Insurance Companies Owe Duty of Good Faith and Fair Dealing to Additional Insureds

In a recent opinion, the Indiana Court of Appeals decisively ruled that insurers owe a duty of good faith and fair dealing to all insureds, even if an insured is not the policyholder.

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Many insurance policies extend coverage to individuals other than the person or persons specifically listed in the policy. For example, a driver’s automobile insurance policy may cover bodily injury to passengers in her vehicle, or a homeowner’s insurance policy may provide hazard coverage to the homeowner’s mortgage lender if the home suffers damage. In these instances, the individual or entity receiving coverage under another’s insurance policy is referred to as an “additional insured.”

In Schmidt v. Allstate Property and Casualty Insurance Company, Schmidt was injured while riding with a friend, who was insured by Allstate. She sued her friend and the driver of the other vehicle for negligence. Schmidt qualified as an insured under her friend’s Allstate policy, which defined “Insured Person(s)” as “any person while in, on, getting into or out of, or getting on or off of an insured auto with your permission[.]”

After Allstate refused to pay Schmidt the policy limits for underinsured motorist coverage, she amended her lawsuit to include a bad faith claim against Allstate. Allstate argued that it did not owe a duty of good faith and fair dealing to Schmidt since she was not named in the applicable insurance policy.

The Indiana Court of Appeals rejected Allstate’s argument. When a policyholder enters into an insurance contract, the court reasoned, they expect that their family and friends will be treated fairly by their insurance company. The court channeled Gertrude Stein to declare that “an insured is an insured is an insured is an insured” for purposes of an insurance company’s duty of good faith and fair dealing. The court therefore affirmed that additional insureds may be entitled to compensation if an insurance company fails to deal with them in good faith.

Parr Richey Attorney Mike Schultz to present at upcoming seminar, “Insurance Coverage Litigation: Secrets Insurance Companies Don’t Want Attorneys to Know”

mls photo 2017On July 13, 2018, Parr Richey attorney Mike Schultz will speak on “Strategies Used to Delay/Deny Claims” and “Bad Faith and Breach of Contract Litigation” at an NBI continuing legal education seminar in Indianapolis.  Mr. Schultz is part of a distinguished panel of attorneys who regularly engage in insurance coverage litigation.  The seminar, which is presented by the National Business Institute, will be held at the Capital Conference Center, 201 N. Illinois Street, Indianapolis, IN 46204.

Complete seminar details, including the full agenda and list of speakers, can be found at this link.

2016 Indiana Homeowners Insurance Complaint Index

The Indiana Department of Insurance publishes complaint indexes for each year.  According to the Indiana Department of Insurance:

The table uses the amount of each company’s premium and the number of closed complaints against the insurer during a calendar year to arrive at a complaint index. A complaint index of 1.00 means the insurer’s share of all complaints received is equal to its share of all the business written in Indiana. An index of 2.00 means that the insurer’s share of complaints is twice as large as its share of business written in Indiana. An index of 0.50 means that the insurer’s share of complaints is half as large as its share of business.

See the IDOI website.

Here is the Index for 2016 for Homeowners Insurance:

NAIC #                   Company Name                       Premium            # of Complaints    Index

19240 Allstate Ind Co 3,135,849 1 5.15
19232 Allstate Ins Co 39,591,393 3 1.22
17230 Allstate Prop & Cas Ins Co 45,547,280 5 1.77
37907 Allstate Vehicle & Prop Ins Co 49,856,801 8 2.59
19100 Amco Ins Co -8,748 1 DNC
19275 American Family Mut Ins Co 84,519,004 9 1.72
28401 American Natl Prop & Cas Co 3,655,934 1 4.42
42978 American Security Ins Co 227,871 1 DNC
10395 Citizens Ins Co Of The Midwest 11,915,176 2 2.71
29734 Conifer Ins Co 2,697,353 1 5.99
22640 Consolidated Ins Co 36,610,526 3 1.32
10921 CSAA Fire & Cas Ins Co 17,308,442 5 4.67
26263 Erie Ins Co 57,635,841 4 1.12
26271 Erie Ins Exch 47,829,824 4 1.35
14176 Hastings Mut Ins Co 14,902,465 1 1.08
13927 Homesite Ins Co Of The Midwest 16,020,294 3 3.03
29068 IDS Prop Cas Ins Co 7,122,894 4 9.07
21679 Illinois Farmers Ins Co 12,681,456 1 1.27
22624 Indiana Farmers Mut Ins Co 48,721,331 2 0.66
26123 Lightning Rod Mut Ins Co 9,917,072 2 3.26
33600 LM Ins Corp 11,695,953 1 1.38
34339 Metropolitan Grp Prop & Cas Ins Co 5,907,391 1 2.74
26093 Nationwide Affinity Co of Amer 19,378,362 1 0.83
23760 Nationwide Gen Ins Co 2,983,865 1 5.42
32700 Owners Ins Co 343,720 1 DNC
32905 Property Owners Ins Co 69,423,093 3 0.70
11215 Safeco Ins Co Of IN 80,179,080 3 0.60
19259 Selective Ins Co Of SC 10,859,545 1 1.49
23388 Shelter Mut Ins Co 13,640,080 1 1.18
42986 Standard Guar Ins Co 13,287 2 DNC
15199 Standard Prop & Cas Ins Co 5,376,584 1 3.01
25135 State Automobile Mut Ins Co 3,792,084 1 4.26
25143 State Farm Fire & Cas Co 505,746,115 24 0.77
28188 Travco Ins Co 40,455,080 3 1.20
27998 Travelers Home & Marine Ins Co 1,697,642 1 9.52
27120 Trumbull Ins Co 7,265,688 1 2.22
40118 Trustgard Ins Co 9,802,315 1 1.65
15288 United Farm Family Mut Ins Co 140,583,062 5 0.57
10861 Universal Prop & Cas Ins 5,432,316 2 5.95
15407 Wolverine Mut Ins Co 3,261,979 1 4.95

 

 

Subtotal Premium and Complaints 1,447,725,299 116
161 Companies with Zero Complaints 426,834,890  
Total Premium and Complaints 1,874,560,189 116

Report does not include 161 companies with zero complaints DNC- did not calculate (premiums under $1 million)

None – No premium was reported during 2016.

Premium information from Property & Casualty Annual Statement Page 19, Line 4, Column 1

Bad Faith Claim Handling

In its recent opinion in Telamon Corporation v. Charter Oak Fire Ins. Co., 2017 U.S. App. LEXIS 4207 (7th Cir. 2017), the Seventh Circuit made a pretty serious error in the opinion of the authors of this blog.  Indiana’s Supreme Court has unequivocally recognized the fact that a claim for bad faith claim handling may exist even if the ultimate claim decision was correct, yet the Seventh Circuit stated just the opposite in this opinion.  What follows is our analysis and reasoning supporting our opinion that on this narrow issue at least, Telamon was wrongly decided.

Insurance companies owe a duty to their insureds to act in good faith, including “the obligation to refrain from (1) making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an insured into a settlement of his claim.” Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519 (Ind. 1993). A strong public policy interest exists in allowing bad faith claims to proceed because bad faith verdicts with punitive damage awards discourage insurers from underpaying claims under the theory they would only be liable for contract damages. Patel v. United Fire & Cas. Co., 80 F.Supp.2d 948, 959 (N.D. Ind. 2000).

While Indiana “has long recognized that there is a legal duty implied in all insurance contracts that the insurer deal in good faith with its insured”, Erie was the first case in which Indiana established a tort remedy for an insurer’s breach of its duty to act in good faith. Erie, 622 N.E.2d at 518. The Indiana Supreme Court found it appropriate to recognize a cause of action for an insurer’s tortious breach of its duty to act in good faith based upon a public policy rationale and because punitive damages are not awardable for a breach of contract. Id. at 518-19. While the Court recognized four contractual obligations an insurer owes to its insured, the Court specifically noted that these were “general observations” and it “need not determine the precise extent of that duty today.” Id. at 519. The Court also noted that a “good faith dispute about the amount of a valid claim” is not enough to sustain a bad faith claim. Id. at 520.

An insurer’s duty to act in good faith was also addressed where an insurer disclaimed coverage under a pollution exclusion and refused to defend or indemnify the insured. Freidline v. Shelby Ins. Co., 774 N.E.2d 37, 39 (Ind. 2002). The Court stated that “to prove bad faith, the plaintiff must establish, with clear and convincing evidence, that the insurer had knowledge that there was no legitimate basis for denying liability.” Id. at 40. Here, the insurer denied the claim based upon their interpretation of the law, which the Court found to be “a rational, principled basis for denying liability.” Id. at 42. As the insurer’s position was supported by a good faith legal argument, the insured did not meet the burden of proof for their bad faith claim. Id.

The Indiana Court of Appeals has discussed the relevance of an insurer’s bad faith conduct after a suit has been filed. In Gooch v. State Farm, an insured filed suit after she was unable to reach an agreed settlement with State Farm on her uninsured motorist claim and later amended her complaint to include a claim of bad faith. 712 N.E.2d 38, 39 (Ind. Ct. App. 1999). During discovery, the insured learned State Farm may have had a policy to litigate low-damage claims so it would be financially unfeasible for the insured to recover. Id. at 39-40. State Farm contended the duty of good faith and fair dealing does not extend to litigation conduct, so only pre-litigation bad faith conduct should be considered in the bad faith claim. Id. at 42. The Court of Appeals considered a number of cases from various jurisdictions and concluded that post-filing conduct “has little relevance to proving that the insurer’s prefiling actions resulted in the wrongful denial of policy benefits” since litigation usually commences after the tort of bad faith occurs. Id. The court also noted “the tort itself occurs when the contract is breached unreasonably.” Id. In this case, State Farm’s alleged bad faith conduct occurred before the insured filed the bad faith claim, so the conduct was relevant to the litigation. Id. at 42-43.

Although Gooch in 1999 noted the tort of bad faith occurs when the contract is breached unreasonably, Indiana courts now recognize that a bad faith claim between an insured and his insurer may proceed even where there has not been a breach of contract. Monroe Guar. Ins. Co. v. Magwerks Corp., 829 N.E.2d 968 (Ind. 2005). A company reported a clam to its insurer when the roof of their business collapsed after heavy rain and snow, causing water and moisture damage to some of the company’s equipment. Id. at 971. One part of the insurance policy excluded loss for collapse but another section provided coverage for collapse. Id. After the insurer denied the claim, the company sued for breach of contract, bad faith, including the manner in which the insurer handled the claim, and punitive damages. Id. at 971, 976. The trial court granted summary judgment to the company as to the breach of contract claim and at trial the company ultimately received a $5.1 million jury verdict including an award for punitive damages. Id at 971. The Court of Appeals found it inappropriate to grant the company summary judgment as to the breach of contract claim because there was an issue of fact as to the definition of “collapse”. Id. at 972. The Court of Appeals also found that the insurer could not have acted in bad faith because the case involved a good-faith coverage dispute and punitive damages could not be awarded to the company. Id.

Our Supreme Court agreed there was an issue of fact as to whether the insurer breached the insurance contract, but disagreed regarding the company’s ability to pursue a bad faith claim. Id. at 976. The Court noted that

[A]n insurer’s duty to deal in good faith with its insured encompasses more than a bad faith coverage claim. And Freidline should not be read to suggest otherwise. In that case the only dispute at issue concerned a good faith difference of opinion over whether a claim was or was not covered. As a result we said “to prove bad faith” etc. the plaintiff must establish “that the insurer had knowledge that there was no legitimate basis for denying liability.” This was not meant however to suggest that this is the only way to demonstrate bad faith.

Magwerks, 829 N.E.2d at 976 (internal citation omitted, emphasis added). In this bad faith case, “the question is whether Monroe Guaranty’s conduct leading up to and including the issuance of the denial letter rose to the level of bad faith.” Id. at 977. The bad faith and punitive damages claims were allowed to proceed as they were a question for the jury and the jury had already reached a verdict. Id. at The Court’s holding was crystal clear—“[w]e hold that a good faith dispute concerning insurance coverage does not automatically preclude a punitive damages claim for bad faith when coverage is denied.” Id. at 978. Additionally, the Court noted that Magwerks asserted part of an insurer’s good faith duty includes the “manner of handling the claim” but did not address the matter further since neither party provided the Court “much guidance on the issue.” Id. at 976.

The cases which predated Magwerks did not have the occasion to address the situation presented in Magwerks—whether bad faith claims are precluded if there is no breach of contract. The insured in Freidline asserted the insurer’s bad faith conduct was the coverage denial and the Court found the insurer had a good faith legal basis for their coverage denial. The Court in Erie made general observations about what an insurer’s duty of good faith entails, but did not determine the extent of an insurer’s duty to act in good faith. As such, Magwerks was a case of first impression, and the Court could not have stated its holding more plainly—“we hold that a good faith dispute concerning insurance coverage does not automatically preclude a punitive damages claim for bad faith when coverage is denied.” Magwerks, 829 N.E.2d at 978. The Magwerks decision must be followed unless it is overturned by the Indiana Supreme Court or the General Assembly enacts a statute.

The Court of Appeals correctly applied the Magwerks opinion in a class action case to determine whether the Class could pursue a bad faith claim against an insurer regardless of the insurer’s coverage determination. Klepper v. ACE Am. Ins. Co., 999 N.E.2d 86, 98-99 (Ind. Ct. App. 2013). The Court found the Magwerks holding consistent with Erie’s conclusion that “an insured who believes that an insurance claim has been wrongly denied may have two distinct legal theories, one in contract and one in tort”. Id. at 98. Because the Class had two distinct theories of recovery, the court could not “conclude . . . that the resolution of the contract dispute necessarily disposes of the tort-based bad faith claim” and found entering “a final judgment on the Class’s bad faith claim would be premature”. Id. at 98-99.

If an insured’s basis for alleging a bad faith claim is a coverage denial, it is necessary to first determine whether the insurer wrongfully denied coverage before considering whether the insurer breached its duty of good faith and fair dealing. HemoCleanse, Inc. v. Philadelphia Indem. Ins. Co., 831 N.E.2d 259, 264 (Ind. Ct. App. 2005). The Court of Appeals followed Magwerks, noting in a footnote:

In addition, however, the court noted that an insurer may breach the covenant of good faith and fair dealing in ways other than a wrongful denial of coverage; hence, an insurer may exhibit bad faith in, for example, its handling of the claim such that even if it engages in a good faith dispute over coverage it may still breach the covenant of good faith and fair dealing.Magwerks, 829 N.E.2d at 977. We note that HemoCleanse has not alleged that Philadelphia acted in bad faith in any way other than its refusal to defend HemoCleanse.

Id. In this case, the Court of Appeals stayed the insured’s bad faith claim pending the outcome of arbitration on the breach of contract claim because the insured’s ability to pursue the bad faith claim depended on the outcome of the breach of contract claim. Id.

The Southern District of Indiana found that a breach of contract is not necessary for a bad faith claim because the legal theories between breach of contract and the tort of bad faith are distinct. Westfield Ins. Co. v. Sheehan Constr. Co., 580 F.Supp.2d 701, 717 (S.D. Ind. 2008). The court found “an insurance company which is ultimately correct in denying a claim may still be liable for acting in bad faith if they had no ‘rational, principled basis’ for denying coverage” and even if the court determines the insurer was correct in denying coverage to the insured, the court still must examine whether the initial denial was made in bad faith. Id.

Unfortunately, the Seventh Circuit misconstrued the Magwerks holding in a recent case. Telamon Corporation v. Charter Oak Fire Ins. Co., 2017 U.S. App. LEXIS 4207 (7th Cir. 2017). Here, the insured sued its insurer for denying two claims—one under a crime policy and one under a general commercial policy. Id. at 4. Telamon alleged its insurer acted in bad faith in handling the claims, and did not allege bad faith conduct under the four types of established bad faith actions laid out in Erie v. Hickman. Id. at 10-11. The Seventh Circuit declined to certify to the Indiana Supreme Court the issue of whether bad faith claim handling is a basis for a bad faith claim, instead determining that “Magwerks explicitly refused to recognize the claim-handling ground for which Telamon advocates” and the Indiana Supreme Court has not expanded the grounds which would support a claim of bad faith since Erie. Id. at 11-12. In addressing HemoCleanse, the Seventh Circuit found that “Magwerks expressly rejected that argument” (referring to the footnote in which the HemoCleanse court noted an insurer may act in bad faith in handling a claim). Id. at 12. The court also found that the Indiana Court of Appeals did not endorse the claim-handling theory of bad faith in Klepper. Id.

The Seventh Circuit concluded that the answer to Telamon’s legal argument was clear and there was no need to certify the question to the Indiana Supreme Court. However, the court mischaracterized the holding in Magwerks—the Indiana Supreme Court did not “explicitly refuse” to recognize claim-handling as a ground for a bad faith claim. The Indiana Supreme Court noted that Erie “specifically declined to determine the precise extent of an insurer’s duty to deal in good faith” and “decline[d] at this time” to expand the duty because neither party provided much guidance to the Court. Magwerks, 829 N.E.2d at 976. Declining to expand a duty because the parties did not brief the Court on the issue is not the same thing as “explicitly refusing” to acknowledge that the good faith duty encompasses more than the four categories explained in Erie. In Magwerks, the Court upheld the jury verdict on the insured’s bad faith claim although the Court determined there was a good faith coverage dispute. So, although the Court declined to expand the duty of good faith and fair dealing to include claim handling, claim handling was the basis on which the jury verdict was upheld.

Accordingly, in our opinion, Telamon incorrectly interpreted Indiana law and has the unfortunate potential to influence the outcome of bad faith litigation in our federal courts.   The Seventh Circuit should have granted Telamon Corporation’s request to certify the issue, in which event we are confident the outcome would have been different.

When the SIU Goes Too Far – Part 2

“The use of ‘scare tactics’ by an insurance representative to discourage the filing of claims cannot be condoned.  Such actions are certainly clear and convincing evidence of oppression and justify the imposition of punitive damages.”  Liberty Mut. Ins. Co. v. Parkinson, 487 N.E.2d 162, 166 (Ind. Ct. App. 1985).

The opinion of the Indiana Court of Appeals in Liberty Mutual predated the Indiana Supreme Court’s specific recognition of the tort of bad faith in Erie v. Hickman by eight years but the holding stands to this day as good law.  It is obvious bad faith for an insurance company to use “scare tactics” to try to get out of paying an insurance claim, and Indiana law provides for compensatory and punitive damages when they do it.

We are seeing an increase in the number of cases where insureds are being subjected to lengthy interrogations by the “special investigation unit”, and in a few of those cases the investigator has gone so far as to use scare tactics to try to convince the insured to drop their claim.  If this happens to you or someone you know, they should immediately seek legal representation.  As the Indiana Court of Appeals observed, such tactics are evidence of “oppression.”

It is one thing for an insurance investigator to question an insured about legitimate concerns that may affect coverage for a loss.  There are many examples of questions that can be asked — and must ordinarily be answered — in the case law dealing with bad faith claim handling practices, but threats and intimidation cross the line every time.

 

Tornado Damage Insurance Claims: The Twist May Be in the Policy Language

Indiana has just been clobbered – again – by fierce, widespread tornadoes. The website of the National Weather Service has excellent data you can review to track the history of the storms and the damage they caused in your area. For example, visit: http://www.weather.gov/ind/august242016severestorm track dataWhen the time comes to finalize your claim with your commercial or homeowners insurance carrier for the damage caused to your property by these strong storms, there are some common pitfalls to be aware of about what is or may be covered.

For example, depending on the scope or extent of the damage to your property, there may be additional dollars over and above the limits of your property coverage available to pay for the cost of debris removal. Policies provide this coverage in different ways and it is important to read and understand how your policy works when you are negotiating with your insurer. Here is one example of how a property policy may provide debris removal coverage:

Debris Removal Language

Language like this appears simple enough on first reading, but look again.  Let’s say you incurred expense removing debris following a storm, and assume the cost of removing the debris was actually more than the damage caused to your structure.  This policy appears to limit the available dollars for debris removal to 25% of the “amount we pay for the direct physical loss of or damage to Covered Property.”  The capital letters means “Covered Property” is defined somewhere else in the policy.  Defined as what?  The building?  The building and outbuildings?  It is important to know.  Also, when this policy provides 25% of the amount of direct loss or damage “plus” the “deductible in this policy applicable to that loss or damage” does that mean 25% of the deductible or 100% of the deductible?  Again — this is important to know when you are settling with your insurance company.

What if all you have is trees down, but (thankfully) they missed your house?  Homeowners policies often provide limited coverage for damage to trees and shrubs. The straight-line winds that accompanied recent storms brought down many, many trees – both living and dead – and the cleanup cost can be staggering. Yet, your homeowner’s policy from that “good neighbor” company that is “on your side” may only provide you with very limited policy proceeds for the cleanup of trees, and then only under very limited circumstances.

Here is some typical language from a standard homeowner’s policy:

We will also pay your reasonable expense, up to $1000, for the removal from the “residence premises” of:

1)  Your tree(s) felled by the peril of Windstorm or Hail or Weight of Ice, Snow or Sleet; or

2)  A neighbor’s tree(s) felled by a Peril Insured Against under Coverage C; provided the tree(s):

3) Damage(s) a covered structure;

4) Does not damage a covered structure, but:  a) Block(s) a driveway on the “residence premises” which prevents a “motor vehicle”, that is registered for use on public roads or property, from entering or leaving the “residence premises”; or  b) Block(s) a ramp or other fixture designed to assist a handicapped person to enter or leave the dwelling building.

The $1000 limit is the most we will pay in any one loss regardless of the number of fallen trees. No more than $500 of this limit will be paid for the removal of any one tree.

Say that again?!

If you need assistance untangling the language of your policy and working to resolve your claim with your insurance company, the policyholder attorneys of Parr Richey are always ready to help. Call Mike Schultz or Jim Buddenbaum toll free at 888-337-7766.

Have You Been The Victim of a Flood Insurance Scam?

Flood insurance has been in the news again lately.  Just this past weekend CBS News’ “60 Minutes” aired a disturbing story, entitled The Storm After The Storm about homeowners having their flood damage claims denied on the basis of altered engineering reports.  The report raised serious questions about the conduct of Wright Flood (www.wrightflood.com), U.S. Forensic (www.usforensic.com) and GEB HiRise Engineering, whose offices were actually raided shortly before the report by the New York Attorney General’s office.  If you believe you have been the victim of inappropriate claim handling practices or fraudulent conduct by any of these companies or any other insurance companies or their vendors, you should contact an attorney to discuss your case.

Notwithstanding the bad faith practices of some insurance companies, flood insurance is critically important for many homeowners.  The Indiana Department of Insurance published this consumer alert back in February 2009, but the information is still valuable today.  Perhaps one of the most important tips for consumers about flood insurance is the waiting period.  Most policies will not take effect until 30 days after you purchase the insurance.  Planning ahead is key.