BAD FAITH PANEL I: TRENDS IN THIRD PARTY ACTIONS

1. BAD FAITH PANEL I:TRENDS IN THIRDPARTY ACTIONS PLRB/LIRB/FDCC CRITICAL ISSUES FOR SENIOR INSURANCE EXECUTIVES AND IN-HOUSE COUNSEL SEMINAR October 23, 2006 – Rosemont, IL

2. EXPANDING THE FRONTIER:BAD FAITH CONDUCT DURING BAD FAITH LITIGATION Presented by Jay Barry Harris, Esquire Fineman Krekstein & Harris www.finemanlawfirm.com

3. TRADITIONAL PROTECTIONAFFORDED LITIGANTS AGAINST ABUSE • Rules of Civil Procedure • Litigation Privilege • Pleadings • Can plead alternative theories • No malicious defense • Communication during a court proceeding • Malicious prosecution • Encourages zealous representation without fear of harassment

4. UNIQUE RELATIONSHIPBETWEEN INSURER AND INSURED • Covenant of good faith and fair dealing • Fiduciary relationship • Government Regulation • Unfair Insurance Practices Act • Unfair Trade Practices and Consumer Protection Law

5. BAD FAITH LITIGATION • Arises from insurer’s alleged frivolous or unfounded refusal to pay proceeds of a policy • Spotlights insurer’s conduct before the institution of the bad faith litigation • Results in insurer and insured becoming adversaries

6. EXTENDING THE SCOPE OF BAD FAITH LITIGATION Bad faith litigation does not terminate the insurer’s fiduciary duties: • Every insurance contract implies good faith and fair dealing with insured • Good faith duty overrides adversary relationship

7. EXTENDING THE SCOPE OF BAD FAITH LITIGATION • If insurer insulated from liability – discourage investigation and negotiation until after bad faith suit is filed – actions unencumbered by any duty to deal fairly (primarily first party) • Incentive for delay • Duty to act in good faith applies before, during and after the bad faith litigation

8. DEFENSES TO BAD FAITH CONDUCT CLAIMS • Defense lawyer must be able to zealously defend the insurer • Litigation tactics irrelevant to insurer’s decision to deny benefits • Litigation tactics are not probative that insurer’s denial was in bad faith • Litigation privilege – any communication in court is privileged (course of conduct is not)

9. DEFENSES TO BAD FAITH CONDUCT CLAIMS • Court has its own rules to impose sanctions for improper conduct • Mere discovery violations should be insufficient to establish bad faith- but what about the cumulative effect of numerous violations?

10. EXAMPLES OFBAD FAITH CONDUCT • Engaging in obstructive conduct – inducing insured to discontinue insured’s state action by misrepresenting its intent to evaluate and settle insured’s claim • Making misrepresentations to the court and filing abusive motions in coverage litigation • Filing baseless counterclaim against insured in coverage litigation

11. EXAMPLES OFBAD FAITH CONDUCT • Following a strategy of concealing or covering employees’ mishandling of the insured’s claim • Retaining defense oriented experts to provide biased opinions not supported by evidence • Intentionally misdesignating a corporate deponent • Purposely concealing evidence • Ridiculously low settlement offers

12. EXAMPLES OF CONDUCTNOT RISING TO BAD FAITH • Withholding material documents • Raising unsupportable objections to plaintiff’s discovery requests • Delaying in producing discoverable material • Failing to adhere to discovery deadlines • Filing motions to compel discovery responses and answers

13. RATIONALE FORTHESE DECISIONS • Prevent insurer from using litigation in a bad faith effort to evade a duty owed under a policy

14. RATIONALE FORTHESE DECISIONS Allows the insured to: • Examine course of conduct of the insurer • Show bad faith motive through sanctions administered by court • Review defense counsel’s conduct – can it be attributed to insurer where insurer participates, directs, encourages or ratifies it

15. POTENTIAL IMPACT • Limit insurer’s ability to defend • Hamper discovery and/or investigation • Require disclosure of any information • Subject defense counsel to being called as a witness

16. POTENTIAL IMPACT • Jury confusion with underlying bad faith claim and litigation tactics • Establishes a different statute of limitations • Diminishes court sanctions • Is there any end to the litigation?

17. HOPEFUL SIGNS • Still a minority of jurisdictions • Even where it is the law, still rarely successful • Hollock dissent