Claim delay and failure to timely pay undisputed benefits are the most frequent complaints of policyholders. Many understand when an insurer cannot pay legitimately disputed amounts following an honest, prompt and thorough good faith investigation. But what happens when portions of a loss can be paid but are not for reasons that are not based on good faith?
I have the honor of representing a number of complex commercial policyholders in this category. The business owners and corporate officers not being paid promptly on undisputed portions of claims can be just as upset and frustrated as individual policyholders feeling they have been “jerked around” waiting for monies. Indeed, when you have responsibilities to others as most businesses do, cash is the blood that keeps businesses alive. Benefits from commercial insurers should be especially prompt.
A recent federal court ruling in Penford Corp. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 09-CV-0013, 2009 WL 2030377 (N.D.Iowa July 13, 2009) highlights the fact that an insurer can be subject to a bad faith lawsuit for wrongfully delaying payment of an undisputed portion of coverage, even if it correctly denies coverage on other parts of a claim.
The facts of this property damage claim indicated that:
“ …In June 2008, Penford’s Cedar Rapids plant was flooded and suffered substantial property damage. Defendants provided insurance coverage for Penford’s facility…Defendants have paid Penford $20 million for flood damages…
In addition, the policy contained certain “time element coverages,” providing coverage for losses caused by business interruption. The policy also provided additional coverages for debris removal, decontamination costs, contaminant or pollutant clean up, and professional fees. Penford claims that it is entitled to additional benefits for losses falling under the time element coverages and additional policy coverages. According to Penford, its covered losses will exceed $50 million. Penford requests that the Court “declare Penford’s rights and Defendant Insurance Companies’ obligations under the Policy,” and that it award compensatory damages for breach of contract….of particular significance to the instant motion, Penford asks that the Court award it additional damages for Defendants’ alleged bad faith in denying Penford benefits which are due under the policy, and “unreasonably delaying undisputed payments under the Policy.”
The defendant insurers moved to bifurcate the contract and bad faith trials and stay discovery of the bad faith aspects of the case, arguing:
“…that recovery by Penford on its declaratory judgment and breach of contract claims is a “condition precedent” to its recovery on the bad faith claim. Defendants argue that the discovery required on the bad faith claim is “not relevant” to the discovery associated with the declaratory judgment and breach of contract claims. Therefore, according to Defendants’ argument, bifurcating the trial and staying discovery on the bad faith claim will promote judicial economy.”
This is the same argument insurers use in many cases. In my experience, judicial economy is best served by denying the stay order and then deciding if matters should be bifurcated at trial. The gamesmanship and lack of good faith, if any, is explored early in the litigation and the matters resolve for all much quicker. This practical experience seems lost on some judges, which is why these motions are so common. When judges do not get sidetracked into granting the motions and instead order full discovery, judicial economy is swiftly served by eager settlement discussions by insurers that may have problems in their claims handling.
The policyholder’s response was:
“…that much of the discovery “intermingles” between the contract and bad faith claims….a number of witnesses have knowledge regarding both the flood loss and the subsequent adjustment of the insurance claim, and staying discovery on the bad faith claim would necessitate deposing those witnesses twice. In addition, Penford argues that even if it does not prevail on the breach of contract claim, it nonetheless has a viable bad faith claim for Defendants’ alleged failure to timely pay the benefits due under the policy. Finally, Penford argues that even if bifurcation of the trial is otherwise appropriate, the parties should be permitted to proceed with discovery on all claims.”
The Court ruled for the policyholder, and the ruling is much more significant than a mere finding about the bifurcation and discovery, because it correctly noted that delay of the previous payments could be an independent basis for the bad faith claim:
“…Defendants argue that it is unnecessary to address discovery and trial on the bad faith claim unless Penford first prevails on its contract claims. This argument fails, however, to address Penford’s claim that Defendants acted in bad faith in delaying the payment of insurance benefits. Even if it is determined that Penford has been paid all of the benefits it is entitled to receive under the policy, a claim for bad faith may lie if Defendants knowingly acted unreasonably in delaying payments. Galbraith v. Allied Mut. Ins. Co., 698 N.W.2d 325, 328 (Iowa 2005) (a bad faith claim may lie if “the insurer lacked a reasonable basis for denying or for delaying payment of the claim”)… Accordingly, Penford is entitled to discovery regarding the adjustment of its loss, even if Defendants ultimately prevail on the contract claims.
…Bifurcating the trial and staying discovery on the bad faith claim until after the contract claims have been resolved would unnecessarily delay this action and, therefore, prejudice Penford…In Agrawal v. Paul Revere Life Ins. Co., 182 F.Supp.2d 788 (N.D.Iowa 2001), the court ordered bifurcation of trial on the coverage and bad faith claims…The court did not, however, stay discovery. The court envisioned that the bad faith claim would be tried immediately following coverage claim, if necessary…Discovery on both claims proceeded, notwithstanding the court’s decision to bifurcate the trial.
The Court concludes that discovery on the bad faith claim should not be stayed… As set forth above, Penford may pursue a bad faith claim for defendants’ alleged delay in the payment of benefits, even if it is not entitled to any additional recovery under the contract.”
This is a common scenario in insurance claims. Part of the claim is paid after a period of time that the policyholder thinks is not within the standards of good faith conduct, and the remaining portion of the claim is denied. Discovery generally moves along much quicker and with a greater chance of complete resolution of all matters if courts do not stay any portion of the discovery. While the Court in this case did not bifurcate the trial, my impression is that justice is best served by usually reserving that decision until right before trial because the evidence at that time may better clarify how the trial should proceed.
The practice tip for the policyholder attorneys is to seek independent actions and remedies for the payments that were delayed. Specific pleadings indicating that the bad faith action is based on the delay of payments for coverage that was acknowledged will help judges recognize that the entire case is not just about the unsettled coverage controversy.
The practice tip for insurers is to act in good faith and not just focus on what might not be paid. Having a sufficient number of properly motivated adjusters with authority to promptly investigate a loss in an honest manner so that all the benefits owed following a loss are determined and paid promptly is the good faith service commercial policyholders purchased long before the loss ever occurred. Claims managers should make certain their adjusters perform to this standard.