A recent federal decision in Virginia has confirmed that policyholders may pursue first party bad faith claims against insurance companies.1
A hotel reported a loss after its HVAC roof units were stolen, resulting in property damage and loss of business income. The insurance company investigated the claim and issued five reservation of rights letters citing various exclusions to bar coverage. It also filed a declaratory action seeking a determination of no coverage. The hotel counterclaimed for breach of contract and breach of the duty of good faith and fair dealing. The court found that the 4th Circuit and Eastern District of Virginia recognize an “implied duty of good faith and fair dealing governing first party relationships in Virginia.”
The owner of the hotel believed that an employee may be responsible for theft of certain items. There was an exclusion in the policy for losses due to criminal acts by employees. When interviewed, the employee admitted to stealing items, including HVAC components. He subsequently pled guilty to grand larceny. Due to the lack of air conditioning, the hotel suffered mold and a roach infestation. It claimed millions of dollars in damage.
An issue was whether the insurance company is liable for breach of contract without formally denying the claim. The court found that the claim had been pending for over seven months, that the insurance company had sent five reservation of rights letters and had filed a declaratory action citing six exclusions, thus an effective or constructive denial existed.
In a prior case,2 the court held that an implied duty of good faith and fair dealing must yield to express terms of a contract. This does not mean that the duty does not exist under Virginia law. Absent an express denial of coverage, an insured may still bring a cause of action for breach of the implied duty of good faith and fair dealing.
This area of the law was previously uncertain in Virginia. This case confirms that, at least in Federal court, policyholders may pursue first party bad faith claims against insurance companies. This is a victory for insureds because it encourages fair and timely adjustment and payment of claims and provides a proven remedy if the insurance company fails to perform.
1 Great American Insurance Company v. GRM Management, LLC and SN Holdings, LLC, 2014 WL 6673902 (E.D.Va. Nov. 24, 2014).
2 Ward’s Equipment, Inc. v. New Holland North America, Inc., 493 S.E.2d 516 (Va. 1997).