Delaware First-Party Bad Faith Claims: What's The Verdict?

does delaware recognize first party bad faith insurance claims

Bad faith in insurance refers to unfair conduct by an insurance company, such as denying a valid claim, unreasonably delaying payment, or making only partial payments. First-party bad faith insurance claims are made by policyholders against their insurers for wrongful denial or delay of claims or underestimated payouts. While there are no statutory grounds for a bad faith cause of action in Delaware, case law suggests that the state recognizes first-party bad faith insurance claims. For instance, in Tackett v. State Farm Fire & Cas. Inc. Co., the court defined the criteria for establishing a claim for punitive damages, indicating that a plaintiff must prove the insurer's conduct was outrageous or driven by an evil motive. Additionally, the Delaware Supreme Court has ruled on the timing of actions for bad faith failure to settle third-party claims, indicating that the state is actively shaping its legal landscape around bad faith insurance claims.

Characteristics Values
First-party bad faith insurance claims Initiated by policyholders against their insurers
Third-party bad faith insurance claims Initiated by a third party against the policyholder, and the insurance provider becomes involved to support the policyholder's side
Damages recoverable in a bad faith claim Contract damages, consequential damages, attorney's fees (only if insured prevails against a property insurer), and punitive damages
Statute of Limitations Three-year statute of limitations on a claim against an insurer for acting in bad faith when refusing to settle a third-party insurance claim

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First-party claims explained

A first-party insurance claim is one that is filed directly with your own insurance company following an accident or injury. This type of claim is made by the policyholder, and it is used to request compensation for covered losses or damages incurred in accidents. For example, if you damage your car by backing into a pole, you will file a claim with your own insurance company, which is a first-party insurance claim.

First-party claims are contractual and contingent on the specific language of the insurance policy. The insurance company will compensate the policyholder according to what is stated in the insurance policy. Therefore, it is important for policyholders to know what is covered and excluded in their policy.

Even though what is covered under a first-party insurance policy is specified in the contract, insurance companies do not always pay out everything they are required to by law. This is known as bad faith insurance practice. Some examples of this include delaying or denying compensation without a justifiable reason, failing to acknowledge and respond to a claim promptly, and failing to perform a proper and thorough investigation into the claim.

If your insurance company is engaging in bad faith practices, you are entitled to file a lawsuit. If you believe your insurance company is not complying with the terms of your insurance policy, you can contact a first-party insurance lawyer to learn about your legal options.

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Third-party claims explained

Third-party claims are a type of insurance claim that is brought by a third party, rather than the insured. In this context, a third party is an individual who is not a part of the original agreement or contract, but who may be added to the original action by a defendant or respondent.

A common example of a third-party claim is when a business is sued by someone. For instance, a pedestrian who claims to have been injured on a business's property sues the business. The business then turns over the claim to their insurer. The insurance company now has two duties: a duty to defend and a duty of indemnification. The duty to defend means the insurance company must represent the business in the lawsuit brought against them by the claimant. The duty of indemnification means the insurance company must pay a judgment entered against the business in the lawsuit.

In the state of Delaware, there is a three-year statute of limitations on a claim against an insurer for acting in bad faith when refusing to settle a third-party insurance claim. This means that a lawsuit must be filed within three years from the time the insurance company committed the wrongful conduct. If this time limit is not met, the claim may be barred. The Delaware Supreme Court has ruled that an action for an insurer's bad faith failure to settle a third-party claim accrues only after a judgment against the policyholder for an amount exceeding the policy limits becomes final and non-appealable.

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What constitutes bad faith

While there are no statutory grounds for a bad faith cause of action in Delaware, the state's Supreme Court has ruled on at least one instance of bad faith failure to settle a third-party claim. In the case of Connelly v. State Farm Mutual Auto Insurance Company, the court found that an action for an insurer's bad faith accrues only after a judgment against the policyholder for an amount exceeding the policy limits becomes final and non-appealable.

Now, what constitutes bad faith? Bad faith insurance refers to unfair or unreasonable conduct by an insurance company, deliberately violating its contractual obligations to its clients. This can include refusing to pay a legitimate claim, unreasonably delaying payment, or failing to properly investigate a claim. Misrepresenting contract terms, nondisclosure of policy provisions, and making unreasonable demands on the policyholder to prove a covered loss are also examples of bad faith.

It's important to note that simple mistakes, delays due to employee oversight or computer error, or a policyholder's dissatisfaction with a claim settlement estimate do not constitute bad faith.

If a policyholder suspects bad faith, they can document their complaint in writing, contact their state department of insurance, or consult a lawyer.

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Recoverable damages

While there are no statutory grounds for a bad faith cause of action in Delaware, damages can be recovered in a bad faith claim. These include contract damages, consequential damages, attorney's fees (only if the insured prevails against a property insurer), and punitive damages.

In the case of Pierce v. Int’l Ins. Co. of Ill., 671, A.2d 1361, 1367 (Del. 1996), it was established that:

> Any recovery for emotional distress without accompanying physical injury must be based in tort law [...] damages “do not arise from a breach of the duty of good faith [...]”.

In other words, emotional distress without physical injury is not a valid reason to sue for breach of the duty of good faith.

To establish a claim for punitive damages, a plaintiff must prove that the insurer’s conduct was “outrageous,” due to an “evil motive” or “reckless indifference to the rights of others.” Mere inadvertence, mistake, or errors in judgment that constitute negligence are not sufficient.

In addition to the above, if successful in proving bad faith against an insurance company in court, you are likely to recover damages, including the amount of money due under your insurance policy (i.e. the coverage amount) and, sometimes, even consequential damages that are not covered under the insurance policy. This means that the court's award could exceed the amount of your insurance policy if the insurance company’s bad faith conduct caused damage in excess of the policy amount.

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Statute of limitations

In the state of Delaware, there is a three-year statute of limitations on claims against an insurer for acting in bad faith when refusing to settle a third-party insurance claim. This means that a lawsuit must be filed within three years from the time the insurance company committed the alleged wrongful conduct. In the context of a bad faith claim, this typically refers to the date when the insurer refused to settle or pay out a claim.

The statute of limitations for such claims in Delaware begins to accrue when an excess judgment against an insured becomes final and non-appealable. This means that the three-year time limit starts from the date when all legal options for the insured, such as appeals, have been exhausted and the judgment is legally binding. This ruling was established by the Delaware Supreme Court in the case of Connelly v. State Farm Mutual Auto Insurance Company on March 4, 2016.

The court's decision to start the statute of limitations from the date of a final, non-appealable judgment was based on several considerations. Firstly, it helps to prevent conflicts of interest between the insurer and the insured during the pendency of a third-party claim, allowing both parties to focus on defending the claim. Secondly, it protects insurance companies from a flood of premature bad faith actions while defending third-party damage claims. Thirdly, it prevents the filing of bad faith actions before all relevant damages are known, which could induce additional and unnecessary motions and litigation. Lastly, the ruling helps preserve judicial resources by avoiding premature lawsuits.

It is important to note that the statute of limitations for bad faith insurance claims may vary from state to state within the United States. Therefore, it is always advisable to consult with an attorney specialising in insurance law or bad faith claims for specific information and guidance on the applicable statute of limitations in Delaware or any other state.

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Frequently asked questions

Bad faith in the context of insurance refers to dishonest dealings, fraudulent intent, neglecting to deal in a fair manner, or an untrustworthy professional performance. The person or entity acting in bad faith does so with an intent to deceive or defraud another person or entity.

First-party bad faith insurance claims are initiated by policyholders against their insurers based on the provider's wrongful delay, denial, or underestimated payouts for submitted claims. Third-party claims are more complex and arise when a policyholder is subjected to a lawsuit and the insurance provider becomes involved to support the policyholder's side.

Yes, Delaware does recognize first-party bad faith insurance claims.

Damages recoverable in a bad faith claim in Delaware include contract damages, consequential damages, attorney's fees (if the insured prevails against a property insurer), and punitive damages.

There is a three-year statute of limitations on a claim against an insurer for acting in bad faith. The claim begins to accrue when an excess judgment against an insured becomes final and non-appealable.

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