Insurance Companies have a duty to act in good faith towards their insureds and endeavor to avoid potential bad faith claims.
In Berg v. Nationwide Mutual Insurance Company, Inc., the Pennsylvania Superior Court addressed a ten-year bad-faith suit arising from the repair of an insured’s car following an accident. Plaintiff was involved in a car accident in 1996, and pursuant to the policy, her insurer was required to either pay for the loss or repair the car. The insurer initially declared the vehicle totaled, and at the time of the accident, the car was valued at $25,000. The insurer subsequently decided to repair the vehicle ten days later. It took four months to repair the car, but plaintiff complained that the car was no longer crashworthy. Once plaintiff completed her lease agreement for the car two years later, the insurer opted to declare the vehicle totaled, which resulted in the insurer paying far more in costs than if they had initially replaced the car.
The plaintiff sued in part for bad faith arguing that the insurer failed to inspect the repair work before the car was returned after repiar, and discovery violations based on the insurer’s failure to disclose an unredacted privilege log taht contained information about the repairs.
Addressing the first bad faith issue, the Court found that an insurer has no duty to inspect a car after repair to ensure the quality of repairs, absent an affirmative agreement to undertake that action. The Court reasoned that at most, the insurer was negligent in failing to inspect the repairs, which did not rise to the level of bad faith. With regards to the second bad faith issue, the Court found that a bad faith claim cannot be based on an insurer’s discovery practices, absent the use of discovery to conduct an improper investigation. The Court recognized that bad faith is occasioned by the insurers duty as a fiduciary to the insured under the insurance policy, not as an adversary in a legal proceeding initiated by the insured.
This case provides an important takeaway that the duty of good faith between an insurer and an insured is separate from the duties between the two in an adversarial proceeding. When plaintiff initiated the lawsuit against her insurer, the duties of the insurance company towards her shifted. Adversaries in a legal proceeding do not have a fiduciary duty to act in the best interests of their opponent. For that reason, a purported discovery violation was not a ground upon which a bad faith claim can be “discovered.”
Thanks for Malik Pickett for his contribution to this post.