Texas Amends Insurance Code In Response To Weather Claims

On May 26, 2017, Texas Governor Greg Abbot signed into law Texas House Bill 1774/Senate Bill 10. The new law makes changes to the Texas Insurance Code that will impact the way in which weather claims are brought and how those claims may be defended. The new law becomes effective on September 1, 2017.

The amendments to the Texas Insurance Code add a new Chapter 542A, which governs certain consumer actions related to claims for property damage. Specifically, Chapter 542A applies to any first-party claim which arises from “damage to or loss of covered property caused, wholly or partly, by forces of nature, including an earthquake or earth tremor, a wildfire, a flood, a tornado, lightning, a hurricane, hail, wind, a snowstorm or rainstorm.” Claims against the Texas Windstorm Insurance Agency are exempted from the new law.

Notice, Inspection and Opportunity to Settle

Chapter 542A continues the policies underlying Section 541.154(a) of the Texas Insurance Code that require notice of a potential claim at least 61 days before suit is filed and provide the insurer an opportunity to settle a dispute claim pre-suit.

The scope of Chapter 542A, however, is significantly broader than the notice provisions that currently exist under Section 541.154 and the Texas Deceptive Trade Practices Act (“DTPA”). Chapter 542A broadly applies to any action on a claim against an insurer, including claims for breach of contract, fraud and misrepresentation, common law bad faith, alleged violations of the Texas Insurance Code and the DTPA. This means that Chapter 542A requires a potential claimant to notify its insurer of potential litigation before he or she files suit, regardless of the nature of the claim involved.

The notice also must now contain very specific information about the claim, including: (1) a statement of the acts or omissions giving rise to the claim; (2) the specific amount allegedly owed; and (3) the amount of reasonable attorney’s fees incurred to date in connection with the claim. This notice is not required if notice is impracticable due to an impending statute of limitations deadline or if the claim is being asserted as a counterclaim.

Importantly, the notice provisions under Section 542A.003 provides specific instructions and requirements for the attorney’s fees demand in a pre-suit notice. Unlike the existing notice provision under § 541.154, the amount of attorney’s fees set forth in the demand must be based on the amount of hours actually worked by the claimant’s attorney, as reflected in contemporaneously kept time records.

Once notice is given, § 542A.003 allows for a 60-day deadline for an insurer to make a settlement offer. Section 542A.004 also allows an insurer 30 days in which to request an inspection of the property at issue. If a claimant fails to provide the required notice, choosing instead to simply file a lawsuit, § 542A.005 requires that a court abate the claim. Similarly, a court must abate a claim if an insurer does receive notice, but is denied the opportunity to inspect the property at issue.

Limitations on Prompt Payment Damages

The new law also changes the damages which may be assessed for certain violations of the Prompt Payment of Claims Act. The prior version of the Prompt Payment of Claims Act imposed additional damages equal to 18% per annum of the actual damages on an insurer who violated the Act. However, for those claims covered by new Texas Insurance Code Chapter 542A, an insurer which is not in compliance with the Prompt Payment of Claims Act will now be liable for additional damages of 5% percent per annum interest added onto the post-judgment variable interest rate determined under Texas Finance Code Section 304.003.

Under the Texas Finance Code, the post-judgment interest rate varies between 5% and 15%, depending on the prime rate established by the Federal Reserve.. Thus, insurers in violation of the Act in claims subject to Chapter 542A face a sliding scale of statutory interest damages that will range from 10% to 20% per annum. While the new rate could exceed the existing 18% per annum if interest rates increase significantly to levels not seen in decades, the new interest damages are likely less that the current 18% per annum damages, at least for the foreseeable future.   Currently the post-judgment interest rate is 5% per annum, which results in 10% additional interest damages under the Act until such time as the post-judgment variable interest rate is raised.

The new interest calculation only applies to a claim that is first tendered to a carrier after the effective date of the Act on September 1, 2017.

Effect of Insured’s Failure to Make Demand or Allow Inspection Under Chapter 542A– Impact on Attorney’s Fees Recoverability

In weather related first party litigation, the threat of potential attorney’s fees triggered by minor infractions of the Texas Insurance Code has often been used as a hammer to induce settlement. However, the new law links recovery of attorney’s fees to the claimant’s trial recovery and initial demand.

Section 542A.007 limits an attorney’s fees recovery to the lesser of: (1) the amount of fees incurred by the claimant in bringing an action; (2) the fees recoverable under another law; or (3) an amount based on the difference between the demand and the amount awarded in a judgment. Under this final provision, the court would divide the amount to be awarded by the amount of the initial demand to obtain a ratio. This ratio is then be multiplied against the amount of fees actually incurred by the claimant. Thus, an excessive demand will result in a substantial reduction of recoverable attorney’s fees, or no recovery at all; but a reasonable or even low demand will result in a recovery of attorney’s fees in excess of the fees actually incurred.

The new law also provides additional and very important restrictions on an attorney’s fees recovery. If a defendant is not given notice as required, § 542A.007(d) prevents a court from awarding any attorney’s fees incurred after the defendant files a separate pleading with the Court. The separate pleading must be filed within 30 days of the date the defendant filed its original answer. The outright bar on recovering attorney’s fees created by § 542A.007(d) should serve as a substantial incentive to follow the law for those lawyers that have traditionally ignored the pre-suit notice requirements in the Texas Insurance Code. Otherwise, insurers will have a valuable tool at their disposal to defend themselves when sued without any prior notice.

Acceptance of Liability and the Impact on Removability

The new law also includes provisions relating to the potential liability of third parties. A common occurrence in recent weather related first party litigation involves the inclusion in a lawsuit of local or independent adjusters or consultants in a claim. Among other impacts, their inclusion prevents insurers from removing a state-filed case to federal court.

Under the new law, however, an insurer can remove the local adjuster or consultant from a claim altogether by agreeing to be liable for any conduct by such local adjuster or consultant. Under § 542A.006, an insurer may accept any liability this third party, as its agent, might have to the claimant by providing written notice to the claimant. If an insurer accepts its agent’s liability before an action is filed, a claimant has no cause of action against the agent, and if the claimant files an action, the court must dismiss that action with prejudice. Alternatively, if the insurer accepts its agent’s liability while an action is pending, the court must also dismiss that action with prejudice.

How exactly this will impact weather-related insurance claims is not yet known. If an insurer receives the required notice before a lawsuit is filed and makes a timely election, the insurer should be able to remove the case to federal court even if the local adjuster or consultant is named because the claimant has no realistic chance of recovering against the local adjuster or consultant. Indeed, the acceptance of liability provision was explicitly designed to create an option to remove the case.

However, under existing precedent, if the insured makes the election while an action is pending, the subsequent dismissal of the local adjuster or consultant likely will not allow the insurer to remove the case. The jurisprudence surrounding the removal statute states that the removability of a case is determined as of the date of filing, and a case becomes removable at a later date only by some voluntary action by the claimant. Thus, if the claimant does not provide the required notice and files suit, the insurer does not have the opportunity to make that election beforehand. Although this may create an incentive to file without notice, the corresponding prohibition on recovering attorney’s fees arguably makes it less likely that a claimant would do so.

The new law nonetheless does carve out a few exceptions to this provision. First, an insurer cannot accept the liability of a local adjuster or consultant if the insurer is in receivership at the time a claimant files an action against the insurer. Second, an insurer’s election of liability cannot be used to obtain the dismissal of an action against an agent if the election of liability allows the insurer to avoid liability for any claim-related damage caused to the claimant by the agent’s acts or omissions. However, if an insurer makes an election of liability in an action where the agent is not a party, evidence of the agent’s acts or omission may be offered at trial and included in the judgment against the insurer. Finally, the insurer may not condition the acceptance of liability in such a way as to avoid responsibility for the local adjuster’s or consultant’s acts or omissions.

Importantly, an insurer which accepts the liability of a local adjuster or consultant will be required to make that person available for deposition under § 542A.006(d). If the insurer fails to make that agent available, §§ 542A.007(a), (b), and (c), which relate to attorney’s fees, will not apply to the action in which the insurer made the election, unless the court finds: (1) a change in circumstances which makes it impracticable to make the agent available; (2) the agent whose liability was assumed would not have been a proper party to the action; or (3) obtaining a deposition of the agent is not warranted under the law.


The new amendments to the Texas Insurance Code potentially have significant impact on how weather-related claims are brought and defended. Insurers and policyholders alike should take careful note of these changes, particularly in the beginning stages of a claim. The stringent pre-suit notice requirements should afford insurers an opportunity to try to resolve claims one last time before becoming embroiled in protracted litigation and, if necessary, use that additional time to demand an appraisal on a disputed loss to limit its potential exposure on extra-contractual claims.

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Ninth Circuit Upholds Bad Faith Award Despite Issues With Policy Limits Demand

In Madrigal v. Allstate Indemnity Co., Cause No. 16-55830 (9th Cir. June 15, 2017), the Ninth Circuit upheld a jury award assessing $14 million in bad faith damages, even though it was unclear whether the insurer could have met the settlement demand which it allegedly refused in bad faith.

The Underlying Dispute

In 2009, Carlos Madrigal (“Madrigal”) was riding a motorcycle when he was hit by a car driven by Richard Tang. The accident left Madrigal a paraplegic. A police report for the accident listed Madrigal at fault for the accident. Allstate provided insurance to Richard Tang and his wife, Anna Tang, with limits of $100,000 per claimant.

Madrigal, through counsel, offered to settle his claims against Richard Tang for $100,000. As a condition of settlement, Madrigal demanded that Allstate produce an asset sheet for the Tangs. Madrigal also requested that Allstate identify any issues with the form of the demand. Allstate forwarded the demand to the Tangs, noting that the exposure to the Tangs might well exceed the available policy limits and recommending that the Tangs consult an attorney about the potential excess exposure. While the settlement demand remained pending, Allstate’s investigator obtained a statement from a “credible witness” indicating that Tang (not Madrigal) caused the accident with Madrigal.

Allstate initially informed Madrigal’s counsel that it accepted the $100,000 demand, but subsequently withdrew that acceptance, claiming that the acceptance was made on the mistaken belief that Madrigal had his own insurance. In place of the $100,000 demand, Allstate offered to pay Madrigal’s then existing medical bills of approximately $35,000. After a verbal conversation, Madrigal’s counsel sent a letter to Allstate confirming the rejection of the $35,000 offer. In response, Allstate communicated in writing that it agreed to pay the $100,000. However, Madrigal declined to accept this offer, noting that Allstate already rejected it. Madrigal filed suit, which resulted in a damage verdict against Tang exceeding $10,000,000, with Tang assessed 100% fault.

After trial, the Tangs assigned their rights against Allstate to Madrigal in exchange for an agreement not to execute the judgment as against the Tangs. Madrigal then filed suit against Allstate, for breach of contract and breach of the implied covenant of good faith and fair dealing.

Allstate’s Defenses and Cross-Motions for Summary Judgment

Both parties moved for summary judgment. Particularly, Allstate argued that it was entitled to summary judgment because: (1) Madrigal’s settlement demand was unreasonable because it only included Richard Tang, but made no mention of Anna Tang; (2) Allstate’s tender of policy limits on two occasions showed Allstate’s good faith; and (3) Madrigal’s settlement demand could not be met, as the Tangs refused to provide an asset sheet. In response, Madrigal argued that Allstate never identified Anna Tang as an insured, or indicated that Anna Tang required a release of liability. Madrigal argued that the exchange of letters of settlement showed that Allstate rejected the settlement demand, and later attempts to accept that demand were untimely. Finally, Madrigal argued that the Tangs would have provided an asset sheet, had Allstate requested one from the Tangs. As such, Madrigal argued that Allstate breached its obligation to accept a reasonable settlement offer within policy limits.

Both parties heavily disputed the evidence submitted by the other. Ultimately, the trial court concluded that fact issues precluded summary judgment for either party. Trial was held on Madrigal’s claim against Allstate for breach of the implied covenant of good faith and fair dealing, resulting in a $14 million judgment for Madrigal.

The Ninth Circuit Upholds the Trial Verdict

On appeal, Allstate raised the same issues as found in its Motion for Summary Judgment, as well as additional issues relating to evidence admitted at trial and the submitted jury charge. The Ninth Circuit, in an unpublished opinion, upheld the trial court judgment against Allstate.

The Ninth Circuit first considered whether the demand for an asset sheet rendered Allstate unable to accept the demand. The Ninth Circuit noted that conflicting evidence was presented to the jury as to whether or not the Tangs actually refused to provide the asset sheet. As such, the trial evidence did not permit a conclusion that Allstate was unable to respond to the demand.

The Ninth Circuit then considered whether Allstate could reject a demand offering to release only one insured since that would violate its obligation to protect all insureds when settling a claim. The court noted that Madrigal’s original demand offered to provide an “appropriate release” and that this language could permit a jury to find that any release would include any other insureds whom Allstate believed needed to be released to resolve the claim. As such, a jury could again conclude that Madrigal’s demand was reasonable.

The Ninth Circuit then considered the exchange of settlement demands. The Ninth Circuit noted that whether an insurer acts unreasonably is generally a question of fact for a jury, and the insurer’s conduct must be unreasonable under all of the circumstances. In this case, at the time of the settlement demand, Allstate knew of a witness who would assess liability against Tang, had medical bills showing exposure in excess of the policy limit, informed the Tangs about a potential excess exposure and declined to identify any problems with the settlement demand. Based on this evidence, the Ninth Circuit concluded a jury had basis to conclude that Allstate breached the covenant of good faith and fair dealing when it rejected the settlement demand.

Consequently, the Ninth Circuit affirmed the trial court judgment against Allstate.


Although Allstate appears to have had reasonable positions regarding the form and language of the underlying settlement demand, Madrigal demonstrates that questions regarding the form of a demand may not excuse an insurer which fails to settle a claim. When a claim involves catastrophic injuries, and insufficient funds to pay for those injuries, a carrier should carefully evaluate any settlement demand before rejecting it.

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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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Posted in Bad Faith

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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Posted in Bad Faith

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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Posted in Bad Faith
Avoiding Insurance Bad Faith
Cozen O’Connor represents insurance clients in jurisdictions throughout the U.S. against statutory and common law first- and third-party extracontractual claims for actual and consequential damages, penalties, punitive and exemplary damages, attorneys’ fees and costs, and coverage payments. Whether bad faith claims are addenda to a broader coverage matter or are central to the complaint, Cozen O’Connor attorneys know how to efficiently respond to extracontractual causes of action. More
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