Eleventh Circuit Reaffirms There Is No Bad Faith Unless the Settlement Offer Fully Protects the Insured

Recently, the Eleventh Circuit, applying Georgia law, reaffirmed that an insurer cannot be liable for negligently failing to settle a case unless the settlement demand provides protection to the insured against all potential claims, even those which have not been asserted.

Linthicum v. Mendakota Insurance Company, No. 16-16593 (11th Cir. May 3, 2017) arises from truly tragic circumstances.  While driving intoxicated, Bobby James Hopkins, II, struck and killed the Linthicums’ 11 year old son.  Hopkins fled the scene, and attempted to have his car repaired.  The child lived a short time before dying. 

When the claim was reported, Mendakota Insurance Company (Insurer) noted that there was a “probable recovery” and set the reserves for the $25,000 policy limit of Hopkins’ auto policy.  Insurer informed Hopkins that he would be responsible for any excess liability over the $25,000 policy limit.  Insurer attempted on several occasions to tender the $25,000 policy limit to settle all claims which might exist against Hopkins, but the Linthicums’ attorney declined to accept the tender.  Eventually, the Linthicums sent Insurer a timed settlement demand for the $25,000 policy limit, which demand was limited to the wrongful death claims the Linthicums had against Hopkins.  Insurer failed to respond, and the Linthicums filed a wrongful death suit against Hopkins.  At no time did the Linthicums open an estate proceeding on behalf of their deceased son, and the lawsuit did not assert any claims which an estate might have for the pain and suffering endured by the Linthicums’ son before he died.  After receiving the lawsuit, Insurer contacted counsel to try and retender the $25,000, only to be told that the settlement demand had expired.  Insurer was also told that its original tender was for more claims than were covered by the expired settlement demand.  The Linthicums reached a settlement agreement with Hopkins for $1,200,000, along with an assignment of Hopkins’ claims against Insurer. 

The trial court granted summary judgment to Insurer, and the Eleventh Circuit upheld that decision.  The court reasoned that the settlement demand was ineffective to trigger bad faith liability because the demand would settle only some of the claims (the wrongful death) claims against Hopkins, leaving Hopkins potentially exposed to other liability in the form of a claim by the non-existent estate of the Linthicums’ deceased son.  The Linthicums argued that the absence of any claim asserted by an estate, as well as the non-existence of such an estate, meant that the timed settlement demand would cover all existing, asserted liability against Hopkins.  Therefore, reasoned the Linthicums, Insurer could be liable for negligently failing to accept that demand.  The courts rejected this argument, noting that Georgia law provided a method of recovery for the estate, should an estate be opened.

The Linthicum holding reaffirms that under Georgia law a carrier acts negligently in refusing to settle a claim only when the settlement demand effects a complete release of liability against the insured party.  Because the Linthicums’ demand left Hopkins potentially exposed to future liability, Insurer could not be liable for failing to accept the demand.

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Florida Alert: Can a Liability Carrier be Sued for Bad Faith when Its Insured Was Not Exposed to Liability In Excess of the Policy Limits?

.Male judge in a courtroom striking the gavelThe Third District Court of Appeals finding recently held that in certain circumstances, a third party can maintain a bad faith claim against an insurer even if the insured is not exposed to liability in excess of the policy limits.  The insurer, claiming that the decision is in direct contradiction to established Florida Supreme Court precedent and other precedential decisions, petitioned the Florida Supreme Court to review the decision.  See Infinity Indemnity Insurance Company v. Delia Reyes, et al., Case No. SC17-659 (Florida, April 26, 2017).

The bad faith lawsuit arose out of an auto accident case.  Delia Reyes was involved in a car accident with Jorge Arroyo, Jr., who is now deceased.  Reyes filed a personal injury lawsuit against Arroyo’s estate in circuit court, rather than probate court.  The Arroyo estate tendered the lawsuit to its liability insurance company Infinity. Infinity declined to defend the lawsuit. Three years after the filing, Reyes entered into a consent judgment agreement with the Arroyo estate assigning its claim against Infinity for any bad faith in failing to defend the lawsuit, among other agreements. Reyes then proceeded to sue Infinity for bad faith.

After a round of procedural issues including Infinity’s intervention in the probate matter, the lower court granted summary judgment for Infinity which the Third District then reversed. Infinity has now petitioned the Florida Supreme Court for review, arguing that the Third District’s opinion is in direct contradiction with Florida precedent and alters long standing Florida law that a third party cannot bring a suit against an insurer unless their insured was subject to liability in excess of the policy limits. Read more ›

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Pennsylvania Federal District Court: Insurer’s Reliance on “Reasonable” Interpretation of Law Does Not Automatically Bar Bad Faith

silhouettes of concert crowd in front of bright stage lightsOn March 13, 2017, the United States District Court, Eastern District of Pennsylvania, rejected the argument that an insurer does not act in bad faith if it relies on a reasonable interpretation of unsettled case law.  The court explained that while supporting case law is highly relevant to the bad faith determination, it does not automatically defeat a bad faith claim.  Allstate Ins. Co. v. Lagreca, 2017 WL 959543, at *2 (E.D. Pa. Mar. 13, 2017).  Nevertheless, the district court ultimately found the insurer’s initial decision to deny liability coverage was reasonable, and granted summary judgment on the bad faith claim, as the insurer “engaged in a reasoned process” prior to denying coverage.

Background

In the underlying lawsuit, the plaintiff concertgoer filed suit against the insured, Dan Lagreca, for “violently beat[ing] and kick[ing]” him in the parking lot after the concert.  The plaintiff asserted a negligence claim, alleging Lagreca carelessly drank himself into incoherence that would foreseeably result in violent behavior.  When Lagreca sought a defense from his parents’ homeowner’s insurance policy issued by Allstate Insurance Company, Allstate denied coverage.  Allstate then filed a declaratory judgment action asserting it had no duty to defend or indemnify Lagreca, as the policy limited coverage to damages caused by “accident[s],” and excluded those resulting from “intentional or criminal acts,” even if the insured “lack[ed] the mental capacity to govern his . . . own conduct.”

Initially, Allstate moved for judgment on the pleadings, which the district court denied and required Allstate to defend Lagreca.  Allstate defended and settled the underlying lawsuit.  Before the district court ruled on Allstate’s judgment on the pleadings, Lagreca counterclaimed for breach of contract and statutory bad faith under 42 Pa. Cons. Stat. section 8371.  Allstate moved for summary judgment on the counterclaims.

Analysis

To recover for bad faith under Pennsylvania law, a plaintiff “must show by clear and convincing evidence that the insurer (1) did not have a reasonable basis for denying benefits under the policy and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim.”  Post v. St. Paul Travelers Ins. Co., 691 F.3d 500, 522 (3d Cir. 2012) (internal quotations omitted).  The insurer “does not act in bad faith by investigating and litigating legitimate issues of coverage.”  Id. at 523.

Allstate argued an insurer does not act in bad faith if it relies on a reasonable interpretation of unsettled case law, and cited three decisions that, at the time Allstate filed the action, had held the same or similar policy language excluded coverage under similar circumstances.  The court held, however, that Allstate’s characterization of Pennsylvania bad faith law was “incomplete,” because “[s]upporting authority, though highly relevant, does not automatically defeat a bad faith claim.”  Lagreca, 2017 WL 959543 at *2 (citing J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993)).  Instead, bad faith claims are highly “fact specific” and their touchstone—“reasonableness”—only “has meaning in the context of each case.”  Id. (internal quotations omitted).

Nevertheless, and applying this “more nuanced standard” to the record, the district court concluded Allstate’s initial decision not to provide coverage was reasonable.  The relevant coverage question was “not an easy one,” the underlying complaint was “not clear,” and the district court’s denial of Allstate’s motion for judgement on the pleadings was narrow.  Indeed, there was “substantial legal basis” for Allstate’s decision to deny coverage, and “in no sense could Allstate’s denial of coverage be deemed arbitrary.”  Significantly, the letter from Allstate’s counsel denying coverage “appropriately” cited the cases supporting Allstate’s position, demonstrating Allstate “engaged in a reasoned process before denying coverage.”

Because, as a matter of law, a reasonable basis existed to deny coverage, Allstate was entitled to summary judgment on Lagreca’s bad faith claim.  Further, because Allstate both paid Lagreca’s defense costs and indemnified him—after the district court denied Allstate’s motion for judgment on the pleadings—the district court granted summary judgment on the breach of contract claims.

Lagreca deserves attention as a reminder that, in Pennsylvania, the hallmark of the bad faith determination is whether the insurer acted reasonably in handling the claim.  What is more, the case demonstrates unsettled case law is not an absolute shield against bad faith liability.  However, well written position letters from counsel detailing the reasoning behind the coverage decision, including supporting law, may go a long way in combatting bad faith allegations if the claim results in coverage litigation.

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Washington: Third-Party Administrators and Adjusters Can Be Liable in Bad Faith Actions

On April 11, 2017, the Division III Washington Court of Appeals, on a 2 to 1 vote, held that third party administrators and adjusters can be liable in bad faith actions under multiple legal theories.  Merriman v. Am. Guar. & Liab. Ins. Co., No. 33929-7-III (Apr. 11, 2017). In Merriman, the storage warehouse owned by Bernd Moving Systems (“Bernd”) and its customer-owned contents, burned to the ground. Customers William and Colleen Merriman (“Merrimans”) lost contents worth over $300,000. Before the fire, the Merrimans had been assured by Bernd that their property would be fully insured. Following the fire, the insurer engaged an independent adjusting firm (“IA”) to adjust the claims for the fire and more broadly administer the entire review, adjustment, settlement, and payment process pursuant to a preexisting third-party agreement. In turn, the IA engaged an agent (“Local Agent”) as its local agent to handle the ground work.

Although the policy covered “[p]ersonal property of others in [Bernd’s] care, custody and control” and provided that “payment for loss of or damage to personal property of others will only be for the account of the owner of the property[,]” the IA instructed the Local Agent to tell customers there would likely be no coverage under Bernd’s policy and that they should file a claim under their own homeowner’s insurance. The Merrimans instituted an action against Bernd alleging its employee’s negligence caused the fire. Through discovery, the Merrimans obtained a copy of the policy and learned that it covered their loss. Consequently, the Merrimans amended their complaint and named the insurer, IA, and Local Agent as additional defendants. They alleged insurance bad faith, negligent misrepresentation, negligence, and violation of the Consumer Protection Act (“CPA”) and were granted class certification. Both the insurer and the Local Agent settled, and the IA successfully moved for and was granted summary judgment and class decertification.  The Merriams appealed.

The court first determined the Merrimans were insured under the policy, and then turned its attention to the extra-contractual claims.

The court rejected IA’s argument that a common law bad faith claim is only available against an insurer. In analyzing the merits of IA’s contention, the court read common law and statutes to broadly apply to “the business of insurance”, including an administrator and adjuster.

The court then rejected IA’s contention that the dismissal of the negligent misrepresentation and negligence claims was warranted because the Merrimans failed to demonstrate that IA owed a duty to them and other customers. In analyzing the merits of IA’s contention, the court noted that, in the context of business transactions, a party owes a duty to disclose “facts basic to the transaction, if [the party] knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.” The court also concluded that, because IA’s agreement and corresponding duties pursuant to it were intended to benefit the claimants, IA owed a duty to the Merrimans and other customers.

Finally, the court addressed the Merrimans’ CPA claim.  While the court rejected the argument that this was per se claim because of alleged Washington Administrative Code violations, it concluded that the Merrimans asserted a viable non per se CPA claim because they could still argue that IA’s failure to alert customers to available coverage was an unfair or deceptive act in trade or commerce.

Ultimately, the court reversed the trial court’s dismissal of the Merrimans’ claims as against the IA for insurance bad faith, negligent misrepresentation, negligence, and violation of the CPA. In remanding the case, the court instructed the trial court to reconsider its decertification decision.

The Merriman opinion was issued by one of Washington’s interim courts of appeal, and thus the case may make its way to the state supreme court.  Presently, those involved in the insurance industry—apart from insurers—may be subject to theories of liability commonly believed to apply exclusively to insurers—particularly, bad faith claims.

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South Carolina Federal District Court: Insurer May Act in Bad Faith by Considering Extrinsic Evidence to Deny Duty to Defend

On February 6, 2017, the United States District Court, District of South Carolina, found a genuine dispute of material fact existed as to whether a Roofing Limitation Endorsement in a liability policy barred the insurer’s duty to defend. Williford Roofing, Inc. v. Endurance Am. Specialty Ins. Co., 2017 WL 479507, at *3-4 (D.S.C. Feb. 6, 2017). Moreover, while an insurer’s defense obligations are “not strictly controlled by the complaint” under South Carolina law, evaluating the complaint is the insurer’s “first step.” Id. at *4. Here, the district court found the insurer skipped the first step and instead looked first to extrinsic evidence to “deny coverage altogether.” Id. As such, the court concluded the trier of fact could find the insurer acted in bad faith, and denied the insurer’s motion for summary judgment on the bad faith claims.

In the underlying lawsuit, the insured, Williford Roofing, Inc., initially sued a homeowner to recover monies owed for roofing work. The homeowner counterclaimed, alleging rainwater entered the home after Williford removed shingles and left the home exposed to heavy rain. To recover any damages owed to the homeowner, Williford added its subcontractors to the lawsuit, which eventually settled.

Williford previously notified its insurer, Endurance American Specialty Insurance Company, and requested coverage under its liability policy. After Endurance denied coverage, Williford filed suit in state court, and Endurance removed the suit to federal court. Williford asserted claims for breach of contract and bad faith, citing Endurance’s failure to defend or indemnify. Endurance moved for summary judgment on all claims.

In considering Endurance’s motion, the district court began with the Roofing Limitation Endorsement, which provided:

It is hereby agreed that we do not cover claims, loss, costs or expense due to “property damage” arising out of wind, hail, snow, rain, ice or any combination of these unless a suitable waterproof temporary covering, able to withstand the normal elements and large enough to cover the area being worked on, has been properly secured in place. This cover is to be put into place any time the contractor leaves the job site. This limitation applies to any sub-contracted work performed on behalf of the insured, including any sub-contractors of sub-contractors.

Williford, 2017 WL 479507, at *2 (emphasis added). Applying the key language underlined above, the court found the affidavits and deposition testimony demonstrated a factual dispute as to whether any covering had been secured on the roof. Because the policy did not define the term “suitable,” and there was no “judicially determined definition of the term,” the district court found a fact issue existed as to whether the endorsement applied. Id.

Significantly, Endurance, in denying coverage, had relied on a letter from the homeowner alleging Williford failed to “adequately” cover portions of the roof during heavy rains. A Williford representative, however, informed Endurance the roof was “dried in” on the night of the heavy rain. Moreover, the allegations in the counter-claim specifically stated Williford failed to notice or stop the rainwater from entering the house “‘through their roof covering.’” Resolving the factual dispute in the insured’s favor, the court found the roof was covered at the time of the rain for purposes of Endurance’s motion for summary judgment. Regarding the term “suitable,” the district court explained Endurance’s definition—i.e., any roof covering that allows water to penetrate is not “suitable”—would render coverage under the policy illusory.

Next, the district court considered Williford’s bad faith claims, noting an insurer owes a duty of good faith to satisfy its duties to both defend and indemnify within policy limits. Viewing the facts most favorably to Williford, the court concluded a reasonable jury could find Endurance both breached the policy and acted in bad faith by refusing to defend Williford. In South Carolina, the duty to defend is based on the allegations and the policy terms. The insurer must defend if the allegations create even a possibility of coverage. The duty to defend, however, is not strictly controlled by the complaint, and extrinsic facts known by the insurer may be considered. See USAA Prop. & Cas. Ins. Co. v. Clegg, 661 S.E.2d 791, 798 (S.C. 2008). Still, evaluating the allegations of the complaint is the first step that must be taken in making the duty to defend determination. Id. at 797. Because, according to the district court, Endurance skipped this first step and looked only to the homeowner’s letter to deny coverage altogether, Williford’s bad faith claims survived summary judgment.

Williford is an interesting decision and offers a warning to insurers, as the insured’s bad faith claims survived summary judgment based on the district court’s conclusion the insurer did not correctly apply the law in assessing whether it had a duty to defend its insured. The court put great significance on the insurer’s reliance on the homeowner’s letter in denying coverage. There is at least the suggestion that had the insurer more specifically detailed, in writing, that it was looking first to the allegations of the complaint and only after that assessment to extrinsic evidence, the district court might have viewed the bad faith claims differently.

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Large Deductibles and Self-Insured Retentions – Potential Bad Faith Exposures

As the economy recovers from the Great Recession, the insurance industry is experiencing an increase in the need to evaluate risk retention and risk transfer mechanisms tailored to the commercial policyholders’ risk management goals as applied to its policy provisions and obligations owed to its insured. Whether labeled as a large or high deductible, matching deductible, or self-insured retention, these mechanisms are governed by the plain language of the relevant policy provision or endorsement and insurers and insureds alike can minimize potential exposures by ensuring that the relevant policy language aligns with their intent. In addition, these vehicles bring their own set of unique considerations in order to maintain good faith practices.

For example, in Roehl Transport, Inc. v. Liberty Mutual Insurance Co., 784 N.W.2d 542 (Wis. 2010), the court recognized a claim for bad faith failure to settle within the insured’s deductible. The court explained:

“Just as in traditional third-party excess judgment cases, the insured with a high deductible needs the protection of a bad faith cause of action to guard against the risk that an insurance company’s exercise of control over a claim might favor its own financial interests over those of the insured. This possibility gives rise to a cause of action for bad faith.”

Id. at 554-55. Although there was no excess verdict, the Roehl court recognized the insured’s claim for bad faith for failure to minimize the exposure within the deductible.

In 2015, the United States District Court for the District of South Carolina denied summary judgment and held that fact questions remained as to whether the insurer acted in bad faith. See Bridge Lofts Prop. Owners Assoc. v. Crum & Forster Specialty Ins. Co., 2015 U.S. Dist. LEXIS 156947 (D.S.C. Nov. 2, 2015). The insured alleged that the insurer acted in bad faith by denying coverage after the insured incurred significant sums in claim-related expenses and exhaustion of the self-insured retention was “imminent.” Id. at *35. In addition, the insured argued that the insurer did not carry out its good faith duty to investigate before the insured satisfied its retention. The insured also raised a breach of contract claim alleging that the self-insured retention provision was ambiguous.

For more information on risk transfer, please refer to Chapter 1A: Self-Insured Retentions Versus Large or Matching Deductibles in the New Appleman on Insurance Law Library Edition, by LexisNexis, in which Deborah M. Minkoff and Abby Sher of Cozen O’Connor’s Global Insurance Department provide an overview of risk retention and risk transfer mechanisms that impact the extent to which an insurance policy will respond to a loss. This chapter outlines the distinctions between large deductibles and self-insured retentions in connection with the duty to defend, erosion of the insured’s retention by defense costs, satisfaction of the deductible or retention, “other insurance” and allocation, and provides information necessary to foster successful insurer/insured relationships.

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Webinar: Review of Significant Bad Faith Cases in 2016 (3/23/2017 at 11:30a – 12:30p ET)

Julia Molander and Jennifer Kennedy-Coggins of the Global Insurance Department present this one-hour Cozen O’Connor webinar which will provide a review of some of the most significant insurance coverage bad faith cases decided across the United States in 2016. The speakers will examine key decisions, provide a discussion of the bad faith trends, and discuss the practical tips that can be gleaned from the courts’ 2016 decisions. The goal of this presentation is to take away practical tips on how insurers can avoid bad faith and how to address and handle claims through discovery and trial.

In this webinar, the speakers will discuss:

  • The latest trends in punitive damage awards
  • Discovery of “institutional” bad faith
  • Bad faith standards, from strict liability to heinous misconduct

FL, GA, TX, NC, and PA approved for 1 CE Credit. CLE is approved in PA and through reciprocity in NY and NJ. CLE is pending in any additional requested states. Insurance license/bar numbers required. Credits cannot be awarded without the information.

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Mediation Statements in Federal Courts May or May Not be Privileged and Can Be Waived

The Bankruptcy Court for the Western District of Missouri declined to recognize a mediation privilege in In re Lake Lotawana Community Improvement District, 2016 WL 7984347 (Bankr. W.D. Mo. Sept. 19, 2016), despite the fact that it conceded that other circuits have done so. Lake Lotawana did not involve a mediation with a plaintiff and an insured; however, the cases presented by the parties drew heavily from the case law in the bad faith context.

More specifically, in a Chapter 9 bankruptcy proceeding, the debtor must allege that it negotiated in good faith at a pre-petition mediation. In Lake Lotawana, the mediation failed and the debtor alleged as a prerequisite to filing a Chapter 9 proceeding that it had negotiated in good faith. In response, the creditor sought the debtor’s mediation statement and argued that the mediation statement was not privileged. In rebuttal, the debtor asserted a work product privilege and argued that the statement was privileged because it was prepared in anticipation of litigation and the mediation privileged also applied.

Courts within the Eighth Circuit, which includes Missouri, had not previously addressed the applicability of the mediation privilege. Initially the Court pointed out that only the Sixth Circuit (Kentucky. Michigan, Ohio and Tennessee) had adopted a mediation privilege. In actuality, courts in the Third Circuit (Pennsylvania), Ninth Circuit (California), and Eleventh Circuit (Georgia) also recognize a mediation privilege. The Seventh Circuit (Illinois, Indiana and Wisconsin) and the Federal Circuit have declined to recognize such a privilege. In deciding whether to adopt a mediation privilege in Missouri, the Court discussed Jaffee v. Redmond, 518 U.S. 1 (1996) which established four factors that must be satisfied before a federal common law privilege can be established. Those four factors are: (1) whether the asserted privilege is “rooted in the imperative need for confidence and trust”; (2) whether the privilege would serve public ends; (3) whether the evidentiary detriment caused by an exercise of the privilege is modest; and (4) whether denial of the federal privilege would frustrate a parallel privilege adopted by the states. The Court indicated that if the debtor attempted to use the mediation statement to prove it was acting in good faith, the debtor could re-urge its motion under the “Sword and Shield” principle.

The learning from Lake Lotawana is that, like most privileges, the mediation privilege can be waived. Insurers should be cautious in relying upon statements to mediators to prove that they were acting in good faith but rather should attempt to prove good faith by offering evidence of the offers and counteroffers that were made at the mediation.

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“Succeeds to the Interests of” Does Not Require Assumption of Obligations: D&O Policy’s Insured v. Insured Exclusion Applies to Claim Assigned to Fidelity Insurer; No Bad Faith

On February 24, 2017, the Texas Supreme Court reinstated a state trial court ruling that an “insured-versus insured” exclusion barred coverage under a D&O policy for the costs of defending a lawsuit. Because the D&O insurer demonstrated, as a matter of law, that the exclusion applied and no coverage existed, the high court also held the extra-contractual claims were properly disposed. See Great Am. Ins. Co. v. Primo, 2017 WL 749870, at *4 (Tex. Feb. 24, 2017).

The individual insured, Robert Primo, previously served as a director and treasurer of Briar Green Condominium Association in Houston, Texas. In 2008 and, shortly before resigning, Primo wrote himself two checks from Briar Green’s account totaling roughly $100,000. Briar Green asserted the funds were misappropriated. Primo, however, contended the funds were payment for management services approved by Briar Green’s board. Briar Green sought coverage from its fidelity insurer, Travelers Casualty & Surety Company, who paid the claim. As consideration for payment of the claim, Briar Green assigned its rights and claims against Primo to Travelers.

Thereafter, Travelers, standing in Briar Green’s shoes, filed suit against Primo to recover the funds. As a previous director under Briar Green’s directors and officers liability policy issued by Great American Insurance Company, Primo demanded that GAIC defend Primo. GAIC refused, citing the policy’s insured-versus-insured exclusion, which barred coverage for claims “made against any Insured by, or for the benefit of, or at the behest of [Briar Green] or . . . any person or entity which succeeds to the interest of [Briar Green].”

Aggrieved, Primo filed suit against GAIC alleging breach of contract, breach of the duty of good faith and fair dealing, fraud, negligent misrepresentation, and violations of the Texas Insurance Code. GAIC moved for summary judgment and the trial court granted the motion. A divided Fourteenth District Court of Appeal in Houston reversed, holding the trial court’s interpretation of the exclusion was too broad as Travelers was not Briar Green’s “successor” under the exclusion.

On review to the Texas Supreme Court, the Court began with long-standing contract interpretation principles, including its refusal to “insert language or provisions the parties did not use or to otherwise rewrite private agreements.” Primo, 2017 WL 749870, at *2. The policy’s “plain language controls, not what one side or the other alleges they intended to say but did not.” Id. (internal citations omitted). The Court further explained that ambiguity does not arise simply because one party suggests an alternative conflicting interpretation, but only where the policy is actually “susceptible to two or more reasonable interpretations.” Id. (internal citations omitted).

According to the Court, the exclusion meant no coverage existed for any claim made against Primo by “any person or entity which succeeds to the interest of” Briar Green. No party disputed Primo’s insured status, or that Briar Green assigned all of its claims against Primo to Travelers. Thus, the high court was tasked with determining whether Travelers “succeed[ed] to the interest of” Briar Green—if it did, the exclusion barred coverage.

Turning to the appellate court’s decision, the Court explained the lower court relied on a prior interpretation of the term “successor” as “one who not only takes another’s place, but also maintains the character of the place taken. It contemplates an assumption of both rights and obligations or ‘stepping into the shoes’ of another.” Augusta Court Co-Owners’ Ass’n v. Levin, Roth & Kasner, P.C., 971 S.W.2d 119, 126 (Tex. App.—Houston [14th Dist.] 1998, pet. denied). Applying this definition, the lower court held GAIC failed to show Travelers succeeded to Briar Green’s interests, because GAIC had not shown Travelers assumed Briar Green’s obligations, in addition to its claims and rights.

The Court disagreed with the lower court’s analysis, citing the Augusta court’s express recognition that “[t]he exact meaning of the word ‘successor,’ when used in a contract[,] depends largely on the kind and character of the contract, its purposes and circumstance, and context.” Augusta, 971 S.W.2d at 125. Unlike the contract at issue in Augusta, the Court here was faced with a D&O policy’s insured-versus-insured exclusion, which “typically provide that the insurer is not liable for claims made by one insured against another, . . . includ[ing] litigation between directors and officers and the entity which they serve.” Primo, 2017 WL 749870, at *3. The purpose of these exclusions is to prevent both collusive suits between business entities and their officers or directors, along with actions arising out of the “bitter disputes that erupt when members of a corporate . . . family have a falling out.” Id. (internal quotations omitted).

Guided by the exclusion’s context, the Court explained that under the lower court’s interpretation, an insured under a D&O policy need only assign its rights in any claim against another insured to a third party to avoid the exclusion. The Court found the meaning it gave to the term “succeeds” comported with interpretations of commentators and other courts analyzing the exclusion in the context of insureds assigning claims against co-insureds to third parties.

In closing, the Court held that the exclusion applied as a matter of law, and no coverage existed under the GAIC policy for the Travelers/Briar Green suit against Primo. Because there was no coverage, the trial court also properly disposed Primo’s extra-contractual claims. Primo, 2017 WL 749870, at *4 (citing State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010) (“When the issue of coverage is resolved in the insurer’s favor, extra-contractual claims do not survive.”).

In the absence of policy provisions to the contrary, it is widely accepted that nothing prohibits insurance coverage for claims brought by one insured against another insured. See, e.g., Higby Crane Service, LLC v. National Helium, LLC, 751 F.3d 1157, 1163-64 (10th Cir. 2014). As such, and for the insurance industry to properly function, it is crucial that courts honor insured-versus-insured exclusions expressly included in the parties’ contract. As explained in Primo, overly narrow interpretations threaten and erode the key motives for including these exclusions. The Texas Supreme Court effectively refused to allow an interpretation that would render the exclusion meaningless, instead viewing the exclusion in the context of the policy, and D&O insurance as a whole. Further, the Court favorably cited the trial court’s holding that, absent coverage and, because the extra-contractual claims were based on improper denial of coverage, Primo’s extra-contractual claims failed as a matter of law.

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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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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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