A Survey of Bad Faith Insurance Tort Cases in Arkansas

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1 A Survey of Bad Faith Insurance Tort Cases in Arkansas Nathan Price Chaney I. INTRODUCTION This article surveys the tort of bad faith against insurance companies in Arkansas. From the first case against an insurance company mentioning bad faith in 1906, 1 Arkansas courts have developed both first- and third-party torts in approximately 130 cases against insurers dealing with the breach of the implied duty of good faith inherent in every contract. The Arkansas Legislature stepped in as well, adding penalties against insurers for requiring policyholders to litigate against their insurers for coverage issues. 2 Today, practitioners have guidance from caselaw in Arkansas and around the country on how insurers can avoid bad faith claims by communicating with their insureds to help guarantee that those insureds are treated fairly. II. WHAT IS THE TORT OF BAD FAITH AGAINST AN INSURER? A. Illustration Drunk Driver Dale drives his pickup truck eastbound on I- 30 through a construction zone at forty-five miles per hour in Clark County, Arkansas. 3 He is following Victims Victor and Vanessa, two twenty-something friends traveling together to a Razorback game in Victor s cardinal red, four-door sedan. Dale The author is a registered patent attorney at the Chaney Law Firm, P.A. in Arkadelphia, Arkansas. His practice involves a substantial amount of intellectual property litigation and prosecution, other business and tort litigation, and election consulting. The author would like to thank Don Chaney and Taylor Chaney for their editorial assistance and contributions to this article Nathan Price Chaney. All rights reserved. 1. People s Fire Ins. Co. v. Goyne, 79 Ark. 315, , 96 S.W. 365, 368 (1906). 2. See ARK. CODE ANN (Supp. 2011). 3. The following hypothetical is drawn from a multitude of Arkansas bad-faith cases and is not intended to refer to any living person or case.

2 854 ARKANSAS LAW REVIEW [Vol. 64:853 drops his sweet-tea-flavored vodka drink and reaches over to pick it up. Just as Dale takes his eyes off the road, Victor brakes for a tractor-trailer in front of him. Dale s truck strikes Victor s car, crumpling the rear end and pushing Victor s car into the trailer. Dale jumps out of his truck, calls an ambulance, and checks on Victor and Vanessa. With tears streaming down his cheeks, he apologizes profusely to the two Razorback fans. A sobriety test shows that Dale was legally drunk at the time of the wreck. Victor and Vanessa go to the hospital. The emergency room doctor diagnoses Victor with a shattered left leg, fractured teeth, and a traumatic brain injury. Victor stays in the hospital for a few weeks before being released with permanent injuries that impair his ability to work, walk, and talk. X-rays of Vanessa s neck show a serious injury that will require a lifetime of treatment. As a result of the wreck, Victor can no longer work his day job as a lumber-mill worker, which means that he cannot support his young family. All told, his damages are $2 million. Vanessa can still perform her work duties, but her desk job causes recurring headaches. She is no longer as active as a normal twenty-something, and her condition is expected to worsen over time. Vanessa s damages are at least $55,000. Dale carries $25,000 per person and $50,000 per accident minimum insurance limits with One-Star Insurance Company. One-Star immediately pays $25,000 per person limits to Victor. While he is in the hospital, Victor makes an underinsuredmotorist claim to his own insurance company, Nope Casualty. Victor has underinsured coverage of $500,000 and umbrella coverage of $1 million. Nope Casualty s senior vice-president, who wants a raise, pens a memo to Adjuster Annie instructing her to avoid paying the claim at all costs. Annie alters Victor s application form to show that he denied underinsured-motorist coverage and changes his other coverage selections to exactly match the premiums Victor paid over the years. Annie also sells Victor s vehicle for scrap while Victor is in the hospital so it cannot be used as evidence in Victor s case against Nope Casualty. Annie s attempts to alter and destroy evidence do not work. Victor sues Nope Casualty for first-party bad faith, and a

3 2011] BAD FAITH INSURANCE TORT CASES 855 jury awards Victor a multimillion-dollar verdict for compensatory and punitive damages. Meanwhile, despite Vanessa s offer to settle for the remaining $25,000 in coverage available to Dale so she can invoke her own underinsured-motorist coverage, One-Star refuses to do so. Vanessa sues Dale, who asks One-Star to settle the case to avoid punitive damages against himself (since he was driving drunk). One-Star refuses to settle, believing it can convince a jury that Vanessa is not a sympathetic victim due to her conviction for bounced checks ten years earlier. The trial judge excludes the earlier conviction, and a jury awards Vanessa the full $55,000 in compensatory damages and $500,000 in punitive damages for Dale s drunk driving. Dale files a notice of appeal but cannot afford to pay a bond. One-Star refuses to prosecute an appeal since it would have to post a bond on the judgment. Dale sues One-Star for third-party bad faith, alleging that One-Star negligently or in bad faith refused to settle with Vanessa. The case proceeds to a jury trial, which awards Dale a substantial verdict for compensatory and punitive damages. He uses the proceeds to pay Vanessa s judgment, plus a premium under an agreement whereby Vanessa agreed not to execute against Dale s assets during the pendency of the action against One-Star. Obviously, this is a hypothetical situation used to illustrate the principles of bad faith. Of course, bad-faith claims are not limited to automobile-insurance claims, but can be made in any insurance context where there is a dishonest and wrongful refusal to pay a claim. B. Definition There are two general types of bad-faith claims against insurers, which are known by reference to the party bringing the action. 4 Third-party bad-faith claims involve some act taken by an insurer while in a fiduciary relationship with the insured with respect to a third party, such as the failure to settle a meritorious 4. See R.J. Bob Jones Excavating Contractor, Inc. v. Firemen s Ins. Co. of Newark, N.J., 324 Ark. 282, 289, 920 S.W.2d 483, 487 (1996) (citing Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463 (1984) (describing first- and thirdparty bad-faith claims)).

4 856 ARKANSAS LAW REVIEW [Vol. 64:853 claim brought by the third party. 5 First-party bad-faith claims involve breach of the covenant of good faith and fair dealing inherent in every contract between a policyholder and an insurer Third Party Bad Faith Defined The first type of bad-faith claim, which developed in Arkansas at least as early as the 1950s, is known as third-party bad faith and involves the negligent or bad-faith failure to settle a claim against the insured. 7 When an insurer has a contractual duty to defend and settle lawsuits against its insured, the insurer owes the insured an obligation of due care, strict performance, and the utmost good faith. 8 The insurer is liable to the insured for any negligence that occurs in conducting the defense, or for any bad faith by which the insurer refuses or fails to settle the claim. 9 Most insurance policies give the insurer an irrevocable right to control the defense of a claim, including whether to settle that claim. 10 When an insurer has an irrevocable right to settle a claim, it creates a fiduciary relationship between the policyholder and the insurer. 11 The fiduciary duties that arise from this relationship require the insurer to settle a case if settlement is the reasonable thing to do. 12 In considering whether to settle, the insurer must give at least equal consideration to the interests of the insured as to its own interests. 13 Furthermore, an insurer cannot defend a case such 5. See, e.g., Home Indem. Co. v. Snowden, 223 Ark. 64, 70, 264 S.W.2d 642, (1954). 6. See, e.g., Aetna Cas. & Sur. Co., 281 Ark. at , 664 S.W.2d at Snowden, 223 Ark. at 70, 264 S.W.2d at (quoting 29 AM. JUR. Insurance 1077, 1079; 45 C.J.S. Insurance 937b). 8. Id. (quoting 29 AM. JUR. Insurance 1077). 9. Id. (quoting 29 AM. JUR. Insurance 1079). 10. See C.T. Drechsler, Annotation, Allegations in Third Person s Action Against Insured as Determining Liability Insurer s Duty to Defend, 50 A.L.R.2d 1, at 461 (1956). 11. S. Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, 848, 341 S.W.2d 36, 41 (1960) (quoting Am. Fid. & Cas. Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10th Cir. 1949)). 12. Id. at 849, 341 S.W.2d at 41 (quoting Tyger River Pine Co. v. Md. Cas. Co., 170 S.E. 346, 349 (S.C. 1933)). 13. Id. at , 341 S.W.2d at 41 (quoting Am. Fid. & Cas. Co., 173 F.2d at 832).

5 2011] BAD FAITH INSURANCE TORT CASES 857 that liability attaches to the policyholder while the insurer escapes liability. 14 An excess verdict against an insured that goes unsatisfied by an insurer makes a bad-faith claim ripe, and the insured need not pay the excess verdict in order to have a viable cause of action against the insurer. 15 Despite the fact that the third party is ultimately the party harmed in a failure-to-settle situation, the insured cannot assign the rights to litigate a bad-faith claim against her insurer to the third party. 16 In practice, many thirdparty injury victims will agree to stay or forego execution on an excess verdict in exchange for the insured s agreement to pursue a bad-faith claim against the insurer. Today, the third-party tort of bad faith still includes both bad faith and negligent failure of an insurer to settle a third-party claim within policy limits, 17 and such rule is firmly entrenched around the country. 18 The primary difference between negligent failure to settle and bad-faith refusal to settle is one of scienter. 19 The purpose of the two torts, collectively, is to ensure that when an insured is harmed due to the fault of an insurer, the insurer must make things right by the insured. Bad-faith refusal to settle is a more egregious tort than mere negligent failure to settle, and the affirmative misconduct attendant to the intentional tort triggers the availability of punitive damages. 20 The practitioner should note that third-party bad faith may be pled in the alternative, with one count for negligence and the other for bad faith. 21 The line between negligence and bad faith is not a bright one, and one court has attempted to explain it as follows: 14. See Joseph E. Edwards, Annotation, Liability Insurer s Negligence or Bad Faith in Conducting Defense as Ground of Liability to Insured, 34 A.L.R.3d 2(b), at n.3 (1970) (citing S. Sur. Co. v. Puryear-Meyer Grocer Co., 151 Ark. 480, 236 S.W. 841 (1922)). 15. S. Farm Bureau Cas. Ins. Co. v. Mitchell, 312 F.2d 485, 497 (8th Cir. 1963). 16. Greer v. Mid-West Nat l Fire & Cas. Ins. Co., 434 F.2d 215, 218 (8th Cir. 1970). 17. See R.J. Bob Jones Excavating Contractor, Inc. v. Firemen s Ins. Co. of Newark, N.J., 324 Ark. 282, 289, 920 S.W.2d 483, 487 (1996) (citing Emp rs Equitable Life Ins. Co. v. Williams, 282 Ark. 29, 665 S.W.2d 873 (1984)). 18. See, e.g., State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003). 19. See David Rand, Jr., Annotation, Recoverability of Punitive Damages in Action by Insured Against Liability Insurer for Failure to Settle Claim Against Insured, 85 A.L.R.3d 2(a), at (1978). 20. Id. 21. S. Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, , 341 S.W.2d 36, 40 (1960) (quoting Waters v. Am. Cas. Co. of Reading, Pa., 73 So. 2d 524, 528 (Ala. 1953)).

6 858 ARKANSAS LAW REVIEW [Vol. 64:853 If the concepts of good faith and negligence can be distinguished in the context of these cases, it may be that negligence relates more to the actual preparation and investigation of the claim against the insured, whereas good faith may relate more to the insurer s evaluation of the case and subsequent decisions regarding settlement. The relationship is, of course, quite close as negligence in the investigation of the claim may be such that the company does not possess sufficient information to make a goodfaith judgment. 22 Since negligence may be the foundation of a third-party bad-faith claim, it appears that scienter is not required to state such a cause of action. In third-party bad-faith claims, the insurer is a fiduciary to the insured, 23 so any breach of the fiduciary duty gives rise to bad-faith liability and punitive damages. Scienter is a factor in determining whether a punitivedamages award comports with due process First Party Bad Faith Defined First-party bad faith developed as an extension of the thirdparty bad-faith doctrine and has been recognized in Arkansas since at least as early as The purpose of recognizing the tort was to provide additional remedies for intentional misconduct. 26 First-party bad faith represents a violation of an insurance company s duty to exercise due care and strict performance and utmost good faith, 27 and it occurs when an 22. McChristian v. State Farm Mut. Auto. Ins. Co., 304 F. Supp. 748, 751 (W.D. Ark. 1969) (citing Robert E. Keeton, Liability Insurance and Responsibility for Settlement, 67 HARV. L. REV. 1136, (1954)). 23. See id. 24. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 419 (2003) (stating that one factor in determining the reprehensibility of an insurer s conduct is whether the harm was the result of intentional malice, trickery, or deceit, or mere accident (citing BMW of N. Am., Inc. v. Gore, 517 U.S. 559, (1996))). 25. See Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, , 664 S.W.2d 463, 465 (1984). 26. Id. at , 664 S.W.2d at (Hickman, J., concurring in part and dissenting in part) ( Bad faith can be, in my judgment interpreted by jurors as merely negligence, and this tort is not one of negligence it is one of intentional malicious, dishonest and oppressive conduct. ). 27. S. Farm Bureau Cas. Ins. Co. v. Hardin, 233 Ark. 1011, 1016, 351 S.W.2d 153, 156 (1961) (affirming verdict based, in part, upon some evidence to the effect that a

7 2011] BAD FAITH INSURANCE TORT CASES 859 insurance company affirmatively engages in dishonest, malicious, or oppressive conduct in order to avoid a just obligation to the insured; this is sometimes characterized as hatred, ill will, or a spirit of revenge in older or more egregious cases. 28 [B]ad-faith law does not define the terms of the insurance contract; instead, it concerns whether and how the insurance company abides by the terms of the contract. 29 If the insurer does not abide by the insurance contract in good faith, then the law provides remedies, including punitive damages. 30 There are many examples in Arkansas cases of what does and does not constitute bad faith. 31 An element of scienter is required to prove first-party bad faith. 32 Proof of an actual intent to engage in dishonest conduct to avoid a just obligation to an insured will substantiate a claim of first-party bad faith. Willful blindness 33 also provides the requisite scienter. 34 Finally, proof of reckless indifference may also serve to meet the scienter requirement, 35 as reckless indifference can give rise to punitive damages. 36 proper investigation was not made to determine the full extent of [the insured s] injuries (citing S. Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, 341 S.W.2d 36 (1960))). 28. Columbia Nat l Ins. Co. v. Freeman, 347 Ark. 423, 429, 64 S.W.3d 720, 723 (2002) (citing State Auto Prop. & Cas. Ins. Co. v. Swaim, 338 Ark. 49, 56, 991 S.W.2d 555, 559 (1999)); see also Emp rs Equitable Life Ins. Co. v. Williams, 282 Ark. 29, 30, 665 S.W.2d 873, (1984); Ark. Model Jury Instructions, Civil 2304 (2011). 29. Selmon v. Metro. Life Ins. Co., 372 Ark. 420, 426, 277 S.W.3d 196, 202 (2008) (citing Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)). 30. Id. at , 277 S.W.3d at See infra Part II.E. 32. See, e.g., Farm Bureau Ins. Co. of Ark., Inc. v. Running M Farms, Inc., 366 Ark. 480, , 237 S.W.3d 32, (2006) (citing Findley v. Time Ins. Co., 264 Ark. 647, 573 S.W.2d 908 (1978) (mere nonfeasance will not justify a bad-faith claim)). 33. See United States v. One 1989 Jeep Wagoneer, 976 F.2d 1172, 1175 (8th Cir. 1992) ( [K]nowledge may be inferred when a person deliberately closes his eyes to the existence of facts that would otherwise be obvious or demonstrates a conscious purpose to avoid enlightenment. (citing Mattingly v. United States, 924 F.2d 785, 792 (8th Cir. 1991))). 34. See Cincinnati Life Ins. Co. v. Mickles, 85 Ark. App. 188, 201, 148 S.W.3d 768, 777 (2004) (finding bad faith where an insurer turn[ed] a blind eye to clear evidence that misrepresentations had been made). 35. Arp v. AON/Combined Ins. Co., 300 F.3d 913, (8th Cir. 2002) (citing Kirchoff v. Am. Cas. Co. of Reading, Pa., 997 F.2d 401, (8th Cir. 1993) (applying South Dakota law)). 36. Ark. Model Jury Instructions, Civil 2218 (2011).

8 860 ARKANSAS LAW REVIEW [Vol. 64: The Distinctions Between the Two Types of Bad Faith Are Not Supported by the Public Policy Underlying the Tort Itself First- and third-party claims are treated differently, since third-party bad-faith claims may be proved by showing merely negligent conduct while first-party claims require scienter. 37 Such a distinction between these bad-faith torts is puzzling, especially considering that a duty is breached by the insurer in each type of tort. For first-party bad-faith claims, the insurer breaches the duty of good faith and fair dealing, 38 while in thirdparty claims, the insurer breaches a fiduciary duty to act in the insured s best interests. 39 Apparently, courts consider a breach of fiduciary duty to be more reprehensible than a breach of the duty to act in good faith. However, this distinction seems arbitrary given the purpose of insurance. The definition of insurance is a contract by which one party (the insurer) undertakes to indemnify another party (the insured) against risk of loss, damage, or liability arising from the occurrence of some specified contingency The factual circumstance giving rise to first-party insurance claims is typically that the insured has suffered some sort of loss, and the purpose of insurance is to place the insured in as close to the same position as the insured was before the loss. Oftentimes, the insured in a first-party case is in a precarious or vulnerable situation after the loss. In contrast, in a third-party situation, the insured has not necessarily suffered a loss, but instead may have caused one. To this author, it appears that first-party claimants are therefore more deserving of protections against unscrupulous or incompetent insurers. However, despite the unequal starting position for claimants in first-party cases, claimants in third- 37. See Home Indem. Co. v. Snowden, 223 Ark. 64, 70, 264 S.W.2d 642, (1954) (quoting 29 AM. JUR. Insurance 1077, 1079; 45 C.J.S. Insurance 937b). 38. Selmon v. Metro. Life Ins. Co., 372 Ark. 420, , 277 S.W.3d 196, 202 (2008). 39. S. Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, , 341 S.W.2d 36, 41 (1960) (quoting Am. Fid. & Cas. Co. v. G.A. Nichols Co., 173 F.2d 830, 832 (10th Cir. 1949)). 40. BLACK S LAW DICTIONARY 870 (9th ed. 2009).

9 2011] BAD FAITH INSURANCE TORT CASES 861 party cases have a lower burden since the actionable tort is mere negligence. 41 The remedies available to an insured might explain the puzzling nature of this distinction. In a first-party case, the claimant has a cause of action sounding in contract to remedy a simple mistake or mere negligence by the insurer in denying a claim. 42 Only when the claim rises to the level of oppressive conduct are the tort of bad faith and attendant punitive damages triggered. 43 However, in a third-party bad-faith case, by definition the claimant has no additional contractual remedies available since the insurer paid its policy limits, thereby leaving the insureds to pay an excess verdict on their own. 44 A bad-faith action sounding in tort is the insured s only remedy for the insurer s negligent failure to settle, and oftentimes will be the only asset against which the third party can collect its excess verdict. Thus, the differing levels of proof as between first- and third-party bad-faith cases may be one borne of pure necessity due to the unique factors in a third-party case. 4. Other Substantive Law Also Governs an Insurer s Relationship with Its Policyholders Such That Bad-Faith Claims Are Invariably Accompanied by Other Causes of Action In addition to the judicially developed tort of bad faith, the Arkansas Legislature provided remedies for policyholders forced to litigate against their insurers in breach-of-contract actions as early as Since other remedies are available, the doctrine of bad faith has been challenged on the basis that it was preempted by the statutory protections afforded to policyholders. 46 The Arkansas Supreme Court rejected such 41. See R.J. Bob Jones Excavating Contractor, Inc. v. Firemen s Ins. Co. of Newark, N.J., 324 Ark. 282, 289, 920 S.W.2d 483, 487 (1996) (citing Emp rs Equitable Life Ins. Co. v. Williams, 282 Ark. 29, 665 S.W.2d 873 (1984)). 42. See Selmon, 372 Ark. at , 277 S.W.3d at Rand, supra note 19, at See Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 SETON HALL L. REV. 74, 84 (1994). 45. ARK. CODE ANN (Supp. 2011) (originally enacted as Act 148 of 1959). 46. Emp rs Equitable Life Ins. Co., 282 Ark. at 29-30, 665 S.W.2d at 873 (citing Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W.2d 463 (1984)).

10 862 ARKANSAS LAW REVIEW [Vol. 64:853 challenge, holding that the tort of bad faith is a separate, cognizable cause of action from breach-of-contract actions involving insurers, despite the presence of explicit, punitivetype 47 statutory penalties available at section of the Arkansas Code. 48 Stated another way, the statutory regime providing for penalties does not preempt the tort of bad faith or punitive damages against insurers. 49 Practitioners should seriously consider whether the facts of their individual cases will meet a pled with particularity standard before alleging bad faith, since failing to prove bad faith can engender sympathy for insurers whom jurors may feel are falsely accused of purposeful or reckless wrongdoing. 5. Relationship Between the Tort of Bad Faith and Deceptive Insurance Practices Set Forth in the Arkansas Trade Practices Act While a violation of statute is some evidence of negligence, 50 a violation of the Trade Practices Act is not necessarily evidence of bad faith. 51 If offered, an instruction to this effect must have support in the evidence. 52 Furthermore, if a jury instruction is offered that a violation of the Trade Practices Act is evidence of deceit or bad faith, then the section of the Trade Practices Act relied upon must have an element of scienter, and the instruction should contain all elements of the statute, including elements referencing scienter or a pattern and practice of conduct Section of the Arkansas Code provides a twelve percent penalty (or a multiplier of 0.12 using the parlance of due-process cases, see Section IV.B., infra), reasonable attorney s fees, and costs when an insured prevails against his insurer. ARK. CODE ANN Aetna Cas. & Sur. Co., 281 Ark. at , 664 S.W.2d at Id. 50. See Ark. Model Jury Instructions, Civil 601 (2011) (stating that a violation of a statute is evidence of negligence). 51. Id. at 135, 664 S.W.2d at 466 (reversing trial court for giving an instruction which omitted a portion of the relevant statute from the Trade Practices Act) (emphasis added). 52. See id. (holding that the evidence did not provide proof relating to the frequency of the insurer s act, which was required by the statute). But see Ark. Model Jury Instructions, Civil 601 (2011) (stating that a violation of a statute is evidence of negligence). 53. See Cincinnati Life Ins. Co. v. Mickles, 85 Ark. App. 188, , 148 S.W.3d 768, (2004) (citing Aetna Cas. & Sur. Co., 281 Ark. at , 664 S.W.2d at 466)

11 2011] BAD FAITH INSURANCE TORT CASES 863 C. Pleading at Various Stages of Litigation and the Accompanying Standards of Review 1. Statute of Limitations The statute of limitations for the tort of bad faith is three years. 54 The case discussing the issue in the most depth is Carpenter v. Automobile Club Interinsurance Exchange (AAA). 55 In that case, the parties disputed when the statute of limitations accrued for a third-party bad-faith case filed in June The insurer argued that the statute of limitations accrued in January 1990, when the time period in the original settlement-demand letter from the injured third party expired. 57 The insured argued that the cause of action accrued in 1991 when judgment was entered against her. 58 The Eighth Circuit held that under the facts of the case, the statute of limitations for the tort of third-party bad faith was triggered by the underlying judgment entered in Notably, the underlying judgment in the AAA case was appealed and affirmed by the Arkansas Supreme Court in The insured did not argue on appeal that the statute of limitations for the bad-faith claim accrued only after the underlying judgment was affirmed and the insurer refused to pay the judgment. 61 That is, the Eighth Circuit did not have to choose an accrual date between entry of the underlying judgment and affirmance of the underlying judgment on appeal and subsequent refusal to satisfy the underlying judgment. This appears to be an unsettled question of law in Arkansas. The AAA case suggests that insureds who claim bad faith against their carriers [need not] sue before knowing (reversing due to instruction that violation of licensing statute was evidence of deceit because the required scienter element was not present in the statute alleged to have been violated). 54. See Carpenter v. Auto. Club Interinsurance Exch., 58 F.3d 1296, 1300 (8th Cir. 1995) (citing ARK. CODE ANN (Repl. 2005)) F.3d 1296 (8th Cir. 1995). 56. Id. at Id. at Id. 59. Id. at Carpenter, 58 F.3d at See id. at 1300.

12 864 ARKANSAS LAW REVIEW [Vol. 64:853 whether the carriers acts or omissions would result in injury. 62 However, an earlier Eighth Circuit case suggests that the insured must prove that he had [] to pay the [amount] he was seeking to recover, over and above the limit of the policy[,] which means that the underlying case must have been fully resolved before the insured could meet his burden of proof. 63 These Eighth Circuit cases must be synthesized with the Arkansas Supreme Court s holding that a pending appeal by the damaged party does not serve to toll the statute of limitations when damages can be presently identified. 64 In determining whether damages can be presently identified when the insured does not know whether the insurer will pay the full judgment, it may be helpful look to several other states that have chosen the date of refusal to pay full benefits and/or the date of the affirmance of the excess verdict on appeal as the date when the statute of limitations for a third-party bad-faith case accrues. 65 It remains 62. Id. at S. Farm Bureau Cas. Ins. Co. v. Mitchell, 312 F.2d 485, 497 (8th Cir. 1963) (citing S. Farm Bureau Cas. Ins. Co. v. Parker, 232 Ark. 841, , 341 S.W.2d 36, 41 (1960)). 64. Ragar v. Brown, 332 Ark. 214, 221, 964 S.W.2d 372, 376 (1998) (citing Gulf Coast Inv. Corp. v. Brown, 813 S.W.2d 218 (Tex. 1991)) (holding that a legal malpractice claim was time-barred when the claim was not brought within three years of the adverse trial court order, even though the claim was brought within three years of the denial of an appeal from that order); see also Rice v. Ragsdale, 104 Ark. App. 364, , 292 S.W.3d 856, 859 (2009) (affirming dismissal of a case in which a trial court held that a statute of limitations for a legal malpractice claim ran before the underlying case was affirmed on appeal); cf. Wright v. Compton, Prewett, Thomas & Hickey, P.A., 315 Ark. 213, 217, 866 S.W.2d 387, 390 (1993) (holding that failing to apply the last act rule could require a plaintiff to bring suit against his attorney before a lengthy transaction were completed, and that, in turn, could well deny the attorney the chance to effectuate the proper result ). 65. See Linkenhoger v. Am. Fid. & Cas. Co., 260 S.W.2d 884, 887 (Tex. 1953) (stating that date of affirmance on appeal, when judgment became final, was date for purposes of the statute of limitations), modified Street v. Honorable Second Court of Appeals, 756 S.W.2d 299, 302 (Tex. 1988) ( [W]e reaffirm the decision of Linkenhoger that the statute of limitations will not begin to run until all appeals have been exhausted. ); see also Sikora v. State Farm Ins. Co., No , 2009 WL , at *3 (W.D. Pa. Aug. 4, 2009) ( [A] claim of bad faith... begins to accrue when the insurer first provides definite notice of a refusal to indemnify.... (quoting Sikirica v. Nationwide Ins. Co., 416 F.3d 214, 224 (3d Cir. 2005))); Flintkote Co. v. Gen. Accident Assurance Co. of Canada, 480 F. Supp. 2d 1167, 1178 (N.D. Cal. 2007) (applying the doctrine of equitable tolling to avoid[] the perverse possibility that an insured will have to file suit against its insurer before the claim is investigated or denied (citing Prudential-LMI Commercial Ins. v. Superior Court, 798 P.2d 1230, 1230 (Cal. 1990))); McLeod v. Life of the S. Ins. Co., 703 So. 2d 362, 365 (Ala. Civ App. 1996) ( [A] cause of action for bad faith refusal to

13 2011] BAD FAITH INSURANCE TORT CASES 865 to be seen whether Arkansas will align with those other jurisdictions. 2. Initial Pleadings Arkansas is a fact-pleading state, rather than a noticepleading state. 66 It does not suffice for a bad-faith plaintiff to recite facts surrounding the failure to investigate and pay a claim and conclude that such actions constitute bad faith; rather, the insured must plead an allegation of affirmative wrongdoing on the part of the insurer. 67 The insurer s wrongdoing should be pled as specifically as possible. 68 Since bad faith is a tort, the policyholder must plead compensatory damages in order to recover both compensatory and punitive damages. 69 When Arkansas courts encounter a similar procedural situation where a party alleges fraud, 70 a party must state the circumstances constituting fraud with particularity. 71 Despite the fact that bad faith does not appear in Rule 9(b) of the Arkansas Rules of Civil Procedure requiring fraud to be pled with particularity 72 caselaw indicates that the practitioner honor insurance benefits accrues upon the event of the bad faith refusal.... (alteration in original) (quoting Blackburn v. Fid. & Deposit Co. of Md., 667 So. 2d 661, 668 (Ala. 1995))); Oaks v. Sellers, 953 So. 2d 1077, 1081 (Miss. 2007) ( In Young, a bad faith case, this Court held that the statute of limitations began running on an insurance claim from the receipt of written notice denying the claim. (citing Young v. S. Farm Bureau Life Ins. Co., 592 So. 2d 103 (Miss. 1991))); Klettner v. State Farm Mut. Auto. Ins. Co., 519 S.E.2d 870, 874 (W. Va. 1999) ( To permit a direct action against the insurance company before the underlying claim is ultimately resolved may result in duplicitous litigation since the issue of liability and damages as they relate to the statutory settlement duty are still unresolved in the underlying claim. (quoting Jenkins v. J.C. Penney Cas. Ins. Co., 280 S.E.2d 252, 259 (W. Va. 1981), superseded by statute W. VA. CODE ANN a (West 2011), as recognized in Noland v. Va. Ins. Reciprocal, 686 S.E.2d 23, (W. Va. 2009))); J.H. Cooper, Annotation, Limitation of Action Against Liability Insurer for Failure to Settle Claim or Action Against Insured, 68 A.L.R.2d 3, at 894 (1959). 66. See Williams v. Joyner-Cranford-Burke Constr. Co., 285 Ark. 134, 139, 685 S.W.2d 503, 506 (1985) (citing ARK. R. CIV. P. 8). 67. Johnson v. Safeco Ins. Co., 265 Ark. 9, 10, 576 S.W.2d 220, 221 (1979); see also Bethel Baptist Church v. Church Mut. Ins. Co., 54 Ark. App. 262, 265, 924 S.W.2d 494, 496 (1996). 68. Am. Underwriters Ins. Co. v. Shook, 247 Ark. 1082, , 449 S.W.2d 402, 404 (1970). 69. Kay v. Econ. Fire & Cas. Co., 284 Ark. 11, 13, 678 S.W.2d 365, 366 (1984). 70. See Shook, 247 Ark. at 1084, 449 S.W.2d at ARK. R. CIV. P. 9(b) (stating that conditions of the mind, such as intent, may be pled generally). 72. See ARK. R. CIV. P. 9(b).

14 866 ARKANSAS LAW REVIEW [Vol. 64:853 would be well advised to plead all circumstances constituting bad faith with as much particularity as possible and to amend as new evidence of bad faith arises. 73 An argument can be made on behalf of the policyholder that the fraud with particularity standard is too demanding in the context of a bad-faith tort claim. As indicated above, Rule 9(b) of the Arkansas Rules of Civil Procedure does not expressly require bad faith to be pled with particularity. Furthermore, as discussed below, insurers hold the key to the castle when it comes to proof of bad faith; in many instances, bad faith will be proven by information found within an insurer s internal policy and procedure documents and the insurer s handling of the claims file. 74 The reality of the policyholder-insurer relationship dictates a more lenient pleading standard than the Rule 9(b) fraud with particularity standard. 75 Because the proof of bad faith will often be information solely in the insurer s possession, 76 the practitioner would be well-advised to use the on information and belief pleading style. 77 Allegations made on information and belief meet factpleading requirements 78 where the facts are peculiarly within the opposing party s knowledge. 79 However, the practitioner should use care to specifically plead that the facts are within the insurer s control and state that the allegations made on 73. See Shook, 247 Ark. at , 449 S.W.2d at 404 (reversing judgment in favor of insured for failure to plead the essential allegations of bad faith or negligence in action against insurer for failure to settle, and citing fraud cases in support of requirement for pleading facts distinctly, definitely, and clearly (quoting Purtle v. Wilcox, 239 Ark. 988, 993, 395 S.W.2d 758, 761 (1965))). Cf. Title Guar. & Sur. Co. v. Burke, 134 Ark. 499, , 204 S.W. 215, 216 (1918) (distinguishing language from U.S. Fid. & Guar. Co. v. Hittle, 96 N.W. 782 (Iowa 1903) that equates bad faith and fraud). 74. See Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 1081, 935 S.W.2d 556, 560 (1996) (citing Marrow v. State Farm Ins. Co., 264 Ark. 227, , 570 S.W.2d 607, 613 (1978)). 75. See, e.g., Marrow, 264 Ark. at , 570 S.W.2d at Parker, 326 Ark. at 1081, 935 S.W.2d at See Drobnak v. Andersen Corp., 561 F.3d 778, (8th Cir. 2009) (discussing sufficiency of fraud claims made on information and belief when the opposing party controlled those facts). 78. Compare FED. R. CIV. P. 9(b) (requiring allegations of fraud to be supported by specific facts), with ARK. R. CIV. P. 8(a) (requiring fact pleading). 79. Drobnak, 561 F.3d at ; see also White v. Williams, 187 Ark. 113, 115, 119, 59 S.W.2d 23, (1933) (complaint pled on information and belief survived demurrer).

15 2011] BAD FAITH INSURANCE TORT CASES 867 information and belief are contingent upon further discovery. 80 Furthermore, all facts that support allegations made on information and belief must be pled as well Summary Judgment In order to survive summary judgment, the bad-faith claim must be complete at the time of filing suit. 82 A policyholder must properly plead the elements of the tort of bad faith in his complaint, 83 and should also plead and provide proof of compliance with all conditions precedent within the policy. 84 The policyholder must also provide evidence that the insurer acted in a manner beyond a mere denial of the claim, avoidance of liability under the policy, or inaction on the part of the insurer. 85 It is likely necessary to demonstrate that any purported controversy over liability put forth by the insurer is not a bona fide dispute. 86 Affidavits alleging fraud on the part of the insurer s agent, if appropriate, may be used to survive a motion for summary judgment Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, (8th Cir. 2001). 81. Id. at 668; see also White, 187 Ark. at 115, 59 S.W.2d at Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 1085, 935 S.W.2d 556, 562 (1996). 83. Kay v. Econ. Fire & Cas. Co., 284 Ark. 11, 13, 678 S.W.2d 365, 366 (1984). 84. Willett s Plumbing Co. v. Nw. Nat l Cas. Co., 261 Ark. 447, 448, 548 S.W.2d 830, (1977). 85. See Ryder v. State Farm Mut. Auto. Ins. Co., 371 Ark. 508, , 268 S.W.3d 298, 300 (2007); see also Reynolds v. Shelter Mut. Ins. Co., 313 Ark. 145, , 852 S.W.2d 799, 801 (1993) (stating that an insurer was not liable for bad faith for failing to investigate a claim it reasonably believed was not covered). 86. See, e.g., Watkins v. S. Farm Bureau Cas. Ins. Co., 2009 Ark. App. 693, at 14, S.W.3d,. 87. See Neill v. Nationwide Mut. Fire Ins. Co., 355 Ark. 474, 482, 139 S.W.3d 484, 489 (2003). In this case, the insurer s agent filled out forms for the insured during an interview in the agent s office. Id. at 477, 139 S.W.3d at 485. There was no proof that the agent intended to defraud the insured at the time the forms were filled out. Id. Rather, the bad-faith conduct occurred later, when the insurer attempted to use the errors and omissions of its agents offensively against the insured in order to deny coverage. Id. at , 139 S.W.3d at 486; see infra Part II.E.1 (outlining the affirmative misconduct that has been used to prove bad faith in the past). Practitioners should align their facts as closely as possible with existing caselaw in order to survive summary judgment. See, e.g., Watkins, 2009 Ark. App. 693, at 14-15, S.W.3d at.

16 868 ARKANSAS LAW REVIEW [Vol. 64:853 Since the claim file and internal policies and procedures will likely be the primary source of evidence of bad faith, 88 the practitioner must be diligent in seeking discovery from the insurer. 89 As once stated to the author, Suing an insurance company for bad faith is like throwing rocks at a wasp nest. You re going to get them riled up. 90 The insurer will likely seek dismissal on the pleadings multiple times throughout the litigation. Since the insurer is in control of much of the information that will be used to prove the insurer s bad faith, motions to dismiss and for summary judgment face a ripeness issue until all pertinent discovery has been completed. 4. Trial The Arkansas Model Jury Instructions (AMI) provide a jury instruction for the tort of bad faith. 91 This jury instruction does not appear to encompass cases involving third-party negligent refusal to settle because AMI 2304 requires scienter. 92 In third-party cases involving negligent failure to settle, AMI 203 and are appropriate because they accurately state minimum standard required to prove a third-party claim. 93 If the case involves a first-party claim or evidence of dishonesty in a third-party claim such that the evidence warrants the giving of AMI 2304, the punitive-damages instruction found at AMI 2218 should also be given, since scienter is a requirement under both AMI 2304 and AMI See Marrow v. State Farm Ins. Co., 264 Ark. 227, , 570 S.W.2d 607, 613 (1978). 89. See infra Part II.D. 90. With thanks to fellow attorney Don Campbell. 91. Ark. Model Jury Instructions, Civil 2304 (2011). This instruction requires the insured to prove that the insurer was guilty of bad faith in an attempt to avoid liability under its policy issued to [Plaintiff]. Id. It also states, that bad faith requires affirmative misconduct, without a good faith defense. The affirmative misconduct must be dishonest, oppressive, or malicious. By malicious I mean carried out with a state of mind characterized by hatred, ill will, or a spirit of revenge. Id. On its face, this instruction does not encompass negligent failure to settle third-party claims. It appears that the Arkansas Supreme Court Committee on Jury Instructions may need to promulgate instructions for use in third-party bad-faith cases. 92. Ark. Model Jury Instructions, Civil Ark. Model Jury Instructions, Civil 203, (2011). 94. Ark. Model Jury Instructions, Civil 2218, 2304 (2011).

17 2011] BAD FAITH INSURANCE TORT CASES 869 In first-party cases governed by AMI 2304, the standard for establishing a claim for bad faith is rigorous and difficult to satisfy. 95 In order to survive a directed-verdict motion, the plaintiff must present more than a scintilla of evidence to support a bad-faith claim; rather, the plaintiff must provide substantial evidence of bad faith. 96 Substantial evidence goes beyond suspicion or conjecture and is sufficient to compel a conclusion one way or the other. 97 There must be proof of affirmative misconduct, rather than mere denial of a claim, simple negligence, or bad judgment Other Litigation Considerations for the Practitioner Where an insured s attorney is involved in the settlement negotiations leading up to a claim of bad faith, the attorney may be a necessary witness to prove bad faith, especially if there has been no written offer to settle within policy limits. 99 Efforts by an insurer to call the insured s attorney are looked upon with disfavor unless the attorney s testimony is truly necessary. 100 The practitioner should insulate himself from becoming a disqualified necessary witness by relaying all offers for settlement within policy limits, as well as other communications with his client s insurer, in writing. In a third-party case, the attorney who defended the insured in the underlying lawsuit will likely be a necessary witness. A common defense to bad-faith claims is that the insured meaningfully participated in the decision to refuse a settlement 95. Unum Life Ins. Co. of Am. v. Edwards, 362 Ark. 624, 627, 210 S.W.3d 84, 87 (2005) (citing Delta Rice Mill, Inc. v. Gen. Foods Corp., 763 F.2d 1001, 1004 n.3 (8th Cir. 1985)). 96. State Auto Prop. & Cas. Ins. Co. v. Swaim, 338 Ark. 49, 57-59, 991 S.W.2d 555, (1999). 97. S. Farm Bureau Cas. Ins. Co. v. Allen, 326 Ark. 1023, 1027, 934 S.W.2d 527, 529 (1996) (citing Barnes, Quinn, Flake, & Anderson, Inc. v. Rankins, 312 Ark. 240, 848 S.W.2d 924 (1993)). 98. Switzer v. Shelter Mut. Ins. Co., 362 Ark. 419, 433, 208 S.W.3d 792, 801 (2005). 99. See generally Weigel v. Farmers Ins. Co., 356 Ark. 617, , 158 S.W.3d 147, 155 (2004) Id. at 628, 158 S.W.3d at 155; see also Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, , 664 S.W.2d 463, 467 (1984) (discussing attorneys testifying as witnesses).

18 870 ARKANSAS LAW REVIEW [Vol. 64:853 offer. 101 Thus, proof of a third-party bad-faith claim will involve evidence of communications between the insured and the insurer, including communications relayed between the two parties by the insured s counsel. 102 Accordingly, the insured s bad-faith claim is likely to involve testimony by her attorney in the underlying action as to whether the insured meaningfully participated in the decision to reject the settlement offers and whether such participation was the result of enough information to constitute informed consent. 103 The attorney cannot claim the attorney-client privilege to avoid testifying, as such privilege belongs to the client. 104 The attorney s testimony will likely touch upon the insurer s position on settlement; for instance, if the insurer had decided to stonewall and instructed the attorney to try the case regardless of the facts particular to this individual case, the insurer would be liable for bad faith. 105 As a practical matter, regardless of which way the attorney testifies, either the insurer or the insured will dispute the attorney s testimony as part of the case. That is, the attorney will face the conflict of aligning his testimony with his client (the insured) to which he owes a duty of undivided loyalty, 106 or with the insurance company that pays his bills. 107 Undoubtedly, this is not an enviable position See W. E. Shipley, Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 12, at 205 (2011) (stating that one factor relevant to bad faith is whether the insured threatened the insurer with the possibility of an excess verdict to settle within policy limits) See Weigel, 356 Ark. at , 158 S.W.3d at See Riske v. Truck Ins. Exch., 490 F.2d 1079, (8th Cir. 1974) (quoting Lange v. Fid. & Cas. Co. of N.Y., 185 N.W.2d 881, 884 (Minn. 1971)) (applying Minnesota law) ARK. R. EVID. 502(c) Lienemann v. State Farm Mut. Auto Fire & Cas. Co., 540 F.2d 333, 339 (8th Cir. 1976) Brown v. Kelton, 2011 Ark. 93, at 11-12, S.W.3d, (Hannah, C.J., concurring); see also First Am. Carriers, Inc. v. Kroger Co., 302 Ark. 86, 90, 787 S.W.2d 669, 671 (1990) (adopting the principles established by the ABA Committee on Ethics and Professional Responsibility, Informal Op (1981)); ARK. RULES PROF L CONDUCT R. 3.7 cmt. 6 (2011) See Brown, 2011 Ark. 93, at 10, S.W.3d at (Hannah, C.J., concurring). Justice Hannah stated: [A]n insurance carrier, for example, is a business and is naturally concerned with profits and retaining as much of the insurance premiums as possible, which translates in a lawsuit into a desire to pay as little in fees, costs, and

19 2011] BAD FAITH INSURANCE TORT CASES 871 D. Discovery Will Include Insurance Claim Files and the Insurer s Policies and Procedures, Which Will Likely Contain the Information Necessary to Prove a Claim of Bad Faith The scope of discovery is broader in bad-faith cases than in virtually all other cases because an insured may only prove his claims through the records kept by his insurer. 108 An insurance company s claim file, policies, and procedures are relevant such that the insurer must respond to interrogatories and requests for production directed to these items. 109 The Arkansas Supreme Court reversed a trial court for abusing its discretion by impermissibly limiting discovery into these matters. 110 The court recognized the very pertinent fact that proof of bad-faith claims necessarily comes from the files of the insurer and the testimony of its officers and agents. 111 In so holding, the court concluded that the scope of discovery permitted should be broader than otherwise and the bad-faith claimant should be permitted to inspect any writing in the files of the insurance company which might lead to admissible evidence The Scope of Discovery is Broad Enough to Encompass the Investigation, Evaluation, Explanation, and Payment by the Insurer of the Underlying Claim Essentially, an insurer must secure enough information that its decision to settle, and its recommendation to the insured on judgments as possible. The insured s interests are not the same as the insurance company s, and those interests may vary greatly. Id See Parker v. S. Farm Bureau Cas. Ins. Co., 326 Ark. 1073, 1081, 935 S.W.2d 556, 560 (1996) (citing Marrow v. State Farm Ins. Co., 264 Ark. 227, 570 S.W.2d 607 (1978)) Marrow, 264 Ark. at , 570 S.W.2d at Id. at , 570 S.W.2d at Id Id. at , 570 S.W.2d at 613 (emphasis added). The basic purpose of discovery is to allow each side to obtain facts about their case. Rule 26 of the Arkansas Rules of Civil Procedure allows discovery into any unprivileged matter so long as the discovery request is reasonably calculated to lead to the discovery of admissible evidence; the purpose of discovery procedures is to make a trial more nearly a fair contest than a game of blindman s buff [sic] by requiring disclosure of basic issues and facts to the fullest practicable extent. Rickett v. Hayes, 251 Ark. 395, 400, 473 S.W.2d 446, 488 (1971) (citing United States v. Proctor & Gamble Co., 356 U.S. 677 (1958)).

20 872 ARKANSAS LAW REVIEW [Vol. 64:853 whether to settle, must constitute informed consent. 113 Other factors relevant to a bad-faith claim for failure to settle include: whether the insurer failed to properly and fully investigate the claim; whether the insured made any misrepresentations that misled the insurer in its settlement negotiations; whether the facts of the case suggest that a defense verdict on liability is doubtful; whether the insurer believed in good faith that the insured was not liable or that the proposed settlement was greater than an amount a jury would reasonably award; whether a verdict would likely be in excess of policy limits due to the plaintiff s injuries; whether the insurer gave due regard to the recommendations of its trial counsel; the negotiations and settlement offers between the plaintiff and the insured, including whether the plaintiff made any efforts to settle for policy limits or less; the information that was available to the insurer at the time the settlement offer was made and whether the insurer ascertained the evidence against its insured; whether the insured was informed of all settlement offers; whether the insured demanded that the insurer settle within policy limits or gave informed consent to the insurer s strategy; whether the insurer failed to communicate with the insured, including informing the insured about the possibility of an excess verdict; whether the insurer gave due consideration to offers of contribution made by the insured; whether the insurer demanded contribution from the insured; 113. See Riske v. Truck Ins. Exch., 490 F.2d 1079, (8th Cir. 1974) (quoting Lange v. Fid. & Cas. Co. of N.Y., 185 N.W.2d 881, 884 (Minn. 1971)) (applying Minnesota law).

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