Expanding When Liability is “Reasonably Clear”: Massachusetts Court Chips Away at Bad Faith Counterarguments

Earlier this month, a Massachusetts Appellate Court affirmed a trial court’s award of bad faith damages in a case where it found the insurer’s approach to a claim to be “at best inattentive, if not incompetent.”  Although the state appellate court in McLaughlin et al. v. American States Insurance Co. ultimately denied an award of multiple damages, its award of attorneys’ fees and costs, along with loss of use of funds damages, shows the limits of arguing no bad faith because the insured’s liability was not “reasonably clear” under Massachusetts’s bad faith statutes.  The Court’s decision, even though unpublished, serves as yet another reminder of the importance for insurers to properly investigate claims and objectively analyze whether an insured’s liability is reasonably clear.

The underlying litigation arose out of a botched landscaping project on coastal property.  The homeowners hired the insured subcontractor to install a well as part of the project.  The homeowners claimed that the subcontractor was negligent for failing to take into account, or at least warn of, the possibility that the well may become inundated with seawater because of its proximity to the coast.  The lack of freshwater caused damage to decorative and ornamental landscaping paintings that had also been installed.  After the homeowners settled their claims against the two other defendants, the claims against the subcontractor went to trial, where he was found liable.

The homeowners (third party claimants) then filed suit against the subcontractor’s insurer for failure to conduct a reasonable investigation of their claim and failure to make a reasonable offer of settlement after liability of its insured (the subcontractor) became reasonably clear, in violation of the unfair claims handling and settlement practices of Massachusetts law.

Massachusetts’ claims settlement statute, G.L.c. 93A, §2(a) taken together with G.L.c. 176D, §3(9)(f), provides that an insurer is liable if it fails to promptly settle claims within the thirty-day period set forth in G.L. c. 93A, § 9(3) or as soon thereafter as liability and damages make themselves apparent.  In practice, this caveat, i.e. when “liability has become reasonably clear,” protects insurers from paying out claims not yet substantiated in the underlying litigation.  The insurer asserted that it was not liable for bad faith because liability was not “reasonably clear” when the claim was under investigation.  According to the insurer, its determination was supported by the fact that although judgment was entered against the insured, the jury did not award any monetary damages.  The insurer also claimed that liability was not reasonably clear because other defendants were named in the suit.  The Court rejected both of these arguments holding that the term “reasonably clear” does not turn on whether the insured will eventually be liable for monetary damages, and is independent of how a jury will ultimately view the insured’s liability.  In addition, the presence of other tortfeasors is not pertinent to the analysis and does not absolve an insurer of its statutory obligation to make an offer when liability of its insured is clear.

In addition to finding the insurer liable for unfair claims settlement practices, the Court also held the insurer failed to conduct a reasonable investigation under G. L. c. 176D, § 3(9)(d).  The Court’s holding was primarily based on the fact that the insurer did not consult an expert in hydrology to independently assess the merits of the homeowners’ claims.

Expert AdviceSo what does this mean?  Under the holding of McLaughlin, to avoid bad faith damages, insurers at a minimum must objectively assess their insureds’ liability and where they recognize the need for expert assistance in assessing their insured’s liability, engage an independent expert to assist them in making an independent or neutral assessment of the insured’s potential fault.

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“Low-Ball” Settlement Offer On Its Own Is Insufficient To Support A Claim for Bad Faith Under Pennsylvania Law

A low-ball settlement offer on its own is not enough to state a claim for a bad faith according to a federal district court for the Eastern District of Pennsylvania which granted the insurer’s motion to dismiss the insured’s claim for alleged violation of Pennsylvania’s bad faith insurance statute, 42 Pa.C.S. §8371. See West v. State Farm Insurance Company, 2016 U.S. Dist. LEXIS 106783 (E.D.Pa. Aug. 11, 2016). The statute provides that in an action on an insurance policy, if the court finds that the insurer acted in bad faith toward its insured, the insured may be awarded interest on the amount of the claim from the date the claim was first made by the insured, punitive damages, court costs and attorneys’ fees,. 42 Pa.C.S. §8371. The statute does not identify what constitutes bad faith on the part of the insurer.

Money            In West, the insured alleged that State Farm acted in bad faith in handling his uninsured motorist claim.  State Farm offered to settle the claim for $1,000 despite receiving medical bills in excess of $8,200. The insured argued that State Farm’s “low-ball” offer on its own was sufficient evidence of bad faith. The court disagreed, explaining that Pennsylvania law requires an insured to show more. Specifically, an insured must allege facts that show the insurer “lacked a reasonable basis for denying benefits under the policy” and the insurer “knew or recklessly disregarded its lack of [a] reasonable basis in denying the claim.” 2016 U.S. Dist. LEXIS at *5. An insurer’s low (even facially unreasonable) estimate of its insured’s damages, without more, does not rise to the level of bad faith.

While the court granted the insured’s request to file a second amended complaint, the insured may be out of luck if he is unable to allege additional facts.  We will continue to monitor the case to see whether the insured can meet the heightened pleading standard imposed by the court.

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POLICY LIMIT DEMANDS + QUIRKY LEGAL ISSUES = CALL LAWYER

The recent California decision Barickman v. Mercury Casualty Company, 2016 WL 3975279, (Calif. App. – July 25, 2016), previously reported in Cozen’s bad faith blog on July 28, 2016, is worth revisiting on a bigger picture issue.  Low policy limit demands are often more dangerous than high policy demands.  This is because often times less experienced adjusters are assigned to lower policy limit cases and may not have recognized some of the red flags presented in Barickman and more importantly may not have recognized the need for legal advice.  In Barickman, those red flags were as follows:  (1) serious injuries; (2) clear liability; (3) low policy limits; (4) policy limits demand made with short time fuse to respond; (5) numerous extensions of time for adjuster to make decision granted by plaintiff’s counsel; and (6) a quirky legal question not frequently seen by adjusters.  The more red flags on a claim, the more urgency there should be for an adjuster to promptly seek legal advice on quirky legal issues.

In response to notification of the claim, and after determining that the claimants had been seriously injured and that there was a policy limits settlement demand from a low limit policy, the adjuster rightly recognized the need to offer those limits of $30,000 and in fact did so quite promptly.  In response to the policy limits offer the plaintiffs’ lawyer added the following language to the standard release:   “This does not include court-order restitution.”  At that point in time, the settlement negotiations went awry.

Lawyer SearchThe adjuster’s concern was whether his insured would receive credit against the order of restitution and the plaintiffs’ lawyer wanted to make certain that the settlement did not extinguish the restitution award.  The adjuster received several letters from the plaintiffs’ lawyer explaining the reasons for the request for the additional language but for whatever reason the adjuster was concerned that the insured would not receive credit for the insurer’s payment.  Rather than seeking legal advice from an experienced insurance coverage attorney, the adjuster contacted the insured’s mother and her daughter’s criminal lawyer seeking an answer to his question.  Additionally, the adjuster sought legal advice from plaintiffs’ counsel on whether payment of the policy limits would go to reducing the restitution order.  Shortly thereafter the insured, through her mother, demanded that the policy limits be paid.  Unfortunately, the final deadline for payment had come and gone, being replaced by a personal injury lawsuit and an agreed judgment for $3 million with the subsequent assignment of that claim and the insured’s bad faith claim.  Despite Mercury’s best arguments the agreed judgment was upheld.

The obvious learning from this decision is that if an adjuster is dealing with a policy limits demand and a quirky legal issue of first impression to him/her, then he/she should seriously consider seeking legal advice from an experienced insurance coverage attorney, not the plaintiffs’ lawyer or the insured’s criminal lawyer.  As a practical matter, had the adjuster sought legal advice on this quirky issue from an experienced coverage lawyer, he could have short-circuited the months of uncertainty regarding this issue and there would most probably have been a more successful outcome for the insurer.

Update: Barickman v. Mercury Casualty was certified for publication on August 15, 2016. Cite as 16 C.D.O.S. 8932.

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Insurers’ Beware: Defending Bad Faith Claim May Lead to Waiver of Privileged Communications

On July 27, 2016, the United States District Court for South Carolina ordered an insurer to turn over its privileged communications. The Court explained that the insurer waived the protections afforded under the attorney-client privilege and work product doctrine by asserting it acted in good faith in the defense of its insured. See State Farm Fire & Casualty Co., et al. v. Admiral Ins. Co., 2016 WL 4051271 (D. S.C. July 25, 2016). While this is a district court opinion and may be subject to appeal, insurers should still be cognizant of the issue.

James McElveen filed suit after he was seriously injured during a fraternity hazing event hosted by Maurice Robinson and Phi Beta Sigma Fraternity. Robinson tendered the suit for defense and indemnification to Phi Beta’s insurer, Admiral Insurance Company. Admiral denied coverage. Robinson’s homeowners’ insurer, State Farm Fire & Casualty Company, provided him a defense. Admiral settled McElveen’s claims against Phi Beta and others prior to trial, leaving Robinson as the lone defendant. The case was tried and verdict was entered against Robinson. State Farm ultimately settled the judgment for $975,000.

State Farm then filed suit against Admiral for a declaratory judgment that Admiral must reimburse State Farm for the settlement and all fees and costs incurred in the underlying defense. State Farm alleged that Robinson was entitled to a defense and indemnification under the Phi Beta policy, and that Admiral acted in bad faith in denying coverage. Part of the damages claimed by State Farm included damages for the emotional distress and humiliation Robinson allegedly sustained from the media attention related to the trial.

Admiral countersued State Farm for bad faith. State Farm apparently had the opportunity to settle the case within its policy limits of $300,000 prior to trial. Admiral alleged that State Farm’s wrongful refusal to settle caused Robinson’s claimed emotional distress damages in having to go to trial. In answering the counterclaim’s allegations, State Farm admitted it owed Robinson a duty to act in good faith and asserted “it did so.”

attorney-client privilegeAdmiral sought discovery related to State Farm’s decision not to settle, and its communications with Robinson discussing the consequences. State Farm objected that the information sought was protected by the attorney-client privilege, work product doctrine, and common interest doctrine.  Although the Court agreed, it nonetheless ordered State Farm to produce the requested information.  The Court, relying on a South Carolina district court case involving an insurer’s communications with its own counsel, explained that by asserting that it did act in good faith in handling the claims asserted against Robinson, State Farm put its communications with Robinson at issue and therefore waived the attorney-client privilege and work product protections.  In other words, the court held that the insurer could not use the substance of the communications with its insured as both a sword (we acted in good faith) and a shield (but we are not going to tell you what we said to our insured).

So what does this mean? How can an insurer defend against bad faith allegations and protect its privileged communications? Potentially, the insurer should maintain communications with the insured separate from communications that include the insurer’s counsel.  The Court’s ruling indicates that an insurer must proceed with caution, at least in South Carolina.

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When a Policy Limits Offer is Not Enough: A Cautionary Tale of a Failure to Settle Case

In a recent unpublished decision, the California Court of Appeals upheld a $3 million judgment against an auto liability insurer that rejected proposed language in a settlement agreement, notwithstanding the insurer’s policy limits offer. Barickman v. Mercury Opinion, 2016 WL 3975279 (Cal. Ct. App. 2016) (unpublished). Although unpublished and not binding precedent, Barickman raises several claim handling issues which may be useful for carriers to consider.

Barickman arises from a personal injury claim in which the insured, Timory McDaniel struck two pedestrians while driving under the influence. McDaniel fled the scene but was later apprehended. She reported the claim the following day to her insurer Mercury Casualty Company as an accident without further detail. Within eight weeks of receiving notice and following its investigation of the claim, Mercury offered policy limits of $15,000 to each injured party. While the offer was pending, a criminal court sentenced the insured to three years in prison and ordered her to pay approximately $165,000 in restitution. The injured parties accepted the $15,000 settlement, but countered with the additional language, “This does not include court-ordered restitution.”

Mercury sought to clarify whether the new language precluded an offset of the policy limits payment against the restitution order. While waiting for input from the insured’s mother, acting as her attorney in fact, and from the criminal defense counsel, the plaintiffs’ demand expired. Criminal counsel responded a few days later instructing Mercury not to accept the offer to the extent it waives the right of offset, citing a newly published decision of People v. Vasquez, 190 Cal.App.4th 1126 (2010) (insurance settlement as a matter of law reduces a criminal restitution order).

Plaintiffs filed suit.  After suit was filed, the insured’s mother requested that the policy limits be paid regardless of the qualifying language added by plaintiffs to the release.  Mercury did not do so, and there was conflicting evidence regarding its discussions with plaintiffs’ counsel, both before and after suit was filed.  Mercury appointed defense counsel, but the case ultimately resulted in a $3 million consent judgment. The insured assigned all of her rights against Mercury in exchange for a covenant not to execute on the judgment against her.

ConflictThe plaintiffs then filed claims for breach of contract and bad faith against Mercury, seeking recovery of the full $3 million consent judgment. The parties submitted the case to a referee to determine all issues of law and fact.

The referee determined that Mercury’s policy limits offer was not enough to defeat the bad faith claim. Mercury had unreasonably rejected the modified policy limits settlement instead of accepting or further amending the release to clarify the parties’ mutual intent. Further, the referee determined the modified release language was superfluous and should not have affected the deal, because as a matter of law, a release in a civil case would not release a defendant from the criminal court’s restitution order, and did not disturb the insured’s right to offset. The Court of Appeals affirmed.

Barickman raises several considerations for carriers faced with similar issues. First, Brickman stands for the proposition that even a timely policy limits offer may be insufficient to defeat a bad faith claim based on failure to settle. California’s test is whether the insurer’s conduct was unreasonable under all of the circumstances. Graciano v. Mercury General Corp., 231 Cal.App.4th 414, 427 (2014). In Barickman, the California Court of Appeals noted there were “significant issues of credibility, as to whether Mercury did all within its power to effect a settlement” once plaintiffs proposed the modified release. Barickman highlights the importance of memorializing settlement negotiations in writing, especially where the other party takes a difficult or unclear position on settlement language. Barickman’s referee appeared to place greater evidentiary weight on plaintiffs’ email correspondence after the settlement had fallen through, than on Mercury’s claim notes during the negotiations.

Next, particularly where defense counsel has not yet been retained, involving outside counsel at the onset of the negotiations may help evaluate the legal effect of certain settlement terms in the given jurisdiction. Coverage counsel may further help clarify the insurer’s duties in responding to a settlement demand. The court in Barickman seemed particularly swayed by the fact that case law would have clarified that insurance proceeds reduce restitution orders as a matter of law.

As a final consideration, the Barickman parties elected to submit all issues of law and fact to a referee. Distinct factual issues and legal precedent typically warrant careful evaluation of the benefits, drawbacks, and options of available forums, whether state court; federal court; retired judge or referee.

Update: Barickman v. Mercury Casualty was certified for publication on August 15, 2016. Cite as 16 C.D.O.S. 8932.

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Don’t Mess with the Texas Prompt Payment of Claims Act: One Court’s Appraisal Result

Texas Appraisal Blog Post - Clip ArtVirtually all property insurance policies contain an appraisal clause, which outlines the appraisal procedure in broad terms. Those broad terms sometimes do not provide much guidance about the process, or about the effect which an appraisal award may have. A case in point is Graber v. State Farm Lloyds, 2015 WL 11120532 (N.D. Tex. 8/6/15).

In Graber, plaintiff purchased a homeowner’s policy from State Farm Lloyds. Plaintiff claimed that the home suffered covered damage as a result of a hailstorm. State Farm Lloyds inspected the home and concluded covered hail damage was present in certain areas of the home. On this basis, State Farm Lloyds issued a payment to plaintiff for damage to those itemized areas. Plaintiff was unsatisfied with the payment and requested a reinspection.  State Farm Lloyds appointed a new inspector, reinspected the property and issued a supplemental payment on the claim. Plaintiff remained unsatisfied and sent a notice letter under the Texas Deceptive Trade Practices Act. State Farm Lloyds conducted a third inspection, but found no additional covered damage. Plaintiff then filed suit, claiming that State Farm Lloyds breached the terms of the insurance policy by failing to make full payment on the hail claim. Plaintiff also alleged, among other things, that State Farm Lloyds was liable for statutory penalties for not paying the claims in a timely manner under Texas Insurance Code section 542, commonly known as the Texas Prompt Payment of Claims Act. After litigating for approximately nine months, Plaintiff invoked appraisal under the terms of the insurance policy. Read more ›

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Subrogation recovery did not violate the made-whole-rule and was not in bad faith per Wisconsin Sup. Ct.

It is highly unusual to find an insurance bad faith case which stems from an insurance company’s subrogation recovery. On July 6th, Wisconsin’s highest court had such a case, reversing the appellate court and holding that Dairyland Insurance Company’s subrogation recovery did not support a breach of contract action and its conduct was not in bad faith.

motorcycle crash 2Dairyland paid its insured Dennis Dufour his uninsured bodily injury policy limit of $100,000 and $15,598 for 100% of his property loss after he was injured in a motorcycle accident caused by an insured of American Standard. Dairyland then pursued American Standard for subrogation in connection with its $15,598.86 property damage payment. As a result of the subrogation action, American Standard paid $100,000 to Dufour which was the tortfeasor’s bodily injury limit, and also paid $15,598.86 to Dairyland in response to its subrogation claim.

Addressing subrogation rights, Dufour’s policy stated “after we have made payment under this policy and where allowed by law we have the right to recover the payment from anyone who may be responsible.’’

Dufour, who had not been fully compensated for his injuries, contended that he was entitled to the $15,598 paid by American Standard in response to Dairyland’s subrogation claim. When Dairyland declined to turn over that recovery, Dufour sued Dairyland for breach of contract and bad faith. Dufour’s argument that he was entitled to the recovery obtained by Dairyland stemmed from the “made-whole-rule” followed by Wisconsin courts, which provides that an insurer is not entitled to pursue subrogation until the insured recovers full compensation for his injuries, i.e. is made whole. The court considered a long line of case law discussing different factual and equitable considerations which may apply in reaching a decision on whether a subrogation action may be pursued under the made-whole-rule. In this case the Court held that the made-whole-rule did not preclude Dairyland from retaining the funds it recovered, because the court found that the equities favored the insurer:

  • Dairyland fully paid Dufour all that he bargained for under his policy.
  • Dufour had priority in settling with the tortfeasor’s insurer, American Standard, and Dairyland waited until Dufour received full policy benefits from American Standard before obtaining its subrogation recovery.
  • If Dairyland had not pursued subrogation Dufour would not have had access to the $100,000 which he was paid by the tortfeasor’s insurer, American Standard.

Of significance in connection with this decision, Dufour didn’t have a claim against American Standard for property damage since Dairyland reimbursed Dufour for 100% of his property damage losses.  In addition, Dufour received all he was entitled to from both Dairyland and American Standard.

The Court next addressed Dufour’s bad faith allegations.  Dufour argued that Dairyland had acted in bad faith by unreasonably failing to turn over the funds it received in subrogation.  Among other prerequisites, in order to prove bad faith in the first party context, Wisconsin law has a fundamental prerequisite in first party bad faith cases that there be some breach of contract.  The court concluded that there had been no breach of contract because Dairyland paid the insured every dollar to which Dufour was entitled under the policy, and that because there was no breach of contract, Dairyland did not act in bad faith with respect to Dufour’s demands for funds Dairyland obtained as subrogation for the property damages it paid Dufour, i.e. there was no breach of contract so Dufour could not satisfy the fundamental prerequisite for a first-party bad faith claim against an insurer by an insured under Wisconsin law.

Insurance carriers, when pursuing subrogation recoveries, should remember that a bad faith cause of action may still be viable.  Therefore, it is the prudent carrier that checks the state’s made-whole and bad faith laws prior to seeking any recovery.

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Genuine Dispute Defeats Both Bad Faith and Elder Abuse

The Paslays sued State Farm for failing to pay a portion of the damage caused to their Pacific Palisades house by a heavy rainstorm and for forcing them to move back into the house while it was still under construction. The complaint asserted claims for breach of insurance contract, bad faith, punitive damages and financial elder abuse under California’s Welfare and Institutions Code. State Farm brought a motion for summary judgment, arguing that it paid all of the benefits due under the policy, and even if it did not, there was a genuine dispute regarding the benefits owed, and therefore State Farm’s conduct was reasonable.

The trial court agreed and granted summary judgment, dismissing the case. On appeal, the court reversed and remanded the claim for breach of contract, but otherwise affirmed the rulings on bad faith, punitive damages and elder abuse. The evidence was disputed regarding whether State Farm failed to do necessary repairs in the master bathroom and whether the drywall ceilings needed to be replaced. The court therefore found triable issues of fact concerning full payment of policy benefits.  Paslay v. State Farm General Ins. Co., 2016 WL 3524086 (Cal.App. June 27, 2016).

Nevertheless, the court concluded that these disputed issues did not constitute bad faith. The undisputed evidence showed that State Farm’s estimator promptly examined the master bathroom and drywall ceilings, assessed the extent and the type of damage, and estimated the cost of appropriate repairs. The Paslays then ripped out the bedroom ceiling and took the bathroom walls down to the studs, preventing State Farm from conducting any further investigation. State Farm promptly paid the undisputed portion of the loss, but would not pay for additional repairs beyond the scope of repair determined by its estimator. The court found that the disputed items of damage qualified as a “genuine dispute” foreclosing bad faith. The court also found no basis for punitive damages under California’s higher evidentiary standard requiring “clear and convincing evidence.”

Elder AbuseMrs. Paslay also sued for elder abuse (she was 80 years old at the time of the loss, although Mr. Paslay was only 60). California prohibits financial abuse of a person over the age of 65.  “Financial abuse” is broadly defined as when a person or entity “takes, secretes, appropriates, obtains or retains real or personal property of an elder” with an intent to defraud or for a wrongful use. The statute further requires that the party sued either knew or should have known that this conduct was likely to be harmful to the elder. Because there was a genuine dispute regarding the payment of additional policy benefits, the court concluded that the scienter or “knowledge” requirement in the statute could not be met.

The court’s opinion suggests that two additional facts may have played a part in the decision:  First, Mr. Paslay had worked as a claims adjuster and appeared very knowledgeable about the claims process. Second, the Paslays ripped out the bathroom walls and bedroom ceiling before State Farm had any further opportunity to investigate. The court also commented on State Farm’s quick response and prompt payment of undisputed amounts. In fact-intensive first party property losses, these sorts of details can be pivotal in the court’s eventual determination that there is no bad faith or punitive damages.

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The Advantages of Removal: Twombly and Iqbal Applied to Bad Faith Claims

This month, the Eastern District of Pennsylvania issued an opinion that reminds insurance carriers and their counsel that it is often beneficial to remove certain cases to federal court. While federal court offers many advantages in insurance litigation, the recent opinion in Camp v. N.J. Mfrs. Ins. Co., No. 16-1087, 2016 U.S. Dist. LEXIS 74496 (E.D. Pa. June 8, 2016) highlights one important benefit: the federal court’s role in protecting carriers from frivolous and groundless claims at an early point in the litigation.

In Camp, the court considered whether to grant the insurer’s motion to dismiss when it was faced with a complaint alleging bad faith for denying the insured’s underinsured motorist (“UIM”) claim. The insurer had denied the claim because it appeared that the insured had been fairly compensated by the tort carrier for the injuries that the insured sustained in the loss. Before getting to the substance of the claim, however, the court looked at whether the allegations were even properly pled.

As background, Federal Rule of Civil Procedure 8(a), which governs the pleading standard for causes of action in federal court, was given teeth by the United States Supreme Court in a set of rulings commonly referred to as Twombly and Iqbal. Those cases, Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007), require that a plaintiff plead a factual basis in support of a cause of action, as mere conclusory allegations are insufficient to state a claim under Federal Rule of Civil Procedure 12(b)(6).

DismissedThe court in Camp ultimately relied on that standard set out in Twombly and Iqbal, showing what an important tool the pleading standard in federal court can be in opposing bad faith claims. In fact, even though the court rejected the insurer’s argument that the heightened pleading standard for fraud under Rule 9(b) should apply, the court still concluded that the insured’s complaint insufficiently alleged bad faith. As the insured’s first complaint was dismissed for failing to plead facts “other than denial and refusing to make an offer,” the plaintiff amended her complaint by including allegations, for example, that the insurer acted in bad faith by:

Failing to make a settlement offer despite clear and uncontradicted medical records and reports establishing that plaintiff suffered serious and permanent injuries to her neck, right shoulder and right wrist including significant aggravations to pre-existing cervical spondylosis with broad based disc protrusion at C5-6, cervical radiculopathy at C6, right shoulder sprain and strain, and carpal tunnel syndrome requiring surgical intervention. See Exhibit B.

Camp, 2016 U.S. Dist. LEXIS 74496 at *6-7.

Yet, the court again found that the amended complaint failed to enumerate “specific conduct” other than a disagreement over the value or amount of the claim. The complaint lacked any “factual specificity as to what claims handling practices were abusive or how NJMIC acted unreasonably.” For example, analyzing the allegation above, the court concluded that the failure to accede to a demand was not a factual basis to support a claim of bad faith. Therefore, the court granted, with prejudice, the insurer’s motion to dismiss, demonstrating that any complaint that fails to allege sufficient factual support should not go unchallenged. Camp reminds us that insurers should always consider whether removal is appropriate as it may ultimately save the insurer the fees and costs associated with prolonged litigation. While it is just one factor in the equation, it is certainly a benefit that deserves proper thought and consideration.

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The Duty to Follow-up Part II: When The Underlying Litigation Changes

In many states, an insurer not only has a duty to timely communicate with its insured and respond to demands for settlement by a claimant asserting a claim regarding the adjustment of a loss, that duty may also include the duty to follow-up on those communications.  Recent case law further emphasizes the importance of follow-up in the context of an offer to settle made by a tort claimant, as well as when the insurer is apprised of changes to the status of claims and defenses in the underlying tort case. 

Neglecting the duty to follow-up can cost an insurer – converting a $25,000 claim to a $7 million loss.  As a recent case decided by the United States District Court for the Northern District of Illinois shows, the costs of not doing so, even on a relatively small claim under a low limit policy, can be catastrophic.

Horace Mann Insurance Company provided automotive insurance limits of $25,000.  Less than 45 days after a motor vehicle accident involving its insured near Tampa, Florida in which the insured’s SUV collided with a motorcycle, Horace Mann was presented with a letter from an attorney for the motorcycle driver offering to settle his claim for the $25,000 limits of the policy.  The letter noted that medical records were not yet available, but included photos of the claimant’s injuries and an exchange of information form filled out at the scene of the accident.  The attorney letter offered to settle the claim if Horace Mann tendered a check for its $25,000 policy limits within 20 days.

The insurer responded before the 20-day period elapsed, acknowledging that it was willing to settle the case for its policy limit, but needed to receive the claimant’s hospital records before settling.  Because the records were not received in that timeframe, the insurer did not tender its settlement check within the time set forth in the demand.

Forty-five days later, suit was filed against the insured.  The case was tried three years later resulting in a $17 million verdict, which was later settled for $7 million while post-trial motions were pending.

Horace Mann was insured for its own E&O by Lexington Insurance Company.  Lexington denied the claim for extracontractual benefits paid by Horace Mann to the claimant on the basis that no claim had been made directly against Horace Mann triggering the E&O coverage afforded by the Lexington policy.  Horace Mann, while never having been named in a claim, did at a point during the post-trial proceedings and before settlement of the underlying litigation, receive an email in which the threat of “bad faith” was made, but it was never conveyed to Lexington.

In a May 13, 2016 ruling, District Judge Charles Norgle held in Lexington Ins. Co. v. Horace Mann Ins. Co., No. 1:11-cv-02352 (N.D. Ill., May 13, 2016), that Horace Mann’s failure to meet the 20-day deadline of the underlying demand in the injury case, coupled with its failure to communicate with its own E&O insurer regarding its settlement of the underlying claim, meant Horace Mann was not only obligated to pay the $7 million settlement, but forfeited its own professional liability coverage for that settlement.

Horace Mann was also left without recourse against its broker, AON, for failing to timely report Horace Mann’s E&O claim to Lexington.  The Court concluded that AON followed the directions given to it by Horace Mann to report only a potential circumstance and that Horace Mann did not ask AON to take any further action after the reporting of those circumstances.  This resulted in no report of an actual claim to Lexington, which was the basis for Lexington’s denial.

This case highlights the importance of thoughtful and strategic follow-up at every stage of the claim process.  Otherwise, as with this case, a $25,000 loss can turn into a $7 million loss.  The insurer’s lack of follow-up in response to the underlying settlement offer and in its own E&O insurance claim resulted in the inability to obtain insurance coverage for the insurer’s failure to settle the underlying claim.

Demands within limits are fraught with potential traps.  This case illustrates the importance of not only making a proper record of the claim investigation and adjustment, but also that lack of follow-up can turn even a small claim into a horrendous loss.

The Duty to Follow-Up When the Underling Litigation Changes.  Bamford, Inc. v. Regent Ins. Co, et al., No. 15-1968, — F.3d —, 2016 WL 2772585 (8th Cir. May 13, 2016), recently decided by the United States Court of Appeals for the Eighth Circuit, applying Nebraska law, was an otherwise typical bad faith failure to settle case where a demand to settle was made in an automobile accident case within the insurer’s limit which was not accepted by the insurer.  The tort case went to trial resulting in a substantial excess verdict.

Bamford’s commercial automobile liability policy limit was $6 million.  The underlying case arose when a Bamford employee, Michael Packer, was operating a Bamford vehicle and collided with another vehicle driven by Bobby Davis (“Bobby”), with his brother, Geoffrey Davis (“Geoffrey”), as a passenger.  A steel pipe on the roof of the Bamford vehicle dislodged during the collision and pierced Davis’ left thigh, traveled through his abdomen and pelvis, and out of his right buttock, pinning him in his vehicle.  Bobby was trapped in this position for 30-60 minutes before paramedics were able to free him.  Geoffrey, his brother, suffered minor injuries, and settled his claim against Bamford.  Packer, the Bamford employee, burned to death inside his vehicle.

Subsequently, Bobby, Geoffrey and Bobby’s wife, Brenda Davis, retained counsel.  In demanding payment of the $6 million policy limits of Bamford’s policy, the Davises’ counsel of course maintained that his client’s case was worth well over the $6 million policy limit.  Regent disagreed, relying on its appointed defense counsel’s assessment of a verdict potential of no more than $1 million.

So far, nothing unusual about the background of the case, but here is where the duty to follow-up is implicated and where things went wrong for Regent.  In addition to Regent’s defense counsel’s dollar exposure analysis, in a later report, defense counsel advised of a new theory of defense that could apply to diminish liability – namely, that Packer, Bamford’s driver, lost consciousness before causing the accident.Defense counsel nevertheless increased his dollar exposure analysis to between $1.5 and $1.75 million, once defense counsel’s further investigation into the loss-of-consciousness defense revealed that Packer had a history of seizures, which Packer had to control through medication.  Even before defense counsel completed his investigation into the new defense, defense counsel opined that the new loss of consciousness defense only had a 25% chance of success. In refusing to settle, Regent relied on both the dollar exposure analysis and the new defense theory.

The parties participated in two mediations – one pre-suit mediation; and a second mediation after the Davises filed suit against Bamford and Packer’s estate, alleging several theories of Bamford’s liability for their injuries.  The Davises filed a motion for partial summary judgment, requesting that the lower court strike Bamford’s loss-of-consciousness defense.  The court granted the Davises’ partial summary judgment motion, and also found that Bamford was liable as a matter of law.  Thus, the case would proceed to trial solely on the issue of damages.  The settlement history recounted in the Court’s decision indicates that the last demand prior to trial was $3.9 million from plaintiff and an offer of $2.05 million from Regent.  The case went to trial resulting in a jury verdict for the Davises of $10.6 million.  Bamford appealed, and, during the appeal, the parties settled the case for approximately $8 million, for which Bamford was responsible for the amount in excess of the policy limits.

Subsequent to the settlement of the underlying case, Bamford filed this action against Regent, alleging that Regent breached its fiduciary duty and acted in bad faith in refusing to settle the Davises’ claims.  Bamford sought damages in the amount it contributed to the settlement, as well as the fees it paid to its counsel.  The jury returned a verdict in Bamford’s favor, awarding the requested damages of $2,037,754.33, and Regent then filed a renewed motion for judgment as a matter of law, challenging the sufficiency of the evidence and the jury instructions, which the district court denied.

Affirming the United States District Court for the District of Nebraska which presided over the bad failure to settle trial against Regent, the Eighth Circuit made special note of Regent’s failure to follow up on the change in status of the parties’ respective positions in the underlying litigation heading into trial:  Here, the jury could have concluded that Regent — by relying on valuations received from mediators, counsel, and internal adjusters – reasonably embraced a low value for the Davises’ claims early in the case, but ultimately acted in bad faith in failing to reassess the value of the claims in light of case developments and advice from its own players that the low value was inaccurate.  Regent’s failure to adjust its valuation following the district court’s grant of partial summary judgment strongly supports such a conclusion.

Again, the district court did not merely grant the Davises’ partial summary judgment motion that resulted in the Court striking the loss-of-consciousness defense.  The court went much further and found Bamford liable as a matter of law.  For nearly two years, Nolan [defense counsel] and Robin [Regent adjuster] had counted on a tempering of damages when the jury heard the purportedly sympathetic facts that would be introduced to support this defense, such as Packer’s history of seizures and use of seizure medication.  They had also believed that the loss-of-consciousness defense, which would have provided Bamford a complete bar to liability, had a slight chance of success.  In the wake of the district court’s ruling, the jury would hear neither the purportedly sympathetic facts supporting a medical emergency nor other evidence that could moderate its view of Bamford’s culpability.

The lesson from Bamford is clear:  litigation is very fluid and any material change in litigation must be considered and evaluated by an insurer faced with potential liability for a verdict in excess of policy limits.  Remember also that reliance upon defense counsel’s assessment of risk is only as good as that counsel’s last report.

Finally, if developments in the litigation are not being factored into defense counsel’s risk assessment or that risk assessment is unclear, insurers who guess wrong on settlement will not be able to later effectively rely on defense counsel’s unclear or inadequate risk assessment as a defense to liability for a verdict in excess of policy limits.

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Posted in Bad Faith
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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