Bad faith claims are on the rise in North Carolina. As an insurer, you must familiarize yourself with the possible grounds for such claims so you will know how best to avoid them.  As you will see below, the outcome of a bad faith case may ultimately be determined by your conduct.

Elements of Proof

In North Carolina, there are two ways to assert a bad faith claim using both a Common Law and Statutory Law approach.

Common Law elements of proof:

(1) Refusal to pay after receiving and recognizing a valid claim;

(2) Bad faith on the part of the insurer; and

(3) Some additional aggravating or outrageous conduct.

To further explain the third element given above, aggravating or outrageous conduct has been held to include fraud, malice, gross negligence, willful and wanton conduct, and other similar conduct which shows a reckless disregard of the policy holder’s rights. Conduct based on honest disagreement or innocent mistake is not bad faith.

In other words, if an insurer denies a claim due to honest and legitimate disagreement as to the validity of the claim, there is no bad faith. Even if the insurers coverage position is ultimately wrong, it does not follow that there was bad faith unless the interpretation of the policy was strained or fanciful.

Statutory elements of proof:

(1) That the insurer engaged in an unfair or deceptive act or practice;

(2) That the insurers actions were in or affected commerce; and

(3) That the insurers actions proximately caused the plaintiff€™s claimed injury.

A practice is unfair or deceptive if it has the tendency to:

  • deceive,
  • offends established public policy, and
  • The practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.


North Carolina statute sets forth certain conduct which amounts to an unfair trade practice as a matter of law. However, conduct not specifically listed in the statute can also amount to bad faith as long as the conduct is determined to be a violation of statute. The offending conduct doesn’t even have to be committed with such frequency that it constitutes a general business practice, as is typically required. Rather, a single violation of the statute can establish the first element of an unfair and deceptive trade practices claim. Even if an insurer rightly denies an insured’s claim, and therefore does not breach its contract, the insured may nevertheless face a bad faith claim if the insurer employs poor business practices that can be described as unfair or deceptive.


The good news is under Statutory Law, just as in Common Law, an insurer cannot be held liable for a bad faith claim if the insurer reasonably believes that a claim is not covered, even if the insurers coverage position is ultimately found to be incorrect. Thus, the reasonableness of an insurers interpretation of the policy is a defense available to the insurer faced with a bad faith claim.  However, good faith is not a defense. Yet, in other good news, a mere breach of contract cannot give rise to a claim for unfair and deceptive trade practices.


The damages you face, as an insurer, are different depending on whether the claim is under common law or statutory law. Under both legal structures, consequential damages proximately caused by the insurer’s acts of bad faith are recoverable.  Punitive damages, on the other hand, are only recoverable under common law as long as the insured meets the statutory requirements.

However, be aware that when the claim is one for statutory bad faith any damages proximately caused by an insurer’s poor conduct are automatically trebled. Additionally, if the judge finds that an insurer willfully engaged in the offending act or practice and there was an unwarranted refusal to fully resolve the matter by the insurer, then the judge may award attorney’s fees to the insured for a statutory bad faith claim.

Note that it is possible for an insured to bring both common law and statutory bad faith claims in the same action. However, the insured cannot recover both punitive and treble damages. In a case where both damages are under consideration, the insured must elect which remedy he wishes to recover.

Third Parties

As for third parties, North Carolina does not recognize a cause of action for third-party claimants against an insurer of an adverse party. However, if the plaintiff achieves the status of an intended third-party beneficiary arising from the contractual relationship between the adverse party (insured) and the adverse party’s insurance company, the plaintiff may then bring a claim against the insurer for bad faith.  Unless the plaintiff obtains a judgment against the insured, the plaintiff is not a third-party beneficiary and plaintiff has no claim for bad faith.  This rule would not apply in the context of uninsured and underinsured motorist claims since the plaintiff in those cases would be the insured.

What can you do to avoid bad faith claims?

Perhaps one of the most important things you can do is familiarize yourself with the conduct which is deemed, by statute, to be bad faith so that you are fully aware of what not to do. Additionally, you should:

  • Perform a thorough and timely investigation of all aspects of the claim.
  • Seek a coverage opinion from an attorney who has expertise in the particular coverage area, if appropriate.
  • Promptly send the insured a reservation of rights or denial letter providing the specific basis for your position, if appropriate.
  • Carefully document all communications with the insured and all other activity on the file.
  • Respond promptly to all communications concerning the claim.
  • Keep the insured informed of all significant developments in the case or claim.
  • Pay undisputed claims in a timely manner.
  • Be polite, patient and respectful when dealing with an insured, no matter how hard it may be.

Following these tips will significantly reduce your chance of having to face a bad faith claim and could potentially save you a great deal of time and money defending such claims.