court ruled that F.R.C.P. 26(g) and 37(a)(2), which provide for sanctions for harassment, unnecessary delay, or needless increase in the cost of litigation in the course of discovery, do not preempt bad faith claims for the conduct of insurers, even where that bad faith conduct occurs in the context of litigation. Rottmund v. Continental Assur. Co., 813 F. Supp. 1104 (E.D. Pa. 1992).
• Duty to Act in Good Faith Does Not End Upon Initiation of Suit but Discovery Misconduct Not Admissible as Evidence of Bad Faith. Where the insured-appellant argued that the jury should have been permitted to consider evidence of the insurer’s submission of interrogatories seeking “frivolous” and irrelevant information, as well as its refusal either to accept or deny insured’s claim following her deposition as evidence of bad faith, the court held that an insurer’s duty to act in good faith does not end upon the initiation of suit by the insured, but ultimately held that allegations of discovery misconduct cannot be used as evidence of bad faith. O’Donnell ex rel. Mitro v. Allstate Ins. Co., 734 A.2d 901, 906, 908‐08 (Pa. Super. Ct. 1999).
• Discovery Misconduct by Insurer in Defending Claim Predicated on Alleged Bad Faith Handling of Insurance Claim Not Valid Conduct for Bad Faith Claim. Where the plaintiff brought a bad faith suit against its insurer in handling the plaintiff’s first‐party underinsured motorist claim, and sought leave to amend his complaint to assert a further allegation of bad faith based on the insurers’ alleged discovery abuses in the instant litigation, the court denied the motion to mend because the alleged bad faith was independent of the insurance contract and did not arise from the parties’ insurer‐insured relationship but from their relationship as litigants. Slater v. Liberty Mut. Ins. Co., No. CIV. A. 98–1711, 1999 WL 178367 (E.D. Pa. March 30, 1999).
• Insurance Bad Faith Claim Which Is Not Entirely Founded on Insurer’s Discovery Tactics but also Includes Allegation of Abusive Motions and Misrepresentations to the Court Was Sufficient to Overcome Motion to Dismiss. Where the trial court denied the insurer’s motion to dismiss where the insured alleged the following intra-litigation conduct was bad faith: (1) a pattern of delay, stonewalling, deception, obfuscation and pretense; (2) intentionally withholding critical documents; (3) ignoring court orders; (4) testifying falsely at depositions, with litigation counsel fully aware of the false testimony; (5) misrepresenting facts to the trial court and opposing counsel; (6) providing incomplete responses, unreasonable objections, unfounded claims of privilege and intentionally incomplete privilege logs in response to reasonable and relevant requests; (7) using an overly broad, clearly untenable theory of privilege to conceal the knowledge, activity and intent which formed the basis of the insurance coverage action; (8) actively hiding highly probative documents while moving for summary judgment on the issues to which the hidden documents related; (9) using hidden documents during a deposition; (10) continuing to locate hundreds of documents that should have been produced or put on privilege logs, each time claiming that they had just been found; (11) engaging in obdurate conduct, including actions demonstrating an attempt to obstruct the discovery process; and (12) encouraging witnesses to provide false and misleading testimony, the appeals court affirmed the trial court holding that the above conduct constituted, “more than just discovery abuses.” General Refractories Co. v. Fireman’s Fund Ins. Co., No. CIV.A. 01–CV–5810, 2002 WL 376923 (E.D. Pa. Feb. 28, 2002), aff’d in part, rev’d in part on other grounds and remanded, 337 F.3d 297 (3d Cir. 2003).
• Bad Faith Claim Does Not Include Post‐Judgment or Post‐settlement Conduct by an Insurer. Where the insured brought a second bad faith action based on the insurer’s failure to pay the proceeds of a settlement or judgment obtained from the first bad faith suit, the Court ruled that the trial court erred in concluding that an insured has a cause of action for the insurer’s alleged bad faith following a settlement and judgment. Rather, the insured’s remedy for non-payment of the judgment was provided for by the Pennsylvania Rules of Civil Procedure for the enforcement of money judgments. Also, the insured could enforce the settlement agreement pursuant to the law on contracts. The court declined to follow dicta from O’Donnell which suggested that post‐litigation conduct could be bad faith.Ridgeway ex rel. Estate of Ridgeway v. U.S. Life Credit Life Ins. Co. , 793 A.2d 972, 978 (Pa. Super. Ct. 2002).
• Something Beyond Discovery Violation Required to Permit Bad Faith Claim to go Forward. In delineating the confines of O’Donnell and in clarifying what acts by an insurer constitute actionable bad faith under Pennsylvania law, the court noted that in those cases in which nothing more than discovery violations – or other actions calculated not toward prolonging an investigation into an insured’s claim, but rather toward winning a lawsuit — were alleged, “courts have declined to find bad faith.” “On the other hand, those cases in which courts have permitted bad faith claims to go forward based on conduct which occurred after the insured filed suit all involved something, beyond a discovery violation, suggesting that the conduct was intended to evade the insurer’s obligations under the insurance contract.”W.V. Realty Inc. v. Northern Ins. Co., 334 F.3d 306, 313 (3d Cir. 2003).
• Post‐Filing Conduct Could Be Considered for Bad Faith Claim Because Conduct Went Beyond Discovery Matters and Included Actions that Attempted to Conceal Conduct of Insurer’s Employees. Where the insurer asserted that the trial court erroneously based its determination of bad faith on the conduct of the company and its employee‐witnesses during trial of the bad faith claim, the court held that post‐filing conduct could be considered because the conduct engaged in during litigation far exceeded mere discovery matters and included actions that were an intentional attempt to conceal, hide or otherwise cover up the conduct of the insurer’s employees. Hollock v. Erie Ins. Exchange, 842 A.2d 409, 414‐16 (Pa. Super. Ct. 2004).
• Good Faith Argument Presented in Answer Was Not Evidence of Bad Faith. Where one of plaintiff’s allegations that the insurer acted in bad faith was based on the insurer raising a two year limitations period defense in its Answer, the court held that the insurer’s decision to invoke the provision did not constitute bad faith, even though the insurer may not ultimately prevail on its interpretation, because when the carrier filed its Answer it had a good‐faith argument that the two‐year limitations period applied. Monarch, Inc. v. St. Paul Property and Liability Ins. Co., No. Civ.A. 03‐CV‐0054, 2004 WL 1717618, 5 (E.D. Pa. July 30, 2004).

South Carolina

• Post-Filing Conduct is Irrelevant. Where the trial court allowed the insured’s attorney to crossexamine the insurer’s claims adjuster concerning her handling of the claim after litigation commenced, the court held that the trial court erred because the evidence was irrelevant as to whether the claim was properly denied. Howard v. State Farm Mut. Auto. Ins. Co., 450 S.E.2d 582, 584 (S.C. 1994).

South Dakota

• Insurer’s Conduct in Refusing to Waive Subrogation Rights and Later Intervention in Lawsuit Admissible Evidence of Bad Faith. Where the plaintiff was allowed to admit evidence of the insurer’s refusal to waive subrogation rights and its later intervention in the lawsuit, the South Dakota Supreme Court determined that it was not error to admit this evidence because the way in which the insurer exercised its rights shed light on whether it acted in bad faith. Harter v. Plains Ins. Co, 579 N.W.2d 625, 629‐30 (S.D. 1998).
• Settlement Tactic as Evidence of Bad Faith. Where the insurer conditioned settlement of a breach of contract claim on the release of a bad faith claim, the court held that such settlement conduct may be used as evidence of bad faith.Athey v. Farmers Ins. Exchange, 234 F.3d 357, 362 (8th Cir. 2000) (applying South Dakota law).
• Rare Case Where the Insurer’s Decisions and Conduct in the Underlying Litigation Will Be Admissible in Bad Faith Claim. Where the insured claimed that the following tactics and decisions during the UM claim litigation were evidence of bad faith: (1) insurer’s decision not to hire an expert in the UM case; (2) insurer’s repetitive attempts “to appeal interlocutory rulings against it when those rulings could be later appealed without prejudice”; (3) insurer’s claim of privilege to avoid DM & E’s requests for discovery; (4) insurer’s failure to settle despite the quick jury verdict; and (5) insurer’s failure to pay the judgment or offer to fairly settle even on appeal, the court held that it is the rare case where the insurer’s decisions and conduct in the underlying litigation would be admissible in a first party bad faith claim. The court held that circuit courts in deciding whether to admit this type of evidence must weigh the probative value of any potentially relevant litigation evidence against the danger of unfair prejudice. The court noted that “[i]n most instances, questions concerning the propriety of tactical litigation decisions by the insurer or insurer’s counsel can be adequately addressed through application of the Rules of Civil Procedure, or through rules governing attorney conduct, rather than presenting the evidence to a jury as part of the tort claim.” Dakota, Minnesota & Eastern R.R. Corp. v. Acuity, 771 N.W.2d 623, 635‐36 (S.D. 2009).

Tennessee

• Strategic Pretrial Discovery Decisions Could Not Be Basis for Bad Faith. Where the insured attempted to use the insurer’s discovery tactics in support of its bad faith claim, the court rejected the insured’s arguments, holding that the insurer’s “normal and commonly accepted strategic pretrial discovery decisions” could not be used as a basis for bad faith. The court also stated that “pressing a legitimate contractual defense … can certainly not be a basis for a bad faith claim.” FDIC v. Aetna Cas. and Sur. Co., 903 F.2d 1073, 1079‐80 (6th Cir. 1990) (applying Tennessee law).

Washington

• Information Furnished by the Insured to the Insurer after the Initiation of Suit on the Policy Was Properly Considered by the Jury in Determining If the Insurer Conducted a Reasonable Investigation. Where the insurer argued that once an insured brings an action against the insurer alleging unfair practices in the settlement of an insurance claim, any post-suit information furnished by the insured to the insurer concerning the claim cannot be a part of the “settlement of claims” process when considering whether the insurer has acted in bad faith, the court held that the information furnished by the insured to the insurer after the initiation of the suit on the policy was properly considered by the jury in determining if the insurer conducted a reasonable investigation. Delvo v. St. Paul Travelers Ins. Co., No. CV‐06‐274‐JLQ, 2007 WL 2601030, 4 (E.D. Wash. Sept. 10, 2007).

West Virginia

• Insurer Needs to Ratify Litigation Misconduct by Insurer’s Attorney for Evidence to be Admissible. In answering a certified question on whether an insurance company could be liable for bad faith for violations that occurred after a lawsuit was filed, the court held that alleged misconduct by a defense counsel during litigation could be admissible so long as the insurer knowingly encourages, directs, participates in, relies upon or ratifies such alleged wrongful conduct. Barefield v. DPIC Companies, Inc., 600 S.E.2d 256, 267, 271 (W. Va. 2004).

Wyoming

• Post-Filing Conduct Not Admissible; Civil Procedure Rules Provides Remedy. Where the plaintiff sought to have the court expand the bad faith claim to include litigation conduct, the court adopted the reasoning of the Montana Supreme Court in Palmer by Diacon v. Farmers Ins. Exchange, 261 Mont. 91, 861 P.2d 895, 914 (1993), to conclude that the rules of civil procedure provide the right remedy for post‐filing conduct and not a bad faith claim. Roussalis v. Wyo. Med. Ctr., Inc., 4 P.3d 209, 257 (Wyo.2000).