Insurer in Bad Faith Due to Adjuster’s Failure to Keep Abreast of Case Law

Tred R. Eyerly | Insurance Law Hawaii

    The federal district court found that the insurer acted in bad faith when the claim was denied based on the adjuster’s lack of knowledge of recent case law in Washington. Sec. Nat’l Ins. Co. v. Constr. Assocs. of Spokane, 2022 U.S. Dist. LEXIS 53533 (E.D. Wash. March 24, 2022). 

    Construction Associates of Spokane was a general contractor hired for a project at the Paulsen Building in Spokane. Construction Association hired a subcontractor, Merit Electric, for whom Mark Wilson worked. Wilson was seriously injured on August 20, 2016. He sued the Construction Associates along with other defendants three years later.

     Construction Associates tendered to Merit Electric’s broker, Alliant Insurance Services, Inc. Alliant forward the tender to Security National. The tender letter included a certificate of insurance issued by Alliant to Contractor Associates on September 3, 2019 and the subcontract with Merit. The subcontract required Merit to maintain CGL coverage with limits of $1 million. Further, the subcontractor was to issue certificate of insurance to the Contractor.

    Merit’s policy for the 2016-17 period included an “Additional Insured” endorsement that conferred additional insured status to “any person for whom you are performing operations when you and such person have agreed that such person be added as an additional insured on your policy.”

    Contractor Associates requested from Merit’s broker the certificate of insurance for April 2, 2016 to April 2, 2017. Alliant provided a certificate, but it was issued for another project that Merit was working on. Alliant also provided a certificate of insurance for 2019 which was not project specific and purported to reflect blanket additional insured status for the period during which Wilson was injured. 

    Claim notes reflected that the adjuster felt it was necessary to consult with claims counsel to determine if the 2019 certificate of insurance would provide coverage for the Wilson accident, but this was not done. Instead, the claim was denied because no Additional Insured endorsement for the 2016 policy was found. The adjuster noted a Washington statute provided that “A certificate of insurance does not confer new or additional rights beyond what the referenced policy of insurance provides.”

    Counsel for Construction Associates spoke and emailed the adjuster to inform him of a recent decision issued by the Washington Supreme Court, T-Mobile USA Inc. v. Selective Ins. Co. of Am., 450 P.3d 150 (Wash. 2019). The decision held that an insurer was bound by the representations of its agent, such as when issuing a certificate of insurance.

    Security National then conducted a second investigation four months after the initial tender. A second denial was issued by Security National when it stated that Alliant had no authority to issue any certificate of insurance after the policy expired. Security National then filed a declaratory judgment action against Construction Associate and moved for partial summary judgment regarding the 2019 certificate of insurance. Construction Associates filed a motion for summary judgment on bad faith.

    The federal district court first relied on T- Mobile USA and found that the certificate of insured issued by Merit, Security National’s agent, provided coverage to Construction Associates for the Wilson accident. 

    The court then turned to Construction Associates’ motion. The court found that Security National acted in bad faith as a matter of law because its denial and determination that it neither had the duty to defend nor indemnify was based, initially, on an inadequate investigation and, later, on arguable readings of the policy and questionable interpretations of Washington law. The adjuster did little to no investigation regarding why the 2019 certificate of insurance was issued. Instead, the adjuster was content to rely on his own (erroneous) knowledge of the applicable law concerning certificates of insurance. Second, Security National filed to look for and account for published case law directly on point, which was especially troubling given the notations in the file that coverage counsel may be required. 

    An adjuster was not excused from having at least a baseline understanding of the relevant state’s law necessary to carry out their duties. Insurers were obligated to undertake the reasonably small steps to ensure adjustors were equipped to make reasonable coverage and defense determinations. Adjustors had to equip themselves or seek out those with the requisite tools and knowledge. 

    Therefore, Construction Associates’ motion for partial summary judgment was granted. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Statute of Limitations and Bad Faith Claims: Factors to Consider

Anastasiya Collins | SDV Insights

How much time do our clients have to bring a bad faith action against an insurer? Although we are not frequently asked this question, it is one that we constantly analyze before asserting a bad faith claim.

To answer this question, we look to the statute of limitations, which is a law passed by a state legislative body that sets the maximum amount of time for a party to bring a claim based upon a particular cause of action. For policyholders, knowing which statute of limitations applies to their bad faith claim is critical because it indicates whether it is possible to initiate legal proceedings. In addition, it determines the amount in damages available in case of a successful resolution.

Statute of Limitations in Breach of Contract vs. Tort Claims
One key determinant of a statute of limitations for bad faith is whether the claim is brought as a tort or a breach of contract action. The consequence of framing bad faith as a tort is that a policyholder is not just limited to contract damages. The policyholder can also receive recourse for emotional distress, pain, suffering, punitive damages, attorney’s fees, and other damages that the court may consider appropriate. Unfortunately, however, not every jurisdiction allows plaintiffs to bring bad faith actions as tort claims. While, for example, courts in California, Colorado, and Connecticut allow bad faith claims sounding in tort, courts in jurisdictions such as Tennessee do not.

This background information is very important to keep in mind as different statutes of limitations may apply to common law bad faith claims sounding in tort as opposed to those sounding in contract. For example, if bad faith is brought as a breach of contract claim in California, plaintiffs have four years from the date they were denied in bad faith to bring action against the insurer. If, however, bad faith is brought as a tort claim, that opening narrows to two years. The length of these time periods and the moment when the statute of limitation in a bad faith claim starts to accrue, significantly vary across jurisdictions. However, the window on a contract claim tends to be longer than that of a tort claim.

Common Law vs. Statutory Bad Faith Claims
When pursuing a bad faith claim, it is also important to keep in mind any state laws that may be relevant. Bad faith claims can broadly be categorized as either: (1) common law bad faith claims; or (2) statutory bad faith claims. The first category stems from case law, while the second is based on laws enacted by state legislatures that deal with insurer bad faith. For example, many states have passed laws based on the National Association of Insurance Commissioners’ “Unfair Claims Practices Settlement Act.” While most states in the country have adopted versions of this act, including California, Connecticut, and Florida, some, like Mississippi, have not.

In states that allow for a private right of action based on a statute, the laws may specify a limitations period. For example, in Connecticut, while a common law breach of contract bad faith claim must be brought within six years, and claims based on the state’s Unfair Trade Practices Act must be brought within three.

Contractual Modification of a Limitations Period
Statutes of limitations for bad faith claims can also be context-dependent. Many courts across the country will allow for contract modification of a limitations period, but typically for purposes of shortening the permitted time period for bringing a claim. Some courts have allowed for a contractual lengthening of a statute of limitations. For example, a court in California has held that the three-year statute of limitations for tortious bad faith specified in a health insurance policy trumped the state’s two-year period prescribed by the California statute.1

Due Diligence for Statutes of Limitations
Bad faith litigation and applicable statutes of limitations are more complex and require more attention than other claims since they are dependent on the nature of the cause of action asserted. Because a bad faith claim may be brought either as a tort or as a breach of contract claim, and because state statutes may apply to give a right of action, policyholders must be mindful of the different deadlines and requirements that may be relevant to each type of claim. Any contractual modification of a statute of limitations may also be relevant. Thus, it is imperative, that policyholders work with an experienced attorney who can advise them on their jurisdiction’s unique rules if they have faced a bad faith handling of their claim.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Statute of Limitations and Bad Faith Claims: Factors to Consider

Anastasiya Collins | Saxe Doernberger & Vita

How much time do our clients have to bring a bad faith action against an insurer? Although we are not frequently asked this question, it is one that we constantly analyze before asserting a bad faith claim.

To answer this question, we look to the statute of limitations, which is a law passed by a state legislative body that sets the maximum amount of time for a party to bring a claim based upon a particular cause of action. For policyholders, knowing which statute of limitations applies to their bad faith claim is critical because it indicates whether it is possible to initiate legal proceedings. In addition, it determines the amount in damages available in case of a successful resolution.

Statute of Limitations in Breach of Contract vs. Tort Claims
One key determinant of a statute of limitations for bad faith is whether the claim is brought as a tort or a breach of contract action. The consequence of framing bad faith as a tort is that a policyholder is not just limited to contract damages. The policyholder can also receive recourse for emotional distress, pain, suffering, punitive damages, attorney’s fees, and other damages that the court may consider appropriate. Unfortunately, however, not every jurisdiction allows plaintiffs to bring bad faith actions as tort claims. While, for example, courts in California, Colorado, and Connecticut allow bad faith claims sounding in tort, courts in jurisdictions such as Tennessee do not.

This background information is very important to keep in mind as different statutes of limitations may apply to common law bad faith claims sounding in tort as opposed to those sounding in contract. For example, if bad faith is brought as a breach of contract claim in California, plaintiffs have four years from the date they were denied in bad faith to bring action against the insurer. If, however, bad faith is brought as a tort claim, that opening narrows to two years. The length of these time periods and the moment when the statute of limitation in a bad faith claim starts to accrue, significantly vary across jurisdictions. However, the window on a contract claim tends to be longer than that of a tort claim.

Common Law vs. Statutory Bad Faith Claims
When pursuing a bad faith claim, it is also important to keep in mind any state laws that may be relevant. Bad faith claims can broadly be categorized as either: (1) common law bad faith claims; or (2) statutory bad faith claims. The first category stems from case law, while the second is based on laws enacted by state legislatures that deal with insurer bad faith. For example, many states have passed laws based on the National Association of Insurance Commissioners’ “Unfair Claims Practices Settlement Act.” While most states in the country have adopted versions of this act, including California, Connecticut, and Florida, some, like Mississippi, have not.

In states that allow for a private right of action based on a statute, the laws may specify a limitations period. For example, in Connecticut, while a common law breach of contract bad faith claim must be brought within six years, and claims based on the state’s Unfair Trade Practices Act must be brought within three.

Contractual Modification of a Limitations Period
Statutes of limitations for bad faith claims can also be context-dependent. Many courts across the country will allow for contract modification of a limitations period, but typically for purposes of shortening the permitted time period for bringing a claim. Some courts have allowed for a contractual lengthening of a statute of limitations. For example, a court in California has held that the three-year statute of limitations for tortious bad faith specified in a health insurance policy trumped the state’s two-year period prescribed by the California statute.1

Due Diligence for Statutes of Limitations
Bad faith litigation and applicable statutes of limitations are more complex and require more attention than other claims since they are dependent on the nature of the cause of action asserted. Because a bad faith claim may be brought either as a tort or as a breach of contract claim, and because state statutes may apply to give a right of action, policyholders must be mindful of the different deadlines and requirements that may be relevant to each type of claim. Any contractual modification of a statute of limitations may also be relevant. Thus, it is imperative, that policyholders work with an experienced attorney who can advise them on their jurisdiction’s unique rules if they have faced a bad faith handling of their claim.

__________________________
1Blue Shield of California Life & Health Ins. Co. v. Superior Court, 120 Cal. Rptr. 3d 727, 729 (Cal. Ct. App. 2011).

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Arizona Appellate Court to Consider Standard for Aiding and Abetting Bad Faith Claims

Patrick Gorman | Jones, Skelton & Hochuli

Iglesia v. Brotherhood
Arizona Court of Appeals
April 12, 2022

In cases alleging bad faith against an insurance carriers, policyholders will often sue employee adjusters or contractors (independent adjusters, engineers, experts) of the insurance carrier to keep the case out of federal court. In a legal sense, policyholders sue the employee adjusters or contractors to defeat “diversity jurisdiction” necessary for the federal court to hear the case. The most common legal claim alleged against the employee adjuster or contractor is “aiding and abetting” the breach of the duty of good faith and fair dealing. In Iglesia v. Brotherhood[1], the Arizona Court of Appeals will address the standard to state a claim against the employee adjuster or contractor for aiding and abetting the breach of the duty of good faith and fair dealing.

Iglesia arises out of a hail loss at a church in Phoenix, Arizona. After the loss, the insurer retained an engineering firm to evaluate the damages. After the insurer denied the claim, Iglesia filed suit against the insurer for breach of contract and breach of the duty of good faith and fair dealing, and against the engineering firm for aiding and abetting the breach of the duty of good faith and fair dealing. The trial court granted the engineering firm’s Motion to Dismiss, finding that Iglesias failed to state a claim upon which relief could be granted. The church appealed.

On appeal, the engineering firm is not challenging the state of the law for aiding in abetting in Arizona, which was pronounced in the case Federico v. Maric[2]. According to Federico, aiding and abetting tortious conduct requires three elements: (1) the primary tortfeasor must commit a tort that causes injury to the plaintiff; (2) the defendant must know that the primary tortfeasor’s conduct constitutes a breach of duty; and (3) the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach. Rather, in Iglesia, the Court of Appeals will address what is necessary under Arizona’s pleading rules to state a claim for aiding and abetting. In other words, what a plaintiff must allege in the complaint to defeat a motion to dismiss on an aiding and abetting claim.

Iglesia could prove to be an important case for insurance carriers, who typically prefer to litigate coverage and bad faith claims in federal court. If an employee adjuster or contractor is named in the suit, insurers often file motions to dismiss to remove that particular defendant, and if granted, remove the case to federal court. Iglesia will give both policyholders and insurance carriers better guidance on what claims can be dismissed, and consequently, what cases can be removed to federal court.

The Court of Appeals heard oral argument on April 12, 2022. (Watch oral argument here.) A decision is expected in the next several months.


[1] 1 CA-CV 20-0358
[2] 224 Ariz. 34, 226 P.3d 403 (App. 2010)

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

An Inadequate Investigation Exposes Arizona Insurers to Bad Faith Only If the Insured Proves Additional Investigation Would Have Favored the Insured

Nathan Meyer | Jaburg Wilk

Plaintiffs often allege an insurer breached the duty of good faith and fair dealing by conducting an unreasonable and/or an inadequate investigation. But, Arizona courts have held for over 30 years that an insurer’s unreasonable investigation can be the basis of bad faith liability only if a reasonable investigation would have disclosed relevant facts. So, consider this post a refresher.

The Takeaway

In Arizona, a bad faith claim based on an alleged inadequate and/or unreasonable investigation fails unless the plaintiff meets its burden of proving additional investigation would have revealed facts favorable to the insured.

The Holdings

  • In Aetna Cas. & Sur. Co. v. Superior Ct. In & For Cty. of Maricopa, 161 Ariz. 437, 440, 778 P.2d 1333, 1336 (App. 1989), the Arizona Court of Appeals held, “An insurance company’s failure to adequately investigate only becomes material when a further investigation would have disclosed relevant facts.” “The plaintiff here has not advised this court, specifically or otherwise, concerning what additional pertinent facts would have been determined by any further investigation. Therefore [plaintiff] has failed to establish that the [insurer’s] pre-denial investigation could amount to bad faith.”
  • In Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 243, 256 P.3d 635, 640 (App. 2011), the Arizona Court of Appeals cited Aetna and “rejected the argument that the insurer breached [the duty of good faith and fair dealing] by failing to investigate the claim because the insured failed to cite any material fact the insurer would have discovered if it had investigated.”
  • In Young v. Allstate Ins. Co., 296 F. Supp. 2d 1111, 1124 n.23, (D. Ariz. 2003), the Arizona District Court cited Aetna, but refused to grant an insurer summary judgment because the insureds “offered evidence that a reasonable investigation, evaluation, and/or processing of [the insured’s] claim would have uncovered certain medical bills and lost earnings not included in [the insurer’s] final voluntary offer.”
  • In Clark v. Indem. Ins. Co. of N. Am., 726 F. App’x 557, 558 (9th Cir. 2018) (Arizona law), the Ninth Circuit cited Aetna and upheld the Arizona District Court’s dismissal of the portion of a bad faith claim based on unreasonable investigation because the insured did not explain “how examination of his medical records, rather than a summary of them, might have revealed facts supporting coverage for his neck injury…”

See also Martinez v. One Beacon Am. Ins. Co., 2020 WL 7016053, *13 (D. Ariz. Mar. 23, 2020); Carlson v. Indep. Ord. of the Foresters, 2017 WL 957283, *7 (D. Ariz. Mar. 13, 2017); Webb v. Farm Bureau Prop. & Cas. Ins. Co., 2017 WL 6328482, *6 (Ariz.App. Dec. 12, 2017); White Mountain Communities Hosp. Inc. v. Hartford Cas. Ins. Co., 2015 WL 1755372, *5 (D. Ariz. Apr. 17, 2015); Henrickson v. Am. Fam. Ins. Grp., 2008 WL 11446832, at *6 (D. Ariz. Mar. 21, 2008).

The Rationale

Although the above cases are surprisingly silent on the rationale of this rule, the rationale is causation. Both first party and third party bad faith must cause damages. See RAJI (Civil) 7th at Bad Faith 4 (First-Party) Causation (2013) (“Before you can find [insurer] liable on the bad faith claim, you must find that [the insurer’s] breach of the duty of good faith and fair dealing was a cause of [plaintiff’s] damages.”); Id. at Bad Faith 11 (Third-Party) Causation (Insured-Plaintiff) (same).

An analogy makes the rationale clear. A motorist who breaches the duty to drive reasonably by running a stop sign is not liable for negligence unless the breach caused damages, i.e. unless the motorist collided with another vehicle while running the stop sign. Likewise, an insurer who breaches the duty of good faith and fair dealing by conducting an inadequate and/or unreasonable investigation is not liable for bad faith unless the breach caused damages, i.e. unless the insurer failed to uncover facts favorable to the insured because of the unreasonable investigation.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.