INSURANCE BAD FAITH: When, What and How Mark A. May COHEN & GRIGSBY, P.C. October 25, 2017

What is “Bad Faith”? Black’s Law Dictionary Any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. . . .

Insurer’s Key Duties Under a standard policy of insurance, the insurer generally owes a number of separate, distinct and express duties to the policyholder: 1. The duty to pay for covered injuries or property damages sustained by the policyholder; 2. The duty to defend the policyholder against claims by third parties;

Insurer’s Key Duties 3. The duty to indemnify the policyholder for amounts paid on third-party claims. ** Implied duty of good faith and fair dealing **

First-Party vs. Third-Party First-party bad faith involves the insurer’s failure to meet the first of these duties, i.e., the duty to pay the policyholder for covered injuries or property damage sustained by the policyholder, and/or the failure to properly and timely investigate and process a claim.

First-Party vs. Third-Party Third-party bad faith involves the insurer’s failure to meet the last two duties (i.e., to settle and indemnify with regard to claims asserted against the policyholder by third parties).

When Might Bad Faith Occur? From the moment a claim is made: - failure to acknowledge promptly; - failure to properly investigate; - unreasonable valuation or coverage positions; - failure to pay promptly; - failure to make a reasonable settlement; - strong-arm tactics (using leverage).

When Might Bad Faith Occur? Post-litigation conduct may be admissible to demonstrate an insurer’s bad faith. See e.g., White v. Western Title Ins. Co., 710 P.2d 309 (Cal. 1985); Spadafore v. Blue Shield, 486 N.E.2d 1201, 1204 (Ohio Ct. App. 1985); Home Ins. Co. v. Owens, 573 So. 2d 343 (Fla. 4th DCA 1990); O’Donnel v. Allstate Ins. Co., 734 A.2d 901 (Pa. Super. 1999).

Common Law Common law bad faith or breach of the duty of good faith and fair dealing: - An insurer’s unreasonable denial of a claim or an unreasonable delay in paying claim benefits; - An insurer’s failure to act reasonably or promptly in the processing or handling of a claim; - An insurer’s unreasonable failure to settle a third-party claim.

Common Law – Third-Party Most jurisdictions recognize the insurer’s duty to settle and an action for bad faith breach of that duty. But see Choharis v. State Farm Fire and Cas. Co., 961 A.2d 1080, 1088 (D.C. 2008) (District of Columbia yet to acknowledge cause of action.)

Duty to Settle --Texas Stowers Doctrine – Once a settlement demand is made, insurance company must exercise degree of care and diligence of prudent person. 1. Claim within coverage. 2. Demand within limits. 3. A prudent person would accept.

Common Law – First-Party First-Party bad faith common law claims may or may not be available. Texas – Common law bad faith exists. Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995). California – Common law bad faith exists. Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

Common Law – First-Party Florida – Common law bad faith has not been recognized. Times Ins. Co., Inc. v. Burger, 712 So. 2d 389 (Fla. 1998). ** Statutory claim and remedy was created**

Know The State of Mind Element The State of Mind of the Insurer may or may not be relevant to bad faith. Objective Standard: the denial is unreasonable. Bafford v. Travelers Cas. Ins. Co. of America, 2012 WL 5465851 at *5-6 (E.D. Cal. Nov. 8, 2012); Delgado v. Inter-insurance Exchange, 61 Cal. Rptr. 3d 826, 846 (Cal. App. 2007) (Subjective intent is irrelevant.)

Know The State of Mind Element Subjective Standard: Two prong test which requires (1) the absence of a reasonable basis for denial and (2) knowledge or reckless disregard of the lack of that reasonable basis. Weiss v. United Fire Cas. Co., 541 N.W. 2d 753 (Wis. 1995); Rancosky v. Washington National Ins. Co., 2017 WL 4296351 (Pa. Sep. 28, 2017).

Know State of Mind (Malice and Ill Will) Even under subjective intent, ill will and malice are not generally required. See e.g., Rancosky v. Washington National Ins. Co., 2017 WL 4296351 (Pa. Sep. 28, 2017).

Strict Liability [W]e consider it of little importance whether an insurer contests an insured's claim in good or bad faith. In either case, the insured is out his consequential damages and attorney's fees. To impose upon the insured the cost of compelling his insurer to honor its contractual obligation is effectively to deny him the benefit of his bargain. Hayseeds, Inc. v. State Farm Fire – Cas., 352 S.E.2d 73, 79-80 (W. Va. 1986).

Beyond Common Law – Statutory Law - Bad Faith Statutes - Unfair claims settlement practices acts - Unfair trade practices and consumer protection laws - Motor vehicle financial responsibility laws

Example Bad Faith Statutes Pennsylvania 42 Pa. C.S.A. § 8371 (actions on insurance policies) In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions: 1. Award interest on the amount of the claim from the date the insured made the claim in an amount equal to the prime rate plus 3%.

Example Bad Faith Statutes Pennsylvania 2. Award punitive damages against the insurer. 3. Assess court costs and attorney fees against the insurer. ** Bad Faith is not defined in the statute**

Example Bad Faith Statutes Florida In 1982, the Florida Legislature enacted a bad faith statute that provides for recovery by an insured of damages caused by an insurer’s bad faith, an award of attorneys’ fees and/or punitive damages. Fla. Stat. § 624.155

Fla. Stat. § 624.155. Civil Remedy (1) Any person may bring a civil action against an insurer when such person is damaged: (a) By a violation of any of the following provisions by the insurer: 1. Section 626.9541(1)(i), (o), or (x); * * * *

Fla. Stat. § 624.155. Civil Remedy (b) By the commission of any of the following acts by the insurer: 1. Not attempting in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests;

Fla. Stat. § 624.155. Civil Remedy 2. Making claims payments to insured or beneficiaries not accompanied by a statement setting forth the coverage under which payments are being made; or

Fla. Stat. § 624.155. Civil Remedy 3. Except as to liability coverages, failing to promptly settle claims when the obligation to settle a claim has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

Fla. Stat. § 624.155. Civil Remedy 4. Upon adverse adjudication at trial or upon appeal, the authorized insurer shall be liable for damages, together with court costs and reasonable attorney’s fees incurred by the plaintiff.

Fla. Stat. § 624.155. Civil Remedy (5) No punitive damages shall be awarded under this section unless the acts giving rise to the violation occur with such frequency as to indicate a general business practice and these acts are: (a) Willful, wanton, and malicious;

Fla. Stat. § 624.155. Civil Remedy (b) In reckless disregard for the rights of any insured; or (c) In reckless disregard for the rights of a beneficiary under a life insurance contract.

Unfair Claims Settlement Practices Most states have adopted some form or version of the UCSPA. The purpose of the UCSPA is to set forth standards for investigation and disposition of claims.

Texas Insurance Code 541 Code 541 : Unfair or Deceptive Acts or Practices - - Misrepresenting material fact or policy provision; - Failure to attempt, in good faith, a prompt fair and equitable settlement; - Failure to provide reasonable explanation;

Texas Insurance Code 541 - Failure to affirm or deny coverage promptly; - Refusing, failing or unreasonably delaying settlement of first party coverage claims to shift responsibility to others; - Denying claim without reasonable investigations; - Requiring production of tax returns. ** Private Cause of Action**

BAD FAITH – Without Coverage Texas – extreme conduct may provide for bad faith. Progressive County Mut. Ins. Co. v. Boyd , 177 S.W.3d 919 (Tex. 2005). Washington – Bad faith investigation. Coventry Assoc. v. Am. States, Ins. Co. ,136 Wash. 2d 269 (1998).

BAD FAITH – Without Coverage West Virginia -- a bad faith claim is brought under the Unfair Trade Practices Act can be maintained without coverage. Jordache Enterprises, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 204 W. Va. 465, 484 (1998). Pennsylvania – Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 244 Fed. App’x 424 (3d Cir. 2007).

How to Recognize Bad Faith - Listen to the Policyholder’s concerns - Know your claim and policy - Review the policy, not only from your client’s perspective, but from the perspective of the carrier - Closely review the carrier’s denial or reservation of rights letter - Lack of concern for Policyholder’s finances

How to Recognize Bad Faith - Identify delays and failures to respond or explain - Identify burdensome, unnecessary or repeated demands for additional information - Identify if reserves continually increase - Settlement offers that are not in keeping with estimates or reserves

Discovery and Depositions - Training material - Claims handling guides and procedures - Consumer complaints - Denial of other claims - Claim professionals’ incentives

Discovery and Deposition Strategy - Internal procedures for implementing standards in insurance statutes - Advertising and promotional material - Meeting minutes of claims committee - Internal communications and documentation - Communications with Insurance Commissioners

Discovery and Depositions - In appropriate cases, courts have ordered production of personnel files and compensation information - Reinsurance – sometimes discoverable - Drafting documents - Underwriting documents

Discovery and Depositions Reserves – normally at least some discovery is permitted on the reserve set for the underlying liability - First, discovery on the procedures used to establish loss reserves - Second, if relevant, discovery on the amount of the reserve

Discovery and Depositions Front-line Claims Representative Decision maker – Not normally the former Corporate Representative – claims handling procedures Underwriter – Knowledge of risk

Discovery and Depositions Experts retained during investigation and adjustment - what were their marching orders? Insurer’s attorneys - acting as adjusters or advice of counsel