What is Insurer Bad Faith in Ohio?

Ohio recognizes that an insurance company may be liable for its bad faith conduct. The standard for bad faith in Ohio is the following:

[A]n insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefore.1

We noted six years ago in What Constitutes Insurance “Bad Faith” in Ohio?:

[W]hat are examples of claims handling not reasonably justified? One can look to the case of Zoppo v. Homestead Insurance Company. In Zoppo, the insured made a claim for a fire loss to his bar. From the outset, the insurance company focused its inquiry primarily on the insured. The investigation did not explore evidence that other individuals—i.e., patrons—had threatened to burn the bar down. Three weeks prior, there was an attempted arson where the wrongdoers bragged in public they were responsible for the fire and would be back ‘to finish the job.’ The insurance company did not bother to locate key suspects, verify the insured’s alibi or follow up with various witnesses. While the insurance company claimed that the insured had a financial motive to set the fire, all evidence actually pointed to the contrary.

The above demonstrates that the insurance company’s investigation was inadequate and therefore, did not have ‘reasonable justification’ to deny the claim.

An excellent 2010 article, Bad Faith in Ohio, noted that the insurance company’s failure to act in good faith does not require an intentional act. The article further explained that outcome-oriented investigations are not in good faith:

Perhaps the most damaging evidence to Homestead’s denial was the fact several individuals who had previously been ousted from the bar by Mr. Zoppo only weeks prior to the fire had threatened to burn down the bar. Compounding matters further was the fact there was a previous attempt to actually set the bar on fire, which resulted in only very minor damage.

Two of the men Mr. Zoppo had thrown out of the bar bragged after the first fire, and before the second fire, they were responsible for the attempted fire and one witness even testified one of the two individuals thrown out of the bar stated ‘he would be back to finish the job.’ Additional evidence was presented at the trial that after the second fire, one of the men ousted from the bar by Mr. Zoppo told a group of patrons at another bar he was responsible for having set the fire which destroyed the Zoppo property.

Homestead, at trial, presented no evidence to refute any of this information and, in fact, their investigator conceded the primary focus of the investigation from the start was centered upon Mr. Zoppo solely. One of the most crucial lessons to learn from this aspect of the case is all evidence must be considered and all reasonable leads should be pursued. A thorough investigation should not be an attempt to prove the insured was at fault, but instead to exonerate the insured. These are crucial aspects of any investigation which, at least according to the evidence presented at trial, Homestead failed to follow in the Zoppo case.

A 2018 federal district order2 indicated that Zoppo is still good law:

The appropriate test to determine whether an insurance company breached its duty of good faith in denying an insured’s claim(s) under the insurance policy is the “reasonable justification” standard…Zoppo v. Ins. Co., 71 Ohio St.3d 552, 554, 1994- Ohio 461, 644 N.E.2d 397 (1994) (finding that over the past forty years the Supreme Court of Ohio has consistently applied the ‘reasonable justification’ standard to bad faith cases)). Significantly, an insured lacks reasonable justification only when it acts in an arbitrary and capricious manner….Under the reasonable justification standard, the crucial inquiry is whether ‘the decision to deny benefits was arbitrary or capricious, and there existed a reasonable justification for the denial,’ not whether the insurance company’s decision to deny benefits was correct.

The court’s order indicated pleading examples that, if proven, could make a case for bad faith in Ohio:

• ‘Defendant failed to properly investigate the claims. Defendant led Plaintiff to believe that it was adjusting the claim while, in fact, Defendant wrongfully intended to deny the claim from the inception.’…

• ‘Defendant did not properly analyze the cause of the loss or applicable coverage. For example, when provided with the GEI engineering report, Defendant made no effort to review the analysis and evidence, nor could it have done so as it issued a written denial for the loss less than four business hours after it received the GEI report.’ …

• ‘Upon information and belief, Defendant never prepared an estimate for damages for the collapsed wall portion of the claim as Plaintiff never received an estimate for such losses. Such failure is indicative of the intent to deny the claim from the outset.’…

• ‘Defendant further refused Plaintiff’s reasonable requests for information, including, without limitation, a request for a copy of the insurance policy, until Plaintiff retained counsel. Even then, a certified copy of the policy was not provided until it was attached to Defendant’s Answer on June 30, 2017 despite such a request being made by email on April 7, 2017, and prior to that time orally.’

Today, many insurance companies seem to arbitrarily dismiss any expert report other than the opinion from the expert they hired. In Ohio, that can be actionable. Indeed, reading Ohio law, bad faith is defined as a failure to act in good faith, which equates an honest and fairly balanced investigation looking at all facts.

Thought For The Day

Fairness is what justice really is.
—Potter Stewart
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1 Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552, 644 N.E.2d 397 (Ohio 1994).
2 Winter Enterprises v. West Bend Mut. Ins. Co., No. 1:17-cv-00360 (S.D. Ohio Mar. 18, 2018).