Claims and Bad Faith Law Blog

BAD FAITH IS NOT ALWAYS A CLAIM.

          The case of Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 (M.D. Fla. May 22, 2013) presents interesting issues of law and of conduct.

          The case did not involve insurance bad faith claims.  It was a first-party case based on Elieser Lumpuy's efforts to repair commercial property that was damaged by a sinkhole.  Scottsdale insured the property with $150,000.00 in sinkhole coverage.

          Scottsdale had the right under the policy to select or repair the professional engineer who would recommend the way in which the property would be repaired.  Lumpuy retained one FTE, an engineering company, to make repair recommendations.  Based on FTE's recommendations, Lumpuy next obtained a "proposed contract" with one Champion to perform the repairs recommended by FTE.  Scottsdale rejected the FTE recommendation and refused to pay for Champion to proceed with the contract for repairs.  Scottsdale instead demanded a neutral evaluation, which it was permitted to demand by the terms of the insurance policy.

          The neutral evaluator, one Thomas Miller, recommended repairs which, like the repairs recommended by FTE, would cost in excess of the $150,000.00 policy limit on sinkhole coverage.

          Faced at this point with competing recommendations for repairs both of which were in excess of the policy limit, Lumpuy rejected Miller's repair recommendation and elected to insist on FTE's repair recommendation.  Scottsdale refused.

          Scottsdale refused to pay for the repairs as recommended by FTE since it, Scottsdale, had not approved or selected FTE to perform the repairs under the policy.  Further, Scottsdale refused to pay because no repairs recommended by an engineer selected or approved by Scottsdale had begun on the property.

          Lumpuy filed a breach of contract action.  To say again, Lumpuy did not allege a bad faith claim.

          Lumpuy alleged breach of the insurance contract on two grounds:  First, Scottsdale's "failure to tender the policy limits, even after the neutral evaluator estimated the repair costs to exceed the $150,000 policy limit;" and, second, Scottsdale's conduct in exercising its contract discretion to approve or select the engineer who would recommend repairs, was allegedly exercised unreasonably.  "The case went to trial, and the jury concluded that Defendant did breach the insurance policy."  Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 *1 (M.D. Fla. May 22, 2013).

          The District Court consistently held that "[t]he insurance policy gave Defendant discretion over the selection and approval of the engineer whose subsurface repair recommendation would be followed."  Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 *2 (M.D. Fla. May 22, 2013).  The Court instructed the jury accordingly, including an instruction that Florida law requires the contract party with a discretionary power to exercise that discretion "'in a reasonable manner.'"  Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 *2 (M.D. Fla. May 22, 2013).

          The Court rejected Scottsdale's repeated arguments that this breach of contract claim in Florida was really governed by Florida's law of first-party bad faith.  The Court rejected this argument on Scottsdale's Motion for Reconsideration.

          "Since Defendant has made the argument contained within this motion several times throughout this case, the Court denies this motion without requiring Plaintiff to file a response."  Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 *1 (M.D. Fla. May 22, 2013).

          Concisely stated, Scottsdale refused to pay for repairs under the proposed contract because the proposed contract with Champion was not enforceable, but the Champion proposed contract "was not enforceable, because it was contingent on Defendant's approval, which Defendant refused to give."  Lumpuy v. Scottsdale Insurance Co., 2013WL 2249288 *2 n.1 (M.D. Fla. May 22, 2013).

          There you have it:  A case of breach of contract where a jury determined that the first-party insurance carrier's conduct under a commercial insurance policy was unreasonable and thereby breached the contract, so that the jury awarded damages to the plaintiff-policyholder without any claim of insurance bad faith being filed in the case.

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FHFA DEADLINE TODAY: INPUT RE FORCE-PLACED, LENDER-PLACED INSURANCE.

         The Federal Housing Finance Agency ("FHFA") has issued a Notice that it invites input on restrictions it should consider placing on Lender Placed (Force Placed) Insurance under Mortgages involving Fannie Mae and Freddie Mac:  Download LPIregister32613.pdf.FHFA Notice of Restrictions Proposed on Lender Placed Insurance Terms and Conditions.  The FHFA is the Conservator for these two government sponsored enterprises ("GSEs").

       Specifically, the FHFA is interested in hearing from anyone interested in these areas in which the FHFA is considering restrictions on Lender Placed Insurance:

The specific practices related to lender placed insurance that FHFA has determined pose risks to the Enterprises or run contrary to the duties of the Conservator and for which actions are specified are practices where there are concerns regarding conflicts between parties to the insurance agreement, including:

1. Certain Sales Commissions. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers.

2. Certain Reinsurance Activities. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer.

 Id. at 4.

           The period for input to the FHFA on this topic ends today, Tuesday, May 28, 2013.

           Here are the portals through which the FHFA will receive incoming input:

FHFA will accept public input through its Office of Housing and Regulatory Policy (OHRP), no later than [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], as the agency moves forward with its deliberations on appropriate action. Communications may be addressed to Federal Housing Finance Agency, OHRP, Constitution Center, 400 Seventh Street SW., Ninth Floor, Washington, DC 20024, or emailed to LPIinput@fhfa.gov. Communications to FHFA may be made public and posted without change on the FHFA Web site at http://www.fhfa.gov, and would include any personal information provided, such as name, address (mailing and email), and telephone numbers.

Id. at 4-5.

          This is a unique opportunity.  If you do not provide input, who will?

A similar article here two months ago, on Thursday, March 28, 2013, and also an article on Wednesday, March 27, 2013 on Insurance Claims and Issues Blogsimilarly announced the opportunity provided by the FHFA to be heard on LPLI.

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EXCESS CARRIER'S MOTION BARS PRIMARY CARRIER EXPERT FROM REALIGNING RELATIONS.

          In Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 (W.D. Ky. May 15, 2013), Netherlands was the primary carrier and Lexington was the excess carrier for insureds they had in common.  They signed an agreement that said so, which ended up in an Agreed Order in Netherlands' lawsuit against Lexington.

          Netherlands' lawsuit against Lexington alleged claims for equitable subrogation, breach of contract, and unjust enrichment.  Under all claims, Netherlands requested that Lexington pay 50% of  the $226,650.57 in defense expenses incurred by Netherlands in defending the underlying claims.

          Parenthetically, Lexington retained a different defense counsel from the one retained by Netherlands, in order to pursue a "causation defense".  Lexington incurred $101,679.82 in billings from the separate defense counsel it retained, and it paid the bill.  Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 *1-*2 (W.D. Ky. May 15, 2013).

          Netherlands' case against Lexington rested in large part on an argument that during the discussions leading to their written agreement, Lexington and Netherland also agreed that they would share defense expenses 50-50.  Lexington denied this.

          Netherlands proffered the testimony of an expert witness who was a lawyer and a former claims adjuster that he interpreted the carriers' agreement to require a fifty-fifty split of the underlying defense expenses.  He based this conclusion in part on an exchange of e-mails between the carriers. Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 *8 (W.D. Ky. May 15, 2013).

          Lexington, the excess carrier, filed a motion to exclude the expert testimony, which the Court granted.  Unfortunately, the Court wrote rather broadly about the particular expert's reading of e-mails in this case:

Moreover, it is inappropriate to allow an expert to interpret the parties' e-mail communications, as experts have no specialized knowledge that would aid in their interpretations.

Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 *8 (W.D. Ky. May 15, 2013).

          The Court's actual holding in this regard was made clear later in the Court's opinion.  The Court granted the motion to bar this testimony because it constituted a legal conclusion, e-mails or not:

           This case boils down to a simple question: whether there was a valid, enforceable contract between Netherlands and Lexington to share the defense costs. As to this question, Netherlands seeks to offer Mr. Huff's opinion that there was such a contract based on the parties' e-mail communications. The Court finds, however, that Mr. Huff's opinion is nothing more than a legal conclusion. Mr. Huff has basically analyzed the facts himself (i.e. the language of the e-mail communications) and drawn a legal conclusion based on his interpretation of these facts (i.e. a contract existed). This is unacceptable. The Sixth Circuit has long held that expert testimony on the law “is excluded because the trial judge does not need the judgment of witnesses.” . . .     Other courts have reached similar conclusions.

 Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 *9 (W.D. Ky. May 15, 2013).

          On the same ground, that an expert witness should not be permitted to testify to legal conclusions, the Court excluded the Netherland's expert's opinions interpreting the insurance policy provisions and the Agreed Order.  Netherlands Ins. Co. v. Lexington Ins. Co., 2013 WL 2120817 *9-*10 (W.D. Ky. May 15, 2013).

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NO COVERAGE, NO BAD FAITH becomes NO DAMAGES, NO ACTION.

          In Siena Del Lago Condo. Ass'n v. American Fire & Cas. Co., 2013 WL 2127137 (W.D. Wash. May 14, 2013), a U.S. District Court in the State of Washington applied the vast majority rule that where there is no coverage, there can be no bad faith claim, either, but only as to one set of claims alleged in that case.

          As to "bad faith" and certain statutory claims, the Court held that relief could not be granted upon them, in the words of the Federal Rules of  Civil Procedure, because no damages were proven to result from them.

          Accordingly  the Court granted Mt. Hawley's Motion for Summary Judgment on all these claims and dismissed them with prejudice:

          The Court must dismiss Plaintiff's IFCA [Insurance Fair Credit Act] claim because Mt. Hawley's denial of coverage was proper and therefore it did not act unreasonably in denying coverage. The Court must dismiss Plaintiff's bad faith and CPA [Washington State Consumer Protection Act] claims because Plaintiff has failed to identify damages proximately caused by Mt. Hawley's conduct.

 Siena Del Lago Condo. Ass'n v. American Fire & Cas. Co., 2013 WL 2127137 *5 (W.D. Wash. May 14, 2013).

          The Court in this case was clearly willing to entertain claims of bad faith and alleged violations of the Washington State CPA, in other words.  However, in that case the plaintiff condominium association did not put evidence of damages caused by the alleged unfair or bad faith behavior in the record; as a result, there was no genuine issue of material fact about the issue of damages caused by any alleged "bad faith" conduct of the insurance company.  There, the law might have supported these alleged claims, but the record facts did not.

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SETTLING EVERY CASE IS NOT A GOOD POLICY.

          A U.S. Senator is focusing the attention of the Department of Justice, the Federal Reserve, and the Securities and Exchange Commission on why they exist.

          They exist for the purpose of protecting the public and enforcing the law.  Each of them in the past has equated serving this purpose with making secret settlements with investment banks.  That includes the secrecy surrounding why exactly they do not demand admissions of guilt in making settlements with investment banks.

          They are not your ordinary parties to civil litigation, who settle their differences rather than go to trial.  Regardless of their public releases, these agencies of government are not serving their common purpose by pursuing a policy of constantly  settling with wrongdoers in every situation.

          They are prosecutors, these agencies, not simply parties who as it happens have a difference of opinion about the wrongs that were done and are still being done.

          Senator Elizabeth Warren (D-Mass.) has demanded that the Department of Justice, the Federal Reserve, and the Securities and Exchange Commission provide the Senate with the analyses they have done, if any, on the pros and cons of settling with large financial institutions accused of financial wrongdoing, without requiring an admission of guilt.  See E. Scott Reckard, "Sen. Warren Goads Fed, SEC, DOJ to Explain No-Fault Bank Deals" (Los Angeles Times Online at www.latimes.com, posted May 14, 2013).

          More to come....

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Related articles

UPDATE 2-US Senator Warren wants bank settlements to be justified

Warren Questions U.S. Agencies on Lack of Bank Trials - Bloomberg

US senator: Show me the economic analysis on settlements vs trials

AFTER SANDY, NORTHEAST IS THE NEW SOUTHEAST FOR CATASTROPHE RISK ...

... UNDERWRITERS POINT TO THEIR COMPUTER MODELS TO TEE OFF ON SANDY DAMAGE.

           Computer models.  Underwriters are now using computer models to justify talk of higher Premiums to come in the Northeast after all the damage that Sandy caused, if property or flood insurance are going to be made available at all in the Northeast.

          In virtually the same language across the Internet, all sorts of sites are publishing the observation that after Sandy, underwriters and the makers of Catastrophe computer models all "will now treat the Northeast more like the Southeast when it comes to property pricing and the availability of flood insurance."  A representative sample comes from Amy O'Connor, "After Sandy, Underwriters, CAT Models View Northeast Like Southeast:  NAPCO" (Insurance Journal Online, posted May 6, 2013).

          There is definitely something to it, in a sense.  There is a recognition in that repeated observation that climate change is not only real right now, it is also so much the reality of our future that even the Northeast can expect previously unusually destructive weather and coming at previously unusual times of the year, as Sandy did.

          However, the idea that opinions about what exactly the future will bring, fed by underwriters into computer programs which exist for the purpose of supporting premium rate increases which are going to be requested from State Insurance Commissioners, is suspect, notwithstanding.

          This shameful exercise with computer programs force-fed by underwriters is not good faith nor fair dealing.

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THE FDIC'S PURSUIT OF BAD FAITH.

          Case law reflects the lines being drawn by the Federal Deposit Insurance Corporation in its pursuit of recoveries while standing in the shoes of banks in its receivership.

          In Federal Deposit Ins. Corp. v. Icard, Merrill, Cullis, Timm, Furen & Ginsburg, P.A., 2013 WL 1830806 *1 (M.D. Fla. May 1, 2013), the FDIC alleged claims of legal malpractice and breach of fiduciary duties.  The defendants are a law firm and a lawyer who advised a bank regarding a closing which involved $5,300,000.00 in a "real estate acquisition and development loan" to a development company.

          Parenthetically, the issue presented to the Court which resulted in this particular decision was the Defendants' Motion in Limine to Exclude Expert Testimony by one of the FDIC's Experts, a nonlawyer who was proffered to testify about "'commercial lending and underwriting practices, bank management, bank operations and procedures, and the standards of care in the banking industry.'"  Federal Deposit Ins. Corp. v. Icard, Merrill, Cullis, Timm, Furen & Ginsburg, P.A., 2013 WL 1830806 *1 (M.D. Fla. May 1, 2013).  The Court denied the motion.

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NEW JERSEY FIRST-PARTY CONSEQUENTIAL DAMAGES: "VALUE AS A COMPANY".

          A First-Party Bad Faith breach of contract claim may nonetheless allow for recovery of consequential damages.  In New Jersey, for example, it has been held that an insurer's implied contractual duty to act in good faith and to deal fairly in the settlement of claims, under which the insurer is viewed as a fiduciary to a party with whom it has a contract, will allow for the recovery of consequential damages.  In particular, the plaintiff seeking recovery of damages in excess of the policy limits must show that the insurance company failed to pay without even a debatably valid reason not to pay, and that the claimed consequential damages were clearly within the contemplation of the insurance contract.  Thus, a corporation's  "claim for damages for its diminution in value" is a claim which allows for the potential recovery of consequential damages, it has been held, arising out of Title Insurance Carriers' failure to pay claims under Title Insurance Policies.[1]

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[1] Walsh Securities, Inc. v. Cristo Prop. Mgt., Ltd., 2012 WL 6053948 *2 (D.N.J. November 28, 2012).

 

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