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—including the duty to promptly pay claims when liability under the insurance policy becomes reasonably clear. 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 unreasonably 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 legally obligated to handle claims in good faith, which means they must conduct investigations and settle claims in a fair and timely manner, particularly when the liability is evident. This requirement is rooted in common law and is often codified in state statutes, primarily relating to first-party claims where the insurance company interacts directly with the insured. There is no equivalent duty for third-party claims, as the obligation stems from the contract between the insurer and the insured. If an insured party in South Dakota believes their insurer has acted in bad faith, they have the right to file a lawsuit for breach of the duty of good faith and fair dealing. To prevail in court, the insured must demonstrate that the insurer had no reasonable basis for denying or delaying payment and that the insurer was aware of, or recklessly ignored, this lack of reasonable basis. If the plaintiff wins the case, they may be awarded interest on the claim, punitive damages, and attorney fees. However, to establish bad faith, the plaintiff must present specific evidence of the insurer's misconduct, as mere allegations are insufficient. An insurer is not considered to have acted in bad faith if they have a legitimate dispute over the coverage or the amount of the claim, provided their position is reasonable. Furthermore, the litigation tactics employed by insurers are not typically viewed as evidence of bad faith in the handling of claims, and actions taken after litigation has commenced do not reflect on the insurer's good faith during the initial investigation and settlement stages.
