South Carolina Code Does Not Invalidate Notice and Cooperation Clauses

In late July, the South Carolina Supreme Court handed down a helpful ruling for insurers when it held that, if an insured fails to give notice to his automobile insurer of a pending claim, the insurer may deny coverage above statutory limits upon a showing that it was substantially prejudiced by its insured’s failure to comply with the standard notice clause in the policy. Neumayer v. Philadelphia Indem. Ins. Co., — S.E.2d —, 2019 S.C. LEXIS 67, at *17 (S.C. July 24, 2019).

The case involved a motor vehicle accident where a pedestrian, Andrew Neumayer, was struck by a bus driver, suffering severe injuries. Neumayer filed suit against the bus driver who then failed to answer the complaint, and after eighteen months, the clerk entered a default in the amount of $622,500. Upon discovery of the existence of the lawsuit, the bus driver’s insurance company, Philadelphia Indemnity Insurance Company, refused to pay the default, instead arguing that its liability was limited to the statutory financial responsibility limit of $25,000 because it was substantially prejudiced by its insured’s failure to notify it of the suit.

Neumayer sought, and received, a declaratory judgment awarding him the entire amount of the default.  He relied on South Carolina Code Ann. § 38-77-142(C), which provides that “[a]ny endorsement, provision, or rider attached to or included in any policy of insurance which purports or seeks to limit or reduce the coverage afforded by the provisions required by this section is void.” § 38-77-142(C).  Neumayer argued this provision invalidated the notice clause in the insurer’s policy which stated:

Duties in the Event of Accident, Claim, Suit or Loss

We have no duty to provide coverage under this policy unless there has been full compliance with the following duties:

a.     In the event of “accident”, claim, “suit” or “loss”, you must give us or our authorized representative prompt notice of the “accident” or “loss.” . . .


b.     Additionally, you and any other involved “insured” must: . . .


c.     Immediately send us copies of any request, demand, order, notice, summons or legal paper received concerning the claim or “suit”

The insurer appealed the ruling, arguing that Neumayer’s interpretation of the Code’s section would prevent an insurer from any recourse in the event its insured never notified it of a lawsuit, resulting in substantial prejudice to an insurer.

The Court stated that, while the statute seeks to protect an insured from language in an automobile insurance policy that would otherwise void coverage, “the General Assembly did not intend to eviscerate settled law concerning notice clauses.” Neumayer, 2019 S.C. LEXIS 67, at *15. The Court, therefore, reversed the declaratory judgment, finding that § 38-77-142(C) does not serve to invalidate notice and cooperation clauses.  Insurers must provide statutorily-mandated minimum coverage for third-party losses.  However, an insurer may rely on the clauses contained within its policy to deny coverage above statutory limits, upon a showing that the insurer was substantially prejudiced by its insured’s failure to comply with the provision.  In this case, where a default judgment was entered, the Court agreed that the insurer was substantially prejudiced.

As discussed by the Court, notice and cooperation provisions are included in nearly every insurance policy. They require an insured to timely notify its insurer at the outset of a lawsuit filed against an insured, and the importance of these provisions cannot be understated. An insurer should only be required to pay a judgment involving an insured’s auto accident and a state’s financial responsibility statute, up to the statutory financial limit. And in some states, a default judgment with no notice to the insurer may mean an insurer does not have any legal obligation to pay the judgment.

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Form and Substance: The Importance of Conducting a Proper Investigation of First-Party Claims Under California Law

A bad faith claim against an insurer often focuses as much on the process of a claims investigation as it does on the substance of a claims decision itself. If the coverage decision was wrong (but not unreasonable), and the investigation was thorough, there may be liability for breach of contract, but there is a reduced risk of liability for bad faith. In contrast, if the coverage decision was wrong, and the insurer also failed to investigate the claim properly, there is a heightened risk of bad faith. Because of this, a proper investigation of the claim is vital to preventing (or defeating) an insured’s bad faith claim.

Egan v. Mutual of Omaha Insurance Company, 24 Cal.3d 809 (1979), is the seminal case in California that addresses an insurer’s duty to conduct a proper investigation, and the resulting bad faith liability that can result from an inadequate investigation. In Egan, the dispute involved a disability insurance claim in which the insurer reclassified its insured’s condition as an “illness” rather than an “injury.” This decision reduced the available benefits under the policy. In reaching this decision, the insurer relied solely on the review of available medical records and made no effort to speak to the insured’s doctors or even have the insured examined by a doctor of the insurer’s own choosing. As the Court explained, to protect an insured’s interests, “it is essential that an insurer fully inquire into possible bases that might support the insured’s claim.” The Court further explained that “[a]lthough we recognize that distinguishing fraudulent from legitimate claims may occasionally be difficult for insurers . . . an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” The Court ultimately held that “the evidence is undisputed that Mutual failed to properly investigate plaintiff’s claim; hence the trial court correctly instructed the jury that a breach of the implied covenant of good faith and fair dealing was established.”

Numerous California cases have followed Egan, finding that an inadequate investigation can lead to bad faith liability. For instance, in Jordan v. Allstate Insurance Company, 56 148 Cal.App.4th 1062 (2007), the California Court of Appeal reversed summary judgment in favor of the insurer, in part because, based on the particular facts of the case, the insurer had failed to conduct “a full, fair and thorough investigation of all of the bases of the claim that was presented.” Specifically, the insurer failed to do a number of things as part of its investigation, including: retaining an engineer to inspect the property, inspecting the inner walls and subflooring of the home despite potential coverage for hidden decay, interviewing the insured, and interviewing the insured’s expert.

In any claim, an insurer and its employees must be mindful of the requirement to conduct a proper investigation. While the scope of the necessary investigation will vary by claim, adjusters should follow the company’s established investigation procedures, and also use their common sense. If the claim involves structural damage where causation is an issue, then consider hiring a qualified structural engineer and if you don’t, then document why an engineer was not needed. If the claim involves a disability, consider retaining a medical expert. If it’s a car accident, make sure to interview witnesses. And no matter what, review all the information provided by the insured and request additional information if necessary. A full and fair investigation can go a long way in preventing a bad faith claim.

If you’re interested in learning more about this topic, and other tips to avoid bad faith claims, we are hosting a webinar on July 24, 2019. Click here to register.

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Store Display Can Be An “Advertisement” Under Coverage B

In Hershey Creamery Company v. Liberty Mutual Fire Insurance Company and Liberty Insurance Corporation, No. 1:18-CV-694, 2019 WL 1900397 (M.D. Penn. May 6, 2019) the court found that a self-serve milkshake machine and related display could constitute an “advertisement” for purposes of insurance coverage, and Hershey was owed a defense for claims alleging patent and trademark infringement of f’real Foods LLC’s (“f’real”) similar machine and display. F’real developed a display kiosk with a blender atop a merchandizing freezer with a see-through glass door. Its milkshake products are displayed in cylindrical sealed cups arrayed in rows and columns within the freezer. The kiosk prominently features f’real’s name with advertising slogans such as “Blend a F’REAL…for REAL” or “REAL Milkshakes, REAL good.” The word “REAL” is a prominent feature of f’real’s advertising.

Hershey packed its competing frozen milkshakes in plastic containers of comparable size and shape and sold the products in kiosks that closely mimicked those developed by f’real. The Hershey milkshake containers made prominent and repeated the use of the word “REAL” in all capital letters, including “REAL MILKSHAKE” and “REAL ICE CREAM.”

Hershey’s general liability policy excluded coverage for injuries stemming from intellectual property infringement, but included exceptions (and thus expressly provides coverage for) injury from infringement of another’s “advertising idea” or “copyright, trade dress or slogan” in Hershey’s “advertisement”. The parties disputed whether the signage on the purportedly infringing kiosks was an “advertisement”, which the policy defined as “a paid announcement that is broadcast or published in the print, broadcast or electronic media.” Hershey argued that the phrase “published in the print media” is broad enough to include slogans published on in-store advertising signage—or at least is ambiguous and should be construed in Hershey’s favor. The court agreed. The allegations made clear that f’real believed Hershey infringed on its advertising ideas and slogans and specifically did so in the context of advertising for competing blending machines and milkshakes located in convenience stores.

The court found a sufficient nexus between advertising and injury to trigger a duty to defend. The court also determined that the insurer violated its obligations under the policy because it wrongfully withdrew from defending Hershey. Interestingly, the court noted that Hershey pled that it suffered injury from the insurer’s withdrawal and refusal to defend, but did not prove any damages.

The takeaway good faith practice tips for insurers assessing personal or advertising injury claims are threefold. First, understand the policy’s definition of “advertisement.” Second, recognize that a defense is owed if, resolving all doubts in favor of the insured, it is possible that a claim as alleged falls within the policy’s definition of “advertisement.” And finally, consider filing a declaratory judgment suit where defense obligations are unclear.

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Massachusetts: Third-Party Claim Handler Made Reasonable, Prompt Efforts to Settle Nursing Home Liability Claim, and Therefore Was Not Liable For $14 M Excess Verdict

On March 18, 2019, the First Circuit Court of Appeals affirmed a decision holding that Sedgwick Claims Management Services made reasonable and prompt efforts to settle a nursing home liability claim, and therefore was not liable for a $14M excess verdict despite the fact that the highest pretrial offer Sedgwick made was for $250,000. Calandro v. Sedgwick Claims Management Services, Inc. 2019 WL 1236927, ___ F.3d ___ (2019). In a colorful appellate decision notable for its loquaciousness, the First Circuit observed, “every case has its twists and turns, and an insurance carrier is not to be held to a duty of prescience.” In reaching its decision, the Court further observed that “perfection is not the standard” to demonstrate good faith and affirmed the trial court’s decision finding that Sedgwick had acted reasonably in its investigation and settlement efforts.

The case involved a Radius nursing home incident in which Genevieve Calandro fell from her wheelchair and later died at a hospice facility. Her Estate brought claims against the Radius Nursing Home. Hartford Insurance Company provided $1M in liability coverage to Radius and retained Sedgwick to handle the claim. When Radius was served with the Complaint, it was accompanied by a $500,000 demand. Sedgwick engaged an independent adjuster and defense counsel for Radius, both of whom were tasked with evaluating the claim.

Within two weeks, the independent adjuster reported that the cause of death seemed to be related to ongoing medical conditions, not the fall. He also noted that some of the records were missing from the nursing home file and that he was having difficulty locating witnesses because the facility was closing.

A second report followed within two months and noted that the witnesses had been located and interviewed, but their statements about the incident were inconsistent. In the meantime, the plaintiff had added claims against the treating physician. Seven months after suit was filed, the Medical Malpractice Tribunal reviewed the plaintiff’s claims, and the claims were allowed to proceed. It was at this point that the plaintiff renewed the $500,000 settlement demand and both defendants made a $275,000 offer. At this time, the defense attorney wrote a report projecting potential exposure in the $300,000 to $500,000 range.

The plaintiff then began efforts to settle separately and reached a settlement with the doctor for $250,000, leaving only Radius as a defendant. The plaintiff then increased the demand to $1,000,000 against Radius, and demanded that an offer of at least $500,000 be made within six (6) days or settlement negotiations would be terminated and the case would go to trial. Because the demand was made the day before the Fourth of July holiday weekend, the defense did not see the offer until the day before it expired. Sedgwick made a further offer of $250,000 a few days later. Plaintiff rejected the demand and the case went to a four-day trial, resulting in a $14M verdict for wrongful death and conscious pain and suffering, which was far in excess of the Hartford policy limit of $1M.

After the verdict, the plaintiff’s attorney notified both Hartford and Sedgwick that he intended to bring claims against both under Massachusetts statutes which imposed an obligation of good faith in conducting investigations and settlement negotiations (Chapter 176D and Chapter 93A). Faced with this threat, Hartford reached a settlement with the plaintiff for an undisclosed amount. Sedgwick offered $2M, but its offer was rejected.

Plaintiff then sued Sedgwick in Massachusetts state court and Sedgwick thereafter removed the case to federal court, citing diversity jurisdiction. Plaintiff argued that Chapter 176D imposed a duty on those engaged “in the business of insurance” to handle claims in good faith and to “effectuate prompt, fair and reasonable settlements of claims in which liability has become reasonably clear.” Mass.Gen.Laws. ch. 176D, section 3. Plaintiff argued that Sedgwick had failed in this duty and should be liable for the excess verdict.

A four-day bench trial ended in Sedgwick’s favor, so the plaintiff appealed to the First Circuit. In reviewing the plaintiff’s contentions, the First Circuit observed that “plaintiff comes out swinging” and hopes to “land a knock-out blow” by arguing that liability and damages were clear when the claim was first received by Sedgwick. The Court then observed that “liability is not reasonably clear if an element of the claim is subject to good faith disagreement.” With this framework in mind, the court observed that Sedgwick had promptly investigated, had engaged an adjuster and counsel, had required routine reporting, had hired a medical expert, and had a reasonable basis for contesting causation. Furthermore, Sedgwick made reasonable settlement efforts at appropriate times that fell within the ranges suggested by defense counsel. For these reasons, the court affirmed the lower court’s holding that Sedgwick had not violated Chapter 176D, and therefore was not liable to the plaintiff.

This case is notable in several regards. First, retired U.S. Supreme Court Justice David Souter was part of the panel, sitting by designation. Second, the Court assumed, but did not expressly hold, that Sedgwick was subject to the good faith standards of Chapter 176D because it was “in the business of insurance.” The topic of whether adjusters (and others “in the business of insurance”) are individually subject to good faith standards is currently being considered in Washington state, in Keodalah v. Allstate, where a lower court found an Allstate adjuster personally liable under a similar statute (currently on appeal.)

Finally, the case comes as a relief to those who handle claims to see a court clearly articulating that good faith does not require perfection.

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Georgia Supreme Court Spares Insurance Company from a $5.3 Million Bad-Faith Verdict

Last week, the Georgia Supreme Court confirmed that an insurance carrier’s duty to settle a claim against its policyholder arises only after an injured claimant presents a “valid offer” to settle within policy limits. In First Acceptance Insurance Company of Georgia v. Hughes,[1] the Court found that, because the letter presented to First Acceptance by the injured parties’ counsel was not a time-limited settlement demand, First Acceptance’s failure to respond before the injured parties withdrew their offer did not constitute negligence or a bad faith failure to settle the claim within policy limits.

In 2008, First Acceptance’s policyholder caused a multi-car crash killing the policyholder and injuring five others, including Julie An and her 2-year-old daughter. The policy had the minimum liability limits of $25,000 per person and $50,000 per accident. In January of 2009, First Acceptance’s counsel circulated correspondence to the attorneys for the multiple claimants indicating it was interested in a joint settlement conference to resolve the  injured parties’ claims.  On June 2, 2009, counsel for An and her daughter sent First Acceptance two letters – the first responding to First Acceptance’s suggestion of a joint settlement conference and expressing his clients’ interests in settling their claims within policy limits, and another requesting information about the policy within 30 days of the date of the letter. First Acceptance’s counsel did not view the letters as including a time-limited demand.

As a result of a clerical error, both letters were inadvertently filed away with medical records. When First Acceptance did not respond to either letter within 30 days, claimants’ counsel sent a letter advising First Acceptance that its offer to settle was rescinded. First Acceptance continued settlement efforts by inviting claimants to a joint settlement conference with the other claimants, and offering to settle their claims for policy limits. Claimants rejected the offers.

After a 2012 trial, a jury found in favor of the claimants and against the policyholder awarding over $5.3 million dollars in damages. The policyholders’ estate then sued First Acceptance claiming that First Acceptance’s failure to settle the claims within the policy limits led to the excess judgment. The trial court granted summary judgment to First Acceptance only to have the Georgia Court of Appeals reverse the grant of summary judgment on the failure-to-settle claim.

The Georgia Supreme Court then granted the insurer’s petition for certiorari. First Acceptance argued that an insurance carrier’s duty to settle is not triggered until an injured claimant has made a valid settlement offer. The estate argued that the duty to settle is not dependent on specific language in a letter, rather the duty arises when “an ordinarily prudent insurer, giving its insured’s interests equal consideration to its own interest, would settle.”

The Georgia Supreme Court agreed with First Acceptance in its unanimous decision, stating that an insurer’s duty to settle is not triggered until an injured claimant has made a valid settlement offer. It found that, when considering the two letters sent to First Acceptance on June 2, 2009 as a whole, they did not include a 30-day deadline for acceptance. Instead, the Court viewed the offer to settle for policy limits as an alternative to claimants’ participation in the proposed global settlement conference. Without a clear deadline, First Acceptance could not have reasonably known it needed to respond within a certain time or risk that its insured would be subject to a judgment in excess of the policy limits. Thus, the Court held First Acceptance did not act negligently or in bad faith when it failed to settle the claims within policy limits.

Georgia’s high court also addressed the estate’s argument that First Acceptance knew or should have known that the minor daughter’s injuries were the most severe, and therefore, it should have settled her claim first. The Georgia Supreme Court disagreed with this position, finding that there was no precedent requiring that an insurer settle part of multiple claims. Instead, it found that a settlement of multiple claims including the minor’s claim was in the insured’s best interest as such a settlement would reduce the overall risk of excess exposure.

Ultimately, First Acceptance dodged a $5.3 million dollar bullet with Georgia’s highest court concluding that First Acceptance was entitled to summary judgment and reinstating the trial court’s ruling. This case serves as an important reminder to be cognizant of language in correspondence from injured parties that could be considered to be a valid settlement offer and to diligently calendar response dates and timely respond to such offers.


[1] First Acceptance Insurance Co. of Georgia Inc. v. Hughes, Case No. S18G0517, in the Georgia Supreme Court.

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The Supreme Court of Texas Clarifies That a Party Can Testify as an Expert Witness without Waiving the Attorney-Client Privilege

Litigation usually involves complex issues related to technology, products, or business processes. In many cases, clients are the best subject-matter experts of their craft. Nevertheless, attorneys are sometimes hesitant to designate a client or a client’s employee as an expert witness for fear of waiving attorney-client privilege. In a recent decision, the Supreme Court of Texas addressed this very issue and held that the attorney-client privilege remains unscathed when a party (or its corporate representative) is designated as a testifying expert witness. See In re City of Dickinson, — S.W.3d —, No. 7-0020, 2019 WL 638555 (Tex. Feb. 15, 2019).


City of Dickinson concerned whether a property insurer underpaid insurance benefits related to a Hurricane Ike claim made by the City of Dickinson. In responding to the City’s motion for summary judgment, the property insurer filed the affidavit of its corporate representative who was also a senior claims examiner. Unsurprisingly, the affidavit offered factual and expert testimony in opposition to the dispositive motion. The City later learned the corporate representative exchanged emails and drafts of the affidavit with defense counsel. The City then moved to compel the production of the emails and all other information “provided to, reviewed by, or prepared by or for” the corporate representative in anticipation of his expert testimony. Naturally, the property insurer claimed the documents were protected by the attorney-client privilege. The trial court, however, disagreed and granted the motion to compel. The intermediate appellate court reversed, finding the information sought was privileged.

The Supreme Court of Texas’s Decision

On appeal, the Court addressed whether Texas Rules of Civil Procedure 192.3 and 194.2 barred the property insurer from asserting attorney-client privilege. Rule 192.3 concerns the scope of discovery and provides that, with respect to a testifying expert, “[a] party may discover . . . all documents, tangible things, reports, models, or data compilations that have been provided to, reviewed by, or prepared by or for the expert in anticipation of a testifying expert’s testimony[.]” In construing Rule 192.3, the Court noted that the use of the word “may” merely meant that an opposing party could discover the information—not that it had an absolute right to discover it when a privilege applied. The Court also noted that another subpart of Rule 192.3 expressly precluded the discovery of privileged information.

Rule 194.2 concerns the content of a discovery tool called “requests for disclosure” and provides that, with respect to testifying expert, “[a] party may request disclosure of . . . all documents, tangible things, reports, models, or data compilations that have been provided to, reviewed by, or prepared by or for the expert in anticipation of the expert’s testimony[.]” As with Rule 192.3, the Court explained that the word “may” simply meant that a party could request the discovery. Another subpart of the rule expressly allowed the trial court to limit requests for disclosure, and the official comment to the rule made clear that “requests for disclosure under Rule 194 are subject to the attorney–client privilege just like the provisions of Rule 192.”

The Court also rejected the City’s argument that the Texas Rules of Civil Procedure should be interpreted the same as the pre-2010 Federal Rules of Civil Procedures because they were modeled after them. The Court summarily rejected the argument because the comments to the rules where substantively different.

The Court also distinguished its decision in In re Christus Spohn Hosp. Kleberg, 222 S.W.3d 434 (Tex. 2007). In that case, the Court held that a party was required to produce an investigator’s report provided to party’s expert. The Court explained that Christus Spohn only addressed the work-product privilege—not undisputed attorney-client communications. The Court explained that its holding was consistent with prior decisions, which “underscore the status of the attorney-client privilege as ‘quintessentially imperative’ to our legal system” and that “[w]ithout the privilege, attorneys would not be able to give their clients candid advice as is an attorney’s professional duty.”


City of Dickinson provides clarity in a previously unsettled area of Texas law. Further, it reinforces the importance of the attorney-client privilege and clarifies that a client does not have to choose between testifying as an expert at trial and invoking attorney-client privilege. Going forward, we expect the primary party-expert dispute to center on whether materials provided to the party-expert constitute discoverable work product under Christus Spohn or protected attorney-client privilege under City of Dickinson. Indeed, as the Court noted in its opinion, the two privileges are often conflated.

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In a surprising decision on rehearing, on February 4, 2019, a panel of the Louisiana Third Circuit Court of Appeal reversed itself and held that bad faith claims arising out of an insurance contract are subject to a ten-year prescriptive period rather than a one-year prescriptive period.[1] Fils v. Starr Indemnity & Liability Company, — so. 3d — (La. App. 3rd Cir. 5/9/2018)(on r’hrg), centered on the timeliness of the plaintiff’s bad faith claims against his uninsured motorist carrier. Dissatisfied with the $45,000 that his UM carrier had tendered following a motor vehicle accident on August 28, 2013, the policyholder filed suit against the insurer for additional benefits the day before the expiration of the two-year prescriptive period applicable to claims for UM benefits. Sixteen months later, the insured amended his petition, alleging bad faith on the part of the UM carrier and seeking penalties and attorneys’ fees pursuant to Louisiana’s two “bad faith” statutes, La. R.S. 22:1973 and La. R.S. 22:1892. The trial court sustained the insurer’s exception of prescription and dismissed the bad faith claims with prejudice.

In a decision rendered May 9, 2018, the Third Circuit affirmed the trial court’s dismissal of the insured’s bad faith claims, holding that claims brought pursuant to Louisiana’s bad faith statutes are subject to a one-year prescriptive period. The Court reasoned that an insurer’s duties under the two bad faith statutes are statutory in nature, not contractual, and that because a contractual relationship between a claimant and an insurer is not a prerequisite to actions under the two bad faith statutes, the ten-year prescriptive period for actions on contracts does not apply. In support of its holding that a one-year prescriptive period applied to bad faith claims against insurers, the Third Circuit noted that the Louisiana Supreme Court has never directly addressed whether a one-year or ten-year prescriptive period applies to bad faith claims against insurers and suggested that the Louisiana Supreme Court tacitly agreed that a one-year prescriptive period applied when it denied writs in Labarre v. Texas Brine Company. In the Labarre case the First Circuit Court of Appeal had reversed the trial court’s application of a ten-year prescriptive period and pronounced that a one-year prescriptive period applied to bad faith claims against insurers.

The Third Circuit granted the insured’s application for rehearing and accepted numerous amicus curiae briefs, some urging the Court to maintain its holding that claims asserted under the two bad faith statutes are subject to a one-year prescriptive period and some urging the Court to reverse its decision.   In its opinion on rehearing, the Third Circuit recognized the split between the First and Second Circuit Courts of Appeal regarding the prescriptive period applicable to bad faith claims and closely examined jurisprudence from those courts and from the United States District Court for the Eastern and Western Districts of Louisiana.

The Third Circuit emphasized that prior to the enactment of the two bad faith statutes, Louisiana courts routinely imposed liability upon insurers for failing to act in good faith and in the best interests of their insureds. The Court also focused on a twenty-four year old pronouncement by the Louisiana Supreme Court that the enactment of the bad faith statute was a recognition of the duty of good faith and fair dealing that had been established by the Courts – a duty that was based on the contractual and fiduciary nature of the relationship between the insurer and the insured.   The Third Circuit determined that all of the insurer’s obligations to the insured in this case arose out of the contract between them that provided for UM benefits and that the insured would not have had any claims against the insurer in the absence of such a contract. The Court held that “[b]ecause any bad faith on an insurer’s part is a breach of a contractual duty, it necessarily follows” that bad faith claims are contractual in nature and therefore subject to a ten-year prescriptive period. The Court also determined that it would be “nonsensical” to apply a one-year prescriptive period for bad faith claims when causes of action for UM benefits are subject to a two-year prescriptive period as such an application would potentially require claimants to file bad faith claims before the running of prescription on the underlying claims.

It is crucial to note that the ten-year prescriptive period will not apply to all bad faith insurance claims in the Third Circuit. The Court recognized that whether a claim is based in contract or tort is determined by the nature of the duty breached and that there may be instances where the bad faith alleged on the part of the insurer is based in tort rather than on the insurance contract, such as a violation of an insured’s privacy rights through an abusive investigative process. However, the Third Circuit emphatically and unequivocally held that when a claimant’s bad faith claims are based on the breach of obligations the insurer assumed in the insurance contract, the Court will apply a ten-year prescriptive period to those claims. The UM carrier has applied for rehearing by the Court en banc. Regardless of any decision by the Court en banc, this significant split among the circuit courts of appeal as to the correct prescriptive period applicable to bad faith claims is one practitioners expect to be appealed to the Louisiana Supreme Court and that should be ripe for the Court to accept. Cozen O’Connor will continue to what and report on this significant Louisiana limitations issue.

[1]              Louisiana has prescriptive periods instead of statutes of limitations.

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In Rhode Island, No Duty of Good Faith to Third Party Claimant

In Summit Insurance Company v. Stricklett, — A.3d —, No. 2017185APPEALPC12536, 2019 WL 190358, (R.I. Jan. 15, 2019), the Supreme Court of Rhode Island held that – similar to many jurisdictions – the duty to act in a reasonable manner and in good faith settling a claim does not run to the claimant absent an assignment from the insured.

The facts of Stricklett are simple. Mr. Stricklett’s vehicle was insured by Summit under a policy with a $25,000 per person, $50,000 per accident coverage limit. In 2002, Stricklett allegedly collided with eleven-year-old Scott Alves, requiring that Alves undergo medical treatment. Alves’s parents submitted the medical bill to Summit Insurance Company, who investigated the incident and determined that Stricklett was not at fault and therefore no payment would issue. This ended the matter until 2011, when the Alveses submitted to Summit a medical bill for roughly $80,000 and made a settlement demand of $300,000. Summit, in turn, offered to pay the per-person policy limit of $25,000. The Alveses rejected the offer and sued Summit. Summit filed a declaratory judgment action seeking a determination that it owed no duty to pay anything beyond its policy limit.

The Trial Court Justice found that (1) Rhode Island’s rejected settlement offer statute was inapplicable because the Alveses had never, as the statute requires, offered to settle at or below policy limits; (2) no evidence suggested that Summit failed to properly investigate the Alveses claim; and (3) an insurer owes duties to its insureds, to its shareholders, and to third parties “to act in a reasonable manner and in good faith” when settling claims against its insured.

On appeal, the Supreme Court affirmed the decision, but – importantly – rejected the third finding of the Trial Court Justice. The Alveses seeking to rely upon a prior Supreme Court decision argued that an insurer owes a good faith duty to a third-party claimant. The Supreme Court rejected this argument, clarifying that a third party may have a claim for breach of extracontractual duties against an insurer only where: (1) the insurer failed to adequately contemplate settlement and (2) the insured assigned its rights against the insurer to the third party. Asermely v. Allstate Insurance Co., 728 A.2d 461 (R.I. 1999).

In Stricklett, no settlement offer for policy limits was ever made and no assignment of rights ever took place. Therefore, the Supreme Court affirmed the judgment of the trial court but sharply limited the trial court’s opinion that Summit owed a duty to third parties. The Supreme Court explained “that this kind of duty on the part of the insurance company to third parties would expand an insurance company’s potential liability under Asermely too far and essentially announce a new, judicially-created cause of action.”

The big takeaway: Under Rhode Island law, insurers do not owe a duty to third parties absent an assignment.

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Progressive recently settled a bad faith lawsuit with the guardians of a child injured in a car accident driven by a Progressive policyholder, Earl Lloyd. Progressive faced liability for an underlying judgment in excess of $22 million against Lloyd, who had purchased a $10,000 auto policy from Progressive. The bad faith lawsuit alleged that Progressive failed to advise its insured regarding the significance of executing a financial affidavit. Had the insured executed the financial affidavit, the claimant allegedly would have accepted the insured’s $10,000 policy limits in exchange for a release of Lloyd. The case, Wallace Mosley v. Progressive American Insurance Company, was set for trial beginning December 10, 2018 in the U.S. District Court for the Southern District of Florida before Judge Beth Bloom.

On November 25, 2018, Judge Bloom denied Progressive’s motion for summary judgment, finding there were questions of fact as to whether Progressive breached its duty of good faith to Lloyd by failing to advise him of the consequences of not signing the financial affidavit. Mosley by & Through Weaver v. Progressive Am. Ins. Co., No. 14-CV-62850, 2018 WL 6171417 (S.D. Fla. Nov. 25, 2018). The court explained that because the focus is on the conduct of the insurer, the reasons why Lloyd refused to sign the affidavit were irrelevant. Other alleged failures on the part of Progressive also led to the court’s decision.

The Underlying Case

The $22.7 million underlying trial court judgment arose out of an auto accident that occurred in November 2008, when Lloyd struck an 11-year-old boy, Wallace Mosley, who was riding a scooter into the roadway. Lloyd failed to report the accident to Progressive. Progressive learned about the accident nearly 10 days later from Rosa Lopez, an attorney representing a relative of Mosley. Lopez provided a copy of the police report to Progressive which indicated Mosley was struck by Lloyd who was “traveling at a high rate of speed.” Mosley was thrown approximately 100 hundred feet.

Progressive assigned the matter to its claims professional, who made several attempts to contact Lloyd. Progressive subsequently issued a reservation of rights letter to Lloyd based on his failure to notify Progressive of the accident. Progressive did not, however, deny coverage. On December 4, 2008, without the benefit of any communications with Lloyd, any medical records, or even a settlement demand, Progressive tendered Lloyd’s $10,000 policy limits to Mosley’s counsel. Four days later, on December 8, 2008, Lloyd finally contacted Progressive.

On December 9, 2008, Lopez sent Progressive a 12-page financial affidavit as a condition of settlement. The cover letter advised that if the affidavit revealed no visible assets, Mosely would execute a release and settle the claim; absent execution within two weeks, suit would be filed. Progressive contacted Lloyd and forwarded the affidavit on the same day it was received. Despite the contemporaneous call notes in Progressive’s claim file reflecting communications about the affidavit, Lloyd contended that, other than the transmittal, Progressive did not advise Lloyd of the consequences of not signing the affidavit; nor did Progressive send him an “excess letter” explaining that he could be exposed to liability in excess of the policy limits. Lloyd, who believed he was a “Sovereign Citizen of Moorish Descent,” refused to sign the affidavit based on his moral and religious beliefs.

On May 5, 2009, Mosley filed suit against Lloyd. Lloyd again failed to notify Progressive that he had he had been served with a complaint. Progressive learned of the suit from claimant’s counsel and immediately retained defense counsel to represent Lloyd. Defense counsel made several efforts to meet with Lloyd to discuss the affidavit. Despite ultimately meeting with defense counsel, Lloyd still refused to execute the affidavit. During his deposition in the underlying case, Lloyd testified that he was an Apostle of God who had previously raised people from the dead, that he had sovereignty because of his Moorish beliefs, and that he was immune from suit brought by the claimant.

The matter proceeded to trial in October 2014, and a $22.7 million judgment was entered against Lloyd. Lloyd subsequently entered into an agreement with Mosley assigning his bad faith claim against Progressive in exchange for an agreement not to execute the $22.7 million judgment.

The Bad Faith Case

On May 5, 2009, Mosley filed suit against Progressive for third party bad faith. Progressive moved for summary judgment, claiming it properly advised Lloyd and asserting Lloyds’ stated religious beliefs as the reason why the affidavit was not executed. The court denied Progressive’s motion, explaining that under Florida law, Progressive has a “fiduciary relationship” with its insureds, which requires it to refrain from acting solely on the basis of the its own interests. Importantly, the court noted that “Progressive did not send Lloyd any written communications explaining the significance of the Affidavit or the potential of an excess judgment being placed against him personally during the critical 14-day deadline,” nor did Progressive advise Lloyd of the steps he might take to avoid an excess judgment, as required by Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980).

While the court acknowledged that Lloyd’s assertion of sovereignty “may be a factor to consider,” the court determined Progressive was not entitled to summary judgment in light of Lloyd’s arguably self-serving testimony that had Progressive properly advised him, he would have signed the affidavit. The court explained: the “focus in a bad faith case is not on the actions of the claimant but rather on those of the insurer in fulfilling its obligations to the insured.” Berges v. Infinity Ins. Co., 896 So. 2d at 677 (Fla. 2004).

Less than two weeks after the court issued its summary judgment ruling, Progressive settled the matter.

This case is yet another example, in the wake of the Florida Supreme Court’s ruling in Harvey v. GEICO Gen. Ins. Co., No. SC17-85, 2018 WL 4496566 (Fla. Sept. 20, 2018), of a $10,000 policy ballooning to one with significantly higher limits, for which the insured did not pay a premium.

The case further emphasizes the heightened duties some states, including Florida, impose on insurers to adequately advise policyholders of the consequences of litigation, particularly in matters with potentially great exposure and low policy limits, and confirming that advice in writing.

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From Birdseed to Crop Dusting, Liability-Triggering Event Determines Number of Occurrences

Texas applies the “cause” test to determine the number of accidents or occurrences, but its emphasis on the “liability-triggering event” requires an analysis of intervening causes. The Fifth Circuit Court of Appeals doubled-down on its focus on the liability-triggering event, reversing the trial court and finding a truck driver’s negligent operation of his vehicle that caused multiple collisions (four autos and a toll plaza booth) was one accident for purposes of liability insurance in Evanston Ins. Co. v. Mid-Continent Cas. Co., —F.3d.—, No. 17-20812, 2018 WL 6037507. The court acknowledged that the analysis espoused in Pincoffs[1] and Goose Creek[2] (i.e., count the number of acts by the insured that give rise to liability) is incomplete because it does not address what level of generality (or specificity) defines the insured’s actions. The district court found the insured did not become liable to anyone until his truck collided with that person’s vehicle (or toll booth) and therefore, conceptualized each collision as a separate event giving rise to liability.

The Fifth Circuit disagreed, finding the appropriate inquiry is whether there is one proximate, uninterrupted, and continuing cause that resulted in all of the injuries and damage. The court relied on the analysis by the San Antonio appellate court in Foust v. Ranger Ins. Co.[3] In Foust the insured’s crop dusting process took almost three hours and required the insured to land the plane several times to refuel, during which time, the temperature, wind and altitude varied during several passes over different sections of property. Even so, the damage to the neighboring properties was caused by the crop dusting—one “occurrence.” In contrast, an employee’s sexual abuse of two different children a week apart constituted two “occurrences” because the immediate cause of the damage was an intervening intentional tort, which broke the chain of causation.[4]

Applying the Foust analysis to the facts before it, the Fifth Circuit noted that the truck driver did not regain control of his truck and there was no indication that the driver’s negligence was interrupted between collisions. Finding that the ongoing negligence of the runaway truck was the single “proximate, uninterrupted, and continuing cause” of each of the collisions, the court determined that all of the collisions resulted from the same continuous condition—the unbroken negligence of the truck driver.

The lesson here is that in order to determine the number of “occurrences” in analyzing a general liability policy under Texas law, the focus is on the general cause of the insured’s liability, and only if a secondary intervening cause interrupts the continuing cause of the insured’s liability will there be more than one occurrence.

[1] Maurice Pincoffs Co. v. St. Paul Fire & Marine Ins. Co., 447 F.2d 204 (5th Cir. 1971).

[2] Goose Creek Consol. ISD v. Cont’l Cas. Co., 658 S.W.2d 338 (Tex. App. 1983).

[3] 975 S.W.2d 329, 333 (Tex. App.—San Antonio 1998, pet. denied).

[4] See, H.E. Butt Grocery Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 150, F.3d 526, 534 (5th Cir. 1998).

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Avoiding Insurance Bad Faith
Cozen O’Connor represents insurance clients in jurisdictions throughout the U.S. against statutory and common law first- and third-party extracontractual claims for actual and consequential damages, penalties, punitive and exemplary damages, attorneys’ fees and costs, and coverage payments. Whether bad faith claims are addenda to a broader coverage matter or are central to the complaint, Cozen O’Connor attorneys know how to efficiently respond to extracontractual causes of action. More
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