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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Is It Bad Faith to Delay the Pay? Federal Court in Pennsylvania Says No

Summary: Uninsured motorist filed a bad faith action against his automobile insurer for failure to pay underinsured motorist (UIM) benefits. Insurer moved for summary judgment and district court held that insurer’s delay in paying UIM benefits did not constitute bad faith.

Rossi v. Progressive Insurance, 2011 WL 1565848 (M.D.Pa. 2011)

On January 5, 2007, the insured, Rossi was involved in an automobile collision with McGroarty. Rossi was insured by Progressive, and his policy provided UIM coverage with a limit of $30,000. The insured turned his car left across on-coming traffic lanes and collided with McGroarty’s vehicle. Both liability and the insured’s damages were hotly contested, which resulted in extensive discovery. Approximately two years after being provided notice of insured’s UIM claim, Progressive forwarded a $30,000 settlement draft to the insured’s attorney. Progressive paid the $30,000 policy limits approximately one year after the insured had filed a bad faith action against it.

Under Pennsylvania law, an insurer has a duty to act in the “utmost good faith towards its insured.” Pennsylvania courts have defined bad faith as “any frivolous or unfounded or refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self interest or ill will; mere negligence or bad judgment is not bad faith.” Under Pennsylvania law, a plaintiff must prove bad faith by clear and convincing evidence.

Clearly Written Exclusion Defeats Contract and Bad Faith Claims

Summary: “Use” is an easily understood word that includes both intentional and accidental actions such that any use of an illegal drug triggered the exclusion.

Sonja Skinner v Guarantee Trust Life Insurance Company, 2011 WL 1598787 (S.D.Ohio)

In this United States District Court case the plaintiff’s husband died while insured under an accidental death and dismemberment insurance policy issued by defendant Guarantee.  The dispute was whether the husband’s death was excluded by a provision of the policy that excluded deaths resulting from taking narcotics, amphetamines or other stimulants without a prescription.  The decedent died of methadone intoxication.  He did not have a prescription for methadone but the wife did and the wife argued that her husband accidentally took the methadone pills in the middle of the night thinking it was his own prescription medication.  The plaintiff contended that the exclusion of the use of methadone only included voluntary or intentional acts of consuming and did not include the accidental use of methadone.

One Reasonable Basis for Denying Coverage Defeats Bad Faith in Iowa

Summary: Pella Corporation, an Iowa company, was a defendant in two class action cases in Illinois. Those cases alleged that Pella’s windows were defectively designed and manufactured. Liberty Mutual filed a declaratory judgment action in Iowa federal court contending it owed no coverage. The District Court ruled that Liberty Mutual had a duty to reimburse Pella’s defense costs, but denied Pella’s bad faith denial of coverage claim. The Eighth Circuit affirmed the bad faith ruling on appeal.

Liberty Mutual Insurance Co. v. Pella Corp., 650 F.3d 1161, (8th Cir. Iowa) 2011 W.L. 3611485

Pella found itself a defendant in Illinois state and federal court class action cases alleging that Pella defectively designed and manufactured windows which resulted in damage to those windows.  The plaintiffs in the underlying cases alleged multiple theories of recovery.  Liberty Mutual denied coverage, but entered into an apparent cost-sharing agreement with Pella’s pre-2001 carriers to pay portions of the defense costs.  Thereafter, it filed a declaratory judgment action contending that it had no duty to reimburse Pella.

The Eighth Circuit reviewed several arguments Liberty Mutual raised in support of its coverage denial.  The Eighth Circuit held that several of Liberty Mutual’s positions were not supported by the policy language and controlling authorities.

Being Wrong Is Okay If the Answer Is in Doubt

Summary: After plaintiff homeowners discovered significant water damage to their home, they filed a claim with their homeowner insurer, defendant Chubb, which denied the claim on the basis that it was excluded under the policy. Homeowners filed suit against Chubb in Minnesota state court. Chubb removed the case to the US District Court. After the court denied Chubb’s Motion for Summary Judgment, plaintiffs moved to amend the complaint to assert a bad faith claim under a Minnesota statute that allows such claims. The court considered the merits of the proposed bad faith claim on the basis that an amendment may be denied when it would not withstand a motion to dismiss.

Joseph and Carolyn Friedberg v Chubb and Son, Inc. (D. Minnesota F. Supp. 2d 2011 WL 3347850)

The Minnesota statute provides for a bad faith claim and allows costs and attorney’s fees.  The statute requires that the insured show two things:

  1. The absence of a reasonable basis for denying the benefits in the insurance policy; and
  2. That the insurer knew of the lack of a reasonable basis for denying benefits in the insurance policy or acted in reckless disregard of the lack of a reasonable basis to do so.

Minn. Stat. §604.18, subd 2(a).  The district court focused its analysis on the first prong of the test and analyzed whether the claim was properly investigated and whether the result of the investigation was subjected to reasonable evaluation and review.

California State Pleading Rules Don’t Govern in California Federal Court, but What About Twombly and Iqbal?

Summary: Bruce Rodgers was driving a company car when he was involved in an accident which injured his passenger.  After his passenger sued him, the defense was tendered to Greenwich which defended under a reservation of rights before filing a declaratory judgment action.  Rodgers counterclaimed for breach of contract and breach of the covenant of good faith and fair dealing and also sought punitive damages.  The plaintiff’s motions to dismiss/strike portions of the counterclaim, as well as the motion to add the injured plaintiff in the underlying case as a necessary party were ruled upon by the U. S. District Judge.  Iqbal and Twombly were cited and received lip service, but it seems like the judge followed the Conley v. Gibson rule instead.

Greenwich Insurance Company v. Rodgers, et al., 729 F.Supp.2d 1158 (C.D. California 2010)

Why the insurance company filed a motion to dismiss the breach of contract count is unclear.  It did, the counterclaim alleged the required elements, and the motion to dismiss was overruled.

Of greater importance in the bad faith world was the court’s ruling on the motion to dismiss the claim for breach of the covenant of good faith and fair dealing.  Under California law the test is “whether the insurer withheld payments of an insured’s claim unreasonably and in bad faith.”  There must be a showing of “a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party thereby depriving that party of the benefits of the agreement.”  Importantly, the District Judge noted that “bad faith” is usually a question of fact.  Because of the factual nature of the inquiry, and in light of the allegation that the insurer “withheld payments due under the insurance contract,” coupled with allegations that the insurance company “ceased paying the costs of [ ] defense without justification,” the District Judge was unwilling to grant the motion to dismiss.  Furthermore, the court rejected the insurer’s argument that the “perceived delay in paying defense costs” was insufficient for pleading bad faith by finding that the alleged delay of approximately six months “may amount to a constructive refusal.  To hold otherwise would allow insurance companies to avoid liability for improperly withholding benefits simply by ceasing payment without acknowledging their actions openly.”  Based upon that logic, the court denied the motion to dismiss the bad faith counterclaim.

Nevada Mother Lies and Loses

Summary: A Nevada mother applied for health insurance coverage on behalf of her four-year-old daughter.  About two weeks later, the daughter was seen by a doctor who diagnosed sexual precocity, made a referral to a specialist, and ordered tests and x-rays.  A week thereafter, an underwriting interview was conducted and the mother failed to reveal facts which would have resulted in the carrier refusing to write the health insurance coverage, including the diagnosis, referral to a specialist, and ordering tests.  The health insurer discovered the misrepresentations, rescinded the policy, and thereafter the parents filed suit.  The U. S. District Judge entered summary judgment in favor of the health insurance carrier on all grounds, including the bad faith claim.

David Siefers, et al. v. PacifiCare Life Assurance Company, 729 F.Supp.2d 1229

The mother of a four-year-old child prepared a health insurance application late in April 2007, signed the application, and submitted it.  That application made it clear that the failure to truthfully answer the questions could lead to a policy rescission.  It further stated that coverage was not in force until the carrier agreed to accept the risk.  The mother signed the application and submitted a deposit premium of $84.00.

About two weeks later, she took her four-year-old daughter in to see a doctor for a pre-school physical.  That doctor apparently diagnosed sexual precocity, referred the four-year-old girl to a pediatric endocrinologist and ordered lab work and a hand x-ray.  A week thereafter an underwriting assistant called and spoke with the mother and asked about the May 4 visit to the doctor.  The mother failed to respond truthfully to questions about the further testing, the treatment, and the referral.  Instead, the mother said that the child had been seen “only for her allergies” and that the child was “perfectly healthy except for allergies.”  Four days later, the insurance company issued the health policy.

Almost Getting It Right Does Not Foreclose a Bad Faith Suit in Colorado

Summary: American Family insured the Dunns who had sewer and water backup flooding in their basement.  That flooding led to a mold build up and them vacating the house.  The vacant and unheated house during a Colorado winter resulted in water pipes freezing and breaking.  Despite a payment of the full policy limits, the Dunns had the right to pursue a bad faith claim for allegedly bad faith conduct due to delays and the manner in which American Family adjusted the claim.

Michael Dunn v. American Family Insurance, 251 P.3d 1232 (Colo.Ct.App. 2010)

The Dunns had a string of bad luck which began with a sewer backup in their basement. Their property and casualty insurer, American Family, provided the Dunns with contact information for a remediation company, Insurance Contractors and Associates (ICA). Unfortunately, ICA did not succeed in its task and black mold was detected near the furnace. Thereafter, the plaintiffs left their home. After ICA’s remediation attempts failed, the Dunns hired a second, then a third, and then a fourth contractor to finish the work on their house. The house was vacant during the winter months, which resulted in the water pipes breaking. All during this time the mold continued to spread, which caused the Dunns to replace all of the contents in the home. American Family ended up paying approximately $340,000 to the Dunns. The Dunns were not satisfied with this payment and filed suit against American Family alleging a bad faith breach of their insurance contract.

Court Finds No Bad Faith Due to Bona Fide Dispute Over Coverage for Wind Damaged Roof

Summary: The District Court granted partial summary judgment in favor of insurer on bad faith claim regarding roof damage. The District Court found there was a bona fide dispute whether coverage applied, but that the insurer had not acted in bad faith by relying on its experts’ reports which concluded that the damage was not caused by Hurricane Ike.

Lee v. Catlin Specialty Insurance Company, 766 F.Supp.2d 812 (S.D. Tx. 2011)

Insured plaintiff owned a commercial shopping center and purchased a commercial property insurance policy from defendant insurer.  The policy provided coverage up to $1.7 million for wind damage with a $36,000 deductable.  Insured submitted a loss notice claiming that the roof of the shopping center sustained damage caused by Hurricane Ike.

The loss was submitted on September 24, 2008, approximately 10 days after the loss was allegedly sustained.  On September 25, 2008, insurer acknowledged receipt of the claim and it retained an independent private adjuster to adjust the claim.  The independent adjuster attempted to contact the insured several times by telephone between September 26 and October 2, 2008, to arrange for an inspection.  On November 9, 2008, the adjuster sent the insured a letter to schedule a time to inspect the property.

Wow! Wisconsin Supreme Court “Needlessly Alters the Well Established [Bad Faith] Law and Creates… New Pleading Requirements and Uncertain Procedures That are Unnecessary and Confusing.” (Bradley, J.)

Summary: Allstate insured Wanda Brethorst was injured while a passenger in the car her husband was driving. The Allstate policy provided both medpay and uninsured motorist coverages. Allstate paid her medical expenses up to the $5,000.00 medpay limit and offered to pay a small portion of the remaining $4,789.00 in medical expenses to settle the UM claim. She rejected the offer to settle the UM claim for roughly 37 percent of her unpaid medical expenses and filed a bad faith claim. The case was before the Supreme Court of Wisconsin on an interlocutory appeal to decide if Wisconsin law allowed her to proceed with a stand alone bad faith claim. In two separate opinions, the court unanimously agreed that she could.

Brethorst v. Allstate Property & Casualty Insurance Company, 798 N.W.2d 467 (WI 2011)

The facts of the case are pretty straightforward.  An uninsured drunk driver hit the Brethorst car causing minor property damage, but Ms Brethorst incurred medical bills approaching $10,000.00 and her treatment extended over several months instead of the several weeks Allstate anticipated.  Allstate first offered Brethorst $1,500.00 to settle the UM claim, followed by an offer to settle for $1,800.00.  The offers were rejected and about 13 months after the accident, Brethorst a stand alone bad faith case alleging that Allstate “had adopted a companywide policy of routinely offering ‘substantially less than the medical bills incurred’ in an accident where MIST [minor impact soft tissue] injuries were involved.”  She also alleged that the bad faith was shown by Allstate’s failures to “conduct a full and fair investigation,” to “have her claim evaluated by anyone with medical training,” and by “ignoring both the medical opinion of the [the insured’s treating doctor] and the law of Wisconsin governing the liability for medical bills and expenses.”  Allstate admitted its MIST policy and filed a motion to bifurcate an unfiled breach of contract claim from her filed bad faith claim and to stay the bad faith proceedings until the unfiled UM claim was resolved.  The trial judge agreed with Brethorst’s argument that there was nothing to bifurcate since only a bad faith claim had been filed.  Even so, the trial judge thought it wise to resolve those issues by certifying questions to a higher court.  Likewise, the court of appeals wanted the Wisconsin Supreme Court to decide the questions.

Scottsdale Insurance Has No Coverage or Bad Faith Exposure for Painless Steel’s Painful Body Piercing Activity

Summary: A Painless Steel customer was injured due to a body piercing. The co-owners of Painless Steel had foregone the expense of insuring it so the commercial liability insurer for one of the individual owners had no duty to defend or indemnify the LLC and had no bad faith exposure.

Burns v. Scottsdale Insurance Company, No. C08-1136RSL (W.D. Wa. 7/23/2010) aff’d, slip op. no. 10-35702 (9th Cir. 5/26/2011)

Lacey Filosa went to Painless Steel and had her tongue pierced. Unfortunately, an infection developed involving a “flesh eating” bacteria. Filosa recovered from the infection, but suffered significant scarring. She filed suit in state court against Painless Steel and its two owners, Mr. and Mrs. Burns, and then settled. After the underlying suit settled, a coverage action was filed in which the underlying plaintiff and the named insured sought coverage declarations, as well as bad faith recoveries.

Scottsdale Insurance insured Mr. Burns as an individual on a policy which provided commercial general liability and commercial property coverage for his property rental business. The policy’s description of “Who Is An Insured” did not seem to provide coverage for Painless Steel-Everett LLC and contained a professional service exclusion, as well as an exclusion “related to fungi or bacteria.”

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