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2012
Linda T. Hoshide, Partner
lhoshide@tresslerllp.com
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James A. Pinderski, Partner
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California
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Chicago, IL 60606
Illinois
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New Jersey
New York
Please note that statutes and case law vary from state to state and from time to time. This
survey does not encompass all possible exceptions to statutes and it does not discuss all
possible case law variations. In addition, choice of law rules may impact the result in certain
cases. Tressler LLP | Copyright ©2012
www.tresslerllp.com
50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
Alabama Reasonableness Federal Ins. Co. and Pearce Breach of good faith if: (1) no lawful basis for refusal coupled
Construction Co., Inc. v. with actual knowledge of that fact or intentional failure to
Travelers Cas. and Surety determine whether or not there was any lawful basis for
Co., et al., 2002 Ala. LEXIS refusal; (2) whether the results of the investigation were
253. subjected to a cognitive evaluation and review. In short,
plaintiff must prove nonpayment without any reasonable
ground for dispute.
Alaska Reasonableness Farquhar v. Alaska Nat’l Ins. Insurers act in bad faith if they do not accept reasonable
Co., 20 P.3d 577 (Alaska settlement offers in a prompt fashion.
2001).
Grace v. Ins. Co. of North
America, 944 P.2d 460
(Alaska 1997).
Arizona Reasonableness Zilisch v. State Farm Mut. Bad faith arises when the insurer intentionally denies, fails to
Auto. Ins. Co., 995 P.2d 276 process or pay a claim without a reasonable basis. If an insurer
(Ariz. 2000). acts unreasonably in the manner in which it processes a claim,
it will be held liable for bad faith without regard to its ultimate
merits.
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STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
Arkansas Affirmative conduct Parker v. Southern Farm Insurance company may incur liability for the tort of bad faith
without a good faith Bureau Cas. Ins., 935 S.W.2d when it affirmatively engages in dishonest, malicious, or
defense 556 (Ark. 1996). oppressive conduct in order to avoid a just obligation to its
insured.
R.J. “Bob” Jones Excavating
Contractor, Inc. v. Firemen’s
Ins. Co., 920 S.W.2d 483
(Ark. 1996).
American Health Care
Providers v. O’Brien, 886
S.W.2d 588 (Ark. 1994).
California Reasonableness Blue Ridge Ins. Co. v. Insurer has duty to accept a reasonable settlement offer within
Brigitte Jacobsen, 22 P.3d the policy limits.
313 (Cal. 2001). Insurer breaches duty of good faith by unreasonably refusing to
accept offer within policy limits.
Kransco v. American Empire
Surplus Lines Ins. Co., 2 P.3d
1 (Cal. 2000).
Colorado Negligence Farmers Group, Inc. v. Insured must establish the absence of any reasonable basis for
Trimble, 691 P.2d 1138 the insurer’s conduct. The insured does not have to provide
(Colo. 1984). evidence of intent, such as intentional misconduct, actual
dishonesty, fraud, or concealment.
Connecticut Reasonableness Bartlett v. Travelers Ins. Co., Where the insured is clearly liable and the insurer refuses to
155, 167 A. 180 (Conn. make a settlement, thus protecting the insured from a possible
1933). judgment for damages in excess of the amount of the
insurance, the refusal must be made in good faith and upon
reasonable grounds.
Delaware Reasonableness Nat'l Union Fire Ins. Co. v. An insurer owes a duty of good faith to a third‐party
McDougall, 773 A.2d 388 beneficiary of its insurance contract. An insurer violates this
(2001). duty when it delays or terminates payment of a claim in bad
faith. To show breach of the obligation of good faith, the
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50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
plaintiff must show that the insurer acted without reasonable
justification in delaying or refusing payment. Mere delay is not
evidence of bad faith if there is reasonable explanation. Willful
or malicious denial or delay may provide a basis for punitive
damages.
Florida Reasonableness State Farm Fire & Cas. Co. v. Fla. Stat. Ch. 624.155(1)(b)(1) authorizes a third‐party to file a
Zebrowski, 706 So. 2d 275 bad faith claim directly against the liability insurer without an
(1997). assignment if the judgment is in excess of the policy limits and
the insurer does not attempt in good faith to settle claims
when it could and should have done so, had it acted fairly and
honestly toward its insured and with due regard for the
insured’s interests.
Georgia Fairness Richards v. State Farm Mut. A cause of action exists for failure to settle a case upon
Auto. Ins. Co., 252 Ga. App. rendering an excess verdict over policy limits, but a potential
45, 555 S.E.2d 506 (2001). third‐party beneficiary has no greater rights than the insured.
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50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
& Cas. Co., 975 P.2d 1159 party’s offer to settle claims against the insured and thereby
(Haw. 1999). exposes the insured to personal liability beyond the coverage
limits.
Honbo v. Hawaiian Ins. &
Guar. Co., 949 P.2d 213
(Haw. 1997).
Idaho Equal consideration Truck Ins. Exch. v. Bishara, An insurer must give equal consideration to the interests of its
916 P.2d 1275 (Idaho 1996). insured by evaluating a claim as though it alone would be
responsible for the payment of any judgment rendered on that
claim without regard to policy limits.
Illinois Negligence Haddick v. Valor Ins., 763 Failure to settle a claim is a tort based action requiring a
N.E.2d 299 (Ill. 2001) plaintiff to prove that (1) the duty to settle arose; (2) an insurer
breached its duty; and (3) the breach caused injury to the
Cernocky v. Indemnity Ins. insured. Generally, there must be a demand or opportunity to
Co. of North America, 216 settle within policy limits, and the facts presented must suggest
N.E.2d 198 (2d Dist. Ill. App. a “reasonable probability of recovery in excess of policy limits
Ct. 1966). and reasonable probability of a finding of liability against the
insured.” A cause of action exists against an insurer for failure
to settle within limits where the insurer’s conduct constitutes
fraud, negligence, or bad faith.
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STATES STANDARD FOR BAD CITATION COMMENTS
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Indiana Negligence Bartlett v. State Farm Mut. An insured may have a claim against her insurer if the insurer
Automobile Ins., 2002 U.S. negligently fails to settle with a third‐party claimant and the
Dist. LEXIS 23541. result of later litigation is a judgment in excess of the policy
limits.
Economy Fire & Cas. Co. v.
Collins, 643 N.E.2d 382,
(Ind. App. 1994).
Iowa Reasonableness North Iowa State Bank v. The insurer, in handling a claim, which might exceed the policy,
Allied Mut. Ins. Co., 471 owes a fiduciary duty to the insured to act responsibly in
N.W.2d 824 (1991). settlement negotiation to prevent exposure of the insured to
unreasonable risk. This places a duty on the insurer to
Thielen v. Aetna Cas. & Sur. investigate the claim and take affirmative action as necessary
Co., 662 N.W.2d 370 (2003). to protect the interest of the insured. The nature and extent of
an insurance carrier's duty to investigate depends upon the
context. It is appropriate, in applying the test, to determine
whether a claim was properly investigated and whether the
results of the investigation were subjected to a reasonable
evaluation and review.
Kansas Reasonableness Assoc. Wholesale Grocers, While an insurer’s good faith obligation to settle is implied, the
Inc. v. Americold Corp., 943 insurer’s coverage obligations are set forth in the policy. An
P.2d 65 (Kan. 1997). insurance company acting honestly and in good faith upon
adequate information should not be held liable because it
Glenn v. Flaming, 799 P.2d failed to correctly predict a result. Something more than a
79 (Kan. 1990). mere error of judgment is necessary to constitute bad faith.
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50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
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Kentucky Bad Faith/ Motorists Mut. Ins. Co. v. Mere negligent failure to settle within the policy limits or errors
Reasonableness Glass, 996 S.W.2d 437 (Ky. of judgment are insufficient to constitute bad faith. The test
1997). for bad faith in a third‐party action is state as follows: Did the
insurer’s failure to settle expose the insured to an
unreasonable risk of having a judgment rendered against him
in excess of the policy limits? If the question is answered “yes”
by the trial court after weighing and evaluating the various
factors, then the insurer is guilty of “bad faith.” The “various
factors” to be considered in determining the existence of bad
faith are (1) whether the plaintiff offered to settle for the policy
limits or less, (2) whether the insured made a demand for
settlement on the insurer, and (3) the probability of recovery
and of a jury verdict which would exceed the policy limits.
Louisiana Negligence Hodge v. American Fidelity The test for good faith is whether the insurer exercised the
Fire Ins., 486 So. 2d 233 (La. degree of skill, judgment, and consideration for the welfare of
Ct. App. 1986). the insured, which it, as a professional, may have been
expected to utilize. If it did not, the court could easily describe
its conduct as being negligent, or not in accordance with the
high duty of good faith owed to its insured.
Maine Reasonableness Blouin v. Home Ins. Co., An insurer's wrongful or bad faith refusal to settle or pay a
1986 Me. Super. LEXIS 192. claim pursuant to its contractual obligations does not give rise
to an independent tort claim.
Maryland Negligence McCauley v. Suls, 123 Md. Maryland recognizes a cause of action for bad faith in a third‐
App. 179 (1998). party context when an insurer fails to settle a claim within the
policy limits of its insured.
Massachusetts Negligence Catholic Relief Ins. Co. of A cause of action for wrongful failure to settle (whether labeled
America v. Liquor Liability as negligence or bad faith) derives from common law and
Joint Underwriting Assoc. of sounds in negligence. To prevail the insured must prove the
Mass., 1997 Mass. Super. basic negligence elements of duty, breach, causation, and
LEXIS 68. damages.
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50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
Michigan Reasonableness Commercial Union Ins. Co. Bad faith by an insurance company for a breach of a duty to
v. Liberty Mut. Ins. Co., 393 settle requires something more than negligence. There can be
N.W.2d 161 (Mich. 1986). bad faith without actual dishonesty or fraud. Bad faith is the
arbitrary, reckless, indifferent, or intentional disregard of the
interests of the person owed the duty.
Minnesota Reasonableness Foss v. State Farm Mut. The measure of damages in a third‐party bad faith action
Auto. Ins. Co., 1996 Minn. against an insurer is the difference between the policy limits
App. LEXIS 1286. and any excess verdict awarded in the underlying action. A
liability insurer should settle a claim within its policy limits
Great West Cas. Co. v. when it is clear that the insured would be liable to an injured
Barnick, 542 N.W.2d 400 third‐party if the matter were litigated and the policy limits are
(1996). less than what a jury would award. An insurer who refuses to
settle under these circumstances acts in bad faith and is liable
Hanks v. Hubbard in a subsequent action by the insured for any excess verdict
Broadcasting, Inc., 493 obtained by the injured party. The test is whether a
N.W.2d 302 (1992). relationship exists which would give rise to the legal duty
without enforcement of the contract promise itself. To have a
cause of action in tort, a duty must exist independently of the
performance of the contract. In effect, the existence of the
contract is ignored when determining whether the alleged
misconduct is actionable in tort.
Mississippi Reasonableness Hartford Acc. & Indem. Co. When a suit is covered by a liability insurance policy, and the
v. Foster, 528 So. 2d 255 suit is for a sum in excess of the policy limits, and an offer of
(Miss. 1988). settlement is made within the policy limits, the insurer has a
fiduciary duty to look after the insured's interest at least to the
same extent as its own, and also to make a knowledgeable,
honest and intelligent evaluation of the claim commensurate
with its ability to do so.
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50‐STATE SURVEY: Bad Faith Standards Related to Handling of Third‐Party Liability Claims
STATES STANDARD FOR BAD CITATION COMMENTS
FAITH
Missouri Intentional disregard Haynes v. Hawkeye Security Insurer exhibits bad faith if it displays an intentional disregard
Ins. Co., 579 S.W.2d 693 for the financial interests of the insured in the hope of escaping
(Mo. Ct. App. 1979). the responsibility imposed upon it by the policy.
Montana Reasonableness Gibson v. Western Fire Ins. The duty to accept a reasonable offer within policy limits arises
Co., 210 Mont. 267 (1984). from an implied covenant of good faith and fair dealing that
neither party will do anything that will injure the right of the
other to receive the benefits of the agreement. One of the
usual benefits of a liability insurance policy is the settlement of
claims without litigation, or at least without trial if the cause is
litigated. The implied obligation of good faith and fair dealing
requires the insurer to settle in an appropriate case, although
the express terms of the policy do not impose the duty. In
determining whether to settle, the insurer must give the
insured's interest as much consideration as it gives its own
interest.
Nebraska Reasonableness Hadenfeldt v. State Farm The standard for bad faith required that the insurer use due
Mut. Auto. Ins. Co., 239 care, diligence and negotiate in good faith.
N.W.2d 499 (Neb. 1976).
Nevada Reasonableness Landow v. Medical Ins. The litmus test for bad faith is whether the insurer, in
Exchange of California, 892 determining whether to settle a suit, gave as much
F. Supp. 239 (D. Nev. 1995) consideration to the welfare of its insured as it gave to its own
interests.
New Hampshire Negligence Gelinas v. Metropolitan The negligence standard is defined as how a reasonable man
Property & Liab. Ins. Co., might act under the same circumstances. In applying this
131 N.H. 154 (1988). standard, the court determines whether one knows or has
reason to anticipate that the person, property, or rights of
Dumas v. State Farm Mut. another are so situated that they may be injured through the
Auto. Ins. Co., 111 N.H. 43 insurer’s conduct. If so, it becomes his duty to govern the
(1971). insurer’s action so as not to negligently injure the person,
property, or rights of that other.
New Jersey Reasonableness Frankel v. St. Paul Fire & Where the insured's deductible is at risk and the insured's
Marine Ins. Co., 334 N.J. consent to settle is not required, the settlement of the matter
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Super. 353 (2000). in the face of the insured's demand to litigate will not be
considered manifest bad faith. Even bad judgment on the part
of an insurer, which might otherwise constitute bad faith for
refusal to pay a first‐party claim, does not amount to bad faith
for wrongful payment given the insurer's broad discretion in
the disposition of third‐party claims. A court should not second
guess a legitimate, albeit questionable, judgment call. The lack
of reasonable basis might be inferred and imputed to an
insurance company where there is a reckless indifference to
facts or to proofs submitted by the insured.
New Mexico Negligence Ambassador Ins. Co. v. St. An insurer makes a good faith conclusion to settle or litigate if
Paul Fire & Marine Ins. Co., it makes a diligent effort to ascertain the facts upon which only
690 P.2d 1022 (N.M. 1984). an intelligent and good faith judgment may be predicated. An
insurer’s failure to settle because it failed to properly
investigate a claim, or the law surrounding it, is strong evidence
of a bad faith failure to settle.
New York Negligence Browdy v. State‐Wide Ins. An insurer is privileged at its own cost to settle any claim or
Co., 289 N.Y.S.2d 711 (N.Y. suit. It is not obliged to do so, neither is it required to consult
Sup. Ct. 1968). the insured in regard thereto. In the absence of fraud,
negligence, or bad faith, alleged and established, it is not the
duty of the court to read into contracts conditions or
limitations that the parties have not assumed.
North Carolina Reasonableness Thomas v. Nationwide Mut. When an insurer, on being notified of an action for injuries,
Ins. Co., 277 N.C. 329 assumes the defense thereof and is negligent, the latter was
(1970). entitled to sue the insurance company for breach of its implied
contract to exercise reasonable care in conducting the suit or in
tort for negligence.
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North Dakota Reasonableness Dvorak v. American Family An insurer's duty of good faith and fair dealing is owed to the
Mut. Ins. Co., 508 N.W.2d insured, but not to third‐party claimants. The covenant of good
329 (1993). faith and fair dealing, which is implied by law in every insurance
contract, creates an implied duty to settle for the benefit of the
insured, but does not give rise to a claim for relief by an injured
claimant. The duty to settle is implied in law to protect the
insured from exposure to liability in excess of coverage as a
result of the insurer's gamble. The insurer's duty to settle does
not directly benefit the injured claimant.
Ohio Negligence Suver v. Personal Service A lack of good faith is the equivalent of bad faith, and bad faith,
Ins. Co., 462 N.E.2d 415 although not susceptible of concrete definitions, embraces
(Ohio 1984). more than bad judgment or negligence. It imports a dishonest
purpose, moral obliquity, and conscious wrongdoing, breach of
Centennial Ins. Co. v. Liberty a known duty through some ulterior motive or ill will in the
Mut. Ins. Co., 404 N.E.2d nature of fraud.
759 (Ohio 1980).
Oklahoma Negligence Christian v. American Home The insurer must act reasonably and in good faith. The insurer
Assurance Co., 577 P.2d 899 who acts to deprive the insured of the benefits of the policy
(Okla. 1977). acts in bad faith. The duty of good faith and fair dealing merely
prevents an insurer from offering less than what its own
Newport v. USAA, 11 P.3d investigation reveals to be the claim’s value.
190 (Okla. 2000).
Oregon Reasonableness/ Maine Bonding & Cas. Co. v. The insurer’s duty is to exercise such care as an ordinary
Negligence Centennial Ins. Co., 693 prudent insurer with no policy limit would exercise. The
P.2d 1296 (Ore. 1985). insurer is negligent in failing to settle a claim where an
opportunity to settle exists and if in choosing not to settle it
Goddard v. Farmers Ins. Co. would be taking an unreasonable risk.
of Oregon, 22 P.3d 1224
(Ore. App. 2001).
Pennsylvania Reasonableness Birth Center v. St. Paul An insurer acts in bad faith by unreasonably refusing to settle a
Companies Inc., 787 A.2d claim. The insurer is liable for the known and/or foreseeable
376 (Pa. 2001). compensatory damages of its insured that reasonably flow
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FAITH
from the insurer’s bad faith conduct.
Rhode Island Reasonableness/ Skaling v. Aetna Ins. Co and A plaintiff must show the absence of a reasonable basis for
Recklessness Travelers/Aetna Ins. Co., denying benefits, and the defendant’s knowledge or reckless
799 A.2d 997 (R.I. 2002). disregard of the lack of a reasonable basis for denying the
claim. Insurer’s actual knowledge might be inferred and
imputed if acts of agents demonstrate a reckless indifference
to facts or to proofs submitted by the insured.
South Carolina Reasonableness Doe v. S. C. Medical Bad faith is a knowing failure on the part of the insurer to
Malpractice Liability Joint exercise an honest and informed judgment in processing a
Underwriting Assoc., 557 claim. An insurer acts in bad faith where there is no reasonable
S.E.2d 670 (S.C. 2001). basis to support the insurer’s decision.
Tadlock Painting Co. v.
Maryland Cas. Co., 473
S.E.2d 52 (S.C. 1996).
South Dakota Reasonableness Sawyer v. Farm Bureau Mut. For proof of bad faith there must be an absence of a
Ins. Co., 619 N.W.2d 644 reasonable basis for denial of policy benefits or failure to
(S.D. 2000). comply with a duty under the insurance contract, and the
knowledge or reckless disregard of the lack of a reasonable
Stene v. State Farm Mut. basis for denial. A finding of bad faith failure to settle may be
Auto. Ins. Co., 583 N.W.2d based on the grounds that an insurance company did not
399 (S.D. 1998). pursue settlement negotiations with the same intensity,
interest, and good faith it would have if there were no policy
Helmbolt v. Lemars Mut. limits.
Ins. Co., 404 N.W.2d 55
(S.D. 1987).
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Tennessee Fairness Gatlin v. Tennessee Farmers The insurer has a duty to deal with its insured fairly and in good
Mut. Ins. Co., 741 S.W.2d faith. This includes informing the insured as to coverage and
324 (Tenn. 1987). policy requirements.
MFA Mut. Ins. Co. v. Flint,
574 S.W.2d 718 (Tenn.
1978).
Texas Reasonableness State Farm Fire & Cas. Co. v. Insurer breaches a duty of good faith by denying a claim when
Simmons, 963 S.W.2d 42 the insurer’s liability and damages in excess of limits become
(Tex. 1998). reasonably clear.
Utah Reasonableness Billings v. Union Bankers The insurer must diligently investigate the facts, fairly evaluate
Ins. Co., 918 P.2d 461 (Utah. the claim, and act promptly and reasonably in rejecting or
1996). settling the claim. Insurers must act reasonably, as an
objective matter, in dealing with their insureds.
Pixton v. State Farm Mut.
Auto. Ins. Co., 809 P.2d 746
(Utah 1991).
Vermont Reasonableness Bushey v. Allstate Ins. Co., To establish a claim for bad faith, a plaintiff must show either
670 A.2d 807 (Vt. 1995). that the insurer had no reasonable basis for denying benefits,
or that the insurer knew or recklessly disregarded the fact that
no reasonable basis for denying the claim existed.
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Virginia Reasonableness Nationwide Mut. Ins. Co. v. Reasonableness requires consideration of the following:
St. John, 524 S.E.2d 649 (Va. whether reasonable minds could differ in the interpretation of
2000). policy provisions; whether insurer made reasonable
investigation; whether evidence discovered supports denial of
Cuna Mut. Ins. Society v. liability; whether insurer’s refusal to pay was used as merely a
Norman, 375 S.E.2d 724 tool for settlement negotiations; whether defense brought by
(Va. 1989). insurer raises issue of first impression, or question of law or
fact.
Washington Reasonableness Ellwein v. Hartford Accident An insurer is not liable for bad faith failure to settle provided
and Indem. Co., 15 P.3d 640 that its actions were reasonable.
(Wash. 2001).
West Virginia Reasonableness Elmore v. State Farm Mut. No cause of action against an insurer for common law breach
Auto. Ins. Co., 504 S.E.2d of the implied covenant of good faith and fair dealing or for
893 (W. Va. 1998). common law breach of fiduciary duty. Implied private cause of
action for a violation by an insurance company of the unfair
Light v. Allstate Ins. Co., 506 settlement practice provisions of W.Va. Code § 33‐11‐4(9) that
S.E.2d 64 (W. Va. 1998). requires more than a single isolated violation in order to show
a general business practice but a claimant may produce
sufficient evidence of this in a single claim.
Wisconsin Reasonableness Mowry v. Badger State Mut. To show a claim for bad faith, a plaintiff must show the
Cas. Co., 385 N.W.2d 171 absence of a reasonable basis for denying benefits of the policy
(Wis. 1986). and the defendant’s knowledge or reckless disregard of the
lack of reasonable basis for denying the claim. An insurer will
Lorenz v. Rural Mut. Ins. have committed the tort of bad faith only when it has denied a
Co., 1997 Wis. App. LEXIS claim without a reasonable basis for doing so, that is, when the
165. claim is not fairly debatable.
Wyoming Reasonableness Gainsco Ins. Co. v. Amoco The governing standard is whether a prudent insurer would
Prod. Co., 53 P.3d 1051 have accepted the settlement offer if it alone were liable for
(Wyo. 2002). the entire judgment. An objective standard is also used to
determine whether an insurer has committed first‐party bad
Western Cas. & Sur. Co. v. faith. Bad faith occurs if an insurer knowingly or recklessly
Fowler, 390 P.2d 602 (Wyo. denied a first‐party claim for insurance benefits without having
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1964). a reasonable basis for doing so.
Herrig v. Farmers Inc. Exch.,
844 P.2d 487 (Wyo. 1992).
310074
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