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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Posted in Bad Faith

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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Posted in Reservation of Rights

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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Posted in Bad Faith

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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Posted in Bad Faith

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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Posted in Bad Faith

Florida Regulators Approve Policy Language Aimed at Limiting “Assignments of Benefits” Claim Practice

Insurance companies that write property risks in Florida are getting in line to request approval from the Office of Insurance Regulation (OIR) for two key policy revisions intended to control losses from a water damage property claim practice called “assignment of benefits.”

Many insurers have attributed the rising costs of water claims in Florida to an increase in the use of assignments of benefits (AOBs).  This practice occurs primarily in the residential homeowners’ context and involves a situation where, following a water damage event, the insured assigns its rights and benefits under its insurance policy to a third-party contractor or water mitigation company.  The water remediation contractor then bills the insurance company directly with rates that often substantially exceed the true market value for these services.  If the rates are not paid in full, the contractor brings a lawsuit pursuant to the AOB from the insured and takes advantage of the attorney’s fee shifting provision contained in Florida’s insurance code, Section 627.428, Florida Statutes. 

Florida insurers, consumer and insurance advocates, as well as regulators, have been attempting to address the misuse of AOBs for water loss claims that they say have become a costly problem in the state.  According to the Florida Consumer Protection Coalition, by some estimates, Florida AOB lawsuits have increased more than 16,000 percent since 2000.  According to Florida regulators, who have been studying this issue for some time, Florida insureds often don’t understand that they are assigning their policy benefits.  According to data collected by the OIR, AOB claims have substantially increased the frequency and severity of water damage claims in Florida since 2010.  See the OIR’s Report on Assignments of Benefits claim data: Pipe

After a number of failed legislative fixes, in late March, the OIR approved requests by Citizens Property Insurance Corp. to limit the cost of emergency repairs after water breaches or other emergencies to $3,000, and to bar permanent repairs from commencing before Citizens has an opportunity to inspect the damage.  The OIR has approved new policy language to this effect and a number of carriers are attempting to obtain OIR approval for similar language in order to eliminate the negative effect that the water damage AOBs has created.

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Posted in Bad Faith

Reservation of Rights Letters Help Avoid Prejudice in the Third Party Context

When discussing bad faith in the third party context, most of the discussion properly centers on the duty to settle a claim.  However, other actions taken by a policyholder and carrier can have an impact.  The recent case of State Farm v. El-Moslimany provides a good example.  In El-Moslimany, State Farm found itself defending its policyholder from a defamation claim.  After defending for two years, State Farm filed a declaratory action, contending that the defamation claim at issue was not covered by its policy.  A year after filing the declaratory judgment action, State Farm filed a motion for summary judgment.  The policyholder responded, in part, claiming that State Farm’s attempt to withdraw from its defense obligation was “bad faith.”  The policyholder argued that State Farm waited too long to seek declaratory relief and that a withdrawal of its defense would prejudice the policyholder.

The court granted State Farm’s motion for summary judgment.  When discussing the “bad faith” withdrawal and prejudice issue, the court pointed out that State Farm sent a reservation of rights letter and that at least some of the delay was the result of the policyholder attempting to evade service of process.  The court also noted that any delay in seeking declaratory relief simply provided the policyholder with additional paid defense items.

Cases like this demonstrate the value of open communication with a policyholder via a reservation of rights letter.  In those states which permit a carrier to withdraw a defense after an initial acceptance, the existence of a reservation of rights letter is very important.  So long as the potential exclusions to coverage are identified and made known to the policyholder, the policyholder will have trouble arguing prejudice by the withdrawal of the defense, even if the withdrawal comes after litigation has commenced.

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Florida High Court – UM Insured Entitled to Liability/Damages Determination Before Filing Bad Faith Action

Petitioner Adrian Fridman (“Fridman”) was injured in an automobile accident involving an underinsured motorist. Fridman filed a claim with his uninsured/underinsured (UM) insurance carrier (Insurer) for the $50,000 limits of his UM policy.  After the Insurer refused to pay the policy limits, Fridman filed a complaint against the Insurer to determine Auto Ins Policy with Keyliability under the UM policy and the full extent of his damages.  One month before trial, the Insurer tendered a check to Fridman for $50,000 and filed a confession of judgment for that amount seeking entry of the confessed judgment and a dismissal.  Fridman opposed the entry of a confessed judgment, arguing that a jury verdict would determine the upper limits of Insurer’s potential liability under a future bad faith claim.  The trial court denied Insurer’s motion to confess judgment and the case proceeded to trial.

The jury determined that the underinsured motorist was 100 percent at-fault and that Fridman’s damages were $1 million.  The Insurer appealed the judgment.  The court of appeal vacated the jury’s verdict, concluding that after the Insurer confessed judgment in the amount of $50,000, Fridman’s UM action became moot.

Fridman then appealed to the Florida Supreme Court.  The Supreme Court quashed the court of appeal’s decision, holding (1) an insured is entitled to a determination of liability and the full extent of his damages in a UM action before filing a first-party bad faith action; and (2) that determination of damages is generally binding, as an element of damages, in a subsequent first-party bad faith action.

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Posted in Bad Faith

New Jersey Supreme Court Upholds Strict Enforcement of Notice Provisions in Claims Made Policies

The New Jersey Supreme Court recently revisited its earlier decision in Zuckerman v. National Union Fire Insurance Fire Insurance Co., 100 N.J. 304, 495 A.2d 395 (1985) and upheld the strict enforcement of notice and reporting requirements contained in claims made policies, holding that an insurance company does not need to show that it was prejudiced by an insured’s failure to comply with the notice provision in a Directors and Officers “claims made” policy to disclaim coverage. Templo Fuente De Vida Corp. and Fuente Properties, Inc., Inc. v. National Union Fire Insurance Company of Pittsburgh, P.A., Supreme Court of New Jersey A-18 September Term 2014, 074572 (decided February 11, 2016).

The insured First Independent Financial Group was insured under a Directors, Officers and Private Company Insurance Policy issued by National Union Fire Insurance Company covering the period January 1, 2006 through January 1, 2007. The policy was a “claims made” policy, which contained a Notice/Claim Reporting Provision, requiring that, as a condition precedent to coverage under the policy, the insured

give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either: (1) anytime during the Policy Period or during the Discovery Period (if applicable); or (2) within 30 days after the end of the Policy Period or the Discovery period (if applicable), as long as such claim is reported no later than 30 days after the date such claim was first made against an Insured.

Plaintiffs, Templo Fuente De Vida Corp. and Fuente Properties, Inc. sued First Independent for breach of an agreement to provide financing for a property plaintiffs intended to purchase. On August 28, 2006, more than six months after being served with the first amended complaint, and after retaining counsel and filing an answer, First Independent provided notice of the claim to National Union. National Union denied coverage, asserting that the claims against First Independent were made outside of the policy period, and that notice of the claims was not given to National Union “as soon as practicable.” Plaintiffs and several defendants, including First Independent, reached a settlement agreement in the underlying litigation, pursuant to which, First Independent assigned to plaintiffs its right and interests under the National Union policy. Read more ›

Posted in Late Notice
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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