Insurance Bad Faith Report, July 2023
Third Circuit Allows “Limit Reinstatement” Theory as Damages for Bad Faith Failure to Settle Claim
Moses Taylor Found. ex rel. Moses Taylor Hosp. v. Coverys, No. 21-3264, 2023 U.S. App. LEXIS 8725 (3d Cir. Apr. 12, 2023).
Moses Taylor Hospital was sued in a medical malpractice action arising from catastrophic birth injuries. Given the seriousness of the injuries, the hospital informed its insurers that it wanted to settle the matter quickly and within policy limits. The insurers, however, failed to send representatives with settlement authority to two pre-trial conferences despite a court order requiring their appearance. While the malpractice case was ultimately resolved, the insurers’ conduct allegedly resulted in a settlement $1.75 million higher than the settlement demand, which depleted any of the policy limit available to cover future liability. The hospital subsequently filed a bad faith suit alleging “monetary damages in the depletion of the aggregate amount of insurance tail coverage available to it” and seeking to reinstate $1.75 million to the limit of liability. The district court dismissed the suit, as the hospital had not alleged monetary damages and could not produce evidence of pending or future claims likely to exceed the policy limit. The Third Circuit reversed, observing that Pennsylvania allows equitable remedies for breach of contract and that, based on the specific facts of the case, “equity’s flexible machinery” was appropriate. Read the decision here.
First Circuit Finds Choice-Of-Law Provision Ambiguous, Allows Massachusetts Statutory Bad Faith Claim
Great Lakes Ins. SE v. Andersson, 66 F.4th 20 (1st Cir. 2023).
After a coverage dispute arose, the insured brought breach of contract and Massachusetts statutory bad faith claims. The maritime policy contained a choice-of-law provision designating that Federal Admiralty Law would govern “any dispute arising hereunder,” “but where no such . . . precedent exists, this insuring agreement is subject to the substantive laws of the State of New York.” The First Circuit found the choice-of-law clause ambiguous based on its use of “any dispute arising hereunder,” which could include contract-related and extra-contractual claims, and its use of “this insuring agreement,” which could be limited to contract-related claims. Because the provision was not broad enough to unambiguously encompass extra-contractual claims, the provision did not preclude the Massachusetts statutory bad faith claim. Read the decision here.
Homeowner Has No Standing to Seek Coverage Under Lender-Placed Policy
Tardo v. Integon Nat’l Ins. Co., No. 23-296, 2023 U.S. Dist. LEXIS 57834 (E.D. La. Apr. 3, 2023).
The mortgagee bank procured an insurance policy to protect its interest in real property when the homeowner failed to provide evidence of insurance. Following a loss, the homeowner filed suit alleging the insurer had underpaid and adjusted the claim in bad faith. The insurer moved to dismiss, arguing the homeowner, who was not an insured under the policy, lacked standing. The court agreed, noting that the policy provided coverage only for the bank’s interest in the property but recognized that, in some instances, homeowners could qualify as third-party beneficiaries when a lender-placed policy’s limit exceeds the lender’s interest. Read the decision here.
Arizona District Court Extends Gatecliff Rationale to Reinsurer Despite No Contractual Privity
Midtown Hotel Grp. LLC v. Selective Ins. Co. of Am., No. 22-CV-01395-PHX-JAT, 2023 U.S. Dist. LEXIS 90244 (D. Ariz. May 23, 2023).
Midtown Hotel Group brought a bad faith suit over loss sustained from flooding caused by an air-conditioning system. Midtown included as defendants both the insurer and reinsurer that handled the claim. The reinsurer moved to dismiss, arguing that there was no privity of contract between itself and Midtown, which was required for Midtown to bring a bad faith claim. Midtown contended that because the reinsurer was responsible for handling the underlying claim, was responsible for paying some or all of the underlying claim, and had controlled certain decisions regarding settlement and payment of the underlying claim, Midtown could sue the reinsurer under a direct-liability theory. The court agreed with Midtown. In denying the motion, the court reasoned that the Arizona Supreme Court, in Gatecliff, had allowed bad faith claims against a non-party to an insurance contract where that party’s direct involvement led to the plaintiff’s harm. The court rejected the reinsurer’s argument that Gatecliff applies only to a company that manages the insurance policies of a closely related policy issuer, finding instead that the reinsurer, by its direct involvement in Midtown’s claim, could be liable directly for bad faith. Read the decision here.
Hawaii District Court Allows Bad Faith Claim Absent Coverage
Bigelow v. Great Am. Ins. Co., No. 22-cv-00545-DKW-KJM, 2023 U.S. Dist. LEXIS 92460 (D. Haw. May 24, 2023).
The insured brought a motion to reconsider the court’s prior dismissal of negligence, bad faith, and intentional infliction of emotional distress claims because the court based its dismissal on its holding that there was no coverage under the insurance policy. The court granted the motion, as Hawaii law allows an insured to bring a bad faith claim in the absence of coverage. The court observed that an insurer is obligated to act in good faith in dealing with its insured, even when a claim is clearly and unambiguously excluded from coverage. The court also rejected the insurer’s argument that the insured had not adequately pleaded bad faith in the complaint, finding sufficient factual allegations in support of a bad faith claim. Read the decision here.
Ripeness of Bad Faith Claim Requires More Than Just Coverage in Florida
United States Sugar Corp. v. Commerce, No. 22-21737-Civ-Scola, 2023 U.S. Dist. LEXIS 86989 (S.D. Fla. May 17, 2023).
After the district court found coverage under the policy, the insured moved for leave to amend its complaint to include claims for statutory and common law bad faith. The insurer opposed, arguing that, despite a finding of coverage, the court had not determined the full extent of the insured’s damages and, therefore, any bad faith claims were not yet ripe. The court agreed, holding that under Florida law, determinations of both liability and damages are required before any bad faith claim can become ripe. The court also noted that because the insured had recently requested to reopen the dispositive motion deadline on the damages issue, amending the complaint to include claims for bad faith would be premature. Read the decision here.
Kentucky Supreme Court Permits Bad Faith Claims in Absence of Final Adjudication on Coverage
Estate of Lahoma Salyer Bramble v. Greenwich Ins. Co., No. 2022-SC-0043-DG, 2023 Ky. LEXIS 159 (June 15, 2023).
The insured company was sued for trespass and conversion of natural gas that occurred for over a decade. The company’s insurer defended under a reservation of rights (under two policy periods) and ultimately agreed to contribute a portion of the underlying judgment. After the insured defaulted on the judgment, the underlying plaintiffs brought statutory and common law bad faith claims against the insurer. The trial court granted plaintiffs’ motion for partial summary judgment, holding that the two policies covered the insured’s conduct and subsequent judgment. The insurer appealed, but the intermediate appellate court dismissed the appeal as interlocutory. As a result, no final determination was made as to whether the policies actually covered the insured’s conduct and the plaintiffs’ claims. The bad faith claims then went to trial, and judgment against the insurer was rendered in the amount of $834,000 in compensatory damages and $14,300,000 in punitive damages. The insurer appealed, arguing that the bad faith claims were improper absent a final adjudication on coverage. The intermediate appellate court agreed with the insurer. The Kentucky Supreme Court reversed, construing its precedent as not requiring a final judicial determination of coverage prior to filing a third-party tort claim against an insurer. Read the decision here.