Defending Institutional Bad Faith Claims, Part III – Proof By Other Claims

John David Dickenson and Chad A. Pasternack | Cozen O’Connor | November 27, 2019

In Part I of this series, we explored the differences between institutional and non-institutional bad faith. For claims of institutional bad faith, plaintiffs often attempt to demonstrate a pattern and practice by offering evidence of claims of other policyholders. Unlike claims of institutional bad faith premised on the insurer’s policies and procedures, “other claims” allegations do not require knowledge of the insurer’s motives or internal programs, but instead rely on evidence of repeated behavior to make the threshold showing of bad faith.

When a plaintiff attempts to offer specific factual allegations relating to other policyholders in order to demonstrate a general business practice, the relevant inquiries relate to any actual similarities between the claims and the threshold at which the plaintiff alleges enough “other claims” to constitute a general business practice. “A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages.”1 Unique policyholders make unique insurance claims. Factors courts consider in determining whether acts involving other policyholders suggest a general business practice include: (1) the degree of similarity between the alleged unfair practices in other instances and the practice allegedly harming the plaintiff; (2) the degree of similarity between the insurance policy held by the plaintiff and the polices held by other alleged victims of the insurer’s practices; (3) the degree of similarity between the claims made under the plaintiff’s policy and those made by other alleged victims under their respective policies; and (4) the degree to which the insurer is related to other entities engaging in similar practices.2

Use the plaintiff’s detailed bad faith allegations to show that the alleged bad faith is unique to the circumstances of the case, and but for the specific circumstances, each successive act or omission would not have happened. Consider the pool of policyholders that the plaintiff is offering as similar. Variables to analyze—in addition to the allegations of bad faith conduct—include the geographic scope, the temporal range, the type of loss or claim, and the personnel involved. In the discovery context, the Supreme Court of Texas considered “the many variables associated with a particular claim, such as when the claim was filed, the condition of the property at the time of filing (including the presence of any preexisting damage), and the type and extent of damage inflicted by the covered event.”3

With respect to the number of other claims, some courts require the plaintiff to “produce evidence of far more than three other claims in addition to his own.”4 While there is no “magic number,” the “appropriate consideration is whether the plaintiff has made facially plausible allegations that, in the circumstances of the particular case, the defendant has engaged in the alleged wrongful acts enough to suggest it has a general business practice of doing so.”5

The best practice for limiting general business practices discovery is to stop it before it starts. Scrutinize the pleadings carefully. When the plaintiff attempts to demonstrate a general business practice with allegations regarding other insurance claims, explore the similarities and the dissimilarities of the claims and emphasize the latter. Failure to do so gives the plaintiff an opportunity to go on what might be a costly and intrusive fishing expedition.

Footnotes

1 State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 422 (2003).

2 Belz v. Peerless Ins. Co., 46 F. Supp. 3d 157, 166 (D. Conn. 2014).

3 In re National Lloyds Ins. Co., 449 S.W.3d 486, 489 (Tex. 2014). In National Lloyds, the Supreme Court of Texas vacated a trial court order compelling an insurer to produce documents relating to the insurer’s valuation of other insurance claims. The court held that the insurer’s evaluation of the damage to other homes is not probative of the plaintiff’s undervaluation claims at issue. Id.

4 See, e.g., Jablonski v. St. Paul Fire & Marine Ins. Co., No. 2:07-cv-00386, 2010 WL 1417063 (M.D. Fla. Apr. 7, 2010) (citing Howell-Demarest v. State Farm Mut. Ins. Co., 673 So. 2d 526, 529 (Fla. Dist. Ct. App. 1996)).

5 Belz, 46 F. Supp. 3d at 167 (holding three alleged other instance of unfair settlement practices are sufficient to withstand a motion to dismiss); see also K Kim v. State Farm Fire & Cas. Co., No. 3:15-cv-879, 2015 WL 6675532, at *5 (D. Conn. Oct. 30, 2015) (“Here, Plaintiffs rely on one instance of wrongful conduct, the denial of their claim at issue in this litigation. They fail to allege any pattern of wrongful conduct, either with respect to their claim or those of others.”).

Defending Institutional Bad Faith Claims, Part II – Focusing On Plausibility

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

In Part I of this series, we discussed institutional bad faith and best practices for insurers to minimize the risk of these costly and intrusive lawsuits. In Part II, we will focus on cutting discovery off at the pleadings—by narrowing the plaintiff’s claim, you limit the scope of relevance in discovery. Under Federal Rule of Civil Procedure 26(b), “[p]arties may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case….”

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.1

Since the United States Supreme Court’s rulings in Twombly and Iqbal,2 Federal courts are taking a closer look at bad faith allegations. For example, in a case out of Florida, the court dismissed a claim for punitive damages that contained only “[c]onclusory assertions about business practices and profit motives ….”3 In Moss v. Liberty Mut. Fire Ins. Co., the plaintiffs alleged the insurer defendant hired a consultant to develop programs to increase the company’s profits and to motivate adjusters to pay claims unfairly and make “low ball” offers, and that this program led to an increase in profits.4 But, the plaintiffs “fail[ed] to provide any factual underpinnings which make the leap from alleged bad faith delay in processing Plaintiffs’ insurance claim to a general business practice of acting with bad faith toward other unnamed insureds.”5 The lesson learned from Moss is that you have to scrutinize even detailed, well-researched complaints. Inferences are not facts and do not raise a claim to the level of facially plausible.

Similarly, vague allegations of bad faith based upon a plaintiff’s “information and belief” do not rise to the level of “plausible.”6 If the plaintiff knew of specific facts that would support its assertions of institutional bad faith, the plaintiff would allege those facts.7 Some plaintiffs may attempt to skirt the pleading requirements of Rule 8(a) by arguing that “information regarding a company’s general business practices is peculiarly within the possession and control of the [company], such that they may plead facts on the basis of information and belief.”8 “However, they still must plead enough facts to permit for the reasonable inference that the unfair insurance practice occurred with enough frequency for it to be deemed a ‘general business practice.'”9 In Kim v. State Farm Fire & Cas. Co., the plaintiffs alleged “it is the general business practice of State Farm to wrongfully deny coverage by relying upon inapplicable policy exclusions.”10 The court rejected the plaintiffs’ argument that “the issue of the frequency with which the defendants engaged in the insurance practices complained of is a more appropriate area for discovery than pleading and that conclusory allegations of [a] ‘general business practice’ suffice for purposes of permitting discovery.”11 Accordingly, the court held that the plaintiffs’ bare allegations fail to state a claim.12

By challenging unsupported allegations, you take away the plaintiff’s argument that broad general business practices discovery is relevant to its claims. To that end, plausible claims of “general” business practices based on “other claims” require allegations of specific facts relating to the insurer’s conduct in regard to policyholders other than the plaintiff.13

Footnotes

1. 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).

2. Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009).

3. Moss v. Liberty Mut. Fire Ins. Co., No. 3:16-cv-677-J-39JBT, at *5 (M.D. Fla. Aug. 18, 2017).

4. Id. at *6.

5. Id.

6. 316, Inc. v. Md. Cas. Co., 625 F. Supp. 2d 1179, 1184 (N.D. Fla. 2008); accord Alqamus v. Pac. Specialty Ins. Co., No. 3:14-cv-00550, 2015 WL 5722722, at *3 (D. Conn. Sept. 29, 2015).

7. See El Doral Office Condo. Ass’n v. Scottsdale Ins. Co., No. 19-20418, 2019 WL 1979361, at *2 (S.D. Fla. May 3, 2019) (“The inclusion of the term ‘to the extent’ within the pleading undermines any claim that the affirmative defense can be supported by facts known to Scottsdale at this moment. If such facts were known, they would almost certainly have been included.”).

8. Kim v. State Farm Fire & Cas. Co., No. 3:15-cv-879, 2015 WL 6675532, at *5 (D. Conn. Oct. 30, 2015) (quotation marks omitted).

9. Id. (quotation marks omitted).

10. Id. at *4.

11. Id. at *5 (quotation marks omitted).

12. Id.

13. Niagara Distribs., Inc. v. N. Ins. Co. of N.Y., No. 10-61113, 2010 WL 11441045, at *3 (S.D. Fla. Oct. 22, 2010).

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).

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.