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A Breach of Nevada’s Unfair Claims Settlement Practices Act Does Not Amount To Bad Faith Per Se

Good Faith Gone BadGood Faith Gone Bad

In United States Fidelity & Guaranty Co. v. Peterson, 91 Nev. 617, 540 P.2d 1070 (1975) the Nevada Supreme Court allowed a common law action by an insured against his insurer for a breach of the implied covenant of good faith and fair dealing, commonly called “bad faith”.

In order to sustain a bad faith claim, the plaintiff must prove that:

1)   The insurer denied or refused to pay an insured’s claim;
2)   The insurer had no reasonable basis to deny or refuse to pay the claim;
3)   The insurer had actual or implied awareness that there was no reasonable basis for denying the claim.

Pioneer Chlor Alkali Company, Inc. v. National Union Fire Ins. Co., 863 F.Supp.1237, 1247 (D.Nev. 1994).

Damages in a bad faith case are not limited to the actual losses suffered by the insured but can also include an award of punitive damages to both punish the conduct and act as a deterrent to other insurers.

However, besides bad faith, Nevada’s legislature took other steps to regulate insurance company activities by passing Nevada’s Unfair Claims Settlement Practices Act.  (N.R.S. 686A.310).  In no time at all, attorneys were trying to claim that a failure to comply with the Nevada Insurance Code constituted bad faith.  However, Hart v. Prudential Property and Casualty Ins. Co., 848 F. Supp.990 (D. Nev. 1994) held Nevada Unfair Claims Settlement Practices Act (N.R.S. 686A.310) was not a codification of common law “bad faith”.  The Court explained that the Act was a code of conduct, setting out an insurance company’s duties in claim handling, whether or not the claim was paid.  Where a violation of the Act results in a financial loss to the insured, there may be a valid private cause of action, but it is not automatically a claim of common law bad faith.  The court specifically said that not every violation of the provisions of N.R.S. 686A.310 is a per se act of bad faith.  Id. at 904.  The court suggested that it would be unfair to subject an insurance company to an inconsequential violation of the statute where in fact the carrier had appropriately paid the claim.

It is important to know which claim is being brought.  Is this a claim for common law bad faith?  Is this a claim for a violation of N.R.S. 686A.310?  Or is it both?  The handling of the case could be radically different depending on the allegations.

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