Insurance Bad Faith Report, October 2023

Sixth Circuit Finds Bad Faith Allegations Insufficient to Satisfy Jurisdictional Amount in Controversy Requirement
Gissendanner v. Riversource Life Ins. Co., No. 22-1577, 2023 U.S. App. LEXIS 18234 (6th Cir. July 17, 2023).

The insured received full disability benefits until her insurer determined she was only partially, not fully, disabled. The insured filed suit in federal court, alleging an amount in controversy over $75,000. The insurer did not move to dismiss, but the court conducted its own analysis and found that the claimed difference between the partial and full disability payments was at most approximately $50,000. While plaintiff alleged bad faith claim and sought punitive damages, the court found the allegations insufficient to state a claim and accordingly refused to consider the claimed punitive damages when determining the amount in controversy. Read the decision here.

Eastern District of Louisiana Finds D&O Insurer Subject to Louisiana Bad Faith Statute
Beebe v. Ill. Nat’l Ins. Co., No. 22-4518, 2023 U.S. Dist. LEXIS 120296 (E.D. La. July 13, 2023).

The collapse of a Louisiana bank resulted in criminal indictments of certain officers. The bank’s D&O insurer, Illinois National, sought to limit coverage based on, among other provisions, a warranty provided by the insured.  Numerous parties filed suit against Illinois National, alleging statutory bad faith under La. R.S. § 1892. Illinois National moved to dismiss, arguing that the bad faith claim was unripe and that the statute applied only to property and casualty insurance. The court disagreed, holding that the bad faith claim was ripe for adjudication because Illinois National had ceased making payments, and that La. R.S. § 1892 applied to D&O insurers. Read the decision here.

Florida District Court Denies New Trial Despite “Manufactured” Bad Faith Claim
Brink v. Direct Gen. Ins. Co., No. 8:19-cv-2844-30AEP, 2023 U.S. Dist. LEXIS 121665 (M.D. Fla. July 14, 2023).

After a bad faith trial, the jury returned a verdict of $19,224,073.56 on a $10,000 policy. The insurer moved for judgment as a matter of law and also for a new trial contending that a jury could not have found bad faith based on the record evidence. In making its ruling, the court expressed its dissatisfaction with the jury verdict, even opining that the basis of the bad faith claim was no more than isolated negligence. The court went on to discuss the “cottage industry” of manufactured bad faith claims that allow the plaintiffs’ bar to “lure” insurers into making mistakes that can be used to “generate” a bad faith claim. The court also conveyed its dissatisfaction with the current state of bad faith law in the Eleventh Circuit, noting that it often confuses the jury and invites error. However, the court found that its hands were tied in the situation because the jury was entitled to interpret the insurance adjuster’s mistake as bad faith. The court therefore denied the motion for judgment as a matter of law and new trial. Read the decision here.

Insurers Oppose Costs and Pre-Judgment Interest After Historic Bad Faith Award in Indiana District Court
Ind. GRQ, LLC v. Am. Guarantee & Liab. Ins. Co., No. 3:21-cv-227 DRL (N.D. Ind.).

Several insurers issued policies covering a factory in South Bend, Indiana, that experienced significant storm flooding, which resulted in release of polychlorinated biphenyls that caused environmental damage. The insured sued alleging bad faith for hiding repair cost estimates and for poaching the insured’s environmental consultant. Earlier this year, a jury awarded the insured $112 million, which included $11.5 million for claimed electrical damages, $13.1 million for environmental damages, and $12.5 million from each insurer for bad faith damages. After the trial, the insured moved to recover costs and pre-judgment interest on the award, requesting more than $18.7 million. The insurers have opposed the motion, arguing that Indiana does not award attorneys’ fees as a matter of right based on an insurer’s breach of the duty of good faith, with additional arguments being made by some of the separate insurers. In order to rule on the motion, the court will have to resolve important questions related to Indiana’s bad faith law, such as whether certain provisions in Indiana’s bad faith statute (including I.C. §34–52–1–1) apply to bad faith actions in federal court, whether a calculation of attorneys’ fees must come from a simple mathematical calculation, and at what point pre-judgment interest begins to accrue in bad faith cases. 

Kentucky Eastern District Court Clarifies Wittmer Threshold for Bad Faith Claims
Austin v. Standard Fire Ins. Co., No. 2:21-00129 (WOB-CJS), 2023 U.S. Dist. LEXIS 142273 (E.D. Ky. Aug. 10, 2023).

After the insured suffered injuries in an automobile accident with a drunk driver, the insured pursued underinsured motorist coverage under her own policy. Although the insurer eventually paid the policy limit, the insured brought a bad faith claim. In ruling on the insurer’s summary judgment motion, the court noted that the Kentucky Supreme Court, in Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993), enunciated three elements of a bad faith claim, and also noted that Wittmer stood for the proposition that evidence of punitive damages must be available before a bad faith claim can exist in the first place. The court observed that many federal courts had interpreted this language to impose a threshold showing of evidence of “conduct that is outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.” Other courts, however, had interpreted Wittmer’s language to be encompassed in the second and third elements of a bad faith claim. Because the Kentucky Supreme Court appeared to follow the second approach, the court declined to require the insured to make a threshold showing of punitive damages evidence. The court instead examined whether there was a genuine dispute as to any element of the insured’s bad faith claim and, finding that there was, denied the motion. Read the decision here.

California Southern District Court Allows Insured to Recover Brandt Fees in Recoupment Action
Hous. Cas. Co. v. Cibus US LLC, No. 19cv828-JO-DDL, 2023 U.S. Dist. LEXIS 148766 (S.D. Cal. Aug. 23, 2023).

When Canadian and American farmers sued a gene editing company in connection with the farmers’ use of hybrid canola seeds, the company sought coverage under its E&O policy. The insurer paid the policy limit to settle the underlying claim then brought a recoupment suit against the insured. The insured asserted counterclaims for breach of contract and bad faith. On a pretrial motion, the court addressed whether the insured could recover Brandt fees—that is, attorneys’ fees incurred to obtain policy benefits that are recoverable as tort damages. The insurer argued that Brandt fees were unavailable in a recoupment action. The court, however, found that Brandt fees were equally available where an insured hires counsel to defend itself in a recoupment action in order to retain the coverage and policy benefits it had already received. The court accordingly awarded the insured Brandt fees of almost $1.2 million. Read the decision here.

South Carolina District Court Dismisses Bad Faith Claim for Failure to Allege Consequential Damages
Sullivan Mgmt., LLC v. Fireman’s Fund Ins. Co., No. 3:20-2275-MGL, 2023 U.S. Dist. LEXIS 135028 (D.S.C. Aug. 2, 2023).

The insured operated several Carolina Ale House establishments that suffered COVID-19 related financial losses.  When the insured sought coverage for its business income loss, the insurer denied coverage. The insured brought suit for breach of contract, bad faith/breach of duty of good faith, and declaratory judgment. The insurer moved to dismiss the bad faith claim for failure to allege consequential damages. The court, having previously found that there was no coverage under the policy, agreed with the insurer that consequential damages are a required element of a bad faith claim under South Carolina law. Finding no such allegations, the court dismissed the bad faith claim. Read the decision here.

Third Circuit Court of Appeals Affirms Summary Judgment Where Lack of Diligence Did Not Amount to Bad Faith
Wash. St., LLC v. Nationwide Prop. & Cas. Ins. Co., No. 22-3396, 2023 U.S. App. LEXIS 24243 (3d Cir. Sep. 13, 2023).

When an apartment building sustained fire damage due to a tenant’s negligence, the insurer took a number of steps that delayed its payment of the full policy limit for several weeks. As a result of the delay, the insured brought suit for bad faith, alleging that the insurer made an incomplete initial investigation, misjudged the amount of certain damages, hired an independent contractor to examine the damage, demanded an itemized list of final damages, and pursued subrogation from the tenant prior to paying the insured in violation of the made-whole doctrine. The district court granted summary judgment to the insurer, finding that the insurer’s conduct and arguable lack of diligence did not constitute bad faith. The Third Circuit Court of Appeals affirmed, reiterating that Pennsylvania’s bad faith statute requires a showing of clear and convincing evidence that the insurer had no reasonable basis for its actions. Considering all of the insurer’s actions, the Third Circuit agreed that there was an insufficient showing of bad faith to survive summary judgment. Read the decision here.