Bad Faith: Crossing The Line

Transcription

1 Bad Faith: Crossing The Line John S. Vishneski III, Reed Smith LLP, represents policyholders Tred Eyerly, Damon, Key, Leong, Kupchak, Hastert, represents both policyholders and insurers Rina Carmel, Zelle McDonough & Cohen LLP, represents insurers Demetrius Rush of Zurich American Insurance Company

2 Candy Blast Hypothetical

3 Candy Blast Hypothetical The H.J. Ruth Co. ( HJR ) is a candy maker famous for its White Hot Lava Bites HJR is family owned and operated HJR s candy making facility sits over an expressway just outside of Oak Park, Il

4 Explosion On a beautiful Saturday afternoon, a vessel containing the secret ingredients to the White Hot Lava Bites suddenly exploded Shrapnel flew through the facility damaging other machines Liquid Lava Bites poured from the machines causing further damage

5 The Cloud

6 The Cloud A cloud of the secret ingredients escaped from HJR s facility and blew over Oak Park, Illinois. It hovered over Oak Park s Scoville Park where the Barristers Big Band was giving a concert Thousands of people were rushed to local emergency rooms after breathing the fumes

7 Third-Party Lawsuits Within a week of explosion, over 50 lawsuits had been filed against HJR claiming bodily injury from exposure to the candy fumes Given the number of lawyers present and injured at Scoville Park, many more suits can be expected

8 HJR s Insurance Coverage HJR has General Liability and First Party Property insurance with Bonbon Mutual Insurance Company ( Bonbon ) HJR promptly filed a proof of loss with Bonbon listing the damage to the candy factory HJR notified Bonbon of each lawsuit as soon as it was received

9 Bad Faith in Third Party Liability Coverage First Party Property Dispute Conduct of Coverage Litigation

10 Bad Faith in Third Party Liability Claims Handling

11 Case 1: Defense Without Reservation of Rights

12 Case 1: Defense Without Reservation of Rights Upon receiving notice of the claims, Bonbon claims handler Kate Wynn calls up HJR s president Hank Ruth Jr. and informs him that Bonbon will defend HJR Kate Wynn also appoints Bonbon s panel counsel, Rock E. Rhode of Bickers & Snickers LLC, to defend HJR Bickers begins defending HJR Bonbon does not issue a reservation of rights letter ( ROR )

13 Case 1: New Evidence One year into the case, an expert asserts that there was asbestos particles in the Cloud Rock E. Rhode sends a copy of the report to Bonbon Kate Wynn quickly skims over the report missing the reference to asbestos Neither Bonbon or Rock E. Rhode informs HJR that the asbestos exclusion may apply

14 Case 1: The Eve of Trial Another year passes and the first candy fumes case is set for trial Rock E. Rhode sends Kate Wynn a trial report that discusses the expert testimony on asbestos thirty days prior to trial Kate Wynn reads the report a week before trial and immediately sends HJR a ROR letter reserving the right to deny coverage because of the asbestos exclusion

15 What Creates the Bad Faith Concern?

16 Case 1 Considerations Are estoppel or waiver of the defense a sufficient penalty? Not all states apply estoppel H.J.R. would be forced to a bring a lawsuit Was Bonbon vexatious and unreasonable? Was it reckless? Was there prejudice to H.J.R.?

17 Case 2: Bonbon s Denies Duty to Defend

18 Case 2: Bonbon Denies Defense Within 24 hours of receiving notice of the candy fumes claims, Bonbon issues a denial of coverage based on its pollution exclusion Bonbon s claims handler Kate Wynn does no legal or factual investigation into the candy fumes claims prior to issuing the denial of coverage Kate Wynn closes the file

19 Case 2: Bonbon Tries to Take Over Defense Hank Jr. tweets his frustration with Bonbon s refusal to defend to thousands of followers Lava Bites having a cult following among news interns, the media picks up the story and runs with it decrying Bonbon s claim that Lava Bites are pollution Bonbon ignores the media blitz for over a year, but finally gives in to the pressure and informs HJR that Bonbon s panel counsel will be taking over the defense under a reservation of rights

20 What Creates the Bad Faith Concern?

21 Case 2 Considerations? What if the complaint was covered under the applicable law of the state? Was she reckless? How does agreeing to defend a year late change the analysis? What if there was no coverage?

22 Case 3: The Additional Insured

23 Case 3: The Additional Insured When Bonbon receives notice from HJR, Kate Wynn notes that Mack Maintenance Ltd. (an additional insured on HJR s policy because Mack provides maintenance to HJR) has also been named in the suit Kate Wynn does not contact Mack Ltd. to inquire if Mack needs a defense Kate Wynn does place a note in the HJR file noting that Mack Ltd. is also covered under the HJR policy

24 Case 3: Late Notice? Over a year into the cases, Mack Ltd. notifies Bonbon of the candy fumes claims The claim is sent to claims handler Ben Wesley Ben Wesley reviews the claim and discusses it with Kate Wynn as she is handling the HJR claims Ben denies the claim because of late notice

25 What Creates the Bad Faith Concern?

26 Case 3 Considerations? What is the effect of actual notice? Estoppel? Is it bad faith to ignore clear precedent? Should Bonbon have provided training on actual notice? What if the jurisdiction requires tender by the insured?

27 Bad Faith in First Party Claims

28 Case 4: Information Requests

29 Case 4: Information Requests After receiving HJR s proof of loss, Bonbon requests HJR s information related to maintenance as part of its investigation HJR does not respond to the request Bonbon sends new requests every 3 months HJR continues to ignore the requests

30 Case 4: Confidential Information HJR is refusing to produce its in-house counsel s interview notes with the plant manager The notes show that HJR knew of problems and had reprimanded Mack, but the problem had not been fixed HJR is concerned that revealing this information to Bonbon will hurt its defense of third-party bodily injury claims Bonbon does not know why HJR is refusing to produce these notes

31 What Creates the Bad Faith Concern?

32 Case 4 Considerations Is HJR acting in good faith? Is Bonbon acting in good faith? What can HJR and Bonbon do to resolve this situation? Is Bonbon prejudiced by HJR s failure to cooperate? When can Bonbon deny the claim?

33 Case 5: Examination Under Oath

34 Case 5: Examination Under Oath Bonbon takes an examination under oath (EUO) of Hank Jr. In an EUO, Hank Jr. has the duty to fully respond Hank Jr. (sometimes called Hank the Crank ) is surly and uncooperative Bonbon s attorney sneaks in questions that are related to the third-party claims

35 What Creates the Bad Faith Concern?

36 Case 5 Considerations Is Bonbon acting in bad faith? Are there limits on the EUO? Can insuer pursue EUO if it injures policyholder in a different matter? Does Hank Jr. s lack of cooperation give Bonbon a defense to any bad faith it committed? What could the parties have done to cooperate?

37 Bad Faith in Coverage Litigation

38 Case 6: The Mack Ltd. Suit

39 Case 6: The Mack Ltd. Suit Bonbon brings a declaratory judgment action against Mack Ltd. asking for a declaration that there is no coverage because of late notice Bonbon alleges that it was first notified of the lawsuits against Mack Ltd. over a year into the case

40 What Creates the Bad Faith Concern?

41 Case 6 Considerations What is the effect of the allegation of no notice? What if the jurisdiction applies the actual notice rule? What if the jurisdiction requires tender of the claim? What should Bonbon consider before filing a declaratory judgment action?

42 Case 7: Discovery Disputes

43 Case 7: Discovery Disputes Mack Ltd. issues document requests for all claims files, including the HJR file, related to the candy fumes claims Bonbon refuses to produce the files because they are not relevant and are confidential Recall that the Bonbon file includes a note that Kate Wynn noticed Mack Ltd. on the complaint when first received

44 What Creates the Bad Faith Concern?

45 Case 7 Considerations Is it reckless behavior not to know about incriminating evidence in claims files? Will a jurisdiction apply bad faith to acts in litigation? Are there other rules that apply to litigation?

46 Case 8: Spoliation

47 Case 8: Spoliation The Judge ordered Bonbon to produce the HJR claims files When Bonbon produced the files they were incomplete and many pages were illegible The note about Mack Ltd. was missing because Ben did not get that part of Kate s file when the case was transferred to him Mack Ltd. learned about the note when it deposed Kate Wynn who had been terminated by Bonbon

48 What Creates the Bad Faith Concern?

49 Case 8 Considerations Will a jurisdiction apply bad faith to acts in litigation? Are there other rules that apply to litigation? Was the spoliation purposeful, reckless mistake or innocent?

50 Questions?