New ED CA Decision is a Feast of First-Party and Third-Party Insurance Coverage and Bad Faith Principles

Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators.  Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011).  The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others.  In June 2008 some of the cattle die suddenly.  By September and October 2008 cattle begin dying at an alarming rate.  Gaylord suspects feed poisoning.  Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed.  There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners.

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008.  One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims.  Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed.  But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

Gaylord makes a first-party claim with Nationwide for the cattle loss on October 2, 2008.  Nationwide denies the first-party claim on October 3, 2008, and advises Gaylord that he has until May 21, 2009, to file a legal action under the one-year contractual limitations clause.  It isn’t clear how Nationwide comes up with the May 2009 deadline.  Nationwide continues to investigate the third-party claim, and denies it in April 2009.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care.  Gaylord tenders his defense to Nationwide in October 2009.  Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010.  Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims.  Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose.  Judge  Ishii articulates the standards in clean, non-legalese prose.  Cut and paste this.  Not that.

Insurance Contract Interpretation

Ditto.  Cut and paste this.  Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim.  The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim.  The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.”

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling.  Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim.  The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.”  Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous.  Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord.  But…

Gaylord says the agent told him that poisoned cattle were covered.  The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it.  The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy.  If Gaylord is believed, he wins.  If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages.  The district court point out, however, that “bad faith” implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a “genuine issue” or “genuine dispute” as to the “insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.” McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994).  In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, “Because [the insurer] investigated the insureds’ claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim.” Id. at 656.

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period.   The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable.  So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.

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