Insurance Bad Faith Report, July 2022

Dykema’s nationally recognized insurance practice provides quarterly reports reviewing notable bad faith decisions issued by state and federal courts nationwide. These reports, along with complete copies of the decisions reviewed, are available online to access at any time.

Delaware Superior Court Finds No Coverage For Appraisal Actions, But Allows Claims For Bad Faith Related To Breach Of Fiduciary Duty Allegations To Go Forward

MPM Holdings Inc. v. Fed. Ins. Co., No. N20C-07-014 MMJ CCLD, 2022 Del. Super. LEXIS 102 (Del. Super. Ct. Mar. 17, 2022).

A merger involving MPM Holdings Inc. closed on May 15, 2019, which spurred a pre-closing 220 demand, three appraisal actions, and a stockholders’ class action.  The appraisal actions and the stockholders’ class action were consolidated and amended to include breach of fiduciary duty claims.  Federal provided directors and officers insurance.  Federal acknowledged coverage for the 220 demand and initially acknowledged coverage for the proposed class action, but it subsequently denied coverage on the basis that none of the individual defendants was an insured person under the policy.  Federal also denied coverage for the appraisal actions.  MPM filed suit, and Federal subsequently agreed to defend the class action subject to a reservation of rights.  The Delaware Superior Court first found that Federal’s coverage denial for the appraisal actions was proper because they did not allege a “wrongful act.”  However, the court was unable to determine coverage for the class action due to fact issues regarding application of the “Larger Settlement Rule.”  The court also found that questions of fact remained regarding the bad faith claim, as it was unclear if Federal’s initial denial of the class action was without “reasonable justification.” Read the decision.

Montana District Court Rejects Possibility Of Safe Harbor From Bad Faith Allegations

UMIA Ins., Inc. v. Arguelles, No. CV 20-177-BLG-TJC, 2022 U.S. Dist. LEXIS 48670 (D. Mont. Mar. 18, 2022).

A medical provider and its president sought coverage from UMIA Insurance, Inc. for several lawsuits alleging that the provider engaged in a pattern of improperly diagnosing rheumatoid arthritis and providing unnecessary treatments.  As a result of the litigation, the provider and its president also were subpoenaed by the U.S. Department of Justice and the Department of Health and Human Services.  The provider and its president sought coverage from UMIA, which undertook defense of the malpractice actions subject to a reservation of rights but denied coverage for the various subpoenas.  UMIA then filed a declaratory judgment action.  The provider and its president counterclaimed, alleging, among other things, breach of contract (including breach of the duty to settle) and breach of Montana’s Unfair Trade Practices Act.  UMIA argued that because it accepted the defense under a reservation of rights and filed a declaratory judgment action as instructed by the Montana Supreme Court, it was immune from any claim based on an alleged breach of the duty to settle.  The district court disagreed, noting that while the Montana Supreme Court has instructed insurers that the “prudent” course of action is to file a declaratory judgment action in such circumstances, there has been no indication “that the Montana Court intended to provide insurers a safe harbor, and leave insureds without recourse for an insurer’s breach of other duties under an insurance contract.”  Regarding the unfair trade practices claim, the district court was unable to determine the “reasonableness” of the insurer’s decisions based on the record. Read the decision.

Eleventh Circuit Holds That A Consent Judgment Entered Following A Settlement Agremeent Qualifies As An “Excess Judgment” For Bad Faith Purposes Under Florida Law

McNamara v. Gov’t Emps. Ins. Co., 30 F.4th 1055 (11th Cir. Apr. 5, 2022).

The insured vehicle owner and tortfeasor driver sued the insurer for bad faith failure to settle within policy limits following a settlement agreement and consent judgments entered in the underlying action.  After removing the case, the insurer moved for summary judgment, and the district court granted the motion, relying on Cawthorn v. Auto-Owners Insurance Co., 791 F. App’x 60 (11th Cir. 2019), which held that only a judgment that follows a trial and results from a verdict qualifies as an “excess judgment” for bad faith purposes under Florida law.  Following Cawthorn, the district court here held that the consent judgments were not qualifying “excess judgments,” and that the insureds could not therefore prove causation in their bad faith action.  The insureds appealed, and the Eleventh Circuit reversed.  The Eleventh Circuit held that whether the consent judgments resulted from stipulated settlements instead of verdicts was immaterial, and that because of the excess judgments entered against the insureds, they could prove causation in their bad faith case.  In declining to follow Cawthorn, the Eleventh Circuit observed that the case is an unpublished decision, unpersuasive, and provides an incorrect analysis of Florida bad faith law. Read the decision.

District Court Compels Arbitration Of Statutory Bad Faith Claims Under Colorado Law

San Juan Constr., Inc. v. W.R. Berkley Syndicate Mgmt. Ltd., No. 21-cv-03317-CMA-SKC, 2022 U.S. Dist. LEXIS 83600 (D. Colo. May 9, 2022).

After suffering losses on a construction project at a U.S. Army base in the Marshall Islands, the insured sued a syndicate of insurers for breach of contract, statutory bad faith, violations of Colorado insurance statutes, and declaratory judgment.  The insurers moved to compel arbitration under the policy’s arbitration provision.  Applying Colorado law pursuant to the policy’s choice-of-law provision, the district court found the arbitration provision to be unambiguous and mandatory.  In granting the insurers’ motion, the court rejected the insured’s arguments that its statutory bad faith claims “could be severely limited if arbitrated,” that it “may be unable to recover its attorneys’ fees,” and that it may not be able to “fully prosecute its bad faith claims due to discovery limits.”  The court found none of these arguments to constitute grounds to undermine the policy’s valid arbitration agreement. Read the decision.

Eleventh Circuit Finds Insureds’ Contingency Fee Payment To Their Attorneys To Constitute Damages Under Florida’s Bad Faith Statute

Levesque v. Gov’t Emps. Ins. Co., No. 21-12257, 2022 U.S. App. LEXIS 12131 (11th Cir. May 5, 2022).

After the insurer confessed judgment for its policy limit to settle a coverage action, the insureds brought another suit alleging bad faith.  A jury found that the insurer handled the underlying claim in bad faith and awarded money damages, which the district court reduced to zero due to collateral source setoffs.  On appeal for the second time, the Eleventh Circuit found that because the insureds were obligated to pay their attorneys a contingency fee for successfully obtaining the confessed judgment, the insureds could recover that fee as “damages” under Fla. Stat. §§ 627.727(10), 624.155(8) as a foreseeable result of the insurer’s bad faith.  However, the court also held that the insureds could not recover as damages any amounts under an alternative fee recovery clause in the insureds’ contract with their attorneys, observing that the insureds could not make their attorneys whole for time and expenses above the contingency amount that the attorneys agreed the insureds would pay them. Read the decision.

Applying the “Fairly Debatable” Bad Faith Standard, Iowa District Court Grants Insurer Summary Judgment Where Insurer Had Only One Reasonable Basis For Denying Coverage

Lemon v. State Farm Fire & Cas. Co., No. C20-3018-LTS, 2022 U.S. Dist. LEXIS 115142 (N.D. Iowa June 28, 2022).

After the insurer denied the insureds’ first-party property claim, they sued the insurer alleging breach of contract and bad faith failure to pay benefits.  The insurer moved for summary judgment, arguing that it had a reasonable basis to deny the insureds’ claim on six grounds.  In rejecting the insured’s contention that those grounds were insufficient to “tip the balance” in favor of the insurer’s conduct being fairly debatable, the district court noted that, under Iowa law, the burden is on the insured to demonstrate that “no single basis for a denial existed.”  Because the court found that the insurer had met its burden of showing that reasonable minds could conclude that the insureds were not entitled to coverage, it held that the insurance claim was “fairly debatable” and accordingly dismissed the insureds’ bad faith claim. Read the decision.