Eleventh Circuit: Jury Instruction About Notice to Insured of Settlement Demand Was Required (Florida)

In its recent decision, Brink v. Direct General Ins. Co., 38 F.4th 917 (11th Cir. 2022), the Eleventh Circuit ruled 2-1 that the Florida district court erred when it failed to instruct a jury that an insurer not only owed a duty to settle claims for its insured, but also owed a duty to advise its insured of settlement offers.

This case arose from a vehicle incident resulting in serious injuries to the plaintiff, Dustin Brink. Brink later won over $12 million in a lawsuit against the at-fault driver, Juan Ruiz Pereles. To recover the judgment, Brink sued Pereles’ insurer, Direct General Insurance, for bad faith toward Pereles.[1] The jury returned a verdict in Direct General’s favor, but Brink argued that the district court abused its discretion by failing to give his proposed jury instruction.

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Under Texas Law, No Tender Means No Obligation To Defend

The United States Court of Appeals for the Fifth Circuit recently affirmed a long-standing Texas rule: the duty to defend is not implicated unless the insured complies with the policy’s notice-of-suit requirements and demands a defense. Moreno v. Sentinel Ins. Co., Ltd., 35 F.4th 965, 975-77 (5th Cir. 2022). This rule applies even when an insurer knows of the lawsuit and defends an additional insured in the same case.

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Texas Supreme Court Axes Policyholder’s Attempt to Expand Insurer Tort Liability

In Elephant Insurance Co., LLC v. Kenyon, the Supreme Court of Texas reiterated the framework of an insurer’s common-law duties to insureds under Texas law.[1] In applying that framework to the facts of the case, the Court rejected an attempt to expand an insurer’s obligations under existing common-law tort principles. The Court also refused to recognize new common-law duties, requiring insurers to protect or warn policyholders following car accidents.

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California Court of Appeal: Insurers Not Liable Under the California Insurance Frauds Prevention Act

In its recent decision, People ex rel. Ellinger v. Magill, et al., —Cal.Rptr.3d—, No. E076378, 2022 WL 1077988 (Cal. Ct. App., Mar. 18, 2022), the California Court of Appeal refused to extend liability under California’s Insurance Frauds Prevention Act (IFPA) to an insurer’s claims handling practices.

Insurance Code Section 1871.7 allows a party to file a qui tam action[1] for violations of certain insurance claim related conduct described in the rule itself. Section 1871.7 also incorporates prohibited conduct from other statutes, such as California Penal Code Section 550, as permissible bases for the qui tam action. A person who violates Section 1871.7 is subject to “a civil penalty of not less than five thousand dollars ($5,000) nor more than ten thousand dollars ($10,000), plus an assessment of not more than three times the amount of each claim for compensation . . .”

The central issue in Ellinger was whether an insurer and its agents are subject to Section 1871.7. The lawsuit arose from an underlying workers’ compensation claim for a back injury. The third party claims administrator (TPA) initially denied that claim but later reversed its decision and compensated plaintiff for his injuries. Despite the TPA’s decision to pay his claim, plaintiff filed a Section 1871.7 qui tam action against the workers’ compensation insurance carrier, the TPA, and the claim professional that handled his claim.

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Montana: Unambiguous Exclusions Enforced Despite Lack of Table of Contents Required Under Statute

A recent Supreme Court decision, High Country Paving, Inc. v. United Fire & Cas. Co., 2022 MT 72, ¶ 1, answered in the negative a question certified by a federal district court regarding tensions inherent in Montana’s  Property and Casualty Insurance Policy Simplification Act (“PSA”).  The Ninth Circuit had submitted the following state law question to this Court:

Whether, when an insurance policy does not include either a table of contents or a notice section of important provisions, in violation of Mont. Code Ann. § 33-15-337(2), the insurer may nonetheless rely on unambiguous exclusions or limitations to the policy’s coverage, given that § 33-15-334(2) provides that § 33-15-337(2) is “not intended to increase the risk assumed under policies subject to” its requirements?

The high court’s “no” response said that failure to meet formatting requirements in the PSA do not expand the risk assumed under a liability policy where unambiguous terms define it.  It, further delineated a boundary to its former holding, Mont. Petroleum Tank Release Comp. Bd. v. Crumleys, Inc., 341 Mont. 33, 174 P.3d 948, 959 (2008) (“Crumleys”), which it distinguished, and which held that an absence of a table of contents listing a contractual limitation period prohibited the insurer from enforcing that limitation.  The Court indicated that imposing CGL coverage here would represent changing the risk insured, whereas compliance with the contractual limitations provision in Crumleys has no impact on the scope of the underlying risk.

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Eleventh Circuit (Florida):  No Bad Faith for Investigating Claim

On February 15, 2022, the United States Court of Appeal for the Eleventh Circuit upheld the Southern District of Florida’s summary judgment victory for GEICO, finding that no reasonable jury could conclude that GEICO had operated in bad faith with respect to its handling of a wrongful death claim against its insured. Ellis v. GEICO Gen. Ins. Co., No. 21-12159, 2022 WL 454176 (11th Cir. Feb. 15, 2022).  This case reinforces that under Florida law, an insurer may take a reasonable time to investigate a claim, and that, absent time to investigate or a settlement demand, an insurer need not voluntarily tender policy limits. 

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New Statute May Spell Trouble for New Jersey Insurers

On January 19, 2022, New Jersey Governor Phil Murphy signed S.B. 1559, known as the “New Jersey Insurance Fair Conduct Act,” which allows motorists to sue their insurance companies over “unreasonably” late or denied coverage benefits and unfair settlement practices.  The bill, passing through both houses of New Jersey’s legislature without substantial amendment, would allow prospective plaintiffs to pursue bad faith litigation against their uninsured/underinsured motorist carriers and employees for “unreasonably” denying coverage for claims or delivering benefits “unreasonably” late after a claim.

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Fifth Circuit Weighs in on Aftermath of Texas Supreme Court’s Decisions Affecting Insurers’ Pre-Appraisal Award Payments and Damages under the Texas Prompt Payment of Claims Act

Just a few short years ago, there was a bright line rule under Texas law concerning appraisal awards.  If an insurer timely paid an appraisal award, that payment extinguished all of the insurer’s contractual and extracontractual liability to the insured.  See, e.g., Garcia v. State Farm Lloyds, 514 S.W.3d 257, 264-273 (Tex. App.—San Antonio 2016, pet. denied); Anderson v. Am Risk Ins. Co., 2016 Tex. App. LEXIS 6538, *10 (Tex. App.—Houston [1st Dist.] 2016, no pet.); Perry v. United Servs. Auto Ass’n, 2018 Tex. App. LEXIS 10108, *7 (Tex. App.—Amarillo 2018, no pet.); Gonzales v. Allstate Vehicle and Property Ins. Co., 2019 U.S. Dist. LEXIS 26203, *3 (S.D. Tex. 2019). 

The Fifth Circuit had previously agreed, making an Erie guess that the Texas Supreme Court would not find a violation of Chapter 542 if the timely pre-appraisal payment of the claim was for a “reasonable amount.”  Mainali v. Covington Specialty Ins. Co., 872 F.3d 255, 259 (5th Cir. 2017). But when faced with the issue, the Texas Supreme Court overturned that precedent.  See Ortiz v. State Farm Lloyds, 589 S.W.3d 127 (Tex. 2019); Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d 806 (Tex. 2019).  Although the Texas Supreme Court affirmed the traditional rule that the insurer’s timely payment of the appraisal award extinguished contractual liability, it held that the insurer’s liability under Chapter 542 of the Texas Insurance Code, the Prompt Payment of Claims Act, may survive the insurer’s timely payment of an appraisal award. See Ortiz v. State Farm Lloyds, 589 S.W.3d at 135; Barbara Technologies Corp. v. State Farm Lloyds, 589 S.W.3d at 822.  Even so, the insured still has to prove coverage and a violation of Chapter 542.  See id.  

Since Ortiz and Barbara Technologies, Texas courts have been grappling with this new landscape concerning the application of Chapter 542 damages.  The United States Court of Appeals for the Fifth Circuit just added to the discussion in Randel v. Travelers Lloyds of Texas Ins. Co., 2021 U.S. App. LEXIS 24098 (5th Cir. August 12, 2021).  Briefly stated, the Fifth Circuit held that where a pre-appraisal payment did not “roughly correspond” to the amount ultimately owed, the pre-appraisal payment was not a defense to liability under Chapter 542.

In Randel, the insured sustained a fire loss.  The insurer made various payments over the following months for the dwelling, personal property, and loss of use totaling $204,437.68, net of the deductible and depreciation.  A public adjuster put forward a much higher estimate of damage to the dwelling, but the insurer performed a re-inspection and declined to issue any further payment.  The insured invoked appraisal as to the dwelling and personal property.

The insured sued the insurer in state court, alleging underpayment of the claim, bad faith and violation of Chapter 542.  The insurer also removed the matter to federal court.  During the district court case, the appraisal panel issued an award in the amount of $417,361.72 and Travelers also paid additional loss-of-use amounts, with Travelers total payments equaling $533,529,88 – over twice the amount of its original payment (with $185,000.00 additional payments just for the dwelling and personal property).  The insurer paid the award within five days, less deductible and prior payments.  Travelers moved for summary judgment on all claims, and won. 

On appeal, the Fifth Circuit affirmed the traditional rule that the timely payment of the appraisal award extinguished the contract claim and statutory and common law bad faith claims. 

The Fifth Circuit then addressed the Chapter 542 claim, reciting § 542.058(a) that an insurer must pay a claim within 60 days after receiving all requested information necessary to evaluate the claim and § 542.060(a) that failure to pay within that deadline makes the insurer responsible for damages pursuant to the Act in the amount of 18% interest and attorney’s fees.  Further, the Fifth Circuit observed that in a March 2021 decision, the Texas Supreme Court provided guidance regarding the effect of pre-appraisal payments since the Fifth Circuit’s Erie guess in Mainali.  In Hinojos v. State Farm Lloyds, 619 S.W.3d 651, 658 (Tex. Mar. 19, 2021), the Texas Supreme Court held that “a reasonable [pre-appraisal] payment should roughly correspond to the amount owed on the claim.  When it does not, a partial payment mitigates the damage resulting from a Chapter 542 violation.  Interest accrues only on the unpaid portion of the claim.” 

It then addressed the facts in Randel, deciding that there was a “substantial gap” of $185,000.00 between the pre-appraisal dwelling and personal property payments versus the appraisal award.  The court decided that such a gap meant that the pre-appraisal payments did not “roughly correspond” to the appraisal award. The pre-appraisal payment,therefore, was not a defense to liability under Chapter 542. 

The Fifth Circuit expressly declined to determine how close a pre-appraisal payment needs to be to “roughly correspond” with the amount owed.  However, the Fifth Circuit also left the door wide open for a case in which the insurer did make a pre-appraisal payment that “roughly corresponds” to the appraisal award, which would allow the Fifth Circuit to announce a rule and factual circumstances by which such a payment would provide a defense to liability under Chapter 542.

Randel means that even more scrutiny will be directed toward an insurer’s early actions on a claim.  The initial inspection of a loss should be thorough and accurate.  Payments should be prompt and accurate.  Getting it right the first time around will help insurers avoid the fact-intensive analysis and potential for the Chapter 542 liability explained in Randel

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Fifth Circuit Finds Potential Coverage for Data Breach; Interprets “Publication” Broadly

Using general contract interpretation principles, the Fifth Circuit reversed summary judgment in favor of an insurer and found a duty to defend Landry’s in a data breach lawsuit. Landry’s Inc. v. The Insurance Company of the State of Pennsylvania, No. 19-20430 (July 21, 2021). Landry’s contracted with Paymentech to process credit card payments at its restaurants, hotels, and casinos. Paymentech discovered a data breach across fourteen Landry’s locations resulting in $20 million of fraudulent credit card payments. The data breach involved an unauthorized program installed on Landry’s payment-processing devices. The program searched data from credit cards’ magnetic strips, including the cardholder’s name, card number, expiration date, and internal verification code, as the information was being routed through the payment-processing systems. Paymentech sued Landry’s for breach of the Paymentech-Landry’s agreement, under which Landry’s was required to comply with certain security guidelines and indemnify Paymentech for damages resulting from Landry’s failure to comply. 

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Iowa Supreme Court Rejects Restaurant’s Allegations of Bad Faith and Breach of Contract After Appraisal

The Iowa Supreme Court recently reversed the appellate court’s denial of an insurer’s motion for a directed verdict, finding that United Fire did not breach the insurance policy and did not commit bad faith during a property appraisal. Luigi’s, Inc. v. United Fire and Cas. Co., No. 19-1669, — N.W.2d —-, 2021 WL 1932711 (Iowa May 14, 2021).

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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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