Bad Faith May Arise Out Of Wrongful Misrepresentation in Application Denial

Chip Merlin | Property Insurance Coverage Law Blog | November 28, 2018

Suspicion runs rampant with some insurance companies when it comes to alleged arson. Even if they cannot prove the policyholder had anything to do with a fire, some adjusters cannot help to look for other ways to deny an insurance claim. In Hayes vs. Metropolitan Property and Casualty Insurance Company,1 an insurer was held liable for bad faith denial of an insurance claim even though the policyholder did not win the breach of contract action because the policyholder failed to file his lawsuit within the one-year statute of limitations.

Since it is a misrepresentation in the application case, let’s start with the application facts:

Hayes’s home at 480 South 6 Street, Springfield, Nebraska, was insured…under a homeowner’s insurance policy. Hayes used the detached garage of the residence as part of a home base for his plumbing business, and in addition to living there himself with his children, he also rented out the second and third levels of the residence to a tenant and her two children.

When Hayes insured the residence in 2007, Met argues that he indicated on his application that the premises were not used to conduct business, and were not used as rental property. However, the application, a five-page document, was not a model of clarity on either of these two points. It was apparent that the form was not filled out by hand because pre-printed “x’s” were used in the checked boxes. Hayes testified that he did not recall personally completing the application in 2007; that he worked with an independent insurance agent when it was filled out, and it was also likely filled out with information from his sister, because his signature “stamp” was used in the signature line instead of his actual handwritten signature, and she had his authorization to use the stamp.

With regard to tenants, the form asked whether “the residence [was] held exclusively for rental?” and a pre- printed “x” was marked next to the letter “N” in answer to that question. The form also asked for number of “families” and the number “1” was printed in that box. With regard to the business, the form asked whether “[a]ny farming or other business [was] conducted on premises?” and again, a box indicating “no” was marked with a preprinted x. Hayes testified at trial that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. He also testified that he definitely did not “run” the plumbing business out of the premises, although customers would on occasion contact him there about doing a plumbing job. Further, Hayes had a separate commercial business insurance policy to cover the plumbing business in the detached garage, (although the address for this business was inadvertently and incorrectly listed on the insurance form as 680 South 6 Street, Springfield, Nebraska, rather than 480), and Hayes testified that he believed the commercial policy adequately covered his business. Hayes did not make a claim with regard to the shop or business as a result of the fire.

(Emphasis added).

Of course, there was no problem with Metropolitan accepting the premiums for six years until a fire happened in January 2013. The insurance company kept rejecting the policyholder’s proofs of loss, made numerous requests for documents and information and took numerous examinations so that by the time the insurance company got around to deny the claim for a misrepresentation in the application, approximately 18 months had passed.

The problem for the policyholder was that he did not file his lawsuit until after the denial and long after the 12-month suit limitation under the policy. The problem for Metropolitan was that the judge who dismissed the contract action because it was late-filed also found that Metropolitan had no reasonable basis to deny the claim and found bad faith on the part of Metropolitan.

The Circuit Court of Appeals noted:

While Met is correct that there must have been a contract at some point in time in order for there to be a bad faith claim, Met cannot insulate itself from a bad faith claim by creating the fiction that a contract never existed by voiding or rescinding it “ab initio.” The cases Met cites do not stand for the proposition that an insurer can do what it did here–discover there is liability after eighteen months of “investigating” and rescind based upon misrepresentation evidence that was within its knowledge five days after the fire….

There are a number of lessons from this case. Insurance companies must investigate claims promptly. Second, when insurance companies deny claims, they must have a reasonable basis to do so, and a reasonable basis cannot be based on an ambiguous application with ambiguous answers which do not indicate an intent to deceive the insurance company.

Insurance Joke For The Day

What’s the difference between an actuary and an accountant?

An actuary looks at his shoes when he talks to you. An accountant looks at your shoes.
1 Hayes v. Metropolitan Prop. & Cas. Ins. Co., No. 17-3005, 2018 WL 5852740 (8th Cir. (Neb.) Nov. 9, 2018).

Ambiguous Insurance Application Language Leads to Bad Faith Award

Marle Laur | Property Insurance Coverage Law Blog | November 25, 2018

A Nebraska court recently ruled that an insured was entitled to bad faith damages after the court found that an insurance application was ambiguous in its language.

In the case at hand, Eric Hayes (“Hayes”), the plaintiff and insured, owned a home in Nebraska. He used the detached garage of the home for his plumbing business, and he rented out the second and third stories of his home to a tenant. The home suffered a fire loss, and Hayes filed a claim with his homeowner’s insurer, Metropolitan Property and Casualty Insurance Company (“Metropolitan”). Metropolitan subsequently learned that Hayes was doing business out of his garage and was leasing out part of his home. However, Hayes had previously indicated on his insurance application that his residence was not used to conduct business and was not used as a rental property.

After its investigation, Metropolitan determined that Hayes had made material misrepresentations on his insurance application. As a result, Metropolitan denied Hayes’ claim and cancelled his policy. Metropolitan sent Hayes correspondence enclosing a check for all premiums Hayes had paid. Metropolitan also sent a check to Hayes’ bank to satisfy the mortgage on the home. The bank accepted the check.

Hayes’ brought suit against Metropolitan for breach of contract and bad faith practices. The U.S. District Court for the District of Nebraska ruled in favor of Hayes.

The Eighth Circuit affirmed the district court’s decision, finding that the application contained unclear language. Hayes also testified that he did not operate his business out of the garage, even though some business activities were conducted there. Additionally, the insurance form asked whether the residence was held exclusively for rental, which it was not. The case is Hayes v. Metropolitan Prop. and Cas. Ins. Co., Nos. 17-3005, 17-3064 (8th Cir. Nov. 9, 2018).

Colorado Supreme Court Clarifies Bad Faith Standard

Ashley Harris | Property Insurance Coverage Law Blog | November 7, 2018

A recent Colorado Supreme Court opinion in Schultz v. GEICO Casualty Company, clarifies the standard for bad faith in Colorado. In the opinion, the court discusses both claims for common law bad faith and statutory unreasonable delay or denial of benefits.

Most notably, the court concluded that the insurance company’s conduct must be evaluated based on the evidence before it when it made its coverage decision, and that the insurance company may not create new evidence to try to support its earlier coverage decision.

This means that when defending against a bad faith claim by attempting to show it acted reasonably, the insurance company can only present the information it considered at the time it made the decision to delay or deny the claim.

The opinion also restates the standard for common law bad faith, which requires the insured to “establish that the insurer acted unreasonably and with knowledge of or reckless disregard for the fact that no reasonable basis existed for denying the claim.” Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).

With regard to a statutory claim, Section 10-3-1115, C.R.S. (2018) provides, in part:

(1)(a) A person engaged in the business of insurance shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of ay first-party claimant.

. . . .

(2)…for the purposes of an action brought pursuant to this section and section 10-3-1116, an insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.

The court confirmed what both the Colorado Court of Appeals and federal courts interpreting Colorado law have consistently recognized, which is that the proof of a statutory claim differs from the proof required in a common law bad faith claim:

[W]hereas a common law claim requires proof that the insurer acted unreasonably and that it knew or recklessly disregarded the fact that its conduct was unreasonable, ‘the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.’ (Citations omitted).

This opinion is great for Colorado policyholders, because it limits insurance companies to the information they had at the time they delayed or denied the claim, prohibiting them from hiring “litigation experts” to bolster an unreasonable delay or denial of the claim.

Timely Paying Appraisal Award Exempted Insurer from Breach of Contract and Bad Faith Claim

Marle Laur | Property Insurance Coverage Law Blog | November 3, 2018

In the case Biasatti v. GuideOne National Ins. Co., No. 07-17-00044-CV (Tex. Ct.App. Aug. 16, 2018), Steven Biasatti and Paul Gross, d/b/a TopDog Properties, brought suit against its insurance company, GuideOne National Insurance Company for breach of contract.

TopDog Properties (“TopDog”) was insured through a commercial insurance policy issued by GuideOne National Insurance Company (“GuideOne”). The property suffered a loss as a result of wind and hail damage, and TopDog put GuideOne on notice of the loss. The insurer inspected the property and determined that the damage totaled $1,896.88. GuideOne did not issue payment to the insured since the damage was less than the $5,000.00 deductible. When GuideOne did not change its coverage determination after a second inspection, TopDog requested appraisal of the claim. GuideOne responded that under the policy, only the insurer could invoke appraisal, and it declined to do so. The insured filed suit.

Months after TopDog filed suit, GuideOne invoked appraisal. The insured resisted, and the trial court refused to compel the appraisal. On appeal, the trial court was directed to grant GuideOne’s motion to compel appraisal.

The appraisers and umpire set the amount of loss at $168,808.00. GuideOne sent TopDog a check for $146,927.30, which reflected the amount awarded less the deductible and depreciation.

TopDog then filed a motion for partial summary judgment against the insurer for breach of contract and failure to timely pay the insured’s claim. The insurer argued, in its own motion for summary judgment, that since it had promptly paid the appraisal award, the insured’s claims against GuideOne could no longer stand. The trial court ruled in favor of GuideOne’s motion. TopDog appealed.

The appellate court affirmed the trial court’s ruling, holding that since GuideOne invoked the appraisal clause following the benefits dispute, as permitted by the policy, then timely tendered the appraisal award, TopDog received the benefits it was entitled to under the policy and did not demonstrate that any policy benefits were withheld.

Florida Supreme Court Strengthens Policyholders’ Bad-faith Claims

Margo Meta | The Policyholder Report | September 27, 2018

Last week, a divided Florida Supreme Court strengthened policyholders’ bad-faith claims against insurers by overturning an appellate court’s decision, finding that the lower court had misapplied Florida’s well-established bad-faith precedent and had relied on inapplicable federal case law.

In Harvey v. GEICO General Insurance Co., James Harvey was involved in an automobile accident that resulted in a fatality. Following the accident, a paralegal with counsel for the deceased’s estate spoke to Fran Kourkas, a GEICO claims adjuster regarding the claim, requesting a statement from Harvey to determine the extent of his assets and other potential insurance coverage. Kourkas denied this request, despite knowledge that it was standard practice, and he failed to inform Harvey of the request.

Shortly thereafter, GEICO tendered the $100,000 policy limits to Sean Domnick, the lawyer representing the decedent’s estate. When Harvey learned of Domnick’s request, he informed Kourkas that he would provide a statement and requested that Kourkas inform Domnick, but Kourkas did not relay the message. Due to Kourkas’s failure to communicate, Domnick returned GEICO’s check and filed a wrongful-death action against Harvey. The case went to trial and Harvey was found 100% at fault. The estate was awarded $8.47 million in damages.

Harvey filed a bad-faith claim against GEICO based on the excess judgment. Domnick testified that he received no communication from GEICO after his request for a statement, and that if he had been aware that Harvey’s only other asset was a business account worth $85,000, he would have accepted the policy limits and would not have filed suit. The decedent’s wife testified that she would have settled for the policy limits at Domnick’s recommendation. At the trial on these bad-faith claims, the jury awarded Harvey $9.2 million. GEICO appealed, arguing that Harvey had failed to provide evidence of bad faith. The appellate court agreed and reversed, stating that “even if the insurer’s conduct was deficient, the insurer’s actions did not cause the excess judgment rendered against the insured.”

Bad-faith Standard

The Florida Supreme Court reversed the Court of Appeals. In its opinion, the Florida Supreme Court expressly disavowed the holding in Novoa v. GEICO Indemnity Co., in which the 11th Circuit Court of Appeals found that an insurer did not have to act “perfectly, prudently or even reasonably” as long as the insurer did not act solely out of self-interest.

The Florida Supreme Court also cited a 1980 case, Boston Old Colony v. Gutierrez, for the proposition that an insurer has a duty to handle defense claims with the same degree of care and diligence as person of ordinary care and prudence would exercise in the management of his own business. The Court noted that because the duty of good faith involves an insurer’s diligence and care, the insurer’s negligence is relevant to a question of bad faith.

The insurer has this duty because it controls all decisions related to the claim, and the insured has no control over the claim handling. The Court further relied on Boston Old Colony, finding that an insurer must provide certain advice to an insured, including the probable outcome of litigation, the possibility of an excess judgment, and steps to take to avoid such a judgment. The court cautioned that these requirements are not a “mere checklist.” Rather, the insurer must work diligently, with the same “haste and precision” as though it were in the insured’s shoes, in order to avoid an excess judgment.

The Court found that where liability is clear, and injuries or damages are so serious that an excess judgment is likely, the insurer has an affirmative duty to initiate settlement negotiations and any delay in making an offer could be viewed as bad faith. Further, an insurer cannot escape its obligations to the insured by simply tendering its policy limits. The insurer’s obligations to the insured continue throughout the duration of the claims-handling process.

The Court concluded that GEICO had failed to act as if Harvey’s potential financial exposure was “a ticking financial time bomb” and served as a “considerable impediment” to both Harvey and Dominick. GEICO failed to act with the same degree of care and diligence as an ordinary, prudent person would in the handling of his own business. Accordingly, it acted in bad faith.


The Court also disavowed the holding in Barnard v. GEICO General Insurance Co., in which the 11th Circuit Court of Appeals found that if an insured’s own actions or inactions result, at least in part, in an excess judgment, the insurer cannot be found liable for bad faith. The Court found that this statement was “fundamentally inconsistent” with Florida precedent, including Berges v. Infinity Insurance Co., which focuses on the actions of the insurer, not the insured. Florida law is clear that an insured’s actions do not excuse an insurer’s bad-faith handling of a claim.

The Court concluded that GEICO’s continued communication failures were a direct cause of the excess verdict, as Domnick had testified that had he been aware of Harvey’s assets, he would have accepted the policy limits and would not have filed suit. As such, GEICO acted in bad faith.

How does this Affect Policyholders?

This opinion is a valuable tool against insurers in future bad-faith cases, as it loosens and broadens the bad-faith standard in Florida. The opinion requires that an insurer put an insured’s interests first and work diligent and hastily to avoid excess judgments. The opinion also strengthens the argument that an insurer is under an affirmative obligation to initiate settlement negotiations in cases where excess judgments are likely, and that even negligent claim handling can result in a finding of bad faith.


Harvey is a win for policyholders. It simply and succinctly states Florida’s bad-faith standard and provides guidance to federal courts on the issue. It also underscores the importance of diligent, competent, and expedient handling of claims, while simultaneously preventing the insurer from shifting the blame for an excess judgment to the policyholder.

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