Defending Institutional Bad Faith Claims, Part III – Proof by Other Claims

In Part I of this series, we explored the differences between institutional and non-institutional bad faith. For claims of institutional bad faith, plaintiffs often attempt to demonstrate a pattern and practice by offering evidence of claims of other policyholders. Unlike claims of institutional bad faith premised on the insurer’s policies and procedures, “other claims” allegations do not require knowledge of the insurer’s motives or internal programs, but instead rely on evidence of repeated behavior to make the threshold showing of bad faith.

When a plaintiff attempts to offer specific factual allegations relating to other policyholders in order to demonstrate a general business practice, the relevant inquiries relate to any actual similarities between the claims and the threshold at which the plaintiff alleges enough “other claims” to constitute a general business practice. “A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages.”[1] Unique policyholders make unique insurance claims. Factors courts consider in determining whether acts involving other policyholders suggest a general business practice include: (1) the degree of similarity between the alleged unfair practices in other instances and the practice allegedly harming the plaintiff; (2) the degree of similarity between the insurance policy held by the plaintiff and the polices held by other alleged victims of the insurer’s practices; (3) the degree of similarity between the claims made under the plaintiff’s policy and those made by other alleged victims under their respective policies; and (4) the degree to which the insurer is related to other entities engaging in similar practices.[2]

Use the plaintiff’s detailed bad faith allegations to show that the alleged bad faith is unique to the circumstances of the case, and but for the specific circumstances, each successive act or omission would not have happened. Consider the pool of policyholders that the plaintiff is offering as similar. Variables to analyze—in addition to the allegations of bad faith conduct—include the geographic scope, the temporal range, the type of loss or claim, and the personnel involved. In the discovery context, the Supreme Court of Texas considered “the many variables associated with a particular claim, such as when the claim was filed, the condition of the property at the time of filing (including the presence of any preexisting damage), and the type and extent of damage inflicted by the covered event.”[3]

With respect to the number of other claims, some courts require the plaintiff to “produce evidence of far more than three other claims in addition to his own.”[4] While there is no “magic number,” the “appropriate consideration is whether the plaintiff has made facially plausible allegations that, in the circumstances of the particular case, the defendant has engaged in the alleged wrongful acts enough to suggest it has a general business practice of doing so.”[5]

The best practice for limiting general business practices discovery is to stop it before it starts. Scrutinize the pleadings carefully. When the plaintiff attempts to demonstrate a general business practice with allegations regarding other insurance claims, explore the similarities and the dissimilarities of the claims and emphasize the latter. Failure to do so gives the plaintiff an opportunity to go on what might be a costly and intrusive fishing expedition.

[1] State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 422 (2003).

[2] Belz v. Peerless Ins. Co., 46 F. Supp. 3d 157, 166 (D. Conn. 2014).

[3] In re National Lloyds Ins. Co., 449 S.W.3d 486, 489 (Tex. 2014). In National Lloyds, the Supreme Court of Texas vacated a trial court order compelling an insurer to produce documents relating to the insurer’s valuation of other insurance claims. The court held that the insurer’s evaluation of the damage to other homes is not probative of the plaintiff’s undervaluation claims at issue. Id.

[4] See, e.g., Jablonski v. St. Paul Fire & Marine Ins. Co., No. 2:07-cv-00386, 2010 WL 1417063 (M.D. Fla. Apr. 7, 2010) (citing Howell-Demarest v. State Farm Mut. Ins. Co., 673 So. 2d 526, 529 (Fla. Dist. Ct. App. 1996)).

[5] Belz, 46 F. Supp. 3d at 167 (holding three alleged other instance of unfair settlement practices are sufficient to withstand a motion to dismiss); see also K Kim v. State Farm Fire & Cas. Co., No. 3:15-cv-879, 2015 WL 6675532, at *5 (D. Conn. Oct. 30, 2015) (“Here, Plaintiffs rely on one instance of wrongful conduct, the denial of their claim at issue in this litigation. They fail to allege any pattern of wrongful conduct, either with respect to their claim or those of others.”).

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Defending Institutional Bad Faith Claims, Part II – Focusing on Plausibility

In Part I of this series, we discussed institutional bad faith and best practices for insurers to minimize the risk of these costly and intrusive lawsuits. In Part II, we will focus on cutting discovery off at the pleadings—by narrowing the plaintiff’s claim, you limit the scope of relevance in discovery. Under Federal Rule of Civil Procedure 26(b), “[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case….”

Plaintiffs often allege institutional bad faith by providing a small amount of information pertaining to the company at large, and then making significant inferences and conclusions and offering those inferences as factual allegations. A skilled attorney can make such logical leaps appear valid. To avoid general business practices discovery, the battle begins with the initial pleadings. If the complaint does not allege institutional bad faith, then it will be much easier to argue that such discovery is not relevant. If, on the other hand, the complaint alleges institutional bad faith, limiting discovery will become more difficult and more dependent on the specific circumstances of the lawsuit and the discovery requests.[1]

Since the United States Supreme Court’s rulings in Twombly and Iqbal,[2] Federal courts are taking a closer look at bad faith allegations. For example, in a case out of Florida, the court dismissed a claim for punitive damages that contained only “[c]onclusory assertions about business practices and profit motives ….”[3] In Moss v. Liberty Mut. Fire Ins. Co., the plaintiffs alleged the insurer defendant hired a consultant to develop programs to increase the company’s profits and to motivate adjusters to pay claims unfairly and make “low ball” offers, and that this program led to an increase in profits.[4] But, the plaintiffs “fail[ed] to provide any factual underpinnings which make the leap from alleged bad faith delay in processing Plaintiffs’ insurance claim to a general business practice of acting with bad faith toward other unnamed insureds.”[5] The lesson learned from Moss is that you have to scrutinize even detailed, well-researched complaints. Inferences are not facts and do not raise a claim to the level of facially plausible.

Similarly, vague allegations of bad faith based upon a plaintiff’s “information and belief” do not rise to the level of “plausible.”[6] If the plaintiff knew of specific facts that would support its assertions of institutional bad faith, the plaintiff would allege those facts.[7] Some plaintiffs may attempt to skirt the pleading requirements of Rule 8(a) by arguing that “information regarding a company’s general business practices is peculiarly within the possession and control of the [company], such that they may plead facts on the basis of information and belief.”[8] “However, they still must plead enough facts to permit for the reasonable inference that the unfair insurance practice occurred with enough frequency for it to be deemed a ‘general business practice.’”[9] In Kim v. State Farm Fire & Cas. Co., the plaintiffs alleged “it is the general business practice of State Farm to wrongfully deny coverage by relying upon inapplicable policy exclusions.”[10] The court rejected the plaintiffs’ argument that “the issue of the frequency with which the defendants engaged in the insurance practices complained of is a more appropriate area for discovery than pleading and that conclusory allegations of [a] ‘general business practice’ suffice for purposes of permitting discovery.”[11] Accordingly, the court held that the plaintiffs’ bare allegations fail to state a claim.[12]

By challenging unsupported allegations, you take away the plaintiff’s argument that broad general business practices discovery is relevant to its claims. To that end, plausible claims of “general” business practices based on “other claims” require allegations of specific facts relating to the insurer’s conduct in regard to policyholders other than the plaintiff.[13]

[1] See All Moving Servs., Inc. v. Stonington, Ins. Co., No. 11-61003-CIV, 2012 WL 718786, at *5 (S.D. Fla. Mar. 5, 2012) (holding that if the general business practices allegations are deemed legally sufficient, or are not challenged, the plaintiff may pursue discovery relevant to its claim for punitive damages).

[2] Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009).

[3] Moss v. Liberty Mut. Fire Ins. Co., No. 3:16-cv-677-J-39JBT, at *5 (M.D. Fla. Aug. 18, 2017).

[4] Id. at *6.

[5] Id.

[6] 316, Inc. v. Md. Cas. Co., 625 F. Supp. 2d 1179, 1184 (N.D. Fla. 2008); accord Alqamus v. Pac. Specialty Ins. Co., No. 3:14-cv-00550, 2015 WL 5722722, at *3 (D. Conn. Sept. 29, 2015).

[7] See El Doral Office Condo. Ass’n v. Scottsdale Ins. Co., No. 19-20418, 2019 WL 1979361, at *2 (S.D. Fla. May 3, 2019) (“The inclusion of the term ‘to the extent’ within the pleading undermines any claim that the affirmative defense can be supported by facts known to Scottsdale at this moment. If such facts were known, they would almost certainly have been included.”).

[8] Kim v. State Farm Fire & Cas. Co., No. 3:15-cv-879, 2015 WL 6675532, at *5 (D. Conn. Oct. 30, 2015) (quotation marks omitted).

[9] Id. (quotation marks omitted).

[10] Id. at *4.

[11] Id. at *5 (quotation marks omitted).

[12] Id.

[13] Niagara Distribs., Inc. v. N. Ins. Co. of N.Y., No. 10-61113, 2010 WL 11441045, at *3 (S.D. Fla. Oct. 22, 2010).

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Defending Institutional Bad Faith Claims, Part I – A Primer on Institutional Bad Faith

Broadly speaking, there are two types of bad faith claims that may be alleged against an insurance company—traditional or non-institutional bad faith, and institutional bad faith. For the former, a policyholder would seek to hold an insurer liable for its acts or omissions that directly and adversely affected the policyholder. For example, in the third-party context, a policyholder may file a bad faith claim against its insurer if the insurer failed to settle a lawsuit against the policyholder within policy limits and a judgment is entered against the policyholder in excess of policy limits.

Institutional bad faith, in contrast, goes beyond a single policyholder. In claims of institutional bad faith, the plaintiff or plaintiffs will attempt to demonstrate a company plan and culture that denies policyholders the reasonable benefits of their insurance policies. A classic example would be where an insurer creates an incentive structure that encourages its adjusters to deny, delay or underpay claims.

The differences between traditional and institutional bad faith manifest in the costs of discovery and the cost of an adverse verdict. Stated simply, institutional bad faith claims are expensive and time consuming to defend. Because institutional bad faith claims pertain to the practices of the insurer or its claims department at a macro level, plaintiffs will seek voluminous company documents and high-level depositions. Plaintiffs may seek copies of the insurer’s policies and procedures, department bulletins, training manuals, compensation programs, and audits and statistics, to name just a few. Given the breadth and expense of e-discovery, institutional bad faith claims pose significant costs.

Further, in any state that has adopted the Unfair Claims Settlement Practices Act, plaintiffs are likely to allege a defendant insurer commits unfair claims practices “with such frequency as to indicate a general business practice.” See, e.g., Fla. Stat. 626.9541[1]; Nev. Rev. Stat. § 686A.310; N.C. Gen. Stat. § 58-63-15;[2] Conn. Gen. Stat. § 38a-816. In Florida, for example, Florida Statutes § 624.155(5) permits punitive damages where the conduct giving rise to the violation occurs with such frequency as to constitute a general business practice, and is either willful, wanton or malicious, or with reckless disregard of the rights insured.

To minimize the risk of institutional bad faith claims, we recommend the following practices:

  • Always be mindful that it is the purpose of an insurance company to pay covered losses and to provide the policyholder the benefits of the insurance policy. Not every claim is covered, however, and some claims involve elaborate fraud schemes. While it is reasonable and necessary to investigate claims, denial of coverage should always be based upon defensible, reasoned conclusions.
  • Train your adjusters properly and train them often. Training should include the procedures for handling claims, the meaning and effects of policy provisions, and legal standards and other jurisdictional-specific requirements. Make sure your adjusters have access to coverage counsel when they are uncertain of how to proceed.
  • Use statistics cautiously. Insurance is a business and it is reasonable for a business to measure performance or outcomes. But, those statistics are likely to become an exhibit at a bad faith trial. Beware of the metrics that are used and how questions are presented. Also consider who has access to the information. Is the information shared with different departments (e.g., underwriting and claims)? Is the information given to managerial employees as well as claims adjusters? Prior to collecting and disseminating information, think defensively—how might a bad faith plaintiff argue this information is nefarious?
  • Review your claim handling guidelines with outside counsel—using a fresh set of eyes is critical because someone with experience with the guidelines may interpret them based on their understanding of the guidelines, as opposed to strictly analyzing the text. Ambiguities in a claim manual may permit a bad faith plaintiff to argue an interpretation of otherwise innocuous text in a manner that supports a finding of institutional bad faith. Further, a claim manual may also create unrealistic claim handling standards beyond that required by the law. In those instances, the claim manual may have the effect of raising the standard of care in the eyes of the jury.
  • Consider employee incentives carefully. Incentives relating to payout on claims are more obviously problematic. Other incentives may be well intentioned but have unintended consequences. For instance, incentivizing speedy closure of clams may seem like an effective way of delivering policyholders prompt payments or claim decisions, but it may also cause adjusters to conduct inadequate investigations. Any use of performance targets or quotas should be carefully considered to ensure that their effect is to promote fair, prompt, and comprehensive evaluation of claims. Reward claims handlers for providing superior customer service—those satisfied customers will in turn reward the company with future business.

While these practices may help prevent bad faith suits, lawsuits are bound to happen regardless of their merits. To avoid costly and intrusive discovery in a bad faith action, it is necessary to analyze the lawsuit and discovery in terms of their specific component parts. Under Federal Rule of Civil Procedure 26(b), “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case….”

In this series, we will focus on cutting discovery off at the pleadings—by narrowing the plaintiff’s claim, you limit the scope of relevance in discovery. Plaintiffs often allege institutional bad faith by providing a small amount of information pertaining to the company at large, and then making significant inferences and conclusions and offering those inferences as factual allegations. A skilled attorney can make such logical leaps appear valid. To avoid general business practices discovery, the battle begins with the initial pleadings. If the complaint does not allege institutional bad faith, then it will be much easier to argue that such discovery is not relevant. If, on the other hand, the complaint alleges institutional bad faith, limiting discovery will become more difficult and more dependent on the specific circumstances of the lawsuit and the discovery requests.[3]

[1] However, “[a]ny person who pursues a claim under this subsection shall post in advance the costs of discovery. Such costs shall be awarded to the authorized insurer if no punitive damages are awarded to the plaintiff.” § 624.155(5).

[2] Under North Carolina law, it is not necessary to allege violations of N.C.G.S. § 58-63-15(11) occur with the frequency of a general business practice in order to allege a cause of action under N.C.G.S. § 75-1.1, which prohibits unfair or deceptive trade practices. Gray v. N.C. Ins. Underwriting Ass’n, 529 S.E.2d 676, 683 (N.C. 2000). However, a plaintiff might allege general business practices as aggravating factors in favor of a claim for punitive damages.

[3] See All Moving Servs., Inc. v. Stonington, Ins. Co., No. 11-61003-CIV, 2012 WL 718786, at *5 (S.D. Fla. Mar. 5, 2012) (holding that if the general business practices allegations are deemed legally sufficient, or are not challenged, the plaintiff may pursue discovery relevant to its claim for punitive damages).

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South Carolina Code Does Not Invalidate Notice and Cooperation Clauses

In late July, the South Carolina Supreme Court handed down a helpful ruling for insurers when it held that, if an insured fails to give notice to his automobile insurer of a pending claim, the insurer may deny coverage above statutory limits upon a showing that it was substantially prejudiced by its insured’s failure to comply with the standard notice clause in the policy. Neumayer v. Philadelphia Indem. Ins. Co., — S.E.2d —, 2019 S.C. LEXIS 67, at *17 (S.C. July 24, 2019).

The case involved a motor vehicle accident where a pedestrian, Andrew Neumayer, was struck by a bus driver, suffering severe injuries. Neumayer filed suit against the bus driver who then failed to answer the complaint, and after eighteen months, the clerk entered a default in the amount of $622,500. Upon discovery of the existence of the lawsuit, the bus driver’s insurance company, Philadelphia Indemnity Insurance Company, refused to pay the default, instead arguing that its liability was limited to the statutory financial responsibility limit of $25,000 because it was substantially prejudiced by its insured’s failure to notify it of the suit.

Neumayer sought, and received, a declaratory judgment awarding him the entire amount of the default.  He relied on South Carolina Code Ann. § 38-77-142(C), which provides that “[a]ny endorsement, provision, or rider attached to or included in any policy of insurance which purports or seeks to limit or reduce the coverage afforded by the provisions required by this section is void.” § 38-77-142(C).  Neumayer argued this provision invalidated the notice clause in the insurer’s policy which stated:

Duties in the Event of Accident, Claim, Suit or Loss

We have no duty to provide coverage under this policy unless there has been full compliance with the following duties:

a.     In the event of “accident”, claim, “suit” or “loss”, you must give us or our authorized representative prompt notice of the “accident” or “loss.” . . .


b.     Additionally, you and any other involved “insured” must: . . .


c.     Immediately send us copies of any request, demand, order, notice, summons or legal paper received concerning the claim or “suit”

The insurer appealed the ruling, arguing that Neumayer’s interpretation of the Code’s section would prevent an insurer from any recourse in the event its insured never notified it of a lawsuit, resulting in substantial prejudice to an insurer.

The Court stated that, while the statute seeks to protect an insured from language in an automobile insurance policy that would otherwise void coverage, “the General Assembly did not intend to eviscerate settled law concerning notice clauses.” Neumayer, 2019 S.C. LEXIS 67, at *15. The Court, therefore, reversed the declaratory judgment, finding that § 38-77-142(C) does not serve to invalidate notice and cooperation clauses.  Insurers must provide statutorily-mandated minimum coverage for third-party losses.  However, an insurer may rely on the clauses contained within its policy to deny coverage above statutory limits, upon a showing that the insurer was substantially prejudiced by its insured’s failure to comply with the provision.  In this case, where a default judgment was entered, the Court agreed that the insurer was substantially prejudiced.

As discussed by the Court, notice and cooperation provisions are included in nearly every insurance policy. They require an insured to timely notify its insurer at the outset of a lawsuit filed against an insured, and the importance of these provisions cannot be understated. An insurer should only be required to pay a judgment involving an insured’s auto accident and a state’s financial responsibility statute, up to the statutory financial limit. And in some states, a default judgment with no notice to the insurer may mean an insurer does not have any legal obligation to pay the judgment.

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Form and Substance: The Importance of Conducting a Proper Investigation of First-Party Claims Under California Law

A bad faith claim against an insurer often focuses as much on the process of a claims investigation as it does on the substance of a claims decision itself. If the coverage decision was wrong (but not unreasonable), and the investigation was thorough, there may be liability for breach of contract, but there is a reduced risk of liability for bad faith. In contrast, if the coverage decision was wrong, and the insurer also failed to investigate the claim properly, there is a heightened risk of bad faith. Because of this, a proper investigation of the claim is vital to preventing (or defeating) an insured’s bad faith claim.

Egan v. Mutual of Omaha Insurance Company, 24 Cal.3d 809 (1979), is the seminal case in California that addresses an insurer’s duty to conduct a proper investigation, and the resulting bad faith liability that can result from an inadequate investigation. In Egan, the dispute involved a disability insurance claim in which the insurer reclassified its insured’s condition as an “illness” rather than an “injury.” This decision reduced the available benefits under the policy. In reaching this decision, the insurer relied solely on the review of available medical records and made no effort to speak to the insured’s doctors or even have the insured examined by a doctor of the insurer’s own choosing. As the Court explained, to protect an insured’s interests, “it is essential that an insurer fully inquire into possible bases that might support the insured’s claim.” The Court further explained that “[a]lthough we recognize that distinguishing fraudulent from legitimate claims may occasionally be difficult for insurers . . . an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” The Court ultimately held that “the evidence is undisputed that Mutual failed to properly investigate plaintiff’s claim; hence the trial court correctly instructed the jury that a breach of the implied covenant of good faith and fair dealing was established.”

Numerous California cases have followed Egan, finding that an inadequate investigation can lead to bad faith liability. For instance, in Jordan v. Allstate Insurance Company, 56 148 Cal.App.4th 1062 (2007), the California Court of Appeal reversed summary judgment in favor of the insurer, in part because, based on the particular facts of the case, the insurer had failed to conduct “a full, fair and thorough investigation of all of the bases of the claim that was presented.” Specifically, the insurer failed to do a number of things as part of its investigation, including: retaining an engineer to inspect the property, inspecting the inner walls and subflooring of the home despite potential coverage for hidden decay, interviewing the insured, and interviewing the insured’s expert.

In any claim, an insurer and its employees must be mindful of the requirement to conduct a proper investigation. While the scope of the necessary investigation will vary by claim, adjusters should follow the company’s established investigation procedures, and also use their common sense. If the claim involves structural damage where causation is an issue, then consider hiring a qualified structural engineer and if you don’t, then document why an engineer was not needed. If the claim involves a disability, consider retaining a medical expert. If it’s a car accident, make sure to interview witnesses. And no matter what, review all the information provided by the insured and request additional information if necessary. A full and fair investigation can go a long way in preventing a bad faith claim.

If you’re interested in learning more about this topic, and other tips to avoid bad faith claims, we are hosting a webinar on July 24, 2019. Click here to register.

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Store Display Can Be an “Advertisement” Under Coverage B

In Hershey Creamery Company v. Liberty Mutual Fire Insurance Company and Liberty Insurance Corporation, No. 1:18-CV-694, 2019 WL 1900397 (M.D. Penn. May 6, 2019) the court found that a self-serve milkshake machine and related display could constitute an “advertisement” for purposes of insurance coverage, and Hershey was owed a defense for claims alleging patent and trademark infringement of f’real Foods LLC’s (“f’real”) similar machine and display. F’real developed a display kiosk with a blender atop a merchandizing freezer with a see-through glass door. Its milkshake products are displayed in cylindrical sealed cups arrayed in rows and columns within the freezer. The kiosk prominently features f’real’s name with advertising slogans such as “Blend a F’REAL…for REAL” or “REAL Milkshakes, REAL good.” The word “REAL” is a prominent feature of f’real’s advertising.

Hershey packed its competing frozen milkshakes in plastic containers of comparable size and shape and sold the products in kiosks that closely mimicked those developed by f’real. The Hershey milkshake containers made prominent and repeated the use of the word “REAL” in all capital letters, including “REAL MILKSHAKE” and “REAL ICE CREAM.”

Hershey’s general liability policy excluded coverage for injuries stemming from intellectual property infringement, but included exceptions (and thus expressly provides coverage for) injury from infringement of another’s “advertising idea” or “copyright, trade dress or slogan” in Hershey’s “advertisement”. The parties disputed whether the signage on the purportedly infringing kiosks was an “advertisement”, which the policy defined as “a paid announcement that is broadcast or published in the print, broadcast or electronic media.” Hershey argued that the phrase “published in the print media” is broad enough to include slogans published on in-store advertising signage—or at least is ambiguous and should be construed in Hershey’s favor. The court agreed. The allegations made clear that f’real believed Hershey infringed on its advertising ideas and slogans and specifically did so in the context of advertising for competing blending machines and milkshakes located in convenience stores.

The court found a sufficient nexus between advertising and injury to trigger a duty to defend. The court also determined that the insurer violated its obligations under the policy because it wrongfully withdrew from defending Hershey. Interestingly, the court noted that Hershey pled that it suffered injury from the insurer’s withdrawal and refusal to defend, but did not prove any damages.

The takeaway good faith practice tips for insurers assessing personal or advertising injury claims are threefold. First, understand the policy’s definition of “advertisement.” Second, recognize that a defense is owed if, resolving all doubts in favor of the insured, it is possible that a claim as alleged falls within the policy’s definition of “advertisement.” And finally, consider filing a declaratory judgment suit where defense obligations are unclear.

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Massachusetts: Third-Party Claim Handler Made Reasonable, Prompt Efforts to Settle Nursing Home Liability Claim, and Therefore Was Not Liable For $14 M Excess Verdict

On March 18, 2019, the First Circuit Court of Appeals affirmed a decision holding that Sedgwick Claims Management Services made reasonable and prompt efforts to settle a nursing home liability claim, and therefore was not liable for a $14M excess verdict despite the fact that the highest pretrial offer Sedgwick made was for $250,000. Calandro v. Sedgwick Claims Management Services, Inc. 2019 WL 1236927, ___ F.3d ___ (2019). In a colorful appellate decision notable for its loquaciousness, the First Circuit observed, “every case has its twists and turns, and an insurance carrier is not to be held to a duty of prescience.” In reaching its decision, the Court further observed that “perfection is not the standard” to demonstrate good faith and affirmed the trial court’s decision finding that Sedgwick had acted reasonably in its investigation and settlement efforts.

The case involved a Radius nursing home incident in which Genevieve Calandro fell from her wheelchair and later died at a hospice facility. Her Estate brought claims against the Radius Nursing Home. Hartford Insurance Company provided $1M in liability coverage to Radius and retained Sedgwick to handle the claim. When Radius was served with the Complaint, it was accompanied by a $500,000 demand. Sedgwick engaged an independent adjuster and defense counsel for Radius, both of whom were tasked with evaluating the claim.

Within two weeks, the independent adjuster reported that the cause of death seemed to be related to ongoing medical conditions, not the fall. He also noted that some of the records were missing from the nursing home file and that he was having difficulty locating witnesses because the facility was closing.

A second report followed within two months and noted that the witnesses had been located and interviewed, but their statements about the incident were inconsistent. In the meantime, the plaintiff had added claims against the treating physician. Seven months after suit was filed, the Medical Malpractice Tribunal reviewed the plaintiff’s claims, and the claims were allowed to proceed. It was at this point that the plaintiff renewed the $500,000 settlement demand and both defendants made a $275,000 offer. At this time, the defense attorney wrote a report projecting potential exposure in the $300,000 to $500,000 range.

The plaintiff then began efforts to settle separately and reached a settlement with the doctor for $250,000, leaving only Radius as a defendant. The plaintiff then increased the demand to $1,000,000 against Radius, and demanded that an offer of at least $500,000 be made within six (6) days or settlement negotiations would be terminated and the case would go to trial. Because the demand was made the day before the Fourth of July holiday weekend, the defense did not see the offer until the day before it expired. Sedgwick made a further offer of $250,000 a few days later. Plaintiff rejected the demand and the case went to a four-day trial, resulting in a $14M verdict for wrongful death and conscious pain and suffering, which was far in excess of the Hartford policy limit of $1M.

After the verdict, the plaintiff’s attorney notified both Hartford and Sedgwick that he intended to bring claims against both under Massachusetts statutes which imposed an obligation of good faith in conducting investigations and settlement negotiations (Chapter 176D and Chapter 93A). Faced with this threat, Hartford reached a settlement with the plaintiff for an undisclosed amount. Sedgwick offered $2M, but its offer was rejected.

Plaintiff then sued Sedgwick in Massachusetts state court and Sedgwick thereafter removed the case to federal court, citing diversity jurisdiction. Plaintiff argued that Chapter 176D imposed a duty on those engaged “in the business of insurance” to handle claims in good faith and to “effectuate prompt, fair and reasonable settlements of claims in which liability has become reasonably clear.” Mass.Gen.Laws. ch. 176D, section 3. Plaintiff argued that Sedgwick had failed in this duty and should be liable for the excess verdict.

A four-day bench trial ended in Sedgwick’s favor, so the plaintiff appealed to the First Circuit. In reviewing the plaintiff’s contentions, the First Circuit observed that “plaintiff comes out swinging” and hopes to “land a knock-out blow” by arguing that liability and damages were clear when the claim was first received by Sedgwick. The Court then observed that “liability is not reasonably clear if an element of the claim is subject to good faith disagreement.” With this framework in mind, the court observed that Sedgwick had promptly investigated, had engaged an adjuster and counsel, had required routine reporting, had hired a medical expert, and had a reasonable basis for contesting causation. Furthermore, Sedgwick made reasonable settlement efforts at appropriate times that fell within the ranges suggested by defense counsel. For these reasons, the court affirmed the lower court’s holding that Sedgwick had not violated Chapter 176D, and therefore was not liable to the plaintiff.

This case is notable in several regards. First, retired U.S. Supreme Court Justice David Souter was part of the panel, sitting by designation. Second, the Court assumed, but did not expressly hold, that Sedgwick was subject to the good faith standards of Chapter 176D because it was “in the business of insurance.” The topic of whether adjusters (and others “in the business of insurance”) are individually subject to good faith standards is currently being considered in Washington state, in Keodalah v. Allstate, where a lower court found an Allstate adjuster personally liable under a similar statute (currently on appeal.)

Finally, the case comes as a relief to those who handle claims to see a court clearly articulating that good faith does not require perfection.

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Georgia Supreme Court Spares Insurance Company from a $5.3 Million Bad-Faith Verdict

Last week, the Georgia Supreme Court confirmed that an insurance carrier’s duty to settle a claim against its policyholder arises only after an injured claimant presents a “valid offer” to settle within policy limits. In First Acceptance Insurance Company of Georgia v. Hughes,[1] the Court found that, because the letter presented to First Acceptance by the injured parties’ counsel was not a time-limited settlement demand, First Acceptance’s failure to respond before the injured parties withdrew their offer did not constitute negligence or a bad faith failure to settle the claim within policy limits.

In 2008, First Acceptance’s policyholder caused a multi-car crash killing the policyholder and injuring five others, including Julie An and her 2-year-old daughter. The policy had the minimum liability limits of $25,000 per person and $50,000 per accident. In January of 2009, First Acceptance’s counsel circulated correspondence to the attorneys for the multiple claimants indicating it was interested in a joint settlement conference to resolve the  injured parties’ claims.  On June 2, 2009, counsel for An and her daughter sent First Acceptance two letters – the first responding to First Acceptance’s suggestion of a joint settlement conference and expressing his clients’ interests in settling their claims within policy limits, and another requesting information about the policy within 30 days of the date of the letter. First Acceptance’s counsel did not view the letters as including a time-limited demand.

As a result of a clerical error, both letters were inadvertently filed away with medical records. When First Acceptance did not respond to either letter within 30 days, claimants’ counsel sent a letter advising First Acceptance that its offer to settle was rescinded. First Acceptance continued settlement efforts by inviting claimants to a joint settlement conference with the other claimants, and offering to settle their claims for policy limits. Claimants rejected the offers.

After a 2012 trial, a jury found in favor of the claimants and against the policyholder awarding over $5.3 million dollars in damages. The policyholders’ estate then sued First Acceptance claiming that First Acceptance’s failure to settle the claims within the policy limits led to the excess judgment. The trial court granted summary judgment to First Acceptance only to have the Georgia Court of Appeals reverse the grant of summary judgment on the failure-to-settle claim.

The Georgia Supreme Court then granted the insurer’s petition for certiorari. First Acceptance argued that an insurance carrier’s duty to settle is not triggered until an injured claimant has made a valid settlement offer. The estate argued that the duty to settle is not dependent on specific language in a letter, rather the duty arises when “an ordinarily prudent insurer, giving its insured’s interests equal consideration to its own interest, would settle.”

The Georgia Supreme Court agreed with First Acceptance in its unanimous decision, stating that an insurer’s duty to settle is not triggered until an injured claimant has made a valid settlement offer. It found that, when considering the two letters sent to First Acceptance on June 2, 2009 as a whole, they did not include a 30-day deadline for acceptance. Instead, the Court viewed the offer to settle for policy limits as an alternative to claimants’ participation in the proposed global settlement conference. Without a clear deadline, First Acceptance could not have reasonably known it needed to respond within a certain time or risk that its insured would be subject to a judgment in excess of the policy limits. Thus, the Court held First Acceptance did not act negligently or in bad faith when it failed to settle the claims within policy limits.

Georgia’s high court also addressed the estate’s argument that First Acceptance knew or should have known that the minor daughter’s injuries were the most severe, and therefore, it should have settled her claim first. The Georgia Supreme Court disagreed with this position, finding that there was no precedent requiring that an insurer settle part of multiple claims. Instead, it found that a settlement of multiple claims including the minor’s claim was in the insured’s best interest as such a settlement would reduce the overall risk of excess exposure.

Ultimately, First Acceptance dodged a $5.3 million dollar bullet with Georgia’s highest court concluding that First Acceptance was entitled to summary judgment and reinstating the trial court’s ruling. This case serves as an important reminder to be cognizant of language in correspondence from injured parties that could be considered to be a valid settlement offer and to diligently calendar response dates and timely respond to such offers.


[1] First Acceptance Insurance Co. of Georgia Inc. v. Hughes, Case No. S18G0517, in the Georgia Supreme Court.

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The Supreme Court of Texas Clarifies That a Party Can Testify as an Expert Witness without Waiving the Attorney-Client Privilege

Litigation usually involves complex issues related to technology, products, or business processes. In many cases, clients are the best subject-matter experts of their craft. Nevertheless, attorneys are sometimes hesitant to designate a client or a client’s employee as an expert witness for fear of waiving attorney-client privilege. In a recent decision, the Supreme Court of Texas addressed this very issue and held that the attorney-client privilege remains unscathed when a party (or its corporate representative) is designated as a testifying expert witness. See In re City of Dickinson, — S.W.3d —, No. 7-0020, 2019 WL 638555 (Tex. Feb. 15, 2019).


City of Dickinson concerned whether a property insurer underpaid insurance benefits related to a Hurricane Ike claim made by the City of Dickinson. In responding to the City’s motion for summary judgment, the property insurer filed the affidavit of its corporate representative who was also a senior claims examiner. Unsurprisingly, the affidavit offered factual and expert testimony in opposition to the dispositive motion. The City later learned the corporate representative exchanged emails and drafts of the affidavit with defense counsel. The City then moved to compel the production of the emails and all other information “provided to, reviewed by, or prepared by or for” the corporate representative in anticipation of his expert testimony. Naturally, the property insurer claimed the documents were protected by the attorney-client privilege. The trial court, however, disagreed and granted the motion to compel. The intermediate appellate court reversed, finding the information sought was privileged.

The Supreme Court of Texas’s Decision

On appeal, the Court addressed whether Texas Rules of Civil Procedure 192.3 and 194.2 barred the property insurer from asserting attorney-client privilege. Rule 192.3 concerns the scope of discovery and provides that, with respect to a testifying expert, “[a] party may discover . . . all documents, tangible things, reports, models, or data compilations that have been provided to, reviewed by, or prepared by or for the expert in anticipation of a testifying expert’s testimony[.]” In construing Rule 192.3, the Court noted that the use of the word “may” merely meant that an opposing party could discover the information—not that it had an absolute right to discover it when a privilege applied. The Court also noted that another subpart of Rule 192.3 expressly precluded the discovery of privileged information.

Rule 194.2 concerns the content of a discovery tool called “requests for disclosure” and provides that, with respect to testifying expert, “[a] party may request disclosure of . . . all documents, tangible things, reports, models, or data compilations that have been provided to, reviewed by, or prepared by or for the expert in anticipation of the expert’s testimony[.]” As with Rule 192.3, the Court explained that the word “may” simply meant that a party could request the discovery. Another subpart of the rule expressly allowed the trial court to limit requests for disclosure, and the official comment to the rule made clear that “requests for disclosure under Rule 194 are subject to the attorney–client privilege just like the provisions of Rule 192.”

The Court also rejected the City’s argument that the Texas Rules of Civil Procedure should be interpreted the same as the pre-2010 Federal Rules of Civil Procedures because they were modeled after them. The Court summarily rejected the argument because the comments to the rules where substantively different.

The Court also distinguished its decision in In re Christus Spohn Hosp. Kleberg, 222 S.W.3d 434 (Tex. 2007). In that case, the Court held that a party was required to produce an investigator’s report provided to party’s expert. The Court explained that Christus Spohn only addressed the work-product privilege—not undisputed attorney-client communications. The Court explained that its holding was consistent with prior decisions, which “underscore the status of the attorney-client privilege as ‘quintessentially imperative’ to our legal system” and that “[w]ithout the privilege, attorneys would not be able to give their clients candid advice as is an attorney’s professional duty.”


City of Dickinson provides clarity in a previously unsettled area of Texas law. Further, it reinforces the importance of the attorney-client privilege and clarifies that a client does not have to choose between testifying as an expert at trial and invoking attorney-client privilege. Going forward, we expect the primary party-expert dispute to center on whether materials provided to the party-expert constitute discoverable work product under Christus Spohn or protected attorney-client privilege under City of Dickinson. Indeed, as the Court noted in its opinion, the two privileges are often conflated.

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In a surprising decision on rehearing, on February 4, 2019, a panel of the Louisiana Third Circuit Court of Appeal reversed itself and held that bad faith claims arising out of an insurance contract are subject to a ten-year prescriptive period rather than a one-year prescriptive period.[1] Fils v. Starr Indemnity & Liability Company, — so. 3d — (La. App. 3rd Cir. 5/9/2018)(on r’hrg), centered on the timeliness of the plaintiff’s bad faith claims against his uninsured motorist carrier. Dissatisfied with the $45,000 that his UM carrier had tendered following a motor vehicle accident on August 28, 2013, the policyholder filed suit against the insurer for additional benefits the day before the expiration of the two-year prescriptive period applicable to claims for UM benefits. Sixteen months later, the insured amended his petition, alleging bad faith on the part of the UM carrier and seeking penalties and attorneys’ fees pursuant to Louisiana’s two “bad faith” statutes, La. R.S. 22:1973 and La. R.S. 22:1892. The trial court sustained the insurer’s exception of prescription and dismissed the bad faith claims with prejudice.

In a decision rendered May 9, 2018, the Third Circuit affirmed the trial court’s dismissal of the insured’s bad faith claims, holding that claims brought pursuant to Louisiana’s bad faith statutes are subject to a one-year prescriptive period. The Court reasoned that an insurer’s duties under the two bad faith statutes are statutory in nature, not contractual, and that because a contractual relationship between a claimant and an insurer is not a prerequisite to actions under the two bad faith statutes, the ten-year prescriptive period for actions on contracts does not apply. In support of its holding that a one-year prescriptive period applied to bad faith claims against insurers, the Third Circuit noted that the Louisiana Supreme Court has never directly addressed whether a one-year or ten-year prescriptive period applies to bad faith claims against insurers and suggested that the Louisiana Supreme Court tacitly agreed that a one-year prescriptive period applied when it denied writs in Labarre v. Texas Brine Company. In the Labarre case the First Circuit Court of Appeal had reversed the trial court’s application of a ten-year prescriptive period and pronounced that a one-year prescriptive period applied to bad faith claims against insurers.

The Third Circuit granted the insured’s application for rehearing and accepted numerous amicus curiae briefs, some urging the Court to maintain its holding that claims asserted under the two bad faith statutes are subject to a one-year prescriptive period and some urging the Court to reverse its decision.   In its opinion on rehearing, the Third Circuit recognized the split between the First and Second Circuit Courts of Appeal regarding the prescriptive period applicable to bad faith claims and closely examined jurisprudence from those courts and from the United States District Court for the Eastern and Western Districts of Louisiana.

The Third Circuit emphasized that prior to the enactment of the two bad faith statutes, Louisiana courts routinely imposed liability upon insurers for failing to act in good faith and in the best interests of their insureds. The Court also focused on a twenty-four year old pronouncement by the Louisiana Supreme Court that the enactment of the bad faith statute was a recognition of the duty of good faith and fair dealing that had been established by the Courts – a duty that was based on the contractual and fiduciary nature of the relationship between the insurer and the insured.   The Third Circuit determined that all of the insurer’s obligations to the insured in this case arose out of the contract between them that provided for UM benefits and that the insured would not have had any claims against the insurer in the absence of such a contract. The Court held that “[b]ecause any bad faith on an insurer’s part is a breach of a contractual duty, it necessarily follows” that bad faith claims are contractual in nature and therefore subject to a ten-year prescriptive period. The Court also determined that it would be “nonsensical” to apply a one-year prescriptive period for bad faith claims when causes of action for UM benefits are subject to a two-year prescriptive period as such an application would potentially require claimants to file bad faith claims before the running of prescription on the underlying claims.

It is crucial to note that the ten-year prescriptive period will not apply to all bad faith insurance claims in the Third Circuit. The Court recognized that whether a claim is based in contract or tort is determined by the nature of the duty breached and that there may be instances where the bad faith alleged on the part of the insurer is based in tort rather than on the insurance contract, such as a violation of an insured’s privacy rights through an abusive investigative process. However, the Third Circuit emphatically and unequivocally held that when a claimant’s bad faith claims are based on the breach of obligations the insurer assumed in the insurance contract, the Court will apply a ten-year prescriptive period to those claims. The UM carrier has applied for rehearing by the Court en banc. Regardless of any decision by the Court en banc, this significant split among the circuit courts of appeal as to the correct prescriptive period applicable to bad faith claims is one practitioners expect to be appealed to the Louisiana Supreme Court and that should be ripe for the Court to accept. Cozen O’Connor will continue to what and report on this significant Louisiana limitations issue.

[1]              Louisiana has prescriptive periods instead of statutes of limitations.

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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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