Admissibility of Expert Opinions in Insurance Bad Faith Trials

David McLain | Colorado Construction Litigation| October 8, 2019

In 2010, Hansen Construction was sued for construction defects and was defended by three separate insurance carriers pursuant to various primary CGL insurance policies.[i]  One of Hansen’s primary carriers, Maxum Indemnity Company, issued two primary policies, one from 2006-2007 and one from 2007-2008.  Everest National Insurance Company issued a single excess liability policy for the 2007-2008 policy year, and which was to drop down and provide additional coverage should the 2007-2008 Maxum policy become exhausted.  In November 2010, Maxum denied coverage under its 2007-2008 primarily policy but agreed to defend under the 2006-2007 primarily policy.  When Maxum denied coverage under its 2007-2008 primary policy, Everest National Insurance denied under its excess liability policy. 

In 2016, pursuant to a settlement agreement between Hansen Construction and Maxum, Maxum retroactively reallocated funds it owed to Hansen Construction from the 2006-2007 Maxum primary policy to the 2007-2008 Maxum primary policy, which became exhausted by the payment.  Thereafter, Hansen Construction demanded coverage from Everest National, which continued to deny the claim.  Hansen Construction then sued Everest National for, among other things, bad faith breach of contract.

In the bad faith action, both parties retained experts to testify at trial regarding insurance industry standards of care and whether Everest National’s conduct in handling Hansen Construction’s claim was reasonable.  Both parties sought to strike the other’s expert testimony as improper and inadmissible under Federal Rule of Evidence 702.
In striking both sides’ expert opinions, the U.S. District Court Judge Christine Arguello set forth the standards for the admissibility of expert opinions in Federal Court:

Under Daubert, the trial court acts as a “gatekeeper” by reviewing a proffered expert opinion for relevance pursuant to Federal Rule of Evidence 401, and reliability pursuant to Federal Rule of Evidence 702.[ii]  The proponent of the expert must demonstrate by a preponderance of the evidence that the expert’s testimony and opinion are admissible.[iii]  This Court has discretion to evaluate whether an expert is helpful, qualified, and reliable under Rule 702.[iv]

Federal Rule of Evidence 702 governs the admissibility of expert testimony. Rule 702 provides that a witness who is qualified as an expert by “knowledge, skill, experience, training, or education” may testify if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.
Fed. R. Evid. 702.

In deciding whether expert testimony is admissible, the Court must make multiple determinations. First, it must first determine whether the expert is qualified “by knowledge, skill, experience, training, or education” to render an opinion.[v]  Second, if the expert is sufficiently qualified, the Court must determine whether the proposed testimony is sufficiently “relevant to the task at hand,” such that it “logically advances a material aspect of the case.”[vi]  “Doubts about whether an expert’s testimony will be useful should generally be resolved in favor of admissibility unless there are strong factors such as time or surprise favoring exclusions.”[vii]

Third, the Court examines whether the expert’s opinion “has ‘a reliable basis in the knowledge and experience of his [or her] discipline.’”[viii]  In determining reliability, a district court must decide “whether the reasoning or methodology underlying the testimony is scientifically valid.”[ix]  In making this determination, a court may consider: “(1) whether a theory has been or can be tested or falsified, (2) whether the theory or technique has been subject to peer review and publication, (3) whether there are known or potential rates of error with regard to specific techniques, and (4) whether the theory or approach has general acceptance.”[x]

The Supreme Court has made clear that this list is neither definitive nor exhaustive.[xi]  In short, “[p]roposed testimony must be supported by appropriate validation—i.e., ‘good grounds,’ based on what is known.”[xii]

The requirement that testimony must be reliable does not mean that the party offering such testimony must prove “that the expert is indisputably correct.”[xiii]  Rather, the party need only prove that “the method employed by the expert in reaching the conclusion is scientifically sound and that the opinion is based on facts which sufficiently satisfy Rule 702’s reliability requirements.”[xiv]  Guided by these principles, this Court has “broad discretion” to evaluate whether an expert is helpful, qualified, and reliable under the “flexible” standard of Fed. R. Evid. 702.[xv]

With respect to helpfulness of expert opinions, Judge Arguello explained:

Federal Rule of Evidence 704 allows an expert witness to testify about an ultimate question of fact.[xvi]  To be admissible, however, an expert’s testimony must be helpful to the trier of fact.[xvii]  To ensure testimony is helpful, “[a]n expert may not state legal conclusions drawn by applying the law to the facts, but an expert may refer to the law in expressing his or her opinion.”[xviii]

“The line between a permissible opinion on an ultimate issue and an impermissible legal conclusion is not always easy to discern.”[xix]  Permissible testimony provides the jury with the “tools to evaluate an expert’s ultimate conclusion and focuses on questions of fact that are amenable to the scientific, technical, or other specialized knowledge within the expert’s field.”[xx]

However, “an expert may not simply tell the jury what result it should reach….”[xxi]  Further, “expert testimony is not admissible to inform the trier of fact as to the law that it will be instructed to apply to the facts in deciding the case.”[xxii]  Similarly, contract interpretation is not a proper subject for expert testimony.[xxiii]

Finding that all three of the experts intended to offer opinions that were objectionable on the basis of helpfulness, Judge Arguello granted both parties’ motions to exclude the expert testimony of the opposing experts. 

[i] Hansen Construction, Inc. v. Everest National Insurance Company, 2019 WL 2602510 (D. Colo. June 25, 2019).

[ii]See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589–95 (1993); see also Goebel v. Denver & Rio Grande W. R.R. Co., 215 F.3d 1083, 1087 (10th Cir. 2000).

[iii]United States v. Nacchio, 555 F.3d 1234, 1241 (10th Cir. 2009); United States v. Crabbe, F. Supp. 2d 1217, 1220–21 (D. Colo. 2008); Fed. R. Evid. 702 advisory comm. notes.

[iv]See Goebel, 214 F.3d at 1087; United States v. Velarde, 214 F.3d 1204, 1208–09 (10th Cir. 2000).

[v]Nacchio, 555 F.3d at 1241.

[vi]Norris v. Baxter Healthcare Corp., 397 F.3d 878, 884, 884 n.2 (10th Cir. 2005).

[vii]Robinson v. Mo. Pac. R.R. Co., 16 F.3d 1083, 1090 (10th Cir. 1994) (quotation omitted).

[viii]Norris, 397 F.3d at 884, 884 n.2 (quoting Daubert, 509 U.S. at 592).

[ix] Id. (quoting Daubert, 509 U.S. at 592–93).

[x]Norris, 397 F.3d at 884 (citing Daubert, 509 U.S. at 593–94).

[xi]Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999).

[xii]Daubert, 509 U.S. at 590.

[xiii]Bitler v. A.O. Smith Corp., 400 F.3d 1227, 1233 (10th Cir. 2004) (quoting Mitchell v. Gencorp Inc., 165 F.3d 778, 781 (10th Cir. 1999)).

[xiv] Id.

[xv]Velarde, 214 F.3d at 1208–09; Daubert, 509 U.S. at 594.

[xvi] United States v. Richter, 796 F.3d 1173, 1195 (10th Cir. 2015).

[xvii] Fed. R. Evid. 702.

[xviii] Richter, 796 F.3d at 1195 (quoting United States v. Bedford, 536 F.3d 1148, 1158 (10th Cir. 2008)); see, e.g., Killion v. KeHE Distribs., LLC, 761 F.3d 574, 592 (6th Cir. 2014) (report by proffered “liability expert,” which read “as a legal brief” exceeded scope of an expert’s permission to “opine on and embrace factual issues, not legal ones.”).

[xix] Richter, 796 F.3d at 1195 (quoting United States v. McIver, 470 F.3d 550, 562 (4th Cir. 2006)).

[xx] Id. (citing United States v. Dazey, 403 F.3d 1147, 1171–72 (10th Cir. 2005) (“Even if [an expert’s] testimony arguably embraced the ultimate issue, such testimony is permissible as long as the expert’s testimony assists, rather than supplants, the jury’s judgment.”)).

[xxi] Id. at 1195–96 (quoting Dazey, 403 F.3d at 1171).

[xxii] 4 Jack B. Weinstein et al., Weinstein’s Federal Evidence § 702.03[3] (supp. 2019) (citing, e.g., Hygh v. Jacobs, 961 F.2d 359, 361–62 (2d Cir. 1992) (expert witnesses may not compete with the court in instructing the jury)).

[xxiii] Id. (citing, e.g., Breezy Point Coop. v. Cigna Prop. & Cas. Co., 868 F. Supp. 33, 35–36 (E.D.N.Y. 1994) (expert witness’s proposed testimony that failure to give timely notice of loss violated terms of insurance policy was inadmissible because it would improperly interpret terms of a contract)). 

Prohibited Insurer Conduct and Unfair Acts Expressed Through California Case Law – Another Quick Guide to Holding an Insurer Accountable

Victor Jacobellis | Property Insurance Coverage Law Blog | October 26, 2019

In California, a carrier’s bad faith liability includes conduct beyond what is set out in the Insurance Code (statutory) and the Fair Claims Settlement Practices Act regulations. Bad faith conduct is also expressed through case law. Some of this additional bad faith conduct is summarized below. Effectively communicating an insurer’s bad faith conduct is essential to resolving insurance disputes. When you see bad faith conduct, a best practice is to bring the conduct to the carrier’s attention and explain why such conduct is prohibited.

A summary of some bad faith conduct expressed through case law is as follows:

  • An insurance carrier cannot in good faith deny a claim without performing a thorough investigation. Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819; Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 721; Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072. An insurer’s duty to investigate continues even after a lawsuit concerning coverage is filed. Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1076, f.n. 7.
  • An insurer has duty to objectively evaluate a claim. An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured. Mariscal v. Old Republic Life Ins. Co. (1996) 42 Cal.App.4th 1617, 1624. This is especially true if an insurer denies a claim before its insured was given a change to provide information to support a claim. Blake v. Aetna Life Ins. Co. (1979) 99 Cal.App.3d 901, 924.
  • An insurer’s failure to reconsider a denied claim after it receives new information can also be bad faith conduct. Austero v. National Cas. Co. of Detroit, Mich. (1978) 84 Cal.App.3d 1, 35.
  • It is improper for an insurer to attempt to settle a claim by making an “unreasonably low,” e.g., a “low-ball” or “nuisance value” settlement offer. White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 886.
  • An unreasonable delay in the processing of a claim or the payment of benefits is prohibited insurer conduct. Fleming v. Safeco Ins. Co. of America, Inc. (1984) 160 Cal.App.3d 31, 37. If more than two weeks have passed, always inform an insurer of this requirement.

Avoid broadly accusing a carrier of “bad faith” with no other support or directly accusing a carrier of bad faith because of a certain act. Rather, focus on the specific bad faith acts and the authority stating that the conduct is prohibited. For example, resist the urge to state, “You are in bad faith because you have not conducted a thorough investigation.” Rather, try and state the following: “You have an obligation not to deny any portion of a claim without performing a thorough investigation.1 You, however, failed to fulfil this obligation because you knew your insured was obtaining an expert report on the scope of covered damage, yet you denied further coverage before the report was received. The claim therefore should be reopened and the claim further evaluated for coverage”

As always, knowing and monitoring all of these duties will enhance your representation of insureds and build your credibility with carriers.
1 Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 819.

An Example of Why Policyholders Need Favorable and Strong Bad Faith Laws

Daniel Veroff | Property Insurance Coverage Law Blog | October 19, 2019

Our Northern California office is battling the big insurers for their conduct in response the 2017 NorCal Wildfires, and recently some of our clients received letters purporting to be a “friendly reminder” from their insurance company. Well, they were actually not so friendly. Instead, they are kind of a punch to the gut.

The letter I am referring to was sent by USAA insurance, who we all know markets themselves as providing above-average service to some of our most honored citizens, servicemembers and veterans. The letter explains its purpose as follows:

We write this letter to summarize the current status of the claim and as a friendly reminder regarding various time related obligations you have under the policy governing your claim.

So, the letter is a “friendly reminder” about deadlines, right? Wrong. It is a sugar-coated gut-punch stating that sorry, you are out of time to rebuild or replace. These letters are dated more than two years after the anniversary of the wildfires, and they go on to state:

In order to recover additional amounts under your homeowners policy or any endorsements, including the Home Protector and recoverable depreciation under the replacement cost coverage, you must complete the actual repair or replacement of the damaged property within 2 years of the date of loss, unless during this time, you send us a written request for an extension for an additional 180 days to complete the repair or replacement.

USAA could have sent this “friendly reminder” a few months before the two-year deadline. Then it really would have been “friendly,” because it could have actually given insureds meaningful insight into what next steps they should take. But instead USAA waited until after, when there is nothing the insured could do except realize they are out of luck.

But that’s not all! It is not even true that an insured has two years from the date of loss to rebuild! The statement itself is an egregious misrepresentation of California law. California Insurance Code Section 2051.5(b)(1) provides:

(b) (1) Except as provided in paragraph (2), no time limit of less than 12 months from the date that the first payment toward the actual cash value is made shall be placed upon an insured in order to collect the full replacement cost of the loss, subject to the policy limit. Additional extensions of six months shall be provided to policyholders for good cause. In the event of a loss relating to a “state of emergency,” as defined in Section 8558 of the Government Code, no time limit of less than 24 months from the date that the first payment toward the actual cash value is made shall be placed upon the insured in order to collect the full replacement cost of the loss, subject to the policy limit. Nothing in this section shall prohibit the insurer from allowing the insured additional time to collect the full replacement cost.

Equally bad, USAA’s letter is in direct contradiction to the California Standards For Prompt, Fair and Equitable Settlements, which requires it to give sixty (60) days notice before any deadlines run:

(f) Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitation or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant not less than sixty (60) days prior to the expiration date; except, if notice of claim is first received by the insurer within that sixty days, then notice of the expiration date must be given to the claimant immediately.

So, what is happening here, in sum, is that USAA is giving its clients a “friendly reminder” that effectively says they are out of time to rebuild or replace, when they are in fact not. How can this be allowed to happen?

When we raise this argument in lawsuits, carriers point to the California Fair Claims regulations at 10 C.C.R. § 2695.4(b), which says:

(a) Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured’s policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer’s additional liability.

Carriers point to this and say, well, we only have to tell you what the policy says, not what California law says. That is, frankly, astonishing, and dead wrong. The key language in this regulation is “that may apply to the claim presented by the claimant.” Thus, it does not matter what the policy says if what it says will not actually apply to the claim. USAA is well-aware that their policy language is trumped by California law and will never apply to the claim.

This is not the first example of a letter like this, but it is the most shocking we’ve seen given its timing in relation to the two-year anniversary of a massive disaster that destroyed so many lives.

So why does this keep happening? The only entity who can legally enforce compliance with the California regulations is the Commissioner of Insurance, and the Commissioner of Insurance has done nothing to stop letters like this. In court, attorneys can cite to the violation of a regulation as evidence of unreasonable claims handling, but that is a far cry from stopping the activity in the first place. Hence, it is our duty to share this with the public in an attempt to educate on what is really going on here.

We have attorneys throughout California to help you with similar bad faith tactics.

Using Unfair Claim Settlement Statutes To Prove Bad Faith

Mikaela Whitman | | October 11, 2019

The covenant of good faith and fair dealing is implied in all insurance contracts. While most states recognize that an action for breach of this covenant (also known as “bad faith”) sounds in breach of contract, some states also recognize an independent tort that can be separate from or in addition to the breach of contract claim. All states also have an insurance code that imposes liability on an insurer which fails to meet the statutory standards. These claims settlement practices statutes are modeled after the National Association of Insurance Commissions’ Model Unfair Claims Settlement Practices Act and often contain a long list of proscribed insurer practices, including whether in an insurer’s defense or settlement of its insured’s claim (third-party bad faith) or its unreasonable refusal or delay in adjusting or resolving an insured’s first-party claim (first-party bad faith).

For example, New York Insurance Law §2601 defines certain acts that constitute “unfair claim settlement practices,” including, among others, “failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies” and failing to “advise the claimant of acceptance or denial of the claim within thirty working days.” NY Ins. §2601(a)(3), (a)(4) (2018). However, most jurisdictions, including New York, may not recognize a private cause of action in favor of an insured and only the state’s insurance commissioner can bring a cause of action alleging a violation of these statutes. See, e.g., Rocanova v. Equitable Life Assurance Soc’y, 83 N.Y.2d 603, 614 (1994) (New York law does not “recognize a private cause of action under Insurance Law §2601”); Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, 304 (1988) (violations of Insurance Code §790.03 and the Fair Claims Settlement Practices Regulations do not by themselves give rise to a separate right of action and are not bad faith per se); Davidson v. Travelers Home and Marine Ins. Co., 2011 WL 7063521, at *2 (Del. Super. Dec. 30, 2011) (holding that the purpose of the Delaware Unfair Trade Practices Act is to regulate trade practices in the insurance business and only the Insurance Commissioner has the authority to investigate or file claims of alleged bad faith acts).

Yet even though these statutes may not provide insureds a private cause of action, insureds should not disregard their benefit as violations of and failures to comply with these statutes can still be used as evidence of an insurers’ bad faith. See, e.g., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) (discussing that while there is no private civil cause of action against an insurer that commits one of the various acts listed in statutes governing unfair claims settlement practices, violations of the section may evidence the insurer’s breach of duty to its insured under the implied covenant of good faith and fair dealing); Davidson, 2011 WL 7063521, at *2 (stating that “[t]he court assumes without deciding here, however, that an insurer’s violation of the [Unfair Trade Practices] Act may be used as evidence of bad faith”); State of N.Y. v. Merchants Ins. Co. of New Hampshire, 109 A.D.2d 935, 926 (3d Dept. 1985) (in a private cause of action for bad faith, court relied on NY Insurance Law 2601 as evidence that the insurer acted in bad faith).

In Belco Petroleum v. AIG Oil Rig, the First Department held that not only can these statutes be used as evidence of bad faith, but they can also be used as evidence when seeking punitive damages for a bad faith claim, stating: “Now, an insured aggrieved by an unfair claim settlement practice can take his grievance to the Superintendent of Insurance; if the grievance has merit, the Superintendent will presumably take it up and investigate; the insured, be he of modest means or substantial, should then be able to use the results of that investigation in pressing a claim for punitive damages.” 164 A.D.2d 583, 591 (1st Dept. 1991).

The use of these statutes as evidence of insurer bad faith takes on greater significance when one considers the standard most jurisdictions apply to determine whether an insurer has acted in bad faith. This broad and general standard typically requires the insurer to act “fairly” and “reasonably.” See N.Y. Univ. v. Cont’l. Ins. Co., 87 N.Y.2d 308, 318 (1995) (bad faith claims can be predicated on an insurer’s failure to investigate, process, or pay an insurance claim, or a general business practice of denying insurance claims without a reasonable basis). As a result, insureds, insurers and courts alike are left to puzzle what it means to act “reasonably” and how to prove that an insurers’ acts were or were not “reasonable.” While traditional sources of proof such as legal precedent, expert testimony, an insurers’ past acts, industry customs, and legal consensuses (i.e., the Restatement), should certainly be considered, unfair claim settlement statutes likewise should not be overlooked.

Insurer Not Entitled to Summary Judgment on Construction Defect, Bad Faith Claims

Tred R. Eyerly | Insurance Law Hawaii | August 12, 2019

    The federal district court denied the insurer’s motion for summary judgment seeking to establish there was no coverage for construction defect claims and for bad faith. Country Mut. Ins. Co. v. AAA Constr. LLC, 2019 U.S. Dist. LEXIS 115935 (W.D. Okla. July 12, 2019).

    Jeffrey and Tammy Shaver entered two contracts with AAA Construction for the construction of a garage and of a barn on their property. After construction was completed, the Shavers sued AAA Construction for building the garage over two high-pressure gas pipelines and the utility easements associated with them. They alleged AAA Construction was negligent for constructing over a working utility line. AAA Construction’s insurer, Country Mutual Insurance Company (CMIC) denied coverage because the alleged faulty workmanship of AAA Construction did not constitute an “occurrence” under the policy. 

    CMIC sued AAA Construction for a declaratory judgment that it had no duty to defend or indemnify. CMIC moved for summary judgment. 

    The court denied the motion. A jury could find AAA Construction was negligent or engaged in other nonintentional conduct by failing to ascertain the location of the easement, meaning the possibility of coverage existed. Therefore, CMIC had a duty to defend.

    CMIC also argued that numerous exclusions were applicable to deny coverage. The court disagreed and found none of the raised exclusions applied. 

    Finally, the motion was denied regarding AAA Construction’s counterclaim for bad faith. Among other arguments, CMIC submitted it had not acted in bad faith by failing to to an adequate investigation. The court found the factual record on this issue was sparse. The record contained sufficient facts, however, upon which a reasonable juror could find the investigation conducted by CMIC was not reasonable.