Insights on bad faith and beyond

In recent years, the insurance industry has faced an array of critical developments, from the rise of nuclear verdicts and bad faith claims to regulatory shifts and contentious legal cases. These issues not only highlight vulnerabilities but also underscore the complexity of navigating a rapidly changing landscape. For insurers, understanding the implications of these events is paramount to mitigating risks. This article provides a deep dive into recent trends, legal rulings, and regulatory updates.

Nuclear verdicts – Huge jury verdicts have continued as a theme across multiple US states, with a $412m award against a clinic in New Mexico having significant ramifications in the insurance market. We recommend not reviewing the case details over breakfast… 

New Mexico is not usually seen as a particularly bad state for insurers, and we understand an appeal has been filed. Nonetheless, it is in keeping with a trend of nuclear verdicts to which insurers could be exposed, as also seen in the Louisiana case of an injured refinery worker awarded a record $411M.

Failure to explain options equals bad faith – The facts of Safeco Insurance Co. v. Rebecca Heikka are relatively complex. The outcome, in a Florida-based bad faith claim following a road traffic incident, is depressingly straightforward. Even though the insurer had agreed to pay the policy limit of $25K very quickly and negotiated with the claimant with the intention of protecting the insured, the court still found there had been bad faith as the insurer had not explained all options and their consequences to the insured. Damned if you do, damned if you don’t…

Claims from States and business lines that have historically been seen as less risky are increasingly being seen. It is not all bad news though; some States have or are looking to improve protections to insurers around litigation risk. Florida introduced their trailblazing legal reform package in 2023; Georgia’s Governor Brian Kemp has just signed two legal reform bills which will make it easier for insurers to do business in state and reduce litigation risk and Louisiana are also considering legal reforms this year. There are some positives!

Please contact us if you would like to access our Howden & Hinshaw’s bad faith US state mapping tool, which provides a guide on the low risk or “best” states and high risk or “worst” states from insurers’ perspective on bad faith exposure.

£110M personal liability for directors – Understanding the appropriate level of D&O cover is always difficult. A tower must be sufficient to cover multiple individuals dealing with multiple claims in a worst-case scenario. A recent example, in which two former directors of the defunct high-street chain BHS were ordered to pay £110M for essentially taking on extra debt when they should have been focusing on minimising losses for creditors. 

The part that has got our Legal Technical and Claims team excited (they don’t get out much) is whether this would have been covered under D&O in any event. The policy limits of £20M had already been blown in legal costs. Therefore, it is an open point whether the insurers would have sought to invoke a conduct or dishonesty exclusion, had there been funds available to pick up the £110M loss.

Section 166 on the rise – The FCA’s approach of opening many investigations (and leaving them open) has receded in recent times, with an increased focus on pre-enforcement mechanisms as a diagnostic tool for improving performance. Section 166, pursuant to which a skilled person is appointed to review a particular aspect or aspects of compliance with regulatory requirements, has become more prevalent for insurers. The latest available figures for Q1 24/25 show six Skilled Persons reports were commissioned for insurers. That is almost as many as the previous full year (Annual Report and Accounts 2023/24 – Appendix 2), which was already an increase on the single Section 166 in 2022/23 (Annual Report and Accounts 2022/23 – Appendix 2).

FCA drops key proposals– The so-called “naming and shaming” plan, to publicly identify entities subject to FCA investigations, had been somewhat unique in uniting almost everyone of any political stripe in their objections. Unsurprisingly, the FCA first watered it down and has now dropped the proposal. 

Perhaps raising more of an eyebrow, proposals for new diversity and inclusion rules have also been shelved. The government and regulator are both under pressure to get the economy moving and reduce regulatory burdens, and this move seems to be part of that strategy. The US trend of ditching D&I initiatives is, of course, also part of the backdrop here, but it is unclear how much of a direct impact that has had as politicians fight to maintain the “special relationship.”

The perils of artificial intelligence in claims handling - the march of AI to streamline processes and create business efficiencies seems as inevitable as the changing seasons. Nonetheless, the highway to AI utopia is paved with potholes.  Allegations that a US healthcare insurer’s reliance on AI has led to erroneous claims denials (and with the associated bad faith risks) will be sober reading for any insurer considering using AI to make coverage determinations. 

If you would like to find out more, please contact:

Hilary Harmsworth

Executive Director

[email protected]

+44 (7761) 516511