Source: http://www.butler.legal/arbitrary-and-capricious
Timestamp: 2019-04-21 11:18:59+00:00

Document:
In Grilletta v. Lexington Insurance Company,8 the United States Court of Appeals for the Fifth Circuit reviewed the insurer's handling of a Hurricane Katrina property claim.9 Mr. Xavier Grilletta and Mr. Randy Lauman owned a vacation lakehouse on the southeastern shore of Lake Pontchartrain, a lake bordering New Orleans to the north. The lakehouse encompassed approximately 6,000 square feet. This large space was enough to house three kitchens, nine bedrooms, and seven and a half bathrooms. The house also included a large boathouse and pier. Water surrounded the lakehouse on three sides.
The insurer hired an independent adjuster to handle the claim. The adjuster met with the insureds at the property on September 27, 2005. After this initial meeting, the adjuster requested additional information from the insureds that was provided on October 28, 2005. On November 13, 2005, the adjuster submitted a report stating his belief that "[t]he damage appears to be wind related" and ultimately concluded that wind, not water or flood, caused the loss. The adjuster recommended a payment to the insureds for the building policy limit, $400,000, and a substantial payment for lost contents around $140,000.
The insurer did nothing relating to the claim until January 26, 2006 when it hired an engineering firm to analyze the damage to determine causation. The period of inactivity, between its adjuster's submitted report and the hiring of its engineer, totaled 74 days. The engineering firm retained a meteorologist who opined that the property was hit by winds between 95 and 100 miles an hour with maximum gusts around 116 miles per hour. According to the meteorologist, the high winds may have damaged the roof, doors, and windows. However, the storm surge, estimated around 15 to 16 feet with waves superimposed on top, destroyed the lakehouse. The engineering firm submitted its report with these findings on April 18, 2006.
The insurer then instructed its independent adjuster to readjust the claim based upon the engineering firm's findings. As wind could have damaged the roof prior to the destruction of the lakehouse by the flood waters, the insurer would pay its insureds for the damage to the roof, siding, interior drywall ceilings and walls, insulation, flooring, cabinets, and contents. This payment occurred on June 5, 2006, when the insurer submitted $311,055.38 to its insureds, $191,674.58 for the house and $119,380.80 for contents.
Grilletta and Lauman filed suit on August 15, 2006, alleging that only wind destroyed the property, that the insurer improperly applied the "water damage" exclusion, and that its handling of the claim was "arbitrary and capricious," triggering Louisiana's statutory bad faith penalty.11 At trial, the insureds presented the testimony of engineer Leonard Quick. Quick proffered that high wind forces, most likely from a tornado, struck and destroyed the lakehouse before the maximum storm surge occurred. Quick also found that winds of 125-155 miles per hour struck the property, and, if the tornado did not occur, that these winds destroyed the lakehouse. Quick reached his analysis and conclusions by examining the forensic evidence at the property fourteen months after the hurricane. Quick did not use meteorological data.
The insurer provided the testimony of its two experts at trial. First, a meteorologist testified that he examined the National Weather Service's Doppler radar and that there was no indication of a tornado during the storm. The meteorologist also testified that according to data from the National Climatic Data Center, the property sustained maximum winds of around 100 miles per hour, with gusts at 129 miles per hour. Such winds, referenced as Category 2 winds on the Saffir-Simpson scale, were not sufficient to destruct the lakehouse. Instead, the storm surge and accompanying waves were responsible as the height of the storm surge, estimated at 15.3 feet, rested against the lowest portions of the lakehouse while waves repeatedly struck the house. The insurer's engineer then described how this activity led to the lifting of the lakehouse off the foundation, destroying the property. The engineer added that the storm surge destroyed a similar property named "Old Glory" close to the lakehouse.
The insurer received the independent adjuster's report on November 13, 2005. This, according to the Fifth Circuit, acted as the time when the insurer had "sufficient information to act on the claim" or had a satisfactory proof of loss.
Grilletta could not track down the internal file examiner assigned to the claim, but did somehow contact another examiner from the insurer to inquire about the claim status.
The newly contacted file examiner, on January 26, 2006, requested the engineering report. In doing so, the Court avers that the examiner was not aware of the independent adjuster's opinion that wind caused the loss.
Neither the original file examiner nor the insurer's eventual corporate representative at trial viewed the independent adjuster's report until right before trial.
The Fifth Circuit's application of Louisiana "bad-faith" law presents several problems. The first issue is the federal court's interpretation of when the insurer received a satisfactory proof of loss. The Fifth Circuit, like the trial court, found that the insurer had sufficient information to act on the claim after its independent adjuster submitted his report. Once the adjuster opined that wind, a covered loss, caused the damage, the 30 day statutory clock began to tick. The insurer, according to this federal court at least, had to pay the claim within 30 days or face scrutiny whether its actions were "arbitrary and capricious" under Louisiana Code.
Is this correct? Should [the insurer] have immediately paid its insureds after receiving this report? What about pursuing an expert opinion? Geographically, water from Lake Pontchartrain surrounded the lakehouse on three sides. As the Fifth Circuit well knows, Hurricane Katrina flooded nearly 80 percent of the New Orleans area.23 Since water levels rose somewhere between ten to fifteen feet at this particular location, not counting the waves created by 100 mile per hour winds, is it not unreasonable for the carrier to believe water played a role in the destruction of the lakehouse? Or is the opinion of the adjuster, who is not an engineer, enough to give the insurer "sufficient information" to pay the claim?
What if [the insurer] procured the engineer's services within one week of obtaining the adjuster's report? What about two or three weeks? Would the Fifth Circuit have held that the proof of loss date was whenever it received the engineer's findings? Probably so. The real issue here is the insurer's delay. The federal court felt the delay was unacceptable, even in the face of the carrier's overloaded claims department and the physical conditions of New Orleans at that time. However, to apply the "bad-faith" penalty under Louisiana law, the insurer must, at some point, be deemed to have sufficient information to act on the claim. The court, having large amounts of discretion as both the finder of fact and law in this case, found this point to be the report's date. The statutory penalties followed. This amount of discretion a Louisiana court has in this regard should not be lost on anyone.
Noting the above, Grilletta creates Louisiana federal court precedence that an insurer receives satisfactory proof of loss if the carrier receives a report from an adjuster – not an engineer, but an adjuster – indicating coverage. Does this mean that the insurer, upon receiving a report from an adjuster suggesting a covered loss, must hire experts, have the experts render their opinion, and pay the loss all within 30 days or the carrier subjects itself to argument that their actions were arbitrary or capricious? It certainly could. Quite simply, this arbitrary opinion could limit the insurer's ability to consult experts if the insurer's adjuster believes coverage exists.
Arbitrary and capricious. Vexatious. These are strong words. By defining an insurer's bad faith behavior with these words, Louisiana requires more than just "bad," "poor," or "wrong" behavior. By the Louisiana Supreme Court's own definition, if a carrier is "vexatious," the carrier lacks an excuse for its actions. The carrier cannot justify itself. By being "vexatious," the carrier's actions only serve to annoy or harass when viewed objectively. Did the insurer's actions live up to this description in Grilletta?
The Fifth Circuit found no clear error that the insurer was vexatious by not acting on the adjuster's report for over two months. Somehow, the insurer's file examiner never saw the report. It offered an explanation – that, in the aftermath of Katrina, its claim offices were overloaded. The insurer made a mistake. But was the mistake vexatious?24 Did the examiner do this to annoy or harass?
Maybe the insurer could have done a better job adjusting this claim. Certainly the primary file examiner's ignorance of the adjuster report indicates that. However, the insurer immediately requested an engineer's report upon noticing the two month delay. This report revealed that the lakehouse was damaged by water. The insured received payment of $311,055.38 because the carrier could not rule out that wind damaged portions of the lakehouse before the water destroyed the property. Yet, because the carrier misplaced the report, it handled the claim in a "vexatious" manner. Unfortunately, this result is an arbitrary and capricious application of Louisiana's statutory bad faith penalties.
2. "Capricious." 20 Apr. 2009. See www.Wiktionary.org --http://en.wiktionary.org/wiki/capricious.
3. Louisiana law provides a loose interpretation of when the insurer receives a "satisfactory proof of loss." This occurs whenever the insurer "receives sufficient information to act on a claim." Sevier v. United States Fidelity & Guar. Co., 497 So. 2d 1380, 1384 (La. 1986).
4. LA. REV. STAT. ANN. § 22:658(B)(1). See also Boudreaux v. State Farm Mut. Auto Ins. Co., 896 So. 2d 230, 233 (La. Ct. App. 2005). In 2006, the Louisiana Legislature increased this penalty to 50%. Previously, the penalty stood at 25%. For additional information, see John J. and Michael A. Zaritsky, "Katrina: Wind, Flood And Fire," Mealey's Litigation Report: Insurance Bad Faith, Vol. 19, #10 (September 20, 2005).
5. Reed v. State Farm Mut. Auto. Ins. Co., 857 So. 2d 1012, 1021 (La. 2003). According to the Louisiana Supreme Court, a failure to pay a claim is "arbitrary and capricious" if the insurer's refusal to pay is "vexatious."
6. "Vexatious." Merriam-Webster's Dictionary of Law. Merriam-Webster, Inc. 20 Apr. 2009. See www.dictionary.reference.com -- http://dictionary.reference.com/browse/vexatious.
7. Reed, 857 So. 2d at 1021.
8. 558 F.3d 359 (5th Cir. 2009).
9. The U.S. Court of Appeals for the Fifth Circuit reviewed the U.S. District Court for the Eastern District of Louisiana's underlying decision.
11. At this time, Louisiana's statutory bad faith penalty under LA. REV. STAT. ANN. § 22:658(B)(1) was still 25%.
12. Grilletta, 558 F.3d at 364.
13. Id. at 369. The U.S. District Court for Eastern Louisiana awarded 25% of $311,055.38 or $77,763.84 in bad faith penalties.
14. 985 So. 2d 1275 (La. Ct. App.2008).
15. Grilletta v. Lexington Insurance Company, 558 F.3d 359, 365 (5th Cir. 2009) (quoting Veade, 985 So. 2d at 1279-80).
17. The underlying case was a bench trial.
18. Grilletta, 558 F.3d at 365.
19. Id. at 365-66. The Court mentioned that Lexington's engineering firm, Halliwell, removed its opinion that the storm surge destroyed the other property, "Old Glory" from future reports. Curiously, this represented the Court's only distinction as to Lexington's presentation and interpretation of the evidence.
22. Id. at 396, n. 5.
23. See In Re Katrina Canal Breaches Litigation, 495 F.3d 191,196 (5th Cir. 2007). See also John J. , "When A Flood Is A Flood: The Doctrine of Contextual Ambiguity," Mealey's Litigation Report: Insurance Bad Faith, Vol. 21, #8 (August 21, 2007).
24. See John J. , "Bad-Faith Should Be Difficult to Prove," Mealey's Litigation Report: Insurance Bad Faith, Vol. 19, #22 (March 21, 2006).

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