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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Posted in Bad Faith

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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Should You Withdraw The Reservation of Rights To Avoid Entry of a Consent Judgment?

shutterstock_327183557An insurer that defends its insured against a third party’s lawsuit, while reserving rights to deny coverage to its insured for any judgment, may face a decision point when underlying settlement discussions become ripe to resolve the case.  In some states, the insurer must decide whether to stand on its coverage defenses, or whether to withdraw its reservation of rights with the understanding that it will pay for the settlement within its policy limits and waive those defenses while it gains control over the settlement negotiations.  These decisions are among the greatest challenges, and are often the most time-sensitive issues, that third-party liability insurers may face when invited to participate in underlying mediations.

One of the key factors influencing whether withdrawing the reservation is prudent, is the strength of the coverage defenses being asserted.  Some jurisdictions, such as Texas, are explicit that an insurer’s duty to settle extends only to the covered claims and not the non-covered claims.  Given this clear law, in Texas a carrier can control the defense and settlement, even while its reservation of rights is outstanding.  Other states are less explicit.  They may generically permit an insurer defending under reservation to offer contributions to an underlying settlement based on the strength of its coverage position, or they may not have clear case authority on the subject at all.  Uncertainties may also exist if various “duty to settle” cases in the applicable jurisdiction come out different ways based on their unique facts.  One thing is certain:  when the insurer withdraws its reservation, any “conflict of interest” ceases that may have been based on the insurer’s potential non-coverage of a claim it defends, and the insurer’s and insured’s interests align in protecting the policy limits (e.g., to cover the insured’s potential future losses).   Read more ›

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The Duty to Follow-up: How A $25,000 Offer To Settle Turns Into A $7 Million Loss

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.  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.

To Do List 3This 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.

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Posted in Bad Faith

Will Discovery Unlock Your Claim File? Federal or State Court Jurisdiction Could Make The Difference

Differences between federal court and state court procedure can be important for insurers that find themselves involved in “bad faith” litigation.  If a lawsuit alleging extracontractual claims is filed in federal court, or if it is removable to the federal court’s jurisdiction, the parties’ discovery approach and procedural strategies could significantly change from those of a similar case that is litigated in state court.

Skeleton Key 5For example, discovery into the contents of an insurer’s claim file in bad faith litigation may be more restricted in federal court than in state court.  As a general suggestion to all insurers, the editors of “Avoiding Bad Faith” believe that claims representatives can improve the substance of their claim files by always assuming that everything in their claim files is discoverable (whether by the insured or as part of an in camera review by the court) in a bad faith case.

Washington state has the 2013 case of Cedell v. Farmers Insurance Co., which imposed, uniquely among all 50 states, a “presumption of discoverability” that presumes “the attorney-client and work protect privileges are generally not relevant” to materials collected within the insurer’s claim file, once the insured has sued the insurer alleging bad faith.  The Cedell court identified methods to overcome the discoverability presumption and suggested that in camera review of contested documents might be necessary, but without mapping a trial court’s review process or even clearly indicating when to undertake in camera reviews of the insurer’s claims file during the process.  Shortly after the issuance of Cedell, federal court judges in Washington State held that Washington’s state law decision did not control how federal courts should analyze protections of work product doctrine because concepts of work product and “anticipation of litigation” were matters of federal procedural, not substantive, law.  Consequently, these federal courts applied federal case law and the Federal Rules of Civil Procedure to an insurer’s claim file, not those required by Cedell.  In sum, Washington’s federal courts have continued to protect the work product contained in claim files from discovery, in ways that Washington’s state courts might not protect those same documents.

In December 2015, District Judge Richard A. Jones’s discovery rulings in Cedar Grove Composting Inc. v. Ironshore Specialty Insurance Co., 2015 WL 9315539 (W.D. Wash. Dec. 23, 2015), took another step away from Cedell, consistent with an Eastern District of Washington opinion that was issued the prior year.  The insurer presented evidence that its outside legal counsel was not retained to handle, process, or evaluate claims against the insured, but instead advised the insurer on coverage and extra-contractual issues.  Judge Jones concluded that the lawyer’s communications with the insurer in the claim file were likely covered by Washington’s attorney-client privilege.  Moreover, Judge Jones ruled that the discoverability of attorney-client privileged communications in an insurer’s claim file could be properly opposed by affidavits, rather than through the procedural in camera review process imposed by Cedell.   Judge Jones further ruled that an “anticipation of litigation” entitling the insurer’s claim file documents to work product protection began over seven months before the insurer received a “notice of intent to sue letter,” when “there was a fair prospect” of litigation.

While the best proactive approach for a claims handler is to treat claim files as though their contents will be seen by a judge, whether an insurer actually has to produce its claim file materials could effectively be determined by a simple question: federal court or state court?

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When is Rescission Based Upon Material Misrepresentations The Proper Course of Action?

Carriers rely on application representations regarding the existence of potential claims.  Sometimes, the carrier learns after the fact that an applicant may not have reported all known potential claims.  What can/should the carrier do?  A recent example is found in Continental Casualty v. Gargoyles, a case involving allegations of securities fraud.  Continental extended a defense under a reservation of rights, which it later sought to withdraw when the president of Gargoyles confessed to criminal wrong-doing as part of a plea agreement.  In this case, the facts confessed in the plea agreement contradicted the reported claims in the insured’s policy application.  Once the plea agreement was confirmed, Continental moved to rescind the policy and recoup its defense costs.  The court held that the policy was void from inception based on the insured’s misrepresentations in the application.

Stop DominosAlthough such an outcome seems obvious, a carrier must always look at state statutes governing policy rescission, as some statutes may limit the ability to rescind a policy, even when the misrepresentations are clearly material.  Continental also argued that it should be able to recover its defense costs expended before the policy was declared void.  Many E&O/D&O policies contain an explicit cost recoupment provision, although the Continental policy at issue did not.  The Court seemed to concede that a recoupment right would exist, yet the Court withheld a ruling on recoupment because Gargoyles argued that a Continental employee had waived such a right by stating that Continental “would pay defense costs to the end.”  Recoupment under facts such as these makes good legal (and equitable) sense due to the insurer’s agreement to defend under what amounts to false pretenses.  Whether and when to rescind, as well as what additional relief to pursue, should be weighed carefully as these questions present significant legal and strategic issues fraught with potential bad faith ramifications.

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Avoid Inconsistent Communications By “Revolving Door” Adjusters

In CE and CLE courses, we hear all the time that the most often cited reason for a grievance or complaint is lack of communication.  This truism provides a useful rule of thumb to avoid bad faith claims.  Remember, for most claimants, the event giving rise to an insurance claim often is the most significant event which will happen to the claimant this year.  Events such as a car wreck, an injury claim, a home fire, a product disruption can wreak havoc on the insured.   And, many insureds have little idea as to how to cope with these disruptions.  At these times, when tension runs high and patience runs low, the carrier which responds promptly to communications from the claimant will be more likely to have a happy insured and less likely to be in a lawsuit.

Revolving DoorFor example, in a recent matter, the independent adjuster initially hired to investigate a claim had to be replaced due to health concerns.  The replacement adjuster passed the claim to a third adjuster due to scheduling difficulties.  The third adjuster then was replaced when the adjuster’s agency was purchased by a larger concern.  During the multiple changes, the policyholder, a construction company, sent increasingly urgent communications stating that a failure to obtain claim resolution was jeopardizing its ability to finish projects.  By the time the fourth adjuster focused on the file, the policyholder had been held in default on several projects and litigation ensued.

Tales like this highlight the need for an insurer to keep communicating with and responding to a policyholder.  Had there been better communication, this result potentially could have been averted.

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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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