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.
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.
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.
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).
An insurer can no longer claim its lack of notice of a lawsuit against its insured excuses it for failing to settle the suit after the Georgia Supreme Court’s recent decision in GEICO Indemnity Co. v. Whiteside, Case No. S21Q0227 (Ga. April 19, 2021). In Whiteside, the Georgia Supreme Court held that an insurer’s bad faith failure to settle a claim may result in liability for judgments in excess of the insured’s policy, even in cases where the insured also breaches its contractual duty to notify the insurer of a suit brought against it.
Waiver, estoppel and forfeiture are
doctrines on which insureds often rely to try to create coverage outside the terms of the insurance
policy. Insureds will often assert that they are entitled to such
extra-contractual coverage based entirely
on how the insurer handled the claim. But
under California law, these doctrines often do not apply, and an insurer can
avoid a potential waiver, estoppel or forfeiture by communicating with the
Although the terms are often used
interchangeably, the doctrines are different. Estoppel refers to conduct by the
insurer that reasonably causes an insured to rely to his detriment. Waiver is
an express or implicit intentional relinquishment of a known right demonstrated.
And forfeiture is the assessment of a penalty against the insurer for either
misconduct or failure to perform an obligation under the contract.”
On March 8, 2021
the California Court of Appeal, reversing a $10 million verdict against
Farmers, found that a jury must specifically find unreasonable acts by an insurer
to support a “failure to settle” bad faith finding. Pinto v. Farmers Ins. Exch., No. B295742,
__ Cal. App. 5th __, 2021 WL 857776 (Cal. Ct. App. Mar. 8, 2021). The court also clarified that it has never
held that a failure to accept a reasonable settlement is per se unreasonable under California law.
The case involved a
single-vehicle rollover accident, which left the claimant, a passenger in Farmers’
insured vehicle, a quadriplegic. Farmers issued an auto insurance policy with a
$50,000 each person and $100,000 each occurrence limit to the owner of the
insured vehicle, a pickup truck. The owner
allegedly allowed her friend to drive the pickup-truck on the day of the
Illinois does not recognize bad
faith as an independent tort. In the first-party context, bad faith is a purely
statutory construct which hinges upon whether an insurer’s conduct was
“vexatious and unreasonable.” Section 155 of the Illinois Insurance Code (215
ILCS 5/155) provides the exclusive remedy
for bad faith conduct by an insurer and also preempts other causes of action
that at their core constitute a breach of good faith and fair dealing.
Section 154.6 of the Illinois
Insurance Code (215 ILCS 5/154.6) enumerates 18 improper claim practices.
Although these practices are not dispositive of a Section 155 claim, a court
may properly consider the enumerated actions when determining whether an
insurer’s conduct was vexatious and unreasonable. As
a result, Section 154.6 provides a helpful guide for what not to do when handling a claim, which can be useful in
establishing practices and rules of thumb for proper claims handling. The
Section 154.6 improper practices can be distilled down to three distinct trouble
areas: (1) where an insurer fails to be prompt and responsive; (2) where an
insurer fails to be proactive; and (3) where an insurer fails to adequately
investigate a claim.
In two recent cases, the courts
showed substantial deference to patients’ treating physicians in determining
the reasonableness of medical treatment. This deference appears to reflect a
reluctance of courts to decide what healthcare is appropriate for a patient.
In Peterson v. Western National Mut. Ins. Co., 946 N.W.2d 903 (Minn.
2020), the policyholder was involved in a low-speed automobile accident.
Following the accident, she sought treatment from a chiropractor for body aches
and headaches. She entered into a settlement with the other driver and her
insurer also paid her policy’s no-fault benefits. For two to three years
following the accident, the insured underwent various treatments for her
headaches. Eventually, she tried Botox injections, which she found effective.
The insured’s treating physician reported that the insured would need the
$2,500 per treatment Botox injections for the rest of her life. As a result,
the insured demanded her insurer pay her policy’s full $250,000 underinsured
motorist coverage limit, and then filed suit.
The key issue in insurance bad
faith litigation is whether the claims professional reasonably handled the
claim. Throughout the claims-handling process, the claims professional should
constantly ask him-or-herself whether the investigation is sufficient to
support a coverage determination and how someone might challenge that
determination. By asking and answering those questions, the claims professional
can be confident in his or her coverage determination. And to ensure that the
claims professional’s analysis is not lost, his or her file should contain the evidence
necessary to fully explain any such determination.
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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