The law imposes a duty or obligation on insurance companies (insurers) to act in good faith (reasonably and fairly) when investigating and settling claims with their insureds. This duty was traditionally created by judges in court opinions (common law) but is now often located in a state’s statutes—often in the insurance code.
This duty of good faith and fair dealing in insurance practices generally requires an insurer to settle a claim with its insured (known as a first-party claim) promptly when liability has become reasonably clear. In contrast, an insurer generally does not have a duty of good faith and fair dealing in the investigation and settlement of a claim with a party other than its insured (a third party or third-party claim). This is because the duty of good faith and fair dealing is rooted in the insurance contract between the insurer and its insured, and a person or entity who is not a party to the insurance contract is not owed the duty of good faith and fair dealing.
An insured who believes their insurer acted in bad faith in the investigation and settlement of an insurance claim may file a lawsuit for breach of the duty of good faith and fair dealing in the insurance contract—known as a bad faith claim. A court may award a plaintiff whose insurer has acted in bad faith (1) interest on a claim amount, (2) punitive damages, and (3) attorney fees.
The bad faith standard requires an insured to prove with clear and convincing evidence that (1) the insurer lacked a reasonable basis for delaying or denying benefits or payment under the insurance contract; and (2) the insurer knew or recklessly disregarded its lack of reasonable basis for delaying or denying benefits under the insurance policy.
Bad faith claims are fact specific and turn on the conduct of the insurer towards the insured. A plaintiff must plead specific facts as evidence of bad faith and cannot rely on conclusory statements.
The insurer does not breach the duty of good faith and fair dealing by investigating a claim, by refusing to pay a claim, or by litigating a dispute with its insured if there is a legitimate dispute as to coverage or amount of the claim—provided the insurer's position is reasonable and legitimate.
In general, an insurer's litigation tactics and strategy in defending a claim are not relevant to the insurer's decision to delay or deny coverage for the claim. And once litigation has begun, the actions taken in its defense are not evidence of whether the insurer acted in bad faith in the investigation and settlement of the insured’s claim for benefits under the insurance policy.
In South Dakota, insurance companies are mandated by common law and state statutes to handle first-party claims with good faith. This means they are required to conduct investigations and settle claims in a manner that is reasonable and fair. While this duty of good faith is owed to their insureds, it does not extend to third parties involved in claims. If an insured in South Dakota believes their insurance company has acted in bad faith, they have the right to file a lawsuit for breach of this duty. To succeed in a bad faith claim, the insured must demonstrate that the insurer had no reasonable basis for denying the claim and that the insurer either knew this or recklessly disregarded it. The insured must provide specific evidence of bad faith rather than mere general accusations. It is important to note that an insurer is not considered to have breached the duty of good faith simply for conducting an investigation, declining payment, or engaging in litigation if there is a legitimate dispute regarding coverage or the amount of the claim. Furthermore, the litigation tactics employed by insurers are not deemed evidence of bad faith once legal proceedings have commenced.
