Minnesota Governor Signs Bill Limiting Liability for Bad Faith Denial of Insurance Policy Benefits

On April 18, 2008, Minnesota Governor Tim Pawlenty signed a bill passed by the Minnesota Legislature that limits liability for "bad-faith" denial of insurance policy benefits.  The law imposes liability if a court finds that the insurer knew of the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance policy.  

The new law, which will appear as § 604.18 and takes effect on August 1, affects all entities licensed or authorized to transact insurance under Ch. 60A.06, but exempts political subdivisions providing self-insurance and pools formed by such subdivisions.  It also exempts Joint Underwriting Associations operating under Ch. 62F or 62I.  In addition, certain policies produced by non-exempt insurers, such as workers' compensation policies and written agreements of health carriers, are exempted from the operation of the law.   

Bad faith under the new law cannot be pled in the complaint.  Like a punitive damages claim, the insured must seek leave to amend to include the claim and show a prima facie case based on affidavits showing the factual basis for the motion.  

The law only allows a court, not the jury, to consider whether an insured has proven "bad faith."  The Court is allowed to add damages as taxable costs if the jury returns a verdict in the insured's favor.  Damage awards are limited to an amount equal to one-half of the proceeds awarded that are in excess of an amount offered by an insurer at least ten days before trial begins, but capped at $250,000.  Attorney's fees may be awarded, but are also capped at $100,000.  Punitive or exemplary damages are not available under the law.

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