What Unreasonable Behavior of the Insurer Gives Rise to Bad Faith in California?

Denise Sze | Property Insurance Coverage Law Blog | October 6, 2017

In a past blog, I explored how the interpretation of California Civil Instruction (CACI) 2334 is impacting the law. This week, we look at the CACI instruction to analyze how an insurer’s “unreasonable” behavior is deciphered to potentially give rise to a bad faith verdict in California.

CACI 2330 states:

In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement.

To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests.

To breach the implied obligation of good faith and fair dealing, an insurance company must, unreasonably or without proper cause, act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.

The jury instruction comes up for interpretation. In order to find bad faith, the insurance company must act “unreasonably.” Yet, mere failure to exercise “reasonable” care is not bad faith. Therefore, the interpretation of what is unreasonable or reasonable behavior of the insurer is the key to interpreting whether an insurer has breached the implied good faith and fair dealing, and committed bad faith. In Bernstein v. Travelers Insurance Company,1 “unreasonable” in concept is a self-conscious disconnect (a large, unabridged gap) between, on the one hand, what the insurer is communicating to, demanding of, and paying its insured and, on the other hand, what the insurer thought it owed and would owe under the claim.

In Chateau Chamberay Homeowners Association v. Associated International Insurance Company,2 the court held an insurer’s conduct is “unreasonable” when a refusal to discharge a contractual responsibility is prompted by a conscious and deliberate act which unfairly frustrates the agreed common purpose and disappoints the reasonable expectation of the other party depriving the party of the benefits of the agreement. The analysis of an insurer’s reasonable or unreasonable performance, depends on whether claims were handled per the Insurance Code, abided by an insurer’s own claims handling practice guides, or if the insurer had self-interest over the interests of the client/customer.

Unreasonableness or reasonableness is largely a subjective standard but CACI 2330 is clear in stating bad faith is not a “mere failure to exercise reasonable care,” which tells us that inadvertent errors or some passage of time by itself may not be a breach rising to bad faith.

Often my clients ask whether their cases and situations surrounding the handling of their claims rise to bad faith. Because the standard is subjective—and almost one of a sliding scale of how egregious or unreasonable an act or failure to act may be—it’s often safe to say that jurors are reluctant to find bad faith until there is a clear bright-line showing that the insurer acted in an inexcusable manner that puts the insured into a position of disadvantage.
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1 Bernstein v. Travelers Ins. Co., (N.D. Cal., 2006) 447 F.Supp.2d 1100, 1108.
2 Chateau Chamberay Homeowners v. Associated Inter. Ins. Co., (2001) 90 Cal.App.4th 335, 346.

Colorado Allows Contractors to Bring Statutory Bad Faith Claim as First-Party Claimant

Jonathan Bukowski | Property Insurance Coverage Law Blog | October 4, 2017

With its 2008 enactment of Colorado Revised Statute § 10-3-1115 and § 10-3-1116, Colorado has created one of the country’s strongest statutory bad faith causes of action. What makes Colorado’s bad faith statute even more exceptional is that it allows a repair vendor, such as a roofer or restoration contractor, to assert a claim for unreasonable delay or denial on behalf of an insured.

Colorado Revised Statute § 10-3-1115 provides that an insurance carrier shall not unreasonably delay or deny payment of a claim for benefits owed to or behalf of any first-party claimant. The statute defines a “first-party claimant” as an:

[I]ndividual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.

In the 2012 case of Kyle W. Larson Enterprises, Inc. v. Allstate, the Colorado Court of Appeals further clarified that a “first-party claimant” unambiguously includes a repair vendor, such as a roofer or contractor, that brings a claim against an insurer on behalf of its insured.1 The appeals court explained that it is in keeping with the legislative objective (preventing unfair and deceptive practices by insurance companies) to allow a repair vendor acting on behalf of the insured homeowner, to assert a claim for relief under Colorado Revised Statute § 10-3-1115 and Colorado Revised Statute § 10-3-1116.

More recently, Magistrate Judge Watanabe of the United States District Court of Colorado and Judge Russel of First Judicial District of Colorado cited Larson in denying insurance carriers motions to dismiss statutory bad faith claims of contractors pursuing benefits owed on behalf of an insured under an insurance policy.2

By defining a “first-party claimant” as a person or entity that asserts a claim on “behalf of” an insured, the Colorado legislature deliberately chose to expand the class of plaintiffs that may pursue a statutory bad faith claim. Colorado state and federal decisions have made it clear that the term “first-party claimant” unambiguously permits parties other than the insured, such as roofers and restoration contractors, to bring statutory bad faith claims on behalf of an insured. Repair vendors who have suffered through the consequences of an insurance company’s delay or denial now have the ability to assert a claim for statutory bad faith on behalf of the policyholder.
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1 Kyle W. Larson Enterprises, Inc. v. Allstate Ins. Co., 305 P.3d 409, 411 (Colo. App. 2012).
2 Sable Cove Condominium Ass’n. and Edge Construction, LLC v. Owners Ins. Co., No. 14-cv-00912, 2014 WL 4398668 (D. Colo. Sept. 5, 2014); Ecoblast, LLC v. Country Mut. Ins. Co., 2016 WL 8938412 (Colo.Dist.Ct. Oct. 18, 2016).

Fourth Circuit Finds No Bad Faith for Delay in Investigating Construction Defect Claim

James W. Bryan | Nexsen Pruet | September 12, 2017

Construction defect claims often include coverage disputes spiced with allegations of bad faith designed to turn up the heat on the insurer. The Fourth Circuit, in its review of one such recent North Carolina case, held while the insured prevailed on its contract claim, there was no bad faith. Delay, without other, aggravating factors is not enough to establish the malice or reckless indifference to consequences necessary to reach the level of bad faith. Westchester Surplus Lines Ins. Co. v. Clancy & Theys Construction Co., 683 Fed.Appx. 259 (4th Cir. 2017).

Westchester involved a dispute over insurance coverage for a general contractor’s liability for defective design of a building foundation. A joint venture, in which Clancy was a partner, was hired to construct a mid-rise student housing building in Raleigh, North Carolina. In September 2011, after construction was well under way, a portion of the building began to lean, damaging other portions of the building. The owner demanded a remedy that would result in no risk to it, or its lender. Following agreement on a repair plan, the joint venture initiated a mediation process with potentially responsible subcontractors seeking allocation of the $14.4 million repair costs. This resulted in agreement that 10.5 million would be paid on behalf of subcontractors, leaving the remaining damages to be absorbed by the joint venture. Clancy sought reimbursement of its share from Westchester under general and professional liability policies.

Upon receiving the owner’s demand for repair in September 2011, Clancy notified Westchester of the potential claim. Clancy was unable to contact the Westchester representative assigned to the claim who, unbeknownst to Clancy, had left the employ of Westchester. After about a month, Clancy established contact with another Westchester employee assigned to the claim. After providing all of the communications between Clancy and the owner, Westchester was silent for another two months. As Clancy pressed for a coverage determination, Westchester requested an accounting of costs and a copy of the joint venture agreement, all of which Clancy provided. Eventually, in May 2012, Westchester informed Clancy it believed its policy did not cover Clancy’s obligations for the construction damages but it was not issuing a formal denial of coverage. Indeed, three months later, Westchester stated it was still investigating the coverage issue. In September, 2012, Clancy complained of Westchester’s year long delay and threatened suit. In response, Westchester filed its action for a declaratory judgment that its policy afforded no coverage. Clancy counterclaimed alleging Westchester’s breach of contract and tortious breach of contract based upon Westchester’s failure to timely investigate, failure to timely issue a coverage opinion, failure to properly defend, failure to assist in mitigating damages, and failure to indemnify for covered losses. Clancy also alleged Westchester acted in willful, wanton disregard of its duty to defend and indemnify, entitling Clancy to extra-contractual damages.

In May 2014, the district court denied summary judgment for either party on the contract dispute but entered summary judgment for Westchester on Clancy’s claim for bad faith tortious breach of contract, finding “in order to recover for tortious breach of an insurance contract, an insured must show that the refusal to pay on the insurance contract was based not on honest disagreement or innocent mistake, but rather on ‘malice, oppression, willfulness and reckless indifference to consequences.’”

The district court concluded

Though there is much dispute present in the record regarding when and whether Clancy notified Westchester of a claim against it, the record does not support that Westchester acted with malice, oppression, or a reckless indifference to consequences. Where courts have found that a refusal to settle an insurance claim was an act of bad faith there has been ample evidence to show not only delay in investigation but also other aggravating factors such as the offer of a woefully low settlement amount, reliance on estimation of damage and repairs submitted by a clearly unqualified professional, and evidence that the insurance company “stirred up hate and discontent” against its insured by making false accusations regarding the insured’s participation in the loss…While the record certainly reflects that Westchester does not think Clancy is entitled to indemnity and defense, Clancy has not demonstrated the presence of sufficient aggravating factors, nor an opinion that Westchester’s actions were not reasonable or appropriate within industry practices, and summary judgment in favor of Westchester is appropriate on Clancy’s tortious breach of contract claim.

A year later, in a bench trial as to the remaining issues, the district court found Westchester owed Clancy coverage for its portion of the loss, less its deductible, plus applicable interest. Westchester appealed and Clancy cross- appealed. The Fourth Circuit affirmed the bench trial judgment on the contract claim, rejecting Westchester’s argument that the joint venture’s liability was separate and distinct from the liability of each of its members. As to the bad faith claim based upon delays in Westchester’s investigation, the Fourth Circuit concluded summary judgment in favor of Westchester was proper, relying on North Carolina law requiring, “malice, oppression, willfulness [or] reckless indifference to consequences” in order to establish tortious breach of contract.

Though an unpublished decision, Westchester reflects a North Carolina trend; delay-based extra-contractual claims in construction defect cases do not end well for the insured. The procedural history of Westchester demonstrates a common pattern and the court’s opinion demonstrates a frequent result.

Fourth Circuit Finds No Bad Faith for Delay in Investigating Construction Defect Claim

James W. Bryan | Nexsen Pruet | September 12, 2017

Construction defect claims often include coverage disputes spiced with allegations of bad faith designed to turn up the heat on the insurer. The Fourth Circuit, in its review of one such recent North Carolina case, held while the insured prevailed on its contract claim, there was no bad faith. Delay, without other, aggravating factors is not enough to establish the malice or reckless indifference to consequences necessary to reach the level of bad faith. Westchester Surplus Lines Ins. Co. v. Clancy & Theys Construction Co., 683 Fed.Appx. 259 (4th Cir. 2017).

Westchester involved a dispute over insurance coverage for a general contractor’s liability for defective design of a building foundation. A joint venture, in which Clancy was a partner, was hired to construct a mid-rise student housing building in Raleigh, North Carolina. In September 2011, after construction was well under way, a portion of the building began to lean, damaging other portions of the building. The owner demanded a remedy that would result in no risk to it, or its lender. Following agreement on a repair plan, the joint venture initiated a mediation process with potentially responsible subcontractors seeking allocation of the $14.4 million repair costs. This resulted in agreement that 10.5 million would be paid on behalf of subcontractors, leaving the remaining damages to be absorbed by the joint venture. Clancy sought reimbursement of its share from Westchester under general and professional liability policies.

Upon receiving the owner’s demand for repair in September 2011, Clancy notified Westchester of the potential claim. Clancy was unable to contact the Westchester representative assigned to the claim who, unbeknownst to Clancy, had left the employ of Westchester. After about a month, Clancy established contact with another Westchester employee assigned to the claim. After providing all of the communications between Clancy and the owner, Westchester was silent for another two months. As Clancy pressed for a coverage determination, Westchester requested an accounting of costs and a copy of the joint venture agreement, all of which Clancy provided. Eventually, in May 2012, Westchester informed Clancy it believed its policy did not cover Clancy’s obligations for the construction damages but it was not issuing a formal denial of coverage. Indeed, three months later, Westchester stated it was still investigating the coverage issue. In September, 2012, Clancy complained of Westchester’s year long delay and threatened suit. In response, Westchester filed its action for a declaratory judgment that its policy afforded no coverage. Clancy counterclaimed alleging Westchester’s breach of contract and tortious breach of contract based upon Westchester’s failure to timely investigate, failure to timely issue a coverage opinion, failure to properly defend, failure to assist in mitigating damages, and failure to indemnify for covered losses. Clancy also alleged Westchester acted in willful, wanton disregard of its duty to defend and indemnify, entitling Clancy to extra-contractual damages.

In May 2014, the district court denied summary judgment for either party on the contract dispute but entered summary judgment for Westchester on Clancy’s claim for bad faith tortious breach of contract, finding “in order to recover for tortious breach of an insurance contract, an insured must show that the refusal to pay on the insurance contract was based not on honest disagreement or innocent mistake, but rather on ‘malice, oppression, willfulness and reckless indifference to consequences.’”

The district court concluded

Though there is much dispute present in the record regarding when and whether Clancy notified Westchester of a claim against it, the record does not support that Westchester acted with malice, oppression, or a reckless indifference to consequences. Where courts have found that a refusal to settle an insurance claim was an act of bad faith there has been ample evidence to show not only delay in investigation but also other aggravating factors such as the offer of a woefully low settlement amount, reliance on estimation of damage and repairs submitted by a clearly unqualified professional, and evidence that the insurance company “stirred up hate and discontent” against its insured by making false accusations regarding the insured’s participation in the loss…While the record certainly reflects that Westchester does not think Clancy is entitled to indemnity and defense, Clancy has not demonstrated the presence of sufficient aggravating factors, nor an opinion that Westchester’s actions were not reasonable or appropriate within industry practices, and summary judgment in favor of Westchester is appropriate on Clancy’s tortious breach of contract claim.

A year later, in a bench trial as to the remaining issues, the district court found Westchester owed Clancy coverage for its portion of the loss, less its deductible, plus applicable interest. Westchester appealed and Clancy cross- appealed. The Fourth Circuit affirmed the bench trial judgment on the contract claim, rejecting Westchester’s argument that the joint venture’s liability was separate and distinct from the liability of each of its members. As to the bad faith claim based upon delays in Westchester’s investigation, the Fourth Circuit concluded summary judgment in favor of Westchester was proper, relying on North Carolina law requiring, “malice, oppression, willfulness [or] reckless indifference to consequences” in order to establish tortious breach of contract.

Though an unpublished decision, Westchester reflects a North Carolina trend; delay-based extra-contractual claims in construction defect cases do not end well for the insured. The procedural history of Westchester demonstrates a common pattern and the court’s opinion demonstrates a frequent result.

Colorado Statutory Bad Faith: Doubling Down On An Insurer’s Unreasonable Delay Or Denial

Jonathan Bukowski | Property Insurance Coverage Law Blog | August 19, 2017

In August 2008, Colorado created a statutory bad faith claim of action for first-party policyholders not only separate and distinct from a claim for common law bad faith breach of an insurance contract, but establishes a much more reasonable threshold to prevail against an insurer under Colorado Revised Statute § 10-3-1115 and Colorado Revised Statute § 10-3-1116.

Most importantly, the statute provides significant recourse for a successful policyholder in the form of:

  • Two times the covered benefit,
  • attorneys’ fees, and
  • court costs

To bring a claim for statutory bad faith under § 10-3-1115 and § 10-3-1116, the party(s) asserting the claim must have entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. However, this does not include any nonparticipating provider performing services or a person asserting a claim against an insured under a liability policy.

Finally, the party asserting the claim must establish:

  1. The insurer delayed or denied authorizing payment of a covered benefit, and
  2. the insurer had no reasonable basis for delaying or denying the covered benefit.

Colorado Revised Statute § 10-3-1116 does not require proof of actual damages. Rather, a policyholder’s recovery is determined by the amount of the “covered benefit” in dispute. Therefore, the right of action is sufficient by itself without the need for an accompanying breach of contract claim, allowing a policyholder to recover two times the “covered benefit” even when the benefit is ultimately paid and no actual damages are sustained.

In passing this bad faith statute, Colorado has provided protection to its policyholders and a strong remedy against the insurers that unreasonably delay and/or deny valid claims.

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