Alaska Creates Exception to General Rule that Injured Party Cannot Sue Insured’s Carrier

The Supreme Court of Alaska in Burnett v. Government Employees Insurance Company, 2017 WL 382648 (Alaska 2017) recently decided in a 3-2 decision that an insurer who voluntarily assumed the responsibility for cleaning up an oil spill on a third party’s property caused by its insured may become liable to that third party if it does not correctly handle the cleanup operations. GEICO argued that its obligations to its insured effectively negated any responsibility to third parties for improperly performing that clean up duty. The Court, over a strenuous dissent, rejected GEICO’s argument holding that an insurer who undertakes an independent obligation to a third party creates a new and independent duty to the third party claimant. GEICO was alleged to have taken some two years after the accident to rectify the damages. While some of the delay was clearly not GEICO’s fault, there was a fact issue of whether some of the delay was the result of GEICO’s decision to assume responsibility for overseeing the clean-up operations as opposed to letting the property owner perform his own clean up and sue GEICO’s insured for such damage. In support of its decision in Burnett the majority cited Howton v. State Farm Mutual Automobile Insurance Co., 507 So.2d 448 (Ala. 1987) (per curiam) which involved a situation where State Farm had agreed to repair the claimants’ vehicle at its expense but after the repairs were made demanded that the third party plaintiff release all personal injury claims. That request prompted a lawsuit where the Alabama Supreme Court held that an independent tort committed against a third party in the course of adjusting a claim for its insured is not prohibited by case law precluding an injured third party from suing the tortfeasor’s carrier for violating an independent tort.

The Burnett dissent strongly pointed out that requiring an insurer to pursue its duties to its insured creates tension between a carrier and its insured with respect to adjustment of the insured’s claim and that if the insurer did some act which damaged the third party that the third party would have a claim against the insured for which the insurer would be responsible. The dissent also pointed out that three judges dissented in Howton and a number of other cases had rejected the reasoning in Howton, specifically the Oklahoma Supreme Court in McWhirter v. Fire Insurance Exchange, Inc. 878 P.2d 1056 (Ok. 1994); Hazen v. Allstate Ins. Co., 952 So.2d 531 (Fla.App. 2007); and Dussault ex rel. Walker-Van Burden v. Am. Int’l Grp., Inc., 99 P.3d 1256 (Wash. App. 2004) [limiting Howtow to intentional tortious acts].

While Burnett appears to be the minority view, it is certainly an area where in the “right” case a plaintiff’s lawyer might seek to expand an insurer’s duty to a third party claimant when the insurer mishandles a claim and creates more damage or independent damages to the third party claimant. Insurers may want to think long and hard before assuming responsibility for repairs, instead limiting their conduct to adjusting and monetarily paying for the claim.

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Are Attorneys’ Bills Privileged Once Litigation Ends – California Supreme Court Says No in ACLU Litigation?

The California Supreme Court recently held, in Los Angeles Board of Supervisors v. Superior Court (2016) that attorneys’ invoices may not be protected by the attorney-client privilege after litigation ends. The issue arose out of a lawsuit brought by the ACLU to obtain billing records by law firms representing the City of Los Angeles to defend litigation brought by jail inmates. The ACLU’s position was that these law firms engaged in “scorched earth” tactics.

The Court affirmed some limitations on production of these bills. The Court conceded that information could be protected if it tells the client “of the nature or amount of work occurring in connection with a pending legal event” or even an uptick in amounts spent “could reveal an impending filing or outsized concern about a recent event.” However, such information may not be protected if the litigation has terminated. At that point, the disclosure of the cumulative amount spent “may communicate little or nothing about the substance of the legal consultation.”

The Court’s core message was that “invoices for legal services are generally not communicated for purposes of legal consultation.” Or stated again, “while a client’s fees have some ancillary relationship to legal consultation, an invoice listing amounts of fees is not communicated for purposes of legal consultation.” Or again: “billing invoices are generally not made for purpose of legal representation.” None of these statements have supporting citations to law or evidence. In other words, there may be an argument in the right case that, once the underlying litigation is terminated, the purpose of the billed amount may be discoverable.

The Court ultimately cited one lower court case, Concepcion v. Amscan Holdings, 223 Cal.App.4th 1309, 1326-1327 (2014), for the proposition that “California courts have generally presumed that invoices for legal services are not categorically privileged.” But there the issue was a motion by class counsel to obtain a fee award from the court. In such cases, the courts have relied on the rule, as did the Concepcion court, that a plaintiff impliedly waives attorney client privilege when the communication goes to the heart of its claim. See, e.g., Chicago Title Ins. Co. v. Superior Court, 174 Cal.App.3d 1142, 1149 (1985).

The Court also cited two Federal decisions as evidence that that “the disclosure of billing invoices is the norm in federal courts in California,” suggesting that fee information is not privileged. But in those cases, the court held that the fee statements were not subject to attorney work-product privilege, which has a narrower scope in Federal court than in state court. Additionally, the bills are subject to in camera review in Federal court, but not in California state court. Costco Wholesale Corp. v. Superior Court, 47 Cal.4th 725, 736-738 (2009).

There are three takeaways from this decision. The first is that this case signals a radical departure from the Court’s prior trend, as exemplified by the Costco case, of giving wide berth to attorney-client privilege, and retaining that privilege beyond the termination of the litigation. The second is that the academics on the Court may not appreciate the degree to which fee bills provide information to clients, especially insurance clients. The third is that this case has significance far beyond a Public Records Act dispute.

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Alert! — Washington Supreme Court Limits “Insurance Fair Conduct Act”

Earlier this month, the Washington Supreme Court strictly limited Washington’s “Insurance Fair Conduct Act” (IFCA) private cause of action. Enacted in 2007, IFCA provides for uncapped triple-damages awards, and mandates attorney fee awards.  However, the statute’s enabling provisions restrict IFCA claimants to insureds whose claims for coverage or payment of benefits are unreasonably denied.  Therefore, as clarified in Perez-Cristanos v. State Farm Fire and Cas. Co., 2017 WL 448991, 2017 Wash. LEXIS 92, ___ Wn.2d ___ (2017), IFCA claims cannot proceed based only on alleged violations of claims regulations (for example, untimely insurer responses to the claimant’s communications), without a related denial of the insured’s coverage or benefits.

The full Cozen O’Connor Alert! is linked here.

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Fifth Circuit Provides Road Map for Review and Trial of Bad Faith Claims in Mississippi

Mississippi essentially has three levels of claim when insurance is at issue: (1) mere breach of contract, allowing recovery of contract damages; (2) breach of contract + no arguable basis for breach, which entitles recovery of consequential damages; and (3) breach of contract + no arguable basis for breach + malice/gross disregard for the rights of the insured, which entitles the recovery of punitive damages.  In Briggs v. State Farm Fire & Cas. Co., 2016 WL 7232136 (5th Cir. Dec. 16, 2016), the Fifth Circuit Court of Appeals approved the bifurcation of the trial of an insurance dispute by the district court.  In so doing, the Fifth Circuit provided a road map for how such claims should be handled for trial.

The Underlying Dispute

In 2011 a tornado damaged the Briggses’ home.  The Briggses made a claim with State Farm for property damage.  A dispute arose between the Briggses and State Farm as to the value of the loss.  The Briggses claimed that the damage to their home exceeded the $250,000 policy limit of the State Farm policy and that their home needed to be demolished and rebuilt.  State Farm contended the home damage could be repaired and valued the loss at approximately $150,000. The Briggses filed suit against State Farm, claiming that State Farm breached the insurance policy by not paying the full value of their claim, that such a breach had no arguable basis and that they were entitled to compensatory and punitive damages.

At trial plaintiffs tried to submit evidence to the jury that State Farm inappropriately relied on Xactimate to value the loss, as well as failed to use proper pricing for materials and labor.  The Briggses also claimed that State Farm used 15 different claims representatives and attempted to intimidate the Briggses.  They also sought to introduce the Mississippi “Policyholder Bill of Rights” to show State Farm improperly adjusted their claim.

The trial court instead bifurcated the claims, and held that claims for extracontractual relief would be presented, if at all, only after a jury found the existence of a breach of contract.  The trial court excluded evidence such as the “Policyholder Bill of Rights” from the breach of contract portion of the bifurcated trial.  The jury returned a verdict, finding that the Briggses were entitled to an additional $75,000 in policy benefits, which was more than the State Farm adjustment, but less than the amount sought by the Briggses.

After the contract phase of the case, the trial court reviewed the Briggses’ evidence to determine whether they had sufficient evidence to proceed with the “bad faith” portion of the bifurcated trial.  The trial court determined the evidence was insufficient to show that State Farm lacked an arguable basis for its actions and entered judgment for State Farm on the bad faith claims.

The Fifth Circuit Opinion

The Fifth Circuit affirmed. The Court of Appeals noted that the decision to bifurcate claims rested within the sound discretion of the trial court.  Because the Briggses’ claims for extracontractual relief and punitive damages both required a showing that State Farm in fact had breached the policy, the Fifth Circuit held that bifurcation was appropriate.  The Fifth Circuit confirmed that evidence such as the “Policyholder Bill of Rights” was excluded appropriately at the initial trial phase because such evidence did not relate to the Briggses’ claim for breach of contract.  Finally, the Fifth Circuit noted that the case always focused on whether or not the Briggses’ home could be repaired.  Thus, the jury verdict which “split the baby” between State Farm and the Briggses demonstrated that the claim was a mere “pocketbook dispute” over the extent of damage, making State Farm’s position at least arguable.  As such, the Briggses possessed insufficient evidence to proceed with the second portion of the bifurcated trial.

Conclusion

The Fifth Circuit opinion in Briggs does not announce new law so much as draw together several strands of Mississippi insurance and bad faith law to provide a road map for how a trial court should handle bad faith claims.  From the decision to bifurcate, to the types of evidence admitted, to a pre-second phase evidentiary exam, the Fifth Circuit held that the trial court in Briggs did everything right.  Litigators should consider Briggs as guidance for how to prepare and present their claims for relief and how to approach evidentiary issues.

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Happy Holidays from Cozen O’Connor

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WHOSE SETTLEMENT IS IT, ANYWAY? NEGOTIATING CONSISTENT WITH AN INSURER’S STRONG COVERAGE DEFENSES

test-your-strengthThis author suggested, in an earlier May 2016 Bad Faith blog article, that an insurer can measure on a “strength scale” its insurance coverage defenses while it defends its insured against underlying claims and lawsuits under a reservation of rights. The “strength scale” of coverage defenses, especially when subject to ongoing updates, can become a useful decision-making tool during settlement negotiations. An insurer has a legitimate basis to assess its coverage defenses as part of the settlement process when the coverage issues may render it unclear whose money will be used to pay for a judgment or settlement: the insurer’s money, the insured’s money, or combined contributions of both.

“Bad faith” case law can be scarce, in many jurisdictions, regarding insurers that base their settlement decisions in whole or in part on insurance coverage considerations. Although Washington state has many reported decisions addressing “bad faith” breaches of an insurer’s duty to defend and/or its duty to indemnify, it has only a few cases specifically addressing the “duty to settle.” And, it has no case law setting forth specific guidelines or rules for an insurer’s settlement decisions based upon “mixed” evaluations of underlying tort claims versus insurance coverage disputes with the insured. But Washington’s often-cited treatise on insurance coverage law, and at least two federal judges in Washington, have stated that insurers are not prohibited from considering coverage issues when deciding how much money to contribute to a settlement. Berkshire Hathaway Homestate Ins. Co. v. SQI, Inc., 132 F.Supp.3d 1275 (W.D. Wash. 2015); Specialty Surplus Ins. Co. v. Second Chance, Inc., 412 F.Supp.2d 1152 (W.D. Wash. 2006) (“Second Chance”) (An insurer can lawfully protect its “monetary interest,” because the insurer has a right to be concerned with “whether it owes a settlement payment” based on a coverage dispute with the insured); Thomas V. Harris, Washington Insurance Law § 19.05 (3d ed. 2010).

These two opinions, reflecting the federal court’s prediction of Washington law and not binding precedent in the Washington state courts, adopted tests set forth in a 1991 Florida appellate case (Robinson v. State Farm, 583 So.2d 1063) as the factors involved in an insurer’s good faith consideration of its coverage concerns during the settlement process. Their five listed factors include not only “the weight of legal authority on the central coverage issues”; but also whether the insurer’s efforts to settle the liability claim were “consistent with the strength of its coverage position.” Although the similar Robinson factor may have originally focused on sufficiency of the insurer’s efforts to settle, the Washington court’s comments in Second Chance support that in Washington, a reasonable element of the analysis is whether the insurer’s proposed contribution to settlement is consistent with the insurer’s genuine coverage disputes.

Ultimately, when faced with reasonableness of settlement bad faith disputes, Washington courts permit an equal consideration of the insurer’s interests, but they also warn insurers against actions demonstrating a greater concern for their own monetary interests than the monetary interests of the insured being defended under a reservation of rights. Like many jurisdictions nationwide, Washington and Florida courts conclude that the entire context of the insurer’s decision making process will determine whether the insurer was reasonable. Therefore, insurers that engage in “mixed” evaluations of tort issues and coverage issues during settlement efforts may benefit from a review of the full factual history leading up to settlement, while they also obtain legal counsel’s confirmation of the most currently applicable legal standards.

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First Circuit Provides Guidance as to When a Notice of Claim Triggers Policy Obligations

When does receipt of a pre-suit claim notice letter trigger an insurance carrier’s obligation to provide a defense and/or indemnity? In Sanders v. Phoenix Insurance Co., the First Circuit provided some guidance to this question, holding that a pre-suit notice letter would not trigger a carrier’s obligations unless a non-response would impact the policyholder’s ability to contest liability during a following proceeding.

The Underlying Dispute

Sanders arises from a “tragic tale of unrequited love.” Ms. Anderson hired an attorney to represent her in a divorce proceeding from Mr. Sanders, her husband. During the course of that representation, Ms. Anderson and her attorney began an affair. Ms. Anderson suffered from depression and anxiety. When the affair cooled, Ms. Anderson wrote a suicide note and drank herself to death.

Mr. Sanders became the executor of Ms. Anderson’s estate (“Claimant”) and sent a demand letter to Ms. Anderson’s attorney (“Insured”). As the affair occurred partially at the attorney’s home, the attorney placed his homeowner’s carrier, Phoenix Insurance Co. (“Insurer”) on notice of the claim. Insurer denied coverage, arguing that Ms. Anderson’s death was not a covered “occurrence” and that the policy’s professional services exclusion barred coverage.

Insured alerted Insurer that he intended to mediate the claim and invited Insurer to participate. Insurer declined. Insured argued Claimant asserted claims for negligent infliction of emotional distress against him, but Insurer continued to decline coverage. Insured settled his personal liability for $500,000 and assigned his rights against Insurer to Claimant in exchange for a non-recourse agreement which precluded any collection from Insured.

The Coverage Lawsuit

Claimant, as assignee of Insured, filed suit against Insurer for allegedly engaging in unfair settlement practices. Claimant argued that Insurer breached its duty to defend Insured when it failed to respond to the pre-suit demand letter sent to Insured. Insured’s policy contained the following language:

If a claim is made or a suit is brought against any insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, even if the claim or suit is false, we will:

. . . .

b.            provide a defense at our expense of counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate.

Insurer argued that the plain language of the policy obligated it only to investigate a claim and that no duty to defend would be triggered until a lawsuit was filed.

When Does the Duty to Defend Commence?

The First Circuit noted that the cited policy language did not contain an obligation to defend an insured prior to a suit being filed. However, the court also noted that the “no pre-suit obligation” rule was not ironclad, as some types of claims were sufficiently analogous to an actual lawsuit so as to trigger a carrier’s obligation to defend. In this regard, the court looked at claims and notice letters sent by the Environmental Protection Agency for CERCLA liability.

The First Circuit distinguished Claimant’s pre-suit demand from an EPA claim notice, stating that the defense of the policyholder would be substantially compromised if there was no response to an EPA notice letter. Specifically, the EPA could proceed unilaterally with an administrative action against a policyholder, which decision would then impact any later judicial review. Also, failure to respond to an EPA notice letter could subject a policyholder to monetary penalties regardless of the outcome of any subsequent litigation. As such, receipt of a notice letter from EPA would force a policyholder (and concomitantly its carrier) to respond.

Claimant argued that failure to respond to a pre-suit demand letter also placed a non-responding party/policyholder at risk, as failure to respond to such a letter could expose the non-responding party to additional damages, attorney’s fees and costs of suit under state law. The First Circuit held that a pre-suit demand letter was not fairly analogous to an EPA notice of claim because the policyholder’s ability to contest liability would be compromised by the latter. The types of additional damages identified by Claimant for non-response to a pre-suit demand, however, would come only after the policyholder was given the opportunity to defend; i.e. after the carrier’s duty to defend had been triggered.

Claimant also argued that, duty to defend issues aside, the indemnification obligations of the policy were triggered by the mediation settlement with Insured. The First Circuit also rejected this argument, stating that the policy contained no such language. Further, the First Circuit noted that a mediation was be an informal, voluntary proceeding. Thus, Insured’s decision to participate in mediation was simply a strategic decision, as opposed to something compelled by operation of law.

Conclusions and Thoughts

Sanders draws a reasonably bright distinction between those “claims” which trigger the obligations of a carrier and those which do not. If the “claim” is such that a non-response could impact the recipient’s liability, the “claim” may trigger a defense obligation. Most pre-suit claims or demands simply do not fall into this category, even though a failure to respond may impact some other aspect of litigation. However, if federal or state law more substantially penalizes a failure to respond, then a different result may follow. Thus, when a carrier assesses whether and how to respond to notice of a pre-suit claim or demand, the carrier may want to, and should under First Circuit case law, consider the consequences of a non-response on the subsequent assessment of a policyholder’s liability.

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Don’t Get Burned by a “Holt Demand” in Georgia

flagGeorgia has a very specific law called “Holt demands” concerning time-limited demands made against a liability insurance policy. In Southern General Ins. Co. v. Holt, 262 Ga. 267, 416 S.E.2d 274 (1992), the Georgia Supreme Court held that where the insurer has full knowledge of the insured’s liability and damages exceeding policy limits, the insurer can be subject to bad faith damages if its failure to settle within policy limits subjects the insured to a judgment in excess of those limits. In deciding whether to settle a claim within policy limits, the insurer must give equal consideration to the interests of the insured.

The Holt demand was later codified in a statute addressing only motor vehicle claims, at O.C.G.A. Section 9-11-67.1. To constitute a valid demand to an insurer under the statute, a claimant must adhere to the following: (1) the demand must be in writing; (2) the time period for accepting the demand must be clearly stated, but cannot be less than thirty days; (3) the specific amount of monetary payment requested must be included; (4) the demand must specifically outline the party the claimant is willing to release; (5) the demand must specify the type of release, if any, the claimant is willing to provide; (6) the demand must specify the claims to be released; and (7) the demand must be sent by certified mail or overnight delivery, return receipt requested.

The motor vehicle claims statute permits insurers to request further information from the claimant to evaluate the demand, and such requests are not deemed a counteroffer or rejection risking potential bad faith exposure. Further, insurers still have defenses to a bad faith claim for refusing a settlement demand where (1) the insured’s liability was not clear; and/or (2) there was no confirmation that the damages would be in excess of the policy’s limits.

Georgia courts have recently shown their willingness to hold claimants to the statute’s specific requirements before an insurer may be sued for bad faith. In September 2016, DeKalb County State Court Judge Michael Jacobs dismissed a claim based on a purported Holt demand letter in the automobile context because it “was not a clear demand, let alone a time-limited demand” that could expose the insurer to bad faith for failure to timely respond. Hughes v. First Acceptance Insurance Company of Georgia, Inc., No. 14A52088 (DeKalb State Ct., Sept. 20, 2016). The court specifically found that there was no evidence the insurer knew or reasonably should have known the complex claims against the insured could have been settled within the policy limits. In October 2016, the claimants appealed this decision to the Georgia Court of Appeals, and the record for review was issued November 21, 2016. At the end of November 2016, the appeal remained pending.

Faced with a settlement demand in Georgia, an insurer acts reasonably when it does not place its interests above that of its insured. The following checklist is also helpful in responding to “Holt demands” in Georgia, and may help the insurer in any defense of a claim or lawsuit for refusal to settle a claim:

  1. Review the demand letter and document your review, itemizing the statutory requirements either met or not met.
  2. Either respond timely to the letter or seek an extension of time to respond.
  3. Request the information that you don’t already have but is necessary to assist in evaluating the demand, including liability assessment reports from defense counsel, accident, police, or other causation reports and information, expert analysis, school records, medical records, medical bills, medical liens, subrogation claims by health insurers, workers’ compensation, Medicare/Medicaid payments, and other relevant facts and/or testimony.

Consult with coverage counsel to ensure you have properly responded and met applicable requirements.

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Insuring Fine Art: The Visual Artists Rights Act and Its Bad Faith Implications

mona-lisaInsuring fine art can present challenges that are not encountered with other types of property. One of these challenges involves the application of the Visual Artists Rights Act of 1990 (17 U.S.C. §106A) (“VARA”) when artwork by a living artist is damaged.   VARA protects an artist’s “moral” rights in his/her work of art beyond traditional property law – in other words, even after a piece of art is sold, the artist retains certain rights to make sure that the artwork is not impermissibly modified.

VARA provides the author of a “work of visual art” the right to “prevent any intentional distortion, mutilation, or other modification of that work which would be prejudicial to his or her honor or reputation, and any intentional distortion, mutilation, or modification of that work is a violation of that right.” That right remains for the life of the artist.   Some states, such as California, have similar statutes (see, e.g. Cal. Civ. Code §987).

When a work of art by a living artist is damaged, VARA may come into play.   If the damage itself was intentional, then the person who damaged it may be liable under VARA. More important in the insurance context, however, is that the restoration of the piece can also implicate VARA.   The work very well may be able to be restored, but the restoration may itself be an impermissible “modification” if it is performed with “gross negligence.”   Though this has not been heavily litigated, at least one court has held that attempted repair without the artist’s permission states a claim for violation of VARA.   (Flack v. Friends of Queen Catherine, Inc., 139 F.Supp.2d 526 (S.D.N.Y. 2001).   Because of this, it is important that when restoring art by a still-living artist, the insurer make a good faith effort to get the artist to approve the restoration plan, if not perform the restoration him/herself.

VARA’s interaction with insurance has not been frequently litigated, and thus there is little legal guidance on an insurer’s potential liability under VARA, but there are several potential issues that could give rise to liability.   The first is an insurer’s direct liability to the artist if it undertakes restoration which violates VARA. The second is potential liability to the insured for breach of contract or bad faith.   If the artwork is restored without input from the artist, then it is possible that the artist can denounce the work in its entirety, rendering the piece virtually worthless. Although this issue has yet to be litigated, it is conceivable that this could lead to bad faith claims against the insurer.   Once again, in the case of damaged art by a living artist, we recommend that insurers consult not just with restoration experts, but with the artist him/herself, prior to restoration in order to avoid potential VARA and bad faith claims.

If you’re interested in learning more about this topic, and other issues related to insuring fine art, we are hosting a webinar on November 29, 2016. To sign up, go here.

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Nickerson Redux: Five Lessons On Punitive Damages For Bad Faith Attorneys

This past June the California Supreme Court issued its decision in Nickerson v. Stonebridge Life Insurance Company, 63 Cal.4th 363 (2016), holding that post-trial Brandt fees could be included in the damage calculus for purposes of evaluating the ratio of punitive damages to compensatory damages. We wrote about this decision in an earlier blog. The Supreme Court remanded the $19 million punitive verdict to the Court of Appeals to amend the judgment to correct the maximum allowable amount of punitive damages of 10:1, or $475,000. In doing so, the Court of Appeals reissued its original decision. This decision has a number of issues that may guide insurance counsel in handling bad faith cases with a punitive exposure.

hospital-bedThe policy involved was a hospital stay policy that paid $350 per day for each day of confinement in a hospital for a covered injury. The definition of “Hospital Confinement” required that the confinement be for a “Necessary Treatment”, as considered by a peer review, and that it not take place in a convalescent facility. Stonebridge determined that 109 days of confinement to a hospital for a broken leg was not necessary, and allowed only 14 days of payment. The payment could be used for any purpose whatsoever, and because Mr. Nickerson was a veteran staying at a VA Hospital, he did not need to use it to pay for his free hospital care.

Issue One: The trial court directed a verdict on the limitation of coverage to “Necessary Treatment”, finding as a matter of law that the limitation was not “conspicuous, plain or clear” in the policy, and therefore was unenforceable. There are few clues as to why the trial court found this definition was unclear since Stonebridge did not appeal from the decision on the contract. The lack of appeal led the Court of Appeals to conclude that Stonebridge conceded its “hidden” definition was not enforceable. Lesson: Unless the insurer’s coverage position is indefensible, counsel should consider asserting an issue on appeal for any coverage denial by a trial court.

Issue Two: Stonebridge admitted in response to discovery that there were 224 other claims in California where lack of “Necessary Treatment” was the basis of a coverage denial.   Its counsel did not object to the admission of this discovery response into evidence at trial. There is no indication in the Court of Appeals decision of factual differences between the various other cases. The Court of Appeals rejected out of hand Stonebridge’s argument that it was being punished for other cases in which no bad faith claims were made. Instead, it concluded Stonebridge was guilty of “recidivism” in using an unenforceable term in its policy, rather than being punished for other dissimilar matters. Lesson: Counsel should object to discovery of other claims involving the same or similar policy language, and if that is not successful, object at trial to its use. Counsel should also be prepared to present evidence of the dissimilarity of those claims.

Issue Three: After receiving the records from the VA, Stonebridge informed Mr. Nickerson that it was seeking a peer review. The case review form had a box that could be checked indicating that the peer reviewer was required to consult by phone with the treating physician. The claims person testified that she never checked this box. After the peer reviewer concluded that more than 14 days’ hospital confinement was not medically necessary, Mr. Nickerson had his treating physician write to the insurer to advocate that he needed to remain in the hospital. The insurer did not forward the letter to the peer reviewer but instead responded by citing grounds not in the insurance policy. Lesson: Trial counsel should consider having an expert witness testify that the basis for denial was valid, such as a medical expert in this case. In preparing a claims handler for deposition or trial, counsel might caution the witness not to go beyond what he or she does in handling a claim.

Issue Four: Both the claims handler and the vice president of claims testified that they would have handled the matter in the same way. The court found this to be evidence of bad faith, which was not contested on appeal. Lesson: Trial counsel should consider using a claims-handling expert to counter the inevitable argument that the insurer committed bad faith regardless of whether or not it would act the same way again. A jury consultant can assist in preparing witnesses to deflect this type of cross-examination. Bad faith is the predicate to the punitive damages, and should almost always be appealed. See Lesson One.

Issue Five: The ground for punitive damages was that the insurer engaged in fraud by concealing the policy limitation in the definition of “Necessary Treatment”, and by not requiring peer reviewers to communicate with treating physicians. The Court of Appeals held that “fraud” for punitive damages in insurance cases equates to the conduct that gives rise to liability, namely bad faith. Additionally, the court held that the fact that the insurer ignored the post-treatment letter by the treating physician violated its obligation to inquire into all grounds that could support Mr. Nickerson’s claim. Lesson: An award of punitive damages generally requires conduct that goes beyond the conduct that supports a mistake in claims handling. Expert witnesses on claims handling and the validity of the grounds for the coverage decision and manner in which the claim was handled should be considered to limit the claim of bad faith at trial. Then the appeal of any bad faith verdict may further limit punitive damages based solely on the same grounds as the defense against the bad faith claims.

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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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