Bad Faith Damages: When the Insurance Co. Unreasonably Delays, How Much More Will It Have to Pay?

Short answer: potentially, A LOT. But, it's critical to understand how these complicated, frequently misunderstood bad faith statutes operate in order to maximize the award for your client.

In the interest of helping you help your clients, here’s a brief primer on what your client may be entitled to under our bad faith penalty statutes—La. R.S. 22:1892 and La. R.S. 22:1973.

For the purposes of explaining the scope of the damages available under these statutes, let’s assume your client is a first-party claimant/insured.

Note that both of these statutes provide for causes of action for third-party claimants. The relief available to third-party claimants is much more limited than what is available to first-party claimants. I’ll be doing a blog post on the contours of third-party rights under these statutes very soon!

La. R.S. 22:1892 is a mandatory penalty and attorney fees statute.

• Under this statute, an insured is entitled to penalties if the insurer fails to pay a claim within thirty days after satisfactory proof of loss, and that failure is found to be arbitrary, capricious, or without probable cause. See La. R.S. 22:1892(B)(1)(a).

• The statute sets a mandatory penalty (in addition to the amount of loss) of fifty percent of the amount found to be due the insured, or one thousand dollars, whichever is greater. See La. R.S. 22:1892(B)(1)(a). In other words, the penalty is calculated based on the amounts due under the insurance contract. See Calogero v. Safeway Ins. Co. of Louisiana, 99-1625 (La. 1/19/00), 753 So.2d 170, 174.

• The statute also mandates an award of reasonable attorney fees and costs. See La. R.S. 22:1892(B)(1)(a); Calogero, 753 So.2d at 174.

• So, assuming La. R.S. 22:1892 alone applies, if the court determines that $100,000 was due under the policy, the mandatory penalty will be $50,000, and the total judgment will $150,000 plus reasonable attorney fees and costs.

• Main takeaway: when you think La. R.S. 22:1892, think 50% mandatory penalty and mandatory attorney fees in addition to whatever is due under the policy.

La. R.S. 22:1973 is a damages and discretionary penalty statute.

• La. R.S. 22:1973(A) articulates a general statutory fiduciary duty of good faith and fair dealing. Under this general duty, a first party claimant/insured has a cause of action for the any damages (both general and special) arising from his insurer’s breach of this duty of good faith.

• La. R.S. 22:1973(A) provides for the mandatory award of any “damages sustained as a result of the breach” of the duty imposed. Durio v. Horace Mann Ins. Co., 11-0084 (La. 10/25/11), 74 So.3d 1159, 1170 (referencing this statute as former La. R.S. 22:1220).

• As applied to first-party claimants, La. R.S. 22:1973(B) sets forth a non-exclusive list of prohibited acts for which an insurer may be subject to liability to its insured. See Kelly v. State Farm Fire & Cas. Co., 14-1921 (La. 5/5/15), 169 So.3d 328, 336.

• La. R.S. 22:1973(C) provides that in addition to these general or special damages, discretionary penalties can be awarded, limited to two times the “damages sustained,” or $5,000.00, whichever is greater. Durio, 74 So.3d at. 1170. Note that that the amount of penalties is discretionary. The statute says "not to exceed two times the damages sustained." See La. R.S. 22:1973(C).

• In Durio, the Louisiana Supreme Court explained that the “damages sustained” for purposes of calculating the discretionary penalty are the damages sustained as a result of the breach of the duty of good faith and fair dealing. Durio, 74 So.3d at. 1170.

• The Durio Court made it very clear that the duties of an insurer under La. R.S. 22:1973 are separate and distinct from its duties under the insurance contract and that a claim against an insurer for breach of the insurance contract is a separate cause of action from a claim against an insurer for breach of its duty of good faith and fair dealing under La. R.S. 22:1973. Durio, 74 So.3d at. 1170.

La. R.S. 22:1973 penalties are calculated based on La. R.S. 22:1973 damages--i.e., the damages arising from the insurer's breach of its duty of good faith.

• Unlike the penalties under La. R.S. 22:1892 which are calculated based on the amount due under the insurance contract, La. R.S. 22:1973 penalties “are calculated by doubling the amount of damages attributable to the insurer’s breach of duties imposed under the statute.” Durio, 74 So.3d at. 1171.

• Critically, to be awarded damages and penalties under La. R.S. 22:1973, you need to put on evidence of the damages sustained as a result of the insurer's breach of the duty of good faith.

• Your evidence of damages for your La. R.S. 22:1973 claim is not evidence of the underlying loss that precipitated your client’s insurance claim. It’s evidence of the damages sustained because the insurer breached his duties of good faith and fair dealing by, for instance, arbitrarily and capriciously failing to timely pay your client what he was owed under the insurance contract for which he paid premiums. See, e.g., La. R.S. 22:1973(B)(1)-(6) (remember, with respect to the insured, the LASC in Kelly said this is non-exclusive list of bad faith acts).

• You need to think creatively about what these damages are and how to prove up these damages.

• Mental anguish, aggravation, and inconvenience associated with the claims adjusting process are compensable general damages for breach of the duty of good faith and fair dealing. See Dudenhefer v. Louisiana Citizens Property Insurance Corporation, 19-0387 (La. App. 4 Cir. 9/25/19), 280 So.3d 771, 778-79 (awarding $12,500 in general damages for breach of the duty of good faith under La. R.S. 22:1973 for plaintiff's mental anguish, aggravation, and inconvenience associated with his claims adjusting experience and awarding double this amount in penalties plus attorney fees). In that case, a $40,414 award for underlying policy damages became an overall judgment of $93,890.5 once the damages, penalties, attorney fees were added.

• To give you an example from a case I worked on recently, an insurer was found to be in bad faith for rescinding an insurance contract and for arbitrarily and capriciously failing to adjust plaintiffs’ claim. Plaintiffs put on evidence of damages resulting from the insurer’s failure to tender. In that case, there was a $1M policy that the insurance company arbitrarily and capriciously failed to tender. As a result of the insurer's breach of its duty of good faith, the plaintiffs lost their highly successful family business. Plaintiffs' counsel called an economist who evaluated that loss of business income. The Court found that plaintiffs were entitled to damages as a result of the breach and, in addition, to penalties of 2 times that amount (e.g., if the court found the bad faith damages were $4M, the court awarded the $1M due under the insurance contract, awarded bad faith damages of $4M, and awarded an additional $8M in bad faith penalties on top of that for a total award of $13M, plus attorney fees (under La. R.S. 22:1892).

• Main takeaways:

1. La. R.S. 22:1973 provides for a mandatory separate award for damages arising from the breach of the duty of good faith and fair dealing plus discretionary penalties of up to double this amount.

2. Your evidence of damages for your La. R.S. 22:1973 claim is not evidence of the underlying loss that precipitated your client’s insurance claim. It’s evidence of the general and special damages sustained because the insurer breached his duties of good faith and fair dealing.

First party claimants are entitled to the greater of the two penalties AND attorney fees.

• In Calogero v. Safeway Ins. Co. of Louisiana, 99-1625 (La. 1/19/00), 753 So.2d 170, 174, the LASC held that were La. R.S. 22:1973 (then numbered La. R.S. 22:1220) provides a penalty greater than La. R.S. 22:1892 (then numbered La. R.S. 22:658), plaintiff is entitled to the greater of the two penalties available plus attorney fees.

The U.S. Fifth Circuit has held that plaintiffs are also entitled to a separate damage claim under La. R.S. 22:1973, even if they elect to take the mandatory La. R.S. 22:1892 penalty.

• In Consolidated Companies, Inc. v. Lexington Ins. Co., 616 F.3d 422, 434 (5th Cir. 2010), the U.S. Fifth Circuit considered the distinction between the damages available under La. R.S. 22:1973, which arise out of the insurer’s breach of its duty of good faith and fair dealing, from the penalties mandated by La. R.S. 22:1892: “Damages are awarded to compensate the insured for losses caused by the insurer's refusal to pay. Penalties, on the other hand, are assessed to punish the insurer for its bad faith. The fact that both require the same finding of bad faith does not render this distinction irrelevant, nor does it render redundant awarding statutory damages along with assessing statutory penalties.” Consol. Companies, Inc. v. Lexington Ins. Co., 616 F.3d 422, 434 (5th Cir.2010).

• Ultimately, the Court found that both statutory damages under La. R.S. 22:1973 (then-numbered La. R.S. 22:1220) and statutory penalties under La. R.S. 22:1892 (then La. R.S. 22:658) may be awarded.

• So, assuming both statutes apply to your facts, if there’s a large amount owed under the insurance policy but the damages arising from the breach are not substantial, then you could theoretically elect to receive mandatory penalties of 50% of the amount due under the insurance contract (under La. R.S. 22:1892), plus damages arising from the breach of the duty of good faith (under La. R.S. 22:1973), plus mandatory attorney fees under La. R.S. 22:1892.

If both statutes apply, your client is entitled to bad faith damages, penalties, and attorney fees.

• In sum, La. R.S. 22:1892 is a penalties and attorney’s fee statute. La. R.S. 22:1973 is a damages and penalties statute.

• If both La. R.S. 22:1892 and La. R.S. 22:1973 apply, then your client is entitled to an award for damages arising from the insurer’s bad faith (from La. R.S. 22:1973), an award of penalties (either from La. R.S. 22:1892 or La. R.S. 22:1973, whichever is greater), and attorney fees (from La. R.S. 22:1892). All of these awards are on top of whatever money is owed to your client under the insurance contract.

If you have any specific questions about your client's rights under Louisiana's bad faith statutes, don’t hesitate to reach out to me at mary@mwsmithlegal.com. A little research could make all the difference!