For many years, courts have held insurance companies responsible for at least some of their bad faith actions. Most courts allow a policyholder to assert a bad faith claim and recover damages in excess of limits in situations where the insurer fails to settle within policy limits or unreasonably denies a claim. These types of allegations give rise to a tort action for breach of the implied covenant of good faith and fair dealing because “the insurer must act fairly and in good faith in discharging its contractual responsibilities.” Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1037 (Cal. 1973). The reason for a bad faith cause of action is to deter that kind of conduct by insurers and level the playing field because “[t]he insurance company, as the dominant party, however, has an even greater obligation than the insured to act in good faith.” Sears Mortgage Corp. v. Rose, 634 A.2d 74, 84 (N.J. 1993).
Recently, however, insurers have tried to turn the tables on policyholders by asserting a theory of “reverse bad faith.” Under this theory, insures assert that the policyholder breached its “duty of good faith and fair dealing” allegedly owed to them, and, because of this, they are entitled to recover money from the policyholder.
In a recent case we handled, the court rejected an insurer’s plea to adopt the theory of reverse bad faith. See Bracco Diagnostics Inc. v. Berkley Insurance Co., No. MID-L-1950-14 (N.J. Super. Ct., Middlesex Co. July 11, 2014) (“Bracco”). In Bracco, the insurer agreed to defend Bracco in the underlying product liability actions, but, nonetheless, refused to pay for counsel selected by the policyholder to defend those actions. After Bracco filed suit, the insurer asserted a counterclaim against Bracco for “breach of good faith and fair dealing” for Bracco’s alleged interference in the insurer’s defense of the underlying actions. The court in Brocco rejected the insurance company’s attempt to recover “consequential damages” and dismissed the insurers “reverse bad faith” count of the counterclaim.
Brocco is one of many cases that have rejected attempts by insurers to assert “reverse bad faith.” See, e.g. Kransco v. American Empire Surplus Lines Ins. Co., 2 P.3d 1, 11 (Cal. 2000) (“An insured’s breach of the covenant is not a tort, and hence does not give rise to tort damages recoverable by the insurer.”) (emphasis in original); Houchin v. Allstate Indem. Ins. Co., 2012 WL 2430474, slip op at *4 (W.D. Ky. June 26, 2012) (“the Court is not aware of any jurisdiction that has recognized a cause of action for reverse bad faith”); In re Tutu Water Wells Contamination Litigation, 78 F. Supp.2d 436, 451-53 (D.V.I. 1999) (although a majority of jurisdictions allow for recovery for an insurance company’s bad faith, “none have elected to extend its protection to insurers . . . .”) ; Tokles & Son, Inc. v. Midwestern Indem. Co., 605 N.E.2d 936, 945 (Ohio 1992) (“Tokles”); Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203, 208 (Iowa 1995) (“we are aware of no jurisdiction that has adopted the tort of reverse bad faith”). As the Ohio Supreme Court explained, there is no need to recognize such a tort because “[a]s the holder of the purse strings, the insurer has a certain built-in protection from such evils.” Tokles, 605 N.E.2d at 945.
Despite the universal rejection of reverse bad faith by the courts, insurers continue to assert the theory in the hope that some court may someday buy the snake oil they are selling. Policyholders should be aware that insurers have yet to establish in any court the existence of a duty supporting the theory of “reverse bad faith.”
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