Progressive Bad Faith Claim: New Opinion

Two weeks ago, I wrote a post explaining what car insurance special investigations units (SIU) do and their purpose. Today, I stumbled across a new opinion that went up to the 10th Circuit Court of Appeals. The basis for the lawsuit seems that the plaintiffs were annoyed that Progressive Insurance – undoubtedly an aggressive car insurance company – sent their claim to their special investigations unit.

The case involved the plaintiffs’ claim that someone had stolen and damaged their car. Progressive Insurance referred the claim to its Special Investigations Unit because (1) the vehicle was for sale at the time of the loss, (2) the column was not compromised, (3) the vehicle was a “gas guzzler” (Chevy Tahoe – the claim arose at the height of the gas prices in 2008); and (4) both sets of keys were in the Walkers’ possession at the time of loss.

Bad Faith Insurance Claims

Before we dig into this Progressive appellate opinion, let’s look at bad faith claims.  Bad faith claims arise when an insured individual believes their insurance company has not upheld its responsibility to act in good faith when handling a claim, resulting in an unjust denial or insufficient payout. Understanding these claims requires delving into the principles of good faith, the nature of first-party claims, and the consequences of bad faith conduct by insurers.

Every insurance contract implicitly contains a covenant, or promise, of good faith and fair dealing. This covenant requires both parties to the contract to act honestly, fairly, and in a manner that does not destroy the right of the other party to receive the benefits of the contract. In insurance terms, this means the insurer must thoroughly and promptly investigate any claim, fairly assess the claim’s validity, and, if the claim is valid, pay it out promptly and fully.

First-Party Insurance Claims

First-party insurance claims are those made by policyholders directly against their insurers for loss or damage. Common types include claims under homeowner’s insurance for property damage, or under auto insurance for vehicle damage or personal injury. These are contrasted with third-party claims, where an individual claims against someone else’s insurance, such as the insurer of a driver who caused a car accident.

Bad Faith in Insurance and Its Consequences

Bad faith arises when insurers fail to uphold their end of the covenant of good faith. This can take many forms, including unreasonable delay in handling a claim, failure to conduct a proper investigation, failure to communicate with the policyholder, and denial of a claim without a valid reason. Each of these actions can leave the insured party in a vulnerable position, bearing costs they thought would be covered by their insurance.

In a first-party bad faith claim, the insured individual brings a lawsuit directly against their insurer. The nature of these suits can vary widely depending on the jurisdiction. Some states allow for tort claims in addition to contract claims, enabling policyholders to recover damages for emotional distress or punitive damages meant to penalize and deter bad faith conduct by insurers. Other jurisdictions may only allow breach of contract claims, limiting damages to the amount of the claim wrongfully denied.

Establishing Bad Faith in First-Party Claims

To establish a bad faith claim, the policyholder must generally show that the insurer’s denial or underpayment of the claim was unreasonable or without proper cause. What counts as “unreasonable” can depend on the specifics of the case and the jurisdiction. Some courts apply a “fairly debatable” standard, where an insurer is not in bad faith if the claim was “fairly debatable” – that is, a reasonable insurer could have debated whether the claim should have been paid. Other jurisdictions use a “reasonable basis” standard, where the insurer is not in bad faith if there was any reasonable basis for the denial, even if that wasn’t the insurer’s actual reason for denying the claim.  You also need to prove something else: injury.  You cannot just be mad liket he plaintiffs in this case against Progressive.

In handling these claims, courts often look at the insurer’s processes and conduct. Did the insurer properly investigate the claim, or did it ignore evidence supporting coverage? Was the denial based on a reasonable interpretation of the policy, or was it a strained reading designed to avoid coverage? Was there a pattern of unfair claim practices, suggesting the insurer’s conduct was not an isolated incident, but rather part of a broader business strategy?

Policy Holders Did Not Appreciate Progressive’s Investigation

At the heart of the controversy were the Walkers’ allegations that Progressive had conducted an untimely and improper investigation.  From a plaintiff’s perspective, this is not what a good claim is about.  The key issues of dispute involved were – somewhat unbelievably – the authenticity of the vacation photos provided by the plaintiffs and the existence of a third key to their vehicle. Progressive Insurance asked the plaintiffs to produce photos from the vacation they were on at the time of the loss. The plaintiffs sent them some pictures which the overzealous Progressive adjuster thought was altered. Goofy stuff that all got squared away. But, ultimately, the Special Investigations Unit concluded the loss was legitimate and paid the claim.

The Walkers, the policyholders, claimed that Progressive’s delay in verifying the origin of the third key and questioning the legitimacy of their vacation photos demonstrated bad faith.  What was their claim really about?  They were made to feel like criminals.  And they, understandably, didn’t like that.  But the problem is that bad behavior should not always land you in federal court.

Perfect Investigation Is Not the Bar

The court ruled that the Walkers failed to show how Progressive’s actions were unreasonable, a necessary element for a bad faith claim. It was also ruled that the Walkers had failed to show how they were damaged by Progressive’s alleged unreasonable actions.

The court underscored that an insurer’s investigation must only be reasonable, not perfect. Even though Progressive had not immediately verified the legitimacy of the vacation photos or the origin of the third key, the company had eventually validated the claim and provided coverage for the Walkers’ loss.

So the plaintiffs were not happy and made a federal case out of it, alleging bad faith from Progressive Insurance in paying the claim. It is pretty clear that they did not find a lawyer to make their claim. I guess they were just plain mad and wanted to get back at Progressive. Not having a lawyer makes things hard.  The court found that the Walkers had waived a bunch of their arguments – none of which were viable anyway, really – due to inadequate briefing or failing to raise them with the trial court.

What You Need for First Party Bad Faith

To establish a first-party bad faith claim in Oklahoma and in most jurisdictions (including Maryland), a plaintiff must show that the insurance company’s action was unreasonable under the circumstances, and that the insurer failed to deal fairly and act in good faith in the claim’s handling. Here, Progressive was wrong and admitted they were wrong and paid the claim. But the court found that they were reasonable to investigate further because there were suspicious things about the claim.

So what you need for first party bad faith in most jurisdictions is

  1. The insurer’s investigation into the claim was unreasonable. This could mean the insurer did not conduct a thorough investigation, or that the insurer ignored evidence suggesting the claim was valid. The standard isn’t perfection, but reasonableness. So if an insurer conducted a reasonable investigation and based its decision on the available facts, even if its conclusion was incorrect, it might not constitute bad faith.
  2. The plaintiff was damaged by the insurer’s unreasonable actions. This could include financial loss, but might also encompass other forms of harm, such as emotional distress. It’s not enough for the insurer to act unreasonably; the plaintiff has to show that they suffered harm as a result of the insurer’s actions.

These two points — an unreasonable investigation and damage to the plaintiff — form the cornerstone of most bad faith claims.

Take Home Message

There are two take-home messages here. First, Progressive Insurance is overzealous and difficult to deal with in car accident claims. Alas, this we already knew. The second is another truth that has stood the test of time: filing lawsuits because you are mad is really not a great idea.