Recent Bad Faith Cases

Transcription

1 Recent Bad Faith Cases 1. In Meleski v. Schbohm LLC, 2012 WI App 63, 341 Wis. 2d 716, 817 N.W.2d 887, the Wisconsin Court of Appeals held that a third-party may assert a bad faith claim against an insurance company when (1) the company s obligation to the non-insured is fixed, and (2) the non-insured contends the company refuses in bad faith to discharge that obligation. Id. 1. Meleski was injured on the property of defendant, Schbohm LLC, when she fell. Defendant Partners Mutual Insurance Company is Schbohm s insurance carrier. According to the terms of the insurance contract, Partners Mutual promised to pay for medical expenses that occurred on Schbohm s property; neither party disputes this provision. The policy also promised that Partners Mutual would pay for medical expenses regardless of fault. Meleski brought suit when Partners Mutual refused to pay for her medical expenses. The circuit court dismissed the case on the grounds that bad faith claims can only be brought by someone who is in privity of contract with an insurer. The Court of Appeals reasoned that the terms of the contract created a third-party-beneficiary duty to a non-insured. In this case, the policy between Partners Mutual and Schbohm, LLC provided that Partners Muitual would pay medical expenses regardless of fault and therefore, Meleski became a third-party beneficiary, who could bring a bad faith claim. The Court of Appeals reversed the circuit court s grant of summary judgment dismissing Meleski s bad faith claims. 2. In Kimble v. Land Concepts, Inc., 2012 WI App 132, 345 Wis. 2d 60, 823 N.W.2d 839, the Kimbles purchased land from the Stevensons in Door County. The land at issue was purchased and passed through a number of parties before coming to rest in the hands of the Kimbles. The Stevensons still retained a portion of land next to the Kimbles plot. Adjacent to the Kimbles and Stevensons land was a plot of land owned by Land Concepts. When the Stevensons purchased their property it was transferred by warranty deed. Under the warranty deed, the Stevensons had an easement for use of a private road, which crossed land that would eventually be owned by Land Concepts. The easement was eventually warranted to the Kimbles when they purchased the land in October The Kimbles obtained title insurance from First American Title Insurance that protected against loss by unmarketability of the title [or]... lack of a right to access to and from the land. When the Kimbles attempted to sell their land in 2008, Land Concepts sent a letter to the Kimbles realtor explaining that the easement was on Land Concepts land and that the Kimbles would not be able to convey the easement to any purchaser. The Kimbles filed suit against Land Concepts, the Stevensons, and others, seeking a declaration of their rights in the private road used to access their property. The Kimbles later added a breach of title claim against First American Title Insurance. The Kimbles settled with all defendants except First American. Under the settlement agreement, Land Concepts conveyed an easement to the Kimbles and Stevensons properties for $40,000. Additionally, the Stevensons would pay the Kimbles $10,000, but the Kimbles would assign their rights and interest in their First

2 American title insurance policy, including any and all claims against First American stemming from First American s denial of coverage to the Stevensons. The Stevensons filed a cross-claim against First American for breach of contract and fiduciary duty, and bad faith. At trial, the jury found that First American had acted in bad faith and awarded the Stevensons $1,000,000 in punitive damages and $29, in compensatory damages. First American appealed. The Court of Appeals addressed four issues on appeal: (1) whether the Stevensons could prosecute the Kimbles claims against First American; (2) whether the evidence was sufficient to establish that coverage under the policy was invoked; (3) whether First American acted in bad faith; and (4) whether punitive damages were awardable to the Stevensons for first American s bad faith and, if so, whether the amount awarded was excessive and therefore violated due process. Id. 13. On those four issues the Court of Appeals held: (1) under Wisconsin law, the Kimbles had a right to assign their claims to the Stevensons; (2) coverage was invoked under the policy because the Kimbles did not have the right to access their property; (3) the jury finding of bad faith by First American because a loss was suffered by the Kimbles was pled and proved sufficiently; and (4) punitive damages can be awarded, but First American s argument were insufficiently developed, so the court rejected the arguments on that basis. Ultimately, the court held that the Kimbles could transfer their policy; the Stevensons proved bad faith; and the jury verdict for damages was upheld. 3. In Ullerich v. Sentry Ins., 2012 WI App 127, 344 Wis. 2d 708, 824 N.W.2d 876, the Wisconsin Court of Appeals held that in a first-party bad faith claim the insured must demonstrate some evidence that an insurer s denial of coverage was unreasonable in order to proceed to discovery. Said in another way, the insured needs to show that the claim was not fairly debatable that there is no reasonable basis for the denial of coverage. In this case, Ullerich suffered an injury as a passenger in an uninsured motor vehicle accident between the driver in his vehicle, Richard Goergen, and the driver of the other vehicle, Kathryn Saffold. Ullerich s automobile insurance policy included an uninsured motorist endorsement. A couple weeks after the accident, Ullerich started to experience shoulder pain that his doctor thought could either be the result of shoveling or the motor vehicle accident that he was involved in. After Saffold s insurance denied Ullerich s claim, he made an UM claim against his provider, Sentry. Sentry responded by stating that it was uncertain if it was required to pay Ullerich on two grounds: (1) the injuries might have resulted from shoveling and not the accident; and (2) Saffold might be liable because there was evidence she may be at fault in the collision. However, Sentry agreed that injury likely occurred, to some degree, and offered Ullerich $22, to settle. Ullerich rejected the offer and brought a claim for breach and bad faith against Sentry. Although not relevant to the bad faith claim against Sentry, Ullerich won damages for negligence against Goergen and Saffold. Prior to discovery, Sentry won a motion to quash discovery and for summary judgment

3 The Court of Appeals held that a first-party claim of bad faith must allege facts that show that there was no reasonable basis for the denial of coverage; the claim must show that coverage was not fairly debatable. The court held that the claim was properly dismissed because there were reasonable reasons for the denial of coverage. First, the shoulder injury could have been caused by shoveling, as shown by medical records, was sufficient to initially deny coverage. Second, that the negligence jury trial, allocating liability among both Saffold and Goergen, was sufficient to show that Sentry had a reasonable basis that another party was at fault. Under both of Sentry s reasons for denial, they were reasonable or at least fairly debatable. 4. In Miller v. Safeco Ins. Co. of America, 683 F.3d 805 (7th Cir. 2012), the court affirmed the district court s judgment of bad faith against Safeco. The court found that Safeco acted in bad faith when it denied Miller s claim based on: (1) preexisting condition; (2) insured s delay in filing a claim; and (3) insured s failure to mitigate damage. In this case, Safeco Insurance Company issued an insurance policy to the Millers for the purchase of their new home. Before the Millers received the policy, they discovered significant and extensive water and mold damage to the home. The Miller s filed a claim under the insurance policy and Safeco denied the claim based on preexisting condition, delay in filing a claim and for failure to mitigate damages. After the trial court determined that Safeco lacked a reasonable basis for denial and that Safeco demonstrated a reckless disregard for its lack of a reasonable basis, the Millers were awarded damages against Safeco. Safeco appealed. The court focused on each denial for the purposes of the bad faith claim in turn. While there was water and mold damage that must have existed prior to closing, there was nothing in the record to indicate that the Millers were aware of the condition. The four month delay in filing a claim as a reason for denial was quickly shot down as well. The court found the delay was not a reasonable reason for denial because the Millers used the four month delay to retain an attorney and professionals to help assess the damage in submitting their claim. Finally, Safeco failed to state what the Millers could have done to help mitigate damage, especially in light of the fact that the house was already a total loss. The court found that Safeco presented no reason why the district court erred in finding that bad faith existed to such a degree that Safeco acted with reckless disregard. For the reasons above, the court affirmed the bad faith claim and subsequent damages. 5. In Prent Corp. v. Labor & Indus. Review Comm'n, 2012 WI App 52, 340 Wis. 2d 742, 813 N.W.2d 248, Regina Leach, an employee of Prent, suffered an injury relating to her job with Prent. Leach's injury prevented her from working for a period of time, and when Leach wanted to return to work, Prent refused to hire her. She sought lost wages based on Prent having unreasonably refused to rehire her. LIRC agreed that Prent had unreasonably refused to rehire Leach, and awarded Leach the maximum penalty allowed by statute, which totaled $30, previously ordered - 3 -

4 After Prent failed to pay the award by the imposed deadline, Leach petitioned LIRC for a bad faith award based on Prent's failure to pay. Prent responded, arguing for the first time that it was justified in not paying the award because it believed it was entitled to a partial offset based on disability payments it had made to Leach. An administrative law judge rejected this argument, found bad faith on the part of Prent, and awarded Leach $30,000 on her bad faith claim pursuant to WIS. STAT (1)(bp). LIRC affirmed the award in a written decision. Prent sought judicial review, and the circuit court affirmed LIRC' s decision. The Wisconsin Appellate reviewed the LIRC' s written decision. The LIRC asserted that Leach had the burden of showing Prent "had no reasonable basis for [not paying the award to Leach] and knew or recklessly disregarded that there was no reasonable basis for [not paying]." Id. Prent argued that the obligation to pay Leach the full amount of the award was "fairly debatable" and thus the LIRC's decision was erroneous. LIRC assumed that the law generally permits an offset for disability payments when calculating lost wages because disability payments should be treated as "wages." Although Leach's award was statutorily capped at the equivalent of one year's lost wages, Leach's actual loss was greater. The LIRC found that with or without Prent's offset, she would still have been entitled to the maximum award because the offset was more than accounted for by additional actual lost wages. The court held that the LIRC's decision also pointed to the un-disputed fact that Prent raised the offset issue only after LIRC' s refusal-to-rehire order was final and after Prent was delinquent in paying the amount awarded. It was reasonable to view this sequence of events as additional evidence of bad faith. 6. Kenneth F. Sullivan Co. v. McManamy, 2012 WI App 62, 341 Wis. 2d 490, 815 N.W.2d 406, concerns a complex lawsuit with multiple claims and counterclaims stemming from the construction of a large single-family dwelling. The original general contractor for the project, Kenneth F. Sullivan Co., walked away when the job was approximately 85% complete. The primary issue in these appeals relates to a breach of contract claim brought by the homeowners, K & W, against Sullivan. On appeal, K & W complain about the dismissal of their bad faith claims against Sullivan's insurers. Those claims relate to K & W's belief that the insurers had a duty to defend K & W from certain affirmative defenses and a counterclaim. Sullivan's insurers had a duty to defend K & W in certain circumstances. K & W did not, however, show that the duty to defend was triggered because they do not show that they were subject to paying damages. All of the affirmative defenses and counterclaims were aimed at negating or reducing the damages that K&W might otherwise be entitled to. Because there was no evidence that the affirmative defenses and counterclaims were anything other than attempts to reduce K&W's potential damages, there was no bad faith on behalf of the insurance company. 7. In Winter v. Seneca, 2012 WI App 1, 338 Wis. 2d 212, 808 N.W.2d 175, a couple was involved in a dispute with their insurance company after their home was destroyed in a fire in March of The Winters were insured by Seneca under a policy that provided several types of coverage, including Coverage C for household personal property. Coverage C required payment of the replacement value of personal property losses, subject to a limit of - 4 -

5 $106,500. The policy included an appraisal provision, which Seneca invoked in September The Winters ultimately filed suit March 23, 2005, alleging breach of contract and bad faith. On March 28, 2005, the Winters formally demanded their Coverage C limit from Seneca. The appraisal process was lengthy and complicated, and it was finalized in November As of November 2005, Seneca had paid a total of $91, under Coverage C, with a holdback of $15, The court conducted a separate bad faith trial. It was limited by stipulation to whether Seneca acted in bad faith subsequent to the Winters' March 28, 2005 correspondence. The court ultimately found that Seneca had not acted in bad faith in failing to pay the additional holdback. The court determined that Seneca's demand for an appraisal was a contractual right and therefore not an act of bad faith. The court determined Seneca properly investigated the Winters' claim and reasonably evaluated and reviewed the results. In the appellate court, the Winters' tried to argue that the circuit court improperly relied on Seneca's consultations with its attorney and appraiser, the court's bad faith analysis was inadequate, and that they established bad faith as a matter of law. The Wisconsin Court of Appeals held that Winters' claim was difficult and complex, and that nothing in Wisconsin's bad faith case law "suggests an insurer must go it alone; indeed, many authorities suggest otherwise." Id. at 4. Though the Winters claimed that an insurer's duty of good faith is generally nondelegable, the Court held that Seneca was correct in arguing that the opinions of third-party experts may permissibly influence an insurer's adjustment decisions. While not dispositive, they may be "properly considered as one factor in determining whether an insurer possessed a reasonable basis for denying benefits." Id. at 5. The Court also held that an "insurer might reasonably conclude that the insured's claim is fairly debatable even if the insurer is ultimately determined liable." Id. Seneca did not act with deceit or deception, and the suspicions that arose during the adjustment process gave rise to a reasonable belief that the Winters' claim was fairly debatable, and thus there was no bad faith on behalf of Seneca. 8. In Brethorst v. Allstate Prop. & Cas. Ins. Co., 2011 WI 41, 334 Wis. 2d 23, 798 N.W.2d 467, the insured brought a bad faith action against the automobile insurer after rejecting the insurer's offer of partial settlement on a claim for uninsured motorist benefits. The insurer moved to have the contract issues bifurcated from the bad faith claim, and requested that discovery on the bad faith claim be stayed until the contract claim was resolved. The insured had uncontradicted evidence that she incurred $10,000 dollars worth of medical expenses for treatment from injuries she suffered in an automobile accident caused by an uninsured motorist. The insured argued that the insurer's refusal to pay full claim was based on nothing more than its theory that a minor accident could not seriously aggravate a pre-existing injury and cause $10,000 in medical expenses and compensable pain. Brethorst opposed the motion on the grounds that she had only filed a bad faith claim and thus no bifurcation or stay of discovery was appropriate. The Wisconsin Supreme Court held that: (1) some breach of contract by an insurer is a fundamental prerequisite for a first-party bad faith claim against the insurer by the insured; (2) to proceed to discovery on bad faith claim, insured must satisfy the court that the claimed - 5 -

6 breach of contract is well founded and can be proved in the future; and (3) insured provided sufficient evidence of a breach of contract to enable her to proceed with discovery on bad faith claim. On the facts, Brethorst had shown uncontradicted evidence that incurred $10,000 in medical expenses, and the insurer's failure to pay all of these expenses without submitting any reasonable basis in law or fact for its failure to do so justified going forth with discovery on the bad faith claim. 9. In Roehl Transp., Inc. v. Liberty Mut. Ins. Co., 2010 WI 49, 325 Wis. 2d 56, 784 N.W.2d 542, a trucking company brought action against liability insurer for the tort of bad faith, following insurer's settling an injured motorist's third-party liability claim for $830,400, which was well below the $2 million dollar policy limit, but cost the trucking all of its $500,000 deductible. This claim stems from a personal injury claim brought against Roehl by Arthur Groth, when Groth's car was rear-ended by one of Roehl's trucks. The jury found Roehl Transport liable to Groth for $830,400 in damages. Roehl tendered the claim to Liberty Mutual, but Liberty Mutual "did little to investigate or settle the matter until it became apparent that its own money was at stake." Id. at 1. Roehl filed a bad-faith action against Liberty Mutual "to recover the difference between the $500,000 it was required to pay Groth and the amount the case could have settled for if [it] had investigated and made a reasonable offer to settle." Id. Five issues were presented to the Wisconsin Supreme Court on appeal, including if Roehl had a cognizable bad faith claim against its insurance company when the insurance company exercises control over the settlement of a third-party claim and engages in bad faith conduct towards insured, even though the judgment does not exceed the policy limits. The Supreme Court of Wisconsin held that as a matter of first impression, an insurer may be liable for the tort of bad faith when it fails to act in good faith and exposes the insured to liability for sums within the deductible amount. Roehl was entitled to attorney fees as a matter of law upon the jury's finding of bad faith. The Court found that Roehl had relinquished the right to negotiate on its own behalf with third-party claimants, and therefore Liberty Mutual was to see that the insured's best interests are protected. In the present case, where the insured has a significant deductible, the insurance company's and the insured's interest might diverge, and the insurance company could make decisions in settling claims that favor its own interests over those of the insured's, which Liberty Mutual did. A jury could conclude that Liberty Mutual demonstrated a significant disregard of Roehl's rights and economic interests and that they were not honest, because Liberty made no attempt to settle the claims when it had the opportunity to do so. 10. Lakeside Foods, Inc. v. Liberty Mut. Fire Ins. Co., 2010 WI App 120, 329 Wis. 2d 270, 789 N.W.2d 754. Lakeside Foods, Inc., ("Lakeside") appeals from a summary judgment in favor of Liberty Mutual Fire Insurance Company ("Liberty") on a duty to defend and bad faith claim. Lakeside premises its bad faith claim primarily on Liberty's alleged failure to respond to its tender of defense for a three-month period after which Liberty reserved its rights and refused to pay reasonable attorney fees to Lakeside's choice of counsel

7 Liberty argued that Lakeside's bad faith claim is not recognized by Wisconsin courts because it does not fall within the three scenarios of insurer bad faith previously addressed in case law and the Wisconsin Jury Instructions. However, Liberty's argument was recently rejected in Roehl Transport, Inc. v. Liberty Mutual Insurance Co., 2010 WI 49. The Supreme Court observed that the tort of bad faith is not "confined to the three fact patterns described in the existing case law." Id. The record reflected that while Liberty denied Lakeside's right to continue with its chosen counsel, Liberty's internal correspondence indicated its understanding that Lakeside may have the right to control its defense. The appellate court agreed with Lakeside that genuine issues of material fact could exist as to whether Liberty fulfilled its duty of ordinary care and diligence in handling Lakeside's claim, and whether it exercised honest and informed judgment in doing so. The court reversed the grant of summary judgment on the bad faith claim. 11. General Casualty Co. of Wisconsin v. Choles, 2010 WI App 62, 324 Wis. 2d 583, 785 N.W.2d 687, addresses whether an insurer engaged in bad faith in the course of its investigation of a claim and in the course of filing a motion for summary judgment. Choles owned a car which he used for personal use and for business use. He sought from his longstanding insurance agent "full coverage" on the vehicle, including underinsured and uninsured motorist coverage. He was injured when he was hit by another vehicle when crossing the street, and his insurer, General Casualty, denied coverage, stating there was no "pedestrian coverage." When General Casualty sought declaratory judgment, Choles counterclaimed, alleging that there had been a mutual mistake resulting from his intention to obtain "full coverage" and General Casualty's failure to procure it. Choles also alleged bad faith. The parties moved for summary judgment on both the reformation issue and the bad faith issue. The Wisconsin Court of Appeals concluded that General Casualty did not engage in bad faith by failing to investigate reformation but did engage in bad faith when it subsequently sought summary judgment on reformation. The court concluded that Choles failed to establish that his insurance agent informed General Casualty that Choles wanted "full coverage," and thus there was no notice prompting General Casualty to investigate reformation. Nor did Choles' pleading or demand letter notify General Casualty as such. The court did conclude, however, that General Casualty acted in bad faith by moving for summary judgment on the issue of reformation. The court concluded that Choles informed his agent of the coverage he desired and that his agent understood the request, but nonetheless failed to obtain the coverage Choles sought. Accordingly, it was not debatable that there was a mutual mistake made by Choles and General Casualty on that score. General Casualty, therefore, lacked a reasonable basis for pursuing summary judgment on the issue of reformation. 12. In Stewart v. Farmers Ins. Group, 2009 WI App 130, 321 Wis. 2d 291, 773 N.W.2d 513, the plaintiffs sought attorney s fees and other expenses after they accepted their insurer's offer of judgment in their bad faith action against it. The Stewarts brought a bad faith action against their insurer, Farmers, stemming from a Menard's employee driving a delivery truck through - 7 -

8 their living room wall. Before trial, Farmers made an offer of judgment for "5,000, plus taxable costs, in exchange for a general release of all claims that [the Stewarts] may have against [it]." Id., 9L 7. The Stewarts accepted the offer of judgment, but subsequently filed a notice of taxation with costs totaling over $45,000, which included attorney fees and interest. The circuit court rejected the Stewarts' request for attorney fees and interest, and the court of appeals affirmed. The court held that case law categorizes attorney fees in bad faith actions as compensatory damages and not as costs. Therefore, "[b]y accepting Farmers' $5,000 offer of judgment, the Stewarts acknowledged that that amount was sufficient compensation for their damages, inclusive of actual attorney fees.... [A]s damages resulting from the tort of bad faith, attorney fees do not remain attorney fees, but instead are transformed are transformed into damages." Id., In Aul v. Golden Rule Ins. Co., 2007 WI App 165, 304 Wis. 2d 227, 737 N.W.2d 24, the court of appeals affirmed the circuit court's grant of summary judgment in favor of the insurer on the plaintiffs' bad faith claim and held that Wisconsin does not recognize the tort of bad faith in underwriting. 14. In Trinity Evangelical Lutheran Church v. Tower Ins. Co., 2003 WI 46, 261 Wis. 2d 333, 661 N.W.2d 789, the Wisconsin Supreme Court held that Tower Insurance acted in bad faith in denying coverage. Trinity sought premium quotations for insurance which would include hired and non-owned automobile liability coverage. Its broker obtained a quotation from Tower and Tower's underwriter, in preparing the quotation, agreed to offer that coverage. However, the policy was erroneously issued without the hired and non-owned coverage. The omission was discovered after Trinity notified Tower of a potential claim. The agent informed Tower's management of the mistake and requested that Tower backdate Trinity's coverage. Management responded in no later than 48 hours with a decision that it would not backdate coverage. After repeated requests that Tower management reconsider its decision not to backdate coverage, including from the agent's E&O carrier, Tower held firm in its initial decision. The court held that Tower acted in bad faith. It reasoned as follows: (1) Tower had litigated a case over three decades earlier pertaining to mutual mistake and thus "should have understood its obligation to provide the requested coverage to an insured... where a mutual mistake has occurred," id., 40; (2) Trinity lacked coverage due to a mutual mistake that was attributable to Trinity's insurance agent; (3) Tower knew of the mutual mistake when it denied coverage; (4) Tower did not backdate the policy and failed to inform the circuit court of the agent's error and of his request that the policy be backdated. In addition, the court upheld the jury's award of $3,500,000 in punitive damages for Tower's bad faith. The court concluded that Tower blatantly disregarded the law and its duty, and that the award was not grossly excessive _1.DOCX - 8 -

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