The United States District Court for the Southern District of California, applying California law, has held that a professional liability insurer acted in bad faith by unreasonably maintaining its position that its policy did not afford coverage for claims brought against its insured. Houston Cas. Co. v. Cibus US LLC, 2023 WL 5432510 (S.D. Cal., Aug. 23, 2023).
In June 2018, the insured seed grower started to receive complaints from farmers regarding the alleged “non-performance” of the insured’s canola seeds. The company’s professional liability insurer agreed to defend the insured under a reservation of rights, and it ultimately agreed to pay its $2 million limit to settle the claims, while reserving the right to dispute coverage and seek recoupment. The insurer’s coverage letter set forth several grounds for its decision to reserve rights, including the applicability of the policy’s prior knowledge provision, retroactive date provision, breach of warranty exclusion, and property damage exclusion that carried a $100,000 sublimit. After paying claims up to the policy limit, the insurer brought an action for declaratory relief and recoupment.
After a week-long bench trial to resolve the coverage dispute, the court determined that none of the coverage limitations applied, and thus the insurer had a duty to defend and indemnify the insured. Wiley’s summary of that opinion can be found here.
Following its ruling on the coverage issues, the court took up the company’s allegations against the insurer for breach of contract and bad faith. The company asserted that the insurer acted in bad faith by unreasonably maintaining its position that no coverage existed under the policy and by filing an action to recoup the $2 million in settlement payments.
In ruling for the insured, the court found that the insurer put its interests above those of its insured by intentionally construing coverage narrowly and exclusions broadly, “thereby rejecting its duty to do the opposite,” unreasonably interpreted the policy to preclude coverage in situations where coverage would reasonably be expected, unreasonably decided to file a declaratory judgment and recoupment action without requesting an objective coverage analysis from outside counsel, and “conducted a biased and one-sided investigation . . . by failing to consider the extensive evidence that supported coverage.” The court also highlighted the insurer’s failure to consider new evidence and reevaluate its coverage position in good faith.
Finally, while the court concluded that the insurer acted in bath faith and found that the company was entitled to damages in the form of Brandt fees (attorneys’ fees incurred in the coverage litigation), the court held that punitive damages were not appropriate because the company “failed to set forth clear and convincing evidence that [the insurer] acted with oppression, malice, or fraud,” as required for an award of punitive damages under California law.