Insurance Bad Faith Law

A 2014 Retrospective and a Look Ahead to 2015

December 21, 2014 Photo

In recent years, there have been an increasing number of court decisions and legislative initiatives related to insurance bad faith law, and 2014 was no different. The past 12 months saw courts and legislative bodies confront new and recurring bad faith issues that affect insurer and policyholder rights. By understanding some of these critical issues that have garnered the most attention over the past year, insurers will be better prepared for 2015.

Attorney-Client Communications and Disclosures

One emerging trend involves policyholder access to communications prepared in the claims-handling stage between an insurer and its counsel. According to a New York appeals court, such documents could be subject to production in litigation over the claim denial. In National Union Fire Ins. Co. v. TransCanada Energy USA Inc., TransCanada sought coverage from its insurers for losses stemming from the shutdown of a power plant generator. The plaintiff sought documents created by the insurers’ attorneys before the coverage denial. The trial court found that many documents prepared by one insurer’s attorneys, who supervised and coordinated the investigation, were not privileged.

The TransCanada court rationalized that, for the privilege to attach, the documents must be primarily used for furnishing legal advice. The court found that the claim investigation documents did not constitute legal advice because the attorneys were determining whether to provide coverage—an ordinary business activity for an insurance company. Affirming the trial court’s order, the appellate court held that “documents prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged” and do not become privileged if an attorney conducts the investigation.

Henriquez-Disla v. Allstate Property & Casualty Ins. Co. (vacated in part), is another example of where courts have grappled with the scope of discovery in bad faith cases. In Henriquez-Disla, the insurer provided redacted copies of the claim log notes. After an in camera review, the court required some claims notes to be produced on the basis that those portions reflected that counsel performed the ordinary business of claims investigation. According to the court, investigating subrogation possibilities, determining the cause of the fire, gathering background information on the claimants, and arranging for examinations under oath are ordinary business functions in claims investigation. However, after reconsideration, the judge certified the attorney-client privilege issue for interlocutory appeal to the 3rd U.S. Circuit Court of Appeals. The court is expected to rule on the issue in 2015.

Not all discovery disputes have been in the policyholder’s favor. In State ex rel. Montpelier U.S. Ins. Co. v. Bloom, the Supreme Court of West Virginia held that coverage opinion letters counsel sent to the insurer were attorney-client material even though the insurer thereafter sent to its policyholder a letter that included the recommendations of coverage counsel. The insured claimed that the attorney-client privilege was waived when the insurer sent the correspondence. The court rejected this argument, finding that a waiver does not occur merely because the insurer communicates the gist of coverage counsel’s recommendations to the insured.

Scope of Bad Faith Liability and Permissible Damages

Disputes over the scope of bad faith liability and compensable damages continued in 2014. For example, the Florida 4th District Court of Appeal ruled that once coverage liability and the extent of damages have been determined, a bad faith cause of action accrues even if there has been no finding that the insurer was liable for breach of contract. In Cammarata v. State Farm Florida Ins. Co., the insurer and insureds proceeded to appraisal on a homeowners’ property claim. The carrier subsequently paid the award, which was lower than the homeowners’ estimate but higher than its own. The homeowners then filed suit for bad faith. The Cammarata court rejected the insurer’s position that a breach of contract determination was required before a bad faith claim may arise. The court held that, besides a statutory notice requirement, only the determination of the existence of liability, including the extent of the policyholder’s damages, is a condition precedent to a bad faith cause of action.

A federal court in Texas assessed the parameters of bad faith liability when it excluded the testimony of a public adjuster who was poised to opine that an insurer acted in bad faith in adjusting a property claim. In Falcon v. State Farm Lloyds, the insureds claimed a 2011 wildfire resulted in smoke damage to their residence. State Farm paid for minor fire damage and cleaning. The insureds, through their public adjuster, sought remediation costs for the entire property. State Farm moved to strike, in part, expert testimony on damages and bad faith offered by plaintiffs’ public adjuster. The Falcon court found that the public adjuster’s method for calculating his damage estimate was unreliable and that his experience was “not enough to render his testimony reliable when all of his opinions are based on guesswork.” Similarly, the court found the public adjuster was not qualified to opine on bad faith and was not even able to “coherently define good faith or bad faith.”

The scope of damages recoverable for bad faith continues to be a closely watched issue. A Washington appeals court affirmed a $13 million bad faith award that included compensation for an auto accident victim’s emotional distress resulting from the insurer’s refusal to settle. In Miller v. Kenny, the claimant and insured agreed to a $4.15 million consent judgment. The claimant proceeded against Safeco Insurance, which initially had refused to settle the claimant’s suit against the insured. The Miller court upheld an award for damages related to emotional distress, creditworthiness, and effects on insurability caused by Safeco’s alleged failure to act in good faith. The court recognized a broadened scope of damages in bad faith cases by noting that the consent judgment amount “was not a ceiling on damages but merely a floor.”

In a similar vein, the 4th U.S. Circuit Court of Appeals in Graham v. National Union Ins. Co. of Pittsburgh, PA, allowed a policyholder to pursue damages for “aggravation and inconvenience” that resulted as a consequence of his insurer’s breach of a duty to defend. The court rejected the insurer’s argument that such damages could be awarded only in breach of contract actions over denials of first-party claims.

What’s Ahead in 2015?

In the coming year, high courts in several jurisdictions are expected to issue decisions involving insurance bad faith issues. The Florida Supreme Court will decide whether state-supported insurer Citizens Property Insurance Corporation should be immune from a condominium association’s bad faith claims after it suffered hurricane damage (see Citizens Property Ins. Corp. v. Perdido Sun Condo. Assn. Inc.). Relying on sovereign immunity, Citizens contends that a 2009 intermediate appellate court decision precluded any claims against the company for bad faith. However, a different appellate court panel disagreed with the decision, finding that Citizens’ alleged willful conduct fell within an exception to the statute. The Florida Supreme Court is expected to resolve the split between the lower courts.

The Pennsylvania Supreme Court is considering whether policyholders should be allowed to assign their bad faith claims to injured parties. In Allstate Ins. Co. v. Wolfe, a claimant was awarded compensatory and punitive damages after suing Allstate’s insured as a result of an auto accident. After Allstate refused to cover the punitive award, the policyholder assigned to the claimant his claims under Pennsylvania’s bad faith statute. Following a trial court judgment against Allstate, the 3rd U.S. Circuit Court of Appeals asked Pennsylvania’s high court to weigh in on whether the assignment was valid.

After hearing arguments in September 2014, the New Jersey Supreme Court is poised to determine the threshold that policyholders must overcome to prevail on insurance bad faith claims. Under the current standard, an insurer’s conduct in claims investigations and payment of claims does not rise to the level of bad faith conduct provided that a “fairly debatable” reason existed for the carrier’s actions. In two cases—Badiali v. New Jersey Manufacturers Ins. Co. and Wadeer v. New Jersey Manufacturers Ins. Co.—policyholders contended that an insurer’s alleged routine rejection of arbitration awards on uninsured motorist claims was not fairly debatable and the conduct instead should be subject to a more subjective standard that allows for earlier discovery of insurer claims-handling information.

Sometimes unprecedented natural events, such as Superstorm Sandy, compel state legislatures to consider new insurance laws. The New Jersey Legislature will consider whether to establish a private bad faith claim for unfair claims settlement practices. Applicable to claims arising out of a declared disaster, Assembly bill A231 would allow a property owner to pursue a lawsuit against an insurer for violations of the state’s Unfair Claim Settlement Practices Act, even if the insurer did not violate the act with enough frequency as to indicate a general business practice. A broader bill introduced by the Senate (S375) is not limited to hurricane-related claims. Successful claimants would be entitled to compensatory damages, punitive damages, prejudgment interest, attorney’s fees, and litigation costs. A similar bill in New York (A05780) never advanced and died at the end of the 2013-14 legislative session.

There is little dispute that bad faith law will continue to evolve. The court decisions in 2014 and the court and legislative developments on the horizon in 2015 will help provide additional guidance for insurance and claims professionals in each state. 

About The Authors
Michael A. Hamilton

Michael A. Hamilton, Esq., is a partner with CLM Member Firm Goldberg Segalla. He can be reached at (267) 519-6833,

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