West Virginia Supreme Court: Bad Faith Claims Are Premature when the Insurer Is Providing a Defense

The West Virginia Supreme Court recently granted an insurer the extraordinary legal remedy of a writ of prohibition, awarding it an immediate dismissal of the insureds’ bad faith claims. State ex rel. Universal Underwriters Insurance Company v. Wilson, ___ S.E.2d ___, 2017 WL 2415343 (W. Va. Jun. 1, 2017). The court reasoned that because the insurer is defending the insureds in the underlying tort action, the insureds have not yet suffered any recoverable item of damages as necessary to make their bad faith claims ripe for adjudication.

The defendants in the underlying tort lawsuit include Salvatore Cava, Salvatore’s father, Daniel Cava, and Daniel Cava’s business, Dan’s Car World, LLC d/b/a Dan Cava’s Toyota World (“Dan’s Car World”). The insurer’s policy was issued to Dan’s Car World, and it included a garage coverage part with a $300,000 limit of liability and a commercial umbrella coverage part with a $5,000,000 limit of liability.

On May 13, 2014, then 19 year-old Salvatore was driving a Rav4 when he was involved in an accident with a motorcycle. David Allen, the driver of the motorcycle, suffered catastrophic injuries and died nine days later. At the time of the accident, Salvatore was living in his parents’ home and working for his father at Dan’s Car World. The Rav4 he was driving with his father’s permission was owned by Dan’s Car World, but Salvatore was not engaged in any activity on behalf of the business at the time of the collision. Allen’s widow filed suit against Salvatore and Dan’s Car World, asserting that Salvatore was an employee, agent, or servant of Dan’s Car World. She also asserted a declaratory judgment action against the insurer to determine the amount of coverage available.

The insurer determined that the complaint triggered its duty to defend, and retained separate counsel for Salvatore (the son) and Dan’s Car World (the insured business). It also retained counsel to defend the declaratory judgment coverage action. While the insurer admitted that the garage coverage part provides coverage for the underlying tort claims, it maintains that the commercial umbrella coverage part does not provide any such coverage because Salvatore was not operating the Rav4 for business purposes.

Allen’s widow subsequently filed an amended complaint that added Daniel Cava (the father) as a defendant and asserted negligent entrustment and family use claims against him. The insurer then retained defense counsel for Daniel as well. In addition to answering the amended complaint, the insureds “mounted a sweeping attack on [the insurer’s] defense strategy or alleged lack thereof, and filed individual cross-claims against [the insurer]” for statutory unfair trade practices and common law bad faith. The insureds generally asserted that the insurer had placed its interest above theirs during the course of the litigation, and acted in bad faith by failing to properly investigate and settle the case. The insureds further alleged that the insurer’s bad faith conduct caused Salvatore and Daniel to suffer “emotional and mental distress.” Id. at *4-7.

The insurer filed a motion to dismiss the cross-claims, which was denied by the circuit court, causing the insurer to seek a writ of prohibition from the West Virginia Supreme Court overturning the trial court’s order. In its writ, the insurer asserted that its duty to indemnify had not yet been triggered, so the insureds could not bring claims for bad faith breach of that duty and, further, that the insureds have not suffered any recoverable damages because no excess judgment has yet been entered against them. The insurer further argued that if the bad faith claims were permitted to stand, it would not be able to properly defend itself in the declaratory judgment coverage action because of the ongoing threat that any action it took would be used as grounds to further the insureds’ bad faith claims based on allegations of “wrongful litigation conduct.”

The insureds countered that they were merely asserting well-recognized claims for breach of the duty to provide an effective defense, and that they should not be forced to endure a trial for which they are not being adequately defended. The insurer replied that it had no right to control the litigation strategy of the defense counsel it retained to represent the insureds, and that the issue of whether or not the defense counsel it retained “have adequately represented the [insureds] is a question that is ‘in flux’ because the representation is ongoing.” Id. at *12.

The appeals court agreed with the insurer. It found that the insureds’ claims essentially amounted to attacking the insurer for defending itself in the declaratory judgment coverage action and second-guessing the strategies of the defense counsel the insurer had retained. It stated:

The gravamen of the [insureds’] cross-claims is that they should not have to endure a trial for which the lawyers retained to represent them … are “unprepared” which may cause them to suffer a potential verdict in excess of the to-be-determined policy limit. However, the issue of whether the [insureds] will suffer any of their alleged economic damages is contingent on future events: the resolution of the plaintiff’s claims against the [insureds], and her declaratory judgment action against [the insurer]. As these claims are pending before the circuit court, certain damages are not impending and the issue is not ripe for adjudication.

Id. at *17-18 (emphasis in original). The court also found that the insureds’ claims relating to “litigation-induced emotional distress” failed because such alleged damages are not recoverable as a matter of law. In so doing, it emphasized that an insurer should have the right to defend or prosecute a declaratory judgment action “without risking exposure merely because the strain inherent in litigation discomfits its insured.” Id. at *18, n. 18.

In conclusion, this case stands for the well-reasoned principles that: (1) an insured should not be able to maintain a bad faith claim until it has actually suffered recoverable damages, (2) an insured should not be able to pull an insurer into litigation to defend the actions of the defense counsel it has retained to protect the insured, particularly when the defense is ongoing and the insurer has no right to control the litigation strategy of the defense counsel at issue, and (3) litigation induced emotional distress is not a recoverable category of damages, at least not in West Virginia.

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Eastern District of California Dismisses Bad Faith Action, Where Misrepresentation Voids Policy

On June 6, 2017, the U.S. District Court for the Eastern District of California found, consistent with longstanding California precedent, that a material misrepresentation made in the course of a coverage investigation voids coverage. The holding reaffirms the importance of the insurer’s investigation into claims it suspects may be fraudulent. The court also, again consistent with California precedent, declined to find any bad faith conduct in the absence of coverage.

Young v. Progressive Casualty Insurance Co., No. 1:16-CV-01198-DWM, 2017 WL 2462497 (E.D. Cal. Jun. 6, 2017) concerned Young’s claim to Progressive for the theft of his motor home. His policy provided comprehensive coverage with an agreed value for the motorhome of $63,000 with no deductible. Law enforcement recovered the motor home from a canal the same day Young reported it missing. The license plates and VIN tag were missing. The steering wheel was tied in place and the accelerator was depressed with a pole.

Progressive’s Special Investigations Unit investigated the claim, obtaining the cell phone records of Young’s family. His son’s cell phone “pinged” a cell tower when it was used at a location near the canal at 4:03 a.m. on the same day Young reported the motor home missing. Further, the phone was used several times in the days prior near Young’s home. Progressive also took examinations under oath of Young’s family. Young testified that his son’s phone was inadvertently left in the truck of a customer several days before the purported theft of the motor home, meaning that the 4:03 a.m. “ping” was not because Young’s son used his phone. Young’s son testified, however, that he had access to and used his phone in the days leading up to the motor home’s disappearance. Progressive denied coverage on the ground that Young’s statement about the whereabouts of his son’s phone in the period just before the motor home’s disappearance was a material misrepresentation.

The court, relying on Cummings v. Fire Insurance Exchange, 202 Cal. App. 3d 1407, 1418-19 (1988), indicated that if in the course of an insurance claim an insured knowingly misrepresents material facts intending to deceive the insurer, coverage is voided. The intent to defraud the insurer is implied when the misrepresentation is material and the insured willfully makes it with knowledge of its falsity. The facts establishing misrepresentation remained undisputed, as oddly, Young never opposed Progressive’s summary judgment motion. Progressive proved that Young’s statement about the whereabouts of his son’s phone were false with the cell phone records and his son’s contrary testimony. Progressive proved materiality by showing the location of the phone was near where the motorhome was recovered, suggesting it was intentionally sunk.

California remains a jurisdiction in which a bad faith claim cannot be stated without a breach of contract. The court here invoked this longtime rule, but indicated that even if there were somehow coverage, Progressive’s investigation and position were reasonable, given the facts uncovered.

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Georgia Supreme Court Clarifies Pre-Suit Offer Requirements

On March 6, 2017, the Georgia Supreme Court answered certified questions regarding the application of Georgia’s Pre-Suit Offer statute concluding that O.C.G.A. § 9-11-67.1, the statute dealing with the formation of settlement agreements pursuant to pre-suit offers to settle tort claims arising from the use of a motor vehicle, does not prohibit a claimant from conditioning acceptance of a pre-suit offer upon the performance of an act, such as timely or prompt payment. Grange Mutual Casualty Co. v. Woodard, 797 S.E.2d 814 (2017). In doing so, the Court clarified that the statute sets forth the minimum requirements for pre-suit offers. Beyond those required terms, the Court explained, parties are free to add additional terms. This includes presenting a pre-suit offer as a unilateral contract that demands acceptance in the form of performance (in addition to the required written acceptance) before it becomes a binding and enforceable settlement.

The case deals with a settlement following an automobile accident. The Woodards, the parents of the deceased, made a settlement offer through their attorney to Grange Mutual Casualty Company, the defendant’s insurer. The settlement offer required that Grange accept it in writing within thirty (30) days, and that Grange remit payment within ten (10) days of the written acceptance. Grange accepted the offer on day 29, and issued the required checks seven (7) days later. However, an addressing error delayed the checks’ arrival. Eleven (11) days after the checks were required to arrive, and before claimants received the checks, claimants’ counsel retracted the offer. Grange immediately sent new checks, which claimants’ counsel returned two days later.

Grange filed suit against the Woodards in United States District Court for the District of Georgia for breach of the settlement contract. The Woodards argued the parties did not reach a settlement agreement because Grange failed to satisfy the payment condition. Grange argued that, under Georgia law, the Woodards’ attempt to require timely payment as a condition of acceptance was not permissible. The district court did not agree with the insurer, Grange, holding that the statute does not prohibit a party from requiring payment as a condition of acceptance. The district court also rejected Grange’s argument that it had issued the settlement checks in a timely manner.

Grange appealed to the Eleventh Circuit, which concluded the requirements in O.C.G.A. § 9-11-67.1 were ambiguous and certified the questions related to the dispute to the Georgia Supreme Court. The Supreme Court held that O.C.G.A. § 9-11-67.1 permits unilateral contracts by the offerors (claimants) including demanding acceptance in the form of performance before there is a binding, enforceable settlement contract. It also held that O.C.G.A. § 9-11-67.1 does not preclude a pre-suit offer from demanding timely payment as a condition of acceptance.

The Court’s holding recognizes that subsection (a) of O.C.G.A. § 9-11-67.1 provides that a pre-suit offer must contain the following five “material terms:” (1) time period within which such offer must be accepted (which shall be not less than 30 days from receipt of the offer); (2) amount of the payment; (3) the party or parties that the claimant will release if the offer is accepted; (4) the type of release, if any, the claimant will provide to each releasee; and (5) the claims to be released.   However, the Court concluded that subsection (a) permits pre-suit offers to include additional terms, as long as the minimum five material terms are also included. The court reasoned that subsection (a) is a list of necessary, but not exclusive, terms to be included in a pre-suit offer.

Subsection (c) also supports the Court’s interpretation. It provides, “Nothing in this Code section is intended to prohibit parties from reaching a settlement agreement in a manner and under terms otherwise agreeable to the parties.” Considering the mandatory language of subsection (a), which provides what terms “shall” be included, subsection (c) indicates that pre-suit offers can include terms in addition to those required by subsection (a). Further, the term “manner” in subsection (c) indicates that claimants may require recipients (usually insurers) of pre-suit offers to perform tasks beyond acceptance in writing for the acceptance to be valid.

The case will now return to the Eleventh Circuit for a determination on the merits.

Even though the Georgia Pre-Suit Offer statute does not apply to non-automobile claims, claimant attorneys in Georgia sometimes use the standards of this statute in making pre-suit offers in those non-automobile claims. While an insurer may not be under any statutory duty to comply with a pre-suit offer in non-automobile tort claim cases, it may still want to consider timely responding and complying with a pre-suit offer regardless of the tort claim involved as part of its best claims handling practices. And, insurers handling Georgia automobile claims need to be cognizant that the Georgia Pre-Suit Offer statute addresses minimum requirements. It is yet to be determined what will be considered a satisfactory “prompt payment” term or other terms of performance.

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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.


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.


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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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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