Since 2001, an insured suing his insurer for breach of contract and for having acted in bad faith was on notice that the two claims would be bifurcated, and that discovery on the bad faith claim would be stayed pending the result of the breach of contract claim.[1] The continuing practical effect of the Dahmen decision is that plaintiffs’ counsel are not entitled to discovery of the insurance company’s claim file until the insurer’s breach of the insurance contract has been proven.

With few exceptions, the Dahmen rule requiring bifurcation of the two claims and a stay of discovery on the bad faith claim has been followed by circuit courts in Wisconsin. In 2011, Dahmen was discussed and distinguished by the Wisconsin Supreme Court in the matter of Brethorst v. Allstate Property and Casualty Insurance Company.[2] The Brethorst decision upset the expectation that the two claims would be bifurcated as a matter of course by holding that an insured may proceed with discovery on a first-party bad faith claim once he or she has: (1) pleaded a breach of contract by the insurer as part of a separate bad faith claim, and (2) satisfied the court that they have established such a breach or will be able to prove such a breach in the future.[3]

More and more, counsel for plaintiffs in underinsured motor vehicle and uninsured motor vehicle lawsuits are choosing to allege only bad faith as a stand-alone claim. Strengthened by the holding in Brethorst, counsel allege that the insurer has not reviewed the plaintiff’s claim with the gravitas it deserves; has ignored medical bills and the seriousness that such bills suggest with respect to the plaintiff’s claimed injuries; and that no reasonable basis for not paying the insurer’s policy limits exists. All of that, according to counsel, is sufficient to allow the plaintiff to proceed on a stand-alone claim for bad faith and, more to the point, is grounds for access to those portions of the insurer’s claim file not otherwise protected by privilege.

1. A Brief History of Bad Faith Claims

The tort of bad faith in a first-party action was originally recognized in Anderson v. Continental Insurance Company.[4] There, the plaintiffs filed suit against their insurer for both breach of contract and bad faith refusal to negotiate a payment after a furnace fire resulted in damage to the contents of their home.[5] The insurer objected to the bad faith claim, arguing that Wisconsin did not recognize such a cause of action.[6] The court held that, while a claim for first-party bad faith had “never been explicitly recognized in this state,” an insured is entitled to bring a claim against her own insurance company for bad faith.[7] The court made clear that a bad faith claim is separate and distinct from a breach of contract.[8] Bad faith “is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.”[9] 

In 2001, American Family Mutual Insurance Company was the defendant in a first-party underinsured motorist lawsuit that included a claim for bad faith.[10] American Family moved to bifurcate the contractual and extra-contractual claims, arguing that a failure to do so would unfairly prejudice it with respect to the contract claim because, absent an order for bifurcation, the plaintiffs would be entitled to discover non-privileged information from American Family’s claim file that they would not otherwise be entitled to discover. The Dahmens argued that bifurcation would be unfair to them by, among other things, increasing their litigation expenses. 

The trial court sided with the Dahmens and denied America Family’s motion to bifurcate and stay discovery. American Family petitioned the court of appeals for leave to appeal the non-final order, which was granted. The court of appeals reversed the trial court, recognizing: 

The risk of prejudice to the insurance carrier when discovery proceeds on a bad faith claim while an underlying claim against the same defendant remains unresolved. WISCONSIN STAT. § 805.05(2) provides that a trial court may order a separate trial “always preserving inviolate the right of trial in the mode to which the parties are entitled.” The bifurcation of the Dahmens' claims accomplishes this.[11]

The court went on to hold that:

[W]e are not satisfied that the use of properly drafted jury instructions and a special verdict will sufficiently remedy the prejudice that would likely result if the two claims are litigated in a single trial. Even though the evidence relevant to the bad faith claim is wholly unrelated to the underlying claim for UIM benefits, the evidence on the two issues will likely overlap. Even the best-intentioned and properly instructed jury might not maintain the discipline to discern between the two claims. As a result, the risk for jury confusion and prejudice to American Family is substantial.[12]

Finally, the court held, “[i]f a jury finds that the Dahmens’ injuries do not exceed the underlying policy limits, it would not be necessary to proceed with a trial on the claim of bad faith.”[13] After Dahmen in 2001, things were clearly delineated: a plaintiff suing his insurer for breach of contract and bad faith should fully expect that the two claims would be bifurcated and that discovery on the bad faith claim would be stayed until such time as the breach of contract claim was resolved.

Things appeared to change, however, with the Brethorst decision in 2011. There, Brethorst was involved in an accident with an uninsured driver and subsequently filed suit against her uninsured motorist carrier, making a stand-alone claim for bad faith.[14] The insurer offered a small amount of money to compromise and settle the claim.[15] Again, Brethorst did not file a breach of contract claim; she went straight to alleging that her insurer acted in bad faith.

The parties made their arguments to the trial court: The insurer argued that it was entitled to an order bifurcating the bad faith and contract claims. Brethorst argued that since she did not make a breach of contract claim, there was nothing to bifurcate and she could move ahead with only the bad faith claim. 

The Wisconsin Supreme Court found in favor of the insurer as to this point: “[W]e conclude that some breach of contract by an insurer is a fundamental prerequisite for a first-party bad faith claim against the insurer by the insured.” [16] Conversely, it held that Brethorst plead facts which, if proven, would demonstrate not only that the insurer breached its contract with her but also that there was no reasonable basis for not honoring the terms of the contract.[17] The Supreme Court therefore affirmed the circuit court's decision denying the insurer’s motion to bifurcate and stay. 

The Brethorst court held that the considerations in Dahmen are only partially applicable when a party chooses to plead only a bad faith claim. It held there is a “need to establish a wrongful denial of some contracted-for benefit before permitting discovery for a bad faith claim.”[18] Then, it adopted specific procedural requirements for the circumstance where only a bad faith claim is brought. The court held that an insured may not proceed with discovery on a solo first-party bad faith claim until she or he has: (1) pleaded a breach of contract by the insurer as part of the separate bad faith claim, and (2) satisfied the court that she or he has established such a breach or will be able to prove such a breach in the future.[19]

While the court also held that an insurer should be given the chance to show that it did not act in bad faith, unfortunately, it did not give clear instruction as to how that might be accomplished.

1. Distinguishing Brethorst

While the holding in Brethorst may seem unfavorable at first glance, defense counsel faced with stand-alone bad faith claims should not be easily discouraged. As the saying goes, “hard cases make bad law.” While Brethorst may have muddied Dahmen’s crystal waters, the facts of Brethorst can usually be distinguished from the average bad-faith case today. 

It is true that the facts in Brethorst are unique and somewhat aggravating. However, defense counsel should find this encouraging. In practice, the unusual circumstances in Brethorst allow it to be distinguished from the typical case on several points. These distinctions, some of which are outlined below, may be used to support the argument that a plaintiff has failed to make the preliminary showing required for a stand-alone bad faith claim. 

1. Physician Opinions

One of the unusual facts in Brethorst which led the court to conclude that the plaintiff’s pleadings were sufficient was an allegation in Brethorst’s complaint that her insurer was provided with a letter from Brethorst’s physician.[20] The letter explained to the insurer that Brethorst sustained an “acute cervical and back sprain/strain” and that the physical therapy the physician ordered for Brethorst had not been ordered to treat some pre-existing injury, but had been ordered to treat “the acute injuries from the accident.”[21]

 Upon receipt of the physician’s letter, the insurer in Brethorst increased its settlement offer by $300, but maintained its position, based on the opinion of the insurer’s adjuster, that the collision was only a minor accident and the full amount of the medical bills was unnecessary.[22] The court critiqued this aspect of the insurer’s handling of the claim, stating that by failing to have the claim evaluated by someone with medical training, the insurer “provided nothing to justify its failure to pay, except its wholly unsubstantiated theory that a minor accident could not seriously aggravate a pre-existing injury.”[23] The court further noted, with emphasis, that the insurer’s “theory is not enough.”[24]

Absent such a report letter from plaintiff/insured’s counsel during the pre-suit investigation, a plaintiff would be hard-pressed to argue that the insurer’s interpretation of her medical records lacks a reasonable basis. Medical records are subject to different interpretations – an insurer may find something upon which it relies to deny a claim that plaintiff’s counsel, absent a supporting medical report, might not have seen. In the event a plaintiff does produce a medical opinion supporting the amount of medical expenses, Brethorst can still be distinguished to support a reasonable basis for denial so long as an insurer had someone with medical training evaluate the claim and arrive at an opposing conclusion.

1. Company Policies

Another fact to be distinguished from Brethorst is the type of company policy in place. In Brethorst, the insurer apparently had a systemic, company-wide and ratified policy of offering settlement sums substantially less than its insured’s medical bills in any accidents involving minor impacts with resulting soft tissue injuries.[25] The insurer referred to these as Minor Injury Soft Tissue (MIST) cases.[26]

In support of her argument that the insurer failed to conduct a full investigation of her case, Brethorst was able to provide evidence of the insurer’s policy of offering artificially low payments in MIST cases. While the court in Brethorst did not explicitly address the insurer’s policy in determining that the insurer failed to justify its failure to pay, it is clear that such a policy supported the court’s ruling that the insurer’s evaluation of Brethorst’s claim was based on speculation.[27]

An insurer in Wisconsin is required to conduct an appropriate and careful investigation before assessing a claim.[28] While the holding in Brethorst may be unfavorable to insurance companies on this point, the company policy at issue was an outlier. So long as an insurer is not stamping certain types of claims and injuries as being less compensable, it can distinguish Brethorst. Absent an allegation (based on a reasonable belief) of such an aggravating fact, the insured/insurer settlement negotiations are no more nefarious than any other arms-length negotiations.

Brethorst can further be distinguished with regard to company policy as the plaintiff in Brethorst dealt with a claims specialist who was, in part, responsible for implementing the insurer’s practice of offering less money in MIST cases.[29] Here, again, if an insurer does not have a practice of offering less money for cases involving low impact accidents and soft tissue injuries, then the argument that an insured did not have a reasonable basis for denying a given claim is weakened.

It’s also worth noting that the existence of the insurer’s MIST policy in Brethorst was not in dispute. Brethorst alleged the use of this practice in her complaint and, in its Answer, the insurer admitted it had what it referred to as a MIST policy.[30] While the insurer disputed Brethorst’s characterization of its policy, its admission allowed the court to utilize the fact of its existence in determining that the insurer failed to fully evaluate Brethorst’s claim. Of course, if no such policy exists, insurers can use the lack of this type of admission to distinguish Brethorst even further.

1. Coverage

While many bad faith claims involve an uninsured or underinsured motorist policy provision, quite a few cases involve claims where the underlying policy coverage is not quite as obvious. The Brethorst court was careful to carve out instances where coverage may be at issue, holding that an insurer’s egregious conduct towards an insured is not sufficient to create coverage that does not otherwise exist under the policy.[31] The plaintiff’s complaint in Brethorst was sufficient, in part, because it established that the plaintiff’s accident involved an uninsured motorist, the plaintiff’s insurance policy covered uninsured motorist claims, and that given the facts and circumstances of the accident, the insurer would be liable and obligated to pay to Brethorst 100% of the damages she sustained as a direct result of the uninsured motorist’s negligence.[32]

The coverage provision underlying a stand-alone bad faith claim may not always be as clear as in Brethorst. In Brethorst, the insurer was not claiming that there was no coverage for the plaintiff’s accident. Rather, the insurer disputed the value of Brethorst’s injuries and the relatedness of the medical expenses she incurred. If defense counsel is faced with a stand-alone bad faith claim where the insurer denied the underlying claim based on lack of coverage, the plaintiff cannot find support in Brethorst. The court in Brethorst was clear that an insured cannot proceed with discovery on a first-party bad faith claim until it has established or will be able to prove a breach of contract. Breach of contract cannot be established where the plaintiff is unable to point to the specific policy provision which was allegedly “breached” based on the facts plead.

1. Subject of the Dispute

Another way Brethorst can be distinguished is by focusing on the subject of the dispute. In Brethorst, there was no dispute as to whether the insured was hit by an uninsured motorist, whether the insured’s policy provided coverage for such instances, or whether the insured incurred medical expenses in the amount claimed. Rather, the dispute of the plaintiff’s underlying claim in Brethorst centered around causation – whether the extent of the plaintiff’s medical treatment was the result of the accident or a consequence of her pre-existing conditions.[33] 

Many bad-faith cases may not be as clear-cut as the case in Brethorst when it comes to the underlying issues in dispute. An insurer and insured may disagree on a number of different issues, such as whether coverage exists and the value of the claim. While the court in Brethorst found that the insurer had no reasonable basis for failing to pay the claim, in part because the insurer disregarded Brethorst’s physician and based its decision on “speculation,” such facts are not applicable to other types of disputes.

When it comes to determining the value of a claim or the existence of coverage, for instance, an insurer may have a myriad of ways to evaluate the claim. While the insurance adjuster in Brethorst may have lacked the medical training and knowledge to determine that the plaintiff’s accident was too minor to cause her resulting injuries, other types of evaluations may not be so far outside the scope of an insurer’s expertise. Depending on the type of dispute at issue, it may be possible to distinguish Brethorst and show a reasonable basis for denying a claim or disputing the claim’s value without an outside expert opinion. 

1. Holding Plaintiff’s Counsel to Brethorst’s Standards

All of this leads to the question: What should an insurer do when it is named as a defendant in a suit that alleges only that it acted in bad faith toward the plaintiff/insured? The court in Brethorst held that “an insured choosing to pursue only a claim for bad faith must plead facts which, if proven, would demonstrate not only that the insurer breached its contract with the insured but also that there was no reasonable basis for not honoring the terms of the contract.”[34]

Where a plaintiff fails to make this preliminary showing, the court in Brethorst provided insurers with two forms of relief: (1) granting a motion for summary judgment pursuant to Wis. Stat. § 802.08(2) and (2) granting a motion to dismiss the case under Wis. Stat. § 802.06(2)(f).[35] Thus, when faced with a stand-alone bad faith claim, defendants should evaluate (1) whether the allegations in the complaint are sufficient under Brethorst to survive a motion to dismiss and/or (2) whether the plaintiff has made the preliminary showing required by Brethorst, through its pleadings and affidavits, sufficient to survive a motion for summary judgment.

1. Evaluate the Pleadings

A plaintiff fails to meet the standard required in Brethorst if he or she brings a stand-alone claim for bad faith and fails to sufficiently plead a breach of contract by the insurer. Brethorst requires more than a paragraph stating, “the insurer breached its contract with the plaintiff.” Rather, a plaintiff must plead with particularity (1) that they are entitled to payment under the insurance contract and (2) allege facts to show that their claim under the contract was not fairly debatable.[36]

Despite an apparent misconception of bad-faith pleading requirements by plaintiffs’ counsel in recent years, this standard should by no means be easy to satisfy. The plaintiff in Brethorst set a uniquely high bar for plaintiffs filing a stand-alone bad faith complaint by pleading the following elements with particularity:

(1) The facts of the accident;

(2) The underlying provision providing undisputed coverage for the accident;

(3) Proof of the medical expenses plaintiff incurred;

(4) Plaintiff’s demand to her insurer for these expenses;

(5) Documentation of plaintiff’s medical expenses;

(6) A letter prepared by plaintiff’s physician opining “to a reasonable degree of medical certainty” that her medical expenses were reasonable, necessary, and related to plaintiff’s injuries from the accident;

(7) This physician’s letter was provided to plaintiff’s insurer;

(8) The insurer offered less than plaintiff’s medical expenses based on the assessment that the collision was only a minor accident;

(9) The insurer had a company-wide policy of offering sums substantially less than the medical bills incurred in accidents involving minor impact soft tissue (MIST) injuries;

(10) Plaintiff was assigned an adjuster specifically responsible for implementing the MIST policy; and

(11) The insurer acted in bad faith by failing to conduct a full investigation of the case, failing to have plaintiff’s claim evaluated by anyone with medical training, and ignoring the medical opinion of plaintiff’s physician.[37]

It was this degree of particularity that led the court in Brethorst to hold “the insured did not fail to plead breach of contract through her bad faith claim.”[38] Anything less than the pleadings outlined in Brethorst should create a challenge for plaintiffs and a basis for defense counsel to move for a motion to dismiss.

1. Challenge by Motion

Even if a plaintiff does plead with the particularity laid out in Brethorst, the plaintiff’s allegations must still withstand the insurer’s rebuttal.[39] The court in Brethorst provided that the battle for a stand-alone bad faith claim does not end with sufficient pleadings. Rather, before a plaintiff may proceed with discovery, an insurer must be permitted to challenge the elements of the claim, not only by a responsive pleading, but also by motion.[40] 

The court in Brethorst required that an insurer be permitted to show that it did not breach the insurance contract or that there was a reasonable basis for its conduct in denying, paying, or processing a claim.[41] If an insured’s claims withstand an insurer’s rebuttal and satisfy the court that the insured has established or will be able to prove both (1) the insurer breached its contract with the insured and (2) the insurer had no reasonable basis for not honoring the terms of the contract, only then, may a plaintiff move forward with a stand-alone bad faith claim.[42] Any failure by the plaintiff to make this preliminary showing is grounds for the court to grant a motion for summary judgment under Wis. Stat. § 802.078(2).[43]

1. Conclusion

In conclusion, it should not be easy for a plaintiff to proceed with a stand-alone claim for bad faith against an insurer, and with that, access to the insurer’s claim file material. While plaintiffs’ counsel may attempt to lean on Brethorst for support, the facts of Brethorst are a double-edged sword. Defense counsel faced with stand-alone bad faith claims should not be afraid to utilize Brethorst and its many hoops. The court in Brethorst created a very high bar for bad faith plaintiffs – more in the essence of a pole vault rather than a limbo. In stand-alone insurance bad faith claims, the duty lies with defense counsel to start making plaintiffs jump. 

Author Biographies:

Michael J. Wirth is a member of Borgelt, Powell, Peterson & Frauen, SC, and a 1999 graduate of Marquette University Law School. Attorney Wirth focuses his practice on bad-faith-claim counseling and litigation, first-party property insurance issues, and insurance coverage analysis and litigation.

Abigail T. Hodgdon is a member of Borgelt, Powell, Peterson & Frauen, SC, and a 2020 graduate of Marquette University Law School. Attorney Hodgdon focuses her practice on automobile liability, civil litigation, municipal law, and subrogation and statutory liens.

[43] Id.