Reverse Bad Faith: Could it Become a Viable Option for Wisconsin Insurers?

WDC Journal Edition: Summer/Fall 2008
By: Erica M. Brumm


Wisconsin courts have long accepted a tort of bad faith arising from the settlement of insurance claims.[1] The tort of bad faith in the context of insurance claims is not a breach of contract claim, but rather a distinct tort action in which a prevailing insured can recover damages.[2] An insured can sue its insurer directly following the insurer's bad faith refusal to honor the insured's claim.[3] Yet, while insureds may be held liable for lack of cooperation or breach of implied duty of fair dealing, no Wisconsin case directly answers the question of whether an insured may also be held liable for committing tortious bad faith.

Since the implied duty of good faith and fair dealing is mutual; that is, the duty is owed by both insurers and insureds,[4] it seems both insured and insurer should be held to specific standards of conduct during the adjustment, investigation, negotiation, and litigation of insurance claims. In the interest of fairness, reason dictates that, at a minimum, an insurer defending a bad faith claim should be able to raise an affirmative defense of the negligent or bad faith conduct of its insured. If Wisconsin were to adopt the doctrine of reverse bad faith, it would require an especially egregious scenario of fraudulent or criminal conduct on the part of the insured. Other avenues, such as pursuing comparative bad faith or a statutory scheme punishing insureds’ bad faith conduct might be more successful.

Insurer Bad Faith

The tort of first-party bad faith typically arises from a dispute over what the insurer owes to the insured and usually involves an insurer’s denial of coverage. [5] The cause of action for tortious bad faith is limited to insurance cases, and it is applied only against the insurer.[6]

Courts generally adhere to the "special relationship" theory for allowing tort recovery for an insurance bad faith suit, an action that traditionally would be viewed solely as a contract claim.[7] In explaining the "special relationship" of the insurer to the insured, courts tend to focus on the quasi-fiduciary nature of the relationship between the insurer and insured and the "public trust" nature of the insurance service.[8]

The courts have defined bad faith as the knowing failure of an insurer to exercise an honest, intelligent, and informed judgment as to any claim submitted by an insured.[9] To prove their claim of bad faith, an insured must show: (1) the absence of any reasonable basis by the insurer for denying the benefits of the policy to the insured; and (2) the insurer's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.[10] A court must determine whether a reasonable insurer under the particular circumstances would have denied or delayed payment of a claim as well as whether the insurer recklessly disregarded a lack of a reasonable basis for the insurer's denial of a claim or proof submitted by the insured.[11] However, when an insurer exercises its duty of ordinary care and reasonable diligence in investigating and evaluating claims and determines that a claim is "fairly debatable," the insurer is entitled to debate and/or litigate the claim if it feels that there is a question of law or fact which must be decided before the insurer, in good faith, is required to pay.[12]

Insurance companies can suffer significant damages resulting from bad faith claims. For example, in 2007, a Wisconsin jury awarded the plaintiffs in a bad faith action $2 million in punitive damages after the insurer denied coverage based upon the insured’s alleged arson of his own property.[13] In another bad faith action, a Wisconsin trial court found that an insurer’s decision to not settle a case and instead try the case was done in bad faith.[14] And although the insurer’s umbrella policy did not cover punitive damages, the court ordered the insurer to pay their insured’s punitive damage judgment because of their alleged bad faith.[15] Bad faith claims can be more financially rewarding for an insured than simply collecting on the underlying insurance claim. The Wisconsin Supreme Court rejected the claim by insurance companies that the tort of bad faith would result in extortionate lawsuits, stating that such a result will not follow if the claim was at least fairly debatable.[16] However, while some insurers receive substantial bad faith verdicts because of their egregious conduct, others are sanctioned by bad faith lawsuits in a situation where coverage is debatable.[17] And although insurers may produce evidence of their good faith denial of coverage, sometimes insurers are stunned by bad faith verdicts and they have no equitable recourse against fraudulent claims by insureds.

Reverse Bad Faith

The doctrine of reverse bad faith is “an independent tort that would allow an insurer to seek affirmative relief for an insured’s breach of the duty of good faith and fair dealing.”[18] It is also based on the mutual duty of good faith and fair dealing shared by all parties to a contract.[19] It rests on the assumption that the duty of good faith “in an insurance policy is a two-way street, running from the insured to his insurer as well as vice versa.”[20] Under this doctrine, an insurer could bring a separate claim or counterclaim against an insured, asserting the right to recover based on the insured’s bad faith or fraudulent acts.[21]

Reverse bad faith is becoming increasingly necessary due to the changing nature of insurance fraud and the sometimes dubious way plaintiff’s attorneys utilize bad faith claims.[22] Current remedies for insured bad faith are insufficient to protect an insurer’s interest. An insurer takes significant risk in denying a claim outright, even if it is fraudulent. In the case of an insured’s fraudulent conduct or phony bad faith claim, the insurer must devote time, money, and other resources to resolve a claim made solely to gain unfair and undeserved benefits. This type of wrongful conduct by an insured should justify a reverse bad faith claim by an insurer. Especially when an insured makes a fraudulent claim and then sues for bad faith after the claim is denied, an independent tort of reverse bad faith makes sense to protect insurers and consumers who bear the brunt of the extra costs.

Specifically in Wisconsin, the Supreme Court recommends that, when faced with a claim for which the insurer believes no coverage is owed, the insurer should still obtain counsel for the insured before pursuing a coverage defense.[23] Therefore, even if it is clear that no coverage is owed, an insurer must still spend time and money defending the insured and pursuing a declaration of non-coverage in order to avoid the risk of bad faith.[24] Even when an insurer believes it owes no duty to indemnify the insured, it often still must spend time and money to avoid an appearance of bad faith.

Wisconsin’s Refusal of Reverse Bad Faith

Wisconsin courts have refused to consider whether the state recognizes reverse bad faith. The only Wisconsin case in which reverse bad faith was addressed presents a model for instituting an independent tort for reverse bad faith. In Snap-on Tools Corp. v. First State Insurance Co., a Wisconsin trial court allowed the jury to consider an insurer’s counterclaim for relief based upon the insured’s bad faith conduct.[25] In their insurance contract, Snap-On Tools retained responsibility for the first $100,000 of liability coverage, and First State Insurance was responsible for the remainder of the liability up to $900,000.[26] Snap-On, a Kenosha, Wisconsin based company, was sued in California by one of its franchise dealers for wrongful termination of his dealership contract.[27] Snap-On did not immediately notify First State of the suit because their estimated liability was under $100,000.[28] However, even after Snap-On was informed of the suit’s potential to exceed $100,000, they still did not notify First State.[29] The California jury returned a verdict in favor of the franchise dealer for over $6.5 million dollars, including punitive damages.[30] Upon receiving notification of the adverse verdict, First State denied coverage for the punitive damage award and began investigation of the compensatory damages award.[31] First State denied the entire claim, prompting Snap-On to file suit against First State, in Wisconsin, for breach of contract and breach of the duty of good faith and fair dealing.[32] First State asserted counterclaims for breach of contract and reverse bad faith.[33]

The Wisconsin trial court instructed the jury that an insured is guilty of reverse bad faith if two elements are satisfied:(1) the insured breached a duty owed to the insurance company pursuant to the terms of the policy, and; (2) the breach was in significant disregard of the insurance company’s rights and interests.[34] Snap-On was found guilty of reverse bad faith, among other breaches of the insurance contract.[35]

However, on appeal, the court refused to consider whether Wisconsin recognized a cause of action for reverse bad faith, and reversed the case on other grounds. Although the Court of Appeals did not address the claim of reverse bad faith, this case illustrates possible standards for setting up a reverse bad faith claim in Wisconsin. When an insured is a sophisticated corporate entity, the arguments for establishing a tort of reverse bad faith are persuasive. Snap-On was a large corporation with great bargaining power and attorneys at its disposal. They knowingly withheld information from their insurer which greatly prejudiced First State. While public policy dictates protecting innocent insureds, when an insured is a corporate entity, it seems that the public policy considerations protecting insureds and barring reverse bad faith do not apply.

Reverse Bad Faith Has Met Little Success in Other States

Other states have directly addressed reverse bad faith, whereby an insurer could assert a cause of action against an insured when the insured willfully submits a fraudulent claim and then sues the insurer in tort for the insurer's bad faith in refusing to pay the fraudulent claim. However, while the tort of reverse bad faith has been widely discussed and debated by the courts, it has not been accepted in practice.[36] Courts have found that the scope of the insured’s duty of good faith and fair dealing and the remedies available to the insured for breach of that duty under the insurance policy are fundamentally distinct from the insurer's duty.[37] An insurer's breach of the covenant of good faith is governed by tort principles and concerns the availability of tort damages.[38] In contrast, an insured's breach of the covenant is not a tort, and instead rests upon contractual remedies.[39]

The Supreme Court of Ohio directly addressed the doctrine of reverse bad faith and explicitly rejected it in Tokles & Son v. Midwestern Indemnity Co.[40] The court based their decision on the insurer’s “built-in protection” from suffering as a result of an insured’s bad faith.[41] Furthermore, the court reasoned that an insured “who often finds himself in dire financial straits after the loss” must be provided the ability to sue for bad faith to level the playing field with the insurer.[42] Reverse bad faith was not necessary, the court held, because insurer’s had other avenues to pursue in the event of insured bad faith or fraud.[43]

Grounds for Rejecting Reverse Bad Faith

Rejection of reverse bad faith has largely been based on the same public policy considerations. The first public policy consideration courts have noted is the inherent disparity in bargaining power between the insured and the insurer.[44] Courts have illustrated the disparity of insurer and insured by noting that the insurer drafted the policy and has the power to refuse the insured's claim.[45] The “equal footing which is provided by the ability to sue the insurer for bad faith” provides the disadvantaged insured with recourse against a powerful insurer.[46] Courts clearly believe that insurance companies can allocate for the risk of insured bad faith and public policy dictates they do not need additional protections.

Additionally, the courts have held that insurers already have reasonable contractual remedies available to them to deal with insured bad faith.[47] Their reasoning seem to suggest that instead of providing insurer’s tort remedies for bad faith, an insurer should respond to insured bad faith by: (1) denying the claim based on fraud or failure of a condition precedent; (2) referring a false claim for criminal prosecution; or (3) bringing other claims and counterclaims such as breach of contract.[48] However, these remedies could actually make an insurer vulnerable to claims of bad faith by an insured. Finally, courts have determined reverse bad faith could be abused by insurers to intimidate insureds and suppress legitimate bad faith claims.[49] Public policy considerations necessitate the court protect insureds who have less power.

Other Options for Wisconsin Insurers to Combat Insured Bad Faith

Comparative Bad Faith

A similar tool to reverse bad faith which would offer insurers recourse against fraudulent conduct by insureds is the affirmative defense of comparative bad faith. Comparative bad faith is based on the same principles as comparative negligence. It “establishes an affirmative defense, premised upon principles of comparative fault, which allocates fault and apportions damages according to harm inflicted by both the insurer’s and insured’s bad-faith conduct.”[50] Comparative bad faith allows an insurer to reduce or preclude an award to the insured based on the insured’s bad faith.[51] Occasionally, an insured’s conduct creates or exacerbates the underlying loss in a bad faith claim. For example, an insured’s conduct could have affected the speed and accuracy of the claims process, or an insured’s conduct might have affected the severity of the loss that results from the insurer’s alleged bad faith.[52]

Although they have since reversed their stand on comparative bad faith, California was the first state which recognized the comparative bad faith defense.[53] Determining that comparative bad faith was a legitimate defense to a claim of insurer bad faith, the California Court of Appeals held that: (1) insurance bad faith has been removed from the contract realm and into the tort realm; (2) comparative fault principles apply to tort claims; therefore (3) comparative fault should apply to insurance bad faith.[54]

However, the defense of comparative bad faith was more recently overruled by the California Supreme Court in Kransco v. American Empire Surplus Line Ins., 23 Cal. 4th 390, 404 2 P.3d 1 (Cal. 2000). In Kransco, the California Supreme Court held that the public policy motivations for tort treatment of insurance bad faith precluded the availability of a comparative bad faith defense.[55] The California high court held that public policy concerns attached only to the insurer and that there was no predicate for applying tort law to insureds.[56] The court confined itself to an inquiry into comparative bad faith alone and did not decide whether a comparative negligence defense should be available to insurers.[57] Most other courts have taken a similar approach, rejecting comparative bad faith under the facts of a given case, but not summarily rejecting the merits of the defense in theory.[58]

Statutory Bad Faith

Illinois has created a cause of action that specifically addresses insurance fraud in a civil context.[59] In Illinois, an insurer can bring a claim or counterclaim of insurance fraud against an insured.[60] The statute provides civil liability for any person who by making a false claim on their insurance policy, knowingly obtains or attempts to obtain property or benefits.[61] For instance, the statute was used by an insurer to bring an action for fraud against a plaintiff who forged documents from his physician to support his fraudulent claim for insurance benefits.[62] The court found that the insured’s false claims fell within the parameters of the statute and justified relief for the insurer.[63] If a false claim is proven, the statute caps costs at three times the value of the property wrongfully obtained or, if property was not wrongfully obtained, twice the value of the property attempted to be obtained, whichever amount is greater, plus reasonable attorney’s fees.[64]

Furthermore, protections for an insured are built into the statute. If an insurer brings an unsuccessful bad faith claim against an insured, the insurer is then liable to that person for twice the value of the property claimed, plus reasonable attorney’s fees.[65] It seems that Illinois’s insurance fraud statute provides an example of a reasonable and workable approach to reverse bad faith that other states could adopt.


Almost all persuasive authority weighs against Wisconsin adopting of the doctrine of reverse bad faith.[66] To date, no state recognizes the tort of reverse bad faith as a cause of action, absent a statute granting the right to bring such a claim.[67] However, to help insurer’s combat fraud, at a minimum the insurer should be able to raise the affirmative defense of comparative fault as a defense to the insured’s claim for the tort of bad faith. Comparative bad faith avoids the potential injustice of a simplistic all-or-nothing concept and equitably apportions damages according to the relative culpability of the parties. As a result, the insured would have the expectation of coverage and a defense, but not to the extent that his/her own breach of the policy provisions caused or exacerbated the loss. When an insured's breach of the duty of good faith and fair dealing contributes to an insurer's failure or delay in the investigation and payment of a claim, it seems it should constitute, at least, a partial defense to an insured's later suit against the insurer for bad faith.

In order for Wisconsin courts to adopt the doctrine of reverse bad faith, it would require particularly appalling conduct by an insured. Perhaps the court would accept reverse bad faith in the event of an insured’s criminal conduct, such as arson or other destruction of property. Moreover, the court might adopt reverse bad faith when the insured is a sophisticated corporate entity who knowingly and willingly commits bad faith. Still, it seems that reverse bad faith and comparative bad faith would only become a viable option in Wisconsin if the legislature were to adopt a similar statute to the Illinois civil insurance fraud statute. Adoption of more stringent statutory protections for insurers against fraudulent insurance claims would be a strong deterrent against insurance fraud and insured bad faith.

[1] A.W. Huss Co. v. Continental Casualty Co., 735 F.2d 246, 249 (7th Cir. 1984).

[2] Id. at 686.

[3] Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 680, 271 N.W.2d 368, 371 (1978).

[4] Commercial Union Assurance Cos. v. Safeway Stores, 26 Cal. 3d 912, 918, 610 P.2d 1038, 164 Cal. Rptr. 709 (Cal. 1980).

[5] Anderson, 85 Wis. 2d at 271.

[6] Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 33 (Iowa 1982); Hauer v. Union State Bank of Wautoma, 192 Wis. 2d 576, 595, 532 N.W.2d 456 (Ct. App. 1995). Foseid v. State Bank of Cross Plains, 197 Wis. 2d 772, 793, 541 N.W.2d 203 (Ct. App. 1995).

[7] Ford Motor Co. v. Lyons, 137 Wis. 2d 397, 423-24, 405 N.W.2d 354 (Ct. App. 1987); Foseid, 197 Wis. 2d at 793.

[8] Ford Motor Co., 137 Wis. 2d at 423-24; Foseid, 197 Wis. 2d at 793.

[9] Anderson, 85 Wis. 2d at 692.

[10] Id. at 691.

[11] Benke v. Mukwonago-Vernon Mutual Insurance Co., 110 Wis. 2d 356, 362, 329 N.W.2d 243 (Ct. App. 1982).

[12] Anderson, 85 Wis. 2d at 693; Benke, 110 Wis. 2d at 364-65.

[13] Milwaukee Ins. Co. v. Amys Forest Products, Inc., No. 05-CV-233 (Wis. Cir. Ct. Douglas County May, 2007).

[14] Allied Processing Inc. v. Western National Insurance Co., No. 98-CV-282 (Wis. Cir. Ct. Dunn County December 1, 2001)

[15] Id.

[16] Anderson, 85 Wis. 2d at 693.

[17] Milwaukee Ins. Co. v. Amys Forest Products, Inc., No. 05-CV-233 (Wis. Cir. Ct. Douglas County May, 2007).

[18] First Bank of Turley v. Fidelity and Deposit Ins. Co. of Maryland, 928 P.2d 298, 307 (Okla. 1996).

[19] Twin City Fire Ins. Co. v. Country Mut. Ins. Co., 23 F.3d 1175, 1180 (7th Cir. 1994); Schulz v. Liberty Mut. Ins. Co., 940 F. Supp. 27 (D. Mass. 1996).

[20] Commercial Union, 26 Cal. 3d at 918.

[21] Turley, 928 P.2d at 298.

[22] Douglas R. Richmond, The Two-Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 Loy. U. Chi. L.J. 95.

[23] Elliot v. Donahue, 169 Wis. 2d 310, 485 N.W.2d 403 (1992).

[24] Id.

[25] No. 91-1356, 1993 WL 91563 (Wis. Ct. App. Mar. 31, 1993). (unpublished, limited-precedent opinion).

[26] Id. at *12-13.

[27] Id. at *6.

[28] Id. at *7.

[29] Id. at *7-8.

[30] Id. at *7.

[31] Id. at *7.

[32] Id. at *8, 12, 14.

[33] Id. at *14.

[34] Id. at *12-13.

[35] Id.

[36] Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St. 3d 621, 605 N.E.2d 936 (1992); Kransco v. American Empire Surplus Line Ins., 23 Cal. 4th 390, 404 2 P.3d 1 (Cal. 2000).

[37] Kransco, 23 Cal. 4th at 404.

[38] Gruenberg, 9 Cal. 3d 566 at 574.

[39] Cal. Fair Plan Ass'n v. Politi, 220 Cal. App. 3d 1612, 1618, 270 Cal. Rptr. 243 (Cal. Ct. App. 1990).

[40] 65 Ohio St. 3d 621, 605 N.E.2d 936 (1992).

[41] Id. at 632, 605 N.E.2d at 945.

[42] Id.

[43] Id.

[44] Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203, 208 (Iowa 1995).

[45] Tokles, 605 N.E.2d at 945.

[46] Tokles, 605 N.E.2d at 945.

[47] Agric. Ins. Co. v. Superior Court, 70 Cal. App. 4th 385, 82 Cal. Rptr. 594 (Cal. Ct. App. 1999).

[48] Kransco, 23 Cal. 4th at 394-410.

[49] Couch on Insurance § 197:8 (3d ed., 1997).

[50] Turley, 928 P. 2d at 307.

[51] Id.

[52] Douglas R. Richmond, The Two-Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 Loy. U. Chi. L.J. 95.

[53] California Casualty Gen. Ins. Co. v. Superior Court, 173 Cal. App. 3d 274, 218 Cal. Rptr. 817 (Cal. Ct. App. 1985).

[54] Id. at 283.

[55] Id. at 407-408.

[56] Id. at 402-403.

[57] Id. at 412.

[58] Stephens v. Safeco Ins. Co. of Am., 258 Mont. 142, 147, 852 P.2d 565 (Mont. 1993); Turley, 928 P.2d at 308.

[59] 720 Ill. Comp. Stat. 5/46-5(a).

[60] 720 Ill. Comp. Stat. 5/46-5(a); Robbins v. Allstate Ins. Co., 362 Ill. App. 3d 540, 841 N.E.2d 22 (Ill. App. Ct. 2005).

[61] 720 Ill. Comp. Stat. 5/46-5(a).

[62] Adelman v. Trustmark Ins. Co. (Mutual), 2008 U.S. Dist. LEXIS 37250 (N.D. Ill. May 7, 2008).

[63] Id.

[64] 720 Ill. Comp. Stat. 5/46-5(a).

[65] Id.

[66] Kransco, 23 Cal. 4th 390; Tokles, 65 Ohio St. 3d 621; Johnson, 533 N.W.2d 203; In re Tutu Water Wells Contamination Litig., 78 F. Supp. 2d 436 (D.V.I. 1999); Wailua Assocs. v. Aetna Cas. & Sur. Co., 183 F.R.D. 550 (D. Haw. 1998).

[67] Douglas R. Richmond, The Two-Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 Loy. U. Chi. L.J. 95.