Insurance Policies and Indemnity Provisions Are Not the Same

Garret Murai | California Construction Law Blog

Just because you own a pair of Air Jordans doesn’t make you Michael Jordan. In the next case, Carter v. Pulte Home Corporation, Case No. A154757 (July 23, 2020), the 1st District Court of Appeal denied an insurance carrier’s equitable subrogation claim explaining that an insurer’s obligations under its insurance policy are not the same as an idemnitee’s obligations under an indemnity provision. Or, as aptly put by the Court of Appeal, while a “subrogated insurer is said to ‘stand in the shoes’ of its insured, because it has no greater rights than the insured. Here . . . [the insurer] is seeking to stand in a different, more advantageous set of shoes.” 

Carter v. Pulte Home Corporation

Pulte Home Corporation was sued for construction defects by 38 homeowners in two housing developments. Various subcontractors had worked on the projects, but under their subcontracts, each subcontractor agreed to indemnify Pulte from and against “all liability, claims, judgments, suits, or demands for damages to persons or property arising out of, resulting from, or relating to Contractor’s performance of work under the Agreement (‘Claims’) unless such Claims have been specifically determined by the trier of fact to be the sole negligence of Pulte . . . ”

Pulte tendered the claim to its subcontractors and Travelers Property Casualty Company of America, the insured for four of the subcontractors, accepted the tender under its policies. Insurance carriers for seven subcontractors, however, refused to accept Pulte’s defense claiming that their policies did not require that they indemnify Pulte.

Thereafter, Travelers filed a complaint in intervention against the seven subcontractors and their insurers for declaratory relief, equitable subrogation, equitable indemnity and contractual subrogation. Travelers later dismissed each of its causes of action except its claim for equitable subrogation.

The homeowners’ claim against Pulte ultimately settled with Travelers having paid $320,491.82 for Pulte’s defense. Travelers later recovered $164,400 from other subcontractors, but as to the balance of $156,091.82, the seven subcontractors and their insurers refused to reimburse Travelers, and the case went to trial.

At trial, Travelers took the position that the seven subcontractors and their insurers were “jointly and severally liable” for the $156,091.82 balance in defense costs. In other words, each of the seven subcontractors and their insurers were responsible for the entirety of the $156,091 balance in defense costs irrespective of their actual proportionate responsibility of allegedly defective work.

In line with the position Travelers took at trial, Travelers filed a motion in limine to exclude all evidence or argument suggesting that damages should be allocated or apportioned among the seven subcontractors in proportion to their allegedly defective work. This motion was granted by the trial court. In addition, Travelers filed, and the trial court granted, a motion in limine excluding all evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

During the trial, the evidence showed that there was considerable variation in the number of homes each of the seven subcontractors worked on. Two of the seven subcontractors worked on each of 38 homes, another worked on 30 of the 38 homes, two worked on 23 of the 38 homes, and the remaining two worked on only six or eight of the 38 homes.

Following the presentation of evidence including closing argument, the court found that Travelers had failed to prove its equitable subrogation claim, by failing to carry its burden on three of the eight elements necessary to prove equitable subrogation.

Travelers appealed.

The Appeal

On appeal, Travelers argued that the trial court essentially “led it astray” by granting its two motions in limine seeking to exclude evidence or argument that damages should be allocated or apportioned in proportion to the seven subcontractor’s allegedly defective work and to exclude evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

Relying on the trial court record, the Court of Appeals found Traveler’s argument on appeal to be “untenable,” finding that while Travelers chose to frame its case as an “all or nothing” joint and several liability claim, nothing precluded the seven subcontractors to challenge the premise of Traveler’s assertion as framed, and nothing precluded the trial court from rendering a decision on the subcontractor’s challenge to this assertion.

As to the three elements that the trial court found that Travelers had failed to carry its burden of proof on, the Court of Appeal explained that the eight essential elements of an insurer’s cause of action for equitable subrogation are:

  1. The insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer;
  2. The claimed loss was one for which the insurer was not primarily liable;
  3. The insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable;
  4. The insurer has paid the claim of its insured to protect its own interest and not as a volunteer;
  5. The insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer;
  6. The insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends;
  7. Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and
  8. The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

In this instance, explained the Court of Appeal, the trial court found that Travelers had failed to satisfy its burden on three of the eight elements necessary to prove equitable subrogation, namely, that: (1) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (2) Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (3) The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

The Subcontractors Were Not “Primarily Liable” for the Defense Costs Travelers Paid to Pulte

As to whether Travelers had met its burden of showing that it had compensated the insured (Pulte) in whole or in part for the same loss for which defendant (the seven subcontractors) were “primarily liable,” The Court of Appeal held that while Travelers (on behalf of its insured subcontractors) may have reimbursed Pulte for its defense costs, it does not follow the the seven subcontractors were “primarily liable” for the defense costs Travelers reimbursed to Pulte, since the  subcontractors worked on different houses and each of the subcontractors were only obligated contractually to defend Pulte with respect to claims involving their respective “performance of work.”

Importantly, the Court of Appeal drew a distinction between an insurer’s obligation to defend an insured even if claims only potentially involve the scope of work of its insured, which is based on policy considerations, as opposed to a subcontractor’s obligation to defend a general contractor under an indemnity provision, which is based on contract. And, here, under the indemnity provision contained in the subcontractors’ subcontracts with Pulte, the subcontractors only agreed to defend Pulte for claims arising from their respective “performance of work.”

The Subcontractors Were Not in an Equitable Position That Was Inferior to That of Travelers

This distinction, between “policy” considerations when it comes to an insurer’s obligation to defend an insured, and a subcontractor indemitor’s obligation to defend a general contractor indemnitee under a “contractual” indemnity provision, also, held the Court, supported the trial court’s finding that Travelers had failed to show that justice required that the loss (Travelers’ payment of Pulte’s defense costs) be entirely shifted from Travelers to the seven subcontractors because their equitable positions were inferior to that of Travelers.

While noting that “there is no facile formula for determining superiority of equities,” the Court of Appeal noted that cases examining the issue had found that an insurer in a “superior position” generally involved a situation where the insurer’s insured contractually agreed to indemnify another, and that the party in the “inferior position” usually involved a party who both contractually agreed to defend the insurer’s insured and who was also performing in whole or in part the work agreed to be performed by the insurer’s insured. In other words, the typical case where a general contractor subcontracts its scope of work in whole or in part to a subcontractor. In such a situation, the general contractor’s insurer would be in the “superior position,” and the subcontractor would be in the “inferior position” because, while the general contractor agreed to indemnify the project owner, the work alleged to be defective was performed by the subcontractor:

Significantly, Travelers is seeking to shift to respondents costs for defending Pulte against claims unrelated to the scope of respondents’ work—claims for which respondents did not promise to indemnify and defend Pulte. Respondents’ failure to comply with their contractual obligations to indemnify and defend Pulte for claims arising from their own work could not make them liable for losses due to the work of other independent subcontractors. Equitable subrogation allows a loss to be shifted from one who was legally liable to another who is more responsible for the same loss. Here, Travelers is trying to shift the loss jointly and severally to respondents who were each liable for only a portion of the total loss.

Finally, as to the trial court’s finding that Travelers had failed to carry its burden that Travelers’ damages were in liquidated sum, the Court of Appeal held that its holding on the two elements of equitable subrogation made it unnecessary to consider this third element.


So, there you have it. An insurer’s obligations under an insurance policy is different than an indemnitee’s obligations under an indemnity provision. While one is based on policy consideration the other is based on contract. And while both can be broad, they’re not the same.

Requesting an Allocation Between Covered and Non-Covered Damages? [Do] Think Twice, It’s [Not Always] All Right

Todd Likman | Colorado Constructin Litigation

As is often the case in construction defect and other insurance defense litigation, a plaintiff’s claims for relief typically encompass both covered and uncovered damages.  Obviously, it is in the insured’s best interests to have as many damages covered by insurance as possible.  From the insurer’s perspective and against the backdrop of owing duty of good faith and fair dealing to its insureds, however, it is generally better to have an allocation of covered vs. non-covered damages.  This places the insurer, insured, and insurance retained defense counsel in a difficult position. 

A recent opinion from U.S. District Court for the District of Colorado, Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt, Civil Action No. 1:16-CV-02760-RM-MJW, 2020 U.S. Dist. LEXIS 35209 (D. Colo. Mar. 2, 2020), sheds light on the issue, even though some may feel it only further muddies already murky waters.  

Rockhill involved review of an arbitration proceeding that property-owner, Heirloom I, LLC (“Heirloom”) filed against CFI-Global Fisheries Management (“CFI”).  Rockhill Insurance Company (“Rockhill Insurance”) was asked to defend the arbitration as CFI’s professional and general liability insurer.  At issue in the arbitration was Heirloom’s claim that CFI defectively designed and constructed a fisheries enhancement that was destroyed by natural processes four times in three years.

Rockhill Insurance agreed to defend the arbitration but reserved the right to deny coverage based on various exclusions, including a faulty workmanship exclusion.  The arbitrators ultimately awarded Heirloom $609,995.91, and the parties subsequently stipulated an additional $265,000 award of attorney fees. The decision was not accompanied by a reasoned award as neither party requested such.

Prior to the issuance of the arbitration award, Rockhill Insurance filed a federal declaratory judgment action against CFI and Heirloom alleging that it had no duty to defend and indemnify CFI in the arbitration.  CFI asserted counterclaims for declaratory judgment, breach of contract, and bad faith for Rockhill Insurance’s failure to timely settle.  After the arbitration award entered, the U.S. District Court for the District of Colorado granted summary judgment in favor of Rockhill Insurance, holding, in pertinent part, that the entirety of the arbitration award was excluded under the policy’s faulty workmanship exclusion. 

The Tenth Circuit Court of Appeals, in Rockhill Ins. Co. v. CFI-Global Fisheries Mgmt., 782 F. App’x 667 (10th Cir. 2019), disagreed, and found that the faulty workmanship exclusion did not apply to design failing, and remanded the case for the district court to consider in the first instance whether the entire arbitration award is covered under a correct reading of the exclusion, or whether the damages could be apportioned between covered professional design services and non-covered construction work.

On remand, the Rockhillcourt emphasized that because Rockhill Insurance controlled the defense, it “had a corresponding duty to ensure that the damages were allocated between those that were covered under CFI’s policy and those that were not.”  Because Rockhill Insurance failed to request an allocated or reasoned award, the arbitrators issued a standard, non-explanatory, award that said nothing with respect to allocation between covered and non-covered damages.  Under such circumstances the Rockhillcourt held that all damages awarded are presumed covered under the policy.  To support its finding that Rockhill Insurance did not meet its burden of establishing that it was not liable for the entire award, the Rockhillcourt relied on the fact that the arbitrators were presented with evidence that CFI’s design work was so faulty that that project was destined to fail, and there was no evidence that any of the damages awarded were due solely to CFI’s construction work.

Though the Rockhill decision may surprise Colorado insurance practitioners, especially insurance defense attorneys, one must bear in mind that like other opinions of the U.S. District Court for the District of Colorado, Rockhillis not binding on Colorado state courts.  Further, Rockhilldoes not go so far as to expressly state that insurance defense counsel has any affirmative duty to seek an allocation between covered and non-covered damages, or that an insurer can direct insurance defense counsel to seek such an allocation.  Such a proposition would insert potentially prejudicial coverage issues into a case in direct contravention of, for example, Colorado Rule of Evidence 411 or insurance defense counsel’s ethical duties as set forth in Colorado Ethics Opinion 91. 

The important takeaway from Rockhillis that it highlights the danger for insurers relying on coverage defenses that do not, prior to an action’s conclusion,at least request intervention in order to seek allocation of covered vs. non-covered damages.  While Colorado courts almost always deny such requests, the fact that such a request was made can be used in an effort to preserve an insurer’s right to subsequently seek allocation.  If no request is made, regardless of whether it is successful, Rockhill makes clear that the carrier risks both waiving its right to seek allocation after the fact, and liability for an entire damages award.

Rockhill’s effect may be that insurers ramp up efforts to request that an insured seek allocation through not only special verdict forms and reasoned arbitration awards, but also case investigation and discovery.  The extent to which it is advisable for an insured defendant to cooperate with such requests is outside the scope of this article.  In such situations, insurance defense counsel should inform its client of the issues and the client’s right to consult with, and follow, the often nuanced, case-specific advice of coverage or other independent counsel.

Ensuing Loss Clause Does Not Create Coverage for “Collapse” Inseparable from Damage Caused by Excluded Perils

Jordan Hess and Paul Ferland | Property Insruance Law Observer

            In Jowite Limited Partnership v. Federal Insurance Company, the United States District Court for the District of Maryland issued a rare opinion addressing whether “collapse” is a covered “ensuing loss” under an all-risks insurance policy without a specific collapse coverage.  Case No. 1:18-cv-02413-DLB (D. Md. August 17, 2020).  In a win for insurers, the Court held that, under Maryland law, the ensuing loss exception to a construction defect exclusion did not apply to reinstate coverage where the purported “collapse” was to the defective property itself, regardless of whether the “collapse” was characterized as merely the damage caused by construction defects or a separate and distinct peril.

            The insured, Jowite Limited Partnership (“Jowite”), owned an apartment complex constructed in the 1980s.  Id. at 2.  At various times between 1999 and 2017, the complex’s “Building 300” was inspected by construction professionals and discovered to be sinking.  Id. at 2-3.  The sinking resulted in significant structural damage to the building, including cracked interior walls and façade, rotted support beams, and a failed cement footer.  One engineer deemed Building 300 uninhabitable.  Jowite’s experts ultimately determined that Building 300’s improperly designed and constructed foundation and footers caused the loss.  Id. at 3, 6.

            In July 2017, Jowite filed a claim with Federal Insurance Company (“Federal”) under an all-risks property policy.  Federal denied coverage under the policy’s Planning, Design, Materials or Maintenance” (“Construction Defect”) and Settling exclusions.  Id. at 4-5.  The Construction Defect exclusion barred coverage for “loss…caused by or resulting from any faulty, inadequate or defecting, design, specifications, plans, workmanship…grading or compaction[;]” subject to an ensuing loss clause providing that the Exclusion “does not apply to ensuing loss or damages caused by or resulting from a peril not otherwise excluded.”  Id. at 5.  The Settling exclusion barred coverage for “loss…caused by or resulting from settling, cracking, shrinking, bulging or expansion of land…foundations, pools, building or other structures[;]” subject to an ensuing loss clause for “specified perils.” 

            Jowite sued for coverage.  Federal and Jowite agreed that the Construction Defect exclusion applied, but disagreed about whether the ensuing loss clause restored coverage.  Id. at 9-10.  Jowite argued that the ensuing loss clause provided coverage because Building 300 “collapsed”—a term not defined in the policy or apparently otherwise mentioned—in that it experienced a significant loss of structural support.  According to Jowite, “collapse” was a separate peril “not otherwise excluded” from the construction defects.  Id. at 10.  Federal countered that “collapse” was not a separate distinct peril, but merely the damage caused by the foundation’s defective design and construction.  Id. at 10.  Further, Federal argued that even if “collapse” was deemed a separate peril, it was conceptually impossible to distinguish the uncovered damage caused by construction defects from the purportedly covered damage caused by “collapse.”  Id. 

            Although the Court sidestepped whether “collapse” was a separate peril from the construction defects—assuming “for the purposes of the analysis” that it was—the Court held that the Construction Defect exclusion barred coverage because all of Building 300’s damage was traceable to the improperly designed and constructed foundation.  Id. at 16.  Accordingly, “any loss or damage caused by the collapse [was] not ‘wholly separate from the defective property itself’” as required to trigger ensuing loss clauses under Maryland law.  Id.  Furthermore, construing the ensuing loss clause to provide coverage would obliterate the Construction Defect exclusion because the clause would restore coverage for the same damage to which the exclusion applied.  Id. at 17-18. 

            The Court also found that the Settling exclusion applied because the damage was caused by Building 300’s settling over time.  Performing an efficient proximate cause analysis, the Court determined that, even if a “collapse” occurred, the collapse itself was initially caused by the Building’s settling.  Id. at 18.  Therefore, the Settling exclusion applied because the resulting damage was caused by settling in the first instance.  Id. at 20.  The Settling exclusion’s ensuing loss clause was not triggered because there was no loss caused by a specified peril.

            Jowite should be considered a victory for insurers in the ongoing “ensuing loss” disputes that arise in first-party coverage analysis.  The court’s decision clarifies that policyholders cannot create a covered ensuing loss by characterizing the damage caused by plainly excluded perils as the separate peril of “collapse”.  Further, Jowite clarifies that, in order for an ensuing loss exception to an exclusion to apply, there must be damage to “wholly separate property”.  Accordingly, Jowite goes a long way toward clarifying what is, and is not, an ensuing loss under first-party property policies. 

The Ancient “But For” Test Controls Coverage Dispute

Barry Zalma | Zalma on Insurance

Additional Insured Endorsement Insures Lessor for Slip and Fall in Parking Lot Serving Property Leased

When the use of the property as a gas station / convenience store depended on customers’ ability to ingress and egress through the attached parking lot – even though the lessees’ lease did not extend to the parking lot where the plaintiff fell but for the use of the parking lot the gas station/convenience store could not operate. In Republic Franklin Insurance Company, a/s/o Paul H. Lamb, t/a Lamb’s Auto Service Coatesville Shell v. Brethren Mutual Insurance Company, No. 20-1431, United States Court Of Appeals For The Third Circuit (October 6, 2020) was asked to determine whether coverage applied for the additional insured even though the lessees policy did not include the parking lot.


When a customer slipped-and-fell in a gas station parking lot in Honey Brook, Pennsylvania an insurance coverage dispute was submitted to the Third Circuit. The owner insured the properties through Republic Franklin Insurance Company. Lamb leased the gas station – but not the parking lot – to Dharmesh and Popat Bhalala, who co-owned Shree Ram Enterprises, LLC, which operated the gas station and associated convenience store. Shree Ram insured the gas station / convenience store through a policy with Brethren Mutual Insurance Company. That policy included an endorsement naming Lamb as an additional insured, subject to a critical limitation: Lamb was covered only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to Shree Ram.

After both insurers (protecting their insureds and agreeing to resolve the coverage dispute later) agreed to pay for the slip-and-fall injuries, Republic Franklin sued Brethren Mutual for reimbursement of its $175,000 payment to the injured customer on Lamb’s behalf. Republic Franklin claimed that Brethren Mutual owed that sum due to Lamb’s status as an additional insured on Shree Ram’s policy and Republic Franklin’s motion was granted.


The sole issue concerned the scope of coverage provided by the additional insured endorsement. In relevant part, that document provides coverage for liability arising out of the use of the leased premises, which Shree Ram operated as a gas station / convenience store. Under Pennsylvania law the phrase “arising out of” means causally connected with, not proximately caused by, and but for causation, i.e., a cause and result relationship, is enough to satisfy this provision. With that understanding, the question becomes whether the use of the leased premises was a “but for” cause of the customer’s slip-and-fall.

The customer slipped and fell in the parking lot after exiting the store. And while not every incidental factor that arguably contributes to an accident is a “but for” cause in the legal sense the customer’s patronage of the store and her egress to the parking lot share more than an incidental causal nexus.

Because the customer would not have slipped in the parking lot but for her patronage of the gas station and store, her injuries arose out of the use of the leased premises. Therefore, the Third Circuit concluded that the incident falls within the coverage provided by the additional insured endorsement, and the District Court’s judgment in favor of Republic Franklin was affirmed.


A lease of a gas station and convenience store without a parking lot is useless to the lessee. The fact that the parking lot existed and that the lessor did not demand the operator of the gas station to pay rent for it, understanding that it was used for the customers of the convenience store, and since the injury would not have occurred but for the existence of and use of the convenience store. Republic Franklin should be honored for protecting the insured and then, after the insureds were protected, seeking reimbursement and resolution of the coverage dispute.

Minnesota Supreme Court’s First Opinion on the State’s Bad Faith Statute

J. Kent Crocker | Carlton Fields

The Minnesota Supreme Court in the matter of Alison Joel Peterson v. Western National Mutual Insurance Company, 946 N.W.2d 903 (Minn. 2020) opined for the first time on the state’s bad faith statute (Minn. Stat. § 604.18) and weighed in on the interpretation of the two prongs contained within the statute.

The statute provides the following two prongs that must be determined for a court to award bad faith damages to an insured against the insurer:

  1. the absence of a reasonable basis for denying the benefits of the insurance policy; and
  2. that the insurer knew of the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance policy.

See Minn. Stat. § 604.18, subd. 2(a).


The underlying matter giving rise to the first-party bad faith lawsuit involved an October 21, 2009, motor vehicle accident where a motorist entered Alison Peterson’s (“Peterson”) lane and struck the right-front side of her vehicle. The low-impact accident resulted in Peterson experiencing neck stiffness, headaches and body aches. Peterson ultimately sued the tortfeasor and settled her claim for $45,000 of the available $50,000 policy limits. Peterson’s insurer, Western National Mutual Insurance Company (“Western”), consented to the settlement, waived its subrogation rights, and also paid Peterson $20,000 in no-fault benefits. Thereafter, Peterson sent Western a demand for her uninsured/underinsured motorist (“UM”) policy limits of $250,000 and enclosed copies of her medical records and bills.

Peterson’s medical records indicated that she was experiencing chronic headaches both before and after the accident. However, Peterson’s chronic headaches were intermittent prior to the accident and became more frequent – often daily – and more severe after the accident.  Peterson’s treatment involved a chiropractor, a neurologist, physical therapy, occipital nerve block treatment, and a headache specialist, but none of the treatment provided effective relief.  Eventually Peterson began receiving quarterly Botox injections that reduced the average intensity of her headaches by 50 percent, but that cost more than $2,500 per treatment.

More than a year after Peterson sent Western her demand for the $250,000 policy limits, she filed suit as Western would not accept that her headaches were caused by the accident. After filing suit, Peterson provided Western with a report from a treating physician that opined that the chronic headaches were different from the prior headaches in location, intensity, and frequency, and were caused by the accident. Peterson’s treating physician also stated that Peterson would require Botox injections for the rest of her life on a quarterly basis as the headaches would never subside. Western retained an independent medical examiner that related Peterson’s headaches to underlying psychological factors, like depression.

The case went to trial and a jury awarded Peterson past and future damages totaling $1,414,090, including more than $900,000 for past and future health care expenses. Western subsequently paid Peterson the $250,000 UM policy limits. Thereafter, Peterson amended her complaint to seek taxable costs and attorney’s fees under Minn. Stat. § 604.18.¹ In a bench trial, the court ruled in Peterson’s favor and awarded Peterson $100,000 in taxable costs and $97,940.50 in attorney’s fees pursuant to Minn. Stat. § 604.18. Western appealed the district court’s decision and a divided court of appeals affirmed. Western then sought review by the Minnesota Supreme Court.


The Minnesota Supreme Court began its analysis by noting the first prong of § 604.18 presents an objective test, under which it must be determined whether a reasonable insurer, having conducted a full investigation and a fair evaluation that considers and weighs all of the facts, would have denied the insured the benefits of the insurance policy.

When analyzing the district court’s determination that Western violated the first prong, the Court stated that, based on the medical records that were provided to Western, the district court did not commit reversible error. In its reasoning, the Court held that the district court appropriately credited the opinions of Peterson’s expert over Western’s independent expert, in finding that a reasonable insurer would have determined that the headaches had changed in intensity, frequency, and location and that it is “unreasonable for an insurer to use as a pretext a supposed preexisting condition supported by bits and pieces of a medical record to deny a claim without investigating and evaluating whether the accident exacerbated or changed the condition.”  Peterson, 946 N.W.2d 903, 914.  Specifically, the Court determined that the district court’s reliance on Peterson’s expert’s opinion that “the overwhelming weight of the evidence, competent evidence, credible evidence was that this accident created a chain of events that ultimately led to [Peterson] having to submit to a painful Botox treatment regimen,” was proper.  Id. at 915.

The Court then turned to the second prong of the statute – or the “mens rea element of a claim” – under which it must be shown that “the insurer knew of the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance policy.” Id. (citing Minn. Stat. § 604.18, subd. 2(a)(2); Anderson v. Continental Insurance Co., 271 N.W.2d 368, 374-376 (Wis. 1978) (explaining that the facts showed purposeful conduct by the insurance company designed to evade providing the insured the benefits of the policy)).

When discussing the second prong, the Court evaluated whether the district court erred in finding that Western “knew, or recklessly disregarded information that would have allowed it to know, that it lacked an objectively reasonable basis for denying benefits to Peterson.” Peterson, 946 N.W.2d 903, 916.  The Court upheld the district court’s determination here too, based on its findings that Western’s claims adjuster repeatedly asked for medical information that had already been made available, Western unnecessarily requested additional medical authorizations to be executed, and that Western did not investigate the claim with an “open mind, but rather ‘developed an early opinion that [Peterson’s] claim was of no value based on its view that the property damage to [Peterson’s] vehicle was minor, and from then on, that opinion was etched in stone.”’ Id.

In the dissent, which the Chief Justice joined, the dissenters pointed out that the first-party bad faith statute was created to provide a bad faith remedy, and is in derogation of the common law and should therefore be strictly construed. Under this principle, the dissent challenged the Court’s expansive approach in its interpretation of the statute. The dissent also pointed out that a jury could have ultimately reached a different conclusion by siding with Western and its independent medical examiner’s alternative opinion. Most importantly, the dissent raised alarm that the Court’s decision will mean any first-party action that results in a verdict for a plaintiff over an insurer’s position will lead to the filing of a bad faith cause of action, thereby opening the flood gates for such cases to be brought against insurers.

¹Minnesota’s bad faith statute allows for pre-judgment and post-judgment interest and costs; an amount equal to one-half of the proceeds awarded that are in excess of an amount offered by the insurer at least 10 days before the trial begins or $250,000, whichever is less; and reasonable attorneys’ fees actually incurred to establish the insurer’s violation that must not exceed $100,000.