Wilson v. State Farm Mutual Automobile Insurance Company, 795 F. Supp. 2d 604

The claimant was a passenger in a vehicle insured by State Farm when it was involved in a collision with another vehicle. The driver of the other vehicle was at fault and uninsured. As a result of the accident, claimant had significant medical bills, some of which were paid by Medicare. The insurer agreed that claimant was due uninsured benefits up to the policy limits of $50,000.

The insurer attempted to determine the value of Medicare’s lien and asked for permission to discuss the lien with Medicare. The claimant refused the request and instead asked the insurer to deposit the full policy limits into an escrow account from which the Medicare lien would be paid. The claimant agreed to hold the insurer harmless from any claim by Medicare; however, Medicare was not involved in and not bound by this agreement. As an alternative, the insurer suggested including Medicare as a payee on the settlement check. Claimant also rejected this request. Finally, the insurer decided to await Medicare’s determination of the value of the lien and then issue separate checks to Medicare and plaintiff.

While waiting for the information from Medicare, the claimant filed a bad faith suit claiming it was bad faith for the insurer to delay payment of the $50,000 more than 30 days merely to protect the insurer from potential future liability to Medicare. Two months after suit was filed, the insurer learned the value of the Medicare lien and the following day paid both Medicare and the claimant.

The appellate court affirmed the grant of summary judgment in favor of the insurer. The court found that merely delaying payment does not constitute bad faith. If the reason for the payment delay was fairly debatable as to either the law or the facts, then bad faith cannot be found. Under Kentucky law, bad faith is outrageous conduct and the insured must demonstrate an evil motive or reckless indifference by the insurer to the insured’s rights.

Under the Medicare statutes, the claimant had the primary responsibility to repay Medicare. However, the insurer is absolutely liable to Medicare if the claimant failed to satisfy the Medicare lien from the settlement funds. Moreover, the insurer may have an obligation to protect Medicare’s lien under the Medicare Secondary Payer Act. The court found the insurer reasonably considered these obligations to Medicare. The court found it was reasonable to include Medicare as a payee on the settlement check and, where the Medicare lien is determinable, the insurer had sound reasons to try to determine the amount of it and take reasonable precautions to protect itself from overpayment.

The court found that the insurer did not delay payment in order to pay less or harass the claimant. Instead, the insurer took steps to comply with federal law and to protect its own legitimate interest against overpayment, which the court found to be reasonable and certainly not in bad faith.

Moreover, the court found the insurer had not violated the Kentucky statute which allows a recovery of attorney’s fees and interest if an insurer fails to make a good faith attempt to settle a claim within 30 days. Because the insurer paid both the claimant and Medicare the day after it received notice of the value of Medicare’s lien, the insurer acted well within the statutory guidelines. The insurer had a “reasonable foundation” to delay settlement by seeking assurances concerning the amount and payment of the lien.

This is a very good result for insurers who now have to contend with compliance with the Medicare statutes along with their obligations to their insureds. The Kentucky court balanced the interest of both and found correctly for the insurer in this case.

Penford Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 662 F.3d 497 (8th Cir. 2011)

The insured, a producer of starch for the paper industry and gasoline-additive ethanol, had a plant sitting on a 29-acre parcel occupying three different flood zones designated A, B, and C. In 2008, the insured bought flood insurance from the National Flood Insurance Program and additional insurance from the two insurers. Though losses of up to $300 million were covered under the policy, specific sublimits capped the insurers’ exposure depending upon the specific peril. The flood peril sublimit was $50 million “per occurrence and annual aggregate,” which was further limited by specific flood zone sublimits for the insured’s plant: $10 million in Zone A and $10 million in Zone B.

On June 13, 2008, the Cedar River breached a dike system surrounding the plant, eventually cresting 12 feet higher than the previous record set in the 1920s. The flood extensively damaged the insured’s plant and shut down operations. In the following months, the insured and its insurers disagreed regarding what losses were subject to the flood sublimits, whether payments were made timely, and how much was due under the policy.

After the insured filed suit against the insurers, the parties completed discovery and sought summary judgment. The district court found the policy ambiguous regarding what losses were subject to the flood sublimits, and decided that the parties’ intent would be determined based on extrinsic evidence. At trial, in addition to directing verdicts in favor of the insurers, the court also found no unreasonable delay in payments made, noting the insurers complied with the policy’s requirement of paying claims within 30 days of receiving a sworn proof of loss.

On appeal, the insured argued that (1) the trial evidence did not as a matter of law resolve the ambiguity in the policy (which according to the insured should have been construed against the insurers as the purported drafters of the policy); (2) the parties’ intentions when contracting involved a question of fact that should have been determined by a jury rather than the district court; and (3) the insurers unreasonably delayed payment in the face of obvious, extensive losses.

The Eighth Circuit turned the first argument around on the insured, noting there was “back-and-forth” in the drafting process and that under applicable Iowa law, “[w]hen a claim is ‘fairly debatable,’ the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.” Because the policy was ambiguous (according to the district court) regarding what losses were subject to the flood sublimits, the policy was “susceptible of two reasonable interpretations,” giving the insurers a reasonable basis for denying coverage for certain losses. Under Iowa law, when there is an “objectively reasonable basis” for denying a claim, “the insurer cannot be held liable for bad faith as a matter of law.” Therefore, the district court properly determined the question of bad faith as a matter of law.

Regarding the insured’s second argument concerning the parties’ intentions, the Eighth Circuit noted the insured had authorized an employee of the insured’s insurance broker to “represent and assist” the insured in all discussions and transactions with insurers relating to the procurement of insurance. In deposition testimony, the broker’s employee admitted she shared the insurance underwriters’ understanding that the $10 million flood sublimits would apply to both property damage and business interruption losses. This evidence was undisputed, established the mutual intent of the parties, and left no role for the jury.

Finally, regarding the insured’s third argument on the timeliness of payment, the Eighth Circuit noted the insurers complied with the policy’s requirements, paying all claims (up to the $20 million sublimits) within 30 days of submission.

American Guarantee and Liability Insurance Company v. United States Fidelity & Guaranty Company; TIG Insurance Company, Eighth Circuit (No.-10-2275)

The primary insurer insured the trucking company under a policy with limits of $5 million. The primary policy was a fronting policy. Fronting policies are policies in which the insured’s deductible is equal to the policy limits. A fronting policy protects the public in the event the insured entity becomes insolvent. These policies are frequently used by trucking companies to stay self insured while still complying with the financial responsibility laws in the state in which they operate. In this case, the insured agreed to indemnify the primary insurer in the event the primary insurer paid any amounts payable under the policy. The insured secured its indemnity obligation with $187 million in collateral which could be drawn upon in the event that the insured became insolvent or bankrupt, which is what happened.

Before the underlying trial, the insured filed for bankruptcy and was dissolved. The automatic stay was lifted as to the underlying lawsuit on the condition that any recovery from the insured would be limited to the available insurance coverage. A pre-trial global mediation was held and the insured participated in the mediation through its third party administrator (TPA) which handled all of the insured’s claims on behalf of the primary insurer. The mediation ended in all defendants settling except for the insured and one other defendant. During the mediation, the plaintiffs demanded $5 million from the insured and the insured rejected this demand.

The only other remaining, non-settling defendant settled with the plaintiffs before the tort case. The total settlement amount that the plaintiffs received prior to trial totaled nearly $5.1 million. This meant the plaintiffs had to recover a verdict exceeding $5.1 million to recover anything from the primary insurer.

In addition to the primary policy, the insured carried excess insurance.  A verdict would need to exceed $10.1 million to exhaust the primary insurance fronting policy, and a verdict exceeding $13.1 million was necessary to recover anything from the excess insurer (the first layer of excess insurance was $3 million through an affiliate of the insured). None of the insurers claims managers, or defense attorneys involved in the underlying lawsuit, estimated the insurance exposure to be more than $13.1 million, and all believed the risk of a jury finding the insured responsible for more than $13.1 million was very low to non-existent.

Like the other claims managers involved, the excess insurer’s claims handler did not believe the value of the remaining claim would expose the excess policy. Nevertheless, the excess insurer asked the TPA to settle the remaining claim within the primary policies limit of $5 million.  Settlement negotiations continued during trial; however, the insured never demanded that its primary insurer settle within the policy limits and settlement was never reached.

Of course, this blog post is being written because the jury returned a verdict totaling $46.06 million.  After subsequent reduction and adjustment for set off and negotiations, the plaintiff eventually settled for $22 million in “new money.”  Of that amount, $5 million was paid by the primary policy and the excess insurer ultimately faced an exposure of $17 million.

The primary insurer filed a Declaratory Judgment Action against the excess insurer in Federal District Court in Missouri. The primary insurer claimed its payment of $5 million terminated all of its obligation with respect to the underlying lawsuit.

The excess insurer filed an action against the primary insurer, its claim manger, and the TPA in the Federal District Court in the State of Washington alleging the primary insurer failed to settle the plaintiff’s wrongful death lawsuit in bad faith. The excess insurer sought $17 million in damages from the primary insurer. (The excess insurer was able to choose Washington because the insured had operated its nationwide trucking company out of Washington before its dissolution.)

Under the “first to file” rule, the Washington Court agreed the dispute between the two insurance companies should be litigated in Missouri and transferred the action where it was consolidated with the primary insurer’s pending Declaratory Judgment Action. The District Court made a determination that Missouri law would apply as requested by the primary insurer and then granted the primary insurer’s motion for summary judgment.

On appeal, the excess insurer contended the district court erred in applying Missouri law rather than Washington law. After applying Missouri’s choice of law rules to determine which states law should govern, the Eighth Circuit agreed that Missouri’s law applied. The Eighth Circuit found the dispute had more contacts with Missouri than with Washington for the following reasons: 1) any injuries arising from the bad faith failure to settle claim did not occur in Washington because the insured was dissolved and no longer existed when the Missouri jury rendered a verdict in favor of the plaintiffs’; 2) the conduct causing the injury occurred in Missouri where most of the settlement negotiations took place or should have taken place; 3) neither the excess insurer or the primary insurer were incorporated in either Washington or Missouri; and 4) Missouri was the place where the relationship between the two insurers was centered because Missouri was where the underlying litigation occurred.

The Eighth Circuit also affirmed the district court’s determination that the excess insurer’s bad faith claim failed because the insured never made a demand for the primary insurer to settle the underlying litigation within the primary policy limits. One of the necessary elements of bad faith failure to settle claims in Missouri is that the insurer has demanded that the insurer settle the claim brought against the insured. Missouri recognizes two exceptions to this general rule. One exception, which is inapplicable here, is when the insurer denies coverage and refuses to defend.

The second exception is when the insured is not informed by the insurer of settlement offers.  The excess insurer argued there were genuine issues on fact of whether this exception applied. The excess insurer contended the primary insurer and the TPA failed to keep the insured advised of the settlement offers. The Eighth Circuit found that the record showed that the insured was advised of settlement demands, but elected not to settle because it believed its exposure was much less than the plaintiffs wanted. As a consequence, it never demanded that the primary insurer settle the case within the $5 million policy limits, despite being urged to do so by the excess insurer.

The excess insurer argued a third exception applied–that no settlement demand was essential when the primary insurer reserves to itself the exclusive right to make settlements. The excess insurer argued the exception applied here because of the insured’s bankruptcy.  Therefore, the TPA exercised the exclusive right to settle because the insured had no financial interest in the underlying litigation and did not have authority to demand the primary insurer settle the claims within the policy limits. Assuming Missouri would even recognize this third exception, the Eighth Circuit concluded that the insured had a financial interest in the outcome because the primary policy was a fronting policy secured with the insured’s collateral, which became part of the bankruptcy estate. When the automatic stay was lifted, it exposed the insured’s collateral up to the $5 million retention limit under the primary policy.

The Eighth Circuit did not address the excess insurer’s argument that Missouri would allow a direct action between insurers when such action is based upon principals of equitable subrogation. In light of the Eighth Circuit’s conclusion the bad faith claim failed because the insured never made a demand of the primary insurers to settle, the excess insurer’s argument regarding equitable subrogation was not reached. However, the Eighth Circuit did acknowledge Missouri law does not generally allow an excess insurer to bring a bad faith claim in its own name against the primary insurer.

Bird v. Farmers Insurance Exchange, 260 P.3d 209 (Wash.App. 2011)

The claimant’s next door neighbor contacted the insured, a plumbing contractor, to repair a leaking sewer line. The insured’s employee, without claimant’s consent, went on to claimant’s property and cut claimant’s pressured sewer line. When the claimant returned home from work, his system cycled on and engulfed him in an explosion of sewage, which caused him to fall and crack his elbow. The claimant later learned that the insured’s employee had cut the sewer line and he demanded that the insured fix the line. The insured attempted to repair the line.  However, over the next 8 months, sewage continued to escape from the line and to cause extensive damage to the residence. The claimant then removed contaminated soil from his lot.  The claimant attributed his subsequent heart attack to the physical labor undertaken during the soil removal. Moreover, to determine the full extent of the damage, the claimant hired a geotechnical engineering firm, contractors, and others. Eventually, a retaining wall estimated to cost approximately $850,000 had to be installed due to instability problems in the hillside water-front property.

Claimant sued the insured for trespass and negligence. The insurer provided a defense without a reservation of rights. Subsequently, the insured admitted its employee went on the claimant’s property without permission and the court granted partial summary judgment in favor of the claimant on liability on his trespass claim. The nature and extent of the claimant’s damage remained for trial.

The parties began settlement talks after their mediation efforts had failed. Eventually, claimant made a $2 million policy limits demand, which was rejected. Concerned about the company’s potential exposure in excess of policy limits, the insured’s President retained personal counsel who negotiated a $3.75 million settlement agreement that included an assignment of the insured’s claims against the insurer, a stipulated judgment, and a covenant not to execute against the insured.

The claimant moved for a determination that the settlement was reasonable. The trial court granted the insurer’s motion to continue the reasonableness hearing and to conduct discovery.  However, the trial court denied the insurer’s jury trial demand. The trial court conducted a reasonableness hearing over 4 days and issued a memorandum ruling finding that the $3.75 million settlement was reasonable.

On appeal, the insurer contended that the reasonableness hearing was unconstitutional because it sets the presumptive amount of damages in a bad faith action under Washington law. The appeals court found the reasonableness hearing, which is subject to Washington statute, is equitable in nature, not legal, and therefore no right to a jury trial attached. The Washington statute specifically states that “a determination by the court that the amount to be paid is reasonable must be secured.” RCW 4.22.060.  The appeals court also relied on persuasive authority from other jurisdictions, which found that reasonable determinations in situations like this are within the discretion of the trial court.

The appeals court held there was sufficient evidence to find the settlement was reasonable. The trial court heard evidence over the course of 4 days which created a record of several thousand pages. In addition, the trial court issued a lengthy memorandum opinion which discussed each of the 9 factors required by Washington’s statute when determining reasonableness. The appeals court found that the trial court had appropriately weighed the liability and damages evidence supporting its reasonableness finding.  Furthermore, the court of appeals found that there was no collusion or fraud.

Moreover, the fact that the insurer was allowed to intervene and participate in the reasonableness hearing weighed in favor of the reasonableness finding. The appeals court opined that the insurance company was given the opportunity to present evidence and argue its point regarding potential liability and damages, but the trial court was not persuaded.  In some states, insurance companies may be foreclosed from intervening in such hearings once they have denied coverage or failed to settle within policy limits.

Tripp v. W. Nat’l Mut. Ins. Co., #10-3759 (8th Cir. Dec. 29, 2011)
Bjornestad v. Progressive N. Ins. Co., #10-3733 (8th Cir. Dec. 29, 2011)

Cindy Tripp was involved in a car accident against an underinsured motorist. After pursuing her claim against the UIM, she notified her insurance company that she would be presenting a UIM claim. She had $250,000 UIM coverage with Western National Mutual Insurance Company (Western National) but sought UIM payments of $150,000. The tortfeasor’s insurance company settled with Tripp for $87,500 of the $100,000 liability limit. Under South Dakota law that was deemed the “best settlement” which could be reached and was all that was necessary in order to preserve her UIM claim. Because Tripp and Western National stipulated that that was the best settlement offer, Western National got credit for the tortfeasor’s full $100,000 liability limit reducing Tripp’s UIM claim to the balance of her UIM limits, $150,000. Western National offered only $10,000.

Thereafter she filed breach of contract and bad faith claims. The jury awarded her the full amount she sought, the $150,000 balance left on her UIM coverage. However, the jury verdict was in favor of Western National on the first party common law bad faith claim. Even so, the U.S. district judge awarded attorney’s fees to Tripp in the amount of $65,000 after finding that Western National’s failure to pay the $150,000 was vexatious or without reasonable cause within the meaning of South Dakota’s statute, S.D. Codified Laws § 58-12-3.

Western National argued on appeal that the jury verdict denying the bad faith claim precluded the district judge from awarding the attorney’s fees under § 58-12-3 as a matter of law. The Eighth Circuit, after reviewing prior rulings of the South Dakota Supreme Court, ruled otherwise. It reviewed the legal argument de novo, but ruled that the district judge’s fact findings had to be reviewed “for clear error,” noting that such a factual finding would be clearly erroneous only if the Eighth Circuit was “left with a definite and firm conviction that a mistake has been committed.”

The Eighth Circuit disposed of the legal argument after reviewing multiple rulings by the Supreme Court of South Dakota. The court principally relied upon Brooks v. Milbank Ins. Co., 605 N.W.2d 173 (S.D. 2000) for the proposition that “an award of fees under § 58-12-3 does not depend upon a jury’s findings of bad faith.” The Eighth Circuit held that that legal proposition supported its holding that “a jury’s adverse finding on a bad faith claim does not, as a matter of law, preclude a trial court from awarding attorney’s fees under 58-12-3…. [A] trial court should undertake a separate analysis to determine whether the insurer’s refusal to pay was vexatious or without reasonable cause in those cases where the jury finds an insurer did not act in bad faith.”

In addition, the Eighth Circuit said its holding was supported by another South Dakota Supreme Court case finding that “vexatiousness ‘is not an element of a bad faith claim.’” Bertelsen v. Allstate Ins. Co., 796 N.W.2d 685, 696 (S.D. 2011). Thus, while a trial court may certainly consider the jury’s disposition of a bad claim relevant, it is not bound by such a finding because the elements of a bad faith claim are distinct from the elements a court considers under § 58-12-3.” Finally, the court noted that the bad faith tort was intended to punish insurers for socially unacceptable acts and to compensate claimants for their damages caused by bad faith conduct, whereas the statutory provision only applied to contract claims and was “designed to recompense a claimant for the legal expenses incurred when an insurance company unreasonably forces the claimant to resort to litigation to obtain contractual benefits.” Id. (citations omitted).

The court also held that the district court’s finding was supported by the facts because Western National’s “own file supported Tripp’s claim that the refusal to pay was without reasonable cause.” In particular, the court noted that the claims adjuster had valued Tripp’s claim in the range of $120,000 to $150,000. Even giving Western National the benefit of its argument that that included the value of the tortfeasor’s insurance coverage ($100,000), the district court noted that Western National had only offered $10,000. That was one-half of the lower end of the $20,000 to $50,000 range, a value which Western National could not contest based upon its claims adjuster’s file. Furthermore, the jury had valued Tripp’s claim at $250,000.

Finally, the court looked at the record which suggested that Western National had failed to make an adequate investigation of Tripp’s loss. Although Tripp had early on given Western National notice that her damages would exceed the underlying liability limits and she would pursue a UIM claim, Western National did not independently investigate the claim by requesting additional information from her treating physicians, seeking an independent medical examination, or retaining an economist to review Tripp’s claimed future wage loss. Considering all of the facts in the record before it, the Eighth Circuit affirmed the ruling in Tripp.

On the same day, the same panel of judges affirmed an award of § 58-12-3 damages in the Bjornestad case. In Bjornestad, the at-fault driver had limits of only $25,000 and Bjornestad had UIM coverage of $100,000. Accordingly, the maximum she could recover was $75,000. As in Tripp, the jury awarded the full amount she sought, the jury denied her common law first party bad faith claim, and the district judge awarded her attorney fees. Relying upon the law set forth in its opinion in Tripp, the Eighth Circuit easily disposed of Progressive’s argument that the district judge was bound by the jury’s finding of no bad faith.

On the lower court’s factual finding, the Eighth Circuit noted that Progressive’s offer to pay $25,000 in exchange for a full and final release was unreasonable because at that time the insured’s medical expenses alone totaled $24,300 and the $25,000 offer (above the tortfeasor’s $25,000 limits) did not take into account future medical expenses, past and future economic loss, pain, suffering, impairment, and loss of enjoyment of life. Although Progressive had an independent medical examiner review the insured’s medical records and that doctor’s opinion was consistent with the belief that there was only a mild neck strain, by the time of trial the insured’s medical expenses had increased to over $50,000.

In affirming the award of attorney’s fees, the court noted that when the $25,000 settlement offer was made, “(1) Progressive itself had valued the UIM claim at a range above that amount ($25,350-$50,350); (2) the Progressive claims specialist handling Bjornestad’s file communicated to Bjornestad’s attorney that Progressive had valued the claim at even less than $25,000, which conflicted with Progressive’s actual evaluation range; (3) Progressive inaccurately told its IME that Bjornestad’s low back pain did not begin until [months after the accident] even though Progressive knew the low back pain and low back treatment began the day after the December 2005 car accident; and (4) Progressive demanded a full and final release of all claims as a condition of its $25,000 offer.” Based upon those factors the district court believed that Bjornestad was entitled to an award of attorney’s fees in the amount of $45,718.60. After reviewing the record in detail, the Eighth Circuit stated: “We are not left with a definite and firm conviction a mistake was made. We, therefore, conclude the district court did not clearly err in finding Progressive’s refusal to pay was vexatious or without reasonable cause.” Accordingly, the Eighth Circuit affirmed.

Government Employees Insurance Company v. King, 68 So. 3d 267

Insured was driving a car when it was struck from behind by another vehicle. The liability insurance company for the other vehicle settled the claim of insured and his wife for its policy limits. Subsequently, the insured and his wife filed claims for UIM with Government Employees Insurance Company (GEICO). GEICO did not settle the UIM claims. The insured filed suit against GEICO. Ultimately, a jury returned a verdict in favor of the insured for approximately $1,588,000 and in favor of his wife for $50,000. The UIM limits were $25,000 per person.

Because the trial involved only a claim for UIM benefits under the insurance contract, the judgment on appeal was not a judgment for the full amount of the jury’s verdict, but rather a judgment based on the $25,000 in insurance coverage. After oral argument on appeal, the three judge panel determined that there was no reversible error and affirmed without a written opinion. The three judge panel denied the insureds’ motion for attorney’s fees because the judgment did not involve a denial of coverage and the insured’s proposal of settlement before the trial had been in the amount of $100,000, which was an amount in excess of the $25,000 policy limits.

The insured filed a motion for re-hearing noting the appeals court had previously allowed a conditional judgment of attorney’s fees for work done at the trial court level in Allstate Insurance Co. v. Sutton, 707 So.2d 760 (Fla.2d DCA 1998). The insured argued that logically he should be entitled to a conditional judgment of attorneys fee’s for the work in this case at the appellate level.

In Sutton, the trial court first entered a judgment for the limits of the insurance coverage, reserving jurisdiction to determine attorney’s fees and costs at a later time. Allstate appealed that judgment, and the appellate court affirmed. On remand, Allstate satisfied the judgment but the trial court proceeded to conduct a hearing on attorney’s fees, entering a judgment in excess of $200,000 even though there had been no determination that Allstate had committed bad faith and there was no legal basis at the time for entering a judgment awarding legal fees. In fact, a bad faith action was pending in federal court when the trial court entered the judgment against Allstate.

Allstate appealed and argued the judgment was “premature” and the appeals court reversed the judgment; however, the appeals court authorized the trial court to enter a so called “contingent judgment” that could be transformed into a real judgment in the event the Suttons prevailed in federal court and the federal judgment exceeded the statutory required 125% of the settlement proposed in the circuit court.

The appeals court in King recognized that in the twelve years since Sutton, the practice of entering contingent judgments had not gained any general acceptance, and courts had criticized the Sutton decision. Recognizing the many difficulties in entering “contingent judgments,” including that a “contingent judgment” is not an appealable order, the appeals court found the insured was not entitled to an award of attorney’s fees for the appeal, and there was no legal basis for the appeals court to order the trial court to determine a contingent award of appellate attorney’s fees for use in any subsequent lawsuit.

The appeals court recognized that an action for bad faith is usually filed as a separate proceeding after the initial case is finished. The damages in a bad faith action involving UIM coverage are specified under the Florida statutes. It is the finder of fact in the subsequent bad faith lawsuit that is entitled to determine the amount of those fees. The appeals court found no authority which allowed it or the trial court to determine the amount of attorney’s fees instead of the trier of fact in any subsequent bad faith lawsuit.

To avoid any confusion, however, they noted that if in a subsequent bad faith action the trial court determined that appellate attorney’s fees were an element of damages or were otherwise awardable, then that award did not require, as a condition precedent, any order from the appeals court awarding fees on a contingent basis. The appeals court receded from its earlier decision in the Sutton case and denied the insureds’ motion for attorney’s fees on appeal.

This appears to be an important decision of the Florida appeals court regarding conditional judgments. Florida is a hotbed of bad faith lawsuits and this decision provides some hope to insurers that at least this Florida appeals court no longer will allow conditional judgments relating to potential bad faith claims.

Aleman v. Zenith Insurance Company, 343 S.W.3rd 817 (Tx. App. 2011)

Rita Aleman (“claimant”) was employed as a packer by an automotive parts manufacturer.  Zenith Insurance provided worker’s compensation insurance for claimant’s employer.  Claimant filed an injury report alleging she had suffered an on-the-job injury to her right hand.  Claimant’s employer immediately referred her to a doctor who diagnosed her with a right wrist sprain and right tenosynovitis.  Claimant also visited a chiropractor who diagnosed her with a wrist sprain/strain and carpal tunnel syndrome.

Zenith handled claimant’s condition as a compensable but it continued to investigate the claim.  As part of the investigation, Zenith’s claims examiner took claimant’s statement and spoke with her employer about claimant’s duties.  Claimant’s supervisor refuted claimant’s claim she packaged 600 orders a day as the entire packaging department packaged only 160 to 165 orders per day.  Zenith and its claims examiner also reviewed the available medical information.  Claimant stated she was still in pain five to six weeks after the date of the injury and that was inconsistent with tendonitis or tenosynovitis according to the medical disability advisor.  Also, an MRI did not reveal any soft tissue swelling or tendon damage in the right wrist.  Zenith also consulted numerous peer reviewed medical studies which led it to conclude that claimant’s work activities would not have caused carpal tunnel syndrome.

Based on this information, Zenith decided to contest compensability and sent notice to claimant denying any further worker’s compensation benefits.  Zenith subsequently requested a peer review of the claim to determine the correct diagnosis and whether the medical condition could have been caused by claimant’s work activities. Zenith explained that it decided to contest compensability before requesting peer review because it did not believe it would receive peer review before the statutory sixty day deadline for filing the dispute expired.  If it did not contest compensability within sixty days of notice of injury, the insurer waived its right to contest compensability under Texas law.

A peer review was performed, and it was determined that a definitive diagnosis had not been established and the limited information provided regarding the work injury was inconsistent with the diagnosis of carpal tunnel syndrome.

Claimant contested the denial of the benefits, and the Texas Department of Worker’s Compensation conducted a benefit review.  Claimant argued she had sustained a compensable injury based on a positive nerve conduction study; however, the study had not been provided to Zenith.  The study reflected the claimant had a carpal tunnel syndrome in both hands but it did not include a diagnosis of tenosynovitis  Based on this information, the Department of Worker’s Compensation determined claimant sustained a compensable occupation disease/injury and Zenith paid claimant accrued and unpaid benefits.

Following the contested hearing, Zenith received a peer review report which questioned whether the carpal tunnel syndrome was related.  Zenith requested the Department of Worker’s Compensation to appoint a designated doctor to conduct a review.  The Department of Worker’s Compensation selected a designated doctor who diagnosed tenosynovitis which was work related and that she had reached maximum medical improvement for the injury with no permanent impairment.  However, he also concluded that she had carpal tunnel syndrome that was not work related.

Based on this opinion, Zenith filed a dispute with the Department of Worker’s Compensation contesting the compensable injury extended to carpal tunnel syndrome.  Another contested case hearing was conducted where Zenith accepted the injury to the right wrist in the form of right wrist sprain and tendonitis.  However, the hearing officer found that the evidence was insufficient to causally relate to right carpal tunnel syndrome as compensable injury.

Claimant filed suit alleging Zenith and its claims examiner violated provisions of the Texas Insurance Code and breached the common law duty of good faith and fair dealing.  More specifically, claimant alleged Zenith failed to attempt in good faith to effectuate a prompt, fair, and equitable settlement of her claim, failed to promptly provide a reasonable explanation of the basis for its denial of the claim, and refused to pay a claim without conducting a reasonable investigation.  Zenith filed a motion for summary judgment.  The lower court granted summary judgment and claimant appealed.

As a general rule, there can be no claim for bad faith when an insurer has promptly denied a claim that is not covered.  The Department of Worker’s Compensation found that the carpal tunnel syndrome was not a work-related injury.  Therefore, the trial court properly granted summary judgment in favor of Zenith on a bad faith claim related to Zenith’s dispute that the compensable injury did not extend to carpal tunnel syndrome.

With regard to claimant’s wrist strain/sprain and tendonitis, the appellate court found Zenith did not act in bad faith in relation to these claims.   Zenith made a decision to dispute compensability of these injuries because the diagnosis was questionable.  Plaintiff waited nearly three weeks to report her injury, and her statement regarding the amount and type of work she did with her hand was later refuted by her employer. There was no objective medical evidence of wrist strain/sprain as the MRI revealed no soft tissue swelling or tendon damage.  Zenith believed, based on the medical information and medical literature that it reviewed, that Aleman might be suffering from a non-work related carpal tunnel syndrome.  Therefore, Zenith did not know nor should it have known it was reasonably clear that the claim was covered.  At the time Zenith filed the dispute with the Department of Worker’s Compensation, it had only received reports from some of claimant’s doctors.  Whether liability is reasonably clear must be judged by the facts before the insurer at the time it denied the claim.  Moreover, Zenith considered other evidence besides just the medical reports in determining whether to contest compensability.

The appeals court also found that Zenith conducted a proper investigation even though it did not request a peer review report before denying the claim.  The appeals court found that even though Zenith did not wait for the peer review report before denying the claim, its investigation to that point indicated that it was not reasonably clear that claimant had sustained a compensable injury.  Claimant failed to cite any authority for the proposition that Zenith acted in bad faith by disputing compensability prior to the expiration of the 60 day statutory dead line.  Further, Zenith testified it decided to contest compensability before requesting the peer review because it did not believe it would receive the peer review prior to the expiration of the statutory deadline.

Claimant also alleged Zenith acted in bad faith by failing to provide a reasonable and clear explanation of the denial of the claim.  Specifically, claimant argued Zenith did not identify the medical literature or provide it with a copy of the medical literature it relied on in claiming there was no causal relationship between the work activities and the diagnosed carpal tunnel syndrome.  The appeals court found that Zenith’s notice of its denial of the claim was stated in plain language and identified Zenith’s reasons for contesting compensability.  Texas law does not impose on Zenith any duty to identify the medical literature on which it relied or provide copies to the claimant in connection with the notice.

This case once again illustrates how an insurance company has the right to conduct an investigation into claims and even issue a denial of the claim before the entire investigation has been completed.  Zenith had done enough investigation at the time of the denial that the court found it had a sufficient and reasonable basis for the denial even if a peer review had not yet been completed.  The short 60 day time frame worked in favor of Zenith because it provided a justifiable reason for denying the claim or otherwise facing waiver of ever being allowed to challenge compensability.  Insurers must often act fast in order to avoid waiver of defenses, violations of claim practices acts or exposure to statutory penalties.  In this case, Zenith worked fast to do as much investigation as possible and obtain a reasonable basis to challenge the claim.

(EDITOR’S NOTE) In Texas Mut. Ins. Co. v. Ruttiger, the Supreme Court of Texas has issued an opinion that precludes a workers’ compensation claimant from seeking extra-contractual damages from an insurer.  See 2011 WL 3796353 (Tex.) (decided August 26, 2011, not yet released for official publication).  In Ruttiger, the employee-claimant brought claims against insurer based on, in relevant part, the Texas Insurance Code, breach of the duty of good faith and fair dealing, and Texas Deceptive Trade Practices Act.  The claimant obtained a judgment on a jury verdict which was subsequently affirmed by the Texas Court of Appeals.  The Texas Supreme Court reversed the judgment in material part, however, finding that the Texas workers’ compensation statute precluded the claimant’s ability to sue under the Insurance Code or the Deceptive Trade Practices Act because the workers’ compensation statute provided the exclusive remedy to claimants.  Because Ruttiger has not been officially release it is subject to revision or even withdrawal, but if finalized in its current form, Ruttiger would represent a significant shift in Texas law.  For instance, under Ruttiger, most of the causes of action pleaded by claimant in Aleman would have been dismissed as they sought relief under the Texas Insurance Code.

Rossi v. Progressive Insurance, 2011 WL 1565848 (M.D.Pa. 2011)

On January 5, 2007, the insured, Rossi was involved in an automobile collision with McGroarty. Rossi was insured by Progressive, and his policy provided UIM coverage with a limit of $30,000. The insured turned his car left across on-coming traffic lanes and collided with McGroarty’s vehicle. Both liability and the insured’s damages were hotly contested, which resulted in extensive discovery. Approximately two years after being provided notice of insured’s UIM claim, Progressive forwarded a $30,000 settlement draft to the insured’s attorney. Progressive paid the $30,000 policy limits approximately one year after the insured had filed a bad faith action against it.

Under Pennsylvania law, an insurer has a duty to act in the “utmost good faith towards its insured.” Pennsylvania courts have defined bad faith as “any frivolous or unfounded or refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e., good faith and fair dealing), through some motive of self interest or ill will; mere negligence or bad judgment is not bad faith.” Under Pennsylvania law, a plaintiff must prove bad faith by clear and convincing evidence.

The federal district court found under Pennsylvania law no reasonable fact finder could find that the insured had proven Progressive’s bad faith by clear and convincing evidence. The court found Progressive continued its investigation in an objectively reasonable manner, even if it did not move as quickly as the insured would have liked.

No evidence suggested dilatory conduct, dishonesty, or malice. The court found that because the insured failed to yield the right of way and turned left into on-coming traffic, it was reasonable for Progressive to investigate liability – notwithstanding the fact that McGroarty was driving while intoxicated and speeding.

In light of Progressive’s knowledge that the insured had been unemployed for some time and was receiving payments after having been adjudicated disabled, it was also reasonable for Progressive to dispute its insured’s damages. The insured’s documented out-of-pocket medical expenses were well within the $100,000, limit of McGroarty’s policy. In the absence of a viable loss of earning claim, it appeared to Progressive that its insured could be made whole without resorting to a UIM claim.

The court was not persuaded by the insured’s argument that Progressive’s conduct in contesting liability on the basis that its insured made a left turn because making a left turn at that intersection was not in and of itself illegal. It was undisputed that McGroarty would have had the right of way and that the insured failed to yield. There was some evidence suggesting that McGroarty may have accelerated into the intersection at a high rate of speed, but it was still reasonable for Progressive to question whether its insured’s negligence was a substantial contributing factor to the collision. Moreover, an arbitration between McGroarty’s insurer and Progressive found Progressive’s insured’s contributory negligence to be 80 percent. In light of all these facts, the court found no reasonable inference of bad faith liability could be drawn from Progressive’s investigation of liability.

The insured also argued the incident was not fully investigated as quickly and fully as it ought to have been. The court found, however, considering the lack of evidence that the insured’s injuries would exceed the amount covered by McGroarty’s policy, the pace and scope of Progressive’s investigation did not suggest bad faith.

The insured also argued Progressive behaved in a dilatory manner that permitted an inference of bad faith because he was not clearly told until more than one year after first providing notice of the UIM claim that liability was at issue. The uncontroverted facts showed that Progressive had investigated liability before this time. The facts also showed that because the estimated value of the insured’s claim did not appear to exceed $100,000, Progressive lacked any clear evidence or documentation that the UIM coverage would be triggered.

I have not provided a detailed account of the underlying facts in this case; however, suffice it to say it appears Progressive conducted a thorough investigation and had a reasonable grounds for conducting the investigation in light of the facts of the case. It seemed the insured believed any liability on his part should be ignored because of the evidence McGroarty was possibly speeding and driving under the influence at the time of the collision. Although those facts did support liability on behalf of McGroarty, the insured was also liable and failed to provide timely evidence that his damages would not be covered under McGroarty’s policy thereby triggering the UIM limits. The higher burden of proof of clear and convincing evidence to prove bad faith in Pennsylvania, also assisted Progressive in obtaining summary judgment in this case.

Sonja Skinner v Guarantee Trust Life Insurance Company, 2011 WL 1598787 (S.D.Ohio)

In this United States District Court case the plaintiff’s husband died while insured under an accidental death and dismemberment insurance policy issued by defendant Guarantee.  The dispute was whether the husband’s death was excluded by a provision of the policy that excluded deaths resulting from taking narcotics, amphetamines or other stimulants without a prescription.  The decedent died of methadone intoxication.  He did not have a prescription for methadone but the wife did and the wife argued that her husband accidentally took the methadone pills in the middle of the night thinking it was his own prescription medication.  The plaintiff contended that the exclusion of the use of methadone only included voluntary or intentional acts of consuming and did not include the accidental use of methadone.

Since the term “use” was not specifically defined in the policy, the court had to determine its plain and ordinary meaning.  The plain meaning of the term meant the act of putting the narcotics into action which included all uses of methadone.  Since it was not disputed that Mr. Skinner died as a result of methadone intoxication, his death was the result of the use of narcotics and therefore excluded.  Defendant’s motion for summary judgment was granted.

The court went on to consider the plaintiff’s bad faith claim.  Not surprisingly, under Ohio law a bad faith claim is dependent on showing that a plaintiff’s claim was covered under the policy.

Clearly written exclusions in a policy coupled with an investigation that establishes facts that fall within the exclusion are an excellent way to defeat coverage and defeat the typical bad faith claim joined with the coverage claim.

Liberty Mutual Insurance Co. v. Pella Corp., 650 F.3d 1161, (8th Cir. Iowa) 2011 W.L. 3611485

Pella found itself a defendant in Illinois state and federal court class action cases alleging that Pella defectively designed and manufactured windows which resulted in damage to those windows.  The plaintiffs in the underlying cases alleged multiple theories of recovery.  Liberty Mutual denied coverage, but entered into an apparent cost-sharing agreement with Pella’s pre-2001 carriers to pay portions of the defense costs.  Thereafter, it filed a declaratory judgment action contending that it had no duty to reimburse Pella.

The Eighth Circuit reviewed several arguments Liberty Mutual raised in support of its coverage denial.  The Eighth Circuit held that several of Liberty Mutual’s positions were not supported by the policy language and controlling authorities.

However, Liberty Mutual raised one issue on appeal which led it to victory.  In addition to its losing arguments, Liberty Mutual denied coverage on grounds that there had been no “accident” so there was no covered occurrence which led to property damage.  The Eighth Circuit reviewed, at some length, the Iowa Supreme Court’s ruling in Purcell Construction, Inc. v. Hawkeye Insurance Company, 596 N.W.2d 67 (1999) for its definition of “accident” the undefined term in the policy used to define occurrence.  Adopting the majority rule, the Supreme Court of Iowa concluded that “defective workmanship standing alone, that is, resulting in damages only to the work product itself, is not an occurrence under a CGL policy.”  The court also noted that “the damages [the developer] seeks is limited to the very property upon which Purcell performed work and were not the result of an occurrence as defined in the policy.”

Relying upon that holding, as well as later Iowa case law, the Eighth Circuit held that “the plaintiffs in the [underlying class action] suits did not allege property damage caused by an occurrence.”  Furthermore, “the property damage—whether to the windows themselves or the structures of the building near the windows—was caused by a defect that Pella was alleged to have known about.  Under Iowa law, such defective workmanship… cannot be considered an occurrence….”  Because no occurrence had been alleged in the underlying class action cases, “Liberty Mutual did not owe Pella a duty to reimburse its costs in defending either action.”

Having ruled that there was no coverage, the court turned to Pella’s cross-appeal.  Pella contended that under Iowa law all actions by an insurance company must be in good faith.  Since the court had already determined that Liberty Mutual relied on several grounds which did not support the coverage denial, Pella contended that the denial was in bad faith.  However, the court pointed out that in Iowa an insured has the burden of proving two elements to recover on a bad faith claim.  Those grounds are:  “(1) the [insurer] had no reasonable basis for denying the plaintiff’s claim or for refusing to consent to settlement, and (2) the [insurer] knew or had reason to know that its denial or refusal was without reasonable basis.”  Bellville v. Farm Bureau Mutual Ins. Co., 702 N.W.2d 468, 473 (Iowa 2005).

Quoting further from the Bellville case, the 8^th Circuit noted that whenever there is “an objectively reasonable basis for denial of a claim…, the insurer cannot be held liable for bad faith as a matter of law.”  Since the court had “concluded that Pella was not entitled to coverage for its defense costs in the [underlying class action] suits…, we necessarily conclude that Liberty Mutual had an objectively reasonable basis for denying Pella’s claim.” Even though Liberty Mutual had emphasized other reasons for the denial of coverage, it had also raised a proper basis for denying coverage.  Accordingly, Liberty Mutual had “relied on a reasonable basis for denying coverage, [so] the district court properly granted summary judgment on Pella’s bad faith claim.”

Pella teaches that Iowa insurance companies must make sure that they have at least one reasonable basis for denying coverage in third party liability cases.  Otherwise, it will be fairly easy for an insured to establish a bad faith claim.