Insurance Bad Faith Report, January 2026

Sixth Circuit Court of Appeals Finds No Bad Faith for Settlement Resulting in Disproportionate Payment by Insured 
Chem. Solvents, Inc. v. Greenwich Ins. Co., No. 25-3366, 2025 U.S. App. LEXIS 26538 (6th Cir. Oct. 9, 2025).

Two insurers settled a lawsuit for less than policy limits for their shared insured, Chemical Solvents. The settlement became complicated because Chemical Solvents and one of its insurers, Illinois National, were both members of Alembic, a group captive insurer. Chemical Solvents paid premiums into a shared reinsurance pool, and Alembic held a portion of the premiums in escrow for Chemical Solvents’ benefit. When Illinois National invoiced Alembic for its portion of the settlement, Alembic paid using Chemical Solvents’ escrowed funds, leaving a negative balance and requiring Chemical Solvents to bring its escrow account current. Chemical Solvents filed a bad faith action alleging that the insurers structured the settlement in a way that resulted in it paying a disproportionate share of the settlement sum. Finding no bad faith as a matter of law, the Sixth Circuit relied on Ohio precedent declining to find bad faith when an insurer settles within policy limits. The court also declined to create an exception or otherwise give credence to Chemical Solvents’ argument that the settlement was prejudicial and caused it to incur substantial additional costs. Read the decision.

Indiana Supreme Court Rules Interpleader Action Precluded Bad Faith as a Matter of Law 
Baldwin v. Standard Fire Ins. Co., No. 25S-CT-33, 2025 Ind. LEXIS 680 (Ind. Oct. 21, 2025).

An insured driver collided with another vehicle, injuring three occupants. One occupant made a demand for the per-person liability limits of the insured’s auto policy. The insurer declined the demand because two of the occupants sustained severe injuries likely to exceed the policy limits. The insurer then filed an interpleader action, naming the three occupants as interested parties. In finding that the insurer did not act in bad faith, the Indiana Supreme Court ruled that an interpleader action can serve as a “safe harbor” that shields insurers from liability in multi-claimant scenarios. To satisfy the “safe harbor” and meet the duty of good faith and fair dealing, the court ruled that the insurer must deposit the policy limits with the court, name all known potential claimants, and if there is a duty to defend, continue such defense. Read the decision.

Ohio Supreme Court Finds Policy’s Arbitration Clause Applies to Bad Faith Claim
United States Acute Care Sols., L.L.C. v. Drs. Co. Risk Retention Grp. Ins. Co., 2025-Ohio-5010, (Ohio 2025).

When a coverage dispute arose in a medical malpractice matter, the insured sued for bad faith, and the insurer moved to compel arbitration under the policy’s arbitration clause. The trial court granted the motion to compel arbitration, the intermediate appellate court reversed, and the Ohio Supreme Court reinstated the trial court judgment ordering arbitration. Ohio’s high court found that the at-issue arbitration clause was sufficiently broad to create a presumption of arbitrability, which the insured failed to rebut. Read the decision.

Oklahoma District Court Allows Bad Faith Claim Despite Time-Barred Breach of Contract Claim
Gaddy v. State Farm Fire & Cas. Co., No. 25-CV-367-MTS, 2025 U.S. Dist. LEXIS 219522 (N.D. Okla. Nov. 7, 2025).

After their property suffered storm damage, the insureds filed suit against their insurer outside of the policy’s one year contractual limitations period. The Oklahoma Northern District Court upheld the contractual limitations clause and dismissed the breach of contract claim, rejecting the insureds’ arguments of equitable tolling and waiver, and that the insurer allegedly breached Oklahoma’s Unfair Settlement Practice’s Act by not specifically notifying them of the contractual limitations period. However, because the bad faith claim was an independent tort, the court ruled that claim was timely filed and could proceed. Read the decision.

California Northern District Court Dismisses Bad Faith Action Against Claims Administrator
Tagliaferri v. Palomar Specialty Ins. Co., No. 25-cv-02148-KAW, 2025 U.S. Dist. LEXIS 233900 (N.D. Cal. Dec. 1, 2025).

The insured homeowner brought suit against her flood insurer and its claims administrator after a severe rainstorm caused damage to her property. The insurer paid less than half of the claimed cost of repairs and loss of use, and the insured alleged that the insurer and claims administrator mishandled and delayed paying the claim. The insurer and claims administrator moved to dismiss the complaint. In analyzing the allegations against the claims administrator, the court acknowledged that the claims administrator was an agent of the insurer, and that courts have found that an agent can be personally liable for some tortious conduct, such as defrauding the insured. But the court found that the breach of contract and bad faith claims required that the defendant be a party to the insurance contract. As the claims administrator was not a party to the contract and the complaint alleged no facts showing that the claims administrator had exceeded its authority, the court dismissed the breach of contract and bad faith claims against the claims administrator with prejudice. Read the decision.

Kentucky Court of Appeals Dismisses Bad Faith Claim When Insured’s Liability Was Not Beyond Dispute
A.M. v. Am. Alt. Ins. Corp., No. 2024-CA-0984-MR, 2025 Ky. App. Unpub. LEXIS 571 (Ky. Ct. App. Dec. 5, 2025).

An insured school district was sued by a special needs student for failing to provide adequate supervision, resulting in sexual abuse suffered by the student. After the school district settled with the student, the student brought suit against the school district’s insurers alleging bad faith. The insurers moved to dismiss, and the trial court granted the motion. On appeal, the court observed that a bad faith claim requires the insured’s liability to be beyond dispute. But here, at the time of the settlement, a motion to dismiss the underlying action was pending and at least one of the student’s causes of action had been dismissed. Based on the uncertainty caused by those factors, the court held that the student could not establish that the school district’s liability was beyond dispute. Read the decision.

New Jersey District Court Clarifies “Fairly Debatable” Standard for Bad Faith Actions
Solimine v. Chubb Custom Ins. Co., No. 25-01250, 2025 U.S. Dist. LEXIS 264920 (D.N.J. Dec. 23, 2025).

The insured homeowner sued the insurer after it denied coverage for damage to a smart home system allegedly caused during repairs for a leak. Before reaching its decision, the insurer hired an electrical engineering and computer science firm, which determined that the repairs were not the cause of damage to the smart home system. The insured alleged bad faith denial, and the insurer moved to dismiss. In denying the motion, the court acknowledged that the New Jersey Supreme Court had previously ruled that the “fairly debatable” standard applicable to a bad faith claim requires the plaintiff to establish a right to summary judgment as a matter of law, even at the motion to dismiss stage. Despite that ruling, the court observed that district courts often permit a bad faith claim to proceed even where the factual record is undeveloped. The court found allegations of the insurer’s reliance on the flawed opinions of its hired contractor were sufficient to withstand dismissal because they demonstrated the lack of a fairly debatable reason to deny coverage. Read the decision.