1. BAD FAITH PANEL I: TRENDS IN THIRD PARTY 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 PROTECTION AFFORDED 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 RELATIONSHIP BETWEEN 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 OF BAD 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 OF BAD 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 CONDUCT NOT 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 FOR THESE DECISIONS Prevent insurer from using litigation in a bad faith effort to evade a duty owed under a policy

14. RATIONALE FOR THESE 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