A few months ago in my post titled "Going through the Motions" Is Usually Not Enough to Compel Bad Faith Discovery From an Insurer, I wrote about a particular policyholder’s attorney and his experience with discovery in a case against Safeco. The attorney researched extensively until he found a case compelling an insurer to produce the kind of materials he needed in his case. The opinion he found included details of the specific discovery requests at issue, so he modeled his own discovery requests after those in the opinion. After serving his discovery requests, Safeco served its responses and objections, which included the usual work product and attorney client objections, along with a few others that a policyholder’s attorney can expect to see when an insurer responds to bad faith discovery. Our colleague then filed his Motion to Compel citing, as persuasive authority (and among other things), the case upon which he had modeled his discovery requests. His “merely persuasive” authority consisted of facts and issues so similar to those in his case and presented an analysis so precise that the Judge ordered Safeco to produce a complete and un-redacted portion of its claims file. That case ultimately had a happy ending – well, at least for the policyholder. Because the United States District Court for the Eastern District of Wisconsin’s Decision and Order is thorough, I will write about it over the course of the next 2-3 weeks.
Craig and Nancy Miller were the owners of a residence in Wisconsin and had a homeowner’s insurance policy with Safeco. The Millers began renovating the property and, after discovering severe inner wall water leaks at their home, they submitted a claim to Safeco. Safeco denied the claim and the Millers subsequently filed a lawsuit against Safeco. The trial on the plaintiffs’ breach of contract/coverage claim was conducted from April 7-9, 2008. On May 30, 2008, the court issued a decision and order. The parties then began discovery and started preparing for a trial on the bad faith claim.
The Court began its analysis of the bad faith issues with a few general principles:
Bad faith is the “absence of honest, intelligent action or consideration based upon a knowledge of the facts and circumstances upon which a decision in respect to liability is predicated.” In other words, “the knowing failure to exercise an honest and informed judgment constitutes the tort of bad faith.” Bad faith is comprised of a two part test. To demonstrate that an insurance company has committed a tortuous bad faith refusal to honor a claim of an insured, a plaintiff must show (1) the absence of a reasonable basis for denying benefits of the policy and (2) the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.
The Court explained that the first prong of the test is objective. An insurer lacks a reasonable basis for denying a claim when the claim is not “fairly debatable.” Whether a claim is “fairly debatable” implicates the questions of whether the facts necessary to evaluate the claim are properly investigated and developed or recklessly ignored and disregarded. The inquiry focuses on whether a reasonable insurer under the circumstances would have denied or delayed payment of the claim under the facts and circumstances.
The second prong of the test is subjective – the insurer’s knowledge or reckless disregard of the lack of a reasonable basis. The Miller Court relied upon the analysis in Brown v. Labor and Indus. Review Comm’n, 267 Wis. 2d 31, 671 N.W. 2d 279 (2003) when explaining that the nature of the tort of bad faith is intentional and that implicit in the two-part test is:
Our conclusion that the knowledge of the lack of a reasonable basis may be inferred and imputed to an insurance company where there is a reckless disregard of a lack of a reasonable basis for denial or a reckless indifference to facts or to proofs, submitted by the insured. The focus for determining whether an insurer is liable for bad faith is the sufficiency or strength of its reasoning.
Because I will address this decision as part of a series, I will stop here and pick up next week with the reasons upon which Safeco denied the claim and the Court’s analysis of same. Please tune in next week for a continued discussion of this decision in Wisconsin.