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.
Summary: Fifth Circuit finds there was no evidence to support insureds’ claim for extra-contractual statutory penalties based on mental anguish and lost wages. Also, Fifth Circuit finds insurer acted in good faith and timely in adjusting insureds’ contents damage claim.
Homeowner insureds French and Sutter sued Allstate to recover additional insurance payments for damages to their home resulting from Hurricane Katrina. The insureds also sought statutory penalties and costs under Louisiana law. After a bench trial, the District Court awarded the insureds additional insurance payments as well as statutory penalties. This blog entry will only discuss the extra contractual damages awarded to the insureds.
The insured’s sought statutory damages for mental anguish and lost wages. However, the District Court concluded the insureds had not presented sufficient evidence to recover such damages. Under the Louisiana statute, insurers have a duty of good faith and fair dealing which includes an obligation to adjust claims fairly and promptly. While general damages for mental anguish may be awarded under the Louisiana statute, a plaintiff is not entitled to such damages absent showing sufficient proof of mental anguish. While the insureds testified they experienced emotional and physical stress since Hurricane Katrina, they presented little evidence that Allstate’s adjustment of their claim was the cause of their stress. Likewise, one of the insureds testified he had been unemployed since Hurricane Katrina, but stated his job loss was directly attributable to Hurricane Katrina’s physical destruction in New Orleans. Therefore, the Fifth Circuit concluded that the District Court did not err in denying statutory damages for lost wages and mental anguish.
SUMMARY: California appeals court finds insurer breached its duty of good faith and fair dealing when it pursued a subrogation action against a tortfeasor to recover the cost of repairs after the insured had not authorized repairs or pursuit of the subrogation action.
Hibbs v. Allstate Insurance Company. 2011 WL 1485623 (Cal.App. 2 Dist.))
The Hibbs’ vehicle, which was insured by Allstate, was damaged when it was struck by Brooks. Hibbs towed the vehicle to a body shop and contacted Allstate. The Hibbs informed Allstate’s claims adjuster that they believed the vehicle was a total loss. The Hibbs also told the adjuster that if the vehicle was repaired they would refuse to pick it up from the body shop. When the adjuster contacted the body shop, she was informed by the body shop that Ms. Hibbs had previously authorized the repairs, which were now substantially complete. The total for the repairs was $6,200. Allstate paid $5,700 directly to the body shop, which took into account the $500 deductible, Allstate then eventually recovered $6,200 from Brook’s insurer in a subrogation action. Allstate sent a $500 check to the Hibbs for the deductible, which they never cashed.
The Hibbs filed a lawsuit against Allstate alleging breach of contract and breach of covenant of good faith and fair dealing. Allstate moved for summary judgment, which was granted.
Summary: Insured owners of a shopping mall brought a fraud claim against CGL Insurer after the insurer denied coverage and filed a declaratory judgment suit in which they aggressively went after the insured.
General Ins. Co. of America (“GICA”) filed a declaratory judgment action against its insured Clark Mall Corporation (“Clark”). Clark then brought a counterclaim for fraud against GICA alleging that GICA issued the property insurance policy but had no intention of honoring it. GICA moved to dismiss the fraud claim alleging that under holding of the US Supreme Court case of Bell Atlantic Corp. v Twombley, 127 S.Ct. 1955 (2009), the claim did not contain sufficient factual matter to state a claim for relief. The court denied the motion and pointed out that the complaint outlined a series of acts that were allegedly designed to effectuate an overarching scheme to collect premiums without having to pay claims. The claimed acts included, multiple document requests that covered not only the mall where the fire occurred, but other business interests of the defendant, discovery directed at the defendant’s accountants, days of depositions of an officer of the insured, a failure of GICA to respond to inquiries about the progress of their claim, and the passing of a year and a half without any determination of the defendants claim. The court described GICA’s claimed conduct as giving the insured the proverbial “run around.” GICA also attacked the counterclaim as implausible because it did not allege a motive for GICA. The court disagreed that a motive must be pleaded. The court went on to say that in a case such as this the motive is obvious, i.e. profit.
The fire department concluded that the fire’s cause was electrical. State Farm’s fire investigator, backed up by an engineer and a forensic lab, concluded that the fire was intentionally set. Before a jury ruled who was right, the Iowa federal judge ruled that State Farm’s claim denial was objectively and subjectively reasonable and granted partial summary judgment in favor of State Farm.
This win for the good guys is recorded in Morse v. State Farm Fire & Casualty Company, 733 F.Supp.2d 1065 (S.D. Iowa 2010). The Morse single-family residence in Guthrie Center, Iowa was destroyed by an early morning fire. The homeowners were not at home and, at first, it seemed that they had left early that morning for legitimate reasons. However, a closer look at the facts by the adjuster raised multiple “red flags” which led to a Special Investigations Unit (SIU) referral. After a cause and origin investigation showed that the fire had been intentionally set, the SIU-led background investigation showed that the insureds had both the opportunity and “a strong financial motive” to burn their house and collect the insurance proceeds. After a thorough review, State Farm denied the claim. Predictably, the insureds filed a complaint alleging both a breach of contract and a “bad faith denial of their coverage claim.”. State Farm responded with a motion for partial summary judgment on the bad faith denial of coverage claim.
An Illinois Appellate Court recently upheld summary judgment in favor of an insurer on the insured’s vexatious refusal to settle claim. The insured driver, Wanda Norton, was involved in a vehicle collision with Karyn Patterson. Norton was insured by West Bend and Patterson was insured by American Family. Norton hired counsel and filed suit against Patterson. Norton’s counsel sent a demand letter to American Family to settle for approximately $18,000. In response, American Family offered to settle Norton’s claim for $7,800. Norton rejected the settlement offer and filed suit.
Norton’s counsel did not inform either American Family or West Bend of the filing of suit against Patterson. Eventually, a default judgment was entered against Patterson, and counsel for Norton did not inform American Family of the default judgment until 90 days after it was entered. As a result of the late notice, American Family denied coverage. After American Family denied coverage, Norton’s counsel contacted West Bend asserting an uninsured motorist claim. West Bend maintained the only reason Patterson was “uninsured” was because Norton had failed to notify American Family of the lawsuit and judgment. Therefore, West Bend requested that Norton’s counsel take steps to vacate the default judgment so West Bend could pursue its subrogation rights under the policy against American Family. Norton’s counsel refused to vacate the judgment against Patterson and, instead, filed suit against West Bend seeking payment pursuant to the uninsured motorist provision of the West Bend policy. The Court ordered the suit to arbitration pursuant to an arbitration provision in the West Bend policy.
Summary: It is a question of fact as to whether an insurer who has a duty to investigate is guilty of bad faith when it asks insured to tell it if facts change such that it is exposed.
Gordon Trucking operated a vehicle that was involved in a serious accident. Another vehicle crossed the center line hitting the Gordon vehicle and then the injured plaintiff’s vehicle. Gordon Trucking had the following coverages:
|CARRIER||AMOUNT OF COVERAGE|
|Great West Casualty||$5,000,000.00 After $500,000 Deductible|
|American International Specialty Lines Insurance Company (AISLIC)||$20,000,000|
Gordon Trucking notified all three carriers of the claim and both Great West and AISLIC had counsel who participated in the trial. Columbia was unaware of the trial. At the trial, the company that operated the truck that crossed the center line settled out and the case went to verdict against Gordon Trucking and its driver and the driver of the other truck. During jury deliberations, Gordon Trucking negotiated a $1,000,000 – $18,000,000 high/low agreement. (Apparently, the damning evidence in the case against Gordon Trucking was that its driver was on his cell phone at the time of the accident.) Gordon Trucking was found 35% at fault and the verdict was $49,000,000. Under California law the ultimate liability of Gordon Trucking “after credits and allocations” was $31,000,000 but was limited by the agreement to $18,000,000.
Summary: Carrier’s diligent attempts to settle after it received a time sensitive policy limit demand demonstrated that it was not acting in bad faith. Plaintiff’s counsel refused to discuss the settlement contained in an overly technical and conditional demand letter while the carrier promptly acted (but failed) to achieve a settlement protecting its insured and did not act solely based on its own best interest.
In Cardenas v. Geico Casualty Co., 2011 WL111588 (No. 8:09-CV-2357-T-23, January 13, 2011), the U.S. District Court for the Middle District of Florida held the carrier (Geico) did not act solely in its own interests in attempting to settle a negligence claim against its insured. The case is interesting because the carrier went to great lengths attempting to settle the claim within the policy limits, it failed to obtain a settlement on behalf of its insured. Moreover, there was evidence that the carrier did not meet certain technical conditions imposed by the plaintiff’s counsel in his the time sensitive policy limits demand letter. Because the suit did not settle, an excess judgment was entered against the insured in the amount of $970,019, nearly 100 times greater than the per person bodily injury policy limit ($10,000 per person/$20,000 per occurrence).
Summary: The Seventh Circuit held an insurer, who controlled the defense of a lawsuit, had a duty of good faith to notify its insured of the “non-trivial probability” of a judgment in excess of the policy limit.
Imagine this scenario. During his deposition plaintiff testifies extensively regarding a back injury which required a lumbar fusion as well as the substantial pain and suffering he has experienced for several years, and his inability to return to work as a construction worker. Shortly thereafter, plaintiff makes a written demand for $6,000,000. The policy limit is $1,000,000. The insurance company has hired defense counsel who has been defending the lawsuit for over two years at the time the demand is made. The insured does not have separate counsel. What should the carrier do once it is notified of the demand well in excess of the $1,000,000 policy limit?
According to the Seventh Circuit in R.G. Wegman Construction Company the Admiral Insurance Company, et al., No. 09-2022 (7th Cir. January 14, 2011) the carrier, pursuant to Illinois law, had a duty of good faith to inform the insured of a potential verdict in excess of the policy limit and advise there is a potential conflict of interest. Judge Posner declared the “the insurance company can satisfy its duty of good faith at the price of a phone call.”