Jonathan Henry and Alphonso Muglia of Dentons provided a comprehensive briefing on the risks of bad faith and extracontractual (EC) liability, specifically within the context of the insurance and reinsurance sectors during the March, 2026 Spring Membership Meeting. A video replay of this presentation is available in the AIRROC On Demand Library.
Important Developments and Key Discussion Points
- Key trend is, in certain states, you can suffer a “nuclear or thermonuclear” judgment as EC even if you did not act in bad faith and did everything right at the time.
- Social inflation: extracontractual and social pressures are continuing to inflate the value of jury verdicts. Between 2024 and 2026 the number of verdicts above $10M has continued to rise, even though some are reduced on remittitur.
- The prior “corporate friendly” trend of judgments in Federal courts is disappearing.
- Two impacts on insurers from these developments: it is difficult for experienced claims adjusters to properly value cases pretrial and carriers are pulled into high bad faith/EC cases as defendants for liabilities that fall squarely into their policy coverage.
- Three sources of bad faith: common law, statutory law, and the contract itself (especially in reinsurance). The bottom line: the scope and severity of bad faith/EC liability will vary by state.
- Conduct that exposes you to bad faith/EC liability: failure to settle a case within policy limits (often hidden like ‘land mines’ in a book of business), delayed or inadequate claims investigations, statutory violations, unexplained, low ball settlement offers to plaintiffs in 1st party cases.
- These increasing bad faith/EC exposures impact all departments in insurance/reinsurance companies and ceding company notice requirements to reinsurers. Plaintiffs are seeking discovery of reserves and the process by which they are set.
- Imperative to practice proper “claims file hygiene:” ensure that what goes in and out of the file is accurate, timely, and complete; avoid jokes or extraneous comments in the record; have a record of properly set reserves; realize that reinsurance documents may be discoverable in certain jurisdictions; appropriately respond to time limit demands.
- Insurers have different defenses against bad faith/EC claims, again depending upon the jurisdiction. Some states are extreme: e.g., in Washington you can properly deny a claim and still be liable for bad faith due to claim handling delays. The policyholder’s conduct may be a defense. In Michigan, bad faith damages are capped.
- California and New Jersey are two of the harshest states for bad faith/EC exposure (e.g., in CA, even high excess insurers have an independent obligation to evaluate a claim that will never reach their layer).
- If your reinsurance treaty expressly covers EC/bad faith liability, additional issues arise (e.g., notice requirements, order and priority of reinsurance covers).
- Recent legal developments: insurer is subject to bad faith for not disclosing to policyholders that claims were denied by AI without a human “in the loop;” in CA, the insurer-defendant in a bad faith case may depose plaintiff’s counsel who sent an incorrectly addressed time limits demand letter to determine how and why it was sent; in OH, insurance counsel attorney/client and work product protections apply to insurance counsel’s work on claim file, drafting claims denials, etc.
