With the arrival of the new year, many are applying the mantra “out with the old, in with the new.” Although this may be motivational for personal resolutions, it does not generally apply in the context of law as last year’s law is often the basis for this year’s lawsuit. The best strategy to prevent bad faith litigation is to be aware of the current trends and decisions (see links). The following bad faith decisions showcase some of the best and the worst holdings for insurers in 2013. We will continue to monitor and report on any major developments in 2014.

Cedell v. Farmers Insurance Company of Washington, 176 Wn.2d 686, 295 P.3d 239 (Feb. 21, 2013): In first-party bad faith litigation, there is a presumption that there is no applicable attorney-client privilege.

The Washington Supreme Court weakened insurers’ ability to protect confidential communications with their attorneys in first-party claims where the insured has alleged bad faith. The court held that, in the context of a first-party claim for bad faith claim handling and processing, courts must apply a presumption that there is no applicable attorney-client privilege. An insurer can overcome the presumption by showing that its counsel was providing legal advice as to the insurer’s potential liability and not acting in the insurer’s “quasi-fiduciary” function. Upon this showing, the trial court conducts an in camera inspection of the documents applying the asserted privilege and any exception asserted by the insured.

The Cedell decision requires insurers vigilantly protect communications with coverage counsel and ensure that counsel’s work does not involve any of the quasi-fiduciary functions of handling, investigating, evaluating or processing a first-party insured’s claim.

Original Alert authored by Craig H. Bennion and Meredith E. Dishaw (March 15, 2013)

K2 Investment Group, LLC v. American Guar. & Liab. Ins. Co., 21 N.Y.3d 384, 993 N.E.2d 1249 (N.Y., June 11, 2013): If an insurer breaches its duty to defend, it may lose policy exclusions that preclude indemnity.

The New York Court of Appeals (New York’s highest state court) held in K2 Investment Group that an insurer that breached its duty to defend could not later rely on otherwise applicable exclusions to deny coverage for indemnification. The ruling potentially expands the indemnity obligation beyond the coverage afforded by the policy and, as the court suggests, makes a pre-denial declaratory judgment action an important strategic consideration.

The K2 Investment Group court did dismiss the bad faith claims before it, however, for lack of evidence that the insurer’s rejection of a within-policy-limits settlement offer demonstrated it had “engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.” By precluding the insurer from relying on its policy exclusions, the court’s judgment has an extracontractual effect without a finding of bad faith conduct. It remains to be seen how broadly New York courts will apply this new rule, which was formed without express consideration of longstanding precedent. The Court of Appeals granted the insurer’s motion for reargument, which has been heard and a decision is currently pending.

Original Alert authored by Melissa Brill, Alicia Curran, and Scott Galla (June 14, 2013)

D.R. Horton, Inc. – Denver v. Mountain States Mutual Casualty Co., 2013 U.S. Dist. Lexis 25145, 2013 WL 674032 (D. Colo. Feb. 25, 2013): Colorado courts continue to split on whether a defense obligation is a first-party benefit under Colorado law.

A liability insured seeking defense costs from its insurer may qualify as a “first-party claimant” for purposes of Colorado’s Unfair Claim Settlement Practices Act, potentially entitling the insured to recover not only the unpaid defense costs, but also the attorneys’ fees in prosecuting the recovery action and two times the unpaid defense costs as a penalty.

The court initially addressed whether an insured or additional named insured qualified as a first-party claimant vis-à-vis its liability insurer for purposes of C.R.S. §§ 10-3-1115 and 10-3-1116 with respect to unpaid defense costs. On its face, C.R.S. § 10-3-1116 does not address whether an insured under a “third-party” liability policy qualifies as a first-party claimant under the Unfair Claim Settlement Practices Act where the insured is seeking defense costs from its insurer. Colorado district court judges are split on the issue. One position interprets the statute using a traditional first-party vs. third-party dichotomy and holds that the statute does not apply to either the defense or indemnity obligations in a liability policy. The other position holds that the defense obligation is owed directly to the insured and, therefore, under the plain language of the statute, is a first-party claim.

Although the court in this case ultimately held that C.R.S. § 10-3-1116 applied to insureds seeking to recover defense costs under a liability policy, the law clearly remains unsettled in Colorado. Thus, insurers with Colorado insureds should be aware that the defense obligation may be viewed as a first-party benefit, entitling the insured to recover two times the unpaid (or late-paid) defense costs plus the costs of prosecuting the recovery action if those benefits are determined to have been “unreasonably delayed or denied.”

Original Alert authored by Christopher S. Clemenson and Nadia Bugaighis (March 19, 2013)

Willis v. Swain, 129 Haw. 478, 304 P.3d 619 (Hawaii, June 7, 2013): An insurer can be exposed to bad faith even if it did not issue a policy.

In Willis, the Hawaii Supreme Court expanded bad faith claims, at least in regard to Joint Underwriting Program (JUP) claims. The Willis court held that a cause of action for bad faith is rooted in the “special relationship between policyholders and insurers” and that issuance of a policy is not necessary to bring a bad faith cause of action. Based on an automobile accident victim’s statutory right to insurance, the court allowed the injured person to bring a cause of action for bad faith against the insurer responsible for coverage for the injured person’s damages, even though no actual policy had been issued to the individual.

In reaching its decision, the court ruled that an insurance policy is “not the sine qua non of a bad faith tort claim.” The court explained that “[t]he special relationship between the insurer and the insured and the conduct of the insurer toward the insured is what gives rise to the tort of bad faith, not solely the existence of a contract.” The court held that the Joint Underwriting Program creates a special relationship between the insurer and the program participants and is akin to an insurance policy. The Hawaii Supreme Court therefore concluded that “the underlying covenant of good faith and fair dealing applies, even in the absence of an actual contract.”

We will continue to monitor whether the Willis decision will influence any of the other states that have adopted similar joint underwriting programs and associations.

Original Alert authored by Brendan Winslow-Nason (June 24, 2013)

Alabama Gas Corporation v. Travelers Casualty and Surety Co., et al., Case No. 2:10-CV-01840-IPJ, 2013 U.S. Dist. LEXIS 88830, 2013 WL 3242743 (N.D. Ala., June 25, 2013): Where a legitimate dispute exists as to coverage liability under Alabama law at the time of the coverage decision, a tort action for bad faith refusal to pay the contractual claim does not exist.

In Alabama Gas Corp., the coverage issue was whether a potentially responsible party (PRP) notice from the Environmental Protection Agency (EPA) constituted a “suit” under the liability policy so as to constitute a claim to trigger the insurer’s coverage obligations. Even though 44 other states previously decided this particular coverage decision in favor of the policyholder (e.g., a PRP notice is a suit that triggers coverage), and the insurer here ultimately did not prevail on this issue of first impression under Alabama law (e.g., the Alabama Supreme Court, in answering this federal district court’s prior certified question on the issue, followed the majority position), the district court was clear – if there is a legitimate dispute as to coverage liability at the time of the coverage decision, under Alabama law, a tort action for bad faith cannot exist. “Defendants had an arguable basis for denying plaintiff’s claim, namely that they did not believe Alabama law required a duty to defend under an insurance contract upon an insured’s receipt of a PRP letter,” the court explained, adding that “[i]n fact, no such requirement for PRP letters appeared in Alabama law until after the initiation of this litigation and certification of that very question to the Alabama Supreme Court.” The decision is further indicative of a policyholder’s high burden of proof when asserting a tort claim of bad faith failure to pay under Alabama law.

Original Alert authored by Stacey S. Farrell (July 18, 2013)

Shannon v. New York Central Mutual Insurance Co., No. 13-CV-1432, 2013 U.S. Dist. LEXIS 165280, 2013 WL 6119204 (M.D. Pa. Nov. 20, 2013): “Bad Faith Set Up” may be a permissible affirmative defense.

The court in Shannon denied an insured’s motion to strike its insurer’s defense of “bad faith set-up,” asserted in response to a bad faith claim for the alleged failure to settle a claim within policy limits in an underlying automobile collision case. The insured argued that Pennsylvania law did not recognize the defense of “bad faith set-up,” which the insurer had defined as “a quick settlement demand, followed by a quick closing of the window before important information is provided so that any subsequent limits offers by the insurer are bemoaned as too late.” The district court disagreed, holding that despite no Pennsylvania case law recognizing the affirmative defense, the allegations “would, if proven, assist in establishing an ‘avoidance’ under the terms of Federal Rule of Civil Procedure 8(c).” The district court further noted that communications between the driver’s insurer and plaintiffs’ counsel would be required as part of the discovery investigation.

The holding of Shannon illustrates that although plaintiffs often use bad faith claims to create settlement leverage in the underlying lawsuit, subsequent litigation should include both sides of the story.

Original Alert authored by Deborah M. Minkoff & Abby J. Sher (December 16, 2013)

 

Topics:  American Guarantee & Liability Ins. Co., Attorney-Client Privilege, Bad Faith, Confidential Information, D.R. Horton, Duty to Defend, Farmers Insurance, Good Faith, Insureds, K2 Investment Group, Liability Insurance, Underwriting

Published In: Business Torts Updates, Civil Procedure Updates, General Business Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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