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.

 

First Ghost Ship Suits Filed

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.

 

Tragic Warehouse Fire in Oakland

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.  636163610717597659-epa-usa-fire-oakland-california-1

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.

 

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.

2014 Indiana Homeowners Insurance Complaint Index

NAIC # Company Name Premium Number Index
1 33898 Aegis Security Insurance Company 728,542 1 DNC
2 19240 Allstate Indemnity Company 2,498,961 2 19.71
3 19232 Allstate Insurance Company 45,755,099 4 2.15
4 17230 Allstate Property And Casualty Insurance Company 58,431,436 5 2.11
5 19275 American Family Mutual Insurance Company 81,690,022 4 1.21
6 38652 American Modern Select Insurance Company 5,188,327 1 4.75
7 19992 American Select Insurance Company 6,245,114 1 3.94
8 10052 Chubb National Insurance Company 7,680,181 1 3.21
9 29734 Conifer Insurance Company 4,560,272 1 5.40
10 40649 Economy Premier Assurance Company 1,393,820 1 17.67
11 22292 Hanover Insurance Company 1,171 1 DNC
12 13927 Homesite Insurance Company of the Midwest 18,528,214 2 2.66
13 22624 Indiana Farmers Mutual Insurance Company 45,541,821 1 0.54
14 42404 Liberty Insurance Corporation 11,949,914 1 2.06
15 33600 LM Insurance Corporation 11,019,915 1 2.23
16 23043 Liberty Mutual Insurance Company None 1 DNC
17 21229 MemberSelect Insurance Company 10,050,059 1 2.45
18 23353 Meridian Security Insurance Company 13,528,349 1 1.82
19 14621 Motorists Mutual Insurance Company 6,307,467 1 3.90
20 23779 Nationwide Mutual Fire Insurance Company 18,676,418 1 1.32
21 32700 Owners Insurance Company 26,433,189 3 2.80
22 32905 Property-Owners Insurance Company 23,933,789 1 1.03
23 11000 Sentinel Insurance Company, Ltd. 1,625,531 1 15.15
24 25143 State Farm Fire and Casualty Company 484,909,595 27 1.37
25 25178 State Farm Mutual Automobile Insurance Company None 1 DNC
26 40118 Trustgard Insurance Company 11,905,377 2 4.14
27 15288 United Farm Family Mutual Insurance Company 137,742,927 4 0.72
28 44393 West American Insurance Company (35,270) 1 DNC
Subtotal Premium and Complaints 1,036,290,240 72
162 Companies with Zero Complaints 737,032,294  
Total Premium and Complaints 1,773,322,534 72
Report does not include 162 companies with zero complaints
DNC- did not calculate (premiums under $1 million)
None – No premium was reported during 2014.
Premium information from Property & Casualty Annual Statement Page 19, Line 4, Column 1

The information contained in this table is based on figures published by the Indiana Department of Insurance on its website.  “Number” in the table above refers to the number of complaints as published by the IDOI.

The Business Activity Exclusion

What happens if you operate a business – say an auto repair shop – as a means of making a living, and then suffer a fire loss to personal property located in that business? Assume the fire occurs as a result of working on a car in your repair shop, but that at the time of the fire you were not actually engaged in business; rather, you were working on your own car, or perhaps helping a friend to work on her car as a favor. Would the business activities exclusion in your homeowner’s insurance policy preclude you from recovering for the loss of your personal property?

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The rule in Indiana is that “an insured is engaged in a business pursuit only when he pursues a continued or regular activity for the purpose of earning a livelihood. American Family Mutual Ins. Co. v. Bentley, 352 N.E.2d 860, 865 (Ind. Ct. App. 1976) (emphasis added); see also Asbury v. Indiana Union Mut. Ins. Co., 441 N.E.2d 232, 239 (Ind. Ct. App. 1982) (same). Further, “[w]hether an activity is a ‘business’ or property is ‘business property’ under an insurance policy is almost always a factual question presented for determination by the trier of fact or jury.” Id., at 243. The question, then, should turn on what you were doing at the time, and not just on the fact that the loss occurred at your business.

In a 2012 decision the district court for the Northern District of Indiana rejected the argument that personal property that is the same as an insured’s business property automatically means a business exclusion applied to preclude coverage for the loss. In Bachman v. AMCO Insurance Company, 2012 WL 4322746 (N.D.Ind. Sept. 20, 2012), the insured sued AMCO for breach of contract after the insurance company applied a $10,000 limitation in its policy applicable to property located in the residence premises used mainly for “business” purposes. Following a theft, the insured, who sold sports cards out of his home, made a claim under his homeowner’s policy for some $150,000 worth of Fleer basketball cards. The cards had been purchased with money from his business, but the insured considered the particular cards stolen to be his “personal collection”. Id. at *1-2. The insured even admitted that he considered his personal collection to be “investments” that he planned to sell one day when he was “ready to retire.” Id., at *1.

The insurance company argued that the $10,000 business property limitation in its policy applied to the stolen basketball cards and, “[r]elying on excerpts from [the insured’s] examination under oath, . . . contend[ed] that the subject property was business property because it was stored in a manner indistinguishable from the business inventory and was acquired with resources from [the business] with the intention of eventually being sold through the company.” Id., at *5. The insurance company relied on Asbury v. Ind. Union Mut. Ins. Co. (and two other cases) to support its argument. Id.

The district court first noted that the cases relied on by the insurance company (including Asbury) “actually support the denial of summary judgment.” Id. The district court went on to reason as follows:

To the extent that AMCO argues that the Fleer basketball cards automatically fit within the business property limitation at issue simply because Mr. Bachman operated a sports memorabilia business out of his home on a consistent basis at the time of the burglary, the argument cannot result in the granting of summary judgment in AMCO’s favor. No one disputes that Spectator Sportscards, Inc. constituted a “business” and that Mr. Bachman regularly and continually sold sports memorabilia from his home office to third persons for the purpose of earning a livelihood. . . . However, the limitation in AMCO’s policy plainly depends on the use of the property at issue.

Id., at *7 (emphasis in original; internal citation omitted).

Issues like this can arise in many contexts.  The application of exclusions in policies is not necessarily simple or obvious, and sometimes the coverage is actually more broad than it seems.  If you have suffered a loss and are involved in a dispute with your insurance company about what is covered and what is excluded by your policy, whether it is a homeowners policy or a commercial policy, you should contact an attorney with experience reading and interpreting the coverages, conditions, limitations and exclusions. Sometimes the insurance company takes a position that looks correct at first glance, but they may not be looking at the whole picture.