The Myth of Bad Faith Insurance Part 2

The Illusion of First Party Bad Faith in Maryland


On October 1, 2007, the State of Maryland joined many other states when it created a civil tort action against insurance companies who fail to act in good faith when adjusting “first party” insurance claims. This new “First Party Bad Faith” law known, as Chapter 150, Senate Bill 389, was to be the sword of justice used by plaintiffs’ lawyers to slay insurance carriers who failed to act in good faith when evaluating first party claims. But, simply put, our law is almost a farce. Unlike other states, Maryland’s “First Party Bad Faith” statute does not provide for the complete recovery of the insurer’s damages against an insurance carrier. It only provides for recovery up to the insurance policy limits and an additional amount for costs, expenses, interest, and attorney fees incurred in the litigation. See C.J.P. 3-1701(e) and (g) and Ins. Art. 27-1001(e)(2)(i).

Maryland personal injury lawyers, tired of having policy limits shoved in our faces in first party insurance claims, were giddy when this law was passed. Unfortunately, the interpretation of the new statute by the Maryland Insurance Administration (M.I.A.) has provided insurance carriers with a shield that has made the new statute a virtual nullity. This should be no surprise when the M.I.A. firmly believes that “ companies are repeatedly faced with claimants who exaggerate their injuries in an attempt to receive more benefits than that for which they are entitled.” One only need to review the annual reports submitted by the M.I.A. to the Maryland General Assembly to appreciate the devastating results. The annual reports can be found here.

Over the last five years only a handful of auto-tort claims resulted in favorable decisions for the insured. These favorable decisions were usually the product of a flat out denial of benefits or instances where the insurance carrier failed to give any consideration to objective injuries and took extraordinary steps to deny the claim.

Any Maryland lawyer considering filing a “First Party Bad Faith” claim should read Senate Bill 389 in its entirety – very carefully. The bill contains some confusing language and it is wise to seek advice from a lawyer who has experience with first party claims before filing such a claim. If you are considering pursing a first party bad faith auto-tort claim in Maryland, this short paper will provide some warnings and guidelines.

What Types of Claims Qualify as “First Party” Auto-tort Claims?

“First Party” claims arise out of car insurance policies that are issued, sold, or delivered in the State of Maryland. See C.J.P. 3-1701(b). Out-of-state insurance policies do not qualify under the statute. The plaintiff does not have to be a named insured under the insurance policy to bring a claim for first party benefits. The plaintiff however must fall into one of the categories of first party beneficiaries under the policy. “First party” benefits include personal injury protection benefits (PIP) uninsured/underinsured benefits (UM/UIM), and medical payment benefits (med pay). Under the statute, the M.I.A. has jurisdiction to determine coverage issues involving first party claims and to determine whether the insurance carrier failed to act in good faith in resolving these types of claims.

In a most recent opinion the M.I.A. found that first party claims also include claims brought by an insured against his own carrier for that carrier’s failure to provide a defense to a liability claim brought against the insured. See Eyes for You, LLC v Zurich, Opinion No. 27-1001-12-0001. A rather unusual conclusion considering there is no Maryland case that provides an insured a direct tort action against an insurance carrier that wrongfully denies coverage stemming from third party claims. Under Mesmer v MAIF, 353 Md. 241, 263 (1999) “…when a liability insurer erroneously takes the position that it has no contractual obligation with respect to a particular claim, and refuses to undertake any defense against the claim, it is liable only for breach of contract.” Generally speaking, the only avenue available for an insured to force his/her own carrier to provide a defense to a third party claim was through a Declaratory Judgment action. The insured could also wait until the tort action was concluded and then bring an action against his carrier for the expenses and attorney fees he incurred in defense of the tort action. In Eyes for You, LLC, the M.I.A. announced that “The fact that the Insurer may ultimately provide a defense to a claim made against the Plaintiff by a third-party or pay a settlement to a third-party does not render this a third party claim. Indeed, the claim in the instant matter arises from the contract that is between the Plaintiff and the Insurer and the determination herein is whether coverage exists. ” Opinion at p. 7.

However, please keep in mind that final orders of the M.I.A. are subject to appeal. Both parties have the absolute right to appeal the decision to a Circuit Court and obtain a true trial de novo. See Ins. Art. 27-1001(f) and (g) and, Annotated Code of Maryland, Article 1, Section 32(b)(3).

Get Part II of This Article HereMore Bad Faith Insurance Information

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