Bad Faith Archives - Page 12 of 14

What are the Available Remedies Against an Insurance Company That Has Acted in Bad Faith?

This article will be the second in a series of articles by McKennon Law Group PC addressing and answering basic questions concerning insurance law. This one addresses: What are the available remedies against an insurance company that has acted unreasonably in handling an insurance claim?

The most common causes of action against insurers in the non-ERISA context are breach of contract and bad faith.

The breach of contract claim allows an insured to recover policy benefits owed under the insurance policy plus applicable interest from the date the benefits were due (or at the rate of 10% on delayed disability payments in California). The benefits due will depend on the type of policy at issue. They may be a specific amount (e.g., death benefits) or may depend upon a proof of loss (e.g., value of property damaged or destroyed).

The bad faith (aka breach of the implied covenant of good faith and fair dealing) claim potentially allows an insured/policyholder to recover future damages owed under the policy (in disability cases), attorneys’ fees, consequential damages (economic damages caused by the bad faith conduct, such as medical bills as a result of emotional distress, interest paid on borrowed funds, loss on investment where there was a forced sale caused by insurer’s denial, lost investment opportunities because personal funds had to be used to pay expenses), emotional distress and punitive damages.

There are three primary categories of damages recoverable in these types of actions:

Contract Damages – In first-party cases, the measure of contract damages is the benefits due under the policy. In third-party cases, the measure is the amount expended or liability incurred by the insured up to the policy limits. Consequential damages are also recoverable where appropriate, and are defined as those damages the parties should have foreseen as likely to result from a breach when they entered into the contract. Thus, an insured may recover damages that were within the parties’ reasonable expectation at the time of contracting.
Tortious (Extracontractual) Compensatory Damages – In bad faith actions, an insured may recover extracontractual compensatory damages based on an insurer’s tortious conduct. This includes all damages caused by the insurer’s tortious conduct, including both economic loss and non-economic harm (e.g., emotional distress). This will often include attorney’s fees reasonably incurred to compel payment of benefits due under an insurance policy (called Brandt fees).
Punitive Damages – In an action against an insurer where, in addition to bad faith or other tortious conduct, there is clear and convincing evidence of oppression, fraud or malice on the part of the insurer, the insured may recover punitive damages. Punitive damages will be awarded to punish an insurer for tortious conduct giving rise to an action not based on the terms of the insurance contract (e.g., fraud).

In addition to breach of contract and bad faith, other claims available to insureds are fraudulent and negligent misrepresentation, intentional and negligent infliction of emotional distress, invasion of privacy, and intentional interference with economic advantage. Each of these causes of action may allow for recovery of alternative and additional damages, including punitive damages.

For additional information on this and other insurance matters you can visit the FAQ section of our website: www.mslawllp.com.

If you need to consult with an attorney about a possible insurance bad faith or ERISA matter, please contact our office.

What is Insurance Bad Faith?

This article will be the first in a series of articles addressing and answering basic questions concerning insurance law. “Bad faith” will be the first concept addressed.

When an insurance company denies a claim, that denial decision might not only be incorrect under the terms of the insurance policy, but also might be in “bad faith.” As a matter of law, every insurance contract contains a covenant of good faith and fair dealing. If this covenant is violated, the insurance company is said to have acted in “bad faith.” A tortious breach of this implied covenant involves something beyond breach of the specific contractual duties or mistaken judgment. To establish a bad faith claim in first party cases (such as those involving life insurance, health insurance, disability insurance, property and casualty insurance, auto liability insurance, and homeowner’s insurance), it must be shown that an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause.

In general, policies involving health insurance, life insurance, or disability insurance that are paid for and provided by an employer are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which precludes recovery for insurance bad faith.

When an insurance company acts in bad faith (that is, when an insurance company violates the covenant of good faith and fair dealing), the policyholder or insured can sue the insurance company for both breach of contract and the tort claim of bad faith. In addition to contract damages, damages available under a tort claim for bad faith can include foreseeable financial losses, emotional distress, and attorney’s fees incurred by the insured to force the insurance company to pay the policy benefits (Brandt fees). If the insurance company acted with malice, oppression or fraud, the insured may also recover punitive damages. Punitive damages are meant to punish the insurer, and are not available in a breach of contract lawsuit.

When determining whether or not an insurer acted in bad faith, a court will use the “reasonable” standard. This means the court will evaluate the actions of the insurers and determine if they were reasonable under the circumstances. If the insurer did not act reasonably, then the insurer has acted in bad faith in dealing with the insured.

Some examples of bad faith are:

interpreting the language of the policy in an unreasonable manner;
unreasonably failing to reimburse the insured for the entire amount of the loss;
unreasonably failing to settle the lawsuit;
unreasonable refusal to defend a lawsuit;
unreasonable delay in paying benefits; and
unreasonable delay in investigating the claim or improper valuation of the claim.

If an insurer does not act reasonably in complying with the terms of the insurance policy, then they have breached the covenant of good faith and fair dealing (a.k.a. bad faith) and will be held accountable by the court. For additional information on this and other insurance matters you can visit the FAQ section of our website: www.mslawllp.com.

If you need to consult with an attorney about a possible insurance bad faith or ERISA matter, please contact our office.

California Homeowner’s Insurer Not Required To Pay Extended Repair Limits Until Homeowner Shows Proof of Repair

Under standard homeowner insurance policies the insurer is typically required to pay only the “actual cash value” of a loss—i.e., the fair (depreciated) market value—unless and until the insured actually incurs repair costs in excess of the actual cash value to repair the home. In Kelly Minich, et al. v. Allstate Insurance Company, __ Cal.App.4^th __, 2011 Cal.App. LEXIS 270 (March 11, 2011) (Minich), a California appellate court recently rejected a homeowner’s creative interpretation of its Allstate homeowner’s insurance policy to get extended repair or replacement cost policy limits without regard to actually repairing or replacing the fire-damaged home.

In Minich Allstate issues a homeowner’s insurance policy to Kelly and Debbie Minich. A fire destroys the Minichs’ home. The policy requires Allstate to pay the Minichs the “actual cash value” of their home up to the $129,840 policy limit. An extended policy limits endorsement requires Allstate to pay up to 150% of the policy limit in excess of the actual cash value if the Minichs actually repair or replace the home.

Allstate pays the $129,840 policy limit, less the $250 deductible, within 2 weeks of the fire. Allstate refuses to pay the $64,920 extended limit until the Minichs demonstrate to Allstate 15 months after the fire that they in fact are rebuilding the home.

The Minichs sue Allstate for breach of contract and bad faith, claiming that Allstate should have paid them the $64,920 immediately after the fire. The Minichs contend that Insurance Code §2051 and §2051.5 2 require that an insurer pay the “policy limit” of a homeowner’s policy whenever the house is destroyed, irrespective of whether the insured rebuilds the house, and that the “policy limit” includes the $64,920 provided for in the endorsement.

Allstate files a motion for summary judgment and argues that it timely paid the Minichs the full “policy limit” under §2051(b)(1), and that the additional $64,920 represents an amount above the policy limit. Allstate maintains that it is not required to pay the additional $64,920 unless and until the Minichs rebuild their home.

The Minichs oppose Allstate’s motion and argue that §2051 and §2051.5 require that an insurer pay the “policy limit or the fair market value of the structure, whichever is less” (§2051(b)(1)), without regard to whether the insured repairs the structure. The Minichs maintain that the “policy limit” of their policy includes the $64,920 provided for in the extended limits endorsement.

The trial court grants Allstate’s motion, and enters judgment in its favor. The Minichs appeal.

The appellate court concludes that the Minichs’ interpretation of the policy is flawed, and that neither the statutes nor the policy require Allstate to pay the extended limits under the endorsement without regard to repair or replacement. The appellate court interprets the endorsement to refer to an amount in excess of the policy limit, and not to extend or increase the policy limit.

The appellate court also notes that public policy supports its interpretation; otherwise the homeowner would be “bettered” by receiving replacement cost benefits above the actual cash value of the home without ever having to actually replace the home—a benefit not bargained for in the insurance contract. And a benefit that the California legislature could easily have mandated in the statutes, if it had so intended.

Since the appellate court determined that Allstate timely paid the Minichs all benefits owed under the policy, it also affirmed summary judgment and dismissal of the Minichs’ bad faith claims. The Minich decision reaffirms that a homeowner must actually start repairs of its damaged home in order to collect policy benefits under an extended repair or replacement cost limits endorsement over and above the actual cash value of the loss.

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.

Court of Appeals Rejects Blue Shield’s Attempt to Impose a Two-Year Statute of Limitations for Bad Faith

Myrna Kawakita was set to undergo gastric bypass surgery, and her health insurer, Blue Shield of California, initially authorized the procedure. However, rather than paying for the procedure, Blue Shield rescinded Kawakita’s health insurance policy, asserting that her application contained misrepresentations about her height and weight.

Kawakita purchased her health insurance policy through Blue Shield’s alleged agent, Steven Stendal, and claimed that Stendal was responsible for any misstatements on her application. Blue Shield rescinded Kawakita’s policy in August 2006, and she filed her lawsuit in July 2009, asserting causes of action for breach of contract, tortious breach on the implied covenant of good faith and fair dealing and declaratory relief.

Blue Shield filed a motion for summary adjudication, arguing that the bad faith claim was barred by the two-year statute of limitations imposed by California Code of Civil Procedure Section 339 and Love v. Fire Insurance Exchange, 221 Cal. App. 3d 1136, 1144 n.4 (1990). The trial court rejected Blue Shield’s motion, and with Blue Shield of California Life & Health Insurance Company v. Superior Court (Kawakita), No. B225632, Blue Shield sought a peremptory writ of mandate directing the trial court to reverse its order. While the California Court of Appeal did not agree with the trial court’s reasoning, it did agree with the result and allowed Kawakita to proceed with her bad faith cause of action.

With its motion, Blue Shield anticipated that Kawakita might rely on California Insurance Code Section 10350.11 to contend that the statute of limitations for a bad faith claim was actually three years. Relying primarily on federal court decisions, Blue Shield asserted that Section 10350.11 relates to contractual limitations tied to filing written proofs of loss and is unrelated to Code of Civil Procedure Section 339. The Court of Appeal explained that even if it accepted Blue Shield’s interpretation of Insurance Code Section 10350.11, the argument was irrelevant because, as permitted by Insurance Code Section 10350, Blue Shield’s policy actually contained language extending Kawakita’s deadline to initiate a lawsuit until three years after the claim for benefits was first denied. Specifically, under the headline, “Commencement of Legal Action,” the policy issued to Kawakita provided that “Any suit or action to recover benefits under this Plan … or any other matter arising out of this Plan … must be commenced no later than three years after the date the coverage for benefits in question was first denied.”

Based on this provision, with its broad application to “any other matter arising out of the Plan,” the Court of Appeal ruled that Kawakita’s bad faith claim needed to be filed no later than three years after the coverage was first denied; which it was. With this ruling, Kawakita’s attempt to impose bad faith liability of Blue Shield’s decision to rescind her coverage case can proceed.

New Ninth Circuit Decision Says California Law Requires Strict Compliance with Insurance Policy Warranty

Noting a paucity of recent California Supreme Court precedent on whether strict or merely substantial compliance with an insurance warranty is required to invoke coverage, the Ninth Circuit Court of Appeals recently held that California law requires strict compliance with a pilot warranty in an aviation insurance policy as a condition precedent to coverage. Trishan Air, Inc. v. Federal Insurance Company, __ F.3d __ 2011 WL 540532 (9th Cir. 2011). The Ninth Circuit affirmed the Central District of California’s summary judgment dismissal of the insured’s breach of contract and bad faith claims.

Trishan Air, Inc. (Trishan) owned a fleet of corporate jets. It purchased an aviation insurance policy from Federal Insurance Company (Federal). The policy included a pilot warranty endorsement that required a two-pilot crew for each aircraft and that

such pilot(s) must have successfully completed a ground and flight recurrent/initial training course for the make and model operated within the past 18 months. Any such course must incorporate the use of a motion-based simulator specifically designed for the insured make and model/make and model series.

In June 2007 Trishan’s 13-passenger Dassault Falcon 900 ran off the main runway at the Santa Barbara Municipal Airport in an aborted high-speed takeoff. The impact snapped the front landing gear, and the Falcon 900 skidded to rest in the dirt 600 feet away. Thankfully, no fatalities. At the time of the accident the co-pilot had never attended any formal training course or flight simulator course for the particular jet involved.

Trishan submitted a claim for the loss to Federal. Federal denied coverage based on a breach of the pilot warranty. Trishan filed suit for breach of contract, breach of the duty of good faith and fair dealing, reformation and declaratory judgment. Federal moved for summary judgment. Trishan introduced fact and expert evidence that the co-pilot substantially complied with the pilot warranty, and that substantial compliance satisfied the warranty. Causation was not an issue because Trishan and Federal stipulated that Federal was not required to demonstrate a causal connection between the accident and any breach of the pilot warranty.

The district court granted Federal’s motion for summary judgment on the grounds that California law requires strict compliance with the pilot warranty. Trishan appealed.

Citing turn-of-the-century California Supreme Court precedent, and more recent appellate precedent, the Ninth Circuit rejected Trishan’s arguments. It concluded that the pilot warranty was in the nature of a condition precedent to coverage, requiring strict compliance, rather than a mere condition of coverage as to which substantial compliance might suffice.

Trishan’s argument is premised on the warranty being a mere condition of the insurance policy, thus requiring only substantial compliance. This argument ignores the dichotomy between conditions relating to basic coverage, such as notice provisions, and conditions, like the pilot warranty, that are ‘an element of the fundamental risk insured.’ [citation]. ‘There are well-established differences between insuring clauses, exclusions, and conditions that should not be amalgamated into one binary question: coverage yes or no under an ‘if … then’ analysis. [citation].

Contrary to such variations in insurance provisions, Trishan seeks universal application of the substantial compliance doctrine untethered from the type of warranty at issue. However, strict compliance with pilot warranties serves as a necessary corollary of aviation insurance policies. ‘Federal courts uniformly enforce [pilot warranties] … and for good reason. Pilot qualifications and experience are obviously factors bearing directly on the risk the insurer is underwriting.’ [citation].

The pilot warranty is like a condition precedent because it expressly establishes the events or conditions that must occur before coverage can take effect. The Ninth Circuit noted that the practical effect of adopting Trishan’s substantial compliance standard would be to substitute the underwriter’s clear underwriting parameters with the insured’s subjective assessment. It would introduce too much uncertainty into ascertaining the risk that the underwriter agreed to assume, and would essentially re-write the insurance policy—which California courts are prohibited from doing.

The Ninth Circuit went further. It noted that even if substantial compliance would suffice, the co-pilot’s lack of formal coursework and simulator training for the Falcon 900 did not even substantially comply with the pilot warranty.

Trishan elides the fact that it did not comply with the pilot warranty’s training requirements for co-pilots in any fashion. Instead, Trishan asserts that the pilot’s alternative training served as a substitute for the simulator training. However, a complete failure to comply is not analogous to minor deficiencies. [citation]. Thus, Trishan’s complete failure to comply with the pilot warranty precludes coverage even under the substantial compliance doctrine. [citation].

Finally, noting the long established rule in California that there is no bad faith where there is no coverage, the Ninth Circuit also affirmed the district court’s dismissal of Trishan’s bad faith claim. The Ninth Circuit added that since Federal’s denial of coverage based on Trishan’s failure to strictly comply with the pilot warranty was reasonable, the “genuine dispute” doctrine also insulated Federal from any bad faith liability.

The take-away for insureds: review your insurance program carefully for warranty endorsements in your policies. Strict compliance may be required.