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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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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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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