Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The plaintiffs’ claims are that the system Farmers uses to deny claims for medical expenses constitutes breach of contract, fraud, breach of the implied duty of good faith, and tortious breach of the duty of good faith. The Oregon Supreme Court notes that in the argument before both of the lower courts and the Oregon Supreme Court, there was no discussion as to the elements of the theories of recovery. The claims are based on Farmers’ use of a computer system to analyze claims that resulted in automatic deductions, rather than a case-by-case review of the particular claims. The court reviewed the PIP statutes and found that ORS 742.524(1)(a) provides a presumption in favor of the necessity of medical expenses incurred by a health care provider. Once a claim is denied, the presumption is removed as well. The court noted, however, that the plaintiffs are not challenging the validity of the denials, but the investigation of the claims prior to the denial. The court held that at the time an insurer decides whether to accept or deny a PIP claim, the medical expenses incurred to that date are presumed to be reasonable and necessary. The court also held that since the summary judgment record did not demonstrate that the process Farmers uses is valid as a matter of law, Farmers was not entitled to summary judgment.

The court discussed an insurer’s duties of good faith to its insured before reaching its decision. In reaching its conclusion, the Oregon Supreme Court found that “because Farmers’ review methodology was an impermissible one, Farmers needed to establish that the procedures it employed to deny plaintiffs’ claims satisfied its statutory and common law duties and did not violate the prohibitions set out in ORS 746.230(1)(d).” ORS 746.230(1)(d) prohibits an insurer from denying a claim without a reasonable investigation. Since Farmers did not present evidence that its claim review process was valid, the plaintiffs did not have to produce evidence that their medical expenses were medically necessary.

The Sixth Circuit first affirmed the district court’s grant of summary judgment to PMA as to the 1967 to 1972 policies, finding that the policyholder failed to establish by clear and convincing evidence the existence and terms of the lost policies under Pennsylvania law. Relying only on a document filed with the district court by PMA which indicated the policyholder had coverage in 1967 (which PMA disputed as a typo in its filings), PMA’s computer records which indicate the 1972 policy was a "renewal" and the testimony of a former PMA employee that stated the pollution exclusion was not approved by the Pennsylvania Commissioner of Insurance until 1970, the court found the policyholder failed to meet its burden of proving the terms and conditions of the policies under Pennsylvania law.

As to the 1972 to 1978 policies, the policyholder argued that the underlying lawsuit fell within the “sudden and accidental” exception to the pollution exclusion. Agreeing with PMA that under Pennsylvania law “sudden and accidental” encompasses discharges which are both unexpected and "abrupt in time," the court affirmed the district court’s grant of summary judgment to PMA as the evidence produced by the policyholder could only be interpreted by a reasonable jury that discharges were “frequent, continuous and highly predictable.” As to the bad faith claim, the Sixth Circuit similarly affirmed the district court judgment finding that, under Pennsylvania law a bad faith claim may not be stated unless the “insurer lacked a reasonable basis for denying benefits.” Because the court affirmed the finding that the underlying lawsuit did not fall within the scope of the policies, PMA had a reasonable basis for denying benefits and did not act in bad faith. 

ACE, having paid three $300,000 limits to settle silica cases against Flexo, claimed exhaustion and attempted to pass the baton to Cincinatti.  The excess insurer demurred and sued ACE for bad faith, claiming that it owed another $1.8 million.  The Hamilton Country trial court agreed and, on appeal, so did the First Appellate District.

As a preliminary matter, the Ohio Court of Appeals ruled that the ACE policies were ambiguous because, in the absence of an annualization clause or other clarifying clause, "aggregate" could be applied "per policy" or "per year."  As a result, the court held that the trial court had not erred in considering extrinsic evidence to clarify the issue (as with New York and a handful of other states, Ohio follows the rule that ambiguity will not automatically be construed against the drafter if it can be clarified by resort to extrinsic evidence).  In this case, the court held that the extrinsic evidence supported the excess insurer's contention that the aggregate limit applied annually.  In particular, the court took note of the fact that Aetna Property & Casualty had been a "Bureau company" and that during this pre-ISO period, the IRB policy manual provided that aggregate limits in multi-year policies apply annually.

The Court of Appeals also rejected ACE's argument that these claims all arose out a single "occurrence," that being the insured's manufacture and sale of a defective product.  The court observed that, unlike asbestos cases, there was nothing intrinsically harmful about a mask:  the mask did not harm anyone, it merely failed to protect them against silica exposures.   Far from accepting ACE's reliance on the "deemer" clause in its policies, the Court of Appeals ruled that the exposure to conditions language required that each claim be treated separately.  The court cautioned against the "blanket judicial application" of tests for numbering "occurrences," however.

While ruling in favor of Cincinatti, the court refused to find that ACE's coverage positions were adopted in bad faith given (while archly observing that it was "feckless").

This case illustrates the interesting interplay between "occurrence" and aggregate wordings.  Most later ISO CGL forms contain language stating that the aggregate applies on an annual basis but are silent with respect to whether the same is true of  the "occurrence" limit.  For the most part, courts have ruled that this reflects an intention to have the "per occurrence" limit apply to the policy as a whole.

This ruling is seemingly at odds with the view of most other courts that have addressed this issue.  For the most part, courts have ruled that in the absence of an "annualization" clause, limits  apply once per policy, not once per year. See Society of Roman Catholic Church of Diocese of Lafayette, Inc. v. Interstate Fire and Cas. Co., 126 F.3d 727, 742 (5th Cir. 1997); Diamond Shamrock Chemicals Company v. Aetna Cas. & Sur. Co., 609 A.2d 440 (N.J. App. 1992); Hercules, Inc. v. Aetna Cas. & Sur. Co., 748 A.2d 481, 495 (Del. 2001) and CSX Transportation, Inc. v. Commercial Union Ins. Co., 82 F.3d 478, 483 (D.C. Cir. 1996).  But see, Chemical Lehman Tank Lines v. Aetna Cas. & Sur. Co., 978 F. Supp. 589, 606 (D.N.J. 1997), rev'd on other grounds, 177 F.3d 210 (3d Cir. 1999).

This case is an interesting illustration of the dilemma that insurers face in missing policy cases wherein the very absence of policy documentation may rob the insurer of the ability to raise otherwise viable policy defenses based on exclusions or limitations to coverage.  If you can't prove what the limits of coverage are, how do you ever exhaust?  Nevertheless, some courts continue to hold that it is the insurer's burden in a missing policy case to prove the existence of exclusions or other limitations to coverage.

Finally, what's with all the crankiness ("gnashing of teeth"??) about having to decide hard cases.  Only two weeks ago, Justice Willets of the Texas Supreme Court grumbled in a concurring opinion in Mid-Continent v. Liberty Mutual about all the "fiendishly difficult" high stakes insurance issues that the Fifth Circuit was saddling them with.  This stuff must be harder than we thought.  I'm asking for a raise.

So far, only one decision has been released applying the Twombly standard in an insurance coverage case.  In State Auto Prop. & Cas. Ins. Co. v. Loehr, No. 4:06CV01427 FRB, 2007 U.S. Dist. LEXIS 69449 (E.D. Mo. Sept. 19, 2007), the Eastern District of Missouri found that a plaintiff insured met the “plausible” standard under Twombly as his complaint adequately alleged that State Auto's refusal to pay benefits was vexatious and without reasonable cause or excuse and cited the appropriate Missouri statute providing for vexatious refusal for payment of claims.  According to the opinion, it did not appear that any separate specific facts related to the basis for the “vexatious” allegation was plead other than an allegation regarding the nonpayment of policy proceeds.  However, the court found that the insured sufficiently met the Twombly standard as the general facts alleged concerning nonpayment of policy proceeds demonstrated "a reasonable expectation that discovery will reveal evidence of defendant's claim for vexatious refusal to pay.”  

In this case, MOE defended its insured, Dan Paulson Construction, Inc. (“DPCI”) under a reservation of rights against construction defect claims brought by the Martinellis related to damages to their personal residence that DPCI constructed. DPCI and the Martinellis proceeded to arbitration on the claims. Shortly before the arbitration hearing, MOE filed a declaratory judgment action in the state court against both DPCI and the Martinellis seeking a declaration that it had no duty to defend or indemnify on the basis of the “Your Work” exclusion. MOE did not serve this action on either DPCI or the Martinellis. 

On December 30, 2003, MOE issued a subpoena duces tecum in the un-served state court declaratory judgment action on the arbitrator seeking documents and the arbitrator’s thoughts regarding the arbitration. With the subpoena, MOE sent the arbitrator an ex parte cover letter explaining its coverage issues with DPCI.  Both DPCI and the Martinellis received the subpoena two business days prior to the arbitration hearing. MOE did not serve the cover letter to the arbitrator on either DPCI or the Martinellis. MOE then sent a second letter to the arbitrator slightly narrowing its original requests and further explaining its coverage dispute with DPCI. Subsequently MOE struck the subpoena and dismissed its first declaratory judgment action. The parties thereafter negotiated a settlement and entered into a stipulated settlement agreement which provided in part that DPCI would assign its coverage and bad faith claims against MOE to the Martinellis. 

MOE subsequently filed the subject coverage action against DPCI and the Martinellis.  On several motions for summary judgment, the trial court found that MOE acted in bad faith but that MOE had successfully rebutted the presumption of harm. The Court of Appeals reversed holding that MOE did not act in bad faith. The Washington Supreme Court reinstated the trial court’s decision that MOE acted in bad faith and further found that MOE failed in rebutting the presumption of harm.  As to bad faith, the court found that through its subpoena and two ex parte letters to the arbitrator, MOE “clearly showed great concern for its monetary interest in establishing which of the Martinellis’ claims were excluded from coverage under DPCI’s policy [while displaying] little to no concern for how its conduct might affect DPCI’s financial risk, which was then being litigated in the arbitration hearing.” The court found that MOE’s actions therefore “conclusively” demonstrated that it had a greater concern for its monetary interest than for DPCI’s financial risk.

The court then determined that MOE did not rebut the presumption of harm arising from its bad faith conduct as it failed to show that its subpoena and ex parte communications did not harm or prejudice DPCI. To the contrary, the court found that the record supported a finding that MOE’s conduct caused significant uncertainly and increased risk for DPCI’s defense. The court rejected the trial court’s initial conclusion that DPCI’s decision to proceed with the arbitration coupled with a subsequent settlement within policy limits effectively rebutted the presumption that MOE’s bad faith harmed DPCI. The court stated that “loss of control of the case is in itself prejudicial to the insured.” 

The court specifically stated that it was not expanding its prior rulings on the presumption of harm to conduct that occurs in connection with an insurer’s coverage duties. Rather, the finding of harm in this case was directly related to conduct during the defense case as, despite the fact that the bad faith conduct was perpetrated by coverage counsel, MOE’s conduct was associated with its underlying defense of DPCI and could not be “reasonably segregated from that defense [as it] interfered directly in that defense.”  

The IFCA became law on May 15, 2007 and was set to go into effect on July 22, 2007. However, a petition was filed on May 16, 2007 for a voter referendum to approve the Act, now referred to as Referendum 67. The IFCA is therefore essentially stayed until the November 2007 election. Should the IFCA survive the referendum, it is unknown whether it will be applied retroactively. 

Alberts eventually sued Dr. Woo for outrage, battery, nonpayment of overtime wages, and negligent infliction of emotional distress. Woo tendered the claim to his insurance carrier, Fireman’s Fund, who provided professional liability, employment practices liability, and general liability insurance. Fireman’s Fund refused to defend, among other reasons, on the basis that the acts alleged in the underlying complaint did not arise out of the provision of dental services. 

Construing the duty to defend broadly, the Washington Supreme Court held that Fireman’s Fund owed a duty to defend Dr. Woo under its professional liability coverage because inserting fake boar tusks in a patient’s mouth during a dental procedure “conceivably fell within” both the state dental statute’s and policy’s broad definition of the practice of dentistry.