New Jersey: Bad Faith Claims Must Contain Factual Support For Insurer’s Reckless Disregard

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NEW JERSEY, April 3 – A New Jersey Federal Court has dismissed a bad faith claim filed by homeowners seeking coverage for property damage sustained  in a fire loss on January 12, 2016.   In Williams v. State Farm, U.S. District Judge Joseph H. Rodriquez found that the homeowners’ bad faith  allegations fell short of the factual support required under the Federal Rules of Civil Procedure.   The allegations were based around State Farm’s failure to pay the claim, but added little factual detail.

In granting State Farm’s motioin to dismiss, Judge Rodriguez wrote:

 

“While the lack of a reasonable basis may be inferred and imputed to an insurance company, there must be allegations of reckless indifference to facts or to proofs submitted by the insured… (quotations and citations omitted).  Plaintiffs reference a ‘reckless disregard for the rights of the Plaintiffs’ but do so in conclusory fashion, thereby leaving the Court to infer reckless indifference from the fact that Defendant denied coverage; however, the Court declines to make such an inference. Plaintiffs do not  provide sufficient factual allegations to suggest an absence of a reasonable basis on the part of Defendant for denying coverage. The mere allegation that Defendant’s denial of coverage inferentially establishes bad faith relies on the very speculation forbidden by Twombly and Iqbal. Accordingly, the Court dismisses Plaintiffs’ claim for bad faith without prejudice.

Having determined that Plaintiffs’ claim for breach of the duty of good faith and fair dealing is insufficiently pled and therefore is dismissed, the Court need not address whether Plaintiffs are entitled to punitive damages under that claim.”

Williams v. State Farm Fire & Cas. Ins. Co., No. 16-9028, 2017 U.S. Dist. LEXIS 50261 (D.N.J. Apr. 3, 2017) (Rodriguez, J.)

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Reservation of Rights Letters: Lack of Specificity Proves Fatal To CGL Insurer In South Carolina

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COLUMBIA, S.C. – Law360.com recently featured the South Carolina Supreme Court Ruling in Harleysville Group Insurance vs. Heritage Communities Inc. as one of the five most important but potentially overlooked insurance rulings in the first quarter of this year.  The Harleysville case points up  the peril insurers face for issuing general, non-specific reservations of rights letter.

In Harleysville, the South Carolina Supreme Court held that a reservation of rights letter which did not clearly state why a carrier believed a CGL policy may not provide coverage for a loss could bind the insurer to cover the loss.  The  Court affirmed a special referee’s decision that Harleysville was obligated to insure a prorated share of large verdicts entered against developers of two Myrtle Beach condominium complexes for a series of construction defect cases.

Harleysville agreed to defend the developer,  Heritage Communities Inc. and related companies in the underlying litigation under the CGL policies, but issued several reservation of rights letters during the defense which were used later to question the insurer’s coverage obligations.    A special referee ruled that the insurer had failed to properly reserve its right to dispute coverage for the actual damages verdicts against Heritage because the letters included only “generic denials of coverage” accompanied by verbatim copies of policy provisions.

The South Carolina high court agreed  that the reservations of rights letters were insufficient, as they did not adequately place the insureds on notice  of the insurer’s specific concerns and arguments against coverage.  Writing for the Court, Justice John W. Kittredge held:

“It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage…At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and-paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement,  Harleysville’s duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage… Here, except as to punitive damages, Harleysville’s reservation letters gave no express reservation or other indication that it disputed coverage for any specific portion or type of damages.”

(emphasis added).  Justice Kittredge went out to point out, for example, that Harleysville did not identify the basis on which it intended to contest that no “occurrence” took place, as defined in the policy.  On that basis, the Court affirmed the referee’s finding that Harleysville could not contest coverage under the CGL policies based on the reservation of rights letters it issued.

Editor’s Note:  The obvious takeaway here is that insurers should not skimp when it comes to the drafting of reservation of rights letters.  The better practice is to have inside or outside counsel prepare specific reservation letters as part of the coverage analysis or coverage opinion, if and when reservation letters are indicated. 

This ruling cautions against any conventional view that reservation of rights letters are merely “cookie cutter” documents that can be generated primarily by word processors.  Reservation of rights form letters may be used as a starting point, but never an ending point — the letters must ultimately contain specific gounds supporting any reserved claim, and wherever possible include citation to facts and information tending to suggest a reasonable dispute as to the terms of the policy on which reservation is being made.  CJH

Harleysville Group Ins. v. Heritage Communities, Inc., No. 2013-001291 (South Carolina, 2017)

Re-Purposing The Free Initial Consultation For The Benefit of Insurers and Corporate Clients

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Alternative fee arrangements are out of the bag by now.  They are being tried and used by insurers as part of ongoing efforts to bring cost-certainty to outside legal fees.  Badfaithadvisor.com has a complete survey of alternative fee options here.

But that is not the end of the leverage in favor of  insurers and corporate clients.  And to that end,  I am going to let you all in on a very big secret.  Not only that, I am going to invite — no — I’m going to dare, you to take advantage of it, and here it is:   I would rather my clients and prospects talk to me for free about matters of concern to them ,  than to let them  talk to any of my competitors.  Under any terms.

And so, the free initial consultation, long a staple of the plaintiff’s bar, has been co-opted and re-purposed for my insurance company and other corporate clients.

Insurance and corporate clients, and prospective clients who are interested in testing the waters, are given  free initial consultations of anywhere from 30 minutes to 2 hours (and sometimes more)  to review documents, and to discuss cases they are considering assigning to outside counsel.  But I offer the same thing to the same clients and the same prospects who are actually looking to AVOID sending a matter to outside counsel, too.  This provides value to them in the form of an informal first or second opinion which will give them early clarity on a matter, and peace of mind on potential action plans for handling those claims or matters.

The free initial document review / consultation is a win – win for clients and prospects.  If they do decide to retain me, on either en alternative or conventional fee basis, they have familiarized me with the matter they will be assigning and brought me up to speed at no cost to them, thereby reducing their overall legal expense on the matter.   If they decide to keep the matter in-house, they have received the value of an outside look for free, and I have hopefully created good will my clients will remember when the next matter comes up for consideration.

There are and will always be major coverage matters and bet-the-company litigation which insurers and corporate clients on which clients will seek outside representation.  Free initial consultations on both these matters and matters which clients never assign to outside counsel is another way to provide value to clients in business environments encouraging the limitation and reduction of outside legal expense.

C.J. Haddick

Pa. Supreme Court Update: Is Ill Will A Required Element of Bad Faith?

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PITTSBURGH, April 4  — This week, the  Pennsylvania Supreme Court heard oral argument on whether intentional ill will or malice was a required element to make out a claim for insurance bad faith in Pennsylvania, exposing insurers to punitive damages.

In Rancosky v. Conseco, the Pa. Superior court reversed a trial court ruling in favor of an insurer on bad faith claims following a bench trial.  The Superior Court held that the insurer  did not have a reasonable basis to deny benefits to LeAnn Rancosky following her diagnosis of ovarian cancer in 2003.  The intermediate appeals court relied on its 1994 ruling in Terletsky v. Prudential, and held that while it was a consideration, ill will and malice was not a stand-alone requirement to establish insurer bad faith.

Ms. Rancosky and her husband sued Conseco in the Washington County Court of Common Pleas in 2008,  and eventually won a $31,000 jury verdict on breach-of-contract claims.  Conseco prevailed, however, on the bad faith claims.

During argument this week, Conseco argued to the state Supreme  Court  that Pennsylvania’s bad faith statute does not contemplate punitive damage awards against carriers without evidence of a malicious motive.  In response, Rancosky’s estate argued that proving ill will was exceptionally difficult, and that making bad motive a requisite element would allow insurers to handle claims recklessly and carelessly without fear of penalty.

Law360.com reported that during argument earlier this week,  Justice Max Baer saw the appeal of Rancosky’s arguments, stating “It’s hard to prove that kind of motive, and if you’re going to hold the insured to that burden then you tend to put the rabbit in the hat and the insurance company wins because they say, ‘We’re the most incompetent organization in the world. We were dead wrong, but we had no motive of ill will.’”

A ruling is anticipated later this year.

Editor’s note:  Justice Baer’s comments during oral argument this week are emblematic of a trending misconception that the Pa. Bad Faith Statute created anything beyond an intentional tort cause of action.  There is a large body of case law in both Pa. state and federal courts holding that mere negligence is not bad faith, and that an insurer has the legal right to be wrong on claims decisions, as long as the decision can be supported by a reasonable basis. 

There should be no real dispute that reasonable but negligenct claims decisions are not actionable, and that intentionally malicious claims decisions are actionable , under the bad faith statute.  The  current battleground in Pennsylvania appears to be the class of claims decisions which lie in the twilight between these two signposts, i.e., claims decisions made recklessly, and wanton disregard to the insured’s rights.   Rancosky is an attempt to find clarity in this twilight.