Source: http://www.butler.legal/possible-bad-faith-in-the-allocation-of-coverage-for-third-party-continuous-loss-claims
Timestamp: 2019-04-20 09:13:34+00:00

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This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 14, #20, p. 32 (February 21, 2001). © Copyright Butler 2001.
An insured causes damage or injury that results in a third party claim for continuous loss spanning three years. The third party makes a claim under the policy in effect at the time of the loss. The policy covers the same three years as the loss and provides $300,000.00 for each year. In other words, the policy provides a total of $900,000.00 aggregate coverage over three years. We will assume the claim is settled for $300,000.00.
Is it proper for the insurer to pay the claim under a one year period of the policy or must it be spread over more than one year? On one hand, by settling the claim under the first year of the policy for $300,000.00, the insurer will exhaust the policy limits for that year, thereby eliminating the duty to defend any other claims that may arise under that year of the policy period. The insured then is exposed to other such claims without coverage. On the other hand, if the $300,000.00 settlement is spread over the three years of the policy period, $100,000.00 to each year, the insured will have the benefit of the settlement of the particular claim, and have some coverage remaining for all three years of the policy.
A logical starting point is to consider how the courts have handled allocation of losses over the triggered years.
Carter-Wallace Inc. v. Admiral Insurance Company, 712 A.2d 1116 (N.J. 1998), addressed the issue of allocation in the context of determining whether a defendant's excess policy provided coverage. In Carter-Wallace, the plaintiff, a manufacturer of pharmaceuticals, contaminated a landfill. The plaintiff spent approximately $9 million dollars cleaning up the landfill and then sought reimbursement from its insurance carriers, including Commercial Union Insurance Company. The comprehensive general liability policy issued by Commercial Union was in effect for three years, 1969-1972, and was a third-layer excess policy. Carter-Wallace, 712 A.2d at 1121. The loss spanned a period of seventeen years, 1966 through 1982.
The issue at trial was whether the plaintiff was entitled to benefits under the Commercial Union excess policy. This depended, of course, on how the loss was allocated to the underlying policies. The trial court found that the first and second layers of coverage had not been exhausted over the entire seventeen years and, therefore, Commercial Union's third layer excess policy was not reached. This was because the trial court misinterpreted the public policy stressed by the Supreme Court of New Jersey in Owens-Illinois, Inc. v. United Insurance Co., 650 A.2d 974 (N.J. 1994), that the risk should be allocated over the years of exposure in accordance with the amount of risk assumed.
On appeal, the New Jersey Superior Court, Appellate Division held that the trial court erred in interpreting Owens-Illinois to require "horizontal exhaustion" of the underlying policies across the seventeen years of the loss before the excess policy that spanned three years could be reached. Carter-Wallace, 712 A.2d at 1121. The appellate court remanded the case leaving the trial court to create an alternative allocation scheme. The Supreme Court of New Jersey certified the issue.
when progressive indivisible injury or damage results from exposure to injurious conditions for which civil liability may be imposed, courts may reasonably treat the progressive injury or damage as an occurrence within each of the years of a CGL policy. 138 N.J. at 478-479 (emphasis provided).
The Carter-Wallace court went on to explain that this theory applied to personal injury claims, such as asbestos exposure claims, as well as property damage cases, such as toxic tort cases. Carter-Wallace, 712 A.2d at 1122. See Owens-Illinois, Inc., v. United Insurance Co., 650 A.2d 974 (N.J. 1994) and Astro Pak Corp. v. Fireman's Fund Ins. Co., 284 N.J. Super. 491, 499, 665 A.2d 1113 (App. Div.), cert. denied, 143 N.J. 323, 670 A.2d 1065 (1995).
Because the "continuous trigger" theory requires that multiple policies provide coverage for losses, the court in Owens-Illinois also had to address the issue of allocating the appropriate share of the loss to the policies involved. The Owens-Illinois court considered and rejected joint and several allocation of the loss between policies. Owens-Illinois, 650 A.2d at 990-991. Under the joint and several theory, the policyholder selects one year of a continuous injury and exhausts coverage, forcing the carriers to sue each other for contribution. Carter-Wallace, 712 A.2d at 1122. When fashioning an acceptable allocation method, the Carter-Wallace court explained that the concern in Owens-Illinois was the efficient use of resources to deal with continuous losses, spreading costs throughout industries that create these losses and the "demands of simple justice." Carter-Wallace, 712 A.2d at 1122. (Emphasis added). Additionally, the Owens-Illinois court stated that "any allocation should be in proportion to the degree of the risks transferred or retained during the years of exposure" and that the formula should "allocate the losses among the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by the years of coverage." Owens-Illinois, 650 A.2d at 994. See Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 20 Cal. App. 4th 296, 26 Cal. Rptr. 2d 35, 57 (1993).
The example provided in Owens-Illinois assumed a loss spanning nine years broken down into three three-year periods. Based on the coverage provided in each three year block, the court calculated a proportion for each carrier's burden. See also Chemical Leaman Tank Lines, Inc. v. Aetna Casualty & Surety Co., 978 F. Supp. 589 (D.N.J. 1997). The more coverage available in any one year or block of time, the greater the proportion of indemnity risk assigned to the block of time. Owens-Illinois, 650 A.2d at 995. Thus, when looking at the reasoning applied by the Carter-Wallace and Owens-Illinois courts, it appears that the courts favor spreading the losses that occur over the triggered policy periods in the context of third party continuous loss cases which results in more available coverage for the insureds.
Another important case is Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178 (2nd Cir. 1995). There, the United States Court of Appeals for the Second Circuit addressed the issue of how to allocate payment of asbestos injury losses where multiple policies provided coverage over the period of the continuous injuries in a declaratory action between an asbestos products manufacturer and its insurers. Stonewall differs from Carter-Wallace and Owens-Illinois because, here, the court decides in favor of pro rata allocation even when the decision adversely affects the insured. In addition to holding that the losses would be prorated among the insurers by multiplying the settlement by a fraction comprised of the number of years that the policy was in effect over the number of years the claimant was injured, the court also held that for the years when the insured was uninsured the insured would be responsible for the pro rata share attributable to such a period. Stonewall Ins. Co., 73 F.3d at 1203. In reaching the decision in favor of pro rata allocation, the Stonewall court relied on the Owens-Illinois opinion and reasoned that failing to allocate a loss over the policy period ignores the insurer's obligation to pay for subsequently discovered damages related to that policy period. Stonewall Ins. Co., 73 F.3d at 1204 citing Owens-Illinois, 650 A.2d at 988-89.
The decision in Stonewall to extend the allocation of the loss to periods where the insured was uninsured was objectionable to the insured because there was a considerable span of time where they were uninsured for the loss. The insured argued that, since the policies obligated the insurers to pay "all sums" for which the insured became liable during the policy period, consideration should not be given in the allocation to how long the insurer was on the risk. Stonewall Ins. Co., 73 F.3d at 1203. The insured contended that the loss should be prorated only between the insurers, not the insurers and the insured. The Stonewall court rejected the insured's reasoning. In doing so, the court noted that unless the risk was allocated between the insurers and the insureds, the insureds would obtain a windfall compared to insureds who purchased insurance for the entire loss period. Additionally, the court stated that if the insured was "permitted to choose the policy it prefers for indemnification of the entire injury, this would be unfair to an insurer who was on the risk for a short period." Stonewall Ins. Co., 73 F.3d at 1203. But see J.H. France Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993).
The Stonewall case shows that, even when pro rata allocation of the damages over the continuous loss policy period is detrimental to the insureds because it results in less coverage, courts still will apply the theory in the interests of fairness and efficient use of resources to settle such claims. Furthermore, it appears an insurer can argue successfully that if the continuous loss starts before, or ends after, the policy period at issue, the loss should be spread beyond the policy period when determining how much of the loss is covered by the policy. Similarly, an insured's argument that the policy should cover the entire loss because the policy period is encompassed within the larger loss period should fail.
The cases discussed above show there is a body of law that favors allocation of a continuous loss when policies cover multiple years. Therefore, an insurer should lean toward the "continuous trigger theory" and allocation of the loss over a multiple year policy period when settling claims in order to avoid potential bad faith claims. In light of the policies of fairness, efficient use of resources, and spreading losses throughout the offending industries, articulated by the Carter-Wallace, Owens-Illinois and Stonewall courts, it appears that an insured may have a solid basis to bring a bad faith action against a carrier who allocated a continuous loss to one year of the policy, exposing the insured to subsequent claims from that year. The supporting policies articulated by the Carter-Wallace, Owens-Illinois and Stonewall courts apply to the hypothetical issue addressed above. It would be difficult for an insurer to successfully argue that it is an "efficient use of resources" to exhaust coverage for one year of the policy by failing to allocate a loss over the span of the policy period when the insured will be left with no coverage for that year.
The Stonewall court stressed that it would not be fair to make an insurance company pay for an entire loss when some of the loss occurred either before or after its policy was in effect and that claimants who elected to be uninsured or underinsured for a period of time should not be rewarded by requiring the insurer to pay for the entire loss under these circumstances when holding in favor of pro rata allocation. Therefore, it does not appear likely that an insurer could successfully argue that a continuous loss should be paid under one year of a multiple year policy when the effect would be to punish an insured who purchased coverage that spanned a period of time by leaving it without coverage for the year where coverage was exhausted. Additionally, if the loss in question continued past the policy period in question, the insurer could not argue on the one hand that the loss should be allocated and prorated to consider the years when its policy was not in effect, but that the insurer should be able to pay the loss under one year of the covered period? This certainly seems inconsistent.
A material misrepresentation made to an insured or any other person having interest in the proceeds payable under such contract or policy, for the purpose and with the intent of effecting settlement of such claims, loss or damage under such contract or policy on less favorable terms than those provided in, and contemplated by, such contract or policy.
Other states' legislation may, of course, be different. However, the broad statutory language in Florida's bad faith statutes emphasize that the prudent insurer should consider whether continuous losses settlements should be apportioned before finalizing any settlement to avoid allegations of bad faith for failure to allocate.
The critical fact that seems to have been glossed over by all of the courts considering this question is the fact that once a final judgment has been entered by a Florida trial court, the court loses jurisdiction to do anything further.
In the January 26, 2015 edition of this publication, I shared a collection of excerpts from documents authored by attorneys. Given the sheer volume of paper which crosses my desk in reviewing claims for coverage and bad faith, I inevitably come across some very humorous (though not intentionally so) mistakes in the various documents reviewed. This month, I share some of the funniest entries I've seen in deposition transcripts and medical records.
As an attorney for more than sixteen years, and a practitioner of insurance bad faith for nearly eleven years, I have seen virtually every kind of bad faith set-up one could imagine. I have shared my observations through various articles published in this fine periodical as well as other publications. The law of insurer bad faith is obviously one which is constantly in flux. Therefore, it would be a simple matter to wax eloquent upon the latest pronouncement from the high court of one of our many state and federal courts. However, I feel compelled to digress from the usual stately discussion of the intricacies of bad-faith law and share some of the more amusing things I have come across during my review of tens of thousands of documents contained in claim files, medical records and correspondence, done in connection with representing insurers in this field.
Generally, if an insurance company refuses to defend its insured against a claim, the insured may protect himself by entering into a stipulated agreement with the claimant and holding the insurance company responsible for paying the claimant the agreed-to amount.
November 24, 2014 PublicationThe Coverage Action 'Fixed' Bad Faith Damages: Are The Total Damages Binding?
Florida state and federal courts struggle with excess damage verdicts in first-party bad-faith actions arising out of uninsured motorist/underinsured motorist (UM) coverage. Recent case decisions produce mixed results for insurers. But mention UM coverage, bad faith, and total damages, and Florida Statute Section 627.727(10) immediately comes to mind. Comments by two judges framed the Section 10 debate.
This article examines the third party beneficiary doctrine in conjunction with the approaches courts follow with regard to the collection of an excess judgment from a liability insurer.
Liability policies typically require the insured to provide prompt notice of a claim or suit. Notice is regarded as a condition precedent to the insurer's duty to defend or indemnify. The notice provisions in a typical liability policy seem straightforward. However, issues surrounding notice become complicated when an additional insured, who is typically not a party to the insurance contract and sometimes unnamed in a policy, is involved. Under those situations, courts have had to address, among other issues, the sophistication and resources of the additional insured, whether the additional insured is aware that coverage potentially exists or even that policies potentially exist, whether the jurisdiction requires the additional insured to actually tender the claim or suit or whether another insured's tender of the claim or suit is sufficient and whether there was late notice or no notice at all by the additional insured. Different jurisdictions have reached different results.
First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.
Generally, liability insurers must secure a release of all of their insureds when settling claims against their insureds. However, some courts have recognized circumstances where an insurer may settle for an insured at the exclusion of another while still maintaining its good faith duties toward all of its insureds. Other courts have seemingly rejected the notion that an insurer can ever settle for one of its insureds at the exclusion of others. These release issues occur most prevalently in automobile accidents involving insured owners and additional insured drivers.
A common scenario: claimant's counsel issues a time limit demand for policy limits and the insurer decides to accept the demand and tender the limits. Once the decision is made to accept the demand, the insurer should go through its checklist of concerns to make sure that each element of the time demand is met, while ensuring that the insured is adequately protected.
Bad faith and ordinary negligence typically involve two very different standards of care. In most jurisdictions, courts agree that proof of bad faith requires a showing of insurer culpability greater than ordinary negligence.
November 21, 2013 PublicationThis Mediation Is Confidential, Right?
Few legal maneuvers generate greater skepticism – among courts and insurers – than the excess consent judgment, an increasingly common settlement device used In liability cases.
Liability insurance carriers should be prompt and proactive when they receive a time-limit demand from a claimant. Time is usually not on the carrier's side when it comes to these settlement communications.
Sometimes it is better to be lucky than good, as the insurers in the following cases learned. These cases demonstrate that, even where the facts indicate that the insurer acted in bad faith, it is still possible for the insurer to escape extra-contractual exposure. In the absence of a causal link between the excess judgment and the insurer's actions, bad faith liability cannot exist as a matter of law.
Over forty states have hospital lien laws. Those laws typically allow hospitals to recover against parties, including insurers, who impair their liens. In many states, the hospital lien laws do not clearly identify the type and extent of damages a hospital can recover against a party who impairs a hospital lien. The damages a hospital can recover from a party who impairs a lien depends upon the language of the applicable hospital lien law and the courts' interpretations of that law. Results vary from state to state.
June 27, 2013 PublicationWhy Sue For Bad Faith When Consequential Damages Are Available?
Bad faith aside, insurers often assume a claim's ‘‘total" exposure under the insurance contract is the policy's limit. Courts traditionally allow insureds to recover contractual damages based on the limit, plus legal interest. However, a new trend is emerging in some jurisdictions.
May 23, 2013 PublicationIs The Bad Faith Claim A Part Of The Package?
In an effort to create yet another way to present a claim for bad faith against an insurance company, plaintiff attorneys have been submitting ‘‘package deal'' demands on behalf of multiple claimants who have all incurred damages as a result of the same occurrence.
Over the last 25 years, courts have wrestled with the issue of whether to apply an absolute privilege to preclude bad-faith lawsuits based on an insurance company's conduct during the litigation of an underlying first-party or third-party claim. Some courts still refuse to recognize a bad-faith claim against an insurance company based upon its post-litigation conduct. However, the prevailing trend seems to suggest that courts will find that some of the insurer's conduct remains relevant and admissible, while the conduct of the insurer's attorneys in defending the claim remains privileged.
March 28, 2013 PublicationWho Is Entitled to the Claims File?
The United States Supreme Court has recognized the "attorney-client privilege" as "one of the oldest recognized privileges for confidential communications," the purpose of which is to encourage "full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice."
In the Southeast, catastrophic natural disasters have become all too common, and the physical and financial consequences are borne by the entire region. Five of the top ten costliest hurricanes to hit the United States have impacted North Carolina, and with approximately $159.6 billion in insured coastal assets, North Carolina continues to have significant loss exposure.
A recent discovery order in the federal court case of Signature Development, LLC v. Mid-Continental Casualty Company is illustrative of our liberal discovery. Note, this liability insurer has yet to be found liable or guilty of any wrongdoing. Signature alleges, however, that the corporate defendant insurer breached the contract of insurance, committed ‘‘bad-faith,'' breached its fiduciary duty to its insured, committed unfair trade practices, intentionally inflicted emotional distress and vexatiously refused to pay. Based upon these allegations alone, the court addressed the scope and burden of discovery.
By definition, mediation begins with ‘‘me.'' Once conflicting parties have resorted to litigation, they naturally act purely in their own respective self-interest. When a mediation involves allegations of insurer ‘‘bad faith,'' this is especially so. The parties are initially polarized.
If given the chance, most property adjusters would skip the aspect of their job involving litigation. Avoiding lawyers, depositions, and, of course, trials would alleviate much stress. Unfortunately, dealing with lawyers and litigation is an unavoidable job hazard for most adjusters.
How can a first-party insurer be legally liable for insurance ‘‘bad faith'' if it has already been found not to be liable for breach of the insurance contract? According to at least one Florida appellate court, by paying an Appraisal Award timely.
On April 25, 2012, the United StatesDistrict Court for the Southern District of Florida issued its opinion in Moultrop v. GEICO General Ins. Co., remanding a bad faith claim to state court pursuant to the one-year ‘‘repose'' provision of 28 U.S.C. § 1446(b). The Moultrop decision is one more in a growing line of cases which refuse insurers access to a federal forum based on the repose provision, under the anomalous reasoning that the right to removal expired before the cause of action for bad faith accrued. Unfortunately for the insurers, 28 U.S.C. section 1447(d) precludes appellate review of an order granting a motion to remand.
Discovery of the insurance company's entire claim file—including confidential communications between the insurer and its attorney—is often the first target on the insured's agenda in a first-party bad-faith lawsuit. In any other context, a party's request for discovery of the opposing party's confidential attorney-client communications would be viewed by courts as a brazen and inappropriate attempt to obtain information obviously protected by the attorney-client privilege; however, in the context of bad-faith litigation, this type of request has been dignified by courts who often look for ways to permit discovery of the insurer's attorney-client communications.
In the past decade, the bad-faith environment has rapidly shifted from a useful tool used by consumers to protect themselves from arguably egregious actions to an elaborate trap set by personal injury plaintiff attorneys to reap outrageous awards from seemingly innocent conduct by claims professionals. Insurance companies now fear multi-million dollar verdicts based on policies written for insureds who did not want more than the absolute minimum coverage allowed. Based on technicalities, clever plaintiff attorneys attempt to convince courts to rewrite insurance policies, allowing for unlimited recoveries.
Many cases hold that a liability insurer can settle a claim against its insured without the insured’s consent because the policy language gives an insurer the right to settle even when an insured may not want to settle.1 For the most part, courts in California, Florida, and Louisiana allow insurers to settle claims without the insured’s consent where the policy gives the insurer the right to settle as it deems expedient. However, courts may nonetheless consider whether a settlement may have adversely impacted the insured to determine whether an insurer acted in good faith.
On November 30, 2011, the California Supreme Court exercised its discretion and let stand a $13.8 million punitive damage award that was more than 16 times the compensatory damages awarded by the jury. The case, Bullock v. Philip Morris, 1 (Bullock) involved a smoker diagnosed with lung cancer who filed suit against the cigarette manufacturer, seeking damages based on products liability, fraud, and other theories.
In every state in the union an insured can seek some form of compensation for an insurer’s ‘‘bad faith’’ in adjusting a claim.Yet only one state, Tennessee, currently allows an insurance company to recover damages caused by the insured’s bad faith.This imbalance has allowed ‘‘bad faith’’ litigation to become big business.The tendency of courts to treat insureds like a disadvantaged class has created an uneven playing field for insurance companies in claims adjustment.
Proximate causation is an element of a claim for bad faith. An often-overlooked element, but an element nonetheless. Even claims with grievous claim-handling errors and high excess judgments can still be very defensible if there is no proximate causation between the two. This article examines the element of the bad-faith cause of action that is most often glossed over.
In some jurisdictions, including Florida, the courts recognize a duty in some circumstances for a liability insurer to initiate settlement negotiations with a third-party claimant before the claimant has ever made a demand. This duty is a relatively recent invention in the common law and has yet to be fully defined. While most articles on the subject tend to focus on whether or not this duty should exist in the first place, this article skips that threshold question and delves into the particulars that apply in the jurisdictions that recognize it. What triggers the duty? What is required of the insurer to discharge it? What are the defenses to a claim for bad-faith failure to initiate settlement negotiations? This article tackles these emerging questions and more in attempt to define this nascent duty.
December 23, 2010 PublicationDoes Policy Reformation Create A Retroactive Bad-Faith Claim?
The Florida Third District Court of Appeal’s 1991 decision in Powell v. Prudential Property & Casualty Insurance Co. recognized a duty, in some circumstances, for a liability insurer to initiate settlement discussions with a third-party claimant who has not made a demand. The case proved to have a strong ripple effect, bringing about a sea change in bad-faith jurisprudence for the next twenty years. This article examines the expansion of Powell from a unique facts-driven anomaly to an entire branch of bad-faith jurisprudence and discusses early indications that the courts may be retreating again to applications more in line with the original case.
Insurance intermediaries (insurance agents and insurance brokers) are especially vulnerable to claims by insureds. While bad-faith actions continue to be the favored method of pursuing recovery beyond a policy limit, some litigants turn to claims against insurance intermediaries (and the insurers they represent) for extracontractual recovery. In addition to bad-faith law, insurers need to know what kinds of claims can be brought in relation to the procurement of the insurance policy itself and what defenses can be raised. This article delves into this often-misunderstood area of the law and illuminates some legal issues with which every insurer should be familiar.
October 22, 2009 PublicationDoes An Insured Owe A Duty Of Good Faith To Its Insurer When The Insured Is Responsible For Defense Costs In A Self-Insured Retention?
Many businesses are increasingly utilizing insurance policies with large self-insured retention endorsements in order to exercise better control over the defense of claims. In these circumstances, an issue may arise regarding whether an insured who is responsible for defense costs under a self-insured retention ("SIR") owes a duty of good faith to its insurer.
August 27, 2009 PublicationFairly Debatable?
On March 31, 2009, the United States Supreme Court dismissed, as improvidently granted, a writ of certiorari in Philip Morris USA, Inc. v. Williams. While the reason for the court's action remains a mystery, it seemed to signal an end to the court's interest in the central constitutional issue in the case: punitive damages. Unfortunately, the court's decision to abandon the issue leaves both the litigants and observers wondering what, if anything, had been gained by years of decisions, reversals and remands.
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.
March 26, 2009 PublicationFlorida's Bad Faith Quagmire: Is Summary Judgment Ever Available?
This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #22 (March 26, 2009).
February 26, 2009 PublicationIs Abnormal Becoming The New Normal In Alabama?
This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #20 (February 26, 2009).
November 25, 2008 PublicationUnreasonable Consent Judgments; What Next?
The scene is all too familiar: an insured, disenchanted with its insurer's refusal to defend an action the insured believes is within coverage, decides to enter into a "consent judgment" with the plaintiff, in return for which, the plaintiff agrees only to pursue satisfaction of the "judgment" against the insurer.
The responsibility of caring for a child is not one to be taken lightly. Our society demands vigilance from those who bring new life into rld, and rightly so. We are held to a higher standard in dealing with our offspring than with others. The special relationship between a parent and a child is built upon trust and an expectation that one (the parent) will give security tothe other (the child). So too is the bond between insurer and insured.
On June 25, 2008, the United States Supreme Court issued its much anticipated opinion in Exxon Shipping Co. v. Baker. The Supreme Court reduced the punitive damage award from $2.5 billion dollars to $507 million dollars, an amount approximately equal to the jury's award of compensatory damages. While the decision certainly warmed the hearts of Exxon's previously discomfitted stockholders, the Court's opinion provides only limited encouragement to defendants involved in the current punitive damage lottery.
June 17, 2008 PublicationConsequential Damages Under the Insurance Contract -- The New "Bad Faith?"
In many jurisdictions, jurors can award punitive damages to punish or penalize an insurer for improper claims handling, in addition to any compensatory damages caused by an insurer’s bad faith. Such jury awards of punitive damages now are subject to scrutiny under State Farm Mutual Automobile Insurance Company v. Campbell.1 As a result of Campbell, insurers have one final check against excessive punitive damages awards by juries.
Since the Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell, courts have struggled to define when the Campbell court’s presumptive limit of 9 to 1 ratio of punitive damages to compensatory damages is appropriate. The Supreme Court stated that the "most important indicium of the reasonableness of a punitive damages award" was the highly subjective measure of the "degree of reprehensibility." Wrestling with such an amorphous concept trial courts and appellate courts have sought to justify various punitive damage awards on the basis of a sliding scale, doing little more than subjectively comparing the "reprehensibility" in the case being reviewed, to other recent cases decided before it. The result is a marked disparity from one court to the next as to what constitutes behavior falling within the five (5) factors of reprehensibility discussed in Campbell.
This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 21, #6, p. 32 (July 24, 2007).
On February 20, 2007, the United States Supreme Court issued its much-anticipated second opinion in the negligence and fraud suit brought by the widow of Jesse Williams against Philip Morris. Mrs. Williams had asserted that the company had purposefully taken actions to obscure the dangers of smoking and, as a result, her husband was deceived into believing smoking was not harmful, a 47 year delusion that ultimately led to his illness and death.
September 19, 2006 PublicationRemanded in Light of State Farm v. Campbell: The Opportunity For Further Illumination Presented by Williams v. Philip Morris Inc.
On May 30, 2006, the U.S. Supreme Court again granted a petition for writ of certiorari in the ongoing dispute between Philip Morris and the widow of Jesse Williams, an Oregon resident who died of lung cancer after smoking cigarettes for about 47 years.
Under liability insurance policies, insurance companies assume the obligation of defending their insureds. In so doing, carriers can settle and foreclose their insured's exposure or refuse to settle, leaving the insured potentially exposed to damages that exceed the policy limits. Most courts find that this obligation places insurers and insureds in a fiduciary (or fiduciary-type) relationship. Accordingly, courts recognize that an insurer owes a duty to the insured to refrain from acting solely on the basis of the insurer's own interests in settlement. This duty extends to situations where an insurer has an opportunity to settle a third-party liability claim against its insured within policy limits and requires an insurer to pay an excess judgement against an insured, where the carrier in good faith should have settled.
Until the 20th Century, insurance contracts were treated the same as any other contract, with recovery generally limited to the damages contemplated by the parties when they entered into the contract. Insurance contracts, like any other, were enforced by their explicit terms, and courts were reluctant to substitute their own judgment for the terms upon which the parties agreed absent some independent tort or injustice. By the end of the 19th Century, however, the judiciary in the United States began to recognize a general obligation of good faith performance implied in every contract. By the 1930s, the implied covenant of good faith became a standard doctrine. This duty of good faith and fair dealing originated to resolve disputes over agreements that were not explicit on pivotal contract terms, or left discretionary power in the hands of one of the contracting parties.
Ging v. American Liberty Insurance Company, 423 F.2d 115 (5th Cir. 1970) is a case often cited for the proposition that third party insurers who act in bad faith could be held liable for punitive damages awarded against their insureds. However, the strength of this proposition appears to depend upon the extent to which a jurisdiction would permit the insurability of punitive damages. Those jurisdictions that permit coverage for punitive damages would also likely permit recovery of those damages later as a result of the carrier's bad faith. Jurisdictions whose public policy precludes insuring against punitive damage awards, may be more reluctant to permit recovery in a later bad faith action, depending upon the nature of the liability giving rise to the punitive damage award.
Dealing with punitive damage claims is like driving down a road that is constantly under repair. The road is dangerous, uncomfortable, and full of detours. Although the United States Supreme Court has issued a rather clear and accurate map to help us through this rocky road, in some respects the map is already outdated, just as the road darkens and your interior auto light dims.
Imagine your insured is at fault in an accident that kills her and causes devastating injury to another individual. You (the insurer) fail to meet a settlement demand within policy limits. Liability is clear and excess exposure is inevitable. The claimant files a civil lawsuit naming the "estate" of the insured as the defendant. However, the estate of the insured is not set up yet. Having no entity to actually serve with the complaint, the claimant petitions the probate court for administration of the decedent's estate, has a personal representative appointed, and immediately serves legal process on that representative. A multi-million dollar excess judgment is obtained in the civil action.
Given that the Utah Supreme Court (“Utah”) previously reinstated a $145 million punitive damages award in favor of the Campbells, it is not surprising that on remand from the U.S. Supreme Court, this same state high court goes to great lengths to justify the largest punitive damages award it believes could possibly survive further constitutional review.
Many jurisdictions have hospital lien laws. These laws ensure payment to hospitals for the beneficial services they provide. Some jurisdictions liberally interpret these laws so that technical deficiencies in establishing or seeking enforcement do not defeat payment to the hospitals. Other jurisdictions are less likely to ignore such deficiencies.
In Liggett Group Inc. v. Engle, the Florida's Third District Court of Appeal reversed the largest punitive damage award in history. The circumstances of the award indicate it would have bankrupted the defendants and was, in essence, a civil death sentence. If that were the only error, Engle would merely mark another notch in the continued upward spiral of American jury awards. However, the compounded procedural and constitutional errors in Engle make it particularly useful for those who wish to examine the pros and cons of the current system of punitive damages.
January 21, 2004 PublicationDo Liability Insurers Have A Duty To Make An Offer Where There Is No Claim Against The Insured?
A liability insurer has a duty to handle and settle claims made against its insured in good faith. Courts have grappled with whether this duty requires an insurer to make a settlement offer when there is no claim against the insured.
Everyone knows that an insurer has to act in good faith to its insured when settling claims with third parties. However, when an insurer is faced with multiple claims exceeding the limits of coverage, the insurer is faced with tough choices. Insurers are frequently called upon to defend these choices in “bad-faith” actions. Can an insurer get summary judgment on the issue of “bad-faith” in multiple claimant/inadequate limits cases? Will the insurer be forced to litigate the “bad-faith” issue through a trial? This article attempts to answer these questions and provide guidance to insurers on meeting their duty of good faith when met with multiple claims, the sum total of which exceed policy limits.
August 13, 2003 PublicationReflections – Thirty Years After Gruenberg v. Aetna Ins. Co.
It has long been accepted that parties to an insurance contract have an obligation to deal with each other fairly and in good faith. As early as 1914, this obligation was found to be grounded within an implied covenant within the contract between the insurer and its insured. If a denial of benefits under the policy was ultimately resolved by a suit on the contract of insurance, a policyholder who prevailed would receive the amount due plus interest. The recognition of a cause of action for the tortious breach of the duty of good faith and fair dealing in the context of the first-party contract of insurance is relatively recent.
July 16, 2003 PublicationWhat is a "Reasonable" Settlement When There Are Multiple Claimants?
Sometimes several people sustain injuries in an accident. This article addresses a recent decision of Florida's Fourth District Court of Appeal, Farinas v. Florida Farm Bureau General Insurance Company, that discusses what liability insurers should do when several people sustain injuries in an accident caused by the insured and the value of most, if not all, of each individual claim exceeds policy limits. This article discusses the basis for the Farinas holding and identifies some questions raised by Farinas.
Once again the annual “hold-your-breath” season is upon us. In Hartford, New York, and London weather channels are beating “sitcoms” on the “Nielson” ratings. Internet strikes on weather.com are out-numbering those for kournikova.com – well, maybe this is a slight exaggeration. But the point remains; that is, CAT losses, especially windstorm, commonly called Hurricanes, make or break a property insurer's profitability, not just in the year of the occurrence, but typically with a two to three year tail.
In most every jurisdiction, the basis for a claim of insurer bad faith is the recognition of a duty of good faith and fair dealing inherent in any contract of insurance. See, e.g., Boston Old Colony v. Gutierrez, 386 So. 2d 783 (Fla. 1980). The focus in such cases is usually the question of whether or not the insurer has violated that duty. Inevitably, the question arises as to whether or not the actions of the insured can be considered bad faith and, if so, whether such actions can be raised as an affirmative defense to a claim of insurer bad faith.
The involvement of legal counsel to provide advice concerning the settlement of property and liability claims has become increasingly commonplace. This is primarily due to the general proliferation of litigation and specifically "bad-faith" claims. As the involvement of legal counsel becomes more prevalent, so does the "defense" of "advice of counsel." This commentary will address this so-called "defense" in the context of "bad-faith" cases.
In 1844, Alexandre Dumas, one of the most famous French writers of the nineteenth century, shared his vision of comradery and unified ambition. In his classic, The Three Musketeers, set under the seventeenth century rule of Louis XIII, a small association of elite combatants swore their allegiance to a common purpose . . . and to each other: All for one, and one for all! Is this sense of nobility and uniformity present in the battle cry of plaintiff lawyers brandishing their swords in modern day litigation against the insurance industry?
Horace once wrote: “Anger is a brief madness.” Such human condition apparently has not changed in over 2000 years.
December 18, 2002 PublicationCan It Be 'Bad Faith' For An Insurer To File A Declaratory Action?
Insurers find nothing more frustrating than paying for unearned indemnification dollars. In a first-party context this may result from unreported values causing a deflated premium. In other words, the insurer's actual exposures require more premium than charged -- usually over many policy years. In a third-party context this unearned protection is the result of an excess judgment that the liability carrier is required to pay. In most jurisdictions this is the consequence of the liability insurer's failure to settle within policy limits when it had the opportunity to do so.
The Seventh Circuit recently addressed the question of whether an independent insurance broker, who provided clients to the insured, was their intermediary, thus barring coverage and bad faith claims. (First Insurance Funding Corporation v. Federal Insurance Company, No. 01-2855 (7th Cir. March 28, 2002)).
October 17, 2001 PublicationJustices: Please Take This Case!
Two recent state court decisions jeopardize the right of insurers to consult legal counsel when considering whether to pay or deny the claim of a policyholder. The Arizona and Ohio state supreme courts have issued opinions eroding, even abrogating, the attorney client and work product privileges. In one of these decisions, Boone v. Vanliner, 744 N.E.2d 154 (Ohio 2001), the insurer has petitioned the United States Supreme Court to issue the writ of certiorari, hear the case and reverse the Ohio Supreme Court. The undersigned urges the United States Supreme Court to take the Vanliner case for the reasons stated below.
Coverage determinations regarding the nature of policy duties that liability insurers owe to additional insureds may create bad faith exposure for the unwary insurer. Bad faith liability frequently arises when an insurer fails to recognize the scope of defense and indemnification obligations it owes to an additional insured. Issues also arise when additional insureds compete with named insureds for limited policy proceeds which cannot adequately protect the interests of both. This article highlights the source of the dilemma – the scope of the coverage afforded to an additional insured – and provides illustrations of bad faith exposure in the wake of claims asserted against additional insureds.
In every jurisdiction that has considered the issue, a claim for bad faith does not accrue until there has been a final determination of the underlying claim for insurance benefits or third party damages. Taylor v. State Farm Mutual Automobile Ins. Co., 913 P.2d 1092 (Ariz. 1996); Blanchard v. State Farm Mutual Automobile Ins. Co., 575 So. 2d 1289 (Fla. 1991). Thus, before a plaintiff can sue an insurance company for bad faith, he must first finally resolve the claim which he contends the insurance company failed to settle in good faith. What constitutes a resolution of that claim varies with the type of claim asserted and the jurisdiction in which it is brought, but it can generally be broken down into three categories: excess judgment, settlement of the underlying claim, and judgment below policy limits.
We have seen, in recent years, a spate of actions for bad faith, and class actions, on the issue of so-called diminished value. These suits claim payment by the insurance company of the actual cash value of a property loss - or the cost to repair a loss - does not make the insured whole. This is because of some intangible quality in the property that cannot be restored by repair. Before the loss it was pristine or original. Afterward it is corrupted or compromised. It is worth less in the market.
In representing insurers in bad faith litigation, from time to time one will find a coverage issue that was not raised in the underlying litigation. The question to be addressed in this article is whether the coverage issue may be raised for the first time as a defense to the bad faith litigation.
August 22, 2000 PublicationIs It Bad Faith to Settle Covered Claims Only?
It is beyond dispute that the duty to defend, under liability insurance, is contractual, and is broader than the duty to indemnify. National Grange Mut. Ins. Co. v. Continental Cas. Ins. Co., 650 F. Supp. 1404 (S.D.N.Y. 1986). Even if some allegations of the complaint clearly are outside the scope of coverage, the insurance company is obligated to defend the entire suit. Id. See also, Aerojet-General Corp. v. Transport Indemnity Co., 948 P.2d 909 (Cal. 1997).
Before resolution of a first-party action for coverage or a third-party action to establish an insured's liability, a plaintiff will often initiate an action for bad faith. By doing so, the plaintiff attempts to gain an unfair advantage in discovery and at trial. This article outlines some of the reasons why the bad faith action should be abated in its entirety or, at the very least, stayed pending resolution of the underlying claim.
Mr. Lesser is a prominent public adjuster. His business office is located in Miami Beach, Florida. The views and opinions stated by Mr. Lesser in this interview are his own. Neither Mr. Craig, nor Butler , necessarily approve or agree with any of them.
May 19, 2000 PublicationContractors' Bonds: Who Can Sue The Surety For Bad Faith?
A contractor's performance and payment bond creates rights and obligations among three parties ­ the principal, the obligee and the surety. The principal may be the general contractor or a subcontractor. The obligee (under a performance bond) usually is the owner of the project or (under a payment bond) the subcontractors, materialmen and equipment suppliers. The surety most often is an insurance company or financial institution engaged, among other things, in the business of issuing performance and payment bonds.
In the trial of a bad faith case, plaintiff often tries to put into evidence the reserves the insurance company set for the claim. This article contends that evidence ought not be admissible. It will outline three reasons why not.
March 01, 2000 PublicationIssue Revisited: Who Can Sue The Surety For Bad Faith Under A Construction Bond?
In this journal, in May 2000, the author discussed the then recent decision in Ginn Construction Co. v. Reliance Insurance Co., 51 F. Supp. 2d 1347 (S.D. Fla. 1999). He argued that, contrary to a suggestion in Ginn, an obligee under a general contractor's performance bond ought not be allowed to sue the surety for bad faith. This article will look at some decisions handed down since. The trend is toward no bad faith liability by a surety to either an obligee or a principal under a surety bond.
per-func-to-ry per-fúngk'te­re adj. Done or acting routinely andwith little interest or care. The American Heritage Dictionary, NewSecond College Edition (1983).
Consider a common scenario. An insurance company issues a liability policy. The policyholder does something, or fails to do something, as a result of which a partyis injured. The injured party becomes the plaintiff, and the policyholder the defendant,in a tort action. The insurance company reviews the tort action and sees right awaythat probably it is not covered. It retains a defense attorney to handle the tort action butsends a reservation of rights letter to the policyholder and files a separate declaratoryaction to determine coverage. So far so good. See, e.g., Insurance Co. of the West v.Haralambos Beverage Co., 195 Cal. App. 3d 1308, 1319 (1987).
This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 13, #16, p. 25 (December 21, 1999). © Copyright Butler 1999.
Courts, commentators, lawyers and others have applied the word "fiduciary" to insurance companies and insurance claims in a loose manner. The result has been bad law and confusion over if and when an insurer is a fiduciary. This article will argue that an insurer does not, and ought not, owe a fiduciary duty to an insured who has presented a first party claim.
First-party bad faith cases are typically based on conduct or events (e.g., settlement offers, investigations and evaluations) occurring during the time period after a claim is made but before any litigation is commenced. Once a breach of contract or declaratory action is filed, it is generally understood that the insured and insurer stand in an adversarial relationship which presumably entitles each party to zealously pursue its litigation tactics and strategy. Thus, courts generally will not permit an insurer's litigation conduct to be admitted as evidence of bad faith. Over the years, however, a significant number of courts have held an insurer owes a continuing duty of good faith to an insured throughout the litigation process and, therefore, an insurer's post-filing conduct may be admitted as evidence of bad faith. This article is a brief review of some of the leading cases addressing the continuing duty of good faith and its ramifications affecting insurance companies and defense counsel.
Insurers and insureds alike may find themselves in the dark when claims against multiple insureds exceed policy limits. Only a few jurisdictions explicitly have addressed how policy proceeds should be allocated in this situation. The jurisdictions that have addressed the issue have split into two general camps. Some hold that carriers must allocate proceeds proportionately among all insureds. Other jurisdictions hold that a carrier need only act in "good faith" and may settle on behalf of fewer than all insureds. The manner of proportional allocation and the characteristics of a "good faith" settlement under such circumstances are not well described in the case law.
When courts and state legislatures expand the duties owed by liability insurers to insureds there is a commensurate expansion of the grounds for extracontractual claims. One area of expansion has been in cases involving multiple third-party claimants - with liability clear and damages exceeding the policy limits. These cases make difficult issues for claims professionals.
The dynamic nature of bad faith law throughout the country practically mandates that insurers have ongoing legal advice to protect the interests of the company, the shareholders and all insureds. Such advice can prevent unwitting misconduct by the insurer. The "advice of counsel defense" in the context of insurance bad faith litigation issimply an insurer asserting, as proof that it did not act in bad faith, that it reasonably relied on the advice given by its legal advisors.
July 01, 1999 PublicationStandard of Care in First Party Bad Faith Actions: Is "Fairly Debatable" Fair?
Since the early 1970s, when first-party bad faith actions came into being, a considerable body of law has developed on the standard of care for insurers to avoid liability. In creating and defining such standards, courts have struggled to balance the interests of insureds and insurers. This article is a general review of those decisions and standards.
March 16, 1999 PublicationStatute of Limitations in a Bad Faith Action: Which One Applies and When Does It Accrue?
Determining which statute of limitations governs a cause of action against an insurer for bad faith is complicated. It depends on whether the action is a first or third party action. It depends also on whether the controlling jurisdiction deems the action to be one sounding in tort or contract.
This article considers whether an insurer has a duty to advise an insured of policy benefits not claimed. Some courts require insurers to protect an insured's interests affirmatively by informing the insured of available benefits. Other courts have refused to impose this duty upon insurers. Recent cases suggest a trend toward imposing this duty.
During the past year, numerous areas in the United States have experienced severe and, at times, unprecedented flooding. Whether the flooding occurred as a result of the active Atlantic hurricane season or the effect of "El Nino" on national weather patterns, the result for insurers is the same: an increase in the number of claims under flood insurance policies. With this comes a corresponding increase in the likelihood of extracontractual or bad faith claims.
This is a supplement to the December 1998 article published in Mealey's Litigation Reports: Bad Faith on "Federal Preemption of Extracontractual Claims Under Flood Insurance Policies" following the U.S. Third Circuit Court of Appeals reversal of its decision on rehearing in Van Holt v. Liberty Mutual Fire Insurance Co. This supplement was originally published in Mealey's Litigation Report: Bad Faith, Vol. 12, #18, p. 27 (Jan. 19, 1999). Copyright Butler 1999.
Bad faith litigation is complex and the stakes are high. In such cases, the discovery process has become critical as litigants struggle for advantage. The litigation often raises issues outside the facts of the particular case or claim. The conduct of the insurance company as a whole sometimes is placed on trial.
October 20, 1998 PublicationDoes a Liability Insurer Have a Duty to Initiate Settlement Negotiations?
Liability insurance policies typically provide the insurer with complete control over the defense and settlement of third-party claims against the insured. This control imposes upon the insurer a duty to exercise good faith in settling claims. When the claimant makes a reasonably prudent offer to settle within the policy limits, courts generally agree the good-faith duty owed an insurer will require the insurer to settle the case.
The substantive law of bad faith is not uniform from state to state. Some states treat bad faith as a breach of contract; some as a tort. In some states, punitive damages are available. In others, they are not. Some allow claims for emotional distress, while others reject them.
Emotional distress damages may be the most significant aspect of any bad faith action in jurisdictions that allow them. This article outlines the several theories that justify the recovery of such damages. It discusses also the impact of a recent Florida Supreme Court decision which authorized recovery for emotional distress under that state's bad faith statute.

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