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

In American Best Food, Security guards from the insured nightclub escorted George and Michael from the premises.   Once outside, George shot Michael nine times.   Michael struggled to the alcove of the club where security guards then brought him back inside.   A club owner ordered the guards to remove Michael from the club which they did.   Michael later sued the club for its negligence in failing to protect him from criminal conduct.   In his suit, Michael specifically alleged that the club exacerbated his injuries by dumping him onto the sidewalk outside the club.   In other words, Michael alleged negligent conduct, occurring after he was shot, worsened his damages.

Alea London, the club’s liability insurer, denied both defense and indemnity for the suit because of its broad assault and battery exclusion which included the phrase “arising out of”:

This insurance does not apply to any claim arising out of:

A.                 Assault and/or Battery committed by any person whosoever, regardless of degree of culpability or intent and whether the acts are alleged to have been committed by the insured or any officer, agent, servant or employee of the insured or by any other person; or

B.                 Any actual or alleged negligent or omission in the:

1.                  Employment;

2.                  Investigation;

3.                  Supervision;

4.                  Reporting to the proper authorities or failure to so report; or

5.                  Retention;

of a person for whom any insured is or ever was legally responsible, which results in Assault and/or Battery; or

C.        Any actual or alleged negligent act or omission in the                     prevention or suppression of any act of Assault and/or Battery.

(Emphasis added).   Alea argued that this language relieved if of the duty to defend or indemnify because, relying on over 20 years of Washington cases, the phrase “arising out of” broadens the exclusion and encompasses any occurrence with a causal connection to the excluded conduct.   According to Alea, but for the excluded assault, Michael would not have sued the insured club.  

The Supreme Court disagreed pointing out that no Washington decision interpreted an assault and battery exclusion when post assault negligence is alleged, and a split of authority existed on the issue in cases which had addressed the issue.   The Court adopted the reasoning of cases holding that “arising out of” in an assault and battery exclusion did not apply to allegations of post assault negligence.   Since there was no analogous Washington decision, and a split of authority existed, Alea should have given the benefit of the doubt to its insured and picked up the defense.   

Perhaps more surprisingly, the Court held that Alea’s denial of the duty to defend was bad faith as a matter of law.   In Washington, bad faith supposedly means the insurer’s denial was unreasonable, frivolous, or unfounded.   To no avail was Alea’s argument that it did not act in bad faith because it relied on a reasonable interpretation of case law.      The Court disagreed and held that Alea should not have denied the duty to defend when it was arguable – based on conflicting non-Washington cases – whether the assault and battery exclusion applied to post assault negligence.

The Third Circuit affirmed the Pennsylvania District Court’s conclusion that the claims in question were subject to an exclusion in the Professional Liability policy for unapproved financial products, as was the case here.

Turning to the issue of the plaintiffs’ bad faith claims, the Third Circuit took note of the two-part test for recovery under 42 Pa. Const. Stat. § 8371. Thus, in order to recover, a bad faith claimant must establish by “clear and convincing” evidence that (1) the insurer lacked a reasonable basis for denying benefits and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis. In this case, the court found that the plaintiff had evidence of neither prong. In light of the fact that Continental Casualty had prevailed on the contractual issue, it clearly had had a “reasonable basis” for denying coverage. Furthermore, there was no evidence that it had known or disregarded the lack of a reasonable basis for denial. Finally, although Continental Casualty’s internal best practice procedures apparently suggest that the insurer should communicate with the policyholder before denying coverage, the court observed that, “While perhaps Continental should have spoken with Sprecker before it made a final coverage decision, a failure to follow best practices does not give rise to a bad faith claim.”

The Third Circuit opinion also contains an interesting footnote with respect to the scope of the reasonable expectations doctrine in Pennsylvania. In this case, the court ruled that reasonable expectations doctrine “applies only to unsophisticated, non-commercial insureds, and only to protect such insureds from ‘policy terms not readily apparent and from insurer deception.’” In this case, the court found not only that the insureds were sophisticated but that in light of the clear application of this exclusion, any suggestion that they were entitled to coverage was not a reasonable one to hold.
 

Unlike the typical “failure to settle” claim, the plaintiff does not want the insurer to accept its settlement offer. Rather, the offer is only a pretext whereby the insurer’s failure to settle can form the basis for making funds available to the plaintiff commensurate with the plaintiff’s injuries. Nevertheless, Florida courts have refused to find that this transparently deceitful practice is a basis for avoiding bad faith claims.

 In contrast to current law, which only requires that insurers act promptly to effectuate settlements on behalf of their insureds, Senate Bill 1650 would amend Section 624.155 to impose a reciprocal obligation on both the insured and any third party claimant demanding payment. Such parties would be required to cooperate fully with respect to settlement.

Further, a failure by the tort claimant to cooperate would serve as a defense to any subsequent bad faith claim against the insurer for failing to settle. Additionally, the legislation would give the insurer a 90-day window after receiving a written complaint to cure its claimed violation. Additionally, the legislation provides that in cases where multiple claimants are seeking compensation under a single policy, the insurer shall not be liable for extracontractual damages if it makes a written offer of its policy limits or tenders its limit into court for apportionment to the claimants. In such cases, the legislation provides that the insurer that tenders its limits is entitled to a release from its insured if the claimant accepts the tender.

Earlier in the district court litigation, St. Paul had obtained a declaration on summary judgment that (1) it “had no duty to defend, indemnify, or settle the underlying action against Onvia” and (2) it did not ”commit bad faith when it refused to defend Onvia.” Id. at *6. Given that the underlying case had settled for $17.515 million, Id. at *5, these were important rulings for St. Paul. However, the rulings did not end the matter because claims remained for bad faith and violation of the CPA, both of which were premised on several alleged violations of Washington regulations governing the handling of insurance claims. Principally, the plaintiff argued that St. Paul “fail[ed] to timely acknowledge and act upon the notice of the claim and tender of defense” and “fail[ed] to promptly or reasonably investigate the claim.” Id. at *6.

The Court’s decision includes some good news for insureds and some good news for insurers. On the one hand, the Court ruled that “a third-party insured has a cause of action for bad faith claims handling [and for violation of Washington’s CPA] that is not dependent on the duty to indemnify, settle, or defend.” Id. a **14, 16. In other words, an insurer can be held liable to its insured even when the insurer possessed no duty to indemnify, settle or defend in the first place. On the other hand, the Court held that “coverage by estoppel is not recognized in this context,” and the insured is not entitled to a presumption of harm. Id. at *15. Rather, the insured “must prove actual harm” and its damages are limited to “the amount it has incurred as a result of the bad faith … as well as general tort damages” for a bad faith claim.  Id.  With respect to the CPA claim, damages are limited to “the statutory remedies available to any successful CPA claimant.” Id. at *16. These statutory remedies consist of “actual damages … together with the costs of the suit, including a reasonable attorney’s fee” plus, in the discretion of the court, the possibility of treble damages in an amount not to exceed $10,000. RCW 19.86.090. Significantly, this standard would generally preclude an award of damages for the underlying claim amount (here, $17,515,000) where the insurer did not breach the duty to defend, settle or indemnify.

The Estate of Dennis Goetz sued Dr. Randall Mullen and Iowa Health Physicians (IHP) for failing to properly vaccinate Goetz against malaria before he took a trip to Africa and, upon his return, for failing to properly diagnose or treat the malarial condition that ultimately killed Goetz.  At the time, Goetz was insured under a medical malpractice policy issued by Physicians’ Insurance Company of Wisconsin with limits of $1 million.  The policy was issued in the name of Iowa Health Physicians, Mullen’s employer, which also paid the premiums on behalf of Dr. Mullen as part of a financial package to entice him into working at the clinic.  Although IHP was listed as the policyholder, the policy itself made clear that it was not an insured and, indeed, IHP declined to pay the additional premium that would have entitled it to coverage under its policy.  Rather, IHP was covered through a combination of self-insurance and a separate commercial insurance policy.

Prior to trial, the Goetz Estate twice offered to settle for $900,000.  Despite the opinions of several experts that Mullen had provided substandard care to Goetz and that his Estate had suffered a significant loss in earnings, PIC failed to respond to these offers.  After a defense expert admitted in his deposition testimony that Mullen’s treatment was inadequate, the plaintiffs withdrew their $900,000 offer and demanded $1.5 million instead.  PIC eventually countered at $200,000.  Ultimately, the case went to trial and resulted in a verdict of $3.5 million against Mullen and IHP.  In the ensuing coverage litigation, the District Cout held that Mullen could pursue a claim for damage to his reputation and for emotional distress even though IHP had paid the $2.5 million excess judgment over the $1 million PIC limit.  However, the District Court ruled that IHP had no cause of action since it was not an insured under the policy.

Under Illinois law, an insurer is deemed to have a good faith obligation to settle within limits and may be liable for the entire judgment against its insured if it fails to act in good faith in responding to offers to settle.  See, e.g. Haddick v. Valor Ins. Co., 763 N.E.2d 299 (Ill. 2001)   Given the facts in this case, the Seventh Circuit opined that Dr. Mullen himself probably had a strong argument against his insurer.  The issue before the court, however, was whether the district court had acted correctly in declaring that the same duty of good faith extended to PIC as the non-insured policyholder. 

IHP argued that it should be treated as a de facto insured given its contractual relationship as a policyholder and customer of the insurer.  The Seventh Circuit rejected this analysis, however, observing that what was important was not the mere existence of a contractual relationship but rather the substance of the insurance contract itself.  The court emphasized the fact that IHP had chosen not to purchase insurance coverage.  “The duty to settle is meant to protect the bargained-for insurance coverage, not extend it.  An insurer who acts in bad faith may end up paying above the contracted policy limits but only when doing so protects the insured’s legitimate expectation of coverage under the policy. . . .” 

The Seventh Circuit also emphasized the fact that the Illinois Supreme Court’s analysis of this issue in cases such as Haddick had analyzed the duty to settle as arising out of the insurer’s exclusive control over the duty to defend, including the right to settle.  In this case, the court pointed out that although PIC had exclusive control over Dr. Mullen’s defense, IHP had arranged its own defense.

Finally, IHP argued that it was unfair to saddle it with an uninsured liability given the fact that it was blameless and merely faced vicarious liability as the result of the misconduct of its agent Mullen.  The Seventh Circuit held that there was a distinction between blame and liability and that IHP’s remedy was not insurance coverage but rather a claim for contribution or indemnification against Mullen depending on what the terms of its employment contract with him permitted.

The insurers argued as a threshold matter they could not be held liable for bad faith because their policies did not cover the claims against the general contractor. While acknowledging the insurers’ coverage position was correct, the court disagreed with their position on bad faith. Citing to Coventry v. American States, 136 Wn.2d 269 (1998) which holds that an insured may maintain a bad faith claim against an insurer even if the insurer owes no duty to defend or indemnify against the claim, the court held Aecon could maintain its bad faith claim against the insurers even in the absence of coverage. 

Aecon tendered to the first insurer on May 3, 2006. That insurer requested and reviewed information from the insured and denied the claim seven weeks later on the grounds that its subcontractor insured’s work at the project, and the project itself, was complete before any property damage occurred. The court pointed out that the insurer knew there was water intrusion at the project but assumed it happened after the subcontractor completed its work on the project and did not attempt to determine whether the subcontractor may have performed deficient work that led to water intrusion while it was still working at the site. A year after this insurer denied another claim handler reviewed the file and determined Aecon was potentially covered as an additional insured. The insurer did not notify Aecon of the second claim handler’s conclusion.

Aecon also tendered to the second insurer, who denied coverage six months later. The second insurer denied coverage because (1) its subcontractor insured finished work on the project after its policy ended so the claim was barred under the “products completed operations hazard” and (2) the units were not turned over to Quinault during the policy period so Quinault had no claim damage during the policy period. This insurer’s denial letter did not explain how the “products completed operations hazard” applied to the claim or its position that Quinalt did not own the property during the policy period and so had no standing to make the claim.

Before denying coverage this insurer’s claim handler requested and received information from the insured and the broker, reviewed the claim file and hired an independent adjuster to determine certificates of occupancy dates for the project. He had a certificate of occupancy dated October 14, 2000 as well as a notation in his claim file showing the project was completed instead in June 2000. In his deposition the claim handler could not identify where he got the June 2000 date or whether it referred to the subcontractor or Aecon’s completion of work. Other than requesting pleadings from Aecon, this insurer did not investigate when property damage attributable to its subcontractor first occurred.

The court held the first insurer’s investigation before denying coverage was not adequate, but declined to rule on whether it had also acted in bad faith by failing to tell Aecon that a second claim handler had determined there was potential coverage. The court found the second insurer failed to establish why, even if its subcontractor’s work was completed after the policy ended and Quinalt did not own the property during the policy period, those facts precluded coverage. Because the insurers acted in bad faith and did not rebut the presumption of harm, the court applied the remedy of coverage by estoppel. The court also found the insurers violated the state Consumer Protection Act by failing to conduct the reasonable investigation required by Wash. Admin. Code § 284-30-330(4) before denying Aecon’s tender.
 

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.

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.