What did you say that Policyholders' "duty" was, again?
In Northrop Grumman Corp. v. Factory Mutual Insurance Co., 2011 WL 4501945 (C.D. Cal. September 28, 2011), Download Northrop Grumman Corp. v. Factory Mut. Ins. Co. (C.D. Cal. Case No. CV05.08444, Order Granting Partial Summary Judgment Filed Sept. 28, 2011) PUBLIC ACCESS, a Federal Judge applied existing California law. Then he invented new law out of thin air.
The Insurance Company contested Insurance Coverage in that case. The Policyholder's claim was for Hurricane Katrina damage. Ultimately, the Insurance Company won on Coverage in an appeal to the Ninth Circuit Court of Appeals. "[T]he Ninth Circuit reversed, holding that the Excess Policy's Flood Exclusion encompassed storm surge damage." Id. at *1.
One of the Policyholder's alleged claims in the present litigation against the Insurance Company was for Tortious Breach of the Implied Covenant of Good Faith and Fair Dealing. Under existing California law, the duty imposed on an Insurance Company -- specifically, the duty imposed on a First-Party Insurance Company providing "property insurance" Coverage for Business Interruption losses incurred by its own Policyholder, as in this case -- "is not to unreasonably withhold payments due under the policy.... Because there was a genuine dispute as to whether Northrop was entitled to flood-related time element damages, Factory Mutual's withholding of these claimed damages was neither unreasonable nor without proper cause." Id. at *3. [Emphasis in original.]
This conclusion follows from existing California law, as noted. However, in reaching this conclusion (which may have been totally correct under the circumstances of that case and which is not in question in this post), the Federal Judge constructed a "duty" upon a Policyholder that never existed before in California.
Or anywhere else.
That may be why the opinion did not contain any supporting citations of authority. There aren't any.
The Federal Court constructed a duty upon the Policyholder which negated the Good Faith, "genuine dispute" Coverage duty upon the Insurance Company in this case:
Where a contract is ambiguous, Northrop had the duty to seek clarification at the time of entering and agreeing to the policy. Under the facts of this case, failure to seek clarification at the time of signing resulted in a surviving ambiguity and a concomitant forfeiture of the right to seek bad faith damages.
Id. at *3.
To paraphrase this unique holding, what this Federal Court is saying is that a Policyholder had the duty to seek clarification at the time of entering and agreeing to the policy, presumably in the knowledge that years later Hurricane Katrina would make landfall and cause an ambiguity in the Business Interruption Coverage. Since a Policyholder cannot make such a forecast, of course, it means that whenever Coverage provisions are ambiguous as applied to an actual claim, there is always "a concomitant forfeiture of the right to seek bad faith damages."
That is one holding too far.
It should have been enough that Factory Mutual had a legitimate, reasonable basis to contest Business Interruption Coverage in that case, without resort to fiction. Citing no authority, this ruling in turn provides no authority for rulings in other cases in the same or other Courts.
The 22nd Annual Bad Faith Litigation Conference of the American Conference Institute is being held in 2011 in Orlando, Florida. The author will be speaking. Here is a link to the American Conference Institute Website Page which features this Conference including registration. If you or someone you know would like to attend, the ACI is offering a discount to the readers of this weblog. If you would like to explore the ACI discount offer, contact:
Marc Gerstein
Delegate Coordinator
Office: 1-212-352-3220 x5432
m.gerstein@americanconference.com
Please Read The Disclaimer.
Comments