Oklahoma Bar Association

The Subjective Element of _Insurer Bad Faith Claims
Are the Requirements of Christian Still Intact, or Have They Given Way to Liability for Simple Negligence?
By Richard J. Harris

Until recently, it seemed to many lawyers in Oklahoma that the tort of insurer “bad faith” may have evolved into a doctrine that, to impose legal liability, required only “unreasonable” conduct in the denial of insurance claims.1 Unreasonableness, of course, is classically understood as an objective measurement of conduct most often used in general negligence law.2 Hope by insurance professionals or the defense bar that the courts may still require proof of a subjective element for the tort of bad faith beyond general negligence (as many insurers and practitioners thought was implicit when the tort was created decades ago) had grown faint. Then came the 2003 Court of Civil Appeals case of Peters v. Am. Income Life Ins. Co. where the court, referring to the cause of action as an “intentional tort,” held that the bad faith claim in that case should not have been presented to the jury because the plaintiff, though she had submitted evidence of “internal negligence,” had failed to prove that the insurance company directed any improper conduct at her in an effort to defeat the claim.3

Even more recently, the Oklahoma Supreme Court addressed the subjective element of bad faith claims in the case of Badillo v. Mid-Century Insurance Co.4 The court’s opinion in Badillo was rendered June 8, 2004, and has not been released for publication in the permanent law reports. That opinion held, in a 5-4 vote, that to recover for bad faith, an insured must present evidence that the insurer’s conduct was motivated by an intent to deprive the insured of the policy benefit that was due.5 This article will analyze whether Oklahoma law requires proof of a subjective element to establish a claim for breach of the implied covenant of good faith and fair dealing, and the potential ramifications of Peters and Badillo on that issue. This analysis will focus on the historical development of the tort in Oklahoma.

As early as 1935, the Oklahoma Supreme Court held in Boling v. New Amsterdam Cas. Co. that a liability insurer must act in good faith when making an offer of settlement on behalf of its insured, and that violation of that duty would support an action for damages.6 The general concept of “good faith,” which extends beyond the field of insurance, is typically defined by the law as including a core subjective component. In fact, it is defined by statute in Oklahoma at 25 O.S. §9 as follows:

“Good Faith” is also defined in the Uniform Commercial Code as generally meaning “honesty in fact.”8 Black’s Law Dictionary is also illustrative. It defines “bad faith” as follows:

In 1977, the Oklahoma Supreme Court recognized that the duty of good faith is implied in first party insurance contracts as well as third party ones. In Christian v. Am. Home Assur. Co., the court, after acknowledging the historic duty of good faith in the context of third-party liability coverage, held as follows:

Upon announcing its holding, the Christian court’s opinion immediately took pains to clarify that insurers would not be held liable in tort for every wrong decision they made, and that there were limitations on this new cause of action. In this regard, the court stated as follows:

The Christian court evidently sought to provide reassurance that this new form of tort liability would not be easy to establish. Indeed, the plain language of the opinion appeared to require at least two conditions to be proven before tort liability would be imposed for nonpayment of a claim. The opinion assured that liability would attach “only” when the insurer’s withholding of payment was 1) unreasonable “and” 2) “in bad faith.”

This language implied that both unreasonableness and bad faith were necessary conditions to a finding of liability. The concepts are mentioned by the court in a paragraph and sentence designed to set forth the limitations on the new cause of action, and should reasonably be read with that purpose in mind.12 In addition, the court used the restrictive word “only” as well as the conjunctive word “and” when listing these two elements of the new claim. Also, “unreasonably” and “bad faith” were punctuated in a manner that implied distinctiveness to each concept: “. . . liability may be imposed only where there is a clear showing that the insurer unreasonably, and in bad faith, withholds payment . . .” (emphasis added). The Christian court noted that the defendant’s conduct in that case was a “malicious, willful and oppressive refusal to pay.”13 Thus, the opinion implied that both concepts must be proven.

Such a reading of the Christian opinion would be consistent with the law’s traditional application of the concepts of reasonableness and bad faith. As mentioned above, the concepts are historically distinct. They usually describe different things under the law. “Reasonableness” is an objective standard of conduct used to determine potential liability in a host of different contexts, and proof of unreasonableness rarely, if ever, requires evidence concerning the actor’s state of mind.14 However, the legal concept of “bad faith” was usually measured by subjective criteria, like dishonesty or “sinister motive.” Examples of this subjective measurement of bad faith include the law that allows courts to award attorneys’ fees against a party that is guilty of “bad faith” filing of litigation, the law concerning misappropriation of trade secrets and other areas.15

Under this traditional understanding of these two concepts, an insurer’s conduct could be unreasonable but not necessarily motivated by bad faith (as historically defined).16 For example, an insurer could honestly conclude that a particular claim was only worth $10,000, when, in fact, a jury could determine it has a reasonable value of $15,000. Thus, its evaluation could be considered unreasonable in light of the jury verdict, but not motivated by bad faith. Conversely, an insurer could take a position in bad faith (i.e., without an honest belief in the accuracy of the position), without the position itself being objectively unreasonable. “Low balling” serves as a good example. Assume there is a claim that has a reasonable value of $10,000 to $15,000. The insurer actually believes the real value of the claim is no less than $15,000, but only offers $10,000. Its offer would be objectively reasonable, but still motivated by bad faith.17

Admittedly, the line between unreasonable and intentional conduct can get blurry. As Prosser observes, although intent “is one of the most basic, organizing concepts of legal thinking,” it “is also one of the most often misunderstood legal concepts. The distinction between intentional and unintentional invasions draws a bright line of separation among shadings of almost infinitely varied human experiences.”18 Generally speaking, the more intentional the harmful conduct, the more culpable it becomes in the eyes of the law.19 A finding of objectively unreasonable conduct implies no level of intent to cause harm, and is the least culpable of all conduct (other than that which gives rise to strict liability).20 On the other end of the spectrum is intentional and malicious conduct, which is the most culpable.21 Between these two is “reckless disregard” of another’s rights or “grossly negligent” conduct (sometimes called “culpable negligence”). Reckless disregard exists when the actor has actual awareness that the conduct is likely to cause harm and consciously disregards that risk, such that the law will “deem” that the actor intended its consequences.22 The Tenth Circuit, albeit in another context, has defined “reckless disregard” as a subjective element that is “closer to being a lesser form of intent than merely a greater degree of ordinary negligence.”23

Most states have now recognized a cause of action in tort for breach of the implied covenant of good faith and fair dealing.24 In every state that has recognized the tort, evidence of the wrongful denial of a claim intentionally and maliciously is sufficient to warrant submission of the claim to the jury.25 A minority of states that recognize the tort require only proof of negligence (unreasonable conduct) to get to the jury.26 The majority require proof of a subjective element before the claim will be submitted to the jury.27 Of those, all but one require only reckless disregard by the insurer of the fact that there was no reasonable basis for denying the claim.28 Only one state, Arkansas, currently requires proof of intentional and malicious conduct before a claim of bad faith can be submitted to a jury.29

It should be noted that, conceptually, there is a distinction between requiring proof of a subjective element to establish tort liability, and holding that a jury may reasonably conclude from inferences based on evidence of objectively unreasonable conduct that the necessary subjective element exists.30 This distinction can be significant. First, not all objectively unreasonable conduct equates to reckless disregard, which is the minimum level of subjectively culpable conduct. Rather, recklessness describes conduct where the risk of harm is enhanced or the actor’s awareness of the risk is particularly certain or acute, and yet the risk is disregarded.31 Second, other inferences besides the elevated risk of the conduct may be necessary before a jury can reasonably conclude that a subjective element has been proven. The jury logically must also conclude that circumstances were such that the actor was actually conscious of the risk, either because of that actor’s actions, statements or higher-than-average mental capacity or similar considerations.32

At least one commentator has suggested that Christian created a “hybrid” cause of action, reflecting a merger between intentional torts and negligence.33 It is unclear what a hybrid tort would look like. If it means that there is a required subjective element for bad faith claims, but that element is inferred from the insurer’s unreasonable conduct alone, this is problematic. If there is a subjective component to the tort, the jury should be instructed as to what that is, so at a minimum, it can assess the evidence to determine whether it has been proven. To instruct the jury that this “intentional tort” is proven by evidence of mere objectively unreasonable conduct, in essence, imposes an irrebuttable presumption that, if the defendant’s conduct is found to be unreasonable by the jury, the court will conclude as a matter of law that the subjective element has also been proven, whatever that may be. Under such a system, the defendant insurer would be effectively deprived of the right to a trial on a necessary element of the case. On the other hand, if “hybrid” is meant to describe a system where liability can be imposed for subjective, actual and conscious unreasonableness (i.e., an actual absence of any rational justification), it would preserve the subjective element of the tort and accurately describe the core Oklahoma jurisprudence on the issue.

TIMMONS V. ROYAL GLOBE AND THE ENSUING AMBIGUITY OVER THE NECESSITY OF A SUBJECTIVE ELEMENT

The nature and extent of the subjective element of bad faith (if any) became very unclear in 1982 when the Oklahoma Supreme Court decided the case of Timmons v. Royal Globe Ins. Co.34 In Timmons, the plaintiff sued his insurer for “maliciously and in bad faith” refusing to pay his claim for damages arising from an airplane crash. The defendant requested a jury instruction defining “bad faith” as “an actual evil intent to mislead or deceive [and not just] a misstatement made through inadvertence or carelessness.”35 In a limited holding, the Supreme Court found, “The trial court did not err in refusing the requested instruction because to limit recovery for Christian-type actions to ‘an actual existing evil intent to mislead or deceive’ limits recovery substantially beyond that required for proof of failure to deal fairly and in good faith.”36

Importantly, the Timmons Court did not say that a “Christian-type” action required no evidence of a subjectively bad state of mind. It only held that the jury instruction requested by the defendant in that case went “substantially beyond” what was required.37 Thus, the court left the door open for at least some subjective element for the still relatively new cause of action. Unfortunately, the court did not elaborate as to how the requested definition of bad faith was overbroad or how the subjective element of bad faith (presumably still part of the cause of action) was to be measured from that point forward.

Since Christian and Timmons, courts at both the state and federal level on various occasions have continued to explain the cause of action for insurer bad faith in terms that arguably implied the necessity of some subjective element of proof as a condition for recovery. For example, in the 1983 case of McCorkle v. Great Atl. Ins. Co., the Oklahoma Supreme Court reiterated its assurances in Christian that bad faith could “only” be imposed when there is proof that the insurer “unreasonably, and in bad faith, withheld payment.” Furthermore, the Court explicitly stated that the cause of action was an “intentional tort.”38 In Buzzard v. Farmers Ins. Co., Inc., the court expressly reaffirmed that the tort was an “intentional” one, stating, “In pursuing a claim, the plaintiff carries the burden of proof and must plead the elements of this intentional tort, the essence of the tort being the unreasonable bad faith conduct of the insurer.”39 The court in Buzzard indicated that the insurer’s state of mind is the dispositive issue in a bad faith case, stating, “The decisive question” in weighing a bad faith claim is “whether the insurer had a good faith belief, at the time its performance was requested, that it had justifiable reason for withholding payment under the policy.”40 The court also stated, “The knowledge and belief of the insurer during the time period when the claim was being reviewed is the focus of a bad faith action.” These concepts have been repeated since Buzzard by several courts.41 Indeed, in Peters, supra42and Price v. Mid-Continent Cas. Co.43, the Court of Civil Appeals has also indicated that “bad faith” is an “intentional tort.”

Moreover, 10 years after Timmons, the Oklahoma Supreme Court decided Goodwin v. Old Republic Ins. Co., in which it held that workers’ compensation claimants can sue for bad faith after the award has been entered by the Workers’ Compensation Court.44 The Supreme Court made clear that this cause of action was the tort previously endorsed in Christian.45 Further, the court expressly referred to the actionable conduct as “intentional,” stating in pertinent part as follows:

In 1997, the Court of Civil Appeals, citing Goodwin, expressly held that a claim for bad faith against a workers’ compensation insurer required evidence of intent, and that mere “unreasonable” conduct was not enough.47

The references in these cases to the intentional nature of the tort of bad faith imply an understanding of “bad faith” in the traditional sense that includes a subjective element, i.e., a dishonest or otherwise improper state of mind. The law has long recognized a distinction between intentional torts and mere negligence.48 In Oklahoma, as in other jurisdictions, the distinction can have important consequences, including the fact that elements of the case which a plaintiff must prove may differ.49 Intentional torts generally require proof of additional facts, not required in negligence claims. Typically, there must be proof of 1) a state of mind, 2) about consequences of an act (or omission), and not just about the act itself, and 3) a purpose or desire to bring the consequences about or a knowledge that the given consequences are substantially certain to result.50 Thus, when both the Oklahoma Supreme Court and the Oklahoma Court of Civil Appeals refer to bad faith as an “intentional tort,” it creates reason to believe that the cause of action requires proof of a subjectively bad state of mind, not mere, objectively unreasonable decision making.

Nevertheless, significant confusion has persisted because numerous cases since Timmons have included language that arguably implies that a tort claim of bad faith can be established with evidence of merely unreasonable conduct in the investigation or evaluation (or both), and that no evidence of subjective intent is required. For example, in Lewis v. Farmers Ins. Co., where the Oklahoma Supreme Court concluded that the tort of bad faith arises in tort and is therefore governed by a two year statute of limitations, it reasoned, “A common law duty to perform with care, skill, reasonable expediency, and faithfulness accompanies every contract. Negligent failure to observe any of these conditions will give rise to an action ex delicto as well as an action ex contractu.”51 Also, in Willis v. Midland Risk Ins. Co., the Tenth Circuit held, “To determine whether an inference of bad faith is permissible, [the court] must evaluate [the insurer’s] actions to judge 1) the reasonableness of the insurer’s actions in light of the law applicable to the claim at the time of denial, and 2) facts [the insurer] knew or should have known at the time” performance was requested.52 (In other legal contexts besides insurance, the “knew or should have known” test is typically associated with negligence claims or other claims involving objective, not subjective, standards of liability.53)

Indeed, several courts have stated that the “essence” of the tort of bad faith is the “unreasonableness” of the insurer’s conduct, thus implying that a finding of “unreasonable” conduct would satisfy the core requirements needed to impose liability.54 However, a careful reading of these cases compared to the original case law upon which they rely reveals that these courts have made a subtle, yet significant, change in the articulation of what is the “essence” of the tort of bad faith. The first case to attempt to define “the essence” of the tort of bad faith, was McCorkle, supra. McCorkle did not limit the essence of bad faith to objectively unreasonable conduct, but included bad faith conduct as well. The McCorkle case stated as follows:

The first case to omit “bad faith” from the description in favor of “unreasonableness” only was Conti v. Republic Underwriters Ins. Co., decided in 1989. Conti stated as follows: “The essence of the tort of bad faith, as it is recognized in Oklahoma, is the unreasonableness of the insurer’s actions.”56 For that proposition, Conti cited McCorkle, supra, which the Oklahoma Supreme Court decided in 1981. Thus, the very case cited by Conti for the concept that the essence of the tort is (mere) unreasonableness (McCorkle) actually says the tort is an intentional one and, consistent with Christian, listed both unreasonableness and bad faith as the elements of the cause of action.57 The cases that followed Conti have perpetuated the ambiguous shift in language.58

However, a different line of cases purporting to articulate the “essence” of the tort have been more consistent with the actual statement of McCorkle which included both unreasonableness and bad faith.59 The most faithful of all of this second line is Price, supra, which expressly continues the McCorkle definition of bad faith as an “intentional tort.”60

Further confusion over the necessity of a subjective element has resulted from statements in Newport v. USAA and other cases, that “if there is conflicting evidence from which different inferences may be drawn regarding the reasonableness of the insurer’s conduct, then what is reasonable is always a question for the jury.”61 This language implies that proof of unreasonableness alone would be enough to get the tort claim to the jury.

Advocates of the view that the tort of bad faith in Oklahoma has no subjective element rely on the oft-stated principle that a plaintiff can recover for bad faith without proving a right to recover punitive damages. As the Court in Christian stated, one who proves bad faith is entitled to “consequential, and in a proper case, punitive damages.”62 In McLaughlin v. Nat’l Benefit Life Ins. Co., the Court held, “clearly, punitive damages do not ipso facto follow from every breach of this duty [of good faith and fair dealing] . . . .”63 Punitive damages can only be imposed when there is proof of “oppression, malice, fraud or gross negligence or wantonness.”64 To recover punitive damages, “the act which constitutes the cause of action must be activated by or accompanied with some evil intent, or must be the result of such gross negligence — such disregard of another’s rights — as is deemed equivalent to such intent.”65 If bad faith can be proven without also establishing a right to punitive damages, and punitive damages are recoverable only when there is proof of evil intent, then bad faith must not require proof of evil intent, or so the argument goes.

One response to this view would point out that, although proof of bad faith itself does not carry an automatic right to have the issue of punitive damages submitted to the jury, a subjective element still logically may be required if it is defined as some measure of intent “less” than reckless disregard but more than mere unreasonableness.66 Punitive damages are only recoverable from an insurer upon proof of at least reckless disregard of its duty of good faith.67 Indeed, the Oklahoma Court of Civil Appeals acknowledged that such a standard was indeed required to recover for bad faith (at least against Workers’ Compensation insurers) in Cooper v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.68 In Cooper, the court expressly held that the basis for liability is something more than mere unreasonableness but less than reckless disregard.69 The court stated in part as follows:

Thus, meritorious arguments can be made from the case law and other authorities to support both propositions, i.e., the idea that bad faith requires proof of some subjective component and the contrary view, that only object-_ive unreasonableness need be shown. The apparent inconsistency of these two lines of authority has not escaped the notice of commentators.71 In fact, the inconsistency is plainly apparent within the text of several court opinions. For example, in McCorkle, although the court expressly stated that bad faith is an “intentional tort,” it also noted that the “focus” of a bad faith claim is “always on the unreasonableness of the insurer’s conduct.”72 Similar observations could be made about Buzzard, Willis and other cases.

THE ROLE OF SUBJECTIVE EVIDENCE IN MEASURING THE LEGITIMATE DISPUTE DEFENSE AND CLAIM INVESTIGATIONS

Although expressions in case law regarding the necessity of a subjective element have conflicted over the years, the case law since Christian and Timmons has consistently indicated that the lack of a real belief by the insurer in its proffered claim defense may be a sufficient condition to negate the legitimate dispute defense. According to numerous decisions, in Oklahoma there is no liability for “bad faith” when the insurer’s decision is based on a legitimate dispute with the insured on issues of coverage, amount of the claim, extent of the loss, etc.73 However, the courts have refused to grant judgment to an insurer based on a legitimate dispute defense where the evidence shows that the insurer did not actually believe and rely on the defense in reaching its decision to deny a claim. For example, in Buzzard, supra, the defendant, uninsured motorist insurer attempted to defend the post-claim, bad faith suit by arguing that it had a “reasonable defense” to the insurance claim based on the insured’s alleged contributory/comparative negligence.74 The Oklahoma Supreme Court rejected the insurer’s argument on the ground that “there was evidence that during the relevant time period, this defense was neither internally noted by [the insurer] nor communicated to plaintiffs as a reason for delay or denial of the claim.”75

In addition, in Timberlake Const. Co. v. U.S.F.&G., the Tenth Circuit Court of Appeals commented as follows with respect to the legitimate dispute defense:

This language from the Timberlake decision (i.e., bad faith may still exist where there is a legitimate dispute) is, of course, not precedential authority in Oklahoma state courts.77 If taken literally, it contradicts the holding of prior Oklahoma Supreme Court cases that there can be no bad faith where there is a legitimate dispute.78 However, the Timberlake language can be reconciled with Oklahoma Supreme Court precedent if it is understood to mean that if there is a dishonest motive or the lack of a real belief in the proffered defense, then the alleged “dispute” is not really a “legitimate” dispute in the first place. In other words, unless the dispute is honest and real, it is not “legitimate” and thus, does not preclude a finding of bad faith.

This understanding of Timberlake is consistent with the subsequent Tenth Circuit case of Vining v. Enter. Fin. Co.79 In that case, the plaintiff’s claim under a credit life insurance policy was denied by the insurer based on the defense of misrepresentation in the insurance application. The named insured had stated on his insurance application that he was in good health and had no treatment during the prior year for heart disease. His medical records obtained after his death showed, however, that he had been taking medication for nine years after coronary bypass surgery to prevent the occurrence of angina. The insurer argued that it was entitled to judgment on the bad faith claim due to the existence of a legitimate dispute over its right to rescind the policy. The trial court and the Tenth Circuit disagreed. The Tenth Circuit echoed the Timberlake concept that a legitimate dispute is not “an impenetrable shield” against bad faith, but then explained as follows: “That is, a plaintiff may bring a bad faith cause of action even though a legitimate defense to a breach of contract claim exists if the defendant did not actually rely on that defense to deny payment under the policy.”80 The essence of Timberlake and Vining, therefore, is that there can be a potential legitimate defense to a claim that would have supported denial, but unless it is actually relied on by the insurance company, that potential defense is not a true legitimate dispute that can prevent a finding of bad faith.

Subjective evidence can also be sufficient to show a bad faith failure to investigate. In Buzzard, supra, the Oklahoma Supreme Court confirmed that “to determine the validity of the claim, the insurer must conduct an investigation that is reasonably appropriate under the circumstances.”81 In Oulds, the Tenth Circuit recognized that dishonest motive in conducting an investigation would constitute “bad faith.” The court there noted, “The investigation of a claim may in some circumstances permit a reasonable conclusion that an insurance company has acted in ‘bad faith’ in denying a claim, particularly if the manner of the investigation suggests that the insurer has constructed a sham defense to the claim or has intentionally disregarded undisputed facts supporting the insured’s claim.”82

Such a “sham defense” appeared to have been at the heart of the Oklahoma Supreme Court’s analysis in the 2000 case of Barnes v. Okla. Farm Bureau Mut. Ins. Co.83 In that case, an uninsured motorist (“UM”) insurance carrier attempted to defend its failure to pay based on the argument that it was entitled to subrogation from the tortfeasor’s liability insurance, even though the combined limits of both UM and liability coverages were admittedly far less than the insured’s damages. The court concluded that the insurer’s position, though based on an attorney’s opinion letter interpreting the statute, was “patently unreasonable” and that the jury could have found that the insurer’s position was not reached in good faith.84 Though the court did not expressly consider a subjective element, it left no doubt that it viewed the insurer’s position as not an honest reading of the UM statute. The court referred to the disagreement as a “purported ‘dispute’,” and consistently referred to the lawyer’s position regarding the UM statute as an “interpretation.” The court described the lawyer’s opinion as “verbal sleight of hand” that was used to “concoct an imagined loophole.” It referred to the insurer’s reliance on the advice as “purported reliance” and concluded that there was sufficient evidence for the jury to conclude that the “insurer was merely using a baseless argument concerning ‘interpretation’ of §3636(E) in an attempt to gain a tactical advantage. . .”85 (The phrase “in an attempt” clearly describes conduct that has its genesis in an ulterior motive. In other words, the insurer’s motive was not to truly follow the law but, rather, to “gain a tactical advantage.”) Thus, the court rejected the insurer’s claimed legitimate dispute defense based largely on the inferences that could be drawn regarding the insurer’s subjective motivation. In this sense, Barnes is a good example of the “sham defense” concept addressed in Oulds.

These cases stand for the principle that a bad faith claim can be established with evidence from which a jury could reasonably conclude that the insurer’s investigation or its proffered basis for claim denial were not honest and genuine. Of course, this principle is consistent with traditional notions of “bad faith” which involve a subjective element.86 From this authority, it seems clear that proof of subjective bad faith is sufficient to establish the insurer’s liability in tort. What remains somewhat uncertain is whether the tort can be established with only proof of objectively unreasonable conduct, in the absence of evidence of subjectively bad motivation. This issue was at the heart of the recent Peters and Badillo decisions. Both concluded that mere objective unreasonableness, without any subjectively bad motive or intent, is not enough.

In Peters, the plaintiff was a beneficiary under certain credit life insurance policies allegedly purchased by her deceased mother.87 The defendant insurer refused to pay the claims even though it had issued the policies because, it claimed, no premiums had ever been paid. Plaintiff produced evidence that an agent had gone to her mother’s house to solicit the policies, that two insurance policies were subsequently mailed to her mother, and that the application and policy terms stated the premiums had been paid with cash. The company argued that the policies were sent by mistake and that company records showed the premiums had not been paid. The agent testified that the two applications were merely intended as trial applications and the premiums were not actually paid. The evidence showed the company did not have policies or procedures in place to handle these situations and that the company exercised loose control over mailing policies to insureds.

The Court of Civil Appeals found the plaintiff had proven that the insurer had acted unreasonably, i.e., committed “internal negligence in the management of its affairs,” but could not show that the insurer’s negligent conduct was directed at her specifically.88 The court held that negligence alone is insufficient to prove bad faith, which requires affirmative conduct aimed “toward” or “against” the insured in an effort to defeat a claim. The court explained its holding in pertinent part as follows:

The potential impact of the Peters case is substantial. If the holding of that case is accepted as the law of Oklahoma, it clearly means that bad faith liability cannot be imposed with proof of objective unreasonableness (i.e., negligence) alone. According to Peters, there must be something more, i.e., evidence of conduct that is “directed” toward or against the insured.

What remained unclear after Peters is how that subjective element should exactly be defined. That is exactly the question the Supreme Court in Badillo attempted to answer. In rejecting mere unreasonableness as the test for bad faith, the court in Badillo stated in part as follows:

The court in Badillo found that the facts did not rise to the level of intent to deprive the insured of the policy benefit. In that case, Mario Badillo’s automobile liability insurer, Mid Century Insurance Company, offered his policy’s limit of $10,000 to settle the claim against him. The injured claimant’s counsel refused to have the release signed without first obtaining a statement from Badillo. When Mid Century refused to produce Badillo for a statement, Smith immediately filed suit against Badillo and recovered a large excess verdict. Badillo sued for “bad faith,” claiming that Mid Century “unreasonably” refused to present him for a statement, and that, if it had produced him, the plaintiff would have released him from liability. On appeal in the bad faith case, the Supreme Court found that the trial court should have directed a verdict in favor of Mid Century on the grounds that it did not gain any “unconscientious advantage” by refusing to produce Badillo for a statement, that it had no contractual obligation to do so, and that it had a legitimate basis for not doing so (Badillo was facing possible criminal charges for his driving conduct and such a statement may have been incriminating). In short, the Court found there was no evidence that Mid Century intended to deprive Badillo of the policy benefits, and therefore, there was no bad faith.

In arriving at its conclusion, the court analyzed the tort of bad faith. The court began with a brief review of Oklahoma’s Uniform Jury Instructions. OUJI - Civil (2d) No. 22.2 requires a finding that the insurer’s refusal to pay was “unreasonable under the circumstances” and that “it did not deal fairly and in good faith” with the insured. The court observed as follows:

The court then cited the proposition from Manis and McCorkle that the tort is an intentional one.92 It noted the historical roots of bad faith in the Boling and Christian cases, finding that Boling implicitly rejected a negligence analysis.93 It then cited the R estatement (Second) of Torts, §870 (1979), comment (b), for its definition of an intentional tort as “one in which the actor intends to produce the harm that ensues; it is not enough that he intends to perform the act.”94 It also observed, consistent with the discussion supra, that tort law “involves a linear progression of culpability” from intent, the most culpable, to negligence, having no culpability.95 From these principles, the court deduced that the necessary element of intent must be more than “a mere risk” that the insured would lose the benefit of the policy. Rather, the insurer’s “action must be motivated by an intent to deprive the insured of the benefit.”96

The court then articulated a new test for determining whether such intent has been proven. In this regard, the court stated, “If a [bad faith] case is allowed to go to a jury, there must be some evidence of dishonest intentions, unconscientious advantage, or action taken that is unreasonable and unfounded.”97

Although the court’s reference to “unreasonable and unfounded” conduct as a measure for intentional tort liability may seem puzzling at first glance, the court made clear elsewhere in its opinion that “unreasonableness” in bad faith law is a different standard than objective unreasonableness used in the definition of “ordinary care.” The court stated, “The ‘ordinary care’ exercised by ‘a reasonably careful person’ used in negligence law is not the same thing as the unreasonable actions of an insurer in the intentional tort of bad faith.”98 The unreasonableness in bad faith law refers to occasions where “the insurer intends to act unfairly or unreasonably.”99 Thus, the phrase “unreasonable and unfounded” as it appears in the test for intentional bad faith does not refer to objectively unreasonable conduct as one encounters in negligence law. Rather, the test apparently refers to actual, subjective or conscious unreasonableness.

If Badillo remains unchanged and becomes law, one could conclude that actionable conduct must be unfounded, knowingly arbitrary and lacking any basis in reason. Such a standard of subjective unreasonableness will provide much needed harmony to this conflicted area of law. It would articulate a core subjective component consistent with historic origins of bad faith. Also, the test would allow liability based on conduct that is intentional by nature, but not necessarily sufficient to warrant punitive damages. (As the Court of Civil Appeals held in Cooper, bad faith requires something more than objective unreasonableness, but not necessarily reckless disregard.) Thus, the test makes sense of the Christian principle that bad faith gives rise to liability for consequential, but not necessarily punitive damages. Because the test requires actual unreasonableness of mind, it resolves the apparently conflicting lines of authority that say on the one hand that “the decisive question” in bad faith is “whether the insurer had a good faith belief” that it’s denial was justifiable, and on the other hand, that “the essence of bad faith is the reasonableness of the insurer’s actions.”

In sum, Peters and Badillo (if it becomes law) may successfully reaffirm the subjective element of insurer bad faith in Oklahoma and provide much needed guidance as to the exact parameters of that element in a manner that makes sense of this heretofore confusing area of law.

1. See e.g. Parker, The Development of First Party Extracontractual Insurance Litigation in Oklahoma; An Analytical Examination, 31 Tulsa L.J. 57, 72 (1995); see also, Oklahoma Uniform Jury Instructions, Civil (2d ed. 1996), No. 22.2.

2. See discussion, infra; see also Busby v. Quail Creek Golf & Country Club, 885 P.2d 1326, 1994 OK 63, reh’g denied (in negligence cases, the standard of care is that of a reasonably prudent person under same or similar circumstances).

4. 2004 OK 42. This Article was originally prepared and submitted for publication before the Badillo decision was announced. Any similarity to the analysis herein and that found in Badillo is coincidental.

7. Title 25 contains “Definitions and General Provisions” for Oklahoma statutes. See 25 O.S. §1.

13. Id. at 905 (stating, “Appellee’s argument asks us to sanction, not only its malicious, willful and oppressive refusal to pay a valid claim to its disabled insured, but also its fraudulent concealment of these true facts from the insured until such time as his right to pursue a remedy in tort would be prejudiced. This we will not do.”).

14. See Prosser and Keeton on The Law of Torts (5th ed.) p. 173, (West 1984) (stating, “The whole theory of negligence presupposes some uniform standard of behavior . . . . The standard of conduct which the community demands must be an external and objective one, rather than the individual judgment, good or bad, of the particular actor; . . . The courts have dealt with this very difficult problem by creating a fictitious person, who never has existed on land or sea: the ‘reasonable man of ordinary prudence.’”); Thomas v. Holliday, 764 P.2d 165, 1988 OK 116 (regarding negligence law); Nelson v. McMullen, 207 F3d 1202 (10th Cir. 2000) (civil rights claim for unreasonable searches measured by objective evidence); State ex rel. Tulsa v. City of Okla. City, 61 P.3d 234, 2002 OK 97, corrected (regarding Rule 11 sanctions for unreasonable litigation conduct); Sallahdin v. Gibson, 275 F.3d 1211 (10th Cir. 2002) (in claims for ineffective assistance of counsel in criminal case, attorney’s performance must be reasonable, as determined by objective evidence); Valdez v. State, 900 P.2d 363, 1995 OK CR 18 (defense of “provocation” to charge of murder is measured by reasonable person test which is an objective one); U.S. v. Roberts, 947 F. Supp. 1544 (E.D. Okla. 1996) (disqualification of assigned judge measured by “objective” test of whether reasonable person would harbor doubts about the judge’s partiality); Tenvillager v. Home of Hope, Inc., 21 F. Supp.2d 1294 (N.D. Okla. 1998) (employer’s defense to FLSA claim for liquidated damages was weighed by “objective standard” of whether it had reasonable grounds to believe its actions complied with law).

15 . See e.g., 78 Okla. Stat. Ann. §89 (regarding claims for misappropriation of trade secrets); 23 Okla. Stat. Ann. §103 (regarding personal injury claims); Green Bay Packaging, Inc. v. Preferred Packaging, Inc. 932 P.2d 1091; 1996 OK 121; Beard v. Richards, 820 P.2d 812; 1991 OK 117.

16 . See First State Ins. Co. v. Keuyer Nat’l Ins. Co., 971 P.2d 953 (Wash. App. Div. 1, 1999) (acknowledging that the two standards are distinct, stating the “theories of either negligence or bad faith [are] independent of each other because a party may fail to use ordinary care yet still not act in bad faith”).

17 . Oklahoma law currently recognizes that both an unreasonably low evaluation and an offer that is less than the range of values assigned to a claim can support a claim of bad faith. See Oklahoma Uniform Jury Instructions-Civil (2d ed. 1996), Instruction No. 22.2; Newport v. USAA, 11 P.3d 190, 2000 OK 59, corrected.

19 . Id. at 9-12; see also, 23 O.S. §9.1 (establishing larger punitive damage award “caps” for intentional and malicious conduct than for reckless conduct).

22 . 7 Am. Jur. 2d, Automobiles and Highway Traffic, §404 (1997); Prosser and Keeton, supra, §34 (discussing varying levels of “aggravated negligence”); Slocum v. Phillips Petroleum Co., 678 P.2d 716, 719 (Okla. 1983); see also, Zeran v. Diamond Broad., 203 F.3d 714 (10th Cir. 2002) (“reckless disregard” of the truth in a claim for false light invasion of privacy requires actual knowledge of probable falsity); Revell v. Hoffman, 309 F.3d 1228 (10th Cir. 2002) (“reckless disregard” in a defamation claim is a subjective inquiry requiring a high degree of actual awareness of probable falsity); Johnson v. Gen. Motors Corp., 889 F. Supp. 451 (W.D. Okla. 1995) (fact issue on “reckless disregard” in products liability action was presented by evidence that the manufacturer was aware of defects in the product that resulted in injuries and intentionally failed to remedy them).

23 . Wertheim & Co. v. Codding Embryological Sciences, Inc., 620 F.2d 764 (10th Cir. 1980) (in the context of securities fraud); but see NMP Corp. v. Parametric Tech. Corp., 958 F. Supp. 1536 (N.D. Okla. 1997).

24 . Ashley, Bad Faith Actions: Liability and Damages, §§2:15, 5:02 (West 1997).

27 . Id.; see e.g., Anderson v. Cont’l Ins. Co., 271 N.W.2d 368 (Wis. 1978) (holding that “the plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying a claim”).

29 . Id.; Stevenson v. Union Standard Ins. Co., 746 S.W.2d 39, 41 (Ark. 1988).

30 . Prosser and Keeton, supra, at 35-36; Hardy v. U.S., 691 F.2d 39 (1st Cir. 1982).

37 . Id. The only explanation proffered by the Court was the somewhat vague statement, “The gravamen of a Christian-type tort is failure to deal fairly and in good faith.” Id. at 914.

39 . 824 P.2d 1105, 1109; 1991 OK 127, overruled on other grounds, Burch v. Allstate Ins. Co., 977 P.2d 1057; 1998 OK 129, corrected, reh’g denied (emphasis added). Interestingly, the Court in Buzzard did not say the essence of the tort was “unreasonable, and bad faith conduct.” One could see the Court’s use of the phrase “unreasonable, bad faith conduct” (without the conjunctive “and” that was used in Christian) as moving at least a step toward the elimination of any distinction between unreasonable conduct and conduct motivated by actual bad faith.

41 . See e.g., Newport v. USAA, 11 P.3d 190, 2000 OK 59, corrected; see also Oulds v. Principal Mut. Life Ins. Co., 6 F.3d 1431 (10th Cir. 1993) (holding that to establish bad faith, the insured must present evidence from which the jury could conclude “that the insurer did not have a reasonable, good faith belief” that its withholding of payment was justified).

43 . 41 P.3d 1019, 2002 OK CIV APP 16, reh’g denied, cert. denied (stating, “The essence of the intentional tort of bad faith with regard to the insurance industry is the insurer’s unreasonable, bad faith conduct, including the unjustified withholding of payment.”).

47 . Cooper v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 921 P.2d 1297, 1299 (OK CIV APP 1997).

49 . See Taylor v. Pepsi-Cola Co., 196 F.3d 1106 (10th Cir. 1999) (regarding the difference between the elements necessary for the tort of intentional infliction of emotional distress and those required for recovery under negligence); Franklin v. U.S., 492 F.2d 1492 (10th Cir. 1993) (appeal after reward); 34 F.3d 106 (distinguishing medical battery from malpractice). The designation of a tort as “intentional” can also have ramifications for sovereign immunity. See McMullen v. City of Del City, 920 P.2d 528, 1996 OK CIV APP 46, cert. denied (holding there was no liability under the Governmental Tort Claims Act for malicious prosecution or intentional infliction of emotional distress).

50 . Prosser and Keeton, supra, p. 34 (discussing R estatement (Second) of Torts, §§8A, 13, 16, 18 and 20).

52. 42 F.3d 607, 612 (10th Cir. 1994) (emphasis added); see also, Oulds, supra.

53 . See, e.g., Gaines Bros. Co. v. Fourth Nat’l Bank of Tulsa, 133 P.2d 742, 192 Okla. 59 (1942) (allegation that bank knew or should have known it was paying funds to wrong person stated claim in negligence); J.C. Penney Co. v. O’Daniel, 263 F.2d 849 (10th Cir. 1959) (whether store had defense to false imprisonment claim depends on whether it knew or should have known plaintiff was stealing); McKinney v. Harrington, 855 P.2d 602, 1993 OK 88 (landowners’ liability to invitee measured by whether it knew or should have known of the danger); Brigance v. Velvet Dove Rest., Inc., 725 P.2d 300, 1986 OK 41, appeal after remand, 756 P.2d 1232, 1988 OK 68 (liability of vendor of intoxicating beverage for injuries to third person measured by whether it knew or should have known patron was noticeably intoxicated).

54 . Vining on Behalf of Vining v. Enter. Fin. Group, Inc., 148 F.3d 1206 (10th Cir. 1998); Barnes v. Okla. Farm Bureau Mut. Ins. Co., 11 P.3d 162; 2000 OK 55; Conti v. Republic Underwriters Ins. Co., 782 P.2d 1357; 1989 OK 128; Narvaez v. State Farm Mut. Auto Ins. Co., 989 P.2d 1051; 1999 OK CIV APP 92; Alsobrook v. Nat’l Travelers Life Ins. Co., 852 P.2d 768, 770; 1992 OK CIV APP 168.

57 . In fairness, it must be noted that McCorkle also said in the very same sentence, “and if there is conflicting evidence from which different inferences may be drawn regarding the unreasonableness of the insurer’s conduct, then what is reasonable is always a question for the jury.” Id.

59 . See Duckett v. Allstate Ins. Co., 606 F. Supp. 728 (W.D. Okla. 1985) (“the essence of the tort of bad faith is the insurer’s unreasonable, bad faith conduct . . .”); Newport v. USAA, 11 P.3d 191; 2000 OK 59, reh’g denied, cert. denied (“the essential question in a bad faith action . . . is whether the insurer engaged in unreasonable, bad faith conduct . . . .”); Price, supra.

61 . 11 P.3d 190, 195; 2000 OK 59, ¶ 11 (emphasis added); see also Price, supra (“conflicting evidence as to the reasonableness of the insurer’s conduct is a question to be determined by” the trier of fact).

63 . 772 P.2d 383, 385; 1988 OK 41; see also, Thompson v. State Farm Fire & Cas. Co., 34 F.3d 932 (10th Cir. 1994); Barnes v. Okla. Farm Bureau Mut. Ins. Co., 11 P.3d 162; 2000 OK 55; Newport v. USAA, 11 P.3d 190; 2000 OK 59; Buzzard v. Farmers Ins. Co., 824 P.2d 1105; 1991 OK 127; Hall v. Globe Life & Accident Ins. Co., 968 P.2d 1263; 1998 OK CIV APP 161.

66 . Another logical rebuttal to this argument under existing law would be that the burden of proof for bad faith is a “preponderance of the evidence” (Alsobrook v. Nat’l Travelers Life Ins. Co., 852 P.2d 768, 1992 OK CIV APP 168, cert. denied), whereas punitive damages require proof by “clear and convincing evidence,” a higher standard. 23 O.S. §9.1. Thus, it is possible that one could prove bad faith but fall short of proving a right to punish the defendant. The shortcoming of this response is that it does not appear to have played any part in the courts’ pronouncements that bad faith does not automatically carry punitive damages. Rather, those pronouncements appear to have contemplated a more substantive distinction between claims for bad faith and punitive damages, irrespective of burden of proof differences.

69 . Id., 921 P.2d at 1299. This holding is directly in accord with Peters, discussed infra.

70 . Id. It is helpful to note that the court in Cooper refers to “bad faith” as an element of the cause of action and one that is not identical to “unreasonableness.” This language is consistent with this article’s analysis, supra, of the original Christian decision which implied that unreasonableness and bad faith were separate elements.

71 . See Ashley, supra, §5:02, fn 8 (West, 1997). Though he places Oklahoma in the “camp” of states that define bad faith broadly to include unreasonable withholding of payment, rather than the other “camp” that defines it “more narrowly and precisely” to require both the absence of a reasonable basis for claim denial and subjectively culpable conduct, Ashley acknowledges that Oklahoma authority is inconsistent in this regard. See also Parker, supra, pp. 65, 72.

72 . 637 P.2d at 587-588 (emphasis in original) (see other inconsistent remarks in McCorkle at Endnote 57, supra, and accompanying text).

73 . Oulds v. Principal Mut. Life Ins. Co., 6 F.3d 1431 (10th Cir. 1993); McLaughlin v. Nat’l Benefit Life Ins. Co., 772 P.2d 383 (Okla. 1988); Claborn v. Wash. Nat’l Ins. Co., 910 P.2d 1046 (Okla. 1996); Mustain v. U.S.F.&G., 925 P.2d 533 (Okla. 1996); Manis v. Hartford Ins. Co., 681 P.2d 760 (Okla. 1984) (“A Christian cause of action will not lie where there is a legitimate dispute.”).

77 . Johnson v. Ford Motor Co., 45 P.3d 86, 2002 OK 24. (On matters of state law, the Oklahoma Supreme Court is not restrained by federal cases, but looks first to its own decision for authority.)

98 . Id., ¶ 22-23. This concept of a different kind of unreasonableness also appears in ¶ 18 of Badillo when the Court cites to a 1995 case by the 9th Circuit Court of Appeals, Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1166 (9th. Cir 1995) which addressed bad faith under California law (where Oklahoma’s tort of first party bad faith had its genesis). According to Badillo, that decision held that “when the term unreasonable conduct is used in connection with this intentional tort, it means something more than the use of the reasonable person standard, which is an element of negligence.”

Richard J. Harris is a director at McKinney & Stringer P.C. in its Oklahoma City office, where he is currently serving as the manager of the insurance and personal injury department. His practice focuses on litigation in insurance, construction, personal injury and commercial issues. He earned his J.D. from Cornell Law School where he graduated magna cum laude in 1994 and his bachelor’s degree with honors from OSU in 1987.

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