Be Careful with Good Faith Payments

Christopher G. Hill | Construction Law Musings | November 25, 2019

Sometimes doing the expedient thing and what looks good at the time can come back to bite you.  Just ask 3M Company.

In Faneuil, Inc. v. 3M Co., the Virginia Supreme Court considered a customer services subcontract between Faneuil and 3M relating to a toll collection contract 3M entered into with ERC.  The subcontract had a “pay if paid” clause in it requiring payment to 3M from ERC before ERC was required to pay Faneuil, a written change order provision and a base monthly payment to Faneuil for the services that could be reduced in the event of less than expected toll collections.  Further, the subcontract stated that if either party settled 3rd party claims, that settlement would not bind the other party to the subcontract absent consent or Court order.

Faneuil was then alleged to have been required to provide “Special Services” relating to manual identification of license plates and other information necessary for toll billing due to 3M’s alleged failure to provide adequate imaging services.  Faneuil requested (without written change order) and 3M promised to pay extra for these services.  When 3M was slow to pay for the special services, Faneuil did what you would expect and threatened to stop providing them.  Instead of contesting the right to the work, 3m made sporadic “good faith” payments to induce continued Special Services from Faneuil.  Eventually 3M’s issues caused ERC to stop payments and thus 3M stopped paying Faneuil.  3M then settled the payment claims with ERC and still failed to pay Faneuil.

Faneuil did what any subcontractor in this position would do and sued for 5 categories of damages, including for base payments.  After a bench trial, the Circuit Court dismissed all of the claims by all parties because Faneuil had not obtained a written change order for the Special Services (ignoring the other claims for damages) and that 3M had failed to follow the proper procedures for reducing the monthly payments.  The Virginia Supreme Court reversed.  It held that damages for the Special Services were off the table for a lack of written change order and that 3M’s counterclaims were in fact barred by the subcontract.

While those two holdings are interesting, the Court further went on to say that 1. the settlement between ERC and 3M satisfied the pay if paid requirement, and the reason for the title of this post, 2. 3M was not entitled to the benefit of its good faith payments to induce Faneuil to continue the special services.  The Court held that under Virginia law, these types of non-legally required voluntary payments are not recoverable.  The Court put the holding as follows:

[w]here a person with full knowledge ofthe facts voluntarily pays a demand unjustly made upon him … it will not be considered as paid by compulsion, and the party thus paying is not entitled to recover back the money paid, though he may have protested against the unfounded claim at the time ofpayment made. Where money has been paid under a mistake ofthe facts, or under circumstances of fraud or extortion, or as a necessary means to obtain the possession of goods wrongfully withheld from the party paying the money, an action may be maintained for the money wrongfully exacted. But such action is not maintainable in the naked case of a party making a payment ofa demand rather than resort to litigation. Williams v. Consolvo, 237 Va. 608, 613 (1989)

Thus, despite doing what was seemingly the expedient and correct business action at the time to keep the contracted work moving, 3M was required to pay the full base compensation without credits for its prior good faith payments.

Situations analogous to this occur on the construction site all the time.  Deals are struck to keep the flow of work moving.  Most of the time, these sorts of “on the fly” deals are helpful.  However, before taking such action, remember 3M and consult your local Virginia construction attorney before taking such steps.

“That Settles It”: The Georgia Supreme Court Provides Clarity Regarding an Insurer’s Duty to Settle

Michele N. Detherage | Robins Kaplan | November 15, 2019

New guidance from the Georgia Supreme Court re: an insurer’s duty to settle

The issue of whether an insurer has fulfilled its duty to settle in good faith was recently litigated in Georgia. Under Georgia law “[a]n insurance company may be liable for the excess judgment entered against its insured based on the insurer’s bad faith or negligent refusal to settle a personal claim within the policy limits.”However, until recently, it has been unclear exactly when an insurer’s duty to settle is triggered. In March 2019, the Supreme Court of Georgia issued a decision that provides some guidance. In First Acceptance Ins. Co. of Ga. v. Hughes,the Court examined: (a) whether an insurer has a duty to make an affirmative settlement offer absent an initial offer from an injured party, and (b) the effect of an injured party’s failure to include a time limit in their settlement offer.

The facts of Hughes are summarized as follows: On August 29, 2008, Ronald Jackson was involved in a multi-vehicle collision. At the time of the accident, Mr. Jackson was insured under an automobile policy issued by First Acceptance Insurance Company of Georgia, Inc., which included bodily injury liability limits of $25,000 per person and $50,000 per accident.Adjusters performed an investigation and concluded that Mr. Jackson was at fault in connection with the incident and that his exposure exceeded his policy limits. First Acceptance retained counsel to resolve the five related injury claims. In January 2009, First Acceptance’s attorney began to make settlement overtures to the claimants’ attorneys.4

On June 2, 2009, counsel for claimants Julie An and Jina Hong sent two letters to counsel for First Acceptance. In the first letter, the attorney stated that his clients were “interested in having their claims resolved within [the] insured’s policy limits, and in attending a settlement conference.”The letter, however, did not include a demand that First Acceptance respond by a date certain.The second letter requested that the company provide certain insurance information within 30 days and conditioned settlement upon compliance with that request.First Acceptance’s attorney reviewed the letters, but did not consider them to impose “any kind of time limit demand.”The letters were misfiled, and a response was not immediately provided.

Shortly thereafter, counsel for the claimants filed a lawsuit for damages arising out of the automobile accident. Then, on June 13, 2009, the claimants’ attorney sent a letter to counsel for First Acceptance revoking his clients’ settlement offer. Counsel for First Acceptance responded by inviting the claimants to attend a settlement conference – an offer which they declined, along with subsequent settlement offers, including an eventual tender by First Acceptance of the total policy limits.The matter went to trial in July 2012. The jury rendered a verdict in favor of the claimants, and the trial court entered a judgment against the now-deceased Mr. Jackson’s estate in excess of $5.3 million.10

In June 2014 the administrator of Mr. Jackson’s estate filed suit against First Acceptance, alleging that it acted negligently and in bad faith by refusing to settle the claim within the policy limits. First Acceptance made a motion for summary judgment, which the trial court granted. The Court of Appeals reversed the trial court’s decision, and First Acceptance petitioned for certiorari – which was granted by the Supreme Court of Georgia.11

As a preliminary matter, the Supreme Court addressed “whether an insurer’s duty to settle arises when it knows or reasonably should know settlement with an injured party within the insured’s policy limits is possible or only when the injured party presents a valid offer to settle within the insured’s policy limits.”12 The Court observed that other courts had found its prior decisions regarding this issue to be unclear.13 To put an end to any speculation, the Court definitively ruled that “an insurer’s duty to settle arises when the injured party presents a valid offer to settle within the insured’s policy limits.”14 15

Next, the Court examined the facts of the underlying action – namely, whether the claimants had made a valid offer that First Acceptance failed to accept either negligently or in bad faith.16 The administrator of Mr. Jackson’s estate argued that, read together, the two June 2nd letters established a 30-day deadline for First Acceptance to respond to the claimants’ settlement offer. The Court disagreed, observing that the June 2nd letters did not contain a time limit for acceptance of the claimants’ settlement offer – rather, the 30-day deadline applied to counsel’s request for insurance information. As such, First Acceptance “was not put on notice that its failure to accept the offer within any specific period would constitute a refusal of the offer.”17 In light of these facts, the Court opined that First Acceptance’s actions were reasonable, as an “ordinarily prudent insurer could not be expected to anticipate that, having specified no deadline for the acceptance of their offer, [the claimants] would abruptly withdraw their offer and refuse to participate in the settlement conference.”18 Accordingly, the Georgia Supreme Court reversed the Court of Appeals’ decision and held that First Acceptance was entitled to summary judgment with regard to the estate’s negligence and bad faith claims.19

In sum, the Court’s decision in Hughes indicates that, under Georgia law, (a) an insurer’s duty to settle is triggered when an injured party presents a valid offer to settle within policy limits; and (b) if an injured party’s settlement offer does not contain an express time limit for acceptance, an insurer’s failure to accept the offer within any specific period would not constitute a refusal of the offer. While it is too early for the impact of the decision to be fully apparent, Hughes provides valuable guidance for those attempting to engage in settlement negotiations that are compliant with Georgia law.

Does the Implied Covenant of Good Faith and Fair Dealing Impose a Broad Duty on Insurers to Act “Reasonably” or “Properly” in Handling Claims?

Christina Phillips | Property Insurance Coverage Law Blog | October 30, 2019

The United States District Court for the District of Minnesota in Selective Insurance Company of South Carolina v. Sela,1 recently addressed whether the implied covenant of good faith includes a broader obligation to act “reasonably” and “properly” in making a decision about whether to pay benefits. Sela had submitted a claim for hail damage to his home. Selective investigated the claim and filed suit alleging that Sela made fraudulent misrepresentations and was not entitled to coverage. Sela counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, and bad faith, pursuant to Minn. Stat. §604.18.

Under Minnesota law, the implied covenant imposes two obligations on insurance contracts. First, the implied covenant is breached when a party to a contract unjustifiably hinders the other party’s performance under the contract. Second, the implied covenant is breached when a party to a contract acts dishonestly, maliciously or otherwise in subjective bad faith in exercising unqualified discretion that is given to the party in the contract.

In granting Selective’s motion in limine to dismiss Sela’s claim for breach of the implied covenant of good faith, the trial court found the two obligations imposed by the implied covenant to be irrelevant in a case involving the denial of insurance benefits. The court concluded that common law does not impose a broad obligation of reasonableness on insurers. Rather, the only question in a denial-of-benefits case is whether the insurance contract requires the insurer to pay the claim. Such a determination is based on the language of the insurance contract.2

The trial court noted that Minnesota decided to address the issue of unreasonable claims handling through §604.148, and not by importing broad reasonableness obligations into insurance contracts via the implied covenant of good faith and fair dealings. It is within the bad faith claim that Sela will have to prove that Selective did not have a “reasonable basis” for denying his claim and that the person or persons at Selective who denied the claim “knew of the lack of a reasonable basis.” We will have to wait and see if Sela is permitted to recover damages and attorney fees pursuant to Minn. Stat. §604.18, as this part of the case is set for trial in December.
1 Selective Ins. Co. of South Carolina v. Sela, 2019 WL 3858701 (D. Minn. Aug. 16, 2019).
2 Id. at * 2.

Bad Faith Legislation: Good for Insurance Policyholders?

William G. Passannante | PropertyCasualty360 | September 12, 2019

When an insurance company violates its duty of good faith and fair dealing, a policyholder should have a remedy for the insurance company’s breach of duty.

In order for insurance purchasers to receive the benefit of their insurance policies, bad faith behavior by insurance companies requires that a remedy be available. A July 2019 NU PropertyCasualty360 column by a lobbyist for the insurance industry articulated an insurance industry creed: “Plainly and simply, bad faith legislation is solely for the benefit of the plaintiffs’ attorneys.”

Is that somewhat alarmist declaration really so?

Skewed incentives require bad faith balancing

When an insurance company violates its duty of good faith and fair dealing, should a policyholder have a remedy for the insurance company’s breach of duty? The answer must be “Yes.” Bad faith legislation, like common law duties, helps policyholders obtain the benefit of the policies they buy. In the absence of such a remedy, insurance companies will breach their obligations with virtual impunity, because breaching their duties will be almost without cost.

Commentators addressing the damages available for breaches of contracts have been noting the need for a remedy for over half a century. When a contracting party willfully breaks its promise to perform because performance, as promised, would cost more than the damages recoverable in an action for breach of contract, courts have shown a willingness to take the willfulness of the breach into account in determining the damages awardable against the breaching party.

Because the insurance product is in the nature of an aleatory (that is, uncertain) promise — the insurance policy is sold and paid for long before performance of the insurance company is needed — an incentive is created for an opportunistic breach of that long-term promise to pay. Over the years commentators have observed that this “money for promise” arrangement in insurance provides a powerful strategic tool for insurance companies to use against their customers.

The argument that insurance purchasers should have remedies that balance this distorted strategic advantage has been updated continually, including this year, as noted in the Restatement of the Law of Liability Insurance. Though insurance companies and their lobbyists would prefer that policyholders not have redress for such wrongs, such redress remains available. Even the American Law Reports (ALR), not a policyholder advocate, concedes as much:

[I]t has been held that the intentional, bad-faith refusal of an insurer to make payments due under an insurance policy constitutes a tortious interference with a protected property interest of its insured, for which damages may be recovered to compensate for all detriment proximately resulting therefrom, including economic loss… resulting from the conduct or from the economic losses caused thereby. Further,… it has been held that,… punitive or exemplary damages may be recovered from an insurer guilty of wrongfully delaying or refusing to make payments due under an insurance contract, in addition to the awarding of consequential damages. [What Constitutes Bad Faith on Part of Insurer Rendering It Liable for Statutory Penalty Imposed for Bad Faith in Failure To Pay, or Delay in Paying, Insured’s Claim — Particular Conduct of Insurer, 115 A.L.R. 5th 589.]

Consequential damages and attorneys’ fees

Among others, three types of damages available to policyholders help correct the strategic imbalance between insurance company and policyholder at the time an insurance claim is made:

  1. Damages for a failure to settle;
  2. Recovery of attorney’s fees in the insurance recovery action; and
  3. Consequential damages from the breach of the insurance policy.

Even New York, which remains a jurisdiction protective of insurance companies, recognizes claims against insurance companies for bad faith failure to settle. In New York, “a bad faith case is established where the liability is clear and the potential recovery far exceeds the insurance coverage.” [DiBlasi v. Aetna Life and Cas. Ins. Co., 147 A.D.2d 93, 98 (App. Div. 2d Dep’t 1989).]

[T]he law imposes upon the carrier the obligation of good faith which is basically the duty to fairly consider the insured’s interests as well as its own in making the decision as to settlement.  In arriving at a workable standard so that the concept could be clear to a juror,…  Was it highly probable that the insured would be subjected to personal liability? [DiBlasi, 147 A.D.2d at 99.]

Further, many jurisdictions have awarded attorneys’ fees to policyholders forced to litigate with their insurance companies when coverage was clearly indicated. A policyholder “who is ‘cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations’ and who prevails on the merits, may recover attorneys’ fees incurred in defending against the insurer’s action.” [Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979)]. In fact, as my colleague Vivian Michael and I previously have written, most states provide some form of potential recovery of attorneys’ fees when a policyholder is forced to litigate with its insurance companies.

Consequential damages for breach of an insurance policy also are available to policyholders facing wrongful denials. [See Bi-Economy Market, Inc. v. Harleysville Ins. Co., 10 N.Y.3d 187 (2008).] In the Bi-Economy Market case, an insurance company’s long delay followed by partial payment of a claim following a fire loss was found to have led to the company’s death. The New York Court of Appeals awarded consequential damages.

Most policyholders battle adverse claimants and the plaintiffs’ bar. The availability of remedies for insurance company breaches of duty is far from a radical benefit solely for plaintiffs’ attorneys. Rather, in the system of risk transfer embodied in the Western insurance and liability markets, the availability of such remedies corrects a strategic imbalance and un-tilts the playing field somewhat, permitting policyholders to obtain the benefits of the insurance product that they paid hard-earned premium dollars to obtain.

The Murky Waters Between “Good Faith” and “Bad Faith”

Theresa A. Guertin | SDV Insights | August 1, 2019

In honor of Shark Week, that annual television-event where we eagerly flip on the Discovery Channel to get our fix of these magnificent (and terrifying!) creatures, I was inspired to write about the “predatory” practices we’ve encountered recently in our construction insurance practice. The more sophisticated the business and risk management department is, the more likely they have a sophisticated insurer writing their coverage. Although peaceful coexistence is possible, that doesn’t mean that insurers won’t use every advantage available to them – compared to even large corporate insureds, insurance companies are the apex predators of the insurance industry.

In order to safeguard policyholders’ interests, most states have developed a body of law (some statutory, some based on judicial decisions) requiring insurers to act in good faith when dealing with their insureds. This is typically embodied as a requirement that the insurer act “fairly and reasonably” in processing, investigating, and handling claims. If the insurer does not meet this standard, insureds may be entitled to damages above and beyond that which they could otherwise recover for breach of contract.

Proving that an insurer acted in “bad faith,” however, can be like swimming against the riptide. Most states hold that bad faith requires more than just a difference of opinion between insured and insurer over the available coverage – the policyholder must show that the insurer acted “wantonly” or “maliciously,” or, in less stringent jurisdictions, that the insurer was “unreasonable.”1

There are, of course, many different types of insurer behavior which exist in the murkier waters between “good faith” and “bad faith” of which policyholders should beware. The following list provides some examples of this questionable behavior.

  • Aggressive use of case law. When new case law is published, carriers race to the smell of blood and attempt to implement the law in new, overly aggressive ways. We saw this after the New York Court of Appeals issued its decision in the Burlington2 case in 2017. The true impact of the decision was fairly limited; the court found no coverage for an additional insured where it had been judged that the named insured was not at fault and the additional insured was solely at fault. That didn’t stop insurers from attempting to use Burlington to deny defense coverage to additional insureds. Policyholders should be sure they review insurer communications thoroughly and evaluate whether the insurer’s basis for disclaiming coverage is valid and appropriate.
  • Changes to insurer personnel. For policyholders who have been with the same insurer for years, there may be a sense of security that claims will be investigated, defended, handled, or settled a certain way. While it is certainly beneficial for corporate insureds to develop partnerships with their insurers, risk managers should always be on the lookout for change which could spell disaster. Sometimes a personnel change – especially when it comes to “legacy” claims like asbestos matters – could signal a shift in the insurer’s treatment of those claims.  Risk managers should insist on dedicated claims personnel whenever possible and hold regular stewardship meetings to maintain relationships and ensure that the insurer is aligned with their goals and strategy as much as possible.
  • Shifting Retroactive Dates. Claims-made policies, such as professional, directors & officers, and pollution insurance, often contain retroactive dates which limit how far back in time the insurer’s obligation to pay attaches. Sometimes, at renewal, the carrier may bump up that date to the start of the policy period – a change that may go by undetected, but can result in a major coverage gap. Retroactive dates should almost always be as far in the past as possible, coinciding with the start of the insured’s business if feasible or, at least, as far back as potential losses may have occurred which would give rise to current liabilities.
  • Refusal to disclose policies, claim numbers, and other non-privileged information. Upstream parties, such as owners and general contractors, have a right to see a copy of the policy on which they have been added as additional insureds. Insurers sometimes inappropriately refuse access to the policy, which hampers the additional insureds’ ability to pursue their rights. Similarly, other non-privileged information stored by the insurer should be accessible to the insured, including loss runs and other claims data. Redacting sensitive information (i.e., premiums) is acceptable, but complete withholding of policies on which you are insured is not.
  • Delay by document request. Another common tactic employed by insurance companies is delaying their coverage analysis until substantial documentation has been submitted to the insurer. Although this may be understandable in the first-party context (i.e., providing back-up documentation to support the cost of repairs for a builder’s risk claim) it is rarely valid when the insured is seeking defense from a liability insurer. Voluminous document requests for contracts, communications, job-site reports, and the like sometimes serve as a hidden means for insurers to delay providing defense, which should be determined based on the complaint’s allegations. 

Staying safe in shark-infested waters takes an educated and dedicated team of professionals. Risk managers should stay afloat by keeping up-to-date on current market and legal developments.