In Rhode Island, No Duty of Good Faith to Third Party Claimant

In Summit Insurance Company v. Stricklett, — A.3d —, No. 2017185APPEALPC12536, 2019 WL 190358, (R.I. Jan. 15, 2019), the Supreme Court of Rhode Island held that – similar to many jurisdictions – the duty to act in a reasonable manner and in good faith settling a claim does not run to the claimant absent an assignment from the insured.

The facts of Stricklett are simple. Mr. Stricklett’s vehicle was insured by Summit under a policy with a $25,000 per person, $50,000 per accident coverage limit. In 2002, Stricklett allegedly collided with eleven-year-old Scott Alves, requiring that Alves undergo medical treatment. Alves’s parents submitted the medical bill to Summit Insurance Company, who investigated the incident and determined that Stricklett was not at fault and therefore no payment would issue. This ended the matter until 2011, when the Alveses submitted to Summit a medical bill for roughly $80,000 and made a settlement demand of $300,000. Summit, in turn, offered to pay the per-person policy limit of $25,000. The Alveses rejected the offer and sued Summit. Summit filed a declaratory judgment action seeking a determination that it owed no duty to pay anything beyond its policy limit.

The Trial Court Justice found that (1) Rhode Island’s rejected settlement offer statute was inapplicable because the Alveses had never, as the statute requires, offered to settle at or below policy limits; (2) no evidence suggested that Summit failed to properly investigate the Alveses claim; and (3) an insurer owes duties to its insureds, to its shareholders, and to third parties “to act in a reasonable manner and in good faith” when settling claims against its insured.

On appeal, the Supreme Court affirmed the decision, but – importantly – rejected the third finding of the Trial Court Justice. The Alveses seeking to rely upon a prior Supreme Court decision argued that an insurer owes a good faith duty to a third-party claimant. The Supreme Court rejected this argument, clarifying that a third party may have a claim for breach of extracontractual duties against an insurer only where: (1) the insurer failed to adequately contemplate settlement and (2) the insured assigned its rights against the insurer to the third party. Asermely v. Allstate Insurance Co., 728 A.2d 461 (R.I. 1999).

In Stricklett, no settlement offer for policy limits was ever made and no assignment of rights ever took place. Therefore, the Supreme Court affirmed the judgment of the trial court but sharply limited the trial court’s opinion that Summit owed a duty to third parties. The Supreme Court explained “that this kind of duty on the part of the insurance company to third parties would expand an insurance company’s potential liability under Asermely too far and essentially announce a new, judicially-created cause of action.”

The big takeaway: Under Rhode Island law, insurers do not owe a duty to third parties absent an assignment.

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Progressive recently settled a bad faith lawsuit with the guardians of a child injured in a car accident driven by a Progressive policyholder, Earl Lloyd. Progressive faced liability for an underlying judgment in excess of $22 million against Lloyd, who had purchased a $10,000 auto policy from Progressive. The bad faith lawsuit alleged that Progressive failed to advise its insured regarding the significance of executing a financial affidavit. Had the insured executed the financial affidavit, the claimant allegedly would have accepted the insured’s $10,000 policy limits in exchange for a release of Lloyd. The case, Wallace Mosley v. Progressive American Insurance Company, was set for trial beginning December 10, 2018 in the U.S. District Court for the Southern District of Florida before Judge Beth Bloom.

On November 25, 2018, Judge Bloom denied Progressive’s motion for summary judgment, finding there were questions of fact as to whether Progressive breached its duty of good faith to Lloyd by failing to advise him of the consequences of not signing the financial affidavit. Mosley by & Through Weaver v. Progressive Am. Ins. Co., No. 14-CV-62850, 2018 WL 6171417 (S.D. Fla. Nov. 25, 2018). The court explained that because the focus is on the conduct of the insurer, the reasons why Lloyd refused to sign the affidavit were irrelevant. Other alleged failures on the part of Progressive also led to the court’s decision.

The Underlying Case

The $22.7 million underlying trial court judgment arose out of an auto accident that occurred in November 2008, when Lloyd struck an 11-year-old boy, Wallace Mosley, who was riding a scooter into the roadway. Lloyd failed to report the accident to Progressive. Progressive learned about the accident nearly 10 days later from Rosa Lopez, an attorney representing a relative of Mosley. Lopez provided a copy of the police report to Progressive which indicated Mosley was struck by Lloyd who was “traveling at a high rate of speed.” Mosley was thrown approximately 100 hundred feet.

Progressive assigned the matter to its claims professional, who made several attempts to contact Lloyd. Progressive subsequently issued a reservation of rights letter to Lloyd based on his failure to notify Progressive of the accident. Progressive did not, however, deny coverage. On December 4, 2008, without the benefit of any communications with Lloyd, any medical records, or even a settlement demand, Progressive tendered Lloyd’s $10,000 policy limits to Mosley’s counsel. Four days later, on December 8, 2008, Lloyd finally contacted Progressive.

On December 9, 2008, Lopez sent Progressive a 12-page financial affidavit as a condition of settlement. The cover letter advised that if the affidavit revealed no visible assets, Mosely would execute a release and settle the claim; absent execution within two weeks, suit would be filed. Progressive contacted Lloyd and forwarded the affidavit on the same day it was received. Despite the contemporaneous call notes in Progressive’s claim file reflecting communications about the affidavit, Lloyd contended that, other than the transmittal, Progressive did not advise Lloyd of the consequences of not signing the affidavit; nor did Progressive send him an “excess letter” explaining that he could be exposed to liability in excess of the policy limits. Lloyd, who believed he was a “Sovereign Citizen of Moorish Descent,” refused to sign the affidavit based on his moral and religious beliefs.

On May 5, 2009, Mosley filed suit against Lloyd. Lloyd again failed to notify Progressive that he had he had been served with a complaint. Progressive learned of the suit from claimant’s counsel and immediately retained defense counsel to represent Lloyd. Defense counsel made several efforts to meet with Lloyd to discuss the affidavit. Despite ultimately meeting with defense counsel, Lloyd still refused to execute the affidavit. During his deposition in the underlying case, Lloyd testified that he was an Apostle of God who had previously raised people from the dead, that he had sovereignty because of his Moorish beliefs, and that he was immune from suit brought by the claimant.

The matter proceeded to trial in October 2014, and a $22.7 million judgment was entered against Lloyd. Lloyd subsequently entered into an agreement with Mosley assigning his bad faith claim against Progressive in exchange for an agreement not to execute the $22.7 million judgment.

The Bad Faith Case

On May 5, 2009, Mosley filed suit against Progressive for third party bad faith. Progressive moved for summary judgment, claiming it properly advised Lloyd and asserting Lloyds’ stated religious beliefs as the reason why the affidavit was not executed. The court denied Progressive’s motion, explaining that under Florida law, Progressive has a “fiduciary relationship” with its insureds, which requires it to refrain from acting solely on the basis of the its own interests. Importantly, the court noted that “Progressive did not send Lloyd any written communications explaining the significance of the Affidavit or the potential of an excess judgment being placed against him personally during the critical 14-day deadline,” nor did Progressive advise Lloyd of the steps he might take to avoid an excess judgment, as required by Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980).

While the court acknowledged that Lloyd’s assertion of sovereignty “may be a factor to consider,” the court determined Progressive was not entitled to summary judgment in light of Lloyd’s arguably self-serving testimony that had Progressive properly advised him, he would have signed the affidavit. The court explained: the “focus in a bad faith case is not on the actions of the claimant but rather on those of the insurer in fulfilling its obligations to the insured.” Berges v. Infinity Ins. Co., 896 So. 2d at 677 (Fla. 2004).

Less than two weeks after the court issued its summary judgment ruling, Progressive settled the matter.

This case is yet another example, in the wake of the Florida Supreme Court’s ruling in Harvey v. GEICO Gen. Ins. Co., No. SC17-85, 2018 WL 4496566 (Fla. Sept. 20, 2018), of a $10,000 policy ballooning to one with significantly higher limits, for which the insured did not pay a premium.

The case further emphasizes the heightened duties some states, including Florida, impose on insurers to adequately advise policyholders of the consequences of litigation, particularly in matters with potentially great exposure and low policy limits, and confirming that advice in writing.

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From Birdseed to Crop Dusting, Liability-Triggering Event Determines Number of Occurrences

Texas applies the “cause” test to determine the number of accidents or occurrences, but its emphasis on the “liability-triggering event” requires an analysis of intervening causes. The Fifth Circuit Court of Appeals doubled-down on its focus on the liability-triggering event, reversing the trial court and finding a truck driver’s negligent operation of his vehicle that caused multiple collisions (four autos and a toll plaza booth) was one accident for purposes of liability insurance in Evanston Ins. Co. v. Mid-Continent Cas. Co., —F.3d.—, No. 17-20812, 2018 WL 6037507. The court acknowledged that the analysis espoused in Pincoffs[1] and Goose Creek[2] (i.e., count the number of acts by the insured that give rise to liability) is incomplete because it does not address what level of generality (or specificity) defines the insured’s actions. The district court found the insured did not become liable to anyone until his truck collided with that person’s vehicle (or toll booth) and therefore, conceptualized each collision as a separate event giving rise to liability.

The Fifth Circuit disagreed, finding the appropriate inquiry is whether there is one proximate, uninterrupted, and continuing cause that resulted in all of the injuries and damage. The court relied on the analysis by the San Antonio appellate court in Foust v. Ranger Ins. Co.[3] In Foust the insured’s crop dusting process took almost three hours and required the insured to land the plane several times to refuel, during which time, the temperature, wind and altitude varied during several passes over different sections of property. Even so, the damage to the neighboring properties was caused by the crop dusting—one “occurrence.” In contrast, an employee’s sexual abuse of two different children a week apart constituted two “occurrences” because the immediate cause of the damage was an intervening intentional tort, which broke the chain of causation.[4]

Applying the Foust analysis to the facts before it, the Fifth Circuit noted that the truck driver did not regain control of his truck and there was no indication that the driver’s negligence was interrupted between collisions. Finding that the ongoing negligence of the runaway truck was the single “proximate, uninterrupted, and continuing cause” of each of the collisions, the court determined that all of the collisions resulted from the same continuous condition—the unbroken negligence of the truck driver.

The lesson here is that in order to determine the number of “occurrences” in analyzing a general liability policy under Texas law, the focus is on the general cause of the insured’s liability, and only if a secondary intervening cause interrupts the continuing cause of the insured’s liability will there be more than one occurrence.

[1] Maurice Pincoffs Co. v. St. Paul Fire & Marine Ins. Co., 447 F.2d 204 (5th Cir. 1971).

[2] Goose Creek Consol. ISD v. Cont’l Cas. Co., 658 S.W.2d 338 (Tex. App. 1983).

[3] 975 S.W.2d 329, 333 (Tex. App.—San Antonio 1998, pet. denied).

[4] See, H.E. Butt Grocery Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 150, F.3d 526, 534 (5th Cir. 1998).

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Fort Worth Court of Appeal Reverses Judgment Awarding Bad Faith Damages Against Insurer

While the November 8, 2018 Court of Appeal of Texas, Fort Worth Division opinion reverses a trial court’s judgment on grounds of legal insufficiency and standing, the court’s analysis and application of current Texas bad faith law is of much more interest. The trial court judgment held that Old American Insurance Company violated both the Texas Unfair Settlement Practices and the Prompt Payment of Claims Acts by failing to promptly pay benefits owed under the life insurance policy assigned to Lincoln Factoring, LLC (assignee of beneficiary’s policy benefits). But the appellate court reversed, concluding that as a matter of law Lincoln could not recover damages on the claims it plead. Old Am. Ins. Co. v. Lincoln Factoring, LLC, No. 02-17-00186-CV, 2018 WL 5832111, at *1 (Tex. App.—Fort Worth Nov. 8, 2018).


In 2011, Rebecca Barnes purchased a life insurance policy from Old American that provided that upon proof of a “covered death” the policy would pay a general benefit of $10,000 upon her death, and an additional $10,000 benefit upon proof that her death was “accidental.” Barnes died on September 28, 2014. On October 12, 2014, Barnes’s fiancé and the policy’s sole beneficiary assigned his entitlement to $4,725 of the proceeds to the funeral home who, in turn, assigned those proceeds to Lincoln. Lincoln sent the notarized assignments and claim forms to Old American, who acknowledged receipt but responded that it “need[ed] a copy of the death certificate” to pay the claim. The death certificate received stated that the manner of death was pending investigation.

Old American refused to pay until it received a death certificate with the final determination of the cause of death. Lincoln objected, asserting the basis for the “delay” was an “out of contract demand [that Old American had] no basis to make.”  Lincoln threatened suit. Old American responded that it could not determine whether the accidental death benefit was payable, as the death certificate listed manner of death as pending investigation; therefore, payment was not due.

In March 2015, Lincoln filed suit in justice court, asserting the delay breached the policy and violated several provisions of Chapters 541 and 542 of the Texas Insurance Code, as well as the DTPA and the common law duty of good faith and fair dealing. Old American received the final death certificate in June 2015, which listed the cause of death as hypertensive cardiovascular disease. Within days, Old American paid all benefits under the policy.

After trial, the justice court signed a judgment that Lincoln take nothing. Lincoln then filed a de novo appeal to the district court, with each party filing competing motions for summary judgment. In granting Lincoln’s motion, the court ordered Old American to pay $9,450 in “treble damages,” $1,050 in “interest,” $12,000 in attorney fees, and costs. Aggrieved, Old American appealed.


The appeal court began with Lincoln’s Chapter 541 and common law bad faith claims. The court agreed that since Lincoln sustained no actual damages (policy proceeds were paid), there was no violation and treble damages or other relief was not available.

In so holding, the court cited USAA Texas Lloyds Company v. Menchaca explaining that “Chapter 541 claims and claims for breach of the duty of good faith and fair dealing are tort claims that are independent from a claim for breach of an insurance contract.” 545 S.W.3d 479, 489 (Tex. 2018). Applying Menchaca and the “independent injury” analysis, the court held:

Here, perhaps because the evidence conclusively showed that Old American paid all benefits under [the policy], the trial court did not award any actual damages. And under the cases cited above, the trial court could not have awarded such damages because the record does not contain any allegation or proof that [Lincoln] suffered an injury that was independent of the benefits it sought under the policy; instead, the record conclusively shows that the damages for which [Lincoln] pleaded and presented evidence flowed from the denial of policy benefits.

Lincoln Factoring, 2018 WL 5832111, at *5.

Next, the court considered Lincoln’s Chapter 542, Prompt Payment of Claims, assertion with its 18% per annum interest damages. Old American argued that, under the plain statutory language, Lincoln lacked standing. The court agreed, holding that Lincoln was not a person or entity afforded protection under the Act because it was not an “insured or policyholder” or “beneficiary named in the policy or contract,” as specified in the statutes. See Tex. Ins. Code § 542.051(2)(A)-(B).

Lastly, the court evaluated Old American’s argument that payment of the policy benefits, albeit later than Lincoln may have requested, foreclosed its breach of contract claim. The appellate court agreed, holding that because Old American fully paid the policy benefits, Lincoln could not prove a breach of contract claim. See, e.g., Minn. Life Ins. Co. v. Vasquez, 192 S.W.3d 774, 776 (Tex. 2006) (“As the claim was paid shortly after suit was filed, no breach of contract claim remains.”)


Lincoln is significant with respect to Chapter 541 (Unfair Settlement Practices) and common law bad faith claims in Texas, in that the appellate court provides a detailed tracing of the “independent injury” analysis framework, both from a historical perspective, and up-to and including the Texas Supreme Court’s recent Menchaca decision.

And, regarding Chapter 542 (Prompt Payment of Claims), the court applied the plain language of the statutes in evaluating the standing issue, giving deference to legislative intent. While the court did not expressly state public policy supports limiting Chapter 542 damages to an “insured or policyholder” or “beneficiary named in the policy or contract,” the cases the court cited do. See Lincoln Factoring, 2018 WL 5832111, at *7 (citing DeLeon v. Lloyd’s London, 259 F.3d 344, 354 (5th Cir. 2001) (“The legislature has framed the claim-processing deadlines of [the prompt pay statute] in terms of the primary relationship between the insurer and the ‘named’ beneficiary—not the lawful, yet unnamed beneficiary . . . . The purpose of the statutory deadline[s] [are] to guarantee the prompt payment of claims made pursuant to policies of insurance; not to create a statutory windfall . . . .”) (internal citations omitted)).

We will keep you informed as to any further developments on this interesting opinion, and whether the parties seek an appeal to the Texas Supreme Court, as the ruling was only just entered on November 8.

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The Florida Supreme Court Pushes Florida Bad Faith Standard Closer to Negligence in Harvey v. GEICO Decision

The Florida Supreme Court recently decided Harvey v. GEICO Gen. Ins. Co., No. SC17-85, 2018 WL 4496566, at *1 (Fla. Sept. 20, 2018), an important case setting forth what many will try to argue has lessened the standard for bad faith law in Florida to one of negligence plus.

The case has a detailed but uncomplicated factual history. However, the factual summary contained in the majority’s opinion must be read along with that of Justice Canady’s dissent in order to understand the full picture factually.

On August 8, 2006, GEICO’s insured, James Harvey (“Insured” or “Mr. Harvey”), was in a motor vehicle accident. The accident resulted in the fatality of the other driver, and Mr. Harvey was at fault.

Mr. Harvey was insured by a GEICO auto policy with $100,000 liability limits. The claim was assigned to GEICO adjuster Fran Korkus, who promptly interviewed Mr. Harvey. On this same date, Mr. Harvey contacted a local attorney whom he did not actually hire (and, in fact, as noted in a footnote in Justice Canady’s dissent, worked for the same law firm who ultimately represented the estate).

On August 11, 2006, GEICO sent its Insured a letter explaining that the estate’s claim could exceed his policy limits and that he had the right to hire his own attorney, which he did. A paralegal employed by the estate’s attorney called Ms. Korkus on August 14, 2006, requesting a statement to determine the extent of Mr. Harvey’s assets. The paralegal did not give Ms. Korkus a deadline to provide the statement. It is disputed whether the request was communicated to Mr. Harvey. Ms. Korkus’s contemporaneous file notes indicate that she “updated [Mr. Harvey] on claim status” and advised him of the firm retained by the estate. Despite Ms. Korkus’s notes, Mr. Harvey testified that “to the best of his recollection,” Ms. Korkus did not mention that the paralegal had asked about other insurance coverage and Mr. Harvey’s assets.

On August 17, 2006, nine days after the accident, GEICO tendered the full amount of Harvey’s $100,000 policy limits to the estate’s attorney, along with a release. Multiple log entries indicate that GEICO had to first contact the estate’s law firm because it had not yet provided a letter of representation. On this same date, Mr. Harvey gathered all of his asset information and set up a meeting with his personal attorney to take place on August 23, 2006. Indeed, Mr. Harvey later testified that he gathered this information and set up the meeting because of GEICO’s August 11, 2006 letter.

On August 23, 2006, Mr. Harvey met with his personal attorney. Testimony revealed that Mr. Harvey owned certain liquid assets exceeding $900,000, plus four motor vehicles and two houses. The estate’s attorney testified that in his view, the only “collectible” asset was $85,000 in the operating account of Mr. Harvey’s business. The estate’s attorney testified that, had he been able to take a statement of Mr. Harvey, he would have recommended to his client that she accept the $100,000 tender of policy limits.

The attorney wrote back to Ms. Korkus in response to GEICO’s tender, acknowledging receipt of the check and Ms. Korkus’ apparent refusal to make Mr. Harvey available for a statement. Ms. Korkus received the letter on August 31, 2006 and faxed it to Mr. Harvey that same day. Further, on this same day, Ms. Korkus contacted the estate’s attorney, who faxed Ms. Korkus a letter memorializing their conversation, confirming that he wanted a statement to determine the extent of Mr. Harvey’s assets and that Ms. Korkus was “unable to confirm that [Mr. Harvey] would be available for a statement.” Ms. Korkus’s contemporaneous file notes, however, indicated that she advised the estate’s attorney that she would contact Mr. Harvey and pass the information along so he could decide whether to provide the statement.

The next day, on September 1, 2006, Mr. Harvey called Ms. Korkus to discuss the letter from the attorney. A log entry from Ms. Korkus reflected that the insured advised her that his attorney would not be available until after the holiday weekend on September 5, 2006 and requested that she contact the estate’s attorney to notify him of this. Despite Mr. Harvey’s request, and instructions from her supervisor to do so, Ms. Korkus did not relay this message to the estate’s attorney. At Mr. Harvey’s request, Ms. Korkus also faxed a copy of the letter to Mr. Harvey’s personal attorney.

On September 11, 2006, the estate’s attorney met with his client, explained bad faith law, and recommended that the estate file suit. On September 13, 2006, the estate returned the check to GEICO and filed a wrongful death suit against Mr. Harvey. A jury found Mr. Harvey 100% at fault and awarded the estate $8.47 million in damages.

Mr. Harvey filed a bad faith suit against GEICO, which proceeded to trial. GEICO moved for directed verdict, which the court denied, and the jury found GEICO in bad faith. Judgment was entered against GEICO in the amount of $9.2 million. GEICO moved for judgment notwithstanding the verdict, which was also denied.

The 4th DCA Opinion

GEICO appealed the denial of its motion for directed verdict, and the 4th DCA reversed, finding in favor of GEICO. In doing so, the 4th DCA walked through seven factors enumerated in Florida’s seminal case on bad faith, Boston Old Colony Insurance Co. v. Gutierrez, 386 So.2d 783, 785 (Fla. 1980). In Boston Old Colony, the Florida Supreme Court held that an insurer is obligated to (1) “advise the insured of settlement opportunities”; (2) “advise as to the probable outcome of the litigation”; (3) “warn of the possibility of an excess judgment”; (4) “advise the insured of any steps he might take to avoid same”; (5) “investigate the facts”; (6) “give fair consideration to a settlement offer that is not unreasonable under the facts”; and (7) “settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.”

The 4th DCA found that GEICO satisfied each of the Boston Colony factors:

  • With respect to the first, the 4th DCA acknowledged that while Ms. Korkus did not immediately notify Mr. Harvey of the estate’s request for a statement, she did so on August 31, 2006. Moreover, the estate never conveyed to Ms. Korkus that settlement was contingent on his providing a statement.
  • With respect to the second, third, and fourth factors, the 4th DCA found that GEICO’s August 11, 2006 letter, which notified Mr. Harvey of a possible excess judgment and advised him of his right to hire an attorney, satisfied each of these.
  • With respect to the fifth factor, the 4th DCA found that there was no evidence that GEICO was deficient in its investigation of the facts.
  • With respect to the sixth factor, the estate never provided GEICO with a settlement demand prior to filing suit, so GEICO could not have given consideration to an offer.
  • With respect to the seventh factor, the 4th DCA noted that GEICO tendered its policy limits nine days after the accident, without any demand from the estate.

The 4th DCA also relied on Novoa v. GEICO Indem. Co., 542 F. App’x 794 (11th Cir. 2013), analogizing the 11th Circuit’s findings in that case, namely, that although the evidence reflected that the insurer could have handled the claim better, this amounted to negligence, not bad faith. The 4th DCA further explained that while evidence of carelessness is relevant to proving bad faith, the standard for determining liability in an excess judgment case is bad faith rather than negligence.

Next, the 4th DCA, relying on Perera v. U.S. Fidelity & Guar. Co., 35 So.3d 893, 903–04 (Fla. 2010), noted that not only must there be actions demonstrating bad faith on the part of the insurer, but the insurer’s bad faith must also have caused the excess judgment. The 4th DCA explained that GEICO did not fail to meet any deadlines or other requirements established by the estate, as a requirement for settling the claim and avoiding the filing of a lawsuit against its insured.

Lastly, the 4th DCA noted that as the Eleventh Circuit explained in Novoa and Barnard v. Geico Gen. Ins. Co., 448 F. App’x 940 (11th Cir. 2011), where the insured’s own actions or inactions result, at least in part, in an excess judgment, the insurer cannot be liable for bad faith. However, the 4th DCA did not actually make any findings or comparisons on this final point.

The Supreme Court Opinion

In a 4-3 decision, the Florida Supreme Court quashed the 4th DCA’s opinion and directed that the jury verdict and final judgment be reinstated. The majority opinion was written by Justice Quince. Justices Canady and Polston each wrote lengthy dissents.

In essence, the Florida Supreme Court held that the Boston Old Colony factors are not the only factors involved in the bad faith inquiry. Instead, it found that because GEICO “completely dropped the ball” by failing to coordinate Mr. Harvey’s statement (a demand GEICO received before even receiving a letter of representation from the estate’s attorney), it was in bad faith. Harvey, 2018 WL 4496566 at *6.

The majority dedicated a significant portion of its analysis to discussion of the 4th DCA’s reliance on Novoa and Barnard for the idea that the insured’s conduct is relevant to the inquiry of bad faith. Indeed, as discussed above, the 4th DCA based its decision on the Boston Old Colony factors, not Mr. Harvey’s conduct, and simply made mention of Novoa and Barnard. Indeed, as Justice Polston explained in his dissent, “[t]he Fourth District’s comment in Harvey regarding the insured’s actions or inactions was dicta and only mentioned after Fourth District reached its holding that GEICO fulfilled its obligations of good faith to the insured.” Harvey, 2018 WL 4496566 at *18 (Polston, J., dissenting).

The majority acknowledged that “it is true that negligence is not the standard.” Id. at *7. At the same time, the majority found that the Florida Supreme Court “made clear in Boston Old Colony that because the duty of good faith involves diligence and care in the investigation and evaluation of the claim against the insured, negligence is relevant to the question of good faith.” Id. It continued on to explain that by relying on [the Eleventh Circuit’s opinion in Novoa] in lieu of this Court’s binding precedent in Boston Old Colony, the Fourth District minimized the seriousness of the insurer’s duty to act in good faith with due regard for the interests of its insured.” Id.

Justice Canady took the opposite view in his dissent, explaining:

Rather than take issue with the Fourth District’s analysis of the specific Boston Old Colony obligations, the majority points to the Fourth District’s purported failure to focus on the more general language in Boston Old Colony regarding an insurer’s duty to use “the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.” E.g., majority op. at –––– (quoting Boston Old Colony, 386 So.2d at 785). In doing so, the majority completely divorces that general language from the specifically enumerated obligations and effectively adopts a negligence standard for bad faith actions, even though negligent claims handling does not amount to bad faith failure to settle. See Campbell, 306 So.2d at 530 (noting that the “standard[ ] for determining liability in an excess judgment case is bad faith rather than negligence”); see also Auto Mut. Indem. Co. v. Shaw, 134 Fla. 815, 184 So. 852, 858 (Fla. 1938) (noting that bad faith involves “a heavier burden upon the insured” than does negligence).

Id. at *15 (Canady, J., dissenting)

Notably absent from the majority’s opinion is any mention of the fact that on August 23, 2006, three weeks before suit was filed, Mr. Harvey had gathered all of his financial documents and met with his attorney to discuss his assets. There was also no mention of the fact that Mr. Harvey in fact had $1 million in assets, independent of his insurance, that at no point since August 2006 did Mr. Harvey ever offer to provide a statement, and that at no point since August 2006 did the estate ever attempt to collect from Mr. Harvey. Further, the majority failed to acknowledge that the estate never provided a settlement demand, advise GEICO of any deadline for providing the statement, or even provide GEICO with a letter of representation until August 17, 2006, the day GEICO tendered its policy limits to the estate.

The effect of the majority’s opinion is that, in Florida, the standard for proving bad faith is essentially whether the insurer “dropped the ball,” which while the court acknowledged bad faith takes more than negligence, still sounds a lot like negligence.

Moreover, the majority’s opinion brings into question whether the insured’s actions—or the claimant’s actions—are a part of the inquiry. This is indisputably in conflict with the fourth Boston Old Colony factor, in which the Florida Supreme Court explained that one of the bad faith factors requires the insurer to advise the insured of any steps he might take to avoid an excess judgment. This, arguably, means that while an insurer has a duty to advise, the insured’s failure to act on that advise will not be held against the insured. As Justice Canady explained in dissent, it is also in conflict with the Florida Supreme Court’s ruling in Berges v. Infinity Ins. Co., 896 So. 2d 665 (Fla. 2004), where the court conducted significant analysis of the insured’s conduct in that case, in that the insured at all times contested liability, requested the insurer not to settle, and executed a hold harmless agreement assuming responsibility for any excess judgment. In other words, Florida Supreme Court precedent clearly requires analysis of the insured’s actions as well as the insurer’s.

As Justice Canady aptly explained:

The result of the majority’s decision is that an insured who caused damages that exceeded his policy limits by over 8,000 percent, who had assets that greatly exceeded his policy limits, and who at no time ever offered to provide his financial information to the third-party claimant despite knowing that the information was being requested even after the policy limits were tendered, has his $100,000 policy converted into an $8.47 million policy, while other insurance customers eventually foot the bill.

Harvey, 2018 WL 4496566 at *12 (Canady, J., dissenting).

Insurers must be aware of what this decision inevitably encourages: “a rush to the courthouse steps by third-party claimants whenever they see what they think is an opportunity to convert an insured’s inadequate policy limits into a limitless policy.” Id. at *16 (Canady, J., dissenting). In light of the current climate in Florida, it is especially important for insurers to communicate and act promptly and ensure that claim files are specifically documented, especially in cases of high value with low policy limits.

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Crypto Covered Under Homeowner’s Policy? Ohio Trial Court Holds Coverage and Bad Faith Claims for Bitcoin Theft Survive Motion for Judgment on the Pleadings

From the high market cap Bitcoin, Ether, Ripple, and Litecoin, to the quirky Fonziecoin, Selfiecoin, Pizzacoin, and (thank you, Dennis Rodman) Pot Coin, we have all been blasted by news of crypto and blockchain, and tales of kids in their parents’ basements getting rich off this new wonder that many of us struggle to understand. But what we might not have heard of, or thought about, is potential insurance coverage under a homeowner’s insurance policy in the event of theft of this “alt” currency.

On September 25, 2018, a Columbus, Ohio trial court judge denied an insurer’s motion for judgment on the pleadings on the grounds that its assessment of Bitcoin as “money” subject to a $200.00 sublimit under a homeowner’s insurance policy was proper and, therefore, the insured had no claims for breach of contract or bad faith. In doing so, Judge Charles A. Schneider relied on Internal Revenue Service Notice 2014-21, which provides that, “[f]or federal tax purposes, virtual currency is treated as property.” While termed “virtual currency,” the IRS recognized Bitcoin as property “and [Bitcoin] shall be recognized as such by this Court.” Kimmelman v. Wayne Ins. Grp., Case No. 18-cv-001041, Doc. 0E337-P71 (Ohio Ct. Comm. Pl., Civ. Div. Sept. 25, 2018).


In August 2017, the insured, James Kimmelman, submitted an insurance claim to his insurer, Wayne Insurance Group (“Insurer”), reporting roughly $16,000.00 of Bitcoin stolen from Kimmelman’s digital wallet. The Insurer investigated the claim and made a payment of $200.00 to Kimmelman, determining the Bitcoin was “money” and governed by a sublimit within the policy.[1] Aggrieved, Kimmelman filed suit against the Insurer in February 2018, asserting claims for breach of contract and bad faith. The Insurer moved for judgment on the pleadings, which the court addressed in its September 25, 2018 order.


The court began by setting forth the applicable standard of review under Ohio state court procedural rules which, for judgment on the pleadings, is similar to that under Federal Rule of Civil Procedure 12(c). The court was limited to the allegations set forth in the complaint, accepted as true, with all inferences drawn in favor of the non-moving party. Only if it appeared beyond doubt that Kimmelman could prove no set of facts entitling him to relief would the court grant the Insurer’s motion. See Id. p. 2 (citing State ex rel. Midwest Pride IV, Inc. v. Pontious, 75 Ohio St.3d 565, 570 (1996)).

The Insurer argued Bitcoin is generally recognized as “money,” citing articles from CNN, CNET, and the New York Times. The Insurer also cited IRS Notice 2014-21, which subscribed the term “virtual currency” to Bitcoin. The court quickly disposed of Kimmelman’s responsive arguments, finding the authorities neither governing nor persuasive. Accordingly, the court held that the only authority it could “rely on in determining the status of Bit[c]oin is” IRS Notice 2014-21. Under the notice, “‘[f]or federal tax purposes, virtual currency is treated as property.’” Id. p. 3 (quoting IRS Notice 2014-21). Even though the IRS used the term “virtual currency,” the court found the IRS recognizes Bitcoin as property and, therefore, the court also recognized Bitcoin as property for purposes of the policy’s available limits of coverage.


In summary, the court held Kimmelman had properly plead his breach of contract and bad faith claims, denied the Insurer’s motion for judgment on the pleadings, and lifted the discovery stay. While the coverage result might be different in this case on a subsequent motion for summary judgment, the court broadly held that it was recognizing Bitcoin as property under the policy. Thus, it is also possible that, in subsequent dispositive motion rulings in this case, the trial judge will reiterate that position.

However, given that this appears to be an issue of first impression in Ohio and much (if not the entire) country, and in light of the IRS’s own use of the term “virtual currency,” on summary judgment review, the insurer should have valid arguments that it committed no bad faith. Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St. 3d 621, 630, 605 N.E.2d 936 (Ohio 1992) (denial reasonably justified where “the claim was fairly debatable and the refusal is premised on either the status of the law at the time of the denial or the facts that gave rise to the claim”).

Cryptocurrencies and blockchain technologies present both emerging risks, and opportunities, for insurers in the global marketplace. As these technologies become more ubiquitous in our economy and everyday lives, the impact of rulings such as Kimmelman will likewise become more significant. Because Kimmelman serves as an early ruling on first-party property and bad faith issues associated with coverage for theft of cryptocurrencies, insurers can expect a great deal of citation to the opinion by policyholders. Insurers wishing to eliminate the risk of coverage for loss of cryptocurrencies may consider modifying policy language to expressly exclude coverage for virtual currencies.

[1] While the policy also included sublimits of $500.00 for “electronic funds” and $1,500.00 for “securities,” which the Insurer raised in its motion, the court’s opinion offered no analysis of whether those sublimits would apply to Bitcoin or other forms of cryptocurrency.

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Texas Federal Court Holds Rock Dust Discharged into Stream is Excluded “Pollutant,” so Insurer Owed No Duty to Defend or Indemnify, and Committed No Bad Faith

On July 10, 2018, Judge John H. McBryde of the United States District Court for the Northern District of Texas, Fort Worth Division, held an insurer owed no coverage to a New Jersey rock quarry owner for the accidental pumping of crushed rock particles into a stream. The policy’s pollution exclusion precluded coverage, regardless of whether the rocks were “wanted or useful.” Great Am. Ins. Co. v. ACE Am. Ins. Co., No. 4:18-CV-114-A, 2018 WL 3370620, at *5 (N.D. Tex. July 10, 2018). Absent coverage or any injury independent of the claim for policy benefits, the court also rejected the insured’s bad faith claim.


Eastern Concrete Materials, Inc. operates a New Jersey rock quarry, where it crushes rock into small stones and fines. Rock fines are small particles of rocks generated in the crushing process, which are washed off with water and placed into settling ponds. Once settled, the fines are removed, dried out, and prepared for use as reclamation fill at the quarry or sold as fill material.

Anticipating substantial rainfall in July 2017, Eastern lowered the level of its settling ponds by pumping into an adjacent stream. But Eastern’s quarry manager failed to stop the pumping before the rock fines were pumped into the settling ponds. This failure caused many rock fines to be pumped into the stream, and subsequent physical damage to the stream and stream beds. New Jersey government bureaus issued violation notices to Eastern, and required Eastern to remove the rock fines to ensure protection of fish habitats and prevent further migration of the fines.

Eastern notified its insurer, Great American Insurance Company, of the claims and demanded defense and indemnity. Great American then sought a declaratory judgment in Texas federal court. Eastern sued separately in New Jersey state court, arguing the pollution exclusion would be interpreted unfavorably to it in Texas law. But the New Jersey court agreed to stay that action pending the outcome of the Texas action. Great American moved for summary judgment, arguing its “absolute” pollution exclusion precluded coverage and, therefore, it owed no duty to defend or indemnify. Great American argued Eastern’s counterclaims for breach of contract and bad faith should be dismissed for the same reason.


The district court began by determining Texas had the most significant relationship with the substantive issue to be resolved—whether the pollution exclusion applied—because the policy was negotiated, brokered and issued in Texas. Further, Eastern had admitted that its parent, U.S. Concrete, Inc., that purchased the policy was “at home” in Texas. Lastly, the policy covered a group of risks scattered throughout the United States and, therefore, the court gave little weight to the location of the insured risk in determining choice of law.

Turning to the exclusionary language, the pollution exclusion precluded coverage for any liability “arising out of or in any way related to . . . discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’ however caused.” The policy defined “pollutants” as “any solid, liquid, gaseous, or thermal irritant or contaminant, including, but not limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste material.” The term “[w]aste material” included “materials which are intended to be or have been recycled, reconditioned or reclaimed.”

According to Judge McBryde, the exclusion was “clear, unambiguous, and absolute,” and the term “pollution” is “not a term of art.” Great Am., 2018 WL 3370620 at *5. Instead, “substances can constitute pollutants regardless of their ordinary usefulness.” Id. (citing Nautilus Ins. Co. v. Country Oaks Apts. Ltd., 566 F.3d 452, 455 (5th Cir. 2009) (substance need not generally or usually act as irritant or contaminant to constitute a “pollutant”)). Here, the rock fines were waste material generated in the rock crushing process, and that they were “wanted or useful” did not change their nature. The rock fines also became “irritants or contaminants” when they were discharged and dispersed where they did not belong. Eastern itself had argued the underlying remediation was necessary to protect the environment.

The district court found the exclusion was “fatal” to Eastern’s duty to defend claims. Likewise, because the same reasons negating the duty to defend “likewise negate[d] any possibility that [Eastern] will ever have a duty to indemnify,” Eastern’s duty to indemnify claims failed as a matter of law. Lastly, Eastern argued it should be allowed to replead its bad faith claim under Texas law. But the district court held repleading would not “salvage” the claim. “Where an insurer has properly denied a claim that is in fact not covered, generally there is no claim for bad faith.” Great Am., 2018 WL 3370620 at *6 (citing Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995)). Because Eastern raised no genuine fact issue on any act by Great American “so extreme that it caused injury independent of the policy claim,” see, e.g., Progressive Cty. Mut. Ins. Co. v. Boyd, 177 S.W.3d 919, 922 (Tex. 2005), the district court also granted summary judgment on Eastern’s claim for breach of the duty of good faith and fair dealing.

Great American is significant because it offers a recent, but rare, example of a Texas court finding the same reasons negating the duty to defend likewise negated the duty to indemnify. See, e.g., Farmers Texas Cty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997). Since the Texas Supreme Court’s holding in D-R Horton-Texas, Ltd. v. Markel International Insurance Company, Ltd., 300 S.W.3d 740, 745 (Tex. 2009), that an insurer may still owe a duty to indemnify even where it owes no duty to defend, Griffin has often been limited to its facts and construed narrowly by policyholders and courts. Great American serves as a well-reasoned opinion for insurers to cite to support arguments that indemnity issues may be decided on the same grounds, and at the same time, as defense issues.

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Illinois Appellate Court Holds Insurer Owed Coverage in Fatal Chicago Gang Shooting Lawsuit, but Insurer Did Not Commit Bad Faith in Denying Claim

On March 1, 2018, an Illinois appellate court held an insurer breached its duties to defend and indemnify a grocer after gang members shot and killed a young woman and injured another outside of the Chicago grocer. The court interpreted “liability arising out of . . . premises” language in an additional insured endorsement, broadly holding that if the basis for imposing liability arises out of the premises, the party qualifies as an insured regardless of how the injury occurs. Dominick’s Finer Foods v. Indiana Ins. Co., 2018 IL App (1st) 161864, ¶ 66. Thus, a premises defect, such as an icy sidewalk or poor lighting, was not required. However, the court refused to find the insurer committed statutory bad faith, explaining “[t]here is a difference between disagreeing with a party’s position and finding that position so untenable as to be unreasonable and evidence of bad faith.” Id. at ¶ 95.


According to the underlying complaint, the shooters first confronted the victims inside the Dominick’s supermarket, and followed them outside to the parking lot where the shooting occurred. The deceased’s estate sued Dominick’s, Kennedy Plaza (the premises owner in which Dominick’s was a tenant), and the security companies working on location. The estate alleged Dominick’s possessed, operated, and controlled the store and had a duty “to ensure the safety of [its] patrons and invitees,” but breached that duty by negligently failing to supervise or otherwise protect “store patrons and invitees,” such as the victims, from harm.

Netherlands Insurance Company provided commercial general liability insurance to Kennedy, under which Dominick’s was an additional insured. After Dominick’s requested a defense, the insurer denied coverage. Dominick’s ultimately contributed $1.3 million to settle the underlying litigation. Dominick’s then filed suit against Netherlands. After cross-motions for summary judgment, the Cooke County Circuit Court held Dominick’s was not entitled to coverage and entered judgment in Netherlands’ favor. Aggrieved, Dominick’s appealed.


In ascertaining the duty to defend, Illinois courts examine the allegations in the underlying complaint—where the complaint alleges facts within or potentially within coverage, the insurer must defend. U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73, 161 Ill.Dec. 280, 578 N.E.2d 926 (1991). Further, where a policy provision is subject to more than one reasonable interpretation, it is ambiguous, and “[a]ll doubts and ambiguities must be resolved in favor of the insured.” Id.

The appellate court began with a detailed summary of the allegations and premises liability under Illinois law. The additional insured endorsement provided Dominick’s was an additional insured, but “only with respect to liability arising out of . . . [p]remises or facilities owned by [Kennedy].” The court broadly defined “liability” as “the condition of being legally responsible to a plaintiff,” and in the tort context, owing and breaching a duty of care, resulting in injury to the plaintiff. Applying that definition, the court found that the “sole basis” for imposing a legal duty on Dominick’s was its relationship to the premises. The “premises” were therefore “directly and indispensably tied to the alleged legal duty . . . .”

In reaching its conclusion, the court distinguished language requiring that the injury arose out of the premises, as opposed to the liability for the injury. See, e.g., Reis v. Aetna Cas. & Sur. Co., 69 Ill. App. 3d 777, 780, 25 Ill.Dec. 824, 387 N.E.2d 700 (1978). The court explained the former requires something particular about the premises play a role in the injury. In contrast, “liability” is a far broader concept, including all of the underlying conduct and circumstances. Accordingly, the court held allegations of a premises defect were not necessary before a lawsuit could be interpreted as alleging “liability arising out of the premises.”

In addressing the Section 155 statutory bad faith claims, the court stated that whether conduct is “vexatious and unreasonable” is determined by the totality of the circumstances. And where “there is a bona fide dispute concerning coverage, the assessment of costs and statutory sanctions is inappropriate, even if the court later rejects the insurer’s position.” See State Farm Mut. Auto. Ins. Co. v. Smith, 197 Ill. 2d 369, 380, 259 Ill.Dec. 18, 757 N.E.2d 881 (2001). Here, the court found Netherlands’ positon was not so unreasonable as to warrant statutory damages. Instead, a bona fide coverage dispute existed. The court relied in part on the fact that an “able and experienced trial judge” had agreed with Netherlands’ coverage decision.

Dominick’s is significant because the court drew a key distinction between the additional insured language “liability arising out of” and “injury arising out of.” While the court found the later requires that something particular about the premises contributed to the injury, the former does not. Instead, where the duty sought to be imposed on the defendant is tied to the premises, the defendant enjoys additional insured status. Insurers and insureds alike should carefully review their additional insured endorsements to confirm the scope of coverage provided for premises lawsuits, whether a traditional slip-and-fall or deadly criminal episode.

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Is It Bad Faith to Exercise a Contractual Right?

A recent malpractice case highlighted this issue.  In Johnson v. Proselect Insurance, the doctor/insured contended that the insurer acted in bad faith by settling a claim after trial without the doctor’s consent.  The doctor contended that the case should have been appealed, which would have reversed the adverse trial verdict.  However, the insurer’s policy stated specifically that the insurer could settle claims after trial without the doctor’s consent.  The doctor claimed, however, that the settlement caused her to suffer professional embarrassment and damaged her reputation.

The Massachusetts appeals court upheld a summary judgment in the insurer’s favor.  The court noted that the settlement was explicitly permitted by the terms of the policy, and argued that the doctor’s right to consent to settle had been bargained away when the policy issued.  Because the settlement was within the limits of the policy, and the doctor therefore had no exposure post-settlement, the court ruled that the carrier was entitled to exercise its contracted for right to settle without consent.

The Johnson case highlights an important line of defense for an insurer accused of bad faith—was the insurer’s conduct authorized by the terms of the policy or not?  If the policy explicitly grants a right to the carrier, and the carrier exercises that right, the carrier will have a powerful shield to a claim that the carrier acted wrongfully.

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PA Supreme Court Addresses Level of Proof Required Under Statutory Bad Faith Claim

In an opinion dated September 28, 2017, the Pennsylvania Supreme Court, Western District, considered as an issue of first impression the level of proof required to prevail in a bad faith claim, examining the elements of a bad faith insurance claim under the PA bad faith statute, 42 Pa.C.S. Section 8371.  The lawsuit involved policy coverage issues under a cancer insurance policy issued to plaintiff as a supplement to her primary employer-based health insurance.  The Rancosky v. Washington National Insurance Company court confirmed that the two-step process, known as the Terletsky test, applied to determine whether a claimant could recover in a bad faith action.  More specifically, a plaintiff must prove by clear and convincing evidence that: (1) the insurer did not have a reasonable basis for denying benefits under the policy (an objective standard) and (2) the insurer knew of or recklessly disregarded its lack of a reasonable basis.  More importantly, the court held that the while proof of an insurance company’s motive of self-interest or ill-will is probative of the second element, the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.  Given the procedural and evidentiary posture of the case, the case has been remanded to the trial court to consider both prongs of the Terletsky test anew.

Concurring Opinion by Chief Justice Saylor

Concurring Opinion by Justice Wecht

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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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