Claims and Bad Faith Law Blog

Third-Party Bad Faith in Settlement/Not: The FAQs Continued ....

    This is the middle or Questions 4 through 6 of a list of 11 Frequently Asked Questions ("FAQs") about situations addressed by the Courts across the United States involving Claims of Third-Party Bad Faith in Settlement or Not.

COPYRIGHT DENNIS J. WALL 2010.  Reprinted With Permission.

LIABILITY INSURERS SETTLING THIRD-PARTY CLAIMS:

by

Dennis J. Wall, Esquire

 

COPYRIGHT © DENNIS J. WALL 2010

All rights reserved.  No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information retrieval system, without permission in writing from the author.

 

* * *

 

4.   What kind of Good Faith duties in settlement are there, when a Liability Policy is "mixed," meaning that it does not have a Duty to Defend but instead a Duty to Indemnify or pay for the Policyholder's Defense Expenses after they are incurred?

 

In a case involving such a Policy -- and a case which many other Courts have spent a lot of time distancing themselves from -- a Federal Trial Judge was confronted with a standard Director's and Officer's Liability Policy, and ruled:  "An insurance company has a duty implied in law to conduct good faith negotiations whether or not the policy explicitly requires it to defend."  Okada v. MGIC Indemnity Corp., 608 F. Supp. 383, 390 (D. Haw. 1985), aff'd in part, rev'd in part, 823 F.2d 276 (9th Cir. 1987).  This decision was questionable even under unsettled Hawaii Law, as the Ninth Circuit held in reversing:

 

   Thus, because of the uncertainty as to whether Hawaii would adopt the insurance “bad faith” developments of other jurisdictions, and because the district court erred in resolving the issue on summary judgment when material facts were disputed, we reverse the finding of bad faith.

 

Okada v. MGIC Indemnity Corp., 823 F.2d 276, 284 (9th Cir. 1987).

 

   Somewhat more recently, another Federal Trial Judge has held that "the duty to defend is the same as the duty to indemnify for defense costs."  Manley, Bennett, McDonald & Co. v. St. Paul Fire & Marine Insurance Co., 792 F. Supp. 1070, 1073 (E.D. Mich. 1992)[emphasis added], aff'd mem., 33 F.3d 55 (6th Cir. 1994).

 

Both of these views are in the minority, in general terms.  Ordinarily, a Liability Policy containing "mixed" Duties of Indemnity for Defense Expenses, and Indemnity for Settlement or Judgment, will be treated as affording Contract Claims for Breach of the so-called Duty of Indemnity for Defense Expenses, and as affording whatever the given jurisdiction recognizes as the legal basis for Bad Faith Claims connected with Indemnity for (or payment of) Settlements or Judgments.

 

 

5.   What activates the Liability Insurers' Duty of Good Faith and Fair Dealing in settlement negotiations, i.e., what turns the key in that Duty ignition?

 

In general terms, Courts across the country will hold that there is a Duty of Good Faith and Fair Dealing in settlement negotiations under a Liability Policy where there is a conflict between the Policyholder-Insured and the Liability Insurance Company.  For example, some Courts examine whether in a given case there is evidence of a likelihood that the Insured's Liability may exceed the Liability Policy Limits.

 

Other Courts say that they will look at whether there is evidence that the underlying claim presents the reasonable probability of a recovery in excess of the Liability Policy Limits, to which the Insured would be exposed if the case were not settled instead.

 

 

6.   What are the requirements for fulfillment or enforcement of Good Faith and Fair Dealing in settlement under a Liability Insurance Policy?

 

When there is a "conflict" of the kind recognized by the Courts (see Question 5 and its Answer, above, in general terms), the Insurer Bad Faith Law of each particular jurisdiction must be consulted.  The variety of legal standards announced by the Courts is just too great to attempt to state a single standard for "Good Faith" or "Bad Faith," which are words that add no meaning in and of themselves.  See Mattadeen v. State Farm Mutual Automobile Insurance Co., Case No. 04-80034-Civ-Hurley/Hopkins (S.D. Fla. filed 2004), December 17, 2004 "Order Granting Defendants' Motion for Final Summary Judgment," at 13.  The author filed an Expert Witness Report for the Defendant in that particular case before the Motion was granted.

 

However, the Courts in some jurisdictions hold Liability Insurance Companies to the same degree of care and diligence which a person of ordinary care and prudence should exercise in the management of that person's own business; or to give at least equal consideration to their Insureds' interests as to their own interests; or to evaluate the underlying claim against the Policyholder/Insured as though there were no Policy Limits and the Liability Insurer alone would be responsible to pay the entire amount of a Judgment on that underlying claim.

 

 

To Be Continued ....

 

Please Read The Disclaimer.

 

This is Fulfilling Fiduciary Duties?

   A newspaper report identifies several "big banks that are struggling in the postbailout world".  Eric Dash, 'Taking Their Cut/Once Banks Hand Out Pay, a Pittance for Shareholders" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Wed., January 27, 2010).  According to the report, these institutions are approving bonuses and payments to their employees which, aggregated, total nearly as much or more than their total profits last year:

• 88 cents out of every $1.00 "it made in 2009 to compensate all workers," id., in the case of one;
• 94 cents out of every dollar, in another case; and
• In another case, more than the total of its 2009 income in what might be called 'deficit dealing,' or "$1.45 for every dollar the company took in last year."  Id.

Who told these companies that making these bonus payments at the obvious expense of the Shareholders fulfilled their Directors' and Officers' Fiduciary Duties?

Please Read The Disclaimer.

 

Third-Party Bad Faith in Settlement/Not: 3/11 FAQs.

   This is a list of Frequently Asked Questions or "FAQs" about situations addressed by the Courts across the United States involving Claims of Third-Party Bad Faith in Settlement or Not.

COPYRIGHT DENNIS J. WALL 2010.  Reprinted With Permission.

LIABILITY INSURERS SETTLING THIRD-PARTY CLAIMS:

by

Dennis J. Wall, Esquire

Dennis J. Wall

Attorney At Law

 A Professional Association

P.O. Box 195220

Winter Springs, FL  32719-5220

Telephone:    (407) 699-1060

Facsimile:    (407) 699-1065

Email:    [email protected]

   [email protected]

www.dennisjwall.com

Author, "Litigation and Prevention of Insurer Bad Faith" (Second Edition Shepard's/McGraw-Hill; 2009 Supplement West Publishing).

Co-Author, "CATClaims: Insurance Coverage for Natural and Man-Made Disasters" (Thomson/West 2008; 2009 Supplement). 

Insurance Claims And Issues Web Log:

Access through American Bar Association web site at

http://www.abajournal.com/blawgs/insurance_claims_and_issues/

Insurance Claims and Bad Faith Law Blawg:

Access through American Bar Association web site at

http://www.abajournal.com/blawg/insurance_claims_bad_faith_law_blog/

 

COPYRIGHT © DENNIS J. WALL 2010

All rights reserved.  No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information retrieval system, without permission in writing from the author.

 

INSURANCE GOOD FAITH AND FAIR DEALING

 

1.   I have heard Liability Insurance called "Third-Party" Insurance.  What does that mean and what are some examples?

 

Third-party insurance just means Liability Insurance.  Under any Liability Insurance Policy, there is a claim of loss or damage; an injured claimant or creditor; and the Policyholder's insurance company.

 

Third-party or Liability Insurance is written and purchased to provide protection against the expense of defending yourself and against the expense of indemnifying or paying a judgment held by, or settlement with, an injured claimant, within the limits of the Liability Policy.

 

Some examples of Liability Insurance generally, are physicians' medical errors and omissions policies; attorneys' legal errors and omissions policies; Commercial or Comprehensive General Liability ("CGL") policies; and many types of Director's and Officer's Policies.

 

Further examples are explored in the many articles available online at www.dennisjwall.com.

 

 

2.   Why is there a duty of Good Faith and Fair Dealing in settling claims against a Policyholder under a Liability Insurance Policy?

 

There is nothing so much like a General on a battlefield, as a Liability Insurer controlling a Policyholder's defense against an injured claimant's lawsuit.  Liability Policies typically provide that the Liability Insurer has control over defense and settlement of every claim covered under these policies.

 

Courts across the nation are in general agreement that because of the Liability Insurer's control over defense and settlement of claims against the Policyholder, the Liability Insurer is held by the law to a standard of extracontractual Liability if that insurance company does not act in Good Faith and Deal Fairly with its Policyholders.

 

 "Extracontractual" in this sense means beyond the contracted policy limit.  In other words, failure to act in Good Faith, i.e., acting in Bad Faith in settlement, can subject a Liability Insurance Company to pay money beyond its policy limit.

 

A California Court long ago pointedly observed that it is actually the control held by Liability Insurance Companies "over the settlement negotiations" that obligates them to act Fairly and in Good Faith.  Kelley v. British Commercial Insurance Co., 221 Cal. App. 2d 554, 563, 34 Cal. Rptr. 564, 569 (Cal. 1st DCA, Div. 2, 1963).  [Emphasis added.]

 

 

3.   What about Liability Insurance Policies where the Policyholder has some say in settling or not settling, what is the standard of Good Faith and Fair Dealing for the Liability Insurance Company then?

 

The provision of a Liability insurance contract which gives the insured control over settlement decisions because the policy requires the insured's consent to settlement, is called a "pride provision".  Such provisions are found for example in professional errors and omissions policies. In general terms, the Liability insurer's exposure for ignoring such a contractual provision and settling without obtaining the insured's consent in a given case, is to a breach of contract claim by the Policyholder.  The insurance company in such a case is generally exposed to the risk of payment for the same damages to reputation and for mental anguish which the insured intended to prevent when she, he or it purchased a pride provision.

 

In Florida, a special statute has been acted for "Medical malpractice insurance contracts."  The Florida Statute pretty much disables so-called pride provisions:

 

It is against public policy for any insurance or self-insurance policy to contain a clause giving the insured the exclusive right to veto any offer for admission of liability and for arbitration pursuant to s. 766.106, settlement offer, or offer of judgment, when such offer is within the policy limits. However, any offer of admission of Liability, settlement offer, or offer of judgment made by an insurer or self-insurer shall be made in good faith and in the best interests of the insured.

 

Fla. Stat. § 627.4147(1)(b)1 (2009). [Emphasis added.]

 

COPYRIGHT DENNIS J. WALL 2010.  Reprinted With Permission.

To Be Continued ....

 

Please Read The Disclaimer.

 

Statutory Rescission ... "in good faith". What does that mean?

   Grounds for Rescission of Insurance Policies due to alleged misrepresentations in the Application, were examined using the Florida experience as an example, on January 7, 2010 and on January 8, 2010 (which also included an analysis of the pending Federal Health Care Bill as it would affect Rescission) on Insurance Claims and Issues Web Log (available through the American Bar Association web site, or at www.insuranceclaimsissues.typepad.com).

   One set of grounds for Statutory Rescission under Fla. Stat. § 627.409 (2009) combines "fraud" and "materiality":

   The misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer.

 

Fla. Stat. § 627.409(1)(a) (2009).  [Emphasis added.]

 

   An alternative set of grounds is expressly based upon Good Faith:

 

     If the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith would not have issued the policy or contract, would not have issued it at the same premium rate, would not have issued a policy or contract in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss.

Fla. Stat. § 627.409(1)(b) (2009).  [Emphasis added.]   It may be helpful to break out and list these four alternative factors, each of which expressly requires Good Faith on the part of the Insurance Company:   

    If the true facts had been known to the insurer pursuant to a policy or other requirement, the insurer in good faith:

  [a] would not have issued the policy or contract[;]

 

  [b] would not have issued the policy or contract at the same premium rate[;]

 

  [c] would not have issued a policy or contract in as large an amount[;] or

 

  [d] would not have provided coverage with respect to the hazard resulting in the loss.

 

   No Case has been found in which the requirement of "good faith" in the Florida Rescission Statute was construed.  What does it mean?

 

   Perhaps it is an open question in your jurisdiction, also.

 

Please Read The Disclaimer. 

 

"Volcker Rule" Proposal Based on Speculative Investors Ignoring Fiduciary Duties.

   In a dramatic switch in position after the Massachusetts Surprise, in which the voters of Massachusetts elected a Republican to the U.S. Senate over a Democrat, President Obama proposed what he called the "Volcker Rule".  The Volcker Rule, as explained by the President, would ban speculative investments by banks and bank holding companies in "proprietary trades".  These are in turn defined under the proposed ban as trades in which the banks invest their money without servicing their clients.

   The basis of the proposed Volcker Rule, named after former Federal Reserve Chair and Obama adviser Paul Volcker, is a perceived ignorance by banks, evidenced by their investing behavior in recent times, of their Fiduciary Duties toward any other party involved in their investment transactions, including their own clients.

   Mr. Volcker warned many people in many places for a long time, "that banks had developed 'unmanageable conflicts of interest' as they made investments for clients and themselves simultaneously."  David Cho and Binyamin Appelbaum, "Obama's 'Volcker Rule' Shifts Power Away From Geithner" (Washington Post Online, Friday, January 22, 2010).  "We ought to have some very large institutions," Mr. Volcker is quoted as saying in a speech he gave in Toronto, Canada ...

... whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit.  They ought to be the core of the credit and financial system.  Those institutions should not engage in highly risky entrepreneurial activity.

Id.  [Emphasis added.]

   Restoring a sense of Duty to speculative investment would be a major change in behavior on the part of speculative investors and so-called banks.  Even if it may have no effect on repetition of the causes of the current Great Recession in the future, the Volcker Rule would to a certainty prevent other causes of another Great Recession as a result of the behavior demonstrated in the past by  speculative investors.  See also Gretchen Morgenson, "Resetting the Moral Compass" p. 1, col. 5 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 24, 2010).

A related post on similar issues can be found on Insurance Claims and Issues Web Log, available through the American Bar Association web site or at www.insuranceclaimsissues.typepad.com.

Please Read The Disclaimer.

  

Bad Faith Claims Without Coverage: The End of First-Party.

      This extends the posts begun on Dr. King's Birthday Observed (Monday, January 18, 2010) and continuing through Tuesday, January 19, 2010 , Wednesday, January 20, 2010 and yesterday on the important issue of whether there can be a "Bad Faith" Claim even though there is no Insurance Coverage.  The posts in this week-long look at the issue, end as they began:  by addressing the predominant type of Insurance Policies, collectively called "First-Party" Policies, which are Insurance Policies issued directly to you or your Client by an Insurance Company.  This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" § 9:25 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).

   Yesterday's post explored the role that Insurance Policy Provisions can play in the decisions of Courts addressing whether there can be a Bad Faith Claim even though there is no Insurance Coverage, in a First-Party case.  Today's post ends our exploration of the current the Case Law on this important issue.

   Asterisks (* * *) reflect omitted material.

As a result, in order to argue for affirmative answers to such questions, it would seem that the argument must be made on the basis of legal rules unique to insurance carriers and possibly unique to their insureds. "Surely an insurer must act in good faith in dealing with its insured and in handling the insured's claim, even when the policy clearly and unambiguously excludes coverage."[165]

Alternatively, the argument has been made on the basis of violation of duties outside coverage under the insurance contract, such as a violation of statute.[166]

[FN165]Enoka v. AIG Hawaii Insurance Co., 109 Hawaii 537, 552, 128 P.3d 850, 865 (Haw. 2006). In the non-insurance contract case of Hospital Corp. of America v. Florida Medical Center, Inc., 710 So. 2d 573 (Fla. Dist. Ct. App. 4th Dist. 1998), review denied, 727 So. 2d 905 (Fla. 1998), Florida's Fourth District Court of Appeal seized the tiger's tail:

   With respect to Appellee's claimed breach of an implied duty of good faith, a duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements … Before the duty of good faith attached, FMC was required to establish that there was a term of the contract which HCA was obliged to perform. Allowing FMC to pursue the claim for breach of duty of good faith where no enforceable executory contractual obligation on HCA's part remained would add an obligation to the contract which was not negotiated by the parties and not in the contract.

*  *  * 

[FN166]Wallace v. State Farm Fire & Casualty Insurance Co., 247 Ga. App. 95, 539 S.E.2d 509, 511 (Ga. Ct. App. 2000). Summary judgment was affirmed for the insurer in that case on the question of the plaintiff's-insured's claim for statutory bad faith penalties and attorney's fees. In that case, the insurance company allegedly refused in bad faith to pay a covered loss within 60 days after demand by the policyholder. There was an IME in that case and the insured failed "to prove that the examiner's opinion was patently wrong by facts timely brought to the insurer's attention." Id. at 97, 539 S.E.2d at 511.

More to come on the important question of whether, and if so, in what kinds of cases, the Courts allow a Claim for Bad Faith in the absence of any Insurance Coverage.

Please Read The Disclaimer.

Bad Faith Claims Without Insurance Coverage: What the Courts Say ... Continued.

   This extends the posts begun on Dr. King's Birthday Observed (Monday, January 18, 2010) and continuing through Tuesday, January 19, 2010 and yesterday on the important issue of whether there can be a "Bad Faith" Claim even though there is no Insurance Coverage.  The posts continue by addressing the predominant type of Insurance Policies, collectively called "First-Party" Policies which are Insurance Policies issued directly to you or your Client by an Insurance Company.  This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" § 9:25 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).

   Yesterday's post explored a unique fact and legal situation in which a Bad Faith Claim was permitted even though there was no Insurance Coverage in a First-Party Case.  Today's post continues to explore the Case Law on this important issue.

   Asterisks (* * *) reflect omitted material.

 

A difference in policy provisions can affect the outcome in this regard.[161] General principles of contract law tend toward a negative answer to such questions. In Dousay v. Allstate Ins. Co.,[162] the court applied La. Rev. Stat. Ann. §§ 22:658 [renumbered as La. Rev. Stat. 22:1892 effective January 1, 2009, and amended in other respects, approved July 10, 2009] and 22:1220(A) [renumbered as La. Rev. Stat. Ann. 22:1973 effective January 1, 2009]. The standard of extracontractual liability under these statutes was "arbitrary and capricious" failure to pay after satisfactory proofs of loss. The carrier correctly applied an intentional acts exclusion. which barred all coverage of course. Therefore, the appellate court held, denial of coverage based on that exclusion was "neither arbitrary nor capricious."[163]

In stark contrast, Washington State allows certain statutory causes of action for bad faith irrespective of coverage.[164]

* * *

 

[FN161]See Lawson v. Fortis Insurance Co., 301 F.3d 159, 166 (3d Cir. 2002) (Pennsylvania law; expressly basing decision on language of policy at bar).

[FN162]Dousay v. Allstate Ins. Co., 741 So. 2d 750 (La. Ct. App. 3d Cir. 1999).

[FN163]Id. at 755. Louisiana R.S. 22:658(B)(1), now renumbered as La. Rev. Stat. 22:1892 effective January 1, 2009, and amended in other respects, approved July 10, 2009, was amended in 2006 to adjust a doubling of the penalty factor, from 25% to 50%, and to add a provision for the recovery of “reasonable attorney fees and costs,” in pertinent part.

   After many complaints of delays and denials of Insurance Coverage Claims for damages in Louisiana after Hurricanes Katrina and Rita, the 2006 Louisiana Legislature passed amendments to the Louisiana Penalties (or ‘Bad Faith’) Statute, La. R.S. § 22:658. “Effective August 15, 2006, La. R.S. 22:658(B) [renumbered as La. Rev. Stat. 22:1892 effective January 1, 2009, and amended in other respects, approved July 10, 2009,] was amended to provide for a fifty percent, rather than a twenty-five percent penalty, and to provide for reasonable attorney's fees and costs.” Best v. State Farm Fire & Casualty Co., 969 So. 2d 671, 679, 2007-0573 (La. 4th Cir. Ct. App. 2007).

   These statutory amendments have been held to apply to the insurance company's conduct at the time of its action, and not simply at the time that it may ultimately pay or deny coverage. Best, 969 So. 2d at 681.

   The Louisiana Legislature also enacted a statutory prohibition in 2006, in response to insurance claims, and claims handling practices, after the destruction wrought by Hurricanes Katrina and Rita in 2005. The subject prohibition was against any insurer using a “floodwater mark on a covered structure” to determine a covered loss under a homeowner's insurance policy, unless that insurance company also considers other evidence, in part here pertinent. La. Rev. Stat. 22:658.2(A)(1), renumbered as La. Rev. Stat. 22:1893 effective January 1, 2009. Extracontractual liability is imposed by statute in Louisiana for failing to pay claims pursuant to Section 22:658.2, renumbered as La. Rev. Stat. 22:1893 effective January 1, 2009, “when such failure is arbitrary, capricious, or without probable cause.” La. Rev. Stat. 22:1220(B)(6), renumbered as La. Rev. Stat. 22:1973 effective January 1, 2009.

[FN164]Barry v. USAA, 98 Wash. App. 199, 206, 989 P.2d 1172, 1176 (Wash. Ct. App. Div. 3 1999) (first-party insurer's correct determination declining coverage was no bar to statutory cause of action for alleged unfair claims settlement practices).

 

From Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 9:25 published by West, a Thomson Reuters business, and UPDATED.

To Be Continued ....

Please Read The Disclaimer.

 

First-Party Bad Faith Claims Without Coverage: What Courts Say.

    This extends the posts begun on Dr. King's Birthday Observed (Monday, January 18, 2010) and continued yesterday on the important issue of whether there can be a "Bad Faith" Claim even though there is no Insurance Coverage.  The posts continue by addressing the predominant type of Insurance Policies, collectively called "First-Party" Policies which are Insurance Policies issued directly to you or your Client by an Insurance Company.  This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" § 9:25 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).

   Yesterday's post continued to provide the large number of citations of cases in which the Courts have explained the majority view that without Insurance Coverage, there is no First-Party Bad Faith. 

 

A unique twist was presented in LeRette v. American Medical Security, Inc.[157] In that case, the policyholder asserted causes of action for breach of contract and also for alleged bad faith. The separate causes of action were allegedly supported by different sets of facts, however. For that reason alone, the cases cited by the parties in which "the insured generally alleged that the same conduct by the insurer amounted to both a breach of contract and bad faith," were inapposite, said the court.[158] Although the Nebraska Supreme Court ultimately held that on the record facts there was not bad faith in the LeRette case, still theoretically it was possible in that peculiar case for the same jury to find for the policyholder on the bad faith cause of action, and also find at the same time for the insurance company on the basis that there was no breach of contract. There, "the core set of facts on the breach of contract cause of action and the core set of facts on the bad faith cause of action differ."[159] Therefore, in that peculiar case, "as submitted to the jury, the breach of contract claim was a cause of action separate and distinct from the bad faith cause of action."[160]

 

* * *

[FN157]LeRette v. American Medical Security, Inc., 270 Neb. 545, 705 N.W.2d 41 (2005).

[FN158]Id. at 554, 705 N.W.2d at 48.

[FN159]Id. at 554, 705 N.W.2d at 48.

[FN160]Id. at 554, 705 N.W.2d at 48.

 

From Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 9:25 published by West, a Thomson Reuters business, and UPDATED.

To Be Continued ....

Please Read The Disclaimer.

Bad Faith Without Insurance Coverage: First-Party Lawsuits ... Continued.

   This extends the post begun yesterday on the important issue of whether there can be a "Bad Faith" Claim even though there is no Insurance Coverage.  The posts continue by addressing the predominant type of Insurance Policies, collectively called "First-Party" Policies which are Insurance Policies issued directly to you or your Client by an Insurance Company.  This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" § 9:25 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).

   Yesterday's post provided the citations of a large group of cases in which the Courts have explained the majority view that without Insurance Coverage, there is no First-Party Bad Faith.

 

 

See, in addition, Benavides v. State Farm General Insurance Co., 136 Cal. App. 4th 1241, 39 Cal. Rptr. 3d 650, 656 (Cal. 2d DCA, Div. 5, 2006):

 

[A]n insured cannot maintain a claim for tortious breach of the implied covenant of good faith and fair dealing absent a covered loss.

***

   The cause of action at issue is not breach of the implied covenant of good faith and fair dealing, but negligence. The question arises, therefore, whether, in the absence of benefits due under the insuring contract, plaintiff can recover for State Farm's negligent investigation of her claim. We conclude in this case that absent coverage, there is no tort liability for improperly investigating a first-party insurance claim whether the insurer's conduct is characterized as an implied covenant breach or negligence.

[Emphasis in original.] The Palub holding, quoted in pertinent part above, in which a California intermediate appellate court refused to apply a "weather conditions" exclusion contained in a policy of insurance which insured loss caused by weather conditions, seems to be in doubt since the California Supreme Court to the contrary upheld that exclusion, applied it, discussed ambiguously Palub's contrary holding, and held that as a result of the "weather conditions" exclusion there was no coverage under the policy at bar in the case of Julian v. Hartford Underwriters Insurance Co., 35 Cal. 4th 747, 759-61, 110 P.3d 903, 911-12, 27 Cal. Rptr. 3d 648, 657-59 (2005).

 From Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith," published by West, a Thomson Reuters business, and UPDATED.

To Be Continued ....

Please Read The Disclaimer.

Bad Faith Without Insurance Coverage: Courts and First-Party Policies.

   This is the first in a planned series of posts to address the emerging issue of whether there can be a "Bad Faith" Claim even though there is no Insurance Coverage.  The posts begin by addressing the predominant type of Insurance Policies, collectively called "First-Party" Policies which are Insurance Policies issued directly to you or your Client by an Insurance Company.  This post in particular is based on an analysis of research compiled by Dennis J. Wall and published online and in print, in "Litigation and Prevention of Insurer Bad Faith" § 9:25 (Second Edition Shepard's/McGraw-Hill, 2009 Supplement West Publishing Company).

Asterisks (***) indicate omitted material.

   Many courts are currently addressing questions concerning whether there can be liability for "bad faith" without any coverage being afforded under the policy in question.  The majority of courts answer that question in the negative, i.e., the majority view is that where there is no insurance coverage there can be no Bad Faith Claim.  In order to understand the majority view on this question, it is appropriate in many cases to allow the courts to speak for themselves.  E.g., Avery Dennison Corp. v. Allendale Mutual Insurance Co., 310 F.3d 1114, 1117 (9th Cir. 2002) (“Except perhaps in highly extraordinary circumstances, California does not permit recovery on a bad faith claim unless insurance benefits are due under the policy.”); Sobley v. Southern Nat'l Gas Co., 210 F.3d 561, 564 (5th Cir. 2000) ("Under Mississippi law, a finding of coverage is a necessary predicate to bringing a punitive damages claim [for allegedly wrongfully denying the coverage claim]."); Gordon v. Allstate Texas Lloyd's, 2006 WL 2827233 *3 (S.D. Tex. Sept. 27, 2006) (“Allstate has no liability under the insurance policy for mold damage to the Gordons' home; it is not liable under [their statutory extracontractual damages claim], as a matter of law.”); Hilton Head Resort Four Seasons Centre Horizontal Property Regime Council of Co-Owners, Inc. v. General Star Indemnity Co., 357 F. Supp. 2d 885, 888 (D.S.C. 2005) ("As a result, no duties on the part of Lexington have arisen under the contract of insurance. Therefore, the Plaintiff's suit for breach of contract, bad faith, and breach of covenant against Lexington Insurance Company based on the November, 2002, claim has no merit, and summary judgment is also appropriate."); State Farm Fire & Casualty Co. v. Slade, 747 So. 2d 293, 317 (Ala. 1999); Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 1235-36, 83 Cal. Rptr. 3d 410, 417 (Cal. 2d DCA, Div. 7, 2008); 1231 Euclid Homeowners Ass'n v. State Farm Fire & Cas. Co., 135 Cal. App. 4th 1008, 1021, 37 Cal. Rptr. 3d 795, 804-05 (Cal. 2d DCA, Div. 3, 2006) (no insurance coverage, no first-party bad faith); Schwartz v. State Farm Fire & Cas. Co., 88 Cal. App. 4th 1329, 1335, 1339, 106 Cal. Rptr. 2d 523, 527, 531 (2nd Dist. Ct. App., Div. 7, 2001) (noting that this principle is “stated in numerous cases … Those cases, however, show that the principle has been applied only when there is no coverage, and no potential coverage, under the policy.” [emphasis by the court]), review denied (unreported) (Cal. Aug. 15, 2001); Anderson v. Georgia Farm Bureau Mutual Insurance Co., 255 Ga. App. 734, 737, 566 S.E.2d 342, 345 (Ga. Ct. App.), cert. denied (unreported) (Ga. Sept. 30, 2002) (“And penalties for bad faith are not available where, as here, the insurance contract does not provide the coverage demanded.”); Robinson v. State Farm Mutual Automobile Insurance Co., 137 Idaho 173, 45 P.3d 829, 834 (2002) (“Fundamental to the claim of bad faith is the idea that there must be coverage under the policy.”); Boughan v. Nationwide Property & Casualty Co., 2005-Ohio-244, 2005 WL 126781 *4 ¶ 19 (Ohio 3d DCA, Allen County, Jan. 24, 2005) ("The Boughans' [sic] also argue that Nationwide breached a good faith duty to handle their claim. This argument is precluded by our holding that the damage was not covered under the homeowner's policy."). See, e.g.,Adams v. Travelers Indemnity Co., 465 F.3d 156, 167–68 (5th Cir. 2006) (Texas law); Miller v. Fidelity Security Life Insurance Co., 294 F.3d 762, 768 (6th Cir. 2002) (Ohio law); Brookville Mining Equipment Corp. v. Selective Ins. Co. of America, 74 F. Supp. 2d 477, 482 (W.D. Pa. 1999) (no action against flood insurer was available under 42 Pa. Cons. Stat. Ann. § 8371 [brought forward to 2007 Main Volume] where the court determined that the insurer had no duty to indemnify under the policy); Palub v. Hartford Underwriters Ins. Co., 92 Cal. App. 4th 645, 651-52, 112 Cal. Rptr. 2d 270, 275 (2d Dist. Ct. App., Div. 5, 2001), review denied (Cal. Dec. 12, 2001); January v. State Farm Mutual Insurance Co., 838 So. 2d 604, 607 (Fla. 5th DCA 2003) (holding, in a PIP case: “Clearly, if there is no coverage for the claim, the insurer's failure to act within thirty days is not fatal to the insurer's right to refuse the claim.”); Brickman Group, Ltd. v. CGU Insurance Co., 2004 PA Super. 487, 865 A.2d 918, 930-31 ¶¶ 29-30 (Pa. Super. Ct. 2004).

From Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith," published by West, a Thomson Reuters business, and UPDATED.

To Be Continued ....

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Fiduciary Duties of Directors' and Officers' Dealings: Earnings or Cash?

   Knowledge is important.  Depreciation is taken against earnings.  Higher earnings may well reflect a depressed depreciation of capital investment such as equipment.  The equipment may thus appear to be newer than it really is.  Many investors, not knowing this, place value on the earnings reported by businesses in which they invest.

   A better measure of 'investability' would clearly appear to be cash flow.  See generally Gretchen Morgenson, "Fair Game/Why All Earnings Are Not Equal" p. 1, col. 2 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 10, 2009).

   Question:  Are Directors and Officers who depress depreciation to increase earnings reports fulfilling their Fiduciary Duties to their Shareholders?  Are they fully and fairly informing people who are potential Shareholders, namely, investors?  Are Directors and Officers who choose to emphasize earnings over cash flow meeting their obligations, including Fiduciary Duties, to the Shareholders?

   The answers to these and similar questions may well arise as Insurance Coverage Questions concerning Directors and Officers Insurance Coverage.

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Alleged Breach First-Party Insurance Contract: Claims Handling Evidence Admissible.

   In Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Filed December 2, 2009), a First-Party Coverage Action in Federal Court, it was held that evidence of the First-Party Insurance Company's claim handling practices could be admissible under the following ruling on Defendant's Motion in Limine to Preclude all such Evidence:

   Defendant seeks to preclude evidence of its claims handling practices.  To the extent Defendant's claims handling practices relate to the pending breach of contract claim, the motion in limine is denied.  However, Plaintiff is precluded from presenting evidence of or referring to Defendant's claims handling practices to the extent such evidence relates to a claim for breach of the implied warranty of good faith and fair dealing and not insurance coverage.  Accordingly, Defendant's motion is granted in part and denied in part.

Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Filed December 2, 2009), attached Official Slipsheet Opinion at 4.

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'No Full Disclosure,' AIG Counseled by Federal Reserve-New York.

   Reportedly, an official at AIG was told by Attorneys representing the New York Federal Reserve Branch that AIG should not disclose anything regarding synthetic collateralized debt obligations -- seemingly an unregulated, publicly undisclosed form of Credit Insurance -- when AIG filed required information with the Securities and Exchange Commission.

   The AIG official, a Deputy General Counsel, reportedly E-Mailed the New York Federal Reserve's Attorneys that AIG's filing with the SEC "'reflects your client's desire that there be no mention of the synthetics in connection with this transaction.  They will not be mentioned at all.'"  Hugh Son, "Geithner's Fed Told AIG to Limit Swaps Disclosure (Update 3)" (Bloomberg.com, Thursday, January 7, 2009).

   It is unknown whether this is good legal advice or reasoning.  It is clearly poor policy for Policyholders, namely, the people who pay the Federal Taxes which are still being used to bail out AIG and pay off AIG's obligations on these Derivatives.

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Fiduciary Duties of Directors Dealing in Derivatives?

   Mr. Gary Gensler, Chair of the Federal Commodities Future Trading Commission, speaks courageously concerning the causes of the Great Recession through which we are now living.  More often than many others, Mr. Gensler's speeches contain downright eloquence.  However, recently Mr. Gensler was quoted by The Financial Times as offering this questionable Opinion about the Fiduciary Duties of "Wall Street firms'" Directors and Officers:

"They have a fiduciary duty to shareholders to maximise profits.  The information advantage is theirs right now."

Gregory Meyer, "CFTC Head Blames OTC Derivatives for Crisis" (FT.com, Wednesday, January 6, 2010).

   Whether maximizing profits is a "Fiduciary Duty" or not, clearly it is a Fiduciary Duty -- of any Fiduciary -- to inform the entrusting parties of all the significant events associated with the risk undertaken by the Fiduciary for which the entrusting parties will bear the burden if things go wrong.  The duties of Loyalty and Information should be any Fiduciary's first priorities -- which is what the Law generally commands.

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UPDATE: City of Baltimore Subprime Lending Lawsuit.

  The Mayor and City Council of Baltimore filed a Complaint in January, 2008 against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc.  The basis of the City's lawsuit was that Wells Fargo's subprime lending and alleged "predatory and discriminatory lending practices have led to foreclosures that harm the City."  Download Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A. (D. Md. Opinion Filed January 6, 2010), attached Official Slipsheet Opinion at 1.  In basic terms, the harm alleged by the City consisted of increased City costs associated with increased Foreclosures.

   The City filed an Amended Complaint.  The Defendants filed a Motion to Dismiss.  "The Motion to Dismiss will be granted, with leave for the City to file a Second Amended Complaint asserting narrower claims if it chooses to do so."  Download Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A. (D. Md. Opinion Filed January 6, 2010), at 1.  The Federal Trial Court applied a "plausibility" standard to the face of the Amended Complaint, which in 2009 replaced the previous Federal standard for measuring the sufficiency of a Complaint to withstand a Motion to Dismiss.  "In the present case, the City's allegations in the Amended Complaint of a causal connection between Wells Fargo's alleged misconduct and the damages the City claims is not plausible."  Download Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A. (D. Md. Opinion Filed January 6, 2010), at 4.

   If and when the City files a Second Amended Complaint, the facts will be followed here.  In the meantime, it appears that City officials in Tennessee, and the State Attorney General of Illinois, are pursuing their own lawsuits seeking to recover Damages allegedly resulting from subprime lending practices.  Michael Powell, "Federal Judge Rejects Suit by Baltimore Against Bank" p. A11, col. 6 (New York Times Nat'l ed., Saturday, January 9, 2010).

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State Rescission Regulation: Local Prosecutions for "Postclaims Underwriting" Violations Upheld.

   In Download Blue Cross of California, Inc. v. Superior Ct. (Cal. 2d DCA Opinion Filed December 15, 2009), attached Official Slipsheet Opinion at 2, a California Trial Court refused to dismiss a lawsuit filed by the Los Angeles City Attorney as a result of alleged "postclaims underwriting," i.e., alleged Rescission of Health Insurance Policies issued by the Defendant after the Policyholders made Claims.  The Appellate Court upheld the Trial Court's refusal to dismiss the case.

   In its Opinion, the California Appellate Court pointed out that "postclaims underwriting" is "a practice prohibited by section 1389.3 of the Health and Safety Code and section 10384 of the Insurance Code."  Download Blue Cross of California, Inc. v. Superior Ct. (Cal. 2d DCA Opinion Filed December 15, 2009), at 3.  The Statutory Prohibition is enforceable by local Prosecutors such as the City Attorney of Los Angeles, the Court held.

   The decision and its evolving aftermath in California are commented on by Lisa Girion, "Healthcare/Health Insurers' Rescission Practices Are Exposed to More Scrutiny/Local Prosecutors, Such as City Attorneys, Can Sue Over the Practice of Revoking Sick Patients' Policies, an Appellate Court Rules" (Los Angeles Times Online, Saturday, January 2, 2010).

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ASSUMING Florida Recognizes Federally Fashioned First-Party Good Faith ...

... "Implied Warranty", Then ABATE!

   In Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Signed June 26, 2009; Filed July 1, 2009), a Federal Judge in Florida adhered to his previous ruling on the same subject in a different case, and effectively abated a Federally fashioned Claim "for breach of the implied warranty of good faith and fair dealing":

As previously determined by the undersigned, a claim for breach of the implied warranty of good faith and fair dealing must wait until the conclusion of the litigation with respect to insurance coverage.  See Isola Condominium v. QBE Insurance Corp., Case No. 08-21592-CIV-DLG at D.E. 32, 50.  Therefore, Count IV, asserting a claim for breach of implied good faith and fair dealing must be dismissed without leave to amend.

Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Signed June 26, 2009; Filed July 1, 2009), attached Official Slipsheet Opinion at 8. 

   The Southern District of Florida's efforts toward fashioning an "implied warranty of good faith and fair dealing" were posted in 2009 on Insurance Claims and Issues.  Florida State Courts never recognized any common law cause of action for alleged breach of duties of Good Faith and Fair Dealing.  It took the enactment of a Florida Statute, Section 624.155 popularly known as Florida's "Bad Faith Statute," before Florida recognized any claim for First-Party Bad Faith.

   Abatement of Bad Faith Claims pending resolution of simultaneous Claims to Insurance Coverage is discussed by Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" (Second Edition, Shepard's/McGraw-Hill; 2009 Supplement, West Publishing Company), in § 5:1 (Settlement Claims in Third-Party Bad Faith Cases), and in § 11:1 (First-Party Bad Faith Cases) .

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Expert Witness Testimony in Insurance Case in Federal Court.

   A Policyholder's Meteorologist Expert "shall be limited to his expertise as a meteorologist," it was held in Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Filed December 2, 2009), attached Official Slipsheet Opinion at 3.  This is the full holding of the Federal Court in this regard:

Defendant specifically wants to preclude testimony by Mr. Branscome regarding damages to the building resulting from Hurricane Wilma or that Hurricane Wilma was a costly hurricane.  The Court finds that Dr. Branscome may not testify regarding damages resulting from Hurricane Wilma.  Dr. Branscome's testimony shall be limited to his expertise as a meteorologist.

Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Filed December 2, 2009), at 3.  [Emphasis added.]

   More recently, in another ruling in the same case, the Plaintiff Policyholder's roofing contractor Expert Witness "should be precluded from testifying regarding meteorological conditions or data."  Download King Cole Condominium Ass'n v. QBE Insurance Corp. (S.D. Fla. Opinion Filed January 5, 2010), attached Official Slipsheet Opinion at 6.  [Emphasis added.]

Evidentiary and Discovery issues addressed by the Courts concerning Expert Witness Testimony in Insurance Cases are addressed by Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 8:17 (Third-Party Cases) and § 12:18 (First-Party Cases) (Second Edition Shepard's/McGraw-Hill; 2009 Supplement West Publishing Company), including issues arising in general in Insurance Cases in which Dennis Wall is frequently retained to provide Expert Witness Services.

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Bad Faith, Good Faith -- Questions of "Fact," Not Summary Judgment.

   In Download Mills v. State Farm Mutual Auto. Insurance Co. (Fla. 1st DCA Opinion Filed December 22, 2009), Florida's First District Court of Appeal adhered to the settled view in Florida, and elsewhere, that Questions of Good Faith and Fair Dealing ordinarily will be resolved by a Jury as Questions of "Fact".  This view is so settled, and so strong, that Summary Judgment may even be improper in the ordinary Bad Faith Lawsuit, at least under this Court's holding, perhaps:

   The question of whether a liability insurer has acted in bad faith in handling a claim against the insured is determined upon the totality of the circumstances, with each case determined on its own unique facts.  The question of failure to act in good faith is ordinarily for the jury.  Boston Old Colony Ins. Co. v. Gutierrez[, 386 So. 2d 783 (Fla. 1980), cert. denied, 450 U.S. 922 (1981)]; Contreras v. U.S. Security Ins. Co., 927 So. 2d 16 (Fla. 4th DCA 2006).  Where material issues of fact which might support a jury finding of bad faith are in dispute, summary judgment is improper.  See Berges [v. Infinity Insurance Co., 896 So. 2d 665 (Fla. 2004)] at 680-81.

Download Mills v. State Farm Mutual Auto. Insurance Co. (Fla. 1st DCA Opinion Filed December 22, 2009), attached Official Slipsheet Opinion at 2-3.  [Emphasis added.]

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Defenses to Coverage Can Be Defenses to Bad Faith Claims.

   In a recent decision, a Federal Judge in Florida held that a "Late Notice" Defense presented questions of Fact to be resolved by a Jury:  Download Vision I Homeowners Ass'n v. Aspen Specialty Insurance Co. (S.D. Fla. Opinion Signed December 21, 2009, Filed December 22, 2009), attached Official Slipsheet Opinion at 4-9.  In that Case, the Policyholder-Plaintiff is Vision I Homeowners Association.  The H.A. sued Aspen Specialty Insurance Company in three counts in that case:  One count for Declaratory Judgment, and two counts containing allegations of Breach of Contract.

   The Federal Court in this case followed the rule established by Florida State Court decisions which prevails in many American jurisdictions:  "Late Notice" is a defense to Coverage, but it affords a rebuttable presumption of prejudice to the Insurance Company which can be overcome by evidence to the contrary.  See id. at 9.

   In addition, in this new case alleged failure to comply with Policy Conditions respecting Examinations Under Oath ("EUOs") was likewise held to present a question of Fact.  Download Vision I Homeowners Ass'n v. Aspen Specialty Insurance Co. (S.D. Fla. Opinion Signed December 21, 2009, Filed December 22, 2009), at 10-12.

   In Cases presenting First-Party Bad Faith Claims in addition to Claims for Declaratory Judgment and alleged Breach of Contract, Court across the nation have frequently allowed such Defenses to Bad Faith Claims as well, depending on the facts in the record of course.  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" (Second Edition Shepard's/McGraw-Hill; 2009 Supplement West Publishing Company) §§ 11.01-11.04 and 11.08, addressing Coverage and Policy Defenses in First-Party Cases, such as the Late Notice and EUO Defenses raised for example in Vision I Homeowners Association, above.  In addition, Sections 5.14-5.15 (Settlement Claims), 5.24-5.25 (Wrongful Refusal or Failure to Defend Claims), and 5.49-5.50 (Inadequate Defense Claims) address issues raised by Coverage and Policy Defenses, including Late Notice Defenses, in Third-Party Cases.

   A related post concerning this new case can be found on Insurance Claims and Issues Web Log at http://www.abajournal.com/blawg/insurance_claims_and_issues/.

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