A Claim for Bad Faith is Not Eliminated By A Late Payment of the Insured’s Economic Damages

The United States District Court for the Southern District of California recently considered whether the carrier’s late payment of the insureds’ economic damages eliminated a claim for bad faith and held that it does not. Polcyn v. Liberty Mut’l Ins. Co., 2013 U.S. Dist. LEXIS 76193 (S.D. Cal. May 30, 2013).

In that case, the insurer at first rejected and later accepted the insureds’ tender of the underlying lawsuit.  After accepting the tender, the insurer agreed to pay all of the insured’s economic damages incurred in defending the underlying lawsuit and enforcing their claim under the policy.  The insurer, however, refused to pay for emotional distress damages claimed.  The insureds filed suit and the carrier moved to dismiss the complaint on the grounds that its payment eliminated any claim for bad faith.

Under California law, to establish a claim for a breach of the implied covenant, “(1) benefits due under the policy must have been withheld; and (2) the reason for withholding benefits must have been unreasonable or without proper cause.” Id. at *6 (citing Love v. Fire Ins. Exchange, 221 Cal.App.3d 1136, 1151 (1990)). The court held that the insureds’ allegation that their tenders were rejected without a reasonable investigation is sufficient to state a claim for bad faith. Id.

The court held that the requirement of an economic loss to recover damages for emotional distress may be satisfied where the insured has paid legal fees and court costs to enforce a claim under the policy. Id. at *7. Here, the insureds incurred over $140,000 in attorney’s fees and costs to defend the underlying lawsuit and pursue insurance coverage.  The fact that the insureds were later compensated for these costs does not eliminate their bad faith claim; but rather, only mitigates the amount of time that they can claim emotional distress damages.  Id. at *7-9.

About The Author

Nejat Ahmed joined Cozen O’Connor’s Houston office in May 2010. As a member of the Global Insurance Group, she focuses her practice in the areas of insurance coverage and commercial litigation.

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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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