Bad Faith in Virginia Against Insurance Companies

Virginia Code §38.2-2206(A) mandates UM/UIM carriers “to pay the insured all sums that he is legally entitled to recover as damages. . .” UM/UIM carriers take the position that “legally entitled to recover” requires a judgement before it is obligated to pay its insured, the plaintiff, UM/UIM benefits. This position frustrates everyone including the plaintiff, the court, and is against Virginia public policy by clogging the courts with meritorious UIM cases that should have settled.

The Virginia Bureau of Insurance Regulations (“Virginia Administrative Code, 14VAC5-400- 700 entitled “Standards for Prompt, Fair and Equitable Settlements of Claims Applicable to All Insurers”) mandates in section D that every insurer must offer a first party claimant (which includes UIM claimants) an amount which is fair and reasonable:

“D. In any case where there is no dispute as to coverage or liability, every insurer must offer to a first party claimant, or to a first party claimant’s authorized representative, an amount which is fair and reasonable as shown by the investigation of the claim, provided the amount so offered is within policy limits and in accordance with policy provisions.”

The Supreme Court of Virginia has held that a UM/UIM carrier’s obligation to pay its insured is triggered by a judgement against the defendant (the uninsured/underinsured motorist). State Farm Mut. Auto Ins. Co. v. Kelly, 238 Va. 192, 380 S.E. 2d 654 (1989).

In 1991, Virginia Code §8.01-66.1(D)(1) was enacted to provide a remedy for pre-trial bad faith when an insurance company refused to pay a first party claim in bad faith, which includes UM/UIM benefits.

Although the Supreme Court of Virginia has not considered whether a UM/UIM carrier is liable for pre-trial bad faith under §8.01-66.1(D)(1), several circuit courts have. In Chevalier- Seawell v. Mangum 90 Va. Cir. 420 (2015), the Circuit Court for the City of Norfolk reviewed the section’s legislative history and prior cases and held that a UIM carrier is liable for pre-trial bad faith:

“Code §8.01-66.1(D)(1) does allow a circuit court to provide relief to an insured when she can prove the UIM carrier failed to act in good faith relating to her claim before trial.”

The new 2016 UIM settlement procedure law was passed by the General Assembly in 2015 to help remedy UIM carrier abuses by encouraging UIM carriers to settle meritorious cases. The new law allows a liability carrier to pay its applicable policy limits and close its file without being burdened with the duty to defend. The UIM carrier now stands alone and makes the decision whether to settle meritorious cases or force the plaintiff (its insured) to obtain a judgement – paying for depositions, experts and trial costs for cases that should have settled but for the UIM carrier’s refusal to negotiate in good faith pre-trial.

If UIM carriers continue to refuse to settle meritorious UIM cases, forcing its insured to obtain a judgement, pre-trial bad faith claims against UIM carriers may be the remedy.

It has been the law in the Commonwealth of Virginia since 1966 that a liability carrier has a duty to protect its insured against an excess verdict by offering policy limits in cases where an excess verdict is likely and plaintiff offers to settle within policy limits. If a jury verdict is in excess of the defendant’s policy limits, the liability carrier is liable to the defendant for the excess. Aetna v. Price 206 Va. 749 S.E. 2d 220 (1966).

The new settlement procedure law protects the defendant against not only from having to pay any excess liability verdict to the plaintiff, but also from paying back the UIM carrier via subrogation, if the defendant reasonably cooperates with the UIM carrier. In meritorious cases, it will be very hard for liability carriers to explain to a jury, in the subsequent bad faith case against it, why it did not protect its insured from having to pay an excess judgement and UIM subrogation when it had the opportunity under the new settlement procedure law.