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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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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