Florida Appellate Court Finds Implications Of Bad Faith In Claims Handling Not Proper In First Party Insurance Coverage Dispute

Ashley Kellgren | Traub Lieberman Straus & Shrewsberry | August 17, 2018

In two separate opinions, Florida’s Fourth District Court of Appeals reiterated the longstanding principle that issues regarding the quality of an insurer’s adjustment of a claim and bad faith should not be interjected into a first party insurance coverage action. In Citizens Prop. Ins. Corp. v. Mendoza, 42 Fla. L. Weekly D. 1523 (Fla. 4th DCA 2018), an issue on appeal was whether the trial court properly instructed the jury on a duty to adjust the claim. In that case, the insureds incurred water damage to their home caused by a water heater leak. The insurer investigated the claim and denied coverage based on the policy’s constant or repeated seepage or leakage exclusion. At trial, the insureds took issue with the way the adjuster denied the claim, asserting that he violated ethical rules and the policy itself.   Over the insurer’s objection, the trial court instructed the jury regarding the adjuster’s “duty to adjust” the claim.

On appeal, the Fourth District reversed final judgment in favor of the insureds, explaining that the trial court’s instruction “transformed the case into a referendum on the quality of the adjuster’s performance instead of focusing the jury on the factual issue of whether the loss fell under the policy exclusion.” Continuing, the Court explained that, while issues regarding whether the adjuster “properly investigated” or “properly adjusted” the claim may be appropriate in a bad faith case, such considerations have no place in a simple breach of contract claim.

On that same day, the Fourth District issued a similar opinion in the case of Homeowners Choice Prop. & Cas. Ins. Co. v. Kuwas, 43 Fla. L. Weekly D 1513 (Fla. 4th DCA 2018). In Kuwas, the insured alleged two counts of breach of contract in connection with the insurer’s denial of coverage for two claims for property damage as a result of a water loss. At trial, the insured’s theory of his case focused on the insurer’s handling of his claim and other claims in general. For example, in opening statement and questioning of the insurer’s litigation manager, counsel for the insured commented that the insurer was “playing the odds” in hopes that the party seeking to be paid will not sue or it would deter others from making claims. Counsel for the insured suggested that this “playing the odds” was the wrong thing to do and would be a breach of the policy. The jury returned a verdict in favor of the insured and the trial court denied the insurer’s motion for a new trial.

On appeal, the insurer argued that “implications of bad faith should not form a basis to determine liability in a first party insurance coverage action.” The Fourth District agreed, finding that criticism of the insurer’s claim handling practices as a business practice was improper. The Court likewise agreed that the insured improperly used his questioning of the litigation manager as an opportunity to paint the insurer as a carrier that denies claims for any (or no) reason, which inappropriately shifted the focus to the insurer’s claim handling and bad faith. The issues of claim handling and bad faith were not before the jury and not proper considerations in a breach of contract action, where the insurer’s liability for coverage and damages has yet to be determined. The Court concluded that this, along with other errors at trial, warranted a new trial.

Texas Supreme Court Issues Highly Anticipated Bad Faith Opinion

Jamie L. Moore | Bradley Arant Boult Cummings LLP | May 15, 2018

One year after its initial decision in a significant bad faith case, the Texas Supreme Court has issued its much-awaited opinion in USAA Tex. Lloyds Co. v. Menchaca. The case involved a homeowner whose post-Hurricane Ike property damage claim was denied by USAA Texas Lloyds Company (USAA). At trial, the jury found that USAA did not breach the policy, but that the company did violate the unfair settlement practices provisions of the Texas Insurance Code.

Given that “substantial confusion” existed in Texas courts regarding the relationship between contractual claims for breach of an insurance policy and statutory bad faith claims under the Texas Insurance Code, the Texas Supreme Court attempted to set clearer precedent in its original opinion in April 2017. However, the ruling was met with concern that it further muddied Texas insurance law and set negative precedent for insurers by reviving claims for treble damages under the Texas Insurance Code. In an unusual move, the Texas Supreme Court agreed to a rehearing.

In the newly released opinion, which replaces the 2017 ruling, the court reiterates the five “distinct but interrelated rules that govern the relationship between contractual and extra-contractual claims in the insurance context” it previously identified last year. Importantly, the court further clarifies the critical point for insurers that generally an insured cannot recover damages under the Texas Insurance Code without establishing a breach of the policy, and that exceptions to the general rule are narrow.

The five rules developed by the Texas Supreme Court that should be applied by Texas courts to the interplay between contractual and Texas Insurance Code statutory claims are:

  1. The General Rule: An insured cannot recover policy benefits under a Texas Insurance Code violation if the insured does not have a right to those benefits under the policy. This rule derives from the fact that the Texas Insurance Code only allows an insured to recover actual damages “caused by” the insurer’s statutory violation.
  2. The Entitled-to-Benefits Rule: An insured who establishes a right to receive policy benefits can recover the benefits as “actual damages” under the Texas Insurance Code if the statutory violation causes the loss of benefits. The court refers to this rule as a “logical corollary to the general rule.”
  3. The Benefits-Lost Rule: An insured can recover benefits as actual damages under the Texas Insurance Code even if the insured has no right to those benefits under the policy if the insurer’s conduct caused the insured to lose that contractual right. This principal is recognized where an insurer misrepresented a policy’s coverage, waived its right to deny coverage or is estopped from doing so, or committed a violation that caused the insured to lose a contractual right to benefits that it otherwise would have had.
  4. The Independent-Injury Rule: This rule has two aspects:
    1. If an insurer’s statutory violation causes an injury independent of the insured’s right to recover policy benefits, the insured may recover damages for that injury even if the policy does not entitle the insured to receive benefits. However, when an insured seeks to recover damages that “are predicated on,” “flow from,” or “stem from” policy benefits, the general rule applies and precludes recovery unless the policy entitles the insured to those benefits; and
    2. An insurer’s statutory violation does not permit the insured to recover any damages beyond policy benefits unless the violation causes an injury that is independent from the loss of benefits.
  5. The No-Recovery Rule: An insured cannot recover any damages based on an insurer’s Texas Insurance Code violation unless the insured establishes a right to receive benefits under the policy or an injury independent of a right to benefits. This rule is considered “the natural corollary to the first four rules.”

The court also provided additional context and guidance for these rules. Ultimately, with respect to the claims at issue in this particular case, the court remanded the case to the trial court for a new trial consistent with its opinion.

Bad Faith Requires Misconduct by Insurer That is Dishonest, Malicious, or Oppressive

Barry Zalma | Zalma on Insurance | July 10, 2018

Negligence in Adjusting Claims is Not Enough to Prove Bad Faith

To prove the tort of bad faith it is necessary that the plaintiff prove that the insurer acted with affirmative misconduct without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. It is more than refusing to pay the person insured what is demanded or what the insured believes if fair and reasonable.

In Alexandra Sims v. State Farm Mutual Automobile Insurance Company, United Policyholders Amicus on Behalf of Appellant(s), No. 17-1333, United States Court of Appeals For the Eighth Circuit (July 3, 2018) the Eighth Circuit was asked to reverse the district court’s grant of summary judgment to State Farm on plaintiff’s bad faith tort claim and on an evidentiary rulings on the underinsured motorist coverage claim.

Alexandra Sims sued her insurance carrier, State Farm Mutual Automobile Insurance Company (State Farm), for the tort of bad faith, violation of the Arkansas Deceptive Trade Practices Act (ADTPA), and for damages on an underinsured motorist coverage claim. She appeals the district court’s grant of summary judgment to State Farm on the bad faith claim, and an evidentiary ruling on the underinsured motorist coverage claim.

FACTS

In 2008, while a senior in high school, Sims was involved in a two-vehicle crash. Her car was rear-ended by an underinsured 16-year-old who was texting while driving. Sims suffered numerous soft-tissue injuries as a result of the crash. Sims sued the underinsured driver and he settled for $50,000, which was the limit of his insurance coverage. Sims filed a claim for her remaining damages under her own underinsured motorist policy, provided by State Farm, seeking the policy limit of $100,000. She submitted past medical expenses of about $21,000, and expert reports that predicted future medical costs and economic losses that well exceeded the policy maximum. She also attached medical records documenting her injuries.

State Farm assigned the claim to claims adjuster Dean Ripley. Ripley sought the assistance of a State Farm medical professional to help assess the medical records Sims had provided. This review indicated that Sims had received treatment for “soft tissue” injuries for longer than the typical six-week period. Ripley, in consultation with claims supervisor Oscar Rodriguez, sought clarification from Sims’s treating chiropractor. The chiropractor explained that Sims suffered from torn ligaments, an injury that could not be expected to heal in six weeks, could not be repaired by surgery, and was likely permanent. After receiving this information, Ripley suggested that State Farm might want to ask for an independent evaluation of Sims’s injuries, but Rodriguez asked Ripley to prepare an offer of settlement based on the information he already had.

Ripley estimated that, after deducting the $50,000 Sims had already received from the underinsured driver, Sims’s damages were between $66,297.12 and $101,297.12. He provided his calculations to Rodriguez and asked for authority to settle Sims’s claim for up to $99,786.72. Rodriguez replied that most of Sims’s medical expenses were from 2008 and it was unclear from the records whether she was still receiving treatment. In his view, “a sympathetic jury would value this claim at [$]100,000 at most,” and he authorized Ripley to settle for a maximum of $50,000 (the estimated value of the claim minus the $50,000 from the underinsured driver).

Negotiations proceeded with no success.  Sims sued State Farm who paid Sims $25,000 for undisputed medical expenses after the suit was filed.

As to the bad faith claim, the trial court found that Sims “has not shown that State Farm has committed any affirmative act of dishonesty, oppression, or malice” as required by Arkansas law. Sims does not contest the district court’s ADTPA ruling on appeal.

The case proceeded to trial on the underinsured motorist claim. At trial, Sims sought to introduce evidence that State Farm’s corporate policies incentivized claims adjusters (like Ripley) and claims supervisors (like Rodriguez) to deny claims regardless of their merit. The district court excluded this evidence as irrelevant and likely to confuse the issues.

After trial, the jury returned a $75,000 verdict for Sims. Because Sims had already recovered that sum from the underinsured driver ($50,000) and State Farm ($25,000), judgment was entered for State Farm.

ANALYSIS

The Arkansas Supreme Court has explained: “[I]n order to be successful a claim based on the tort of bad faith must include affirmative misconduct by the insurance company, without a good faith defense, and that the misconduct must be dishonest, malicious, or oppressive in an attempt to avoid its liability under an insurance policy. Such a claim cannot be based upon good faith denial, offers to compromise a claim or for other honest errors of judgment by the insurer. Neither can this type [of] claim be based upon negligence or bad judgment so long as the insurer is acting in good faith.] Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 664 S.W.2d 463, 465 (Ark. 1984). This standard “is rigorous and difficult to satisfy.” Unum Life Ins. Co. of Am. v. Edwards, 210 S.W.3d 84, 87 (Ark. 2005). The “dishonest, malicious, or oppressive” acts must be “carried out with a state of mind characterized by hatred, ill will, or a spirit of revenge.” Id. Therefore, even when the insurance company is guilty of “negligence, gross ignorance, or a complete failure to investigate a claim,” the tort of bad faith is unavailable. S. Farm Bureau Cas. Ins. Co. v. Allen, 934 S.W.2d 527, 529 (Ark. 1996).

Even if Ripley and Rodriguez should have done a more thorough investigation and shouldhave given greater weight to the opinions of Sims’s experts, Sims’s allegations show only negligence and fall short of dishonest, malicious, or oppressive conduct as a matter of law.

Viewing the record as a whole, the Eighth Circuit concluded that the nature of the evidence Sims presented reveals the essence of her claim to be that the denial itself was wrongful, which, under Arkansas law, is not enough to make out a claim for the tort of bad faith. The district court did not err in granting judgment to State Farm on this claim.

Sims wanted to introduce evidence that she said would show State Farm had a practice of denying all claims, even those they were contractually bound to pay. If Sims’s damages exceeded the $75,000 she had already recovered, she would receive the balance from State Farm. State Farm’s allegedly obstructive institutional practices had no bearing on the amount of damages proximately caused by the car crash. And even if the “institutional practice” evidence had any probative value on that point, it was substantially outweighed by a danger of confusing the issues and distracting the jury from the task at hand. The district court did not abuse its discretion.

ZALMA OPINION

To prove the tort of bad faith the plaintiff must prove more than the insurer failed to pay what plaintiff wanted. There was clearly good reason not to succumb to plaintiffs’ demands or the jury would have found damages. Bad faith, a tort I find to be overused and abused, requires activities that are dishonest, malicious, or oppressive.  Plaintiff abused the tort of bad faith by insisting on this trial and could have avoided trial by negotiating reasonably with State Farm.

The Other Bad Faith

Paul A. Rose | Brouse McDowell | July 19, 2018

Certain aspects of insurance bad faith are well known, particularly to insurance coverage practitioners. For instance, it is widely understood that an insurer commits bad faith if it fails to pay upon or otherwise honor a claim without reasonable justification for its refusal. It is, conversely, generally understood that an insurer cannot be liable for bad faith failure to pay a claim if it obtains a judgment that the claim is not covered. What is less understood, and sometimes overlooked, is that a policyholder may successfully assert a bad faith claim against its insurer, even in regard to a policy claim that is determined ultimately not to be covered, if the insurer commits bad faith in its handling of the claim. In other words, there are two types of bad faith—bad faith denial and bad faith claim handling, and the latter type is actionable regardless of whether the policy claim is covered.

Underlying this dichotomy are two fundamental principles of insurance law. First, an insurer owes its policyholder a duty of good faith and fair dealing, and this duty arises from the nature of the relationship between the two. The duty exists in regard to every claim the policyholder presents, regardless of whether the claim ultimately is determined to be covered. An insurer is not obligated to honor every claim presented to it, but it is obligated to timely, adequately, and properly investigate every claim and to make and communicate a timely determination on each, regardless of whether the determination ultimately is one of acceptance or denial.

Second, bad faith is a tort. An insurer’s bad faith liability, therefore, can exist independently of any contractual liability it may have under its policy. Although a determination that an insurer has no contractual obligation to pay on a claim may, correspondingly, serve to exonerate that insurer from a claim of bad faith failure to pay, such a determination would be immaterial to a claim against the insurer for bad faith claim handling. An insurer has a duty to handle claims submitted to it in good faith, regardless of whether the claims are covered.

The law on these matters is well developed in many jurisdictions, including Ohio. In Staff Builders, Inc. v. Armstrong, 37 Ohio St. 3d 298, syllabus 1 (Ohio 1988), the Supreme Court of Ohio made clear that bad faith is an independent tort:

An insurer has a duty to act in good faith in the processing and payment of the claims of its insured. A breach of this duty will give rise to a cause of action in tort against the insurer irrespective of any liability arising from breach of contract.

The Court later echoed these concepts in Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552, syllabus 1, (Ohio 1994): “An insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification therefore.” In finding that the insurer engaged in bad faith, the Court focused on the insurer’s failure to adequately investigate the fire loss claim at issue. Other Ohio courts have followed suit. For instance, in Furr v. State Farm Mut. Auto Ins. Co., 128 Ohio App. 3d 607, 623-626 (Ohio Ct. App. 1998), the Court found bad faith in the handling of an uninsured motorists claim when the insurer conducted a delayed and superficial examination of the claim, and, further, found the claim handling to be sufficiently egregious to support an award of punitive damages. In addition, an insurer’s duty of good faith continues even during the pendency of coverage litigation, and insurers have been found liable for bad faith based upon their conduct in initiating litigation and following the commencement of litigation. (See, e.g.Nationwide Mut. Fire Ins. Co. v. Masseria, 1999 WL 1313637 (Ohio Ct. App. 1999); Zaychek v. Nationwide Mut. Ins. Co., 2007-Ohio-3297 (Ohio Ct. App. 2007)).

As noted above, these concepts are not limited to Ohio. In a recent decision, the Texas Supreme Court echoed many of them. In USAA Texas Lloyds Co. v. Menchaca, 2018 WL 1866041 (Texas 2018), the Court considered bad faith claims made against a homeowner’s insurer. Although it ultimately remanded the case back to the trial court for a new trial based upon irregularities in the initial trial, the Court took the opportunity to articulate various points of insurance bad faith law. It stated that bad faith is a tort that is “distinct” and “independent” from contractual claims under insurance policies. Id. at *5. It noted that bad faith may be predicated upon an insurer misrepresenting a policy’s coverage or engaging in conduct that causes a policyholder to lose policy rights that it otherwise would have had. Id. at *12. It further noted that an insurer’s violation of statutory requirements for insurer conduct, such as exist in many states, under certain circumstances can result in a recovery for the policyholder, even if the policy would not otherwise cover the claim. Id. at *14. Perhaps most generally, it stated, “[I]f an insurer’s statutory violation causes an injury independent of the loss of policy benefits, the insured may recover damages for that injury even if the policy does not grant the insured the right to benefits.” Id. at *5.

These legal principles make clear that insurers should be timely, thorough, and professional in their handling of claims. If they fail to properly fulfill their duties in this regard, they can be liable for bad faith, even in regard to claims that ultimately are not determined to be covered. Policyholders, for their part, should consider whether their insurers have fulfilled both the duty of good faith in regard to claim payment, if the claims are covered, and the duty of good faith in regard to claim handling, regardless of whether the claims are covered. The analysis is incomplete if bad faith in regard to claim payment is analyzed but the “other” type of bad faith is not considered.

Denied Water Damage Claims and Unethical Adjuster Conduct

Chip Merlin | Property Insurance Coverage Law Blog | July 9, 2018

Denied water damage claims are one of the more frequently handled claims by our law firm. The cost to repair these claims can be quite high depending on many factors including the length of time the water leaked, the length of the leak, the nature of the water, and the location of the water leak itself.

Many insurance companies have recently changed policy language or taken positions so water damage claims are more frequently in litigation. Merlin Law Group recently noted denied water damage claims in Follow-Up: My Insurance Claim Was Denied Because My Water Leak Lasted Over a Period of 14 Days or More – Was the Denial Proper, and Policyholders Beware: When You Hear “Drip…Drop” Think “Tic Tock.”

Insurance adjusters can say and do the most outrageous comments and actions. It results with very upset and frustrated policyholders, especially if the claim is denied. Does that mean that if adjusters act unethically and even in bad faith, that such conduct relieves the requirement that coverage is found?

In a water damage denial case, one court recently answered this question “no” stating:

The central fact issue for the jury in this case was whether the Insureds’ loss fell under the repeated seepage or leakage exclusion of the policy. If so, there was no coverage; if not, there was coverage. The main problem with the jury instructions and the Insureds’ arguments at trial is that the jury could have decided the case solely because the adjuster did not “do a good job” regardless of whether the incident fell within the policy exclusion. The instructions focused on whether the adjuster “properly investigated” or “properly adjusted” the claim and talked about a code of ethics. While such considerations may be appropriate in a bad faith case, they have no place in a simple breach of contract action….The Insureds were free to criticize the adjuster’s conclusions without arguing that he breached a duty or obligation to them. If an adjuster makes a mockery of the code of ethics but the insurance company correctly denies a claim, there is no action for breach of contract.1

I am not certain I agree with this in every instance. Suppose an adjuster agrees to coverage, intentionally instructs the policyholder to do something which destroys the evidence of the cause of the loss, and then changes his position and claims no coverage? I could make up many other scenarios.

But, the court correctly noted that whether an adjuster did a good job does not absolutely mean that such breach of the good faith and ethical duties of the adjuster means that coverage exists.

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1 Citizens Prop. Ins. Corp. v. Mendoza, No. 4D16-1302 (Fla. 4th DCA July 5, 2018).