Insurance Bad Faith Report, April 2023

Dykema’s nationally recognized insurance practice is pleased to present its Insurance Bad Faith Report. All of the quarterly Reports, along with complete copies of the decisions reviewed, are available online to access at any time.

Texas District Court Notes Only Stowers Bad Faith Claim Applicable In Third-Party Context
 BPX Prod. Co. v. Certain Underwriters at Lloyd’s London Subscribing to CGL, No. 4:22-cv-01058, 2023 U.S. Dist. LEXIS 85 (S.D. Tex. Jan. 3, 2023).

BPX Production Company, an oil and gas producer, contracted with BJ Services, LLC to provide oilfield support.  While working for BPX, BJ Services allegedly caused damage that forced BPX to abandon an oil well.  BPX invoked the ADR provision in the parties’ contract, claiming $2.5 million in damages.  BJ Services sought coverage under its CGL and umbrella policies, issued by Certain Underwriters at Lloyd’s London.  After Underwriters denied coverage, BJ Services filed for bankruptcy and assigned its insurance claims to BPX, which brought suit against Underwriters.  In dismissing the coverage action, the Southern District of Texas first found that Underwriters had no duty to defend or indemnify because the ADR process did not meet the policy’s definition of a “suit” as required for coverage.  The court then addressed BPX’s breach of the duty of good faith and fair dealing claim, observing that under Texas law, such claim could arise in the third-party context only when faced with a Stowers policy limit demand, which had not occurred.  The court further found that the Texas Insurance Code Chapter 541 claims based on unfair or deceptive acts or practices were not assignable.  Read the decision.

Southern District Of West Virginia Applies Work-Product Doctrine To Reserve Information Contained Within Documents Created After Insured Filed Suit
Raines v. Westfield Ins. Co., No. 3:21-cv-00637, 2023 U.S. Dist. LEXIS 7638 (S.D. W. Va. Jan. 17, 2023).

In response to the insured’s discovery demands for claim reserve information, the insurer disclosed pre-suit reserve information but asserted the work-product doctrine with respect to reserve information contained within documents created after the insured filed suit.  The insured moved to compel the production of unredacted documents and requested in-camera review.  In denying the motion and declining further review, the court observed that while reserve information in bad faith cases may be appropriate in certain circumstances, the documents at issue were created after the insured filed suit such that the work-product protection applied on its face.  Read the decision.

Southern District Of California Dismisses Bad Faith Claim Despite Insurer’s Failure To Strictly Follow Its Internal Claims Handling Guidelines
Fed. Ins. Co. v. Tungsten Heavy Powder & Parts, Inc., No. 21-CV-1197 W (MDD), 2023 U.S. Dist. LEXIS 20857 (S.D. Cal. Feb. 7, 2023).

After a fire caused damage to the insured’s facility, the insurer advanced $1 million in costs while it investigated the claimed business income loss.  The insured later submitted false information and made various misrepresentations, which caused the insurer to deny coverage and file suit to void the policy.  The insured counterclaimed, alleging that the insurer had acted in bad faith by “failing to comply with its own General Adjuster and Property Special Investigations Unit Guidelines.”  Contending that there was a genuine dispute regarding coverage, the insurer moved for summary judgment on the bad faith claim.  The Southern District of California dismissed the bad faith claim, finding that there was a genuine dispute regarding coverage and no evidence to support bad faith.  In so holding, the court rejected the insured’s contention that the insurer’s failure to strictly follow its internal guidelines constituted bad faith.  Read the decision.

Eastern District Of Washington Refuses To Dismiss Statutory Bad Faith Claim Premised On Insurer’s Recoupment Suit
Am. Alt. Ins. Corp. v. Walla Walla Sch. Dist. No. 140, No. 4:22-CV-05031-SAB, 2023 U.S. Dist. LEXIS 29639 (E.D. Wash. Feb. 22, 2023).

An insurer filed suit seeking to rescind a policy and to recoup amounts paid to settle alleged sexual abuse claims.  The insured counterclaimed, alleging statutory and common law bad faith, including a claim for violating the Washington Insurance Fair Conduct Act (“IFCA”), which provides redress for bad faith coverage denials.  The insurer moved to dismiss, arguing failure to state a claim under the IFCA because it settled the alleged sexual abuse claims and did not “deny” coverage.  The insured countered that the attempted recoupment was an attempt to unreasonably deny coverage, satisfying the IFCA’s requirements.  While acknowledging an absence of case law on the point, the court found that the insured’s allegations sufficiently alleged an IFCA violation under the deferential motion to dismiss standard.  Read the decision.

Oregon District Court Dismisses Underlying Claimant’s Bad Faith Claim Due To Lack Of Standing
Franquemont v. Shelter Mut. Ins. Co., No. 3:22-cv-00223-JR, 2023 U.S. Dist. LEXIS 34326 (D. Or. Feb. 22, 2023).

An underlying claimant filed suit directly against the defendant’s insurer, seeking damages related to an auto accident and alleging that the insurer failed to engage in reasonable settlement negotiations.  When the insurer moved to dismiss, the magistrate judge recommended dismissal of the claims associated with the accident but allowed the bad faith claim to proceed on the basis that Oregon’s Unfair Claim Settlement Practices Act permits an injured party to pursue such claims under certain circumstances.  The insurer filed objections to the magistrate’s recommendation on the bad faith claim.  The district court declined to adopt the magistrate’s analysis, holding instead that an injured party may not bring a bad faith claim against an insurer absent a judgment in the underlying action.  Because no such judgment had been entered, the claimant lacked standing, and the court dismissed the case.  Read the decision.

Eastern District Of California Allows Bad Faith Class Action To Proceed 
Allen v. Protective Life Ins. Co., No. 1:20-cv-530-JLT-CDB, 2023 U.S. Dist. LEXIS 49147 (E.D. Cal. Mar. 22, 2023).

Plaintiff filed a bad faith class action against her husband’s life insurer, claiming that her husband’s policy and others’ policies had been wrongly cancelled in violation of California law requiring explicit notice and a grace period following a late premium payment.  In its motion to dismiss, the insurer argued that plaintiff could not assert bad faith absent a “claim” or “denial of benefits,” and that, in any event, there was a genuine dispute between the parties.  The court disagreed on both counts, noting that a “claim” or “denial of benefits” was not explicitly required and that a wrongful cancellation could constitute bad faith.  In denying the motion, the court further noted that the “genuine dispute” defense was not suited for the dismissal stage.  Read the decision.

Ohio Appellate Court Overturns Trial Court’s Blanket Rule Requiring Insureds To Provide Expert Testimony In Bad Faith Cases
Crawford v. Am. Family Ins. Co., C.A. No. 29588, 2023 Ohio App. LEXIS 1041 (Ohio Ct. App. Mar. 31, 2023).

An Ohio trial court granted summary judgment in favor of the insurer on the insured’s bad faith claim because the insured failed to produce an expert on insurance industry standards.  The trial court cited no case law for its holding and raised the issue sua sponte.  The appellate court rejected the trial court’s blanket rule requiring expert testimony, observing that the Ohio evidentiary rules do not require expert testimony in every bad faith case and finding the insurer’s cited decisions unpersuasive and inapposite.  In concluding that the trial court abused its discretion, the appellate court noted that whether an expert is required must be determined on a case-by-case basis.  Read the decision.

Insurers Need Not Plead “Fairly Debatable” Affirmative Defense To A Bad Faith Claim In Vermont
Freda v. Union Mut. Fire Ins. Co., No. 20-CV-00692, 2023 Vt. Super. LEXIS 20 (Vt. Super. Mar. 31, 2023).

After the insured submitted a claim for hailstorm roof damage, the insurer inspected the property and found that, while the metal under the roof suffered some hail damage, the roof’s performance was unaffected.  The insurer accordingly denied the claim.  Years later, the insured obtained a home appraisal, which noted hailstorm roof damage requiring repair.  Based on the appraisal, the insured asked the insurer to re-open the claim, after which the insurer affirmed its denial.  The insured then sued for bad faith and fraud.  The insurer moved for summary judgment on the extra-contractual claims arguing that coverage was “fairly debatable.”  The insured countered that the insurer failed to plead “fairly debatable” as an affirmative defense and could not therefore rely on it on summary judgment.  The court rejected the insured’s argument, reasoning that the insurer’s motion essentially argued that the insured failed to identify sufficient evidence for a triable claim.  In granting the motion, the court found that the insured failed to present evidence of fraud and bad faith, as the insurer had a reasonable basis to deny the claim.  Read the decision.

Missouri Supreme Court Affirms Insurer’s Intervention Right And Western District Of Missouri Dismisses Bad Faith Claim
M.O. v. Geico Gen. Ins. Co., 657 S.W.3d 215 (Mo. 2023).
GEICO Gen. Ins. Co. v. Brauner, No. 4:22-cv-00082-CV-W-FJG, 2023 U.S. Dist. LEXIS 44860 (W.D. Mo. Mar. 10, 2023).

Plaintiff contracted a sexually transmitted infection from a consensual encounter in the insured’s vehicle.  Plaintiff then sent a policy limit demand to the vehicle owner’s insurer, alleging “bodily injury.”  Following its coverage denial, the insurer commenced litigation in the Western District of Missouri, and the insured counterclaimed for bad faith.  While the coverage action was pending, plaintiff and the insured, without informing the insurer, entered into an arbitration agreement with any award recoverable only against the insurer.  At arbitration, plaintiff was awarded $5.2 million after which plaintiff pursued confirmation of the award in state court.  Plaintiff informed the insurer of the arrangement, as required under the Missouri statute, but failed to advise that the arbitration already had concluded.  Twenty-five days after receiving plaintiff’s notice, the insurer moved to intervene and vacate the arbitration award.  The insurer’s motions were denied.  On appeal, the Missouri Supreme Court ruled that the insurer had a statutory right to intervene within thirty days of receiving plaintiff’s notice, and that the trial court erroneously denied the insurer’s motions.  Shortly after the Supreme Court decision, the Western District of Missouri reached a decision in the coverage action, finding no coverage because plaintiff’s alleged injury did not arise out of the “use” of an auto.  Absent coverage under the policy, the insured’s bad faith counterclaim was dismissed.  Read the decisions here and here.

Sweeping Florida Tort Reform Bill Shakes Up Insurance Standards

On March 24, 2023, Florida Governor Ron DeSantis signed into law HB 837, overhauling  Florida’s tort and bad faith laws.  Highlights include: 

  • Bad Faith: Disallows bad faith claims against a liability insurer that tenders the lesser of the policy limits or the claimant’s demand within 90 days after receiving actual notice of a claim accompanied by sufficient evidence to support the amount of the claim.  Establishes an insured’s reciprocal duty to act in good faith in providing information regarding a claim, in making demands of the insurer, in setting deadlines, and in attempting to settle, and further allows a reduction of damages in a bad faith action where the insured failed to act in good faith.  Provides that “mere negligence” alone is insufficient to constitute bad faith.  Permits insurers to file an interpleader action when faced with multiple claimants and insufficient policy limits.  [amends Fla. Stat. § 624.155]
  • Modified Comparative Negligence: Adopts a modified comparative negligence standard, eliminating economic recovery by any party in a negligence action where that party is found to be greater than 50 percent at fault.  [amends Fla. Stat. § 768.81]
  • Statutes of Limitations: Sets the applicable statute of limitations for actions founded on negligence to two years.  [amends Fla. Stat. § 95.11]
  • Attorney Fees: Repeals “one-way” attorney fees statutes for insureds.  Requires the court to award reasonable attorney fees when an insured successfully establishes coverage in an action for declaratory relief following a “total coverage denial,” but disallows the transfer or assignment of such right to anyone other than a named or omnibus insured or named beneficiary.  Establishes a strong presumption in favor of the lodestar calculation method.  [repeals Fla. Stat. §§ 627.428, 626.9373; amends Fla. Stat. § 57.104; adds Fla. Stat. § 86.121]

Read the statutory changes here.