Insurer Bad Faith: Recent Trends. With increasing frequency, it seems, courts issue decisions that have the effect of imposing extra-contractual liability upon insurance companies for “bad faith” in the handling of claims. These decisions often lead to jury awards that impose millions of dollars in liability upon insurance companies on the thinnest of bases. Recently, for example, in Madrigal v. Allstate Indemnity Co., --- F. App’x ----, 2017 WL 2590771 (9th Cir. June 15, 2017), the Ninth Circuit refused to overturn a jury award against Allstate for $14 million in bad faith damages. Allstate incurred this multi-million dollar exposure even though its claims handler agreed to pay a policy limits demand of $100,000, withdrew the offer for a few days upon receipt of conflicting information about the responsible party, then reiterated that the limits were available for settlement. The Ninth Circuit refused to reverse the jury award, finding that the question of whether Allstate’s conduct was reasonable was properly before the jury.
The Tenth Circuit’s decision in Home Loan Investment Co. v. St. Paul Mercury Insurance Co., 827 F.3d 1256 (10th Cir. 2016), provides a chilling example of this trend. The jury heard extensive testimony that the policyholder may not have had a sufficient interest in the home that was the subject of the fire claim, but nonetheless found in favor of the policyholder on a statutory bad faith claim. On appeal, the Tenth Circuit affirmed the jury’s verdict, reading the Colorado bad faith statutes expansively and holding that even where coverage is fairly debatable, an insurer could be found to have acted in bad faith.
Even in cases where courts find no coverage, bad faith claims can still find their way to a jury. In Travelers Property Casualty Co. of America v. Federal Recovery Services, Inc., 156 F. Supp. 3d 1330 (D. Utah 2016), for example, the court determined that the insurer had no duty to defend the policyholder against a suit that alleged willful and malicious conduct. Despite that there was no coverage for such claims, the court refused to dismiss the bad claim, allowing the jury to determine whether the insurer’s investigation and its communications with the policyholder were reasonable.
The trend is a troubling one for insurers as it has led policyholder counsel to market their ability to obtain huge jury verdicts against insurers on even fairly disputed claims. However, the federal court decisions in Sinclair Wyoming Refining Co. v. Infrassure Ltd., 2017 WL 3123461 (D. Wyo. Mar. 10, 2017), and 2017 WL 3187597 (D. Wyo. May 25, 2017), demonstrate that bad faith claims can be defeated when vigorously litigated. In that case (handled by Quinn Emanuel) the policyholder cited a parade of alleged bad faith acts committed by the insurer with regard to its claims investigation, its communications with the insured, its run off status, and its participation in a subrogation action. On summary judgment, the court reviewed the record of the investigation and claims process and then precisely addressed each of the allegations raised by the policyholder about the insurer’s handling of the claim. Because the files were carefully documented, the court found the record to be undisputed and concluded that the amount of the claim was “fairly debatable,” that the insurer had conducted a reasonable investigation and communicated appropriately with the policyholder. On reconsideration, the court then grated summary judgment dismissing the bad faith claim altogether finding that the policyholder had failed to demonstrate injury independent from its contractual damages.
As the Sinclair case demonstrates, the surest way to avoid bad faith liability is for the insurer to carefully document its file and hire experienced coverage counsel to assist it in avoiding the bad faith minefield created by the law in many states.