Insurance Bad Faith Report, July 2025

Michigan Supreme Court Forecloses Bad Faith Litigation Through Garnishment Proceeding
Hairston v. LKU, No. 166473, 2025 Mich. LEXIS 600 (Apr. 4, 2025).

When the claimant obtained a $13 million judgment, the defendant’s insurers immediately paid their policy limits, which were insufficient to cover the entire judgment. After receiving an assignment, the underlying claimant filed a garnishment proceeding against the insurers arguing bad faith failure to settle. The trial court dismissed the garnishment proceeding, but the intermediate appellate court reversed, citing a decades-old decision that had allowed a similar claim to proceed. The Michigan Supreme Court reversed, finding that the bad faith allegations were not sufficiently liquidated to be brought as a garnishment. The court also observed that garnishment procedures are not as robust as civil trial procedures and were thus ill-suited for addressing a bad faith failure to settle claim. Read the decision.

Utah District Court Finds No Bad Faith When Insurer Communicated Diminishing Limit
Jenkins v. Prime Ins., No. 2:21-cv-00130-RJS-DAO, 2025 U.S. Dist. LEXIS 75694 (D. Utah Apr. 21, 2025).

A plastic surgery center obtained professional liability coverage with depleting limits. After a patient died during a procedure, the patient’s estate filed suit and obtained a judgment in excess of the policy limit. In its coverage correspondence, the insurer advised the center of the applicable limit and stated that the limit would be depleted by defense costs. In the ensuing bad faith suit, the District Court of Utah found that no jury could find that the insurer had acted in bad faith because the insurer had repeatedly communicated the depleting limit to the center, and the insurer had no obligation to advise the center it was free to contribute to a settlement. Read the decision.

Central District Of California Permits Insurer To Depose Law Firm Employees Regarding Alleged Bad Faith Setup
Tomaszewski v. AIG Prop. Cas. Co., No. CV-24-04661-JFW (AGRx), 2025 U.S. Dist. LEXIS 70989 (C.D. Cal. Apr. 8, 2025).

In bad faith litigation, the insurer sought to depose a former employee of the claimant’s law firm under the theory that the policy limits demand was a “setup.” The insurer contended that the law firm purposefully mailed the demand to the wrong address and otherwise omitted critical information. Claimant’s law firm terminated the deposition and sought a protective order. While acknowledging the potential for privilege issues, the court found that the insurer was entitled to depose the firm’s employees to obtain information about the alleged setup. Read the decision.

New Jersey District Court Rejects Bad Faith Claim Based On Clerical Mistake
Johnson v. Hanover Ins. Co., No. 1:23-cv-1294-KMW-AMD, 2025 U.S. Dist. LEXIS 101805 (D.N.J. May 29, 2025).

When the homeowners’ roof was damaged in a hailstorm, they notified their homeowners insurer about the loss.  Based on contradictory roofing reports, the insurer concluded that the covered damage was within the policy’s deductible. A couple months later, the insurer discovered that a lower deductible had been in effect when the hailstorm occurred, so it issued payment for damages exceeding the lower deductible. The insureds filed suit alleging breach of contract and bad faith. On the insurer’s summary judgment motion, the court found that neither of plaintiffs’ bases for bad faith was tenable. Plaintiffs’ argument that the insurer had acted in bad faith by failing to submit the claim for an appraisal failed because the insurer had disputed the scope of coverage, not monetary damages. Plaintiffs’ argument that the insurer applied the wrong deductible also could not be the basis for a bad faith claim because it was a clerical error fixed two months later that resulted in no injury caused by the delay in payment. The court therefore granted the summary judgment motion. Read the decision.

Oklahoma Western District Dismisses Bad Faith Claim Lacking Damages
Lyndon S. Ins. Co. v. Williams Grocery, Inc., No. CIV-25-38-J, 2025 U.S. Dist. LEXIS 109292 (W.D. Okla. June 5, 2025).

The insurer issued a commercial general liability policy to the insured grocery store, which was sued over the death of an independent contractor the store hired to perform electrical work. The insurer defended the insured under a reservation of rights, including its issuance of the policy based on the insured’s representation that it did not hire independent contractors. The insurer then filed a declaratory judgment action, and the insureds (the store and individual defendants) counterclaimed for breach of the implied duty of good faith and fair dealing. On the insurer’s motion to dismiss the counterclaim, the court noted that, under Oklahoma law, an essential element of a bad faith claim is that such conduct must be the direct cause of any damages sustained. Because the insureds had not sustained any damages (as the insurer continued defending them), the court “declined to speculate” about damages and dismissed the bad faith claim. Read the decision.

New York Southern District Court Allows Sweeping Bad Faith Discovery On Reserve And Reinsurance Information
Mandarin Oriental, Inc. v. HDI Glob. Ins. Co., 2025 U.S. Dist. LEXIS 111184 (S.D.N.Y. June 10, 2025).

A hotel chain sought business interruption coverage for losses due to Covid-19. In the subsequent coverage litigation in which the insured alleged that its insurers adjusted the claim in bad faith, a dispute arose over certain categories of discovery, with the insured moving to compel the production of reinsurance, reserve, and other information. Overruling the insurers’ relevance objection, the court found that reinsurance information could reflect the insurers’ understanding of the risk that the claims posed and, therefore, went to the merits of plaintiff’s claim.  The court also overruled the insurers’ objection to the reserve information, finding that it could show the insurers’ position on coverage and liability. Further, after conducting an in camera review, the court also overruled the insurers’ assertion of the attorney client privilege and work product doctrine, finding that reserves were set in the ordinary course of business and were not privileged simply because outside counsel was involved. Finally, the court ordered the production of all but one set of documents withheld on privileged grounds, finding the insurers’ unsworn assertions in their opposition “underwhelming.” Read the decision.