Bad faith is first a feeling held by a property owner. The property owner feels like the insurance company is being unfair, but that feeling may or may not lead to a claim in court. Understanding the criteria for a Wisconsin bad faith claim is necessary when it’s time to get serious about an insurance company’s conduct.
State law drives a Wisconsin bad faith claim. The Wisconsin Supreme Court has set forth the following elements a property owner must prove to make a bad faith claim: 1) an absence of a reasonable basis for denying policy benefits, and 2) the insurer’s knowledge that it is acting reckless in denying or underpaying the claim. With these elements, a claim has an objective and a subject component. The property owner must prove both.
The objective component is the absence of a reasonable basis for denying or underpaying the claim. A property owner must establish that there was no legitimate reason for the insurer to deny the claim or slow payment. In other words, objectively, there is simply no excuse for the insurer to take its position.
An example of a frustrating fact that would not be bad faith is an insurer’s claim that observed hail damage is from an old storm. The property owner saw the storm, photographed hail hits, and quickly reported it. The property owner believes all hail hits to shingles are new and covered. The adjuster comes out, looks at shingles on the roof, and sees evidence that some holes in shingles are gray and thus old. In this hypothetical, black holes are evidence of new hail hits while gray holes show they are older. The adjuster then renders an adjustment for some funds but less than what the property owner feels is fair.
In this scenario, the property owner may ultimately win on the merits regarding whether the hail hits are old or new. Yet when an insurer loses on the merits it has not automatically committed an act of bad faith. The insurer’s position must be objectively unreasonable and with no basis in fact. If there are gray holes and black holes in the shingles the insurer’s position – while lacking merit – is not objectively unreasonable. If an insurer puts forward a “fairly debatable” argument there is no bad faith.
Insurers certainly do cross the line into bad faith. Perhaps a good example is to add to this scenario the fact the insurer does not even bother to get a close-up of the damage on the roof. No climbing on the roof or drone video footage. In that scenario, the insurer has not truly surveyed the damage thus there is no basis for saying the holes in shingles are gray or black.
The subjective component is an insurer’s knowledge or reckless disregard that it did not have a reasonable basis for denying the claim or delaying payment. This subjective component can be inferred from the facts because it is difficult to prove an adjuster’s state of mind. Using my last example, if an insurer says “the holes in shingles are gray and old” without ever getting close enough to make that determination, in my view it has recklessly disregarded the property owner’s right to an adjustment. There is no “fairly debatable” dispute because the insurer has not bothered to investigate.
Most bad faith claims are about the process the insurance company used to reach its decision, not the outcome. There are exceptions to this general rule, but generally the objective component of a bad faith claim comes from an insurance company’s failure to properly investigate a claim. When you consider a bad faith claim, focus on what your insurance company has done to investigate the facts.
Wisconsin case law does have an example of an insurance company taking an unreasonable interpretation of its policy. That is very helpful as well. I deal with insurance company interpretations of its policies every week. The policies can be confusing and poorly written which is unfortunate for bad faith claims because the confusing and poor language can give the insurer a “fairly debatable” position that defeats bad faith. Yet when an insurance company is taking the position contrary to its policy language that can be the basis for bad faith claim.
If you have any questions about bad faith in Wisconsin feel free to email me at ed@beckmannlawfirm.com.
Ed