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Defenses to the Tort of Bad Faith  

https://zalma.com/blog

A bad faith claim should be dismissed on summary judgment if there was a  genuine dispute on a reasonable factual dispute or an unsettled area of  insurance law. In determining if a dispute is genuine, the court does  not decide which party is \\u201cright\\u201d as to the disputed matter, but only  that a reasonable and legitimate dispute actually existed. [Chateau  Chamberay Homeowners Ass\'n v. Associated Int\'l Ins. Co., 90 Cal. App.  4th 335, 348 n.7 (2001), as modified on denial of reh\'g (July 30, 2001).  Insurers, afraid of a bad faith judgment, should consider the fact that  there can be no bad faith claim for denial of coverage if the insurer  was correct as a matter of law in denying coverage. [Frog, Switch &  Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 751 n.9 (3d Cir.  1999).] 

When a court finds that Great American was not obligated to  provide coverage under the terms of the Policy, the bad faith claim  similarly fails. Before succumbing to the extortionist bad faith suit  and offering up millions to avoid trial the honest insurer who knows it  acted toward its insured fairly and in good faith must consider that an  insurer does not act in bad faith if it declines to pay sums that are  reasonably in dispute. While an insured may present evidence showing  that the insurer knew there might be some question as to whether there  was a legitimate question or difference of opinion over the eligibility,  amount or value of the claim. An insured needs to present some evidence  of a clear entitlement to coverage. If the insurer is convinced the  evidence does not exist providing the insured with an entitlement to  coverage, it must, in good faith, refuse to pay and be willing to  litigate to the highest court available to prove that it acted properly.

The tort of bad faith is like the mythical vampire\\u2014it hides in the dark.  The law of unintended consequences applies to the situation and the  reasons for its creation \\u2013 bad acts by insurers costing innocent  insureds to suffer was not cured by the tort of bad faith. Rather,  insurers and their customers were hurt by the fear of the assessment of  tort and punitive damages, increased the cost of insurance across the  country. The truth about the tort of bad faith is that it will die only  if it is put into the light of day. It does not solve the problem  anticipated. Rather, it created a new problem: multiple bad faith suits  brought even when the reason for the denial of all or a part of a claim  were made because there was a genuine dispute between the insurer and  the insured or that the decision to deny was fairly debatable.  

Insurers seem to forget, or ignore, the fact that to establish a claim  for bad faith in the insurance context, a plaintiff must show two  elements: (1) the insurer lacked a \\u201cfairly debatable\\u201d reason for its  failure to pay a claim, and (2) the insurer knew or recklessly  disregarded the lack of a reasonable basis for denying the claim.