Responding to Allegations of Bad Faith

Transcription

1 Responding to Allegations of Bad Faith Matthew M. Haar Saul Ewing LLP 2 N. Second Street, 7th Floor Harrisburg, PA (717) mhaar@saul.com

2 Matthew M. Haar is a litigation attorney in Saul Ewing LLP s Harrisburg office and is a member of Saul Ewing LLP Insurance Practice Group. He focuses his practice on corporate and commercial litigation with an emphasis on complex coverage and bad faith disputes, as well as administrative proceedings and rehabilitations and liquidations. Mr. Haar also routinely handles extra-contractual liability cases for other clients in the financial services industry, such as banks, trust companies, producers, and credit card companies, as well as agents and brokers in the real estate industry. A frequent speaker on the law of bad faith, Mr. Haar is an active member of DRI s Insurance Law Committee, chair of its Bad Faith Subcommittee, and previously served as co-editor of the committee s monthly e-newsletter, Covered Events.

3 Responding to Allegations of Bad Faith Table of Contents I. Introduction...5 II. Third-Party Trends...5 III. First-Party Trends...6 IV. Inter-Layer Disputes...7 Responding to Allegations of Bad Faith Haar 3

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5 Responding to Allegations of Bad Faith I. Introduction A pervasive problem for the insurance industry is that people, including businesses and commercial entities, likely may be underinsured (or uninsured) for significant exposures. The problem for the industry worsens when insureds and third parties target insurers for recoveries beyond available coverage, often through the guise of allegations of bad faith and claims for extra-contractual exposure. Increasing numbers of courts are willing to assist insureds and third parties with this risk transfer. II. Third-Party Trends Third parties have attempted to create or increase the exposure to insurers for failing to defend an insured, even where there is a legitimate coverage issue. As an example, in Leboon v. Zurich Am. Ins. Co., No , 2016 WL (3rd Cir. Dec. 12, 2016), the trial court granted the defendant insurer s motion to dismiss a bad faith complaint under Pennsylvania s bad faith statute, 42 Pa. C.S.A 8371, rejecting plaintiff s theory that Zurich failed to make any good faith offers to settle an underlying employment litigation that was decided adversely to the plaintiff. Zurich argued that its only obligations under the applicable policy were to defend and indemnify the plaintiff s prior employer, and that it had no duty to make a settlement offer. In affirming the district court s dismissal of the bad faith claims against the insurer, the appellate court agreed that the insurer had no duty to the third party plaintiff to settle the underlying employment litigation. Third parties have also attempted to seize opportunity in situations where there are either insufficient limits or there is an unclear path to releasing all insureds. In Shaheen v. Progressive Cas. Ins. Co., No , 2016 WL (6th Cir. Dec. 15, 2016), the trial court granted the defendant insurer s motion for summary judgment on plaintiff s claims under Kentucky s Unfair Claims Settlement Practices Act, Ky. Rev. Stat The insurer paid policy limits, but the plaintiff still pursued third party statutory bad faith claims. The court agreed with the insurer s argument that it balanced its competing duties of paying policy limits with demanding that plaintiff provide a full release and indemnification of the insured. The appeals court affirmed, ruling that the insurer properly handled the claim. Insurers can also run into issues with third parties where the third parties raise issues regarding the reasonableness of how a claim was defended. In Wahlert v. American Standard Ins. Co. of Wisc., 173 F. Supp.3d 1187 (D. Colo. 2016), a coverage and bad faith case stemming from a vehicle collision, the court granted a motion for summary judgment on a common law claim of bad faith, but denied a motion for summary judgment on a statutory bad faith claim. The court dismissed the common law bad faith claim because it believed the insurer s evaluation of the plaintiff s claim was reasonable. The court denied the statutory bad faith claim for two reasons: 1) the insurer did not offer to settle for what it believed the claim to be worth, and 2) once litigation was commenced the insurer did not tender what it believed the claim to be worth, apparently conditioning payment on the plaintiff s relinquishment of her claim that she was entitled to more. Wahlert contains a helpful critique of a plaintiff s expert that the court characterizes as unpersuasive and without any basis or support in the record. Other similarly developing third party allegations of bad faith include: Insurer responsibilities and obligations in the face of shifting or conflicting case law, or other ambiguities in developing law; Issues with time limited or otherwise conditioned offers, within limits, even where there is a legitimate coverage issue; Responding to Allegations of Bad Faith Haar 5

6 Where liability is clear, requiring insurers to affirmatively assess exposure and make an offer; Inter-layer multi-insurer disputes where coverage is inadequate and verdict in excess of primary limits is awarded; and Producer disputes regarding interpretation in areas where insurability does not exist or is limited. III. First-Party Trends One of the most common trends is for an insured to attempt to plead a claim for bad faith, often in tandem with a coverage action, by reciting only a conclusory list of supposed bad faith conduct. In Camp v. New Jersey Mfrs. Ins. Co., No , 2016 WL (E.D. Pa. June 8, 2016), a breach of contract and bad faith claim, the court granted a motion to dismiss a claim for statutory bad faith under 42 Pa. C.S.A for failure to plead sufficient facts to support the bad faith claim. In addition to her claim for UIM benefits, the plaintiff attempted to plead a count for bad faith by including generic allegations of wrongdoing by the insurer, for example failing to evaluate plaintiff s claim objectively and fairly and engaging in dilatory and abusive claims handling. The court had previously dismissed the bad faith count and given plaintiff the opportunity to replead. While plaintiff attempted to add some detail to six of the fifteen allegations of bad faith, the court determined that they were still unsupported by any allegations of fact. Similarly, in Toney v. State Farm Lloyds, 661 Fed. Appx. 287 (5th Cir. 2016), the appellate court affirmed summary judgment in favor of an insurer on coverage and extra-contractual claims under the Texas Insurance Code and Texas Deceptive Trade Practices Act. Following damage from a hail storm, the insured sought total replacement and upgrade of spaced roof decking with solid decking, arguing that it was required by local ordinances. The insurer correctly concluded that local ordinances did not require the decking to be completely replaced and upgraded, so the insurer was entitled to judgment as a matter of law. Insureds have also attempted to pursue bad faith claims for insurer actions outside of the claims handling context, for example where insureds fail to disclose information material to a risk and then defend on a post-loss underwriting theory. These claims often contain allegations of illusory coverage and/or material misrepresentations, fraud in the procurement/inducement, bad faith underwriting, negligence and violation of a special relationship between the insurer and the insured. In Paslay v. State Farm Gen. Ins. Co., 248 Cal. App.4th 639 (Cal. Ct. App. 2016), after suffering roof damage from a rainstorm, homeowners sued their insurer for breach of contract, bad faith and elder abuse. The trial court granted summary judgment on all claims, and the appellate court affirmed dismissal of all claims except the coverage issues. The courts concluded that the genuine dispute doctrine precluded any claim for bad faith. The courts also concluded that, because there was a genuine dispute, the insureds claims of elder abuse could not be substantiated. These claims can also pursue recovery theories without substantive damages. For example, insures may argue that time delay, with or without an underlying covered loss, can lead to insurer liability. Insureds may also seek, without a firm link to covered damages, attorney fees and interest, emotional distress and mental anguish (even by non-individual insureds) and timing provisions in policies and fair claims handling statutes and regulations. In contrast, in Home Loan Inv. Co. v. St. Paul Mercury Ins. Co., 827 F.3d 1256 (10th Cir. 2016), plaintiff, a residential property investor, obtained coverage on a property that it held in trust, and which it was attempting to help the homeowner in default sell. After a fire, the defendant insurer denied the claim on the basis that the property did not meet the definition of a foreclosed property under the policy. A jury decided the case in favor of the insured on both coverage and bad faith claims. The insurer appealed the bad faith deci- 6 Insurance Coverage and Claims April 2017

7 sion, but not the decision on coverage. The appeals court ruled that even though the insurer s denial of the claim was fairly debatable, there could still be a finding of unreasonable conduct. The appeals court also ruled that sections and of the Colorado Code related to unreasonable delay or denial of insurance benefits were not limited to issues regarding claims handling, but broadly included more practices in the business of insurance. IV. Inter-Layer Disputes Unfortunately, sometimes these issues even spill over into disputes between insurers. In Columbia Cas. Co. v. Ironshore Specialty Ins. Co., No ML, 2016 WL (D.R.I. May 19, 2016). In a declaratory judgment action between excess insurers on successive layers of coverage, the court denied a motion to dismiss Ironshore s counterclaims for common law bad faith and statutory bad faith under R.I. Gen. Laws In a medical malpractice action, Columbia was the first layer of excess coverage from $6 million up to $21 million, and Ironshore was the second excess layer from $21 million to $32 million. Following a jury verdict that exceeded a high-low cap of $31.5 million, Columbia filed a declaratory judgment action seeking a declaration that it did not have a duty to reimburse Ironshore s share of the judgment, where Columbia had earlier refused demands by Ironshore to settle the matter within Columbia s layer. Ironshore filed counterclaims for common law and statutory bad faith, which Columbia sought to dismiss. The court concluded that Columbia s entry into a high-low settlement did not bar all bad faith claims, that Rhode Island s statutory bad faith claim did not supplant a common law bad faith claim, and that Ironshore had standing to bring the suit even though it wasn t Columbia s insured. Responding to Allegations of Bad Faith Haar 7

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