Operating any business is difficult. Ensuring you have enough left over for yourself after you take care of all expenses is stressful enough, but combined with a myriad of state and federal regulations, the stress can be overwhelming. Operating a national business is even more difficult, as burdensome federal regulations can make running a business nearly cost-prohibitive. But what about scenarios where there’s a national business without a great deal of federal oversight? One may think this would make things easier on the business, but that is often not the case. State regulations, which can vary wildly, often can be just as burdensome and complicated as federal regulations. Plus, they’re often difficult to find and understand. In the insurance and home warranty industry, companies need to be aware of the varying regulations in which they operate to avoid liability.
One of the most pressing legal issues for home warranty companies is the risk of bad faith litigation. “Bad faith” is when an insured alleges an insurer denies a claim despite knowing the claim should be covered. While bad faith claims exist in some form in every state, the extent to which the insured is protected can vary wildly. Some states have placed a much higher burden on the insured than others when proving what constitutes enough to show “bad faith” on behalf of the company.
For example, in California (the first state to recognize bad faith as an actionable tort), the insured need only show the insurer refused, “without proper cause, to compensate its insured for a loss covered by the policy.”[1] Conversely, some states such as Iowa add a subjective element, requiring the insured to show the insurer had reason to know its denial was without reasonable basis.[2] South Dakota requires the insured show the insurer actually knew what it was doing was wrong.[3] Additionally, some states allow for punitive damages, while others such as Kansas do not.[4]
Recently, verdicts across the country should give insurers reason for caution. In South Dakota, despite fairly insurer-friendly standard shown above, a recent plaintiff was awarded $30 Million in damages from a jury.[5] In other states, some home warranty companies have also been subject to class action lawsuits, where the companies agreed to expensive settlements despite maintaining they acted properly regarding denial of the claims.[6]
Bad faith laws can vary wildly from state to state. Certain states will have harsh consequences for actions which may not even arise in liability in other states. An increased visibility in significant payouts for insureds only increases the already substantial risks posed to insurers and warranty companies. Companies should ensure their claims practices are in line with the requirements of each state in which they offer coverage. A review of said practices from an attorney experienced in each state could save millions in potential lawsuits.
Contact a Goosmann Lawyer in Sioux Falls, Sioux City, or Omaha today with any questions!
[1] Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).
[2] Dolan v. Aid Insurance Company, 431 N.W.2d 790 (Iowa 1988).
[3] Stene v. State Farm Mut. Ins. Co., 583 N.W.2d 399, 403 (S.D. 1998).
[4] Guarantee Abstract & Title Co., Inc. v. Interstate Fire & Cas. Co., Inc., 652 P.2d 665 (1982).
[5] https://www.kotatv.com/content/news/Exclusive-Local-woman-awarded-millions-in-historic-verdict--459242723.html
[6] https://www.homewarrantyreviews.com/home-warranty-companies/ahs-class-action-lawsuit-settlement/
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