Does An Insurer Act In “Bad Faith” If It Denies Coverage For A Hail Loss Based On Its Retained Engineer Defining Hail Damage As Functional Damage?

Edward Eshoo | Property Insurance Coverage Law Blog | September 9, 2019

In my last blog post, I wrote about the Seventh Circuit Court of Appeal’s recent decision in Windridge of Naperville Condominium Association v. Philadelphia Indemnity Insurance Company.1

There, the Seventh Circuit rejected Philadelphia’s argument that because only the south and the west elevations of siding on townhome buildings suffered “direct physical loss to covered property” within the meaning of the policy’s coverage grant, it need only replace the siding on those elevations. With respect to the phrase “direct physical loss,” the Seventh Circuit applied a common sense meaning, i.e., physical damage to tangible property causing an alteration in appearance, shape, color, or in other material dimension, which is what occurred to the siding. The Seventh Circuit also cited to its previous ruling in Advance Cable Company v. Cincinnati Insurance Company,2 where it concluded that “physical loss or damage” within the meaning of a property insurance policy’s coverage grant includes “cosmetic” denting from hail that physically alters the insured property (visible hail indentations to a metal roof). The Seventh Circuit in that case reasoned that “physical loss or damage” is not limited to damage that affects the functional integrity or diminishes the value of building components.3

As the Windridge and Advance Cable decisions establish, the Seventh Circuit has rejected a “functional damage” definition as the only definition of hail damage, which definition insurer-retained engineers consistently and routinely follow. Indeed, as the Seventh Circuit stated in Advance Cable, if an insurance company wishes to exclude cosmetic damage from coverage or if it wishes to limit hail damage to functional damage (reduction of water-shedding capability or reduction in the expected long-term service life of material), then it should write its policy that way.4

So, does an insurer act in “bad faith” if it denies coverage for a hail loss based on its retained engineer defining hail damage as limited to functional damage when the policy does not contain such a limitation? According to an Indiana federal district court in North Shore Co-Owners’Ass’n, Inc. v. Nationwide Mutual Insurance Company,5 the answer is yes. There, the insured alleged that Nationwide breached the insurance policy and acted in bad faith by failing to pay for cosmetic shingle damage. Nationwide retained Nederveld, Inc., a forensic engineering investigation and fire investigation consulting firm, to inspect the buildings’ roofs. Nederveld concluded that there was no hail damage because the shingles did not sustain functional damage; it only sustained cosmetic damage.

Nationwide moved to dismiss the bad faith claim, arguing it had a rational basis for its coverage position.6 The district court accepted as true for purpose of the motion the following allegations: Nationwide hired Nederveld, a preferred vendor, who defined hail damage to only include functional damage when the policy covered cosmetic damage; Nederveld reported to Nationwide that the roofs had no damage, even though the damage was open and obvious; and, in the course of denying the claim for cosmetic damage, Nationwide misrepresented its policy and conspired with Nederveld to deceive the insured. The district court concluded that these allegations raised an inference that Nationwide knew there was no legitimate basis for defining damage to only include functional damage and in denying coverage for the hail loss. The district court reasoned that if Nationwide conspired with Nederveld to conceal facts and to mislead the insured about the nature and the extent of the damage, then it is reasonable to infer that Nationwide’s actions were not the result of poor judgment, negligence, or a good-faith dispute; but, rather bad faith.

The district court’s ruling in North Shore Co-Owners’Ass’n, Inc. should serve as a warning to insurers to stop denying hail and wind damage claims based on an engineering definition of hail or wind damage not supported by the policy or be subjected to a bad faith claim. But nothing will surprise me, as insurers’ repeated failures to do the right thing is what has kept me in business for the past 34 years.
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1 Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 WL 3720876 (7th Cir. August 7, 2019).
2 Advance Cable Co., LLC v. Cincinnati Ins. Co., 788 F.3d 743 (7th Cir. 2015).
3 See also Great Plains Ventures, Inc. v. Liberty Mut. Fire Ins. Co., 161 F.Supp.3d 970 (D. Kan. 2016) (“direct physical loss or damage” includes hail indentations on a metal seam roof regardless whether the indentations caused functional damage or merely cosmetic damage).
4 The two organizations that standardize forms and policies for property insurers, AAIS and ISO, have drafted cosmetic damage endorsements excluding coverage for exterior surfacing of walls, roofs, doors and windows if wind and/or hail damage simply affects the appearance of these surfaces, and not their ability to keep weather-related or other elements from entering the property.
5 North Shore Co-Owners’Ass’n, Inc. v. Nationwide Mut. Ins. Co., 2019 WL 3306212 (S.D. Ind. July 22, 2019).
6 Under Indiana law, bad faith arises when an insurance claim is wrongfully denied and the insurer knows there is “no rational, principled basis” for denying the claim. Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519 (Ind. 1993).

Wyoming Bad Faith Remedies For Delayed and Wrongfully Denied Property Insurance Claims

Chip Merlin | Property Insurance Coverage Law Blog | September 7, 2019

We recently were presented with a case involving a property insurance claim in Wyoming. The policyholder was upset, and his public adjuster had a long list of improper actions by the insurance company. Merlin Law Group attorney Jonathan Bukowski wrote a short article about this in, Wyoming Denied or Delayed Property Damage Claims.

We recently were presented with a case involving a property insurance claim in Wyoming. The policyholder was upset, and his public adjuster had a long list of improper actions by the insurance company. Merlin Law Group attorney Jonathan Bukowski wrote a short article about this in, Wyoming Denied or Delayed Property Damage Claims.

Wyoming policyholders who have been harmed by their insurance company have a common law right to file a bad faith law suit. For a policyholder to establish a first-party bad faith claim in Wyoming, the policyholder must establish:

  1. The absence of any reasonable basis for denying the claim; and
  2. The insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.1

Wyoming passed an Unfair Settlement Practices Act. Unfortunately, the Wyoming Unfair Claims Settlement Practices Statute does not create a private cause of action available to a policyholder. A policyholder’s bad faith lawsuit may not be based on the statute.2

Insurance claim delays and denials are frustrating at best and sometimes catastrophic. When policyholders in Wyoming are treated in this manner, they at least have an avenue for redress and can hold their delaying, lowballing, and denying insurance company accountable for misdeeds.

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1Ahren Holtz v. Time Ins. Co., 968 P.2d 946 (Wyo. 1998); State Farm Mutual Automobile Ins. Co. v. Shrader, 882 P.2d 813 (Wyo. 1994); Cathcart v. State Farm Mutual Automobile Ins. Co., 123 P.3d 579 (Wyo. 2005); Gainsco Ins. Co. v. Amoco Production Co., 53 P.3d 1051 (Wyo. 2002).
2Herrig v. Herrig, 844 P.2d 487 (Wyo. 1992); Julian v. New Hampshire Ins. Co., 694 F. Supp. 1530 (T. Wyo. 1988).

Insurance Company Act in Bad Faith? Can It Be Punished? What Policyholders Need To Know About California Bad Faith Law

Daniel Veroff | Property Insurance Coverage Law Blog | June 10, 2019

Insurance policyholders who are considering suing their insurance companies for bad faith need to consider many pros and cons, including the potential for financial compensation. California juries can allocate the money they award policyholders to several categories, such as unpaid policy benefits, attorney fees, and punitive damages. This post addresses punitive damages and looks at three key issues that came up in a recent decision from California’s Second Appellate District.1 Keep in mind, there are many other factors to consider, and there is no substitute for a consultation with an experienced insurance law attorney.

What is the standard for awarding punitive damages?

California law states that punitive damages can only be awarded if “clear and convincing evidence” shows the insurance company engaged in “oppression, fraud or malice.”2 “Malice” is an intentional injury or “despicable conduct which is carried on the defendant with a willful and conscious disregard of the rights or safety of others.”3 “Oppression” is “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.”4And “fraud” is “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant” with the intent to deprive the insured of their legal rights or to cause injury.5

In the recent appellate decision, the court stated that punitive damages were justified because the insurance company, there GEICO, egregiously relied “selectively on facts that support its position and ignore[d] those facts that support[ed the] claim.”6 This is an all-too-common scenario in the claims we see.

When is the insurance company responsible for the malice, fraud and oppression of its adjusters?

In many cases we see, there are bad acts by the adjusters. Insurance companies need to right the wrongs of their adjusters. But should an insurance company be responsible for additional, punitive damages for the acts of one bad apple? The law does not think so, unless there is proof that at least one of two scenarios exists.

First, a jury can award punitive damages against an insurance company for the fraud, malice or oppression of its adjusters if an “officer, director or managing agent” of the company knew in advance that the adjuster was unfit for the job.7

Second, a jury can award punitive damages against an insurance company if an “officer, director or managing agent” of the company authorized or ratified the wrongful conduct” of the adjuster.8

An officer or director is easy to identify, but a “managing agent” can take many forms. In general, the definition of “managing agent” for purposes of punitive damages is an employee who exercises “substantial discretionary authority over significant aspects” of the insurance company’s business.9 For example, in the recent California case, the court held that a regional claims manager was a “managing agent” because he set the standards for claim settlement in his region, viewed the claims process as an adversarial negotiation, and reviewed and approved the adjuster’s course of conduct based on biased summaries.10 Even though the manager never read the claim file, the fact he had access to it was sufficient to support the award for punitive damages.11

Is there a limit or range for the amount of punitive damages that can be awarded?

After the plaintiff and defendant rest their cases in trial, the jury decides whether there is clear and convincing evidence that the insurance company engaged in malice, fraud or oppression. If it finds that such evidence exists, then it determines the amount of punitive damages to award.

The jury’s award is not free from scrutiny however. Courts have the power to reduce punitive damages awarded if the amount is “grossly excessive” compared to the compensatory damages, or “arbitrary.”12 Where the amount of compensatory damages are high, punitive damages in a 1:1 ratio are typically accepted as the ceiling.13 Where the compensatory damages are middle of the road, the generally accepted ceiling for punitive damages is a 3:1 ratio.14 Where the compensatory damages are small but the fraud, malice or oppression was severe, awards have greatly exceeded 3:1.15

In deciding whether the amount chosen by the jury is “grossly excessive” or “arbitrary,” courts consider several “guideposts.”16

First, courts consider “the degree of reprehensibility of the defendant’s misconduct.”17 For this, the court looks at whether (1) the harm was physical as opposed to economic; (2) the insurance company was reckless or engaged in malice, trickery or deceit, as opposed to an accident; (3) the insured was financially vulnerable; and (4) the extent and duration of bad acts to the insured in the single claim, or to a large group of insureds.”18

Second, courts consider “the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award.”19 In other words, the jury cannot make a mountain out of a molehill.

Third, courts consider “the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Many courts find this factor unhelpful given the penalty laws in California.20

In the recent California appellate decision, the court held that the punitive damages award of less than 3:1 was justified based on the reprehensibility of the insurer’s conduct.21 Importantly, the court explained that evidence of several wrongful acts towards one insured is just as good as evidence of the same wrongful act towards many insureds.22

Bonus question: should I consult with an attorney?

The rules discussed in this post are just the beginning of the analysis. The body of law about punitive damages in California is complex and cases must be analyzed based on their own unique facts. You can contact our attorneys for a free case consultation and ask us how these questions apply to your case.
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1 Mazik v. GEICO General Ins. Co., Case No. B281372 (Cal. 2nd. Dist. App. May 17, 2019).
2 Civil Code § 3294(a).
3 Civil Code § 3294(c)(1).
4 Civil Code § 3294(c)(2).
5 Civil Code § 3294(c)(2).
6 See footnote 1; see also Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 721; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 821–822.
7 See Civil Code § 3294(b).
8 See footnote 1 and cases cited.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id.
17 Id.
18 Id.
19 Id.
20 Id.
21 Id.
22 Id.

Jury to Decide If Carrier Risked Trial Because It Had Nothing Left to Lose

Claims Journal | May 23, 2019

A federal judge in Rhode Island has cleared the way for a trial to decide whether Columbia Casualty Insurance, in bad faith, put its own interest over its policyholder’s by gambling on a trial instead of settling a claim that resulted in a $25 million jury verdict.

Boston-based Ironshore Specialty Insurance Co. sued Columbia, accusing the Chicago-based carrier of pulling a fast one. Ironshore says Columbia risked a jury trial in a malpractice claim only because it knew it would have to shell out the full $9 million in coverage provided to settle the case.

By not settling, Columbia exposed Ironshore and its policyholder to even greater losses. A jury in August 2015 awarded claimant Carl Beauchamp $25.6 million in damages — which came to $35 million with prejudgment interest — forcing Ironshore to pay all of the $11 million in coverage that it provided as a third-tier insurer. That was the largest negligence verdict in Rhode Island history at the time, the court said.

Columbia filed a motion with the U.S. District Court in Rhode Island to dismiss Ironshore’s suit on the grounds that a carrier cannot be liable for bad faith unless it has been accused of breaching an insurance contract. Columbia said its insurance contract was with Rhode Island Hospital’s parent organization, Lifespan, not Ironshore.

On Monday, U.S. District District Judge William E. Smith ruled that Ironshore did not have to be a party to a contract with Columbia to bring a bad faith claim.

“The crux of the dispute here is whether Columbia’s settlement tactics in the Beauchamp action were reasonable and legitimate efforts to reduce Lifespan’s exposure to damages, or were executed in bad faith and in reckless disregard of Lifespan’s best interests,” the judge explained in his opinion.

Ironshore also scored a victory against Columbia by persuading Smith to bar one of Columbia’s expert witnesses, a retired judge who wrote a report finding that Columbia’s actions were consistent with industry standards.

Both litigants are heavyweights in the liability market. Columbia Casualty Co., based in Chicago, had $572 million in direct written premiums in 2018, all but $5 million of that in liability lines, according to National Association of Insurance Commissioners’ data. Ironshore Specialty Insurance Co. had $990 million in direct written premiums last year, all but $77 million of it in liability lines.

Columbia provided the second tier in malpractice insurance coverage through an umbrella policy covering Rhode Island Hospital. The hospital was self-insured for up to $6 million in losses. Columbia covered amounts beyond that retention up to $15 million. Ironshore covered the excess: anything more than $15 million up to $32 million.

The dispute between the carriers stems from Beauchamp’s claim. The hospital had admitted that Beauchamp had suffered permanent brain damage because of its negligence. The only issue left to settle was the amount of damages.

Columbia said Beauchamp’s attorney demanded $32 million to settle the case and refused to come down from that number. The carrier says it earnestly negotiated a pre-trial “high-low” agreement that guaranteed Beauchamp at least $15 million in damages and no more than $31.5 million.

The jury verdict triggered the high-end of that agreement, effectively exhausting all of Rhode Island Hospital’s insurance coverage.

Smith said now it’s up to a jury to decide if Columbia ignored its policyholder’s “reputational risk and used Ironshore’s money to roll the dice in hopes of getting snake eyes.”

A Good-Faith Attempt to Limit Unwarranted Bad-Faith Liability in Georgia

Bryan Lutz, Tiffany Powers, and Kyle Wallace | Alston & Bird | March 21, 2019

A victory for insurers in Georgia’s Supreme Court clarifies state law on liability for failing to settle a claim. Our Insurance Litigation & Regulatory Team offers three key holdings that will limit an insurer’s potential exposure.

  • The injured party must present a valid offer
  • Whether a claimant has made a valid offer to settle is a legal question
  • Insurers may exhaust the policy limits by settling one of multiple claims

In a recent victory for insurers by Alston & Bird’s insurance team before the Georgia Supreme Court, the court issued an opinion in First Acceptance Insurance Co. of Georgia v. Hughes clarifying longstanding (and much debated) Georgia law governing an insurer’s liability for failing to settle a claim within the policy limits. The court held that a claimant’s ambiguous demand letter did not create a duty for the insurer to settle a claim, shedding light on three key aspects of Georgia law:

  • Insurers have no duty to settle a claim until they receive a valid offer to settle.
  • Demand letters are construed by the court with the principles of general contract construction, with ambiguous terms to be construed against the drafter.
  • Insurers have no duty to settle one of multiple claims when there is no time-limited demand and the claimant has expressed a willingness to engage in a joint settlement conference.

Georgia Law on Liability for Bad-Faith Failure to Settle Claims Against an Insured

The Georgia Supreme Court recently stepped in to clarify Georgia’s law governing an insurer’s liability for failing to settle a claim within the policy limits. Decades ago, the Georgia Supreme Court announced a rule in Southern General Insurance Co. v. Holtthat if an insurer acts in bad faith by refusing to settle a claim for an amount within the policy limits, it may be liable for the full amount of any judgment against the insured. The reason for the rule was simple: to encourage insurers to settle to avoid liability to their insured for judgment amounts exceeding the insurance coverage rather than take a chance at a trial where the insurer will face the same policy-limits maximum exposure but will possibly save money if the insured is found not liable.

In the 27 years following Holt, however, the rule has been weaponized. Plaintiffs’ attorneys have recognized that when the person at fault in a catastrophic accident may be rendered insolvent by a massive judgment, the insurer is often the only possible source to collect from. In these instances, plaintiffs’ attorneys have every incentive to break through the contractual limits of the insurance policy and to seek collection of the entire judgment from the insurer. Holt provided an inlet with its bright-line rule. As a result, rather than promoting settlement, the Holt rule has often been used as a trap to ensnare unwary insurers through the use of strategic “set-up” demands to create bad-faith liability even when the claimant never truly intends to settle their claim for an amount within the policy limits. Set-up tactics have included demand letters that require hand delivery of settlement payments within an unrealistic timeframe and vague and confusing demands that may not fully release all claims. These tactics have become so widespread that plaintiffs’ attorneys have actually created continuing legal education seminars to instruct on their use.

The Georgia Supreme Court’s Opinion in Hughes

Although the Georgia legislature took action to curb the abusive tactic of sending time-limited demands,[1] the Georgia Supreme Court recognized in Hughes that the law governing bad-faith liability needed further reform. In Hughes, the insured caused a car accident that seriously injured multiple parties and resulted in the insured’s death. The insurer, recognizing the $50,000 policy limit would quickly be exhausted, attempted to schedule a joint settlement conference with all injured parties. One of the injured parties (on her own behalf and her minor child’s) sent two letters to the insurer on the same day: (1) a letter expressing interest in a joint settlement conference and alternatively offering a limited release that would carve out claims for uninsured motorist coverage upon payment of the policy limits and receipt of coverage information; and (2) a letter requesting coverage information within 30 days.

After 41 days, the attorney “withdrew” the offer, filed suit, and the claimants at issue were awarded a judgment of $5.3 million against the insured’s estate. The estate then filed suit against the insurer for the full amount of the judgment. The trial court granted the insurer’s motion for summary judgment, finding that the insurer could not have reasonably known that all of the injured parties’ claims could have been settled within the policy limits. The Georgia Court of Appeals reversed, relying on a rigid application of Holt, finding that a jury could find that a demand had been made with a “purported 30-day time limit” and that the insurer failed to settle the two claims at issue within that timeframe. The Georgia Supreme Court reversed the court of appeals, finding that there was no “time-limited” demand for settlement and that the insurer could not be liable for bad-faith failure to settle when the claimant unilaterally withdrew a pending offer that had no express time limit. 

Georgia’s highest court in Hughes made three key holdings that work to further limit an insurer’s potential exposure from the use of set-up demands:

An insurer’s duty to settle does not arise until the injured party presents a valid offer.

The court in Hughes held that insurers cannot be liable for excess judgments if the claimant never presented a valid offer to settle a claim within the insured’s policy limits. Before Hughes, courts had openly questioned whether under Georgia law an insurer could be liable for bad-faith failure to settle even without an express offer to settle for the policy limits. Many plaintiffs argued that an insurer had an obligation to initiate settlement discussions or make an offer even if the claimant had not. However, the court in Hughes recognized that such a rule would encourage after-the-fact testimony that a claimant would have settled every time a judgment is entered that exceeds the policy limit. 

By holding that a claimant must first present a valid offer to settle within the policy limits, the court has provided insurers with a powerful defense to set-up demands that are vague, contradictory, or fail to settle the entire claim. In those instances, insurers can argue that there was no valid offer to “accept” that would avoid future liability for the insured.

Whether a claimant has made a valid offer to settle is a legal question decided by the court according to the general rules of contract construction.

The court also struck at the heart of set-up demands that provide vague, confusing, or contradictory terms by holding that courts must construe the validity of an offer as a matter of law, resorting to a jury only if ambiguity remains after applying the rules of contract construction. Ambiguous demand letters are construed against the drafter—in this instance, the claimant. Before Hughes, plaintiffs often sought to avoid summary judgment (and to appeal to sympathetic jurors) by arguing that the interpretation or intent of a demand letter was a fact question that was appropriately resolved at trial and by arguing that agreements are generally construed in favor of the insured or claimant.

The court in Hughes clarified that demand letters are to be construed against the injured party, and that if its terms are “too indefinite for a court to [ ] determine, there can be no assent thereto” and the offer is not valid. Applying this basic rule of contract interpretation, the court held as a matter of law that there was no time-limited demand when a claimant mailed two separate letters—one expressing a willingness to attend a joint settlement conference or, in the alternative, to settle the claims if insurance information was provided, and the other requesting insurance information within 30 days. In light of Hughes, insurers will have a powerful defense when faced with vague, confusing, or contradictory demand letters.

Insurers may exhaust the policy limits by settling one of multiple claims, but need not do so absent a time-limited demand.

Finally, the court addressed the situation insurers face when there are multiple claimants involved. It has long been the rule that an insurer may settle one claim that exhausts the policy limits without incurring liability for excess judgments resulting from litigation by the non-settling claimants. However, Hughes clarifies that an insurer has no obligation to settle one of multiple claims for the full policy limits, absent a time-limited demand.

However, Hughes should not be seen as limiting an insurer’s potential liability in the face of a valid time-limited demand—even in the context of multiple claimants. The court noted that in Hughes, the two claimants at issue “expressed their interest in attending a settlement conference with the other claimants.” Consequently, the insurer’s failure to settle with the two individual claimants was “reasonable as an ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”


[1]  Effective July 1, 2013, Georgia enacted a law that provided insurers with a minimum of 30 days to respond to a time-limited demand and clarified that an insurer’s request for clarification of an offer letter will not be deemed a rejection and counteroffer. O.C.G.A. § 9-11-67.1(a)(1), (d).