The Expanding Frontiers of Bad Faith

by Julia Molander

March 31, 2003

For better or worse, the legal climate in the West often predicts stormy litigation weather heading for the rest of the country. This certainly is true in the realm of bad faith lawsuits against insurers.

California was one of the first jurisdictions to allow third-party plaintiffs to sue insurers for failing to settle underlying lawsuits promptly. Although the California Supreme Court eventually disallowed this cause of action, in the landmark case of Moradi Shalal v. Fireman’s Fund Ins. Cos., 46 Cal.3d 287 (Cal. 1988), plaintiffs and policyholders counsel continue to create additional claims that will buttress weak or low-damage bad faith complaints. Among those most in vogue these days are tort direct actions against insurers, class actions based on claims practices, and use of the unfair competition laws to attack insurer business practices.

In many cases, these causes of action are pursued not for their merits but for the discovery that the causes of action allow into insurer claims practices. Armed with this discovery, the plaintiffs’ counsel may try to enlarge the original bad faith case, adding more plaintiffs and pumping up damages. A good defense strategy, therefore, is to forestall discovery prior to preliminary motion practice. Additionally, defense counsel should aggressively resist discovery that is not tailored to the particular elements of these causes of action.

In bad faith cases, plaintiffs often assert peripheral claims against insurers - such as direct actions, class actions and unfair competition claims - for their discovery value more than their monetary value. The courts are very liberal in allowing widespread discovery into insurer business practices, particularly where plaintiffs have asserted claims that place such practices at issue. The expense and intrusion into the insurer’s files, particularly computer files, can have a serious impact on the insurer’s ability to handle its ongoing business.

The practicalities of dealing with these discovery issues need to be managed from the outset of the litigation. Efforts should be undertaken to dismiss the non-core bad faith claims. If that tactic is not successful, defense counsel needs to take decisive action to limit the types of broad and undisciplined discovery that can occur. Protective orders need to be considered, and if necessary, interlocutory appeals taken.