AMI 2304 Issues—Tort of “Bad Faith” by Insurance Company—Burden of Proof

Do not use the final bracketed paragraph when the case is submitted on interrogatories.

This instruction is based on elements that the Arkansas Supreme Court has articulated in a series of cases, which originated in tort actions against liability insurers for bad-faith failure to settle within policy limits claims brought against their insureds (i.e., third-party cases). The court subsequently extended the cause of action to include claims for bad-faith failure to pay benefits owed under first-party insurance policies. The background to and elements of such claims are described in Findley v. Time Ins. Co., 64 Ark. 647, 655, 573 S.W.2d 908, 912 (1978) (declining in major medical insurance case to “reject the possibility that an insurer may be liable in tort” for bad-faith conduct to avoid liability, but leaving the question “to the future” because insurer's alleged misconduct—failure to investigate the insured's claim and to explain the reasons for denial of coverage—did not amount to bad faith in any event). The court subsequently applied those elements to a first-party insurance case in Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 133–34, 664 S.W.2d 463, 465–66 (1984) (adopting elements in fire insurance case; concluding that bad faith was question for jury).

A distinct cause of action in tort for bad-faith failure to perform contractual obligations is available under Arkansas law only against insurers for misconduct seeking to avoid liability under an insurance policy. Country Corner Food & Drug, Inc. v. First State Bank, 32 Ark. 645, 655, 966 S.W.2d 894, 898–99 (1998) (rejecting bad-faith claim against lender). Arkansas law does not recognize a distinct cause of action in tort or contract for breach of the implied covenant of good faith and fair dealing outside of the insurance context. Arkansas Res. Med. Testing, LL.C. v. Osborne, 2011 Ark. 158 at 3–6. For further discussion of this distinction, see the Comment to AMI 2426.

The court has stated that to constitute bad faith, the insurer's “misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy.” Aetna Cas. & Sur. Co., 281 Ark. at 133, 664 S.W.2d at 465 (1984). The court has defined “actual malice” as “that state of mind under which a person's conduct is characterized by hatred, ill will or a spirit of revenge.” Id. at 133–34, 664 S.W.2d at 465. For the sake of simplification and juror comprehension, the Committee has substituted the definition of “actual malice” in the instruction for the term itself.

It is unsettled in Arkansas whether a health maintenance organization is liable in tort for bad faith failure to pay claims. Although noting that the tort of bad faith is limited to insurers and that an HMO differs from an insurer to the extent that it is not regulated by the state insurance code, the court declined to answer the question in American Health Care Providers, Inc. v. O'Brien, 318 Ark. 438, 441, 886 S.W.2d 588, 590 (1994), concluding instead that the HMO's conduct did not rise to the level of bad faith. It is also “questionable” whether one who has subcontracted with a principal has “a cause of action for bad faith against the principal's surety or bonding company.” R.J. Bob Jones Excavating Contractor, Inc. v. Firemen's Ins. Co. of Newark, N.J., 324 Ark. 282, 289–90, 920 S.W.2d 483, 487 (1996) (concluding that court need not decide question because tort not proved in any case); Williams v. Joyner-Cranford-Burke Const. Co., 285 Ark. 134, 138–39, 685 S.W.2d 503, 506 (1985) (affirming summary judgment for defendant on subcontractor's bad-faith claim because the complaint failed to assert an ”affirmative” action by defendants that would have amounted to bad faith).

The Arkansas Supreme Court has held that bad-faith claims arising out of employee benefit plans covered by the Employee Retirement Income Security Act, 29 U.S.C.A. § 1001 et seq. (“ERISA”), are preempted by the Act's express preemption clause, 29 U.S.C.A. § 1144(a), and are not salvaged by its savings clause, 29 U.S.C.A. § 1144(b)(2)(A). Selmon v. Metropolitan Life Ins. Co., 372 Ark. 420, 426, 277 S.W.3d 196, 202 (2008). See generally, Thomas Fox, et al., Health Care Fin. Transactions Man. § 20:16 (2013) (stating that, “ERISA has generally been found to preempt state laws prohibiting unfair or ‘bad faith’ claims practices by insurance companies on the basis that such laws do not specifically regulate insurance and as such are not saved from preemption”).

The Arkansas Supreme Court collected examples of cases illustrating what conduct does and does not constitute bad faith in State Auto Property and Cas. Ins. v. Swaim, 338 Ark. 49, 991 S.W.2d 555 (1999):

Swaim, supra, 338 Ark. at 58, 991 S.W.2d at 560–61, quoted in Columbia Nat'l Ins. v. Freeman, 347 Ark. 423, 429, 64 S.W.3d 720, 723 (2002). In Swaim, the court concluded that foot-dragging in payment and the insurer's use of multiple adjusters (and resultant confusion about whether the insureds should have discarded items of personal property) did not constitute substantial evidence of bad faith. 338 Ark. at 59, 991 S.W.2d at 723. In Freeman, the court found substantial evidence of bad faith in the insureds' proof that a fire insurance carrier failed to pay their ongoing business expenses after they had provided requested documentation, failed to fulfill a promise to provide a temporary location for their business, failed to pay for agreed-to repairs, deliberately altered their file, falsely accused them of being uncooperative, and chose the lesser of two appraisals. 347 Ark. at 430–31, 64 S.W.3d at 723–25. See also Unum Life Ins. Co. of America v. Edwards, 362 Ark. 624, 629–30, 210 S.W.3d 84, 89 (2005) (distinguishing Freeman on the ground that Unum had not denied Edwards's claim for failure to provide adequate documentation but for the failure of the documentation she did provide to establish her disability). In Hortica-Florists' Mut. Ins. Co. v. Pittman Nursery Corp., 729 F.3d 846, 855 (8th Cir. 2013), the court ruled that, even assuming the insured had a right under Arkansas law to select its own counsel if the insurer-appointed counsel had a conflict of interest, the insured's failure to offer evidence that the insurer chose defense counsel “out of malice or dishonesty,” or that the insured's inability to choose its own counsel “proximately caused its harm,” defeated the insured's bad-faith and negligence claims. For an extensive catalogue of actions held to constitute bad faith and held not to constitute bad faith, see Nathan Price Chaney, A Survey of Bad Faith Insurance Tort Cases in Arkansas, 64 Ark. L. Rev. 853, 879–86 (2011).

It is unclear whether or in what circumstances, even if its conduct does not constitute bad faith, an insurer may be held liable for negligent failure to perform its obligations under the policy—especially in first-party cases. In a third-party case, the court stated that “[i]t is well established in this state that an insurer is liable to its insured for any judgment in excess of the insured's policy limits if the insurer's failure to settle the claim was due to fraud, bad faith, or negligence.” Members Mut. Ins. Co. v. Blissett, 254 Ark. 211, 215, 492 S.W.2d 429, 432 (1973). Further, in a case involving a claim for bad-faith refusal to pay first-party insurance benefits, the court stated that, “[a]lthough an insurer's actions, or inaction as the case may be, may not amount to a claim for bad faith, those same actions or inactions may support a claim in contract for non-performance (breach of contract) or a claim for defective performance (negligence).” Reynolds v. Shelter Mut. Ins. Co., 313 Ark. 145, 149–50, 852 S.W.2d 799, 802–03 (1993). In Farm Bureau Ins. Co. of Arkansas, Inc. v. Running M Farms. Inc., however, the court agreed with Farm Bureau's argument that Running M's theory of recovery—negligent performance of an insurance contract—“has not been adopted in this state.” 366 Ark. 480, 490, 237 S.W.3d 32, 40 (2006). The court explained that Running M's tort claim amounted to one for “nonfeasance,” which, citing Findley, the court said Arkansas “has never recognized.” Id., 366 Ark. at 491, 237 S.W.3d at 40. The court also stated that the language quoted above from Reynolds “clearly denotes that Arkansas has not recognized a tort for mere nonperformance by an insurance carrier.” Id., 366 Ark. at 492, 237 S.W.3d at 41. At a minimum, Findley and Running M Farms seem to stand for the proposition that the mere failure to timely satisfy the insured's claims under the policy is not actionable in tort. The precise boundary between “nonfeasance” and “misfeasance” in negligence cases against insurers otherwise is difficult to determine. Some commentators, the language from Reynolds v. Shelter Mut. Ins. Co. notwithstanding, have suggested that negligence claims do not lie in the first-party context. See generally, Chaney, supra, at 879–86; Howard W. Brill & Christian H. Brill, 1 Arkansas Law of Damages §§ 24:3-4 (5th ed. 2013).