• Atlanta
• Boston
• Dallas
• Ft. Lauderdale
• London
• Minneapolis
• New York
• Oakland
• Philadelphia
• Washington, DC

by Megan Shutte

Clients regularly ask us for the basics of first-party bad faith in the many jurisdictions in which they issue policies or handle claims. In this edition of the Midwest Monitor, we provide Minnesota and Wisconsin first-party bad faith essentials. While this short summary cannot, of course, cover the finer details of bad faith law in these jurisdictions, this article addresses the most asked questions we receive: Does the jurisdiction apply statutory or common law bad faith? What damages are available if an insured succeeds on their bad faith claim? Does the jurisdiction have any special procedural rules for litigating bad faith claims? Does the jurisdiction recognize actions under an unfair insurance practices statute or regulation? And, what is the statute of limitations for bad faith claims?

We plan to periodically summarize bad faith law in other Midwestern states. Up first: the Badger State and the Gopher State. Although Minnesota and Wisconsin apply the same test to determine whether an insurer may be liable for bad faith, the tests are applied under different legal frameworks. Minnesota only recognizes bad faith via a statute that permits limited damages, while Wisconsin recognizes bad faith as an intentional tort that may allow an insured to recover punitive damages. Minnesota also has a unique procedural twist that depends on whether the claim is brought in state or federal court—which Wisconsin does not have.

Wisconsin

Bad Faith Standard. Bad faith is an independent tort under Wisconsin law. Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978). To prevail, the insured must prove two elements: (1) the absence of a reasonable basis for denying policy benefits, and (2) the insurer’s knowledge or reckless disregard of that lack of reasonable basis. Id. at 376.The first prong is objective: would a reasonable insurer have denied or delayed payment under these facts and circumstances? Id. at 377. Courts examine whether the claim was properly investigated and whether the results were reasonably evaluated and reviewed by the insurer. Id. The insurer’s subjective bad faith intent may be inferred “where there is a reckless disregard of a lack of a reasonable basis for denial” or a “reckless indifference to facts or to proofs submitted by the insured.” Id. Insurers can challenge claims that are “fairly debatable”—on legal or factual grounds—without acting in bad faith. Id. at 368.

Damages. Wisconsin takes a broad view: insurers may be liable for “any damages which are the proximate result” of the insurer’s bad faith conduct. DeChant v. Monarch Life Ins. Co., 200 Wis. 2d 559, 571, 547 N.W.2d 592, 596 (1996). These may include compensatory damages, punitive damages, and even emotional distress damages—although emotional distress recovery requires severe distress plus substantial damages beyond loss of contract benefits. Anderson, 271 N.W.2d at 378. Punitive damages require proof of “evil intent” or “special ill-will or wanton disregard of duty.” Id. at 379. Attorney’s fees are recoverable as compensatory damages. Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 2010 WI 49, ¶ 183, 325 Wis. 2d 56, 123, 784 N.W.2d 542, 575. Policy proceeds may also be awarded when the insured forgoes a separate breach of contract claim. Jones v. Secura Ins. Co., 2002 WI 11, ¶ 37, 249 Wis. 2d 623, 648, 638 N.W.2d 575, 587.

Procedure. Wisconsin imposes no special procedural barriers to asserting a bad faith claim. Insureds can plead bad faith alongside breach of contract from the outset in both state and federal court. “Historically, the two separate claims have gone together.” Brethorst v. Allstate Prop. & Cas. Ins. Co., 2011 WI 41, ¶ 50, 334 Wis. 2d 23, 46, 798 N.W.2d 467, 479. Notably, a bad faith claim can proceed without a separate breach-of-contract claim, provided the insured alleges they were entitled to payment under the policy and that the claim was not fairly debatable in order to proceed to discovery on their bad faith claim. Id. at 483.

Unfair Trade Practices. Wisconsin's unfair insurance practices statutes and regulations provide no private right of action. Instead, they are meant to aid enforcement by the insurance commissioner. Kranzush v. Badger State Mut. Cas. Co., 103 Wis. 2d 56, 81, 307 N.W.2d 256, 269 (1981). However, violations of the unfair regulation are admissible as evidence to support a bad faith claim. Heyden v. Safeco Title Ins. Co., 175 Wis. 2d 508, 526, 498 N.W.2d 905, 911 (Ct. App. 1993).

Statute of Limitations. Bad-faith claims carry a two-year statute of limitations as intentional torts. Wis. Stat. Ann. § 893.57; Jones, 638 N.W.2d at 577. The Wisconsin Supreme Court has held that a bad-faith claim may be pursued even after the statute of limitations expires on the insured’s breach-of-contract claim. Id.

Minnesota

Bad Faith Standard. In 1979, the Minnesota Supreme Court declined to recognize a common law bad faith tort claim. Haagenson v. National Farmers Union Property & Casualty Company, 277 N.W.2d 648 (Minn. 1979). The legislature stepped in nearly three decades later, enacting Minn. Stat. Ann. § 604.18 in 2008 to create a statutory cause of action. The statute was expressly modeled after Wisconsin's Anderson framework and applies to policies requiring direct payment to insureds.  It does not apply to “provisions of a written agreement obligating an insurer to defend an insured, reimburse an insured's defense expenses, provide for any other type of defense obligation, or provide indemnification for judgments or settlements.”

The statutory test mirrors Wisconsin's two-prong framework. Under § 604.18, the court may award certain damages and costs if the insured can show: (1) the absence of a reasonable basis for denying policy benefits, and (2) the insurer knew of that lack of reasonable basis or acted in reckless disregard of it.

The first prong is objective: would a reasonable insurer not have denied policy benefits under the circumstances? Peterson v. W. Nat'l Mut. Ins. Co., 946 N.W.2d 903, 910 n.2 (Minn. 2020) (noting statute was adopted “nearly word for word” from Anderson). In applying the standard, the factfinder should consider the level of investigation a reasonable insurer would have conducted under the circumstances, how a reasonable insurer would have evaluated the claim in light of that investigation, and whether the investigation is fair—meaning, whether the insurer considered all of the facts and circumstances a reasonable insurer would consider relevant. Id.

The second prong is subjective: did the insurer know or recklessly disregard information that would have allowed it to know that it lacked an objectively reasonable basis for denial?

Damages. After the factfinder determines the amount owed under the insurance policy (i.e., after the court or jury decides the insured’s breach-of-contract claim), the court determines the amount of costs owed in a “subsequent proceeding.” Id.  Importantly, an award under § 604.18 is not available if the claim “is resolved or confirmed by arbitration or appraisal.” Id.

If the insured proves bad faith, available damages are capped. The court may award: (1) one-half of the proceeds awarded in excess of the insurer's pre-trial offer (made at least ten days before trial begins) or $250,000, whichever is less; and (2) reasonable attorney's fees up to $100,000 (non-duplicative of fees for the insured’s action for policy proceeds). Punitive and exemplary damages are not available.

Procedure. Minnesota's statute creates an unusual procedural hurdle in state court. Under § 604.18, subd. 4(a), an insured cannot include bad faith claims in the initial complaint. § 604.18, subd. 4. Instead, they must later move to amend their pleading, alleging the “applicable legal basis” for awarding costs, supported by one or more affidavits. The state court will grant leave to amend a complaint to add bad faith only upon a showing of prima facie evidence of bad faith.

But federal court is different. The District of Minnesota has held that § 604.18's pleading requirements conflict with Federal Rules 8 and 15. Selective Ins. Co. of S.C. v. Sela, 353 F. Supp. 3d 847, 859 (D. Minn. 2018). Rule 8 requires that complaints request any and all relief sought. Rule 15 allows amendment without affidavits or prima facie showings. Id. at 858. Applying U.S. Supreme Court precedent, the District of Minnesota held in Selective Insurance Company of South Carolina v. Sela that the Federal Rules prevail. The practical result: complaints filed in the District of Minnesota must include bad faith claims from the start, notwithstanding § 604.18.

Unfair Trade Practices. Minnesota does not recognize a private right of action under the state’s Unfair Claims Practices Act (M.S.A. § 72A.20). Enforcement is administrative only. Morris v. Am. Family Mut. Ins. Co., 386 N.W.2d 233 (Minn.1986).

Statute of Limitations. The statute is silent on limitations, but Minn. Stat. Ann. § 541.05 provides a six-year period for actions upon statutory liabilities.

_________________________________

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.