What is Bad Faith in North Carolina?

North Carolina recognizes the breach of the obligation of good faith in a first-party insurance case. In North Carolina, these actions are known as the tort of bad faith, which involves a showing of (1) a refusal to pay after recognition of a valid claim, (2) bad faith—a decision or action not based on honest disagreement or innocent mistake, and (3) aggravating conduct such as fraud, malice, gross negligence, insult, rudeness, oppression, or wanton and reckless disregard of policyholder’s rights. 1

North Carolina also has a statutory remedy for policyholders, which was noted in Treble Damages for Insurance Company Misconduct in North Carolina and Collapse Coverage Confirmed. Violations of the North Carolina Unfair Claims Settlement Practices statute are actionable under North Carolina’s Unfair and Deceptive Practices Act and, in some instances, establish a violation of Chapter 75 per se. 2

Just because a North Carolina policyholder is initially far underpaid does not mean that bad faith has occurred or that just any attorney can win the bad faith case. Policyholders should carefully select counsel. A recent bad faith case demonstrates this where the pleadings of the case did not get the policyholder to first base in the bad faith lawsuit. 3

The policyholder lost the case at the trial level and the appellate court on a motion to dismiss. This means that based on what the policyholder alleged in the complaint, the policyholder could never win the case. The appellate court seemed completely in agreement with the insurer. So, let me quote why the policyholder could not prevail based on the insurance company’s brief:

The District Court did not err when it granted Appellee Underwriters’ Motion to Dismiss. The Baileys’ argument asserted on appeal is a house of cards built upon exaggerations and mischaracterizations of the allegations in the Amended Complaint. Once those mischaracterizations are replaced with the actual allegations in the pleading, the argument crumbles. Additionally, the main body of the Baileys’ argument does not rely upon any binding precedent, instead only discussing three unpublished district court opinions.

The Baileys also focus exclusively on a few discrete allegations, while putting on blinders to those allegations in the Amended Complaint that do not support their narrative (and when actually viewed as a whole show no unfair and deceptive practices, but rather nothing but good faith). For example, the Baileys’ brief makes much of the fact that the appraisal panel ultimately awarded more than Underwriters’ initial payment of ‘approximately $170,000.00.’ The Baileys conveniently fail to acknowledge, however, that the Amended Complaint also alleges that the Baileys’ own initial estimate was only $308,649.42 and that Underwriters continued to consider the information submitted by its insureds and made several supplemental payments as additional damage was discovered. The Baileys also omit from their brief the fact that the Amended Complaint admits that their final demand/estimate exceeded the appraisal award by more than $1 million and was more than double the amount of the appraisal award. (See JA526 (showing total amount claimed by the Baileys as $2,123,945.17).) When viewed as a whole, the Amended Complaint shows that Underwriters adjusted the claim, retained multiple experts, considered information from the Baileys as it was submitted, made several supplemental payments, and ultimately timely paid the appraisal award. As recognized by Judge Dever, these factual allegations undermine the Baileys’ allegations that Underwriters acted in bad faith.

Focusing on the law, the appellate court stated:

North Carolina recognizes a claim for breach of the implied covenant of good faith and fair dealing. Heron Bay Acquisition, LLC v. United Metal Fishing, Inc., 781 S.E.2d 889, 894 (N.C. Ct. App. 2016). In the insurance context, this claim ‘is separate from a claim for breach of contract.’ Nadendla v. WakeMed, 24 F.4th 299, 308 (4th Cir. 2022) (applying North Carolina law). A claim for breach of the covenant of good faith and fair dealing in an insurance contract includes three elements: (1) a refusal to pay after recognition of a valid claim; (2) bad faith; and (3) aggravating or outrageous conduct.

Applying the law to the facts, the most important findings were very close to the exact argument found in the insurer’s brief:

We agree with the district court. As to the assessment of the field adjuster, the Amended Complaint includes no plausible, nonconclusory allegations that the adjuster knew, yet concealed, the true extent of the damages. The Amended Complaint alleges that the adjuster conducted a visual inspection and concluded that the extent of the damage could be determined based on that inspection. …The adjuster may have been wrong about the extent of damage, or the need to conduct further inspection, but “honest disagreement or innocent mistake” does not amount to bad faith.

…

Appellants cite nothing indicating that Appellee’s decision not to equally consider the report of Appellants’ engineer would amount to bad faith. There is no dispute that Appellee not only agreed to reappraisal following the report of Appellants’ engineer but also promptly paid the full final award amount.

Notably, Appellants’ demand following their engineer’s inspection of the property and assessment of damages was $2,123,945.17, which was much higher than the final award amount of $1,002,114. In fact, the sum demanded by Appellants was twice as much as the final award and twice as far from the final award as the sum of assessed damages Appellee had paid to that point, $447,019.23. Appellee rightly argues that this underscores the reasonableness of its disagreement with Appellants regarding the scope of damage. Appellee can hardly be said to have acted in bad faith by refusing to pay Appellants’ demand when the appraisal panel awarded Appellants less than half of what they demanded. Further, Appellee’s willingness to provide supplemental payments above the initial assessed damage shows its good faith in the execution of the insurance contract. Even accounting for Appellants’ allegations regarding its engineer’s assessment, this case remains merely a reasonable disagreement regarding the scope of damage.

Thus, we agree with the district court that Appellants failed to plausibly allege that Appellee demonstrated bad faith. 4

The bottom line is that North Carolina has valuable common law and statutory remedies when an insurer violates unfair claims practice statutes or fails to conduct itself in good faith. However, the facts of the case, as well as the knowledge and experience of the policyholder attorney, are important in alleging what “good faith” conduct has been breached.

Thought For The Day

An investment in knowledge pays the best interest.
—Benjamin Franklin

1 Rivenbark v. N.C. Farm Bureau Mut. Ins. Co., Inc., 155 N.C. App. 777, 574 S.E.2d 715 (2003) (unpublished opinion); Lovell v. Nationwide Mut. Ins. Co., 108 N.C. App. 416, 416, 424 S.E.2d 181 (1993), aff’d in part, disc. review improvidently granted in part, 334 N.C. 682, 435 S.E.2d 71 (1993); Bank of Am. Corp. v. SR Int’l Bus. Ins. Co., 2007 NCBC 36 (2007).
2 Gray v. N.C. Ins. Underwriting Ass’n, 352 N.C. 61, 529 S.E.2d 676, reh’g denied, 352 N.C. 599, 544 S.E.2d 771 (2000); Martini v. Companion Prop. & Cas. Ins. Co., 679 S.E.2d 156, 2009 N.C. App. Lexis 1099 (2009); Country Club of Johnston Cnty., Inc. v. U.S. Fid. & Guar. Co., 150 N.C. App. 231, 563 S.E.2d 269 (2002); Cash v. State Farm Mut. Auto. Ins. Co., 137 N.C. App. 192 (2000), 528 S.E.2d 372, aff’d, 353 N.C. 257, 538 S.E.2d 569 (2000).
3 Bailey v. Certain Interested Underwriters at Lloyd’s London, No. 23-1642, 2024 WL 2795187 (4th Cir. May 31, 2024).
4 Id. at *4.