The nation’s premier blog focused exclusively on claims of bad faith and extra contractual damages, the Bad Faith Blog discusses current issues and highlights best practices in an increasingly complex area of law.

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So Which Rule Applies? Wisconsin Supreme Court Justices Disagree in a Split Decision

Summary: A Wisconsin high school discharged an employee who then sued. The school district’s insurer defended the case through an adverse summary judgment, but refused to indemnify the school district for an adverse judgment even though it had never sent a reservation of rights letter. The majority ruled that the doctrines of waiver or estoppel were insufficient “to defeat… a coverage clause in an insurance contract that would otherwise justify the insurer’s denial of coverage.” The Maxwell case is primarily a coverage opinion which declares how and when the estoppel and waiver doctrines apply in state courts in Wisconsin. Because of its brief discussion of Wisconsin bad faith law it merits attention in our blog.

Maxwell v. Hartford Union High School District, 2012 WL 1937109 (Wis. May 30, 2012)

Dawn Maxwell was employed by the Hartford Union High School District from 2000 until her employment was terminated on August 31, 2007. The day before she was to be terminated, a complaint was filed seeking injunctive, declaratory, and monetary relief. Initially, the school district was defended by its general counsel, but shortly thereafter its insurance carrier, Community Insurance Corporation, retained counsel to enter an appearance and defend. The extent to which the general counsel remained involved is unclear, although it appears that he was at least indirectly involved (and was an attorney of record for the school district) until an adverse summary judgment was made against the school district, but before Maxwell was awarded compensatory damages.

Shortly after he withdrew, the general counsel sent an e-mail to defense counsel, the school district superintendent, and an insurance company representative to “make one point perfectly clear:” that the insurance company’s provision of a defense to the school district without sending a reservation of rights prevented the insurance company from denying “coverage for any compensatory damages that might be awarded.” (*3) The insurer’s representative responded shortly thereafter informing the general counsel that the insurer “was not liable for any judgment for damages due under Maxwell’s performance contract or any settlement for lost wages or lost benefits.” In addition, the insurance company stated that it would continue to defend the district, but stated that it would not be liable for any damages excluded from coverage in the policy. After the compensatory damages were awarded, the school district’s general counsel filed a motion for leave to file a third-party complaint to address the coverage issues.

There is No First Party Common Law Bad Faith Cause of Action Declares Florida Supreme Court

Summary: Hurricane Wilma caused over $7,000,000 of damage to the Chalfonte Condominium complex in 2005. The property damage, subject to a substantial hurricane deductible, was covered, but the condominium association was not entitled to more than $270,000 for “breach of the implied warranty of good faith and fair dealing” which had been awarded by a federal court jury.

QBE Insurance Corporation v. Chalfonte Condominium Apartment Association, Inc., Slip Opinion No. SC09-441, May 31, 2012 (Supreme Court of Florida)

Hurricane Wilma struck Boca Raton, Florida on October 24, 2005 and significantly damaged Chalfonte Condominium Apartment Association property.  QBE Insurance had issued an insurance policy for the calendar year beginning January 1, 2005.  The condominium association presented its damage estimate about two months after the loss and then submitted its Sworn Statement in Proof of Loss about nine months after the loss.  When Chalfonte became dissatisfied with QBE’s handling of the case, it filed suit in federal court.  The counts were for declaratory judgment, a failure to provide coverage breach of contract, a breach of the implied warranty of good faith and fair dealing, breach of contract, and violation of a Florida statute imposing notice requirements when an insurer limited hurricane coverage.

The court dismissed the statutory violation count holding that it did not provide a private right of action.  The jury awarded more than $7.8 million on the coverage claims and over $270,000 for breach of the implied warranty of good faith and fair dealing.  After post-trial motions, the judgment was amended to enforce the hurricane deductible reducing the award by approximately $1.6 million.  The court amended the judgment despite a jury finding that the QBE policy failed to comply with the hurricane deductible statutory requirements.  Chalfonte had also moved to amend the final judgment to allow for pre-judgment interest.  The court granted that motion allowing both pre-judgment and post-judgment interest.  Thereafter, QBE appealed to the Eleventh Circuit Court of Appeals.

Million-Dollar Defense Nets $295 Verdict … and That’s the Insurer’s Potential Problem

Summary: A 1996 Jeep Grand Cherokee owned by Daniel and Sheryl Berg sustained heavy damage in an accident. The Bergs took their vehicle to a dealer participating in their automobile insurer’s “Blue Ribbon Repair Service Program.” According to the Bergs, although the appraiser concluded the Jeep’s frame could not be repaired because it was “too twisted,” the insurer “reversed” the appraisal and sent the Jeep to another repair shop to attempt repairs over the next four months.

Berg v. Nationwide Mut. Ins. Co., Inc., – A.3d –, 2012 WL 1313055 (Pa. Super. Apr. 17, 2012)

Ten months later the Bergs got a phone call from one of the dealer’s former employees, who told the Bergs of possible structural failures during repairs. The Bergs then filed suit against the insurer and dealer under several theories, including violation of the Uniform Trade Practices and Consumer Protection Law (UTPCPL) and Pennsylvania’s bad faith statute.

The trial court bifurcated the trial, saving the bad faith allegations for the second phase. In the first phase, a jury returned a verdict on the UTPCPL claim against the insurer for $295, and against the dealer for $1925. The dealer paid the verdict before the second phase began, and was dismissed from the case. The insurer fought the bad faith claim and won a directed verdict in the Common Pleas Court. After a trip to the Superior Court (which affirmed) and then up to the Supreme Court of Pennsylvania (which reversed and remanded (see 6 A.3d 1006)), the Superior Court vacated and remanded for a new trial on the bad faith claim. Berg v. Nationwide Mut. Ins. Co., Inc., – A.3d –, 2012 WL 1313055 (Pa. Super. Apr. 17, 2012).

Instead of looking at the procedural issues addressed, let’s examine why the trial and appellate courts disagreed so greatly on the bad faith claim. Then we’ll look at whether there are some lessons to be learned from this case.

A $1.275 Million Ouch? What Can Happen When an Omnibus Insured Slips Through the Fingers of Allstate’s Good Hands

Summary: Hamiti borrowed Skenderi’s truck and hit motorcyclist Kirk resulting in a leg amputation. Allstate, Skenderi’s insurer, failed to obtain a release for Hamiti when it settled on behalf of Skenderi for Allstate’s policy limits. The Appellate Court in Illinois reversed and remanded the trial court’s award of partial summary judgment in favor of Allstate.

Steven Thomas Kirk v. Allstate Insurance Company, 2012 Ill.App. (5th) 100573

Enver Hamiti ran a stop sign while driving Lindsey Skenderi’s automobile, hit Steven Kirk, who was riding a motorcycle, and injured Kirk to the point that his leg was amputated. Allstate insured Skenderi’s car for $100,000 per person and Mercury Insurance provided liability coverage to Hamiti for $50,000 per person.

Skenderi lived in one location, but Hamiti lived a few miles away in a different Madison County, Illinois community. Even though Hamiti told Allstate that his address was not the same as Skenderi’s, Allstate continued to send all letters intended for Hamiti to Skenderi’s home for almost two years.

The badly injured Kirk retained counsel who made a policy limits demand to both insurers and notified Allstate that her client’s medical bills exceeded $100,000. Although the Allstate adjuster advised the Allstate named insured that this was an excess case, and that she might want to hire her own attorney, Hamiti did not receive such a letter. The Allstate adjuster met with his supervisor because of the excess nature of the case. The supervisor instructed, in part, to “not issue payment until we can secure a release….” After the Allstate adjuster agreed to pay the policy limits to the Plaintiff- Kirk, that adjuster was advised that Plaintiff was going to sue both the named insured and Hamiti, but thereafter agreed to settle. Plaintiff’s attorney advised the Allstate adjuster that the release language had to be changed to include only Allstate’s “insureds.” The adjuster obliged by taking the omnibus insured’s name off of the release. A few months later the Plaintiff signed the release which had excluded Hamiti. Thereafter, there was a trial against Hamiti which resulted in a jury verdict against him for $1.375 million. The trial court set off the $100,000 previously paid by Allstate and reduced the excess verdict to $1.275 million.

Insured’s Bad Faith Suit Goes Up in Smoke in California

Summary: A homeowner’s insured brought an action against the insurer for breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted summary judgment for the insurer. On appeal, the appellate court held that the police officers’ seizure of insured’s marijuana was not a covered “theft” and insurer did not commit bad faith in failing to wait for the outcome of criminal proceedings before denying coverage.

Barnett v. State Farm General Insurance Company, 132 Cal. Rptr. 3d 742

The insured argued the trial court erred in concluding a police seizure of items pursuant to a search warrant did not constitute a “theft” within the policy terms. The items seized included 12 seven-foot tall marijuana plants, freezer bags containing approximately 5 ounces of marijuana and a tray with loose marijuana and rolling paper, which the insured used for medicinal purposes.

The prosecutor did not file charges against the insured until almost six months after the search. In the interim, the insured filed a claim with his insurer. The insured included an appraisal of $98,000 for the items seized. The insurer initially denied the claim but then re-opened for consideration.

Kentucky Court Finds Insurer Did Not Commit Bad Faith in Delaying UM Benefit Payment Until Medicare Lien Was Determined

Summary: Claimant brought action against automobile insurer alleging insurer acted in bad faith for delaying payment of his claim for uninsured motorist (UM) benefits until determining the exact amount of the Medicare lien. The appellate court held the insurer did not act in bad faith by waiting to determine the amount of the Medicare lien before paying the UM benefits.

Wilson v. State Farm Mutual Automobile Insurance Company, 795 F. Supp. 2d 604

The claimant was a passenger in a vehicle insured by State Farm when it was involved in a collision with another vehicle. The driver of the other vehicle was at fault and uninsured. As a result of the accident, claimant had significant medical bills, some of which were paid by Medicare. The insurer agreed that claimant was due uninsured benefits up to the policy limits of $50,000.

The insurer attempted to determine the value of Medicare’s lien and asked for permission to discuss the lien with Medicare. The claimant refused the request and instead asked the insurer to deposit the full policy limits into an escrow account from which the Medicare lien would be paid. The claimant agreed to hold the insurer harmless from any claim by Medicare; however, Medicare was not involved in and not bound by this agreement. As an alternative, the insurer suggested including Medicare as a payee on the settlement check. Claimant also rejected this request. Finally, the insurer decided to await Medicare’s determination of the value of the lien and then issue separate checks to Medicare and plaintiff.

This Policy’s Ambiguous, So Let’s Have a Trial. On Second Thought …

Summary: A severe flood struck Cedar Rapids, Iowa in 2008, damaging the insured’s manufacturing facility and impacting its business operations, leading to claims of property damages exceeding $35 million and business interruption losses exceeding $26 million. Two insurers equally shared responsibility for payment of claims under the same insurance policy. They paid only $20 million, contending the policy’s flood sublimits had been reached. The insured then filed a first-party claim for breach of contract and bad faith. After the insured rested its case at trial, the U.S. District Court for the Northern District of Iowa directed a verdict against the insured on the bad faith claim. Then after the insurers rested their case, they won a directed verdict on the breach of contract claim. The Eighth Circuit affirmed.

Penford Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 662 F.3d 497 (8th Cir. 2011)

The insured, a producer of starch for the paper industry and gasoline-additive ethanol, had a plant sitting on a 29-acre parcel occupying three different flood zones designated A, B, and C. In 2008, the insured bought flood insurance from the National Flood Insurance Program and additional insurance from the two insurers. Though losses of up to $300 million were covered under the policy, specific sublimits capped the insurers’ exposure depending upon the specific peril. The flood peril sublimit was $50 million “per occurrence and annual aggregate,” which was further limited by specific flood zone sublimits for the insured’s plant: $10 million in Zone A and $10 million in Zone B.

On June 13, 2008, the Cedar River breached a dike system surrounding the plant, eventually cresting 12 feet higher than the previous record set in the 1920s. The flood extensively damaged the insured’s plant and shut down operations. In the following months, the insured and its insurers disagreed regarding what losses were subject to the flood sublimits, whether payments were made timely, and how much was due under the policy.

Eighth Circuit Finds No Bad Faith by Primary Insurer Under Missouri Law in Insurer Versus Insurer Dispute

Summary: This case is a dispute between an excess and primary insurer, both of whom insured a trucking company whose tractor trailer was involved in a fatal traffic accident. The parties injured in the accident sued the trucking company and obtained a jury verdict, which exposed the excess carrier to a $17 million liability. The excess carrier sued the primary carrier alleging bad faith for failing to settle the underlying claim within the policy limits. The district court granted primary insurer’s Motion for Summary Judgment and the Eighth Circuit affirmed.

American Guarantee and Liability Insurance Company v. United States Fidelity & Guaranty Company; TIG Insurance Company, Eighth Circuit (No.-10-2275)

The primary insurer insured the trucking company under a policy with limits of $5 million. The primary policy was a fronting policy. Fronting policies are policies in which the insured’s deductible is equal to the policy limits. A fronting policy protects the public in the event the insured entity becomes insolvent. These policies are frequently used by trucking companies to stay self insured while still complying with the financial responsibility laws in the state in which they operate. In this case, the insured agreed to indemnify the primary insurer in the event the primary insurer paid any amounts payable under the policy. The insured secured its indemnity obligation with $187 million in collateral which could be drawn upon in the event that the insured became insolvent or bankrupt, which is what happened.

What a Mess! — Insurer Has No Right to Jury Trial to Determine if Settlement Between Its Insured and Claimant Was Reasonable

Summary: After the insurer denied a settlement demand for the $2 million policy limits, the insured, a plumbing contractor, and the land owner plaintiff (“claimant”) reached a settlement agreement for approximately $3.75 million. The trial court judge determined that the settlement was reasonable. The insurer appealed arguing it had a right to a jury trial on the issues of reasonableness and that the reasonableness finding was supported by substantial evidence. The appeals court affirmed.

Bird v. Farmers Insurance Exchange, 260 P.3d 209 (Wash.App. 2011)

The claimant’s next door neighbor contacted the insured, a plumbing contractor, to repair a leaking sewer line. The insured’s employee, without claimant’s consent, went on to claimant’s property and cut claimant’s pressured sewer line. When the claimant returned home from work, his system cycled on and engulfed him in an explosion of sewage, which caused him to fall and crack his elbow. The claimant later learned that the insured’s employee had cut the sewer line and he demanded that the insured fix the line. The insured attempted to repair the line.  However, over the next 8 months, sewage continued to escape from the line and to cause extensive damage to the residence. The claimant then removed contaminated soil from his lot.  The claimant attributed his subsequent heart attack to the physical labor undertaken during the soil removal. Moreover, to determine the full extent of the damage, the claimant hired a geotechnical engineering firm, contractors, and others. Eventually, a retaining wall estimated to cost approximately $850,000 had to be installed due to instability problems in the hillside water-front property.

Evidence Suggesting Substandard Claims Handling Supports South Dakota Statutory Vexatious Awards

Summary: Cindy Tripp and Andrea Bjornestad suffered injuries in separate car accidents. Each settled with the at-fault driver and then sought underinsured motorist benefits from their own insurance companies each of which offered to settle for less than the UIM limits and less than the value placed on the UIM claim by the company’s adjustor. After separate juries denied the tort-based bad faith claims, separate district court judges ruled that the carrier’s refusal to pay the amount demanded by the insured was “vexatious or without reasonable cause” and awarded statutory attorney fees. The Eighth Circuit affirmed.

Tripp v. W. Nat’l Mut. Ins. Co., #10-3759 (8th Cir. Dec. 29, 2011)
Bjornestad v. Progressive N. Ins. Co., #10-3733 (8th Cir. Dec. 29, 2011)

Cindy Tripp was involved in a car accident against an underinsured motorist. After pursuing her claim against the UIM, she notified her insurance company that she would be presenting a UIM claim. She had $250,000 UIM coverage with Western National Mutual Insurance Company (Western National) but sought UIM payments of $150,000. The tortfeasor’s insurance company settled with Tripp for $87,500 of the $100,000 liability limit. Under South Dakota law that was deemed the “best settlement” which could be reached and was all that was necessary in order to preserve her UIM claim. Because Tripp and Western National stipulated that that was the best settlement offer, Western National got credit for the tortfeasor’s full $100,000 liability limit reducing Tripp’s UIM claim to the balance of her UIM limits, $150,000. Western National offered only $10,000.

Thereafter she filed breach of contract and bad faith claims. The jury awarded her the full amount she sought, the $150,000 balance left on her UIM coverage. However, the jury verdict was in favor of Western National on the first party common law bad faith claim. Even so, the U.S. district judge awarded attorney’s fees to Tripp in the amount of $65,000 after finding that Western National’s failure to pay the $150,000 was vexatious or without reasonable cause within the meaning of South Dakota’s statute, S.D. Codified Laws § 58-12-3.

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