Third-Party Bad Faith Claims

Third-party bad faith occurs when the at-fault party's insurance company unreasonably refuses to settle your claim within their policyholder's coverage limits, exposing their own insured to personal liability for the excess judgment. Unlike first-party claims (your insurer vs. you), third-party bad faith involves the relationship between the at-fault party's insurer and their policyholder—but you can benefit through an assignment of that claim.

When an insurer's unreasonable refusal to settle results in a verdict exceeding policy limits, their policyholder faces personal liability for the excess. Often, that policyholder assigns their bad faith claim against their own insurer to you in exchange for a covenant not to execute on their personal assets. This lets you pursue the insurance company directly for the full verdict amount plus potential punitive damages.

An excess judgment is a verdict that exceeds the at-fault party's insurance policy limits. For example, if the at-fault driver has $50,000 in coverage but the jury awards $500,000, the $450,000 excess is personally owed by the at-fault driver. If their insurer unreasonably refused settlement offers within limits, the insurer may be liable for this excess through a bad faith claim.

Oklahoma courts consider: (1) whether liability was reasonably clear, (2) whether damages likely exceeded policy limits, (3) whether the claimant made a policy-limits demand, (4) whether the insurer failed to properly evaluate the claim, (5) whether the insurer prioritized its own financial interests over its insured's exposure, and (6) whether the insurer communicated the settlement opportunity to its insured.

A Stowers demand (named after a Texas case but applicable in concept) is a formal offer to settle for the at-fault party's policy limits. It puts the insurer on notice that they can resolve the claim within coverage, and failure to accept creates potential bad faith exposure if a larger verdict follows. In Oklahoma, we craft these demands carefully to establish the insurer's unreasonable conduct.

After obtaining an excess judgment, the injured party often negotiates with the at-fault defendant: in exchange for not pursuing the defendant's personal assets, the defendant 'assigns' their bad faith claim against their own insurer to the injured party. This allows the injured party to directly sue the insurance company for the full verdict amount plus punitive damages for bad faith.

Through an assigned bad faith claim, you can potentially recover: (1) the full excess judgment amount (not just policy limits), (2) interest on the judgment, (3) consequential damages suffered by the original insured, and (4) punitive damages against the insurer for their bad faith conduct. Oklahoma doesn't cap punitive damages in bad faith cases.

Third-party bad faith cases are less common than first-party claims because they require specific circumstances: clear liability, damages exceeding policy limits, an unreasonable refusal to settle, and an assignment. However, when these elements align—often in serious injury or wrongful death cases—they can result in substantial recoveries well beyond original policy limits.

Sometimes adjusters miscalculate risk, undervalue injuries, or hope plaintiffs will accept less. Some insurers have corporate cultures that resist settling claims. Others may be protecting their own bottom line rather than their policyholder's interests. Whatever the reason, when an insurer prioritizes its financial interests over protecting its insured from personal liability, that's bad faith.

Generally, yes—you need a verdict or judgment exceeding policy limits to establish the excess liability that triggers the bad faith claim. However, the threat of a bad faith claim often motivates insurers to settle before trial. We strategically position cases to maximize settlement pressure while preparing for trial if the insurer remains unreasonable.