Extra-contractual damages result directly from the insurer’s bad faith. For example, if an insurer fails to pay a disability claim in bad faith, it is not only responsible for paying those disability benefits as set forth in the insurance policy but is alsoresponsible for paying for the insured’s general and special damages as a result of the bad faith conduct. “General damages” include mental anguish and pain and suffering. “Special damages” include those out-of-pocket expenses which the insured incurred as a result of not receiving disability payments, such as attorney’s fees, borrowed money, interest on borrowed money, ruined credit, etc.
Another form of extra-contractual damages is punitive damages. Punitive damages or “exemplary” damages are meant to deter or “punish” a defendant whose conduct is reprehensible or done with reckless disregard of the consequences of that conduct. Such conduct is even worse than an insurer failing to pay a claim when it knows it should. In the insurance context, an example of punitive conduct is when an insurance company knows that its failure to authorize medical treatment covered under the policy will likely lead to the death of the insured or person covered under the policy, such as a child.
State law governs insurance bad faith claims not preempted by the Employee Retirement Income Security Act of 1974 (ERISA). Acts which constitute evidence of bad faith are known as unfair claims practices and are usually codified. For example, in Nevada, NRS 686A.310 enumerates a list of prohibited actions by an insurance company towards its insureds. Commission of any one of these actions is an unfair claims practice, and the statute allows an insured to sue an insurer for such a violation. Similarly, the Nevada Administrative Code sets forth additional requirements which an insurer must follow in order to handle an insurance claim properly.
If you or someone covered by an insurance policy makes a claim under the policy, that claim is referred to as a “first party” claim. You are making a claim under your own insurance policy. Conversely, if you make a claim under someone else’s policy, your claim is referred to as a “third party” claim. You are making a claim against another person’s (third party) insurance policy, not your own. Nevada does not recognize a cause of action for insurance bad faith against the insurer of the third party. Thus, if you are a passenger in a vehicle owned by your friend’s mother, you would have a third party claim under her insurance policy for any injuries to you. If the insurer did not recognize your claim or timely pay your claim, you could not sue the third party insurer for insurance bad faith. However, such conduct could constitute violations of the Nevada Administrative Code, which provide remedies for these violations.
Insurance bad faith generally describes the type of law which governs the actions of insurance companies that fail to pay claims covered under insurance policies when they should pay a claim and know it. Under these circumstances, an insurance company can be liable for the actual claim amount which should have been paid under the contract, plus all damages which flow from the insurer’s failure to pay. These “extra” damages are referred to as “extra-contractual” damages because they would not be paid but for the insurer’s failure to act in good faith. Thus, they are “outside” the contract as written.
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