Archive for the ‘Extracontractual/Commercial Insurance Litigation’ Category

Eastern District of Pennsylvania Finds No “Link” to Bad Faith in Excess Carrier’s Conduct Towards Sausage Company Insured

Thursday, September 25th, 2014

by Alice Ye, Sedgwick Chicago

This month, the Eastern District of Pennsylvania held that excess carrier American Guarantee and Liability Insurance Company (“American Guarantee”) did not engage in bad faith conduct towards insured Maglio Fresh Foods (“Maglio”), a sausage company. Charter Oak Ins. Co. v. Maglio Fresh Foods, Case Civil No. 12-3967, 2012 WL 4434715 (E.D. Pa. Sept. 9, 2014).

Maglio filed cross-claims against American Guarantee for statutory bad faith under 42 P.S.A. § 8371 and breach of the implied covenant of good faith and fair dealing. The claims were based on American Guarantee’s refusal to post a supersedeas bond for Maglio so that Maglio could appeal an adverse judgment entered in the underlying action. Maglio argued that, as the primary carrier had already tendered its policy limits to the court, the primary limits were exhausted and American Guarantee’s duty to defend, including the duty to post the appellate bond, was triggered. In contrast, American Guarantee argued that, under the terms of its “follow form” policy, it had no duty to defend until the primary carrier exhausted its limits through payment for a covered claim. American Guarantee argued that only one out of the two claims in the underlying action was covered (the “Forte brand claim”). American Guarantee previously disclaimed coverage for the other claim (the “Maglio brand claim”). As the value of the covered Forte brand claim was less than the primary policy limit, the primary carrier’s payment of that claim did not exhaust the policy. American Guarantee further contended that the primary carrier’s payment of an additional $440,000 into the court was a “voluntary payment” that did not exhaust the primary policy.

The court found in favor of American Guarantee, holding that “Maglio has failed to prove, by the applicable standard of proof, clear and convincing evidence, that American Guarantee is liable for statutory bad faith, because the evidence does not show any conduct that meets the Pennsylvania legal standard for statutory bad faith, and certainly no conduct that would warrant punitive damages, under Pennsylvania law.” The court further held that its “analysis of the common law bad faith claim, arising out of the contractual relationship … leads to the same conclusion.”

With respect to its disclaimer of coverage, the court held that “Maglio has not brought forth evidence that American Guarantee’s conduct lacked a reasonable basis.” Rather, American Guarantee’s “vigilance” (including (1) conducting a reasonable investigation, (2) justifiably relying on the primary carrier’s denial of coverage of the Maglio brand claim and the primary carrier’s commitment to continue to defend the claim, and (3) hiring coverage counsel to monitor the underlying action), coupled with the primary carrier’s continued defense of Maglio, relieved American Guarantee of having to take any action in the defense. Moreover, the court held that, even if American Guarantee incorrectly evaluated coverage for the Maglio brand claim, “the evidence fails to show that American Guarantee did so out of self-interest or ill will.” The court found that, “[a]bsent such a showing, Maglio’s bad faith claim falls short.”

The court also determined that, as the verdict for the covered Forte brand claim was only $660,000, it did not exhaust the primary policy limits, and thus concluded that the primary insurer’s payment “did not trigger American Guarantee’s duty to defend, and therefore, its duty to post an appellate bond.” As a result, “American Guarantee did not act in bad faith by refusing to post such bond.”

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

Saturday, June 7th, 2014

By Robert 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.

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

Webinar Series: The State of Bad Faith

Wednesday, December 4th, 2013

Sedgwick’s 2013 webinar series explored the current state of insurance bad faith law and practical issues impacting the defense of bad faith cases in Washington, California, Florida, New York, New Jersey, Texas and Illinois.  The programs are available for on demand viewing.

The Washington program was presented by Sedgwick Seattle’s Robert A. Meyers and Eliot M. Harris on  June 12, 2013.

The California program was presented by Alex Potente (Sedgwick San Francisco) and Valerie Rojas (Sedgwick Los Angeles) on July 10, 2013.

The New York/New Jersey program was presented by Sedgwick New York’s Greg Lahr and Laura Markovich on August 21, 2013.

The Florida program was presented by Ramón Abadin (Sedgwick Miami) and Al Warrington (Sedgwick Fort Lauderdale) on September 25, 2013.

The Texas program was presented by Sedgwick Dallas’ Lisa Henderson and Sondra Rosebrock on October 30, 2013.

The Illinois program was presented by Sedgwick Chicago’s David Dolendi and Michael McNaughton on November 13, 2013.

 To request a video copy of any of the webinars listed above, please click here.

 

Despite Limited Jurisdiction, Texas Federal Court Keeps the Class in Class Action

Friday, October 4th, 2013

By Michael J. McNaughton, Sedgwick Chicago

The forum selection battle between insurance carriers and policyholders over whether litigation should be conducted in state or federal courts remains as contentious as ever. Litigants on both sides know forum shopping affects the rules of civil procedure, the choice of law analysis, remedies, and the potential judge and jury pool. Insurance carriers often believe that federal courts can provide a more equal playing field to address coverage disputes when compared to the home court advantage policyholders are perceived to have in local state courts. Because federal courts are of specific and limited jurisdiction, an insurance carrier removing a case to federal court can face significant hurdles in maintaining that cause of action.

This issue recently was addressed in the context of a class action in Magnum Minerals, L.L.C. v. Homeland Ins. Co., No. 2:13-CV-103 (N.D. Tex., Sept. 5, 2013), where plaintiffs sought class certification in state court of all Texas residents who had been insured by a surplus lines insurance carrier (Homeland) from January 2005 to the present. The plaintiffs alleged that Homeland had violated Chapters 101 and 981 of the Texas Insurance Code, which allows a policyholder to procure insurance from surplus lines carriers through authorized agents, but only if the policyholder has failed to obtain non-surplus lines insurance after a diligent search.  Plaintiffs alleged defendant insurance agents placed their surplus lines coverage with Homeland without first searching for non-surplus lines coverage. Accordingly, plaintiffs sought injunctive relief that, in part, prohibited Homeland from enforcing any contractual rights or exclusions to insurance coverage against them and the putative class.

In response, Homeland removed the plaintiffs’ suit to federal court pursuant to the Class Action Fairness Act (CAFA). CAFA grants federal jurisdiction for diversity class actions involving more than 100 class members if at least one member of the class is diverse from at least one defendant, and if more than $5 million in damages is in controversy exclusive of interests and costs. While conceding diversity, plaintiffs argued there was no federal jurisdiction under CAFA as the amount in controversy did not exceed $5 million.  In the alternative, plaintiffs argued the “local controversy exception” and “small class exception” to CAFA defeated federal jurisdiction.

As the removing party, Homeland had the burden to show that CAFA’s prima facie elements were met to maintain federal jurisdiction. The court held that, because the validity of the putative class members’ insurance contracts was at issue, the proper measure to determine the amount in controversy would be based on the policy limits for each distinct class member. Homeland presented evidence showing that there were 117 insureds on 73 Homeland policies, with each policy containing a per-insured limit of liability of at least $1 million. Accordingly, the court held the amount in controversy easily exceeded the $5 million threshold.

In contrast, the plaintiffs could not show by a preponderance of the evidence that the local controversy and small class exceptions to CAFA should apply. Although the local controversy exception has four requirements, the only requirement in dispute was whether the plaintiffs sought “significant relief” from at least one of the Texas defendants, which were insurance agents and individuals involved in placing coverage with Homeland. Looking to the pleadings, the court determined that plaintiffs did not seek injunctive relief against of those defendants.  Moreover, the plaintiffs’ remaining allegations against the Texas defendants fell within exceptions to relief sought under the Texas Insurance Code. Accordingly, the court held that the plaintiffs were only seeking significant relief against Homeland, which was a New York corporation. The court also disagreed with the plaintiffs’ argument that the small class exception applied.  Although the plaintiffs asserted only the 73 customers that purchased policies should be considered class members, the court concluded that each of the 117 named insureds were distinct class members.

Because plaintiffs failed to show that either exception to CAFA applied, Homeland was allowed to proceed with its action in a federal court.

 

California Supreme Court Holds that Insurers May Be Held Liable for Violations of California’s Unfair Competition Law

Thursday, August 1st, 2013

By Valerie D. Rojas, Sedgwick Los Angeles

In Zhang v. Superior Court, __ Cal.3d __ (2013), the California Supreme Court held that Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 does not preclude insureds from maintaining a claim for violations of California’s Unfair Competition Law (UCL) against insurers. In Moradi-Shalal, the court held that, when the Legislature enacted California Insurance Code 790.03(h) (UIPA), it did not intend to create a private cause of action for commission of the various unfair insurance practices set forth in the UIPA. Thereafter, a split of authority developed in the California Courts of Appeal concerning whether an insurer could be subject to liability for UCL violations based upon conduct that was also a violation of the UIPA. The court has resolved the disagreement finding that an insurer may be held liable for violations of the UCL even when the insurer’s conduct also violates the UIPA.  The court issued its decision today.

In Zhang, the plaintiff alleged causes of action for false advertising under the UCL and insurance bad faith based upon the insurer’s alleged misleading advertising, which included false promises that the insurer would timely pay proper coverage in the event the insured suffered a loss. The insurer demurred based upon the grounds that plaintiff’s false advertising claim was barred by Moradi-Shalal, and the trial court sustained the demurrer. The Court of Appeal disagreed with the trial court, and the California Supreme Court affirmed the Court of Appeal’s decision.

As a result of the decision, insurers may now be subjected to claims for violations of the UCL.  Insureds may recover under the UCL if they can show that they were likely to be deceived, and that they suffered economic injury as a result of that deception. The court also held that insurers may be liable under the UCL for conduct which also supports a bad faith claim, such as unreasonable claims handling practices, withholding of policy benefits, etc.

If an insured prevails on its UCL claim, it may be entitled to restitution (i.e., return of premiums) and injunctive relief. Damages are not available under the UCL. Although there is no provision for attorney’s fees under the UCL, the court noted that a prevailing plaintiff may seek attorneys’ fees as a private attorney general under Code of Civil Procedure section 1021.5. Additionally, insurers may now be subjected to class actions for violations of the UCL. Insurers should also expect insureds to use the decision to attempt to expand the scope of discovery.

Click here to review the decision issued today.

New York Assembly Presents Insurance Reform Overhaul in Wake of Superstorm Sandy

Tuesday, June 25th, 2013

By Ryan C. Chapoteau, Sedgwick New York

We previously reported on the New Jersey Legislature’s attempts to enact a bill that would allow policyholders to sue an insurer for bad faith in the wake of Superstorm Sandy.  New Jersey Assembly Bill A3710  is still pending.  On the other hand, New York’s Assembly has been very active after Superstorm Sandy and resoundingly passed 12 new bills on June 4, 2013, which would affect changes to the Insurance Law.  The State Senate is now holding debates for these bills, which provides insurers an opportunity to request the legislature to reject these proposed laws.

The American Insurance Association has attacked the new legislation, stating that it is “misguided, if well-intentioned” because the bills “would simply open the floodgates for even greater litigation after a catastrophe.”  Although policyholders already have considerable privileges under current law, the New York Assembly is attempting to rewrite insurance policies by rejecting basic contractual principles that allow parties to form the terms of their own agreements.  If passed, the insurance market may raise premiums to ensure they can pay the newly-mandated covered claims, and handle an increase in litigation costs.

The New York insurance reform legislative package includes the following bills:

• Investigation and Settlement Standards (Bill No. A01092, passed 121-23).  The Assembly is attempting to require insurers to investigate a claim and advise the claimant in writing within 15 days (with a potential additional 15 day extension) on whether the insurer has accepted or rejected the claim.  The insurer then must pay the claim within 3 days from the settlement date.

• Creating a Task-Force for Disasters (Bill No. A01093, passed 144-0).  This bill creates an 18-member task force, including officials from federal and state agencies, insurers and independent representatives who will examine and report on whether policyholders and communities have adequate insurance coverage for disasters.

• Discounts on Fire and Homeowner’s Insurance Upon Completing Residential Home Safety and Loss Prevention Course (Bill No. A01475, passed 141-3).  The Assembly is attempting to force insurers to provide discounts to homeowners for a three-year period upon completing a state-certified course that would teach insureds how to prevent losses triggered by weather-related events.  The bill does not comment on the amount of the discount, but requires the discount to be based on sound actuarial practices.

• A Homeowner’s Bill of Rights (Bill No. A02287, passed 118-26).  Legislators are attempting to educate homeowners who purchase property and casualty coverage by obligating insurers to provide them with a consumer guide written “in plain language in a clear and understandable format.”  This disclosure must provide information, such as how coverage is affected by different types of weather conditions and natural disasters as well as whether the property is located in a flood zone.  Additionally, the Department of Financial Services will be required to establish a “Consumer’s Guide on Insuring Against Catastrophic Loss” brochure.

• A Uniform Windstorm Deductible (Bill No. A02729, passed 144-0).  The Superintendent of Insurance will have the duty to institute a uniform and reasonable standard for hurricane windstorm deductibles.  Proponents of the bill claim it will help promote a better understanding of the applicability and amount of hurricane windstorm deductibles.

• Expediting State Disaster Emergency Insurance Claims (Bill No. A05570, passed 117-26).  This bill establishes an expedited procedure for claimants to advance any lawsuit against insurers that deny claims related to property damage sustained in counties where a State Disaster Emergency is declared by the Governor.

• Private Right of Action for Unfair Claim Settlement Practices (Bill No. A05780, passed 108-34).  The bill creates a private right of action for unfair claim settlement practices for claims relating to a loss or injury in an area under a declared disaster emergency.  If enacted, insurers will be liable for punitive damages if their claims practices are deemed willful.

• Limiting Insurers from Deciding Not to Renew Homeowners Policies (Bill No. A06913, passed 120-24).  The Assembly is trying to restrict insurers’ reduction of coverage by regulating notices of intention to not renew homeowner’s insurance policies.  If passed, insurance companies must file a plan with the Superintendent of Insurance if they intend to reduce by 20% the net number of these policies in New York, or if they plan to reduce the number of these policies by 500 within five years, whichever is greater.  Additionally, insurers must file a plan if they intend to not renew 4% or more of their total number of covered policies within New York.

• Coverage for Business Interruption Claims Arising From Excluded Perils (Bill No. A07452, passed 113-30).  This bill would force insurers to cover business interruption claims even if the loss directly or indirectly arose from or was caused by an excluded or uninsured peril.

• A Standard Set of Definitions (Bill No. A07453, passed 115-29).  This bill would force all New York insurance policies to adopt a standard set of definitions, as promulgated by the Superintendent of Insurance, for all commonly used terms and phrases.  The proposed legislation does not include a list of the terms and phrases it considers to be common, but provides that an insurer may use alternative definitions as long as they are not any less favorable to the policyholder.

• Providing a Copy of a Policy Prior to it Being Purchased (Bill No. A07454, passed 119-24).  The bill would require insurers to provide potential customers of personal and commercial lines of insurance a copy of the policy prior to the policy being purchased.  Legislators want customers to have sufficient time to review a policy before agreeing to buy it.

• Outlawing Anti-Concurrent Clauses (Bill No. A07455, passed 119-24).  The law would forbid insurers from denying a claim when a loss occurred from several causes, and one cause is covered while another cause is precluded from coverage.  If enacted, New York would be joining California,[1] North Dakota,[2] West Virginia,[3] and Washington[4] in eliminating anti-concurrent causation clauses.

The Assembly also passed Bill No. A07456 on June 10, 2013, by a vote of 125-14, which would require the Superintendent of Financial Services to prepare a report card on insurers’ responses to emergencies and disasters.  Insurers would be graded on: (1) the number of claims the insurer received and the status of those claims; (2) the number of independent adjusters the insurer has working in the field; (3) the number of policyholders who have hired public adjusters; (4) the average amount of time, in days, for the insurer to investigate a claim, make a payment, and close a claim; (5) the number of complaints the insurer has received from its insureds and the number of complaints the Department has received on each insurer; and (6) any other information the Superintendent deems necessary.  This report card must be published within 20 days of the declaration of a disaster or emergency and updated every week for at least 6 months or until the Superintendent determines that the report card is no longer necessary.

 

NJ’s Bad Faith Legislation Stemming From Superstorm Sandy Needs Emergency Relief

Tuesday, March 19th, 2013

By Jeffrey M. Winn and Ryan C. Chapoteau, Sedgwick New York

In the wake of Superstorm Sandy, the New Jersey Legislature is considering the passage of A3710, which will enable policyholders to sue insurers for bad faith based on a single alleged violation of the New Jersey Insurance Trade Practices Act, NJSA § 17:29B-1, et seq.

The proposed legislation is unnecessary and will just promote more litigation, delay the resolution of first-party claims, disturb New Jersey’s current landscape of thoughtful and termperate common law remedies, and result in higher premiums for all policyholders. Although the proposed legislation may be a boon for lawyers, it likely will be a losing proposition for virtually everyone else.

Prior to Superstorm Sandy, the New Jersey Legislature and the courts had carefully crafted a comprehensive framework of rules, causes of action, and damages measures which have adequately protected the public against the bad faith claims settlement practices of insurers.  For example, in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974), the New Jersey Supreme Court prescribed a cause of action that protects policyholders from excess verdicts.  In Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993), the Supreme Court conducted a thorough national survey of insurance bad faith decisions before adopting the centrist “fairly debatable” test for New Jersey first-party bad faith claims, thereby rejecting the extreme standards that prevail in some jurisdictions.

While New Jersey already permits policyholders to recover extra-contractual damages against insurers, both the Legislature and courts have adroitly balanced the competing interests.  The Supreme Court in Pickett posited that, when the policyholder has demonstrated that the insurer has engaged in bad faith, the policyholder may recover consequential damages (including attorneys’ fees) and punitive damages.  On liability insurance disputes, prevailing policyholders are generally permitted to recover their costs and fees if they can satisfy the elements of New Jersey Civil Practice Rule 4:42-9(a)(6).  Thus, the remedies are in place and the public is adequately protected.

Policyholder attorneys dislike the Pickett standard because it requires a showing of “gross negligence” by the insurer.  This middle-of-the-road standard eschews the extreme liberal standard of simple negligence advocated by policyholder attorneys, and the extreme conservative standard of “intentional wrongdoing” favored by some insurance industry advocates.  In adopting the Pickett standard, the Supreme Court sent the strong message that bad faith claims should not be a routine add-on to the typical insurance coverage dispute, but should be reserved for sufficiently reckless conduct by the insurer.  The Supreme Court was clear that, to make out an actionable bad faith claim, “simple negligence” is not enough.

The proposed legislation will eviscerate the time-honored Pickett standard.  If enacted, the legislation will unsettle the New Jersey insurance market by equating bad faith with simple negligence, thus making bad faith claims commonplace in most first-party cases.  In the interest of maintaining a stable insurance market in New Jersey, the proposed legislation should not be adopted.

Sedgwick Attorneys
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
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