Tips for Avoiding First-Party “Bad Faith” in Illinois

Illinois does not recognize bad faith as an independent tort. In the first-party context, bad faith is a purely statutory construct which hinges upon whether an insurer’s conduct was “vexatious and unreasonable.” Section 155 of the Illinois Insurance Code (215 ILCS 5/155) provides the exclusive remedy[1] for bad faith conduct by an insurer and also preempts other causes of action that at their core constitute a breach of good faith and fair dealing.[2]

Section 154.6 of the Illinois Insurance Code (215 ILCS 5/154.6) enumerates 18 improper claim practices. Although these practices are not dispositive of a Section 155 claim, a court may properly consider the enumerated actions when determining whether an insurer’s conduct was vexatious and unreasonable.[3] As a result, Section 154.6 provides a helpful guide for what not to do when handling a claim, which can be useful in establishing practices and rules of thumb for proper claims handling. The Section 154.6 improper practices can be distilled down to three distinct trouble areas: (1) where an insurer fails to be prompt and responsive; (2) where an insurer fails to be proactive; and (3) where an insurer fails to adequately investigate a claim.

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Recent Bad Faith Cases Regarding Reasonableness of Medical Treatment

In two recent cases, the courts showed substantial deference to patients’ treating physicians in determining the reasonableness of medical treatment. This deference appears to reflect a reluctance of courts to decide what healthcare is appropriate for a patient.

In Peterson v. Western National Mut. Ins. Co., 946 N.W.2d 903 (Minn. 2020), the policyholder was involved in a low-speed automobile accident. Following the accident, she sought treatment from a chiropractor for body aches and headaches. She entered into a settlement with the other driver and her insurer also paid her policy’s no-fault benefits. For two to three years following the accident, the insured underwent various treatments for her headaches. Eventually, she tried Botox injections, which she found effective. The insured’s treating physician reported that the insured would need the $2,500 per treatment Botox injections for the rest of her life. As a result, the insured demanded her insurer pay her policy’s full $250,000 underinsured motorist coverage limit, and then filed suit.

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Claims Handling: Questions Are the Answer

The key issue in insurance bad faith litigation is whether the claims professional reasonably handled the claim. Throughout the claims-handling process, the claims professional should constantly ask him-or-herself whether the investigation is sufficient to support a coverage determination and how someone might challenge that determination. By asking and answering those questions, the claims professional can be confident in his or her coverage determination. And to ensure that the claims professional’s analysis is not lost, his or her file should contain the evidence necessary to fully explain any such determination.

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Texas Supreme Court Crafts “Undisputed Evidence of Collusive Fraud” Exception to Eight-Corners Rule

In Texas, and as a general rule, only the four corners of the policy and the four corners of the petition against the insured are relevant in deciding whether the duty to defend applies. Richards v. State Farm Lloyds, ___S.W.3d ___, 2020 WL 1313782 at *1 (Tex. 2020). Texas courts and practitioners refer to this general rule as the “eight-corners” rule. After years of implicitly acknowledging an exception to the eight-corners rule may exist, in Loya Insurance Company v. Avalos, ___ S.W.3d ___, 2020 WL 2089752 (Slip.Op. Tex. May 1, 2020), the Texas Supreme Court affirmatively adopted a narrow exception to the rule: “courts may consider extrinsic evidence regarding whether the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they otherwise would not exist.” Id. at *1.

Background Facts

Loya Insurance Company issued an automobile liability policy to Karla Flores Guevara. The policy specifically excluded coverage for Guevara’s husband, Rodolfo Flores. While moving Guevara’s car, Flores collided with another car carrying the Hurtados. Guevara, Flores, and the Hurtados agreed to tell both the responding police officer and the insurer that Guevara, rather than Flores, was driving the car. Guevara sought coverage from Loya for the Hurtados’ claim and Loya furnished an attorney to defend Guevara. Early in the discovery process, Guevara claimed to be the driver. However, she disclosed the lie to her insurer-retained defense attorney right before her deposition. 592 S.W.3d 138, 141-42 (Tex. App.—San Antonio 2018), review granted (Jan. 17, 2020), rev’d, 2020 WL 2089752. The deposition was cancelled and Loya denied a defense and coverage to Guevara. The opinion from the Court of Appeals states that Guevara “testified she did not tell anyone at Loya that Flores was driving until right before her deposition in the underlying suit was to begin.” 592 S.W.3d at 142. After reviewing the briefs filed in the Texas Supreme Court, it is unclear when or how Loya learned of Guevara’s confession. The Hurtados obtained a default judgment against Guevara. The trial court granted summary judgment in favor of the Hurtados and awarded approximately $450,000.00 in damages.

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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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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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