Insurance Bad Faith Report, April 2026

Nevada Supreme Court Permits Excess Insurer’s Equitable Subrogation Claim Against Primary Insurer
N. River Ins. Co. v. James River Ins. Co., 582 P.3d 1113 (Nev. 2026) (en banc).

An apartment complex was insured under a $1 million primary policy and a $10 million excess policy. Following a fatal shooting at the complex, the deceased’s estate made two settlement demands within the primary policy limits. The primary insurer declined both demands, and the claim ultimately settled for $5 million. The excess insurer then sued the primary insurer for equitable subrogation. The excess insurer argued that the primary insurer’s failure to settle within its policy limits breached the duty of good faith and fair dealing. The primary insurer argued that equitable subrogation was not permitted where the claim was settled within the primary and excess limits and the insured suffered no damage. The Ninth Circuit Court of Appeals certified the following question to the Nevada Supreme Court: under Nevada law, can an excess insurer state a claim for equitable subrogation against a primary insurer where the underlying lawsuit is settled within the insurers’ combined policy limits? The Nevada Supreme Court answered ‘yes,’ reasoning that equitable subrogation allows the excess insurer to stand in the shoes of the insured and to assert all claims against the primary insurer that the insured could have asserted. If an insured could have sued the primary insurer for failure to settle, then the excess insurer who paid the excess liability may also do so. Read the decision.

Settling Without Insureds’ Consent While Pursuing Recission Not Bad Faith In New York
Colony Ins. Co. v. Oz Sols., No. 1:24-cv-1935, 2026 U.S. Dist. LEXIS 1807 (S.D.N.Y. Jan. 6, 2026).

An insurer defended two insureds in a construction defect lawsuit under a reservation of rights. The insurer filed a separate suit seeking to rescind the applicable policies based on misrepresentations in the applications. The following year, defense counsel negotiated a settlement of the construction defect lawsuit within policy limits. The insureds, however, refused to sign the settlement agreement. Instead, they asserted, in the rescission suit, counterclaims for bad faith and breach of the covenant of good faith and fair dealing, alleging that the insurer acted in bad faith when it agreed to settle without the insureds’ authorization while seeking recission at the same time. The court acknowledged that failure to keep an insured informed of settlement negotiations may be evidence of bad faith, but found there was no bad faith or inference of bad faith under the circumstances because the insureds’ and insurer’s interests were aligned. Further, there was no guarantee the policies would be rescinded, and the insurer properly obtained the lowest settlement possible. Read the decision.

Texas Appellate Court Reverses Denial Of Bifurcation Of Bad Faith Suit 
In re Covington Specialty Ins. Co., No. 09-25-00507-CV, 2026 Tex. App. LEXIS 68 (Tex. App. Jan. 6, 2026).

A Texas trial court denied an insurer’s motion to bifurcate trial into separate breach of contract and bad faith phases. The Texas Court of Appeals conditionally granted mandamus and reversed the trial court, finding that the insurer would be unfairly prejudiced by having to simultaneously defend against breach of contract and bad faith claims, as the insurer would rely on settlement offers to defend the bad faith claim while also seeking to exclude such evidence on the breach of contract claim. Although trial courts may generally exercise discretion on bifurcation, the appellate court held that trial courts cannot properly deny bifurcation when denial would prejudice one party and granting bifurcation would not prejudice the other party. Read the decision.

Fifth Circuit Affirms Exclusion Of Appraisal Award From Bad Faith Trial
Talluri v. AIG Prop. Cas. Co., No. 24-30744, 2026 U.S. App. LEXIS 4114 (5th Cir. Feb. 10, 2026).

A multi-million dollar mansion filled with international bespoke fixtures suffered hurricane damage. The insurer arranged for an engineer to inspect the property and paid $309,474.21 based on the engineer’s estimate. The insured then hired a consultant, who submitted an estimate of over $6.7 million. The insurer then revised its estimate, made several supplemental payments, and eventually invoked appraisal, which culminated in a $16 million award. Contemporaneously, the insured sued for bad faith based on the insurer’s rejection of the consultant’s estimate. Prior to trial, the insurer successfully excluded the appraisal award and then succeeded at a jury trial. The insured appealed, arguing that the appraisal award should have been presented to the jury. The Fifth Circuit disagreed, finding that the appraisal award had no bearing on whether the insurer acted in bad faith by rejecting the consultant’s estimate submitted months before the appraisal award was entered. Read the decision.

Pensivlania Supreme Court Finds Insurance Bad Faith Statute Inapplicable To Surety Bonds 
E. Steel Constructors, Inc. v. Int’l Fid. Ins. Co., 351 A.3d 766 (Pa. 2026).

In 2008, Pennsylvania State University began construction on a new science center. The contractor obtained a surety bond exceeding $10 million from Fidelity Insurance Company that would pay subcontractors “all sums due” regarding the project in the event of the contractor’s insolvency. When a subcontractor made a claim on the bond, Fidelity issued partial payment for undisputed amounts. The subcontractor then demanded arbitration from the contractor, and after obtaining an award, the subcontractor sought to collect from Fidelity and also alleged damages for breach of Pennsylvania’s bad faith statute. The trial court allowed the statutory bad faith claim to proceed, but the Pennsylvania Supreme Court reversed, finding the statute applied only to “insurance policies” and “insurers” and not to surety bonds or actions of a surety. Read the decision.

Alabama Northern District Dismisses Insured’s “Normal” And “Abnormal” Bad Faith Claims
Nelson v. Frankenmuth Mut. Ins. Co., No. 2:24-cv-01277-SGC, 2026 U.S. Dist. LEXIS 59131 (N.D. Ala. Mar. 20, 2026).

The insured owned a motorcycle service shop that suffered water damage from a burst pipe. After the property insurer denied coverage because the property was vacant, the insured brought suit alleging breach of contract and bad faith. Ruling on the insurer’s motion for summary judgment, the court first observed that Alabama recognizes two types of bad faith claims: a “normal” bad faith claim for refusal to pay, and an “abnormal” bad faith claim for failure to investigate. Here, the insured alleged both types of bad faith. Under both types, however, the court explained that the insured bears a heavy burden of showing that the underlying contract claim is so strong that it would be entitled to pre-verdict judgment as a matter of law. Because the court found that the insurer had correctly denied coverage, the insured could not meet its burden. In granting the insurer’s motion, the court found that the insurer conducted an investigation and had a reasonably legitimate basis to deny the claim. Read the decision.

Oklahoma Western District Rejects Bad Faith Defenses In Bankruptcy Brawl
Davis v. Gresham, No. CIV-22-871-G, 2026 U.S. Dist. LEXIS 64676 (W.D. Okla. Mar. 25, 2026).

The insured was a defendant in a personal injury lawsuit who was forced to file for bankruptcy after judgment was entered against him. While in bankruptcy, the personal injury judgment creditor initiated a garnishment proceeding against the insured and insurer. The insurer objected, claiming that the insured was not indemnified under the policy. The trustee for the insured’s bankruptcy estate then intervened and asserted claims on the insured’s behalf for breach of contract and breach of the duty of good faith and fair dealing. The insurer moved to dismiss the bad faith count on two grounds. First, the insurer argued that because the insured’s debts would be discharged in bankruptcy, the insured’s economic position as to the judgment would not change and he therefore lacked the necessary damages to assert a bad faith claim. Second, the insurer argued that allowing the trustee to assert bad faith claims where the insured himself had never alleged bad faith prior to declaring bankruptcy was against public policy. The court rejected both arguments and denied the insurer’s motion. The court found that filing for bankruptcy does not preclude a bad faith claim, and that the trustee could assert the claim, which was property of the bankruptcy estate. Read the decision.