On 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.
With the recent biting cold, many property owners are taking steps to protect their investments to the best of their ability. Some great information on how best to prevent disasters caused by freezing water pipes can be found in the Resource Links at the bottom of this article.
Recent research suggests a strong correlation between the loss of arctic sea ice and a particular pattern of the jet stream that causes the more frequent cold spells we feel here in Indiana. But wherever you may fall on the never ending debate over global warming, one thing is beyond debate: recent temperatures in Indiana have been unbearably and dangerously cold. It is reasonable to expect that despite our best efforts a great deal of property damage will result from frozen and burst pipes.
Insurance claims involving frozen pipes, ice dams, and other cold-weather-related disasters can prove to be particularly frustrating for homeowners and businesses. For example, many commercial policies include provisions that may limit or even exclude coverage for the catastrophic damage that can occur when pipes freeze, then burst. If you have a dispute or potential dispute with your insurance company about coverage for frozen pipes or water damage, the time to seek advice and representation is now. The property damage attorneys at Parr Richey are experienced with all aspects of these sometimes difficult claims and there is no fee charged for initial consultation.
The last time Indiana experienced the “polar vortex” the number of insurance claims for frozen and burst pipes skyrocketed. Some estimated the cost to the US economy of such claims to exceed $5 billion. Much of this loss is borne by individual homeowners and business owners who are not properly reimbursed for the loss and damage. If you need help with your claim, Contact Us.
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.
Here is the Index for 2016 for Homeowners Insurance:
NAIC # Company Name Premium # of Complaints Index
|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
Hurricanes Harvey and Irma have brought catastrophic flooding to parts of Florida and Texas, and the storm surge has affected other areas such as Charleston, South Carolina where high tides hit almost 10 feet on September 11th, about 3 feet above flood stage. Flooding is everywhere in the news.
What happens when you have a flood – particularly in areas not typically prone to flooding? Do you have coverage under your homeowner’s insurance policy?
Probably not. The typical homeowner’s policy excludes damage caused by what we typically consider to be a “flood”. This includes water pushed over the land by waves or tides. But flood insurance is available through the National Flood Insurance Program (“NFIP”). There is a wealth of information available here. Unfortunately, not many affected homeowners are enrolled in NFIP.
Does this mean that if you suffer a water-related loss that you are automatically out of luck? Not necessarily. There may be many situations where damage that is covered by your policy occurs at or around the same time as the flood damage occurs, and it is necessary to carefully analyze the language in your policy to determine whether and under what circumstances there may be coverage for your water-related loss. And, if the policy is unclear, that can benefit you as the policyholder. For example, in Indiana, the law clear that ambiguities in insurance contracts are resolved in favor of the insured. See Erie Ins. Exch. v. Sams, 20 N.E.3d 182, 187 (Ind. Ct. App. 2014) (citing Meridian Mut. Ins. Co. v. Auto-Owners Ins. Co., 698 N.E.2d 770, 773 (Ind. 1998)). This is particularly true with unclear provisions that limit or exclude coverage. Id. Where provisions limiting coverage are not clearly and plainly expressed, the policy will be construed most favorably to the insured. Id. This strict construal against the insurer is driven by the fact that the insurer drafts the policy and foists its terms upon the customer. Am. States Ins. Co. v. Kiger, 662 N.E.2d 945, 947 (Ind. 1996), reh’g denied. (quoting American Economy Ins. Co. v. Liggett, 426 N.E.2d 136, 142 (Ind. Ct. App. 1981)).
The bottom line is this: If you have suffered a water-related loss, it may be important to seek a legal interpretation of your policy before communicating with the insurance company.
The firm of Parr Richey wishes to celebrate the life of our partner, David S. Richey, who passed on July 2, 2017 at the age of 85. Dave was our mentor and leader and those who knew him will remember his great love for the law, life and family. Dave thought the firm was part of this family and as with all big families a lot of fun was had by all when Dave was around. Dave was former president of the Indiana State Bar Association (1991-1992) and served the legal needs of nearly every Indiana rural electric cooperative. Dave was instrumental in regulatory, legislative and litigation efforts. We wish the best to his wife Patti Haney Richey and his children, Rand Richey and Robin Richey Roberts, and their families.
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.
“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.
The San Francisco Chronicle reports the filing of the first lawsuit arising out of the tragic Ghost Ship fire earlier this month. Details here: Families of 2 Oakland warehouse fire victims file 1st lawsuits.
Parr Richey partners Mike Schultz and Jim Buddenbaum are closely watching the fire investigation, including the origin and cause determination, of the tragic and devastating fire at the warehouse party in Oakland, California.
Handout frame grab from video released via Twitter use @Oaklandfirelive showing fire crews arriving at the scene of the warehouse fire in Oakland, December 3, 2016.
The Associated Press reports that at least nine people are dead and as many as two dozen more may have perished in the fire, which occurred at a warehouse party. The warehouse itself is reported to have been converted, illegally, into studio and living space for electronic music artists. According to the AP report, “City officials confirmed Saturday that building authorities had opened an investigation just last month into complaints about the safety of the structure. That inquiry was ongoing when the fire struck.”
We will continue to follow this developing story.