Defending Institutional Bad Faith Claims, Part I – A Primer On Institutional Bad Faith

John David Dickenson and Chad A. Pasternack | Cozen O’Connor | November 26, 2019

Broadly speaking, there are two types of bad faith claims that may be alleged against an insurance company—traditional or non-institutional bad faith, and institutional bad faith. For the former, a policyholder would seek to hold an insurer liable for its acts or omissions that directly and adversely affected the policyholder. For example, in the third-party context, a policyholder may file a bad faith claim against its insurer if the insurer failed to settle a lawsuit against the policyholder within policy limits and a judgment is entered against the policyholder in excess of policy limits.

Institutional bad faith, in contrast, goes beyond a single policyholder. In claims of institutional bad faith, the plaintiff or plaintiffs will attempt to demonstrate a company plan and culture that denies policyholders the reasonable benefits of their insurance policies. A classic example would be where an insurer creates an incentive structure that encourages its adjusters to deny, delay or underpay claims.

The differences between traditional and institutional bad faith manifest in the costs of discovery and the cost of an adverse verdict. Stated simply, institutional bad faith claims are expensive and time consuming to defend. Because institutional bad faith claims pertain to the practices of the insurer or its claims department at a macro level, plaintiffs will seek voluminous company documents and high-level depositions. Plaintiffs may seek copies of the insurer’s policies and procedures, department bulletins, training manuals, compensation programs, and audits and statistics, to name just a few. Given the breadth and expense of e-discovery, institutional bad faith claims pose significant costs.

Further, in any state that has adopted the Unfair Claims Settlement Practices Act, plaintiffs are likely to allege a defendant insurer commits unfair claims practices “with such frequency as to indicate a general business practice.” See, e.g., Fla. Stat. 626.95411; Nev. Rev. Stat. § 686A.310; N.C. Gen. Stat. § 58-63-15;2 Conn. Gen. Stat. § 38a-816. In Florida, for example, Florida Statutes § 624.155(5) permits punitive damages where the conduct giving rise to the violation occurs with such frequency as to constitute a general business practice, and is either willful, wanton or malicious, or with reckless disregard of the rights insured.

To minimize the risk of institutional bad faith claims, we recommend the following practices:

  • Always be mindful that it is the purpose of an insurance company to pay covered losses and to provide the policyholder the benefits of the insurance policy. Not every claim is covered, however, and some claims involve elaborate fraud schemes. While it is reasonable and necessary to investigate claims, denial of coverage should always be based upon defensible, reasoned conclusions.
  • Train your adjusters properly and train them often. Training should include the procedures for handling claims, the meaning and effects of policy provisions, and legal standards and other jurisdictional-specific requirements. Make sure your adjusters have access to coverage counsel when they are uncertain of how to proceed.
  • Use statistics cautiously. Insurance is a business and it is reasonable for a business to measure performance or outcomes. But, those statistics are likely to become an exhibit at a bad faith trial. Beware of the metrics that are used and how questions are presented. Also consider who has access to the information. Is the information shared with different departments (e.g., underwriting and claims)? Is the information given to managerial employees as well as claims adjusters? Prior to collecting and disseminating information, think defensively—how might a bad faith plaintiff argue this information is nefarious?
  • Review your claim handling guidelines with outside counsel—using a fresh set of eyes is critical because someone with experience with the guidelines may interpret them based on their understanding of the guidelines, as opposed to strictly analyzing the text. Ambiguities in a claim manual may permit a bad faith plaintiff to argue an interpretation of otherwise innocuous text in a manner that supports a finding of institutional bad faith. Further, a claim manual may also create unrealistic claim handling standards beyond that required by the law. In those instances, the claim manual may have the effect of raising the standard of care in the eyes of the jury.
  • Consider employee incentives carefully. Incentives relating to payout on claims are more obviously problematic. Other incentives may be well intentioned but have unintended consequences. For instance, incentivizing speedy closure of clams may seem like an effective way of delivering policyholders prompt payments or claim decisions, but it may also cause adjusters to conduct inadequate investigations. Any use of performance targets or quotas should be carefully considered to ensure that their effect is to promote fair, prompt, and comprehensive evaluation of claims. Reward claims handlers for providing superior customer service—those satisfied customers will in turn reward the company with future business.

While these practices may help prevent bad faith suits, lawsuits are bound to happen regardless of their merits. To avoid costly and intrusive discovery in a bad faith action, it is necessary to analyze the lawsuit and discovery in terms of their specific component parts. Under Federal Rule of Civil Procedure 26(b), “[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case….”

In this series, we will focus on cutting discovery off at the pleadings—by narrowing the plaintiff’s claim, you limit the scope of relevance in discovery. Plaintiffs often allege institutional bad faith by providing a small amount of information pertaining to the company at large, and then making significant inferences and conclusions and offering those inferences as factual allegations. A skilled attorney can make such logical leaps appear valid. To avoid general business practices discovery, the battle begins with the initial pleadings. If the complaint does not allege institutional bad faith, then it will be much easier to argue that such discovery is not relevant. If, on the other hand, the complaint alleges institutional bad faith, limiting discovery will become more difficult and more dependent on the specific circumstances of the lawsuit and the discovery requests.3

Footnotes

1. However, “[a]ny person who pursues a claim under this subsection shall post in advance the costs of discovery. Such costs shall be awarded to the authorized insurer if no punitive damages are awarded to the plaintiff.” § 624.155(5).

2. Under North Carolina law, it is not necessary to allege violations of N.C.G.S. § 58-63-15(11) occur with the frequency of a general business practice in order to allege a cause of action under N.C.G.S. § 75-1.1, which prohibits unfair or deceptive trade practices. Gray v. N.C. Ins. Underwriting Ass’n, 529 S.E.2d 676, 683 (N.C. 2000). However, a plaintiff might allege general business practices as aggravating factors in favor of a claim for punitive damages.

3. See All Moving Servs.Inc. v. Stonington, Ins. Co., No. 11-61003-CIV, 2012 WL 718786, at *5 (S.D. Fla. Mar. 5, 2012) (holding that if the general business practices allegations are deemed legally sufficient, or are not challenged, the plaintiff may pursue discovery relevant to its claim for punitive damages).

What Is the Prescriptive Period for Louisiana First-Party Bad Faith Claims?

Deborah Trotter | Property Insurance Coverage Law Blog | November 27, 2019

Louisiana federal courts have been split on the issue regarding the applicable prescriptive period (statute of limitation) for first-party insureds’ bad faith claims against their insurers. Recently, the Louisiana Supreme Court granted review of Smith v. Citadel Insurance Company, to definitively rule on the primary legal issue presented: “the proper prescriptive period applicable to a first-party bad faith claim against an insurer.”1

Ms. Smith, pursuant to an assignment of rights from the named insured, which placed her in the position of the first-party insured, brought a bad faith claim against GoAuto. The Louisiana courts agree that Louisiana recognizes an insurer owes its insured a duty of good faith. The split has arisen in the classification of the action in regard to Louisiana law.

The supreme court recognizing this uniqueness of Louisiana law outlined the basis of its ruling by first explaining some of the distinct points of Louisiana law and later demonstrated how its earlier opinions, though not directly addressing the issue before it in Smith, are consistent with Smith:

All personal actions, including an action on a contract, are subject to a liberative prescription of ten years, unless otherwise provided by legislation. La. C.C. art. 3499; Roger v. Dufrene, 613 So. 2d 947, 948 (La. 1993). Delictual actions are subject to a liberative prescription of one year. La. C.C. art. 3492. The nature of the duty breached determines whether the action is in tort or in contract. Roger, 613 So. 2d at 948; Dean v. Hercules, Inc., 328 So. 2d 69, 70 (La. 1976). “The classic distinction between damages ex contractu and damages ex delicto is that the former flow from the breach of a special obligation contractually assumed by the obligor, whereas the latter flow from the violation of a general duty owed to all persons.” Thomas v. State Employees Grp. Benefits Program, 05-0392 (La. App. 1 Cir. 3/24/06), 934 So. 2d 753, 757. See also, Certain Underwriters at Lloyd’s, London v. Sea–Lar Mgmt., 00-1512 (La. App. 4 Cir. 5/9/01), 787 So. 2d 1069, 1074; 6 Saul Litvinoff & Ronald J. Scalise Jr., Louisiana Civil Law Treatise, Law of Obligations § 5.2 (2d ed. 2018) (“Fault is contractual when it causes a failure to perform an obligation that is conventional in origin, that is, an obligation created by the will of the parties, while fault is delictual when it causes the dereliction of one of those duties imposed upon a party regardless of his will, such as a duty that is the passive side of an obligation created by the law.”).2

Basically, the court ruled that a first-party insured’s bad faith claim is a personal action subject to a ten-year prescriptive period, as it arises under the contract of insurance. The court went on to explain how the bad faith statutory laws worked within the personal action:

Although the duty of good faith owed by the insurer to the insured is codified in La. R.S. 22:1973, the bad faith cause of action by an insured against the insurer does not rest solely on this statute. Gourley v. Prudential Prop. & Cas. Ins. Co., 98-0934 (La. App. 1 Cir. 5/14/99), 734 So. 2d 940, 945 (citing Smith v. Audubon Insurance Company, 94-1571 (La. App. 3 Cir. 5/3/95); 656 So. 2d 11, 14, rev’d on other grounds, 95-2057 (La. 9/5/96), 679 So. 2d 372). The duty of good faith is an outgrowth of the contractual and fiduciary relationship between the insured and the insurer, and the duty of good faith and fair dealing emanates from the contract between the parties. In the absence of a contractual obligation, the duty of good faith does not exist. See La. C.C. art. 1759 (“Good faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation.”); La. C.C. art. 1983 (“Contracts have the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law. Contracts must be performed in good faith.”). Because we find an insurer’s bad faith is a breach of its contractual obligation and fiduciary duty, we hold the insured’s cause of action is personal and subject to a ten-year prescriptive period. See also 15 William McKenzie & H. Alston Johnson, Louisiana Civil Law Treatise: Insurance Law and Practice § 11:25 (4th ed. 2018) (“Unless otherwise provided by statute, claims under the penalty statutes prescribe in ten years.”).3

This ruling by the court is a win for policyholders, as they are no longer restricted in some Louisiana venues to the previously misapplied one-year prescriptive period for their bad faith claims. Note—Louisiana does allow parties to enter into contracts of insurance with a suit limitation for breach of contract of not less than two years from the inception of loss.4

So, the next question is … how many bad faith claims from the past ten years remain to be pursued? The previous, potential one-year timeframe, which only aided the insurers in their “arbitrary, capricious, and without probable cause” actions has ended. We will be happy to evaluate your potential bad faith claims. Happy Thanksgiving!
__________________________
1 Smith v. Citadel Ins. Co., __ So. 3d __, 2019 WL 5445086 (La. Oct. 22, 2019).
2 Id. (emphasis added).
3 Id. (emphasis added).
4 LA Rev Stat § 22:868 (2018).

7th Circuit: Appraisal Should Have Ended Dispute Over Roof Replacement

Jim Sams | Claims Journal | November 18, 2019

When managers of the Villas at Winding Ridge in Indianapolis asked a contractor to assess the condition of the 33 roofs in the condominium complex, they learned that a hailstorm the year before had damaged soft metal parts, fascia and air-conditioning condensers on seven or eight of the buildings.

Winding Ridge filed a claim with State Farm Insurance. The insurer said the damage was minor and estimated repairs would cost $65,713.54. Winding Ridge disagreed, but while the matter was still pending, the homeowners’ association borrowed $1.5 million to replace the roofs.

Winding Ridge sued State Farm, alleging bad faith, breach of contract and promissory estoppel. The complex demanded that State Farm pay the entire amount of the loan, plus prejudgment interest in the amount of $97 per day.

On Nov. 8, the. U.S. 7th Circuit Court of Appeals affirmed a district court’s ruling that rejected Winding Ridge’s claims. After nearly five years of litigation, the appellate court found that Winding Ridge was entitled to nothing more than what State Farm had already paid because “very little if any hail damage to the shingles was observed.”

“The fact that Winding Ridge independently replaced the shingles on all 33 buildings for $1.5 million while its claim was pending does not obligate State Farm under the policy or mean State Farm breached the policy,” Circuit Judge Amy St. Eve wrote for the appellate panel.

After Winding Ridge disputed State Farm’s first assessment, the condo complex and State Farm both hired independent appraisers, as called for by the policy. Winding Ridge’s appraiser said shingles had to be replaced on 13 buildings at a total estimated cost of $676,824.07. State Farm’s appraiser said no shingles had to be replaced, but there was minor damage to all 33 buildings that would cost $79,921.80 to repair.

The parties appraisers selected an independent umpire to settle the matter. He found that that State Farm should pay 20% of the cost of replacing shingles on 13 buildings and make other repairs, with a total cost of $154,391,77. State Farm paid that amount.

Winding Ridge insisted that that the shingled needed to be replaced and filed suit in Indiana state court. State Farm removed the case to federal court and persuaded a district court judge to dismiss the claim.

The 7th Circuit affirmed. The appellate panel rejected Winding Ridge’s argument that State Farm was liable for the cost of replacing shingles on all 33 roofs because the style of shingle on the damaged buildings was no longer available. The court also said that State Farm’s initial low-ball settlement offer doesn’t mean it wasn’t acting in good faith.

“The mere fact that State Farm’s initial estimate was less than the award does not suggest culpability,” the opinion says. “At best, it may suggest that State Farm’s first inspection was inadequate. But this alone does not constitute bad faith.”

Dennis Wall, a Florida insurance attorney, summarized the court’s findings Thursday in his Claims and Bad Faith Law Blog. He reminded readers of sage advice attributed to Davey Crockett: “Be sure you’re right, then go ahead.”

“Even after all these years, it is still a good motto to follow,” Wall wrote.


He Who Represents Himself has a Fool for a Client

Barry Zalma | Zalma on Insurance | November 8, 2019

Release of all Claims Defeats Bad Faith Suit

First party property insurers seldom use a release of all claims to resolve a fire claim. The only time a release is used is when there is a serious dispute between the insurer and the insured and threats of extra-contractual litigation. For example if an insurer believes the insured committed fraud or attempted an arson for profit but has insufficient evidence to prove the fraud without years of serious litigation, a settlement paying more than indemnity, but less than the cost of the litigation, will be reached with a release. Similarly, if the insured is litigious, threatens a bad faith suit on first contact, a release might be required to protect the insurer from unnecessary litigation.

In Perfection, LLC D/B/A Carl Krueger Construction, Inc., Liberty Mutual Group Inc., v. Edward Cole, A/k/a Carl Cole D/b/a North Shore Station, NNS, LLC D/B/A North Shore Station, Cecole Properties, LLC, Debtor, Appeal No. 2017AP242, State of Wisconsin in Court of Appeals District II (October 23, 2019) Edward Cole appealed, acting pro se (as his own lawyer), from a judgment which held him liable to Perfection, LLC and eliminated his case against his insurer.

FACTS

This case arises out of a fire loss that occurred at Cole’s laundromat business on January 12, 2013. Cole’s business had insurance coverage with Liberty Mutual. In furtherance of his insurance claim, Cole submitted expenses relating to his retention of a restoration contractor (Perfection).

After exchanging multiple emails, Cole and Liberty Mutual reached an agreement as to the final amount of the insurance claim. Liberty Mutual agreed to pay Cole a total of $298,232.99. In return, Cole signed a policy release in which he agreed to release all claims against Liberty Mutual, including any extra contractual claims.

On February 28, 2014, Perfection filed suit against Cole for breach of contract, alleging that he had withheld payment for some of its work. Cole filed counterclaims against Perfection, asserting breach of contract and breach of warranty. He also filed a cross-complaint against Liberty Mutual, alleging that it had acted in bad faith. In order to pursue this latter claim, Cole sought to rescind the policy release executed eight months earlier, claiming that he had signed it under duress.

Liberty Mutual sucessfuly moved for summary judgment, seeking dismissal of Cole’s cross-complaint.  The court refused to allow Cole to rescind the policy release because he did not, as a matter of law, show the elements necessary to establish duress.

As the new trial date approached, Cole’s new attorney also moved to withdraw, citing disagreement with Cole over strategy. Cole asked the court to reject the motion; however, he also began acting pro se, submitting numerous filings. Ultimately, the court denied counsel’s motion, noting that it had “gone through this before” and wanted to keep the case on track. Accordingly, it refused to consider Cole’s pro se filings.

The matter proceeded to trial where a jury found Cole liable to Perfection for breach of contract and punitive damages. The jury rejected Cole’s counterclaims against Perfection.

ANALYSIS

Perfection’s action was fully litigated in state court with the jury. Cole claimed that the circuit court erred when it dismissed his cross-complaint against Liberty Mutual. He accuses the court of failing to consider facts in support of his bad-faith claim.

Summary judgment is appropriate if there are no genuine issues of material fact and one party is entitled to judgment as a matter of law. The Court of Appeals was satisfied that the circuit court properly granted Liberty Mutual’s motion for summary judgment because, regardless of the merits of Cole’s bad-faith claim, the policy release barred him from bringing it.

ZALMA OPINION

Mr. Cole was not a very reasonable insured. He caused Liberty to enter into a negotiated settlement raising enough concern that it required – to effect the settlement for more than it believed it owed – required that Cole sign a release of all claims including extra contractual (bad faith) claims. Liberty was right about Cole. Cole’s lawyers begged to be relieved of the obligation to represent him. Even with the release Liberty was sued for bad faith and needed to make a summary judgment motion and defend that motion on appeal. The release protected Liberty but Cole still cost them a great deal of money defending against his frivolous suit and appeal.

Insurer Must Defend Additional Insured Though Its Insured is a Non-Party

Tred R. Eyerly | Insurance Law Hawaii | September 4, 2019

    The plaintiff insurer’s motion for partial summary judgment seeking an order that defendant insurer was obligated to defend a non-party as an additional insured was granted. Am Empire Surplus Lines Ins. Co. v. Burlington Ins. Co., 2019 N. Y. Misc. LEXIS 4145 (N. Y. Sup. Ct. July 25, 2019). 

    Quality Building Construction, LLC was the contractor hired to work on exterior facade of a building owned by Central Park West Corporation. The underlying complaint alleged that Quality caused plastic spacers and pedestals used for the penthouse terrace to fall down the roof drain riser. A clog and rainwater backup resulted in water damage to apartment 8A. The resulting damage was allegedly due to the clogged roof drain riser.

    Quality subcontracted the work to Mega State, Inc. The subcontract required Mega to indemnify and hold Quality harmless against claims in connection with Mega’s work, as well as name Quality as an additional insured on a primary, non-contributory bases under Mega’s CGL policy. Burlington issued a policy to Mega naming Quality as an additional insured. American Empire issued a CGL policy to Quality.

   Quality was sued in the underlying action, but Mega was not.  American Empire tendered a demand for coverage to Mega and Burlington, relying on the agreement between Quality and Mega. Burlington responded that Mega was not liable for the alleged damages. American Empire sued Burlington. Subsequently, Burlington accepted the tender to defend Quality in the underlying action, and reserved rights as to whether Burlington’s policy was primary and on the question of indemnification. American Empire agreed to withdraw its suit if Burlington would modify its reservation of rights. Burlington refused.  

    Mega completed its work prior to the date of loss. American Empire contended that Quality was an additional insured and entitled to coverage under the “Completed Operations Endorsement” in the Burlington policy. American Empire argued that additional insured coverage was triggered because there was at least a reasonable possibility that the named insured, Mega, was a proximate cause of the underlying property damage. Further, coverage to Quality as an additional insured under the Burlington policy was primary and non-contributory. 

    Burlington argued the underlying allegations precluded the possibility of coverage. The underlying complaint stated that the property damage was caused by Quality, and there could be no determination that Mega caused the property damage. There was no proof or allegation that Mega was negligent and Mega was not a party to the underlying action. The only evidence that Mega’s work caused the damage was an affidavit from Quality’s President swearing that Quality did not perform work because it subcontracted the work to Mega. Burlington challenged this affidavit as self-serving and inadmissible on the cross motions for summary judgment. 

    The court ruled that it was irrelevant that Mega was not mentioned in the underlying complaint. Burlington had the subcontract between Mega and Quality, so it had actual knowledge of facts establishing a reasonable possibility that the complaint was within its indemnification policy terms and that its coverage was primary and non-contributory. Burlington was liable to reimburse American Empire for defense costs, with interest because of the language of the policies and the sub contract between Quality and Mega.