American Family appealed the lower court's award of damages to the Matusiaks, claiming that because the Matusiaks sold their house to the Martins for the agreed-upon price in the purchase contract, despite the intervening hail damage, the Matusiaks bore none of the costs of that damage and did not suffer a loss. The Appellate Court did not agree with American Family.

American Family's policy provided the Matusiaks with two types of coverage:

Procedures to Claim Replacement Coverage.

If you receive an actual cash value settlement for damaged or stolen property covered by replacement coverage and you have not reached your limit, you may make a further claim under this condition for any additional payment on a replacement cost basis provided:

(1) you notify us within 180 days after the loss of your decision to repair or replace the damaged or stolen property; and

(2) repair or replacement is completed within one year of the date of loss.

The Court explained that this provision means that the Matusiaks cannot seek replacement coverage unless they first receive payment for the actual cash value of the loss, which did not happen because American Family denied the claim. The question, then, is whether the Matusiaks were entitled to a cash value settlement that they did not receive, which would require them to establish that they suffered a “loss” under the terms of the insurance contract and in the context of cash value coverage.

The Matusiaks had evidence that they suffered a loss because they pledged to pay to repair the roof and agreed to give any insurance proceeds to the Martins. By making the foregoing pledges, the Matusiaks established a cash value loss and, therefore, American Family breached its insurance contract when denying their claim.

The lower court denied the Matusiaks’ motion for summary judgment as to bad faith. The appellate court sent the bad faith issues back to the trial court for an evaluation and ruling on bad faith subsequent to the finding that American Family breached the contract.

It is important to consider that when a property is sold, the rights to the proceeds of any pending insurance claims or for insurance claims for losses occurring before the date of purchase may create an issue if that insurance claim is pursued. It is important to buyers to inspect property before closing and to review the contract for sale regarding the rights to any insurance claims. In this case, the language of the insurance policy at issue played a key role in determining whether the prior owner had any rights.

It is also important for policyholders and their attorneys to carefully evaluate the language in the policy at issue, the law in the particular jurisdiction where the property is located, and sometimes, the documents for the purchase of a property.

You may extend the insurance provided by this Coverage Form to apply to your Covered Property, other than ‘stock,’ that is temporarily at a location you do not own, lease or operate.

Southern Trust claimed that because Dr. T's products were in a temporary warehouse that he did not own, lease or operate, his products were not covered. The lower court disagreed with Southern Trust and found it breached the policy by failing to provide coverage for Dr. T's products in the temporary warehouse. A Georgia appellate court agreed with the lower court on the breach of contract claim. With regard to the bad faith claim, the appellate court agreed with the lower court’s finding that a determination of the bad faith issues needed to be deferred.

Policyholders cannot always bring a bad faith claim at the same time as a breach of contract claim. Each case will depend on the particular facts and the law in a specific jurisdiction. Policyholders contemplating a bad faith suit should contact experienced counsel.

This insurance is void if you or any other insured intentionally conceals or misrepresents any material fact or circumstance relating to this insurance at any time.

Federal referred the claim to its special investigations unit on grounds that the claim was suspicious because of alleged inconsistencies regarding where the stolen property was actually located at the time of the theft and the actual items stolen. American Pepper sued Federal for breach of contract and bad faith. During the trial on the matter, the Court told the jury that Federal had to prove the policy defense of concealment or misrepresentation by “clear and convincing” evidence . The jury ruled in favor of American Pepper and awarded $15,000. The Supreme Court of Arizona later examined what the burden is for an insurance company when, as a defense to a claim, it asserts concealment or misrepresentation.

American Pepper took the position that the higher burden of "clear and convicing evidence" applied because Federal's defenses of concealment and misrepresentation sounded in fraud. The Court, however, agreed with Federal, that the appropriate burden of proof for Federal's defense of concealment or misrepresentation was a "preponderance of the evidence." As such, the Supreme Court of Arizona sent the case back to the lower court for an application of the appropriate standard to American Pepper's breach of contract and bad faith claim against Federal.

Please keep in mind that this ruling is specific to Arizona. Other courts might rule differently on the same issue.

An insurance company is liable for penalties under OCGA § 33–4–6 when it fails to pay a covered loss within 60 days after a demand for payment has been made and there has been a finding that the refusal to pay was in bad faith. The purpose of the section is to penalize insurers that delay payments without good cause. As the section imposes a penalty, it is strictly construed; consequently, a proper demand for payment is essential to recovery. In this sense, a demand for payment must be made when immediate payment is in order ...It is well-settled that, in order to assert a claim under OCGA § 33–4–6, the demand for payment be made at least 60 days before suit is filed. ..[A] failure to wait at least 60 days between making demand and filing suit constitutes an absolute bar to recovery of a bad-faith penalty and attorney fees under this statute.

In Mr. and Mrs.Cagle's case, they made the demand for payment on the same day as filing suit against State Farm. They were supposed to wait sixty days between making the demand and filing the lawsuit against State Farm. State Farm was not required to pay their fire loss until sixty days after they submitted their proofs of loss. In other words, the insureds jumped the gun on filing the lawsuit.

Mr. and Mrs. Cagle argued that it would be inequitable to bar their claim because they were forced to file suit before the sixty day period expired because their policy required that any lawsuit against State Farm had to be brought within one year after the date of loss. The Court was unable to find any case law that supported the Cagle's position. The Court also pointed out that because the statute imposes a penalty against a carrier for bad faith, the statute is to be strictly construed.

In this case, Mr. and Mrs. Cagle's failure to make a timely demand for payment was due to their eleven month delay in submitting the property inventory forms, despite frequent requests from State Farm. The Court explained that after having waited eleven months to submit the necessary documentation, Mr. and Mrs. Cagle could not then complain that they were “forced” to file suit before the expiration of the sixty day period. For this reason, the Court determined the bad faith claim was barred.

This case serves as a reminder to policyholders that it is important to review the policy and comply with post-loss obligations as soon as reasonably possible. Please keep in mind that this ruling is specific to a Georgia appellate court. Courts in other jurisdictions might rule differently on the same or similar issues.

The same day Mr. Empey learned of the damage, he gave notice to Allied. After many meetings and exchanges of information, Mr. Empey and Allied were unable to agree upon the amount of the loss. Mr. Empey decided to file a lawsuit against Allied, claiming that Allied breached the insurance contract and the implied covenant of good faith. He asked the court to determine the parties' rights under the policy.

In California, the general law of bad faith provides:

California law recognizes in every contract, including insurance policies, an implied covenant of good faith and fair dealing…In the insurance context, the implied covenant of good faith and fair dealing requires the insurer to refrain from injuring its insured's right to receive the benefits of the insurance agreement…In order to state a claim for bad faith, a plaintiff has the burden of showing that (1) the insurer withheld policy benefits, and (2) that the withholding was unreasonable and without proper cause.

When deciding whether Mr. Empey’s bad faith claim met the standard above, the Northern District of California could not determine which estimate of damages was correct – Mr. Empey’s estimate or Allied’s estimate, and whether Allied had a reasonable basis for its decision to pay $154,485 less on the dwelling claim than the amount estimated by Mr. Empey’s general contractor. It was also unclear whether Allied’s estimate included all of the covered repairs. Finally, the Court was unable to confirm that Allied unreasonably delayed processing the dwelling claim.

The Court also had difficulty deciding whether Allied improperly delayed processing the personal property claim. There was evidence suggesting that Allied did not provide Mr. Empey or his representatives with information they would have needed to prepare a proper proof of loss statement. However, the Court was unable to definitively find that Allied’s failure to provide that evidence was unreasonable.

Because of the substantial lack of evidence at the pleading stage, the court decided that these issues would have to be determined by a jury.

A copy of the Order is available here.

Actual Cash Value...mean[s] replacement cost of the property at the time of loss less depreciation.

Farmers calculated the ACV payment by depreciating labor costs for tear-off labor and new installation. Mr. Branch filed a lawsuit against Farmers alleging, among other things, that Farmers' depreciation was in bad faith. When the U.S. District Court in the Western District of Oklahoma ruled against Mr. Branch on the bad faith claims, he filed an appeal.

Mr. Branch asked the appellate court to determine whether the cost to tear off damaged shingles is subject to depreciation, whether the labor cost of installing shingles is subject to depreciation, and whether the district court made a mistake when finding that Farmers' conduct did not amount to bad faith.

At the time Mr. Branch's case was before the Tenth Circuit Court of Appeals, there was a conflict in the Western District of Oklahoma regarding the proper application of depreciation to roof replacement claims under an ACV provision. When there are different rulings on the same or similar issue in a particular federal district, a federal court will often look to the particular jurisdiction’s state law. In Mr. Branch's case, however, Oklahoma state case law did not provide any guidance as to how ACV provisions were evaluated by the state courts.

Ultimately, the appellate court decided that the labor cost to remove the damaged shingles is not depreciable but the labor to install new shingles is depreciable. With regard to Mr. Branch's bad faith claim against Farmers, the Tenth Circuit Court of Appeals explained:

Because Farmer's interpretation of the actual cash value provision was a reasonable position taken in litigation of a legitimate coverage dispute, we affirm the district court's grant of summary judgment against Appellant's [Mr. Branch's] fraud and bad faith claims.

At the end of my posts, I remind readers that the case I write about is specific to a particular jurisdiction. This case demonstrates that there are sometimes different rulings on the same issue within a particular jurisdiction. This is why it is important to thoroughly research and consider all possibilities when litigating a property damage claim.

Click on the following links to read other posts on Actual Cash Value and Depreciation.

Virginia [Surety] relied upon the Policy's 'Progressive, Continuous or Intermittent ‘Property Damage’ Exclusion'...that… excludes coverage for damages that occurred prior to commencement of the Policy...Virginia [Surety] also claimed that the 'damage to your work' exclusion…that…excludes coverage for damage caused by the policyholder (as opposed to damage caused by third-parties, such as the policyholder's subcontractors)—“may well operate to bar coverage for this claim...Rather than claiming that this exclusion definitively barred coverage, however, Virginia [Surety] stated that “we do not have sufficient information to know if the subcontractor exception to the exclusion might apply.

When the townhomes' HOA filed a lawsuit against WSP alleging various defects in the building and naming Ledcor as a third-party defendant, Ledcor notified Virginia Surety and provided Virginia Surety with certain pleadings. Although Ledcor again submitted a claim for coverage, Virginia Surety did not respond.

Several months later, the condominiums' HOA filed a similar lawsuit against WSP, naming Ledcor as a third-party defendant. Ledcor sent the relevant pleadings to Virginia Surety and re-tendered its claim for coverage. Virginia Surety did not respond.

Like many homeowners who challenge the denial of a claim or the amount of loss determined by their carrier, Ledcor sued Virginia Surety for breach of insurance contract, violations of Washington's Consumer Protection Act, and Violations of the Insurance Fair Conduct Act. Once the litigation was underway, Ledcor filed a Motion for Partial Summary Judgment claiming, among other things, that Virginia Surety's denial letter misinterpreted and misrepresented the policy and that the carrier failed to acknowledge and investigate Ledcor's initial tender for defense and indemnity.

When evaluating the evidence before the United States District Court for the Western District of Washington, the Court pointed out that Virginia Surety’s own claims handler testified that the 'damage to your work exception' would not apply to work conducted by Ledcor's subcontractors. He also testified that, at the time Virginia Surety sent the denial letter, he knew that Ledcor was the general contractor on the Adelaide Project and that it employed a number of subcontractors. Despite the fact that Virginia Surety knew this, the Court could find no evidence that the carrier conducted any investigation into whether a subcontractor caused the damages at issue.

The Court also considered that Virginia Surety relied upon the Fungus Exclusion to deny coverage when the lists of construction defects provided by the HOAs did not mention mold or fungus. Finally, the Court ruled that the Progressive Loss Exclusion did not apply to preclude coverage either. The evidence showed that Virginia Surety was aware that certain punch list work was still ongoing at the Adelaide Project as late as April of 2004, a date that was several months into the term of the policy. The Court agreed with Ledcor’s position that a reasonable investigation by Virginia Surety would have revealed the ongoing nature of the work at the Adelaide Project and would have at least required an inquiry into whether the construction defects at issue occurred within the term of the policy.

After undergoing the analysis above, the Court determined that Virginia Surety's denial of coverage and failure to investigate, together with its subsequent failures to respond, constituted bad faith and breach of contract and violations of Washington's Consumer Protection Act and Insurance Fair Conduct Act.

The ruling referenced above is specific to the United States District Court for the Western District of Washington; rulings on the same or similar issues in other jurisdiction may vary.

There is no independent cause of action in tort for bad faith involving insurance coverage disputes in Virginia. . . .There is, however, a statute-based remedy allowing a court to award attorney's fees and costs if 'the court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy'.

In some states, insureds cannot file a bad faith claim until they have succeeded on a breach of contract case against the insurance company. The U.S. District Court determined that it was not necessary to dismiss Ms. Decker's bad faith claim, but that it would stay discovery on bad faith until the breach of contract dispute was resolved. The Court explained that it made no difference whether Ms. Decker's bad faith claim was a separate count from the breach of contract count. The manner in which Ms. Decker plead bad faith against Massachusetts Bay in her Counterclaim did not change the fact that Virginia law gives her the right to recover attorney's fees and costs if the Court finds that Massachusetts Bay acted in bad faith when denying coverage for her claim or refusing to pay her claim. The Court denied Massachusetts Bay's Motion to Dismiss and stayed the issue of bad faith.

Please consider that this ruling is specific to this Court. Cases in other jurisdictions may be governed by different rulings on this issue.

…authorizes all insurers licensed to write essential property insurance in New Mexico to establish and maintain a FAIR plan to provide…essential property insurance to responsible and qualified applicants unable to obtain insurance on the open market…[the Act] plans are intended to create a means for high-risk property owners to obtain essential property insurance coverage, where they would not otherwise be able to do so on the normal insurance market because their risks would be unprofitable for insurance companies to assume on a voluntary basis.

Audubon argued that the Fair Act Plan includes an immunity provision that prohibited the insured from filing a bad faith lawsuit. The immunity provision in the Fair Plan Act provides:

There shall be no liability on the part of, and no cause of action of any nature shall arise against, any member insurer, the association or its agents or employees, the governing committee or the superintendent or his representative for any action taken by them in the performance of their powers and duties under the FAIR Plan Act.

Although insurance companies such as Audubon function as a “Servicing Insurer” when a homeowner obtains insurance coverage through the Fair Plan Act, the immunity for bad faith lawsuits did not extend to Audubon. In evaluating the Legislature’s intent with regard to whether Servicing Insurers like Audubon had immunity, the Supreme Court of New Mexico noted that Servicing Insurers are not named in the immunity provision. The Court also pointed out that even for those members of the NMPIP that can assert immunity, there are very strict restrictions as to who is immune and the circumstances in which immunity applies. As a result, the Court did not interpret the immunity provision to include Audubon as a Servicing Insurer that would be immune from a bad faith lawsuit.

The Court rejected the proposition that Audubon could be immune from the bad faith lawsuit if it served as an “agent” of the NMPIP:

Audubon misconstrues the NMPIP Bylaws in urging us to find the requisite control… The reasonable construction of these provisions, read in the context of the [NMPIP] Bylaws as a whole, is that the NMPIP has control over certain aspects of the FAIR Plan insurance policies, e.g., whether property is eligible for insurance…and whether to cancel a policy issued under the FAIR Plan…and that the NMPIP Governing Committee has authority over administration and budgeting of the FAIR Plan…However, the reasonable reading of these provisions, and the reading which we adopt, is that the requisite control does not exist nor does any textual basis from which we can imply a principal-agent relationship between the NMPIP and Audubon.

The Court acknowledged that the NMPIP regulates Servicing Insurers like Audubon, but found that the NMPIP does not have the type of control over Audubon that is needed to establish a principal-agent relationship, which could allow Audubon to assert immunity to the bad faith lawsuit.

Please keep in mind that this decision was based on a New Mexico statute and the specific facts before the Court.

ASIC pursued dilatory litigation tactics in order to delay proper payment and subject its policyholder to ongoing and potentially dangerous property damage. In short, ASIC acted in bad faith.

The United District Court for the Middle District of Florida began its analysis with this principle:

In order to successfully plead a cause of action pursuant to Fla. Stat. Sec. 624.155(1)(b), an insured must: (1) file a written Civil Remedy Notice; (2) obtain the favorable resolution of an underlying civil action for insurance benefits against the insurer; and (3) allege both that there has been a determination of the existence of liability on the part of the insurer and the extent of plaintiff's damages.

In its motion to dismiss the insured’s complaint, ASIC argued that the complaint didn’t identify the basis of the bad faith claim. Because the bad faith claim did not satisfy the pleading requirements set forth in the applicable Federal Rules of Civil Procedure, ASIC argued that it should be dismissed. In response, the insured argued that between his Amended Complaint and the CRN, there were sufficient factual allegations that established ASIC's bad faith.

With regard to the CRN, the Court explained the following: 

The Florida DFS' acceptance of a CRN serves as evidence that the CRN has sufficient specificity to provide the insurer with notice of the violation and start the 60-day clock...Because the DFS accepted Canales' CRN, the Court finds that the CRN provides a factual basis for the claims against ASIC sufficient to survive the Motion to Dismiss.

Based on this evaluation, the United States District Court for the Middle District of Florida denied ASIC’s motion to dismiss the bad faith claim on these grounds.

ASIC also argued the CRN undermined and contradicted the allegations underlying the bad faith claim. In his Complaint, the insured alleged that ASIC failed to pay the claim in good faith in a timely fashion after investigating the claim and determining that the cost to repair exceeded the policy limits. The Court determined that these allegations were sufficient under Florida law to support the bad faith claim.

ASIC's last argument in support of its position that the bad faith claim should be dismissed was the following:

Canales's bad faith claim must fail because it is predicated on the Policy's Loss Settlement provision, which is superseded by the Loss Settlement provision of the Sinkhole Endorsement ...The Sinkhole Endorsement states that ASIC will settle a sinkhole loss once the insured enters into a contract for repairs ...ASIC argues that it was not required to pay Canales the policy limits because he did not execute a contract for the repair work.

The Court evaluated the insured’s argument that portions of the Loss Settlement provision in the Sinkhole Endorsement not quoted by ASIC suggest circumstances in which ASIC might pay claims if ASIC's own estimates suggested that payment above policy limits is necessary to restore the premises to its pre-loss condition. The Court also considered the insured’s assertion that he had a contract for the repair work and that ASIC ultimately paid policy limits after the CRN expired. Although the insured apparently referred to the wrong policy language, the Court decided that this did not void the bad faith claim:

[A]n action for bad faith is extra contractual in nature and relates to the duties of an insurer as defined by statute, not the express terms of the contract…Furthermore, the statute specifies that CRNs ‘shall [refer] to specific policy language that is relevant to the violation, if any’ ...Thus, Canales was not required to reference specific, relevant language from the Policy. ..It therefore makes little sense to dismiss Canales's claim simply because he refers to the wrong policy language.

For these reasons, the Court denied ASIC's motion to dismiss the bad faith claim pursuant to Florida Statute 624.155(b)(1).

Please consider that this is an unreported federal trial court decision. Both unreported and reported decisions in other jurisdictions may rule differently on these same issues.

To recover attorney's fees or penalty for bad faith a demand for payment of the loss must be made more than 60 days prior to filing of the suit . . . no particular language is necessary to constitute a demand. In Clark the statement of the insured to an adjuster insisting upon payment of his loss and if not paid he would resort to the court constituted a sufficient demand. Applying that holding to this case, the demand made by plaintiff's attorney here more than 60 days prior to the suit would be sufficient and the failure to demand payment in any particular sum would not render the demand insufficient.

Additionally, the Court found that the Hanover adjuster waived the proof of loss requirement.

The Court determined that the evidence presented by the parties supported the award of the bad faith penalty and attorney's fees against Hanover. Please consider that rulings on these or similar issues by courts in other jurisdictions may vary.

Among other bad faith allegations, B Street claimed that Lexington acted without a reasonable basis in investigating whether the premises were heated, as this might have caused or contributed to the pipe burst which caused of the loss. Lexington argued that B Street failed to comply with post loss obligations.

Here, Plaintiffs did not file a proof of loss within the thirty days following the submission of their claim on January 8, 2008...Further, despite attempts by Defendant to obtain necessary documentation confirming that the premises were heated, Plaintiff either failed to provide the requisite information or provided deficient and/or conflicting documentation.

When evaluating Lexington's actions, the Court gave substantial weight to B Street's failure to timely provide a proof of loss and failure provide the information requested by Lexington regarding whether the property was heated. The Court ruled that B Street could not demonstrate that Lexington lacked a reasonable basis in conducting an ongoing investigation on the issue. In combination with other issues, the Court decided that Lexington's delay in payment was not in bad faith.

Although this decision is specific to the Eastern District Court of Pennsylvania, it serves as a reminder that it is important for policyholders to review their policy and understand their obligations. It is also critical that the insured comply with requests for information and documentation that can assist the carrier with the investigation of the claim.

The prohibited conduct under these two statutes is virtually identical: the failure to timely pay a claim after receiving satisfactory proof of loss when that failure to pay is arbitrary, capricious, or without probable cause...The difference between the statutes is the time period permitted for payment. La. R.S. 22:658 requires payment within thirty days of receiving satisfactory proof of loss and La. R.S. 22:1220 requires payment within sixty days. Both statutes impose a penalty when the failure to pay is arbitrary, capricious or without probable cause.

With regard to the contents portion of her claim, the Court carefully evaluated the documentary evidence and testimony of various individuals. Although the contents estimate prepared for Ms. Reilly by Carr & Associates was not provided to Audubon until September 2002, it was clear that Ms. Reilly submitted to Audubon a "satisfactory" proof of loss for at least part of her contents claim by May 20, 2002, only 18 days after the fire. Even Mr. Allain, the adjuster for Audubon, stated that if Ms. Reilly had requested an advance, he probably would have been able to advance approximately $2,500 on the contents policy. He claimed, however, that the only way to pay a partial contents claim was if he had an inventory list and supposedly that was not received by Audubon until it got the Carr & Associates estimate in October 2002. Despite the fact that Audubon was aware that she was owed some money on her contents claim in May 2002, Audubon failed to make any payment to Ms. Reilly for her contents until October 28, 2002, more than the thirty (30) and sixty (60) day applicable time periods. It is important to consider that when Audubon finally made a payment on contents, it paid the full policy limit. The Court explained that Audubon was on notice of Ms. Reilly's claim in May 2002 and should not have waited until about five (5) months later to make a payment. Audubon's actions in delaying payment on a known, covered claim were in bad faith.

The Fourth Circuit Court of Appeals in Louisiana awarded Ms. Reilly $48,141.94 for the balance of her dwelling policy limits, $25,000 for bad faith penalties, forty percent attorneys' fees and other damages not discussed in this post. Please keep in mind that rulings on these issues may be very different in other states.

When evaluating these issues, the Court relied on this basic principle:

As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims… While New York does not recognize an independent tort cause of action for an insurer's failure to perform its contractual obligations under an insurance policy…where an insurer breaches its duty to investigate, bargain and settle claims in good faith, consequential damages for breach of contract may be recovered not limited by the amount specified in the insurance policy . . . .

The Supreme Court in New York found that Mr. and Mrs. Pelham proved they suffered damage due to the delay in the reconstruction of their home caused by Allstate’s bad faith. To settle the claim, Allstate initially offered $265,000, then $575,000 and later paid $832,982. The Court determined this constituted a prima facie claim for breach of the covenant of good faith and Allstate failed to submit any evidence that raised a question of fact requiring a trial.

Please keep in mind that this decision is unreported and is particular to New York. The law in other jurisdictions may differ.

There were three types of deductibles in the policy:

(c) In respect of loss caused directly by the peril of Windstorm, as defined: $25,000…

(d) In respect of loss caused directly by the peril of a “Named Windstorm”, as defined, 3% of the total insurable values...subject to a minimum of $50,000 per occurrence

(e) In respect of loss caused directly by the peril of Flood, as defined: $25,000....

At the heart of the bad faith litigation filed by SEACOR against Commonwealth, was whether SEACOR’s damages were caused by windstorm, named windstorm or flood. SEACOR argued a Named Windstorm caused its losses. Commonwealth argued that a “multi-peril occurrence” caused the losses so the deductibles and liability limits for both flood and named windstorm applied. When evaluating the policy and arguments made by the parties, the district court determined that the flood liability limits and deductibles did not apply because the named windstorm's percentage-based deductible structure already included the possibility of greater damages and a correspondingly higher deductible. Accordingly, the Court ruled that only the limits and deductible for a named windstorm should be applied to SEACOR’s claim.

SEACOR also alleged that the claim was adjusted in bad faith because Commonwealth misinterpreted its own policy and, as a result, it should be liable for penalties based on applicable Louisiana statutes and precedent. However, SEACOR presented no evidence that Commonwealth acted arbitrarily or capriciously beyond its inconsistent reading of the provisions in policy. Noting that Commonwealth promptly paid Seacor over $4 million to cover undisputed damages and sought judicial assistance to resolve disputes regarding the policy deductible and liability limits, the Fifth Circuit Court of Appeals upheld summary judgment in favor of Commonwealth on the issue of bad faith.

During its investigation of the fire claim, AHICT learned that Mr. Bennett had been unemployed at the time that he bought his home. It seems he was also unemployed at the time that he applied for the insurance coverage with AHICT. Mr. Bennett’s insurance application, however, indicated that he was employed. AHICT took advantage of this discrepancy and used it as the basis to deny his claim. AHICT alleged that he made a material misrepresentation on his insurance application.

Mr. Bennett sued AHICT for wrongful denial of his claim. During the course of the lawsuit, AHICT filed a motion for summary judgment on the breach of contract and bad faith claims arising from its denial of the claim based on material misrepresentation of employment status on the policy application.

The U.S. District Court for the District of South Carolina explained that, when reviewing the facts in a light most favorable to Mr. Bennett, there was evidence that his insurance agent did not ask him if he was employed. The facts also demonstrated that Mr. Bennett signed the application without reading it. When taking into consideration the agent’s actions and the fact that Mr. Bennett did not review his application, the Court decided to deny AHICT’s motion for summary judgment on the breach of contract claim, concluding:

[T]here is a genuine issue of fact for determination by a jury as to whether or not Plaintiff intended to deceive Defendant with regard to his employment status.

Additionally, the U.S. District Court for the District of South Carolina denied AHICT’s motion for summary judgment on the bad faith claim, explaining:

[I]f a jury were to find that [Bennett] had no intent to deceive [AHICT], it is possible that a jury could also find that [AHICT] was unreasonable in relying on the error of its own agent to deny coverage without investigating the circumstances surrounding the completion of [Bennett's] insurance application.

The decision above is specific to the U.S. District Court for the District of South Carolina. Courts in other jurisdictions might decide a similar case differently. Regardless of the jurisdiction, this is another example of a case where the insurance company’s motion for summary judgment was without merit.

Mr. Belsito sued Allstate for breach of contract and bad faith. Allstate filed a partial motion for summary judgment on the bad faith count. The District Court of Ohio denied Allstate’s motion on the following grounds:

The court was not persuaded, based on the record before it, that there was no genuine issue of material fact that Allstate denied Belsito’s claim in good faith, as Allstate had not provided sufficient evidence of any material misrepresentations or fraud. Furthermore, Allstate had not pointed out or offered any evidence that Belsito lacked sufficient evidence to prevail on his bad faith claim. Therefore, Allstate had failed to meet its initial burden on summary judgment.

This case serves as a reminder that policyholders and their attorneys should always carefully evaluate a motion for summary judgment – or any dispositive motion - filed by a carrier. Whether the carrier’s motion has any teeth, can only be determined by exercising due diligence in carefully evaluating whether there are arguments and evidence that can persuade the court to deny the motion.

Please keep in mind that the decision above is specific to the U.S. District Court for the Northern District of Ohio. Other jurisdictions may hold either similarly or very differently.

When evaluating the issue of bifurcation, the Supreme Court of Wisconsin made reference to the Court of Appeals’ decision in Dahmen v. American Family Mutual Insurance Co., 635 N.W.2d 1:

[T]he considerations bearing on the bifurcation decision weigh in favor of bifurcation for the following reasons: (1) the failure to bifurcate a claim of bad faith from an underlying claim for UIM benefits would significantly prejudice American Family; (2) the two distinct claims present differing evidentiary requirements that increase the complexity of the issues and the potential for jury confusion; and (3) a separate initial trial on the claim of UIM benefits increases the prospect of settlement and promotes economy by narrowing the issues for the jury and potentially eliminating the need for a later trial on the bad faith claim.

The Court pointed out the primary distinction between the Dahmen decision and the facts in Brethorst. In Brethorst, the insured did not file a breach of contract claim; she only sued Allstate for bad faith. 

The plaintiff absolutely insists ... that it has not and does not intend to plead a cause of action for breach of the insurance [contract]. That [its] pleading be interpreted and be prosecuted solely as a bad faith claim.

The Court explained that, when evaluating whether a party must prevail upon a claim for breach of contract by establishing an inadequate offer before it can proceed on the separate and independent cause of action for bad faith, it was more appropriate to consider what relief the Court might properly grant on Allstate’s motion to bifurcate. The Court concluded that there was nothing to bifurcate because the insured only brought one claim; there was no other claim from which the bad faith claim could be bifurcated.

[A] bad faith claim is separate and distinct from a breach of contract…Bad faith is not the same as breach of contract, which is a “failure to pay the claim in accordance with the policy” [citation omitted]. Rather, bad faith “is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.”

An insurance company may challenge a claim, as a matter of fact or law, when the claim is fairly debatable.

[T]o bring a bad faith claim, “a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” [citation omitted]. The knowing failure of an insurer to proceed in a manner that is honest and informed constitutes bad faith [citation omitted]. Thus, bad faith is an intentional tort….[A]n insurance company ... may challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis.

The Court explained that this standard recognizes the intentional nature of the tort of bad faith. The standard applies an objective basis, quelling concerns that allowing bad faith claims will result in extortionate lawsuits. The Court also pointed to the standard civil jury instructions for first-party bad faith claims as set forth in “Bad Faith By Insurance Company: Assured's Claim:”

To prove bad faith against (insurance company), the (plaintiff) must establish that there was no reasonable basis for the insurance company's denying (plaintiff )'s claim for benefits under (his)(her) policy and that (insurance company), in denying the claim, either knew or recklessly failed to ascertain that the claim should have been paid.

Bad faith is the absence of honest, intelligent action or consideration of an insured's claim.

Bad faith exists if, upon an examination of the facts found by you, you are able to conclude that (defendant) had no reasonable basis for denying (plaintiff)'s claim.

In answering this question, you may consider whether (plaintiff)'s claim was properly investigated and whether the results of the investigation were given a reasonable evaluation and review. If you find that (insurance company) either refused to consider the (plaintiff)'s claim for damages, made no investigation, or conducted its investigation in such a way as to prevent it from learning the true facts upon which the (plaintiff)'s claim is based, the insurance company can be found to have exercised bad faith. This is because you may infer from these facts a reckless disregard on the insurance company's part to learn that there was no reasonable basis for it to deny (plaintiff)'s claim.

If, on the other hand, you find that the insurance company, after conducting a thorough investigation of the facts and circumstances giving rise to the (plaintiff)'s claim, reasonably concluded that the claim is debatable or questionable, then there is no bad faith even though it refused to pay the claim.

I will continue the discussion of this opinion next week.