Primarily, courts across the nation have applied two different
standards to determine whether an insurance company has acted in bad
faith.
First is the standard set by the California Supreme Court case of Gruenberg v. Aetna Ins. Co., 9 Cal 3d 566, 510 P.2d 1032 108 Cal. Rptr. 480 (1973). In Gruenberg,
the California Supreme Court found that an insurer breaches the
covenant of good faith and fair dealing when it refuses “without proper
cause, to compensate its insured for a loss covered by the policy.” 9
Cal. 3d at 574. Under the Gruenberg standard, the carrier need not demonstrate an evil intent or a malicious or immoral nature. See Neal v. Farmers Ins. Exch.,
21 Cal 3d 910, 921-22, fn 5, 582 P.2d 980, 148 Cal. Rptr. 389 (1978).
In order to prove bad faith, a policyholder must simply show that the
insurance company failed to pay or delayed payment without proper
cause. The Gruenberg standard is objective rather than subjective.
The second standard, as enunciated in the case of Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978), adds a subjective element to the Gruenberg
model. In addition to a failure to pay or a delay in payment, the
policyholder must also show that the insurer acted with knowledge or
reckless disregard of the lack of a reasonable basis. In determining if
there has been a violation, the insurance company’s actions are
compared to the actions of a “reasonable insurer under the
circumstances” Id., 85 Wis. 2d 692. See also, Fehring v. Republic Ins. Co., 118 Wis. 2d 299, 310 (Sup. Ct. 1984), overruled on other issues by DeChant v. Monarch Life Ins. Co., 200 Wis 2d 559 (1996). The Anderson standard builds on the same objective standard of Gruenberg but applies the supplemental subjective standard of knowledge to that. See New Appleman Insurance Bad Faith Litigation § 5.03 [2]
In many circumstances, Nevada follows precedents from the State of
California. In this instance, Nevada does not. Nevada has instead
adopted the Anderson standard. As stated in the case of Guaranty National Ins. Co. v. Potter,
112 Nev. 199, 206, 912 P.2d 267 (1996) the Nevada Supreme Court said
that before there is bad faith, the insurance company must act
unreasonably AND with knowledge that there was no reasonable basis for
its conduct. See also, American Excess Ins. Co. v. MGM Grand Hotels, Inc., 102 Nev. 601, 605, 729 P.2d 1352, 1354-55 (1986). In fact, in the case of Great Am. Ins. Co. v. Gen. Builders, Inc.,
113 Nev. 346, 355, 934 P.2d 257, 263 (1997) the Nevada Supreme Court
said that the insurance company’s actions must be “grievous and
perfidious.” In a recent case, the U.S. District Court, District of
Nevada said that “bad faith requires more than an unreasonable act, it
requires the insurer act in a deceitful manner with the awareness that
the act was unreasonable”. Jackson v. Am. Family Ins. Co., Case No. 2:10-CV-01874-LRH-PAL (D. Nev. June 18, 2012)
For more information visit www.NevadaCoverageLaw.com or email Mike Mills.
Mike Mills chairs the Transportation Insurance Substantive Law Group for DRI.