Archive for the ‘Bad Faith’ Category

Washington Bad Faith Law At A Glance – Third Edition

Tuesday, September 12th, 2017

By: Bob Meyers

Washington state can be a difficult jurisdiction for insurers. To help insurers avoid or mitigate their extra-contractual exposure, Sedgwick’s Bob Meyers published the Third Edition of Washington Bad Faith Law At A Glance, arguably the seminal and most comprehensive resource on Washington insurance bad faith law. In his paper, Bob Meyers cites notable Washington authorities relating to common law bad faith, the Consumer Protection Act and the Insurance Fair Conduct Act. For insurers’ ease of reference, he also includes excerpts from notable Washington insurance statutes and regulations.

In the Third Edition, Bob Meyers addresses several recent developments about which any insurer with exposure in Washington should be aware, including the Washington Supreme Court’s conclusion that a regulatory violation is not independently actionable under the Insurance Fair Conduct Act; the Ninth Circuit Court of Appeals’ conclusion that an insured under a liability insurance policy is not a “first party claimant” with a right of action under the Insurance Fair Conduct Act; a Washington Court of Appeals’ reaffirmation that an insurer generally has the right to select defense counsel; a federal judge’s reaffirmation that estoppel cannot be used to create insurance coverage that never existed; and a Washington Court of Appeals’ conclusion that an insured may assert a bad faith claim against an insurer’s claim adjuster. He also discusses recently filed Washington cases that address an insured’s burden of proving bad faith, the presumption of harm, coverage by estoppel, privilege and work product issues and damage issues.

To view the white paper, click here.

Washington Bad Faith Law at a Glance

Thursday, September 10th, 2015

By Bob Meyers, Sedgwick Seattle

Sedgwick Seattle partner Bob Meyers has authored a white paper, Washington Bad Faith Law At A Glance, which discusses bad faith law in Washington state. Noting that Washington state can be a difficult jurisdiction for insurers, and their duties of care are sometimes interpreted or applied quite broadly, Meyers cites notable Washington authorities relating to common law bad faith, the Consumer Protection Act, and the Insurance Fair Conduct Act. For ease of reference, he also includes excerpts from notable Washington insurance statutes and regulations.

Bob Meyers has extensive experience representing U.S. and international insurers in complex, high-value insurance matters, including advising clients about their rights and obligations under insurance policies, bad faith law, and insurance statutes and regulations, and representing insurers in disputes and lawsuits.

Colorado Supreme Court Holds that the Notice-Prejudice Rule Does Not Apply to Date-Certain Notice Requirement in Claims-Made Policies

Wednesday, February 25th, 2015

By Eryk Gettel, Sedgwick San Francisco

Like many jurisdictions, Colorado’s notice-prejudice rule generally provides that an insured who fails to provide timely notice of a claim does not lose policy benefits unless the insurer establishes that the late notice prejudiced its interests.  Friedland v. Tranvers Indem. Co., 105 P.3d 639, 643 (Colo. 2005).  In Craft v. Philadelphia Indemnity Insurance Co., 2015 WL 658785 (Colo. Feb. 17, 2015), the Colorado Supreme Court held that this rule does not apply to date-certain notice requirements in claims-made policies.

Dean Craft was the principal shareholder and president of Campbell’s C-Ment Contracting, Inc. (CCCI).  Craft agreed to sell a portion of his CCCI shares to Suburban Acquisition Company (Suburban), and later sold his remaining shares back to CCCI.  Suburban and CCCI sued Craft for alleged misrepresentations and fraud regarding the stock sales.

At the time he was sued, Craft was unaware that CCCI had purchased a D&O policy from Philadelphia Indemnity Insurance Company (Philadelphia).  The policy required the insured to notify Philadelphia “as soon as practicable” after becoming aware of a claim, but “not later than 60 days” after the policy period expired.  The policy period was November 1, 2009 to November 1, 2010.  Craft did not report the matter to Philadelphia until March 2012 (more than one year after the policy had expired), and settled the underlying litigation in June 2012.  Philadelphia ultimately denied coverage for Craft’s legal fees and the underlying settlement because Craft had not complied with the policy’s notice provision.

Craft sued Philadelphia in Colorado State Court for breach of contract, breach of the implied covenant of good faith and fair dealing, and statutory violations.  Philadelphia removed the case to federal district court, and then successfully moved to dismiss the coverage action on the basis that Craft did not notify Philadelphia of the claim within 60 days of the policy’s expiration date.  After appealing the district court’s decision, the Tenth Circuit certified the following questions to the Colorado Supreme Court:  (1) whether the notice-prejudice rule applies to claims-made liability policies as a general matter; and (2) whether the rule applies to one or both types of notice provisions in claims-made policies.  Because the parties agreed that the prompt notice requirement was not at issue, the Colorado Supreme Court limited its analysis to the issue of whether the notice-prejudice rule applies to a claims-made policy’s date-certain requirement.  The court answered the question in the negative.

The court first explained how “occurrence” and “claims-made” policies differ in terms of the coverage they provide.  Whereas occurrence policies (like the policy in Friedman)provide coverage for injuries or damage that occur during the policy term regardless of when the claim is actually made, claims-made policies (like the policy in Craft) only provide coverage if the claim is made during the policy period or any applicable extended reporting period.  The court further explained that this conceptual difference is critical to the risks that insurers undertake and the premiums that insureds pay.  With a claims-made policy, the risk to the insurer passes when the policy expires.  Thus, the date-certain requirement in a claims-made policy is a fundamental policy term because it defines the temporal boundaries of the policy’s basic coverage terms.  The court found that, to extend the notice-prejudice rule in the context of a claims-made policy’s date-certain notice requirement, “would defeat the fundamental concept on which coverage is premised.”

The court also rejected Craft’s argument that strict enforcement of the date-certain notice requirement would result in a windfall for the carrier based on a technicality.  To apply the notice-prejudice rule so as to excuse an insured’s noncompliance with a date-certain requirement would essentially rewrite the policy and effectively create coverage where none previously existed.  By doing so, the insured — and not the insurer — would reap the windfall.

Not Feeling It: Court Nixes Claim for Feng Shui Fees and Finds No Bad Faith

Tuesday, June 17th, 2014

By Timothy Kevane, Sedgwick New York

In Patel v. American Economy Ins. Co., — F. Supp. 2d. —, 2014 WL 1862211 (N.D. Cal. May 8, 2014), the U.S. District Court for the Northern District of California granted the insurer’s motion for partial summary judgment, finding no coverage for the fees of a feng shui consultant, rejecting business losses outside the specified period, and concluding there was no bad faith.

The insured dental office suffered smoke damage due to a fire in the basement of premises it occupied.  Among other expenses submitted to its property insurer was a bill for $50,000 from its feng shui consultant who provided advice with respect to crystal replacements, energy balance restoration, furniture placement, and the alignment of Qi forces.  The court held that such expenses did not constitute a “direct physical loss” covered by the policy as they did not involve damage to tangible, material objects.  Furthermore, there was no evidence these expenses were incurred to minimize the suspension of the business and to continue operations (as a covered “extra expense”).  The court held that the extra expense provision was not rendered vague simply because it did not specifically exclude feng shui costs from coverage.

The court also rejected the insured’s supplemental claim for lost business income when it had to shutter its business in 2014 due to additional repairs to the building relating to the original fire, which occurred five years earlier.  The insured argued that the policy covered twelve months’ worth of lost income, and because it initially claimed only one month of lost income immediately after the fire, it remained eligible for another eleven months of coverage.  The court rejected this argument as the business income coverage was limited to the defined “period of restoration,” subject to the requirement that lost income must be sustained within twelve consecutive months from the date of loss.  The court found that it made no difference that restoration work may have resumed outside this limiting period.

Lastly, the court rejected the claim that the insurer disregarded in bad faith the insured’s need to relocate in 2014, citing the absence of any underlying contractual obligation to cover the 2014 lost income.

 

Washington’s Insurance Fair Conduct Act Does Not Apply to Liability Insurance Claims

Saturday, June 7th, 2014

By Bob Meyers, Sedgwick Seattle

 On May 16, 2014, Judge Marsha Pechman of the U.S. District Court for the Western District of Washington dismissed an insured’s cause of action against his liability insurer under Washington State’s Insurance Fair Conduct Act (“IFCA”), declaring that an insured under a liability insurance policy does not have a right of action under IFCA.  Cox v. Continental Cas. Co., 2014 WL 2011238 *5 (W.D. Wash. May 16, 2014). The Court reasoned that only a “first party claimant” has a right of action against IFCA, and observed that a liability insurance policy is a “third-party” insurance policy, and the Washington Supreme Court consistently has recognized that there are material differences between first-party insurance and third-party insurance. It thus declared that an insured under a third-party liability policy does not have a right of action under IFCA.

This decision is notable, as it is the first decision in which a Washington judge has dismissed a cause of action against a liability insurer under IFCA on that basis.  In certain cases involving first-party insurance, Washington judges have opined that IFCA applies only to cases involving first-party insurance. However, in other cases involving third-party liability insurance, certain judges have summarily applied IFCA to those cases, without analysis and presumably without any briefing on the issue.

Although the decision is not binding precedent, it is well reasoned and should serve as highly persuasive precedent in future Washington suits. In turn, the decision should help to mitigate liability insurers’ exposure to an award of uncapped treble damages and reasonable attorneys’ fees under IFCA.

 The decision also may noteworthy consequences in insurance-related discovery disputes. In 2013, the Washington Supreme Court declared that it will presume that an insurer “in [a] first party insurance claim” may not assert the attorney-client privilege or work product protection in a bad faith lawsuit. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 700, 295 P.3d 239 (2013).  Without analysis, and presumably without briefing on the issue, certain federal judges have applied the presumption in Cedell to bad-faith suits relating to third-party liability insurance.  That said, the distinction between first-party insurance and third-party insurance which Judge Pechman recognized in Cox for purposes of IFCA would seem to apply equally to a discovery dispute under Cedell.  Therefore, as a result of Judge Pechman’s decision, it is possible that Washington judges will be disinclined to apply Cedell in discovery disputes in bad-faith suits relating to third-party liability insurance.

District Court Seeks to Streamline Hurricane Sandy Insurance Cases Through Dismissals

Friday, June 6th, 2014

Yesterday, in the In re Hurricane Sandy Cases, Civil Action No.: 1:14-mc-00041-CLP-GRB-RER, a committee of magistrates in the Eastern District of New York recommended that the district judges presiding over more than 150 lawsuits against insurance companies arising from Hurricane Sandy dismiss numerous state law causes of action and damages claims. The magistrates, who have been appointed to manage more than 1,000 civil actions arising from the hurricane, based their recommendation on prior rulings in Sandy-related cases that certain state law claims and types of damages are not cognizable under New York law. On February 21, 2014, the magistrates directed plaintiffs to voluntarily dismiss claims or damages not recognized by New York law, or submit letters to the Court explaining the legal basis for continuing to pursue such claims. Those plaintiffs who did not respond to the Court’s directive are now subject to the committee’s June 5th Report and Recommendation.

The committee’s recommendation is aimed at avoiding “wasteful and unnecessary” motion practice before the District Court in each of the individual Sandy-related cases, and to resolve claims that are not cognizable under New York law. Plaintiffs have 14 days from receipt of the Report and Recommendation to file objections with the Court or they will be deemed to have waived their right of appeal.

Among the state law claims to be dismissed are: (i) fraudulent misrepresentation and inducement – on the ground that plaintiffs have failed to allege the necessary elements of a legal duty owed by the insurer separate from its duty to perform under the policy and entitlement to special damages; (ii) breach of the implied covenant of good faith and fair dealing – on the ground that New York courts do not recognize a separate cause of action for breach of the implied covenant when a breach of contract claim is also pled on the same facts; (iii) bad faith denial of insurance coverage – on the ground that plaintiffs have not alleged conduct actionable as a tort, independent of the underlying insurance contract; and (iv) claims under Section 349 and 350 of New York General Business Law­ – on the ground that plaintiffs have not alleged injury independent of loss caused by an alleged breach of contract.

The committee also recommended the dismissal of demands for punitive damages, because plaintiffs have not identified that the insurers’ conduct was actionable as an independent tort, and any claims for attorney’s fees, which are not recoverable in actions against insurers to settle rights under a policy.

 

Texas Federal Court Dismisses Insurer in Case Alleging “Bad Faith” and Violations of the Texas DTPA

Monday, May 12th, 2014

On April 18, 2014, a federal district court in Texas granted summary judgment in favor of an insurer that had paid the policy proceeds demanded by the insureds, but nonetheless were sued for “bad faith.”  The court’s decision adds to a growing body of Texas case law weeding out unfounded first-party insurance “bad faith” lawsuits.

In Bell v. State Farm Lloyds, 2014 WL 1516254 (N.D. Tex. 2014), a hail and wind storm damaged the policyholder’s property in Midlothian, Texas.  The insureds submitted a property insurance claim and, five days later, the insurance company sent out an adjuster to inspect the property.  The policyholders, and their construction contractor, were unsatisfied by the adjuster’s estimate of the damage, and then sought a second opinion from a public adjuster.  However, the inspection by the public adjuster produced an estimate that was lower than the insurance company’s estimate.  Undeterred, the policyholders requested a re-inspection of the property.  A new adjuster from the insurance company conducted the second inspection, and the estimate was higher than the previous estimate.  Subsequently, the policyholders’ construction contractor sent out a “final invoice” for the same amount, as the policyholders agreed with the contractor’s estimate, and the insurer issued the requested payment.

The policyholders filed a lawsuit after receiving the payment, claiming that the insurance company had breached its contract, breached the duty of good faith and fair dealing, violated the Texas Deceptive Practices Act, the Texas Insurance Code § 541, and the Prompt Payment Act § 542, and committed fraud.  The court granted the insurer’s motion for summary judgment on each of the claims.  On the breach of contract claim, the court held that the insurer’s full payment of the amount stated in the final invoice “prov[ed] that there was no breach and that the Plaintiffs suffered no damages.”  The bad faith claim also failed because there was no evidence that the insurer, among other things, failed to properly investigate or timely pay the claim, or committed any “extreme act” giving rise to independent damages.  Because the claim for bad faith failed, the court found that the claim for unfair settlement practices also failed.  Similarly, because there was no evidence that the insurer had delayed in making the required payment, the claim under the Prompt Payment Act failed.  Finally, the court held that there was no merit to the fraud claim because the policyholders failed to establish that the insurer made any false representations.  Accordingly, the court entered judgment in the insurer’s favor.

New York Federal Court Dismisses Superstorm Sandy Bad-Faith Claim as Redundant

Tuesday, April 29th, 2014

In 433 Main Street Realty, LLC v. Darwin National Assurance Co., 2014 WL 1622103 (E.D.N.Y. Apr. 22, 2014), the United States District Court for the Eastern District of New York dismissed the insureds’ cause of action against their insurer for alleged breach of the covenant of good faith and fair dealing in connection with a property damage claim related to Superstorm Sandy. The court concluded that the bad-faith claim was redundant and duplicative of the insureds’ cause of action for breach of contract.

The insureds owned and were developing a residential property in Port Washington, New York when the construction site sustained wind and water damage related to Superstorm Sandy. The insureds sought coverage under a commercial inland marine policy issued by Darwin National Assurance Company which was subject to a $10,000 deductible, except for loss caused by flood, which was subject to a $250,000 deductible. Although Darwin agreed that the claim was covered under the policy, the parties disagreed as to whether the property damage was caused by flood and, therefore, subject to the $250,000 deductible. The insureds later commenced a declaratory judgment action asserting, among other things, causes of action for breach of contract and breach of the insurer’s good faith obligations premised upon Darwin’s alleged mishandling of the claim and its insistence that the higher deductible applied.

The district court acknowledged that New York implies a duty of good faith and fair dealing into every express contract, but further recognized that a breach of that duty is merely a breach of the underlying contract. In that regard, the court concluded that New York authorities do not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim based upon the same facts also is pled. Under those circumstances, the cause of action for breach of the implied covenant of good faith and fair dealing should be dismissed as redundant.

In reviewing the insureds’ allegations, the district court held that the core of the dispute was that the insurer had not paid what the insureds believed was due under the insurance policy. Accordingly, because the insureds failed to allege facts showing bad faith differing from the facts supporting the alleged breach of contract, the district court dismissed the bad faith claim as redundant. Notably, however, the court acknowledged in a footnote that dismissal of the bad faith claim does not preclude the insureds from claiming consequential damages beyond the policy limits on their breach of contract claim based on allegations of bad faith.

Please click here to see our earlier coverage of Superstorm Sandy and related regulations and property coverage disputes.

Homeowners Beware: Fraud in Claims Process Can Lead to Judicial Sanctions in Bad Faith Action

Thursday, March 13th, 2014

By Beth E. Yoffie, Sedgwick Los Angeles

A federal court for the Southern District of Texas has sanctioned a pro se litigant for making fraudulent misrepresentations to his homeowner’s insurer following a fire, and for bringing a bad faith action against the insurer.

In Alexander v. State Farm Lloyds, 4: 12-CV-490, 2014 WL 549389 (S.D. Tex. Feb. 11, 2014), Tony Alexander sued State Farm Lloyds (“State Farm”) for breach of contract, violations of the Texas Insurance Code, violations of the Texas Deceptive Trade Practices Act, and bad faith.  He sought more than $1 million under the policy’s Dwelling Coverage as well as $77,000 for the cost of additional living expenses, personal property damage, and securing of the residence.  He did so despite concealing material facts and making misrepresentations to State Farm during the claims process.

Mr. Alexander abandoned the case three days into the jury trial after his fraudulent conduct had become apparent.  Following that, State Farm moved for sanctions to be levied against him.  Mr. Alexander retained counsel, who argued that he could not be sanctioned because his “foolishness” had taken place before he had filed the lawsuit.  Counsel asserted that Mr. Alexander had not lied during the trial, and so had not displayed contempt for the judicial process.  The court disagreed.

Mr. Alexander’s decision to file suit was itself contemptuous.  The court found that he was a sophisticated individual, given he had worked in the finance industry, possessed an advanced degree, and previously operated multiple businesses; and, that he had connived to use the judicial system as a continuation of his lawless efforts to exploit the July 24, 2005 fire to squeeze additional money from State Farm.

The court concluded that, although Rule 11 did not permit sanctions on the facts before it, attorney’s fees could be awarded to State Farm under Texas Rule 13 and Chapter 10 of the Civil Remedies and Practices Code.  Accordingly, it awarded attorney’s fees to State Farm.

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