Insurance Bad Faith Report, April 2024

Connecticut District Court Holds Bad Faith Claim Subject To Suit Limitations Provision
Five Star Cars LLC v. Graphic Arts Mut. Ins. Co., No. 3:22-CV-00915-MPS, 2024 U.S. Dist. LEXIS 3435 (D. Conn. Jan. 8, 2024).

After a used car dealership suffered fire damage, its property insurer allegedly undervalued the loss. The insured brought suit alleging breach of contract, bad faith, and violations of the Connecticut Unfair Trade Practices Act and the Connecticut Unfair Insurance Practices Act. The insurer moved to dismiss, arguing that the policy required suit to be brought within two years. The insured countered that its bad faith claim was independent of the insurance policy and, therefore, not circumscribed by the two-year limitations provision. The district court rejected the insured’s argument based on Connecticut cases finding that bad faith claims are subject to policy limitations. The district court also rejected the insured’s public policy argument, noting that public policy concerns applied only to tortfeasors, not insurers. Read the decision.

Indiana Northern District Court Balances Low Pleading Standard For Bad Faith Claims With Partial Discovery Stay
Crane 1 Holdco, Inc. v. Cont’l Ins. Co., et al., No. 2:23-CV-205-PPS-JEM, 2024 U.S. Dist. LEXIS 7570 (N.D. Ind. Jan. 16, 2024).

The insured business serviced construction cranes and was sued for negligence after a crane accident. The business brought suit against its insurers, seeking indemnification. The first layer excess insurer moved to dismiss the bad faith claim based on the lack of allegations showing conscious wrongdoing, as required by Indiana law. Distinguishing the burden of proof for bad faith, the district court observed that bad faith need not be pleaded with particularity. While acknowledging that some of the relevant allegations in the complaint were borderline conclusory, the district court still found that bad faith was adequately pleaded. However, the district court also found that commencing bad faith discovery would be inefficient and granted the insurer’s motion to stay bad faith discovery. Read the decision.

Illinois Northern District Court Dismisses Bad Faith Counterclaim and Strikes Affirmative Defense
Phila. Indem. Ins. Co. v. Hometown Coop. Apartments, Inc., No. 1:23-cv-4977, 2024 U.S. Dist. LEXIS 16023 (N.D. Ill. Jan. 30, 2024).

The insurer issued a commercial property policy covering 63 apartment buildings. When a hailstorm damaged some of the properties, the insured submitted a claim for loss totaling nearly $8.7 million. The insurer paid only $3 million, and the insured demanded the balance, leading the insurer to file a declaratory judgment action. The insured asserted bad faith as both an affirmative defense and counterclaim. The insurer moved to strike the affirmative defense and dismiss the counterclaim. In dismissing the counterclaim, the district court found that there was a bona fide dispute over coverage and that the insured’s unreasonable delay claim failed because the insurer timely filed the declaratory judgment action. Questioning whether bad faith could serve as an affirmative defense in the first instance, the district court struck the affirmative defense because it was based on the same alleged conduct as the dismissed counterclaim. Read the decision.

Washington District Court Finds Post-Reservation Coverage Denial Not Indicative Of Bad Faith
Evanston Ins. Co. v. NW Classic Builders, Ltd. Liab. Co., No. C22-1454RSM, 2024 U.S. Dist. LEXIS 18938 (W.D. Wash. Feb. 2, 2024).

A construction worker was injured and subsequently filed suit against several parties. Evanston Insurance Company provided additional insured coverage for one of the defendants. Evanston initially defended under a reservation of rights while conducting its investigation and subsequently denied coverage. Another insurer of the defendant filed suit, seeking a declaration that Evanston provided primary coverage and had wrongfully denied, arguing that the provision of a defense followed by a denial was indicative of bad faith. The court rejected this argument, noting that it was proper and common for insurers to defend under a reservation of rights while investigating, and that Evanston had acted properly by doing so then correctly denying coverage. Read the decision.

Louisiana District Court Dismisses Bad Faith Claim Not Expressly Assigned
Witten Roofing LLC v. Liberty Mut. Ins., No. 3:23-CV-01438, 2024 U.S. Dist. LEXIS 31687 (W.D. La. Feb. 23, 2024).

An insured’s roof was allegedly damaged by hail. The insured gave notice to his insurer and, on the same day, executed an assignment in favor of his roofing contractor. The assignment transferred “all rights, benefits, and causes of action” but did not specifically mention transfer of any bad faith claim. The district court found that such claim was not included in the assignment, as Louisiana requires the express transfer of extra-contractual claims. In any event, the assignment occurred before the existence of any potential bad faith claim because the assignment was executed the same day notice was provided to the insurer. Read the decision.

Indiana Northern District Court Upholds Historic Bad Faith Punitive Damage Award In Flooding Case
Ind. GRQ, LLC v. Am. Guarantee & Liab. Ins. Co., No. 3:21-CV-227 DRL, 2024 U.S. Dist. LEXIS 51281 (N.D. Ind. Mar. 22, 2024).

In the October 2023 issue of its Insurance Bad Faith Report, Dykema highlighted the historic jury award of $112 million against a number of insurers related to policies covering a factory in South Bend, Indiana. The award included $11.5 million for claimed electrical damages, $13.1 million for environmental damages, and significantly, $12.5 million from each insurer for bad faith. In a recent ruling, the district court denied all of the insurers’ post-verdict motions and upheld the jury award. In denying their motions, the district court detailed the “disturbing” conduct that led to the unusually large award, including “directing [the insured’s] consultant to work against the company’s interests on remediation” and “later hiring that very consultant who once worked for [the insured] on this same issue of remediation now to undermine the company’s efforts for additional remediation or coverage.” Notably, in contesting the bad faith award, defendant Interstate Fire & Casualty Company argued that there was no evidence that connected it with the insured’s consultant, and further argued that its policy excluded environmental claims, which were the specific claims the insured’s consultant worked on. But the district court found that Interstate’s arguments “misse[d] the point,” observing that it, like the other insurers, “acted in bad faith in furtively coopting [the consultant] to its advantage to protect the insurers (not the insured), leverage settlement, elude TSCA, and deny coverage, such that Interstate caused [the insured] bad faith damages.” Read the decision.

Insurer Appeals $29 Million Duty-To-Defend Case To North Carolina Court Of Appeals
Defendant-Appellant’s Brief, Ortez v. Penn Nat’l Sec. Ins. Co., No. 19-CvS-2391 (N.C. Ct. App.).

An insurer has appealed a $29 million ruling against it for failing to defend its insured’s employee. The claim arose from a fatal accident that occurred when two employees were driving the company truck and collided with a tractor trailer, killing one of the employees. In the wrongful death lawsuit that followed, a $9.5 million judgment was entered against the surviving employee. The insurer, whose policy contained a $1 million limit of liability, had refused to defend the employee. After judgment was entered, the surviving employee and the decedent’s estate sued the insurer. The district court granted the employee and decedent’s motion for judgment on the pleadings, finding that the insurer had breached its duty to defend, and imposed treble penalties on the insurer, resulting in the $29 million judgment. The insurer now asks the North Carolina Court of Appeals to reverse, arguing that the policy does not cover bodily injury to any fellow employee of the insured arising out of the employee’s employment. The insurer also argues that the district court erred by entering th $29 million judgment, contending that “[n]o North Carolina appellate court has held that an insurer waives all policy provisions and its policy limits when it breaches a defense obligation.” The North Carolina Court of Appeals will have to determine the consequences of breaching the duty to defend under North Carolina law. Read the brief.