Retailer that self-insures not subject to bad faith claims for arguable errors in adjusting claim involving self-insurance.
An important limitation on bad faith actions, particularly when sounding in tort rather than in contract, is that they generally only apply to insurers. An ordinary breach of contract obligation or duty by a party that is not a fiduciary or near-fiduciary duty generally does not support a bad faith claim. Under the law of most states, bad faith actions or their analogs (e.g., a claim for enhanced damages) are available only when there is a special relationship between the parties. As discussed previously, the insurer-policyholder relationship is generally considered to be such a special relationship. However, the mere presence of risk management through risk distribution will not convert a situation to one supporting a bad faith claim, even when one of the actors involved is performing functions often performed by an insurer. For example, in a recent case, the Supreme Judicial Court of Massachusetts held that a tort claimant could not maintain an insurance bad faith claim against a toy retailer that was self-insured for its first million dollars of exposure. See Morrison v. Toys "R" Us, Inc., 441 Mass. 451, 806 N.E. 2d 388 (2004).
The claimant was injured when a sign fell on her while shopping. Acting as its own self-insured claims adjuster, the toy store offered relatively low amounts in settlement, topping out at a $45,000 offer on the morning of trial. In a result likely to get the attention of tort reformers and company management, the jury returned a verdict of $1.2 million, later remitted to $250,000. Arguing that a self-insurer was nonetheless an insurer that had failed to settle a claim in good faith, the plaintiff then argued that the retailer was liable for damages under the state's unfair claims practices statute. The court rejected the claim, concluding that under these circumstances, the retailer was simply a defendant. See 806 N.E. 2d at 389-92. The purpose of such statutes and bad faith law generally to protect the policyholder facing third party claims where the insurer mangles the defense and settlement of such claims. Where a company is adjusting its self-insured retention, there is no problem of the company favoring itself at the expense of a policyholder. The company is not only the self-insurer but is also the policyholder.
A related issue arises when a claimant wishes to sue the administrator of an insurance plan. In certain contexts, courts will permit such claims but not in other situations. The key determinant is whether the third-party administrator is both acting like an insurer and subject to the danger that it will, like an insurer acting in bad faith, place its own economic interest ahead of the interests of the policyholder. If so, a bad faith action may lie against the third-party administrator. If instead the administrator is simply being paid a flat fee by the insurer or employer and the compensation is not based on claims experience, the administrator may be regarded as a mere agent of the insurer or employer and not as the functional equivalent of an insurer. See Wolf v. Prudential Ins. Co of America, 50 F. 3d 793 (10th Cir. 1995) (applying federal common law); Wathor v. Mut. Assur. Adm'rs, Inc., 87 P. 3d 559, (Okla. 2004). But see 806 P. 3d at 564 (Opala, V.C.J. and Watt, C.J., dissenting) (arguing administrator could not be exonerated as a matter of law in the instant case and that failing to treat administrators as equivalent of insurers creates gaping and unjustified gap in bad faith tort liability).
Jeffrey W. Stempel
University of Nevada, Las Vegas
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|Title Annotation:||Recent Court Decisions|
|Author:||Stempel, Jeffrey W.|
|Publication:||Journal of Risk and Insurance|
|Date:||Sep 1, 2004|
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