Presented by Howard S. Shafer Shafer Glazer LLP. July 23, PDF Free Download

Presented by Howard S. Shafer Shafer Glazer LLP July 23, 2013

Primarily governed by common law of contracts New York: no private right of action under NY Insurance Law 1261 (Unfair Claim Settlement Practices Act) New Jersey: no private right of action under NJ Statute 17:29B-4(9)

Third-party Plaintiff brings suit against insured defendant Allegation of carrier s bad faith in the handling of the suit/litigation First-party Insured brings claim under policy Allegation of bad faith in carrier s processing of claim

Theory: insurance carrier s control over settlement of claims creates a duty to exercise good faith in settlement Carrier = quasi-agent of insured with quasi-fiduciary duty Failure to settle within policy limits risk of judgment against insured in excess of policy limits Primary carrier also has duty to excess carrier, because excess carrier s interests may be implicated But excess carrier cannot bring claim against primary if excess denies coverage to insured (NJ)

Plaintiff must show 1. Insured lost real opportunity to settle claim a. Demand for settlement was made b. Insured s liability was clear c. Potential recovery was much greater than policy limits 2. Carrier exhibited gross disregard of insured s interests a. a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests b. Mistaken judgment or administrative delay not sufficient

Plaintiff in underlying action s likelihood of success Potential damages Financial burden on each party if refuse to settle Adequacy of carrier s investigation Carrier s info at time settlement offer was made Insured s fault in delaying/ceasing settlement negotiations Any other evidence tending to negate/establish insured s bad faith

Carrier has duty of good-faith evaluation of claim Courts consider essentially the same factors as in NY Showing of gross negligence required

Alleging bad-faith denial of coverage, underpayment, delay of payment, failure to defend Failure to provide independent counsel where conflict of interest so requires (NY) Often dismissed before trial NY and NJ treat as breach of contract The majority jurisdictions that recognize first-party claims do so in tort Bad-faith acts generally treated as breach of implied covenant of good faith and fair dealing

If carrier can show it had a fairly debatable reason for denying coverage, the bad-faith claim cannot lie. Insured must show (1) carrier lacked reasonable basis for its action (2) carrier knew or recklessly disregarded fact that it lacked reasonable basis Similar to if plaintiff moved for summary judgment and showed an absence of material dispute as to facts Violations of 17:29B-4(9) may be considered evidence of bad faith

Generally, breach of contract compensatory damages Punitive damages only available for extraordinary contract breach 1. Carrier s breaching act was itself independent tort 2. Part of pattern of wrongdoing 3. Directed at public generally a. Demonstrate such wanton dishonesty as to imply a criminal indifference to civil obligations 4. Insured personally wronged

Theory: insured bargained for peace of mind as well as remuneration for damage; carrier s underpayment/delay in paying policy benefits denies insured that bargained-for benefit consequential damages compensate insured for additional harm resulting from carrier s breach of contract Damages must have been 1. Foreseeable consequences of breach 2. Caused by a breach of covenant of good faith Dissent: consequential damages here were essentially punitive damages

Usually: amount insured was charged in excess of policy coverage (NY) Carrier may not reimburse insured for punitive damages levied against insured in underlying action, even if carrier is liable for bad-faith failure to settle that action (NY) Court has discretion to award litigation costs/attorneys fees to successful plaintiff in third-party action (N.J. Civil Rule 4:42-9(a)(6))

Both: create statutory private right of action based on unfair claim settlement practices statutes allow possible punitive damages against insurer require increased disclosure in simple terms New York: new unfair claim settlement practice: Knowingly misrepresenting or failing to provide pertinent facts of policy provisions to claimants Accelerated timeframe for stages of litigation Prohibits insurer from denying a claim for a covered loss because an uncovered flooding event was concurrent or a contributing factor New Jersey: retroactive applicability to any claim filed on or after October 1, 2012 Successful claimant is entitled to full amounts of final judgment with interest, reasonable attorneys fees and litigation expenses

Increased litigation Increased insurance premiums as litigation costs are passed on to the consumers Decreased availability of insurance

A 1979 decision by the Supreme Court of California recognized a similar private cause of action Overruled itself in 1988, on the grounds that the rule has generated and will continue to produce inequitable results, costly multiple litigation, and unnecessary confusion. The Oregon senate introduced bills similar to those proposed in NY and NJ in early 2013 As of 2010, only four states had enacted bad faith legislation

Uninsured/underinsured motorist policies posing a problem Wadeer v. New Jersey Manufacturers Insurance Group Plaintiff insured was hit by unknown driver; carrier refused to pay Jury entered excess verdict for plaintiff, but court molded verdict to policy limits Insured sued carrier, alleging bad-faith failure to settle and seeking the excess Appellate Division reasoned: Rova Farms allowed excess damages, but theory did not apply to first-party claim, so plaintiff had no cause of action Pickett provided appropriate cause of action, but: consequential damages did not include excess jury verdicts Insured did not assert bad faith claim in initial suit, thus was barred by the entire controversy doctrine. Badiali v. New Jersey Manufacturers Insurance Group No finding of bad faith where defendant insurer rejected a binding arbitration decision and sought trial de novo Even though its argument against its liability for the arbitration award was found to be in error.

Bi-Economy: majority held that while policy excluded coverage for consequential damages, insured could recover consequential damages for breach of covenant of good faith and fair dealing from insurer K2 Investment Group, LLC v. American Guaranty & Liability Insurance Co. Insured sued for malpractice; carrier refused to defend, relying on policy exclusion. Insured tried to bring claim for bad faith failure to settle. Court of Appeals concluded that: 1. Insured failed to show that carrier knew/had reason to know claim would settle beyond policy limits 2. Insured s claim was actually for bad faith failure to defend 3. Carrier did breach its duty to defend, but to warrant an award in excess of policy limits would require the insured to show, at a minimum, that the judgment against him would not have been entered if the insurer had defended the case.

I. Notice must be prompt a. New Jersey: after reasonable opportunity to investigate or once aware of grounds for questioning coverage, carrier must promptly inform insured. i. Carrier may NOT unilaterally reserve right ii. Insured s consent required (can be implied) b. New York: Reservation of rights must be timely (e.g., 3 months after receiving notice of claim; 2 years before trial) i. MAY reserve rights unilaterally, but should obtain consent of insured

II. Content a. possible defenses/grounds for disclaiming coverage b. reference specific policy provisions c. New Jersey: must explicitly state that the insured may accept or reject the offer to defend pursuant to the reservation d. New York: in Third Department, must inform insured of its right to independent counsel (split between departments)

III. Waiver/Estoppel a. New Jersey: grounds for estoppel from denying coverage: i. Defending without reservation of rights ii. Failure to timely inform insured of its coverage position 1. Applies even if carrier did not control defense of underlying action iii. Ineffective reservation of rights (e.g., without insured s consent, without specifically notifying insured that it could accept or reject carrier s defense) iv. Conducting pre-suit investigation in manner indicating an intent to control defense 1. But actions that maintain status quo on coverage issue, such as obtaining a stay, do not indicate control of defense

b. New York: i. Carrier will be estopped from disclaiming coverage at a later date if it: 1. Knows of defense to coverage, 2. Does not disclaim liability/reserve its rights, 3. Defends claim on behalf of insured, and 4. Insured is prejudiced by carrier s actions. ii. Otherwise, specific defense not included in reservation is not waived 1. If learn additional grounds for denial of coverage, should supplement initial reservation. iii. Use of declaratory proceedings to determine coverage before trial encouraged iv. If carrier refuses to defend entirely, and does so in error, will be estopped from arguing policy exclusions at later date

IV. Reimbursement in Reservation of Rights Context a. Carrier may not reserve right to seek reimbursement for costs of defending claims that are later determined to be non-covered. (3 rd Circuit, applying PA law) b. If the carrier denies coverage of a claim, the insured may undertake defense of that claim and seek reimbursement by the carrier if it is later determined to be covered. (NJ) i. Reimbursement will be limited to a reasonable rate

V. Conflicts of Interest a. New Jersey: carrier may refuse to defend insured on claims for which it denies coverage b. New York: conflicts of interest include: i. When coverage issue may allow defense counsel to unethically steer the outcome of the case toward liability premised upon a non-covered cause of action ii. Conflicting trial strategies iii. Claims exceeding policy limits and including punitive damages iv. Reservation of rights is not per se conflict of interest

VI. Cumis Counsel a. New Jersey: no statute mandating independent counsel when carrier enters reservation of rights i. Case law does not recognize insured s right to unilaterally select counsel ii. Dicta suggests insured should select, subject to carrier s approval

b. New York: insured acquires right to select own independent counsel, to be paid for by insurance carrier, when conflict of interest exists i. Department split 1. Third Department: Elacqua v. Physicians Reciprocal Insurers: carrier, when it enters a reservation of rights, has an affirmative obligation to inform the insured of its right to have an independent defense counsel a. Failure to do so constituted unfair trade practice 2. First Department: no affirmative obligation to inform 3. Second Department: mentioned Elacqua favorably but has yet to state clearly any opinion on the issue

Osorto v. Feimer: court held carrier s cancellation of insured s policy invalid Carrier s attorney then settled case Because carrier never reserved its rights, it was estopped from denying coverage, and could not pursue an appeal aimed at canceling that coverage. Arrowood Indem. Co. v. Metallo Gasket Co. (District Court of New Jersey) March 2001: insured and carrier entered nonwaiver agreement February 2007: carrier withdrew March 2007: issued new reservation of rights one month later Court held this was sufficient to protect carrier s right to reimbursement of certain litigation costs since February 2007

Reported decisions indicate frequent use of declaratory and summary judgments to resolve coverage issues pretrial Estoppel is popular issue Even where reservation was absent or invalid, additional requirement of showing prejudice difficult for plaintiffs to meet First Department recently held that carrier s control of litigation does not inherently prejudice insured indicated would need some indication that carrier manipulated the litigation in its favor Split between First and Third Departments re: duty to notify remains unresolved

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Presented by Howard S. Shafer Shafer Glazer LLP. July 23, 2013