Oftentimes, when an insured sues their insurance company for not providing benefits the insured believes they are entitled to under their policy, the insured alleges that the insurance company breached the applicable contract and did so in bad faith. Wisconsin law makes clear that breach of contract and bad faith are distinctly separate claims, with different elements that the insured must establish.
Wisconsin first recognized the tort of bad faith in the state Supreme Court’s seminal decision in the case of Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 686, 271 N.W. 2d 368, 374 (Wis. 1978). In Anderson, two insureds came home one day and discovered their house was covered with oil and smoke residue as a result of a fire or an explosion in their furnace. Id. at 681 The insureds filed a claim with their insurer, but the insurer declined to issue the payment the insureds sought. Id. The insureds then filed a lawsuit, alleging that they were entitled to $4,611.77 for the cost of repairs as well as additional sums for the insurer’s failure to negotiate in good faith. Id.
After the circuit court dismissed the bad faith claim as not recognized in Wisconsin, the case went up on appeal to the Supreme Court of Wisconsin, which reversed the lower court’s ruling and held that an insured could plead a separate cause of action of bad faith against their insurer. Id. at 697. In short, the court held that an insured has a valid claim of bad faith against an insurer where the insured can prove (1) the absence of a reasonable basis for denying policy benefits; and (2) the insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Id. at 691.
Though Anderson created the tort of bad faith in Wisconsin, the decision includes safeguards to protect insurers from “extortionate lawsuits.” Id. at 693. In essence, to establish bad faith, an insured must establish not only that they were entitled to benefits under their contract that were not provided but also that the insurer lacked any reasonable basis to contend otherwise. Id. at 691. Additionally, the insured must prove that the insurance company was either aware of this lack of a reasonable basis or recklessly disregarded that it lacked a reasonable basis for its coverage determination. Id. Stated differently, where a claim is “fairly debatable,” the insurer may not be held to be in bad faith. Id.
Subsequent case law has provided additional safeguards from the perspective of the insurer. The Supreme Court of Wisconsin has held that the elements of bad faith, as articulated in Anderson, must be proven by clear and convincing evidence, a burden of proof that is higher than the typical
“preponderance of the evidence” standard used in most civil cases. Johnson v. American Family Mut. Ins. Co., 93 Wis. 2d, 645, 287 N.W.2d 729. Moreover, the Wisconsin Court of Appeals has held that Wisconsin does not employ a “strict liability” approach to insurance bad faith and that the mere fact that an insured can prove that the insurer breached their contract does not per se imply the insurer acted in bad faith, unless the elements outlined in Anderson can be proven. Mills v. Regent Ins. Co., 152 Wis. 2d 566, 574, 449 N.W.2d 294 (Ct. App. 1989).
Thus, in light of the above, where an insurer has a reasonable basis in fact or law for its coverage position, it may not be held to be in bad faith. However, an insurer in Wisconsin should take care to investigate each claim to an appropriate degree in order to stave off any extra-contractual liability.
