Category: Bad Faith

Insurance Agent Dropped From Bad Faith Suit

insagentTULSA, May 6 – An insurance agent who neither wrote nor issued the insurance policy was dismissed from a federal bad faith and coverage suit by an Oklahoma federal judge last week.

Christopher Wise filed a state court breach of contract suit against two insurers after they denied coverage  to Wise following a motorcycle accident Wise was involved in on the same day he purchased the bike.  The Hagerty Insurance Agency produced one of the policies issued by Essentia Insurance Company.  CSAA General Insurance Co. was the other insurer.

Essentia removed the action to the U.S. District Court for the Northern District of Oklahoma based on diversity jurisdiction, and the Hagerty  agency  moved to dismiss for failure to state a claim for relief on the grounds that it was not an insurance company, and it neither wrote nor issued any policy to Wise.

U.S. District  Judge Claire V. Eagan granted the motion, holding:

“[u]nder Oklahoma law, an insured cannot state a claim against an insurance agent for breach of contract when it is not in privity of contract with that agent…Defendant Hagerty included with its motion to dismiss both the insurance card and the relevant policy. The insurance card clearly states that the insurance company is Essentia and that Hagerty is the agent. The policy itself, in the definitions section, defines ‘we,’ ‘us,’ and ‘our’ as ‘the Company providing insurance.’ The policy does not include any provision involving the insurance agent, nor does it impose any responsibility on the agent under the contract. These documents clearly demonstrate that defendant Hagerty is the insurance agent, not the insurance company. The insurance contract is between Essentia and plaintiff, and Hagerty is a stranger to this contract. As such, plaintiff has failed to state a claim against Hagerty for breach of contract and bad faith. Defendant Hagerty’s motion to dismiss should be granted.”

Wise v. CSAA Insurance Group, Inc. et al  (N.D. Okla. 2016)

Allstate’s Denial of Water Leak Claim Reasonable, Court Rules

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PHILADELPHIA, May 5  — A Pennsylvania federal judge on May 5 granted judgment in favor of an insurer in a water damage suit after determining that the company’s reliance on a maintenance exclusion to deny the claim was reasonable.

David Dougherty filed sued Allstate in state court for breach of contract and bad faith.   The suit was removed the U.S. District Court for the Eastern District of Pennsylvania on diversity jurisdiction grounds. Allstate denied Dougherty’s homeowner’s  water damage claim, contending that coverage was barred by the policy’s occupancy/heat exclusion and the planning, construction or maintenance exclusion.

The home was vacant and unoccupied at the time of the water loss, which occurred in winter weather.

Following cross motions for summary judgment Judge Thomas N. O’Neill Jr.held  Allstate met its burden in proving that it properly applied the policy’s maintenance exclusion in denying coverage. He held that the evidence presented

“supports a conclusion that the incident was caused by a failure to maintain the furnace at the property…On the record before me, viewed in the light most favorable to plaintiff, I find that a reasonable jury could not conclude that Allstate breached its obligation to plaintiff in applying the maintenance exclusion to bar plaintiff’s claim.”

Allstate’s summary judgment motion was also granted as to the bad faith claim.  The Judge held:

“It was not unreasonable for Allstate to focus its claim investigation on the condition of plaintiff’s furnace given that the water damage to the property occurred in January in Pennsylvania in an unoccupied property where the gauge on the oil tank read empty at the time of the loss (even though the gauge was later determined to be faulty.”

Dougherty v. Allstate Property And Casualty Insurance Company, (E.D. Pa. May 5, 2016, O’Neill, J.)

Faulty Construction Workmanship Not Covered Under Commercial and Umbrella Policies

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PHILADELPHIA, March 23 – A federal judge in Philadelphia has ruled that Selective Way Insurance Co. need not defend nor indemnify an insured subcontractor from allegations in an underlying suit regarding faulty workmanship, whether the workmanship is cast as negligence or breach of a construction contract.

The Villas, a  condominium owner,  filed suit against the general contractor for defective work, including cracking and water damage, and Lenick Construction was added as an additional defendant in the litigation.  Lenick tendered its defense and indemnity to Selective under a commercial liability policy, and Selective provided a defense to Lenick under a reservation of rights.

After the underlying litigation was settled between The Villas and the general contractor, the general contractor assigned its rights against the subcontractors, including Lenick to the condominium owner.

Lenick sued Selective in the Philadelphia County Court of Common Pleas, seeking a declaration that the insurer had a duty to defend and indemnify it in the underlying lawsuit. Lenick asserted a claim for breach of contract and a bad faith claim . Selective removed the case to the U.S. District Court for the Eastern District of Pennsylvania, and the parties each moved for summary judgment.

Judge Cynthia M. Rufe granted summary judgment to Selective and denied Lenick’s motion, examining the underlying pleadings and finding that defective workmanship was alleged to be the cause of the water infiltration into condominium units.   She wrote:

With regard to Lenick’s argument that the underlying joinder complaint and the Third Amended Complaint did not only allege that Lenick’s own work was deficient, but that its defective work caused damage to the work of others, the Court agrees that this is a plausible reading of the underlying complaints. However, where liability is premised upon poor workmanship, the fact that nearby work was also damaged does not change the analysis, so long as such damage is reasonably foreseeable. It is foreseeable that windows and doors which are not watertight will cause water damage inside the unit, to parts of the unit other than the windows and doors. Accordingly, these additional allegations do not give rise to a duty to defend.

The judge found no facts whch would support a tort claim against Lenick, and which would potentially be covered under the Selective Way policy.

Judge Rufe also granted summary judgment for Selective on Lenick’s bad faith claim, observing that  Selective’s interpretation of the underlying  construction litigation pleadings was not unreasonable.

Lenick Construction v. Selective Way Ins. Co.., (E.D. Pa. March 23, 2006)

 

Six Red Flag Indicators of Reverse Bad Faith

 

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While the debate still goes on across jurisdictions  as to whether and how the reverse bad faith of an insured serves as a defense to an insurer in a bad faith case, that reverse bad faith has a place of some sort in bad faith litigation is much less open to doubt.  Most jurisdictions recognize a place for consideration of the conduct of the insured in bad faith litigation, largely because it is grossly inequitable to judge a two-party interaction by the conduct of only one of those parties.  Fundamental fairness would seem to require that if the light of scrutiny is to be placed on the handling of an insurance claim, it be placed on two parties, not one.

Reverse bad faith comes in all shapes, sizes and shades.  Sometimes it is overt;  other times it is more passive.  Here are six of the biggest red flags indicating the presence of the reverse bad faith of the insured in an insurance claim:

  1.  The Early-Onset Time Limit Settlement Demand – This is one of the most obvious signs that the insured may be looking to construct a bad faith claim where one may well not otherwise exist.  This tactic is designed to pressure the insurer to pay a claim before it has had the full and fair opportunity to investigate it, or risk being painted as failing to settle within the limits after it is too late.   It is also the subject of an earlier  post  on how to defend against them.
  2. Refusal to Reduce A Policy Limits Demand – An intractable policy limits demand by an insured can be the functional equivalent of a “low-ball” settlement offer from the insurer.   In Pennsylvania, for example, courts have held that a limits demand by an insured can be tantamount to expressing no interest in compromise, which in turn may relieve the insurer of settlement responsibility.  Zapille v. Amex Assurance,  2007 WL 1651271 (Pa. Super. 2007)  As a result, an insured’s failure to contribute to a settlement-conducive environment is relevant to bad faith analysis.
  3. Delay – This one is the easiest to spot among The Big Six,  and relatively easy to prove.   Most courts consider the insured’s responsibility for delaying the life span of an insurance claim in bad faith litigation. Some courts have gone so far as to say that an insurer has a reasonable expectation that information requested will be provided promptly and accurately.  Delay which may be considered reverse bad faith is not merely calendar delay occasioned by the insured’s failure to respond, it can also be delay cause by the insured’s giving false, misleading, or partial answers to questions or requests for information. See, e.g., Sadel v. Berkshire Life Insurance Company of America et al., No. 09-612, 2011 WL 292239 (E.D. Pa. Jan. 31, 2011).
  4. Failure To Cooperate In Investigation – this is a close cousin of delay.  Non-cooperation is often most seen in an insured’s failure to produce medical authorizations, requested medical, wage, and property records, or the failure to  submit to an examination under oath, or an independent medical examination.
  5. Inconsistent, Exaggerated, and Untruthful Information – If an insured presents answers for information at various times which conflict with each other, or are plainly exaggerated or not truthful, this is fairly reliable evidence of reverse bad faith.  At a minimum, it may justify the insurer’s denial of a claim, extension of investigation, or lower settlement offer.
  6. Is The Insured Represented? – While this red flag is not intended to paint all practitioners with  the same broad brush, it would be foolish not to identify this factor as a potential red flag in the ferreting out of reverse bad faith.  I have lost count of the number of depositions of insureds I have taken in which I receive only a blank stare in response to the questions, “Do you know what bad faith is?” or “Can you tell me how the insurer committed bad faith in the handling of your insurance claim?” Insureds in and of themselves are not prone to the advocacy which tends to present itself when a trained legal professional has a contingent interest in the outcome of an insurance claim.

If any of these six factors are present in an insurance claim, it could well be that there may be some conduct on the part of the insured which the fact finder should consider in the bad faith analysis.

For more information on identifying and defending against reverse bad faith in the claims process, reach me at chaddick@dmclaw.com or 717-731-4800.

Bad Faith Expert Permitted To Testify Against Progressive, Judge Rules

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KANSAS CITY, Kan., March 9 – A Kansas federal judge has ruled that an expert may testify on Plaintiff’s behalf in a bad faith case against Progressive Insurance, and that the expert can criticize Progressive’s handling of a third party auto liability claim.

In Grant M. Nelson v. Progressive Northwestern Insurance Co., No. 15-7454, D. Kan.; 2016 U.S. Dist. LEXIS 28952, District Judge John W. Lungstrom denied Progressive’s motion to preclude the Plaintiff’s expert from testifying.  Nelson sued Progressive for bad faith in the handling of his third party claim after suing and obtaining an excess verdict against a Progressive insured for personal injuries sustained in a car accident.

Progressive’s insured, Hardacre, had a $50,000 policy limit.  Following non jury trial of the personal injury case, a   state court awarded Nelson more than $530,000.  During the underlying case, Progressive offered the policy limit on Hardacre’s behalf, but Nelson declined to accept it, demanding $1 million.  Hardacre also assigned his rights against Progressive to Nelson in exchange for Nelson’s agreement not to collect against Nelson.

Nelson sued Progressive for bad faith in state court, and Progressive removed to federal court.   In the case, Progressive sought to bar opinion evidence from Plaintiff’s expert Jim Leatzow.  Judge Lungstrum rejected Progressive’s claim that Leatzow was unqualified because he had no specific auto claims handling experience.  He also rejected Progressive’s contention that Leatzow, in opining that Progressive’s investigation was insufficient, did not consider all relevant material in the claims investigation.  The judge wrote:

“Mr. Leatzow’s failure to find fault with every investigative step actually taken by Progressive is not remarkable and does not provide a basis for exclusion. Progressive will be free to cross-examine Mr. Leatzow at trial concerning the weight he gave to particular facts in forming his opinions, and the Court will assign only such weight to those opinions as warranted by the evidence. The Court denies Progressive’s motion to strike.”

While conceding the Plaintiff’s bad faith case was weak, the judge also denied Progressive’s motion for summary judgment in the bad faith case on the merits:

“there is at least some evidence that could support a finding that some percentage of fault would have been apportioned to Ms. Hardacre… the seriousness of plaintiff’s injury meant that even a small allocation of fault to Ms. Hardacre could have exhausted the policy limit of $50,000, leaving the possibility of an excess judgment. Thus, viewing the evidence in the light most favorable to plaintiff, the Court concludes that a question of fact remains concerning whether Progressive acted negligently or in bad faith in handling the claim and in failing to attempt to secure a settlement for the policy limit to protect the interest of its insured.”

The judge also ruled that Progressive’s tender of the limit did not moot the bad faith claims made by Nelson.

Grant M. Nelson v. Progressive Northwestern Insurance Co., No. 15-7454, D. Kan.; 2016 U.S. Dist. LEXIS 28952

 

Wyoming Refinery Bad Faith Claim Against Swiss Insurer To Continue

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WYOMING, March 11 –  A Wyoming federal judge ruled that a unit of Sinclair Oil  Corp. can maintain a bad faith claim against insurer Infrassure Ltd.  under Wyoming law, although the judge has ruled that New York law controls the companies breach of contract claim.

U.S. District Judge Nancy D. Freudenthal denied motions to dismiss filed by Infrassure, of Switzerland, which sought dismissal of  Sinclair Wyoming Refining Co.’s bad faith and declaratory judgment claims.  Judge Freudenthal wrote:  “The court finds that Wyoming law would apply to Sinclair’s bad faith claim because the choice of law language in the [insurance program] is narrow and does not include issues arising related to the performance of the contract.”New York law would have been far more restrictive of the bad faith claim.

The coverage dispute arises out of a  September 2013 explosion at a Sinclair refinery in Sinclair, Wyoming.  Sinclair alleges it lost $150 million in property damage and lost income.  Under Sinclair’s insurance program, Infrassure owes 7.5% of the claim, or about $4.5 million. Infrassure hasn’t payed anything on the claim yet, according to Sinclair,

Judge Freudenthal did not agree with Infrassure that the bad faith claim was controlled by New York Law because it was “inexplicably intertwined” with Sinclair’s contractual claims. She ruled that the policy’s choice of law provision did not preclude Wyoming law from applying to the bad faith claim:

 “Even if language requiring ‘construction and interpretation’ of the contract under New York law applied, the application of New York law prohibiting an independent claim for bad faith would be contrary to a fundamental policy in Wyoming, which based on the allegations in the pleading has a materially greater interest than New York in the determination of this issue.”

The case is Sinclair Wyoming Refining Co. v. Infrassure Ltd., case number 2:15-cv-00194, in the U.S. District Court for the District of Wyoming.

Third Circuit: No Coverage Owed In IP Battle

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PHILADELPHIA, March 10 – The U.S. Court of Appeals for the Third Circuit has affirmed judgment for insurer USLIC, holding it has no duty to defend or indemnify its insured in an battle over appropriation of computer software /  intellectual property.

In Hammond v. USLIC, the Plaintiff, Hammond, entered into a working relationship with TCA and LANTek to develop hazmat transportation compliance software.  After a dispute arose and the companies filed a declaratory judgment action against Hammond alleging misappropriation and infringement, Hammond tendered responsibility for his defense and indemnification to USLIC under Businessowners’, Technology and Professional Liability, and Malicious Prosecution endorsements to his USLIC policy.  USLIC denied coverage, relying in part on a policy exclusion disclaiming coverage for the alleged infringement of patent, copyright, and other intellectual property rights.  Hammond then filed breach of contract and bad faith claims against the insurer.

Judge Arthur Schwab of the U.S. District Court for the Western District of Pennsylvania granted USLIC’s motion for judgment on the pleadings after undertaking analysis of the civil action filed by TCA and LANTek against Hammond.   The Third Circuit affirmed, finding that while the policy did afford Hammond coverage for “personal advertising injury” claims and claims of “malicious prosecution,”  the request in the underlying suit for statutory attorneys fees arose out of patent and trademark issues, not claims of malicious prosecution.   The Court also held that the intellectual property infringement exclusion of the policy supported USLIC’s denial of coverage.

The Court affirmed dismissal of Hammond’s follow-on bad faith claim as well.

Hammond v. USLIC (3rd Cir., March 10, 2016)

Insured’s Failure To Cooperate In Corvette Theft Claim Dooms Bad Faith Case in Mississippi

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ABERDEEN, Feb. 26 – An insured’s failure to cooperate in the investigation of the claimed theft of his Corvette entitled his insurer to judgment as a matter of law on coverage and bad faith claims, a Mississippi federal judge has ruled.

In Holt v. Victoria Fire & Casualty Company, Plaintiff Eddie Gray Holt claimed his 2008 Corvette was stolen from an Alabama parking lot where it was left overnight, and filed a theft claim with his insurer, Victoria.  Because video surveillance of the parking lot did not show the presence or the theft of the car, Victoria sought Holt’s Examination Under Oath, and requested in writing that he bring to the examination documentation, including documentation regarding his finances, income, and expenses.

At his examination, Holt refused to produce the requested documents, and refused to answer certain questions.  After Victoria denied his claim, he filed a breach of contract and bad faith suit, after which Victoria moved for summary judgment on grounds that Holt breached several contractual duties in the policy, most notably his contractual duty to cooperate in the investigation of any claim.

After reviewing not only the applicable policy language but Mississippi common law, U.S. District Judge Carlton Reeves ruled that Holt’s refusal to cooperate in the investigation voided the policy, and entered judgment for Victoria on breach of contract and bad faith claims.

Holt v. Victoria Fire & Casualty Co., (N.D. Miss., March 3, 2016)

Use Privilege Logs To Win Bad Faith Discovery Battles

Privilege-log

There is no more critical or touchy stage of discovery in a bad faith case than the request for the claims file.  It will color the rest of the discovery course, including, most notably, depositions of claims personnel.  Inevitably the request for the file comes, seeking every bit of data, electronic and hard copy, which ever existed in the claims file.  The request contains no restrictions, and no reasonable bounds – the bane of insurance company counsel’s existence.  How to respond, yet again, without having to fight World War III?

A well-prepared privilege log provides insurance company counsel with an opportunity to frame and present argument on discovery motions before they are ever filed.  And yet this opportunity is overlooked — passed over for  rote, form privilege log entries like “Not Discoverable:  Attorney Client Privilege” and the like.  These bland entries will neither  satisfy plaintiff’s counsel, nor a judge.  So take a step back and look differently at the privilege log which accompanies your initial  claims file production.  Look at the opportunity as a chance to file a free discovery brief, and treat it as such.  Get the jump on making valid arguments to protect those portions of the claims file which need not be disclosed under the applicable jurisdiction’s discovery law.

First, a quick look at an example regarding the discovery of claims reserve information, and then a review of the basic elements of privilege log entries which will persuade judges and protect portions of the insurer’s claims file:

Bad Privilege Log Entry Example:  “Objection.  Claims Reserves Are Not Discoverable”

Much Better Privilege Log Entry Example:  “Reserve information is non-discoverable work product and/or is irrelevant and disclosure of information will not lead to admissible information. See, Safeguard Lighting Sys. , Inc. v. N.Am. Specialty Ins., 2004 WL 3037947 (E.D.Pa. 2004); Union Carbide Corp. v. The Travelers Indemnity Co., 61 F.R.D. 411 (W.D.Pa. 1973); Fidelity & Deposit Co. of Maryland v. McCulloch, 168 F.R.D. 516 (E.D.Pa. 1996); and Williams v. Nationwide Mut. Ins. Co., 750 A.2d 881 (Pa.Super. 2000). Reserving is an insurance accounting instrument largely designed for purpose of regulatory compliance, and not evidence of an insurer’s opinion as to either the actual value or settlement value of the claim.  See, id.”

The differences in the two privilege log entries is apparent, but it is not simply the size — don’t confuse length with persuasive substance.  The better privilege log entry contains the following elements:

  • specific reference to the discovery sought, identifying it with as much particularity as possible;
  • Comprehensive statement of case law and rule of procedure which supports insurance company counsel’s position that the discovery sought is protected from discovery.
  • Where possible, additional identification of important public policy principles which weigh in favor of protecting the discovery sought.  Common sense and logical arguments can also appear here.

In addition to providing a jump on the opposition should the dispute make its way to a judge, it demonstrates to the reviewing judge that the objections were not “knee-jerk” or form objections not worthy of the judge’s consideration.  It sets up the insurer’s counsel as credible and thoughtful in the mind of the Court , which will not hurt the insurer, of course.

Good insurance company counsel do not look at privilege logs as merely something to be thrown together as part of preparing discovery answers.  They look at logs instead  as an opportunity to advocate for the protection of discovery at a key point in the bad faith or coverage case.

CJH

 

 

 

 

Delaware: Bad Faith Limitations Period Starts Only Upon Excess Judgment

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NEWARK, DE., March 4 – The Delaware Supreme Court has ruled that a third party  bad faith cause of action does not begin to run for statute of limitations purposes until the underlying excess judgment upon which the claim is based becomes final.  In Connelly v. State Farm Mut. Auto Ins. Co., the Court found that such an approach “conserves litigant and judicial resources,” and that the rule permitted an insured to plead requisite damages, “which she cannot do before there is a final excess judgment against her.”

In Connelly, State Farm’s insured, Brown, rear ended Connelly, who sued Brown.  In May 2011, Connelly offered to settle with Brown for $35,000 of Brown’s $100,000 per per son liability limit, which State Farm declined on Connelly’s behalf.  State Farm stipulated to Connelly’s negligence at trial and the jury awarded Connelly nearly $225,000.   That judgment became final on April 29, 2012.

After State Farm paid only half the judgment, Connelly sued State Farm as a judgment creditor on September 3, 2014 , claiming among other things bad faith.  The Delaware Superior Court dismissed the complaint, ruling that the claims were untimely, the applicable three year statute of limitations having begun to run from the date of State Farm’s alleged wrongful act of  declining the settlement in May of 2011.

The Supreme Court reversed, and in so doing conducted an extensive survey of the precedents in other states, as well as leading insurance treatises to arrive at the result.  It also point out that the ruling was consistent with the Delaware Corporate code and Chancery Court decisions  which provide that indemnity claims  to not accrue until there is a final judgment.

Connelly v. State Farm Mut. Auto Ins. Co., (Delaware March 4, 2016)