BAD FAITH IN THIRD-PARTY CLAIMS

O R L A N D O D . C A B E Z A , E S Q U I R E

J A M E S M . S H A W , E S Q U I R E D E M A H Y L A B R A D O R D R A K E V I C T O R &

C A B E Z A , P . A .

1 5 0 A L H A M B R A C I R C L E

C O R A L G A B L E S , F L O R I D A 3 3 1 3 4

J O S E I . R O J A S , E S Q U I R E R O J A S L A W F I R M , L L P

9 1 0 0 S O U T H D A D E L A N D B O U L E V A R D

M I A M I , F L O R I D A 3 3 1 5 6

LEARNING OBJECTIVES

1) Spot warning signs of bad-faith exposure in third-party contexts, and develop a responsive action plan

2) Develop action plan to respond to and contain punitive damages claim in third-party bad faith context

3) Review emerging bad-faith issues and trends in the third-party liability claims context, including discovery issues and bifurcation

4) Identify warning signs of bad faith "set ups" by third parties

UNDERSTANDING BAD FAITH CLAIMS

Contractual obligations and the rise of the tort claim Courts have long recognized a cause of action for common law

bad faith under the guise of an implied covenant of good faith and fair dealing between the insured and the insurer. See Auto Mut. Idem. Co. v. Shaw, 184 So.2d 852 (Fla. 1938); Boston Old Colony Ins. Co. v. Gutierrez, 386 So. 2d 783 (Fla. 1980). Courts reasoned that because there exists an implied

covenant of good faith and fair dealing in every contract, bad faith on the part of a contracting party constitutes a tort. See Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 589 (1973).

Implied covenant of good faith and fair dealing imposes the following duties on the insurer: 1) Duty to defend the insured against liability

lawsuits; 2) Duty to indemnify if insured loses liability lawsuit;

and 3) Duty to settle claims with merit, which presents

potential for excess exposure.

UNDERSTANDING BAD FAITH CLAIMS

Why do bad faith claims exist? To ensure that insurers do not place their own interests,

in paying as little as possible, ahead of those of their insured’s. “The covenant of good faith and fair dealing requires

that neither party do anything that will injure the right of the other to receive the benefit of their agreement.” Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654, 657 (1958).

UNDERSTANDING BAD FAITH CLAIMS

CURRENT LAW REGARDING BAD FAITH CLAIMS

Generally, the elements of a bad-faith claim are: 1) The insurer lacked a reasonable basis for denying

the benefits of the policy; 2) The insurer had knowledge or recklessly

disregarded the lack of reasonable basis for denying benefits of the policy; and

3) Damages resulting therefrom. See Anderson v. Continental Ins. Co., 271 N.W.2d 368 (Wis. 1978).

CURRENT LAW REGARDING BAD FAITH CLAIMS

Some states have created a statutory claim for bad faith claims: Such as Florida, Kentucky, Louisiana, Massachusetts, and New

Mexico. States where third-party bad faith claims are allowed: Arizona, Arkansas, Florida, Georgia Illinois, Indiana, Kentucky,

Louisiana, Maryland, Massachusetts, Missouri, Nebraska, New Hampshire, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota, Tennessee, Utah, Washington, Wisconsin, and Wyoming. See The Claim Adjuster's Automobile Liability Handbook § 7:6.

DUTY TO DEFEND AND INDEMNIFY

Potential for coverage Generally, there is a duty to defend or indemnify, when there is

a potential for coverage under the terms of the policy. See Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 36 (1995), as modified on denial of reh'g (Oct. 26, 1995)(applying California Law); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821 (Tex. 1997)(applying Texas law).

Strict liability Some courts hold the insurer strictly liable if they fail to defend

the insured, regardless if the insurer had a bona fide belief that the policy did not provide coverage to the insured. Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d 9, 15 (1975)(applying California law).

DUTY TO SETTLE The most common bad faith claim is brought forth when the

insurer fails or refuses to settle third-party claims within policy limits. Does the claim have merit? Are damages within policy limits? The insurer has a duty to engage in settlement discussions when

a claim has merit and the insurer is presented a settlement demand that is within policy limits.

Right to contribute. If settlement offer exceeds the policy limits, the insured may have

the right to contribute to the settlement. Insurer may suggest, not demand, that the insured contribute to

settlement. See Brown v. Guarantee Ins. Co., 319 P.2d 69 (Cal. Ct. App. 1958).

DUTY TO SETTLE

Thinking about rejecting a settlement offer? Insurer’s have a duty to investigate the merits of a claim

before rejecting any settlement offers. Good faith implies understanding the claim made.

Insurer given enough time to investigate the claim? Courts will consider how much time the insurer has had to

investigate the claim. See DeLaune v. Liberty Mut. Ins. Co., 314 So. 2d 601, 603 (Fla. Dist. Ct. App. 4th Dist. 1975)(Plaintiff’s offer to settle within 10 days was unreasonable when defense counsel received the file 8 days before the offer.)

FACTORS COURTS CONSIDER IN A BAD FAITH CLAIM

1) Failure to inform the insured of litigation developments;

2) Failure to keep the insured informed of all settlement demands within policy limits;

3) Failure to initiate or promptly respond to settlement negotiations;

4) Failure to accept a reasonable settlement offer when the facts show blatant liability and serious injury;

5) Rejecting a reasonable settlement offer within policy limits;

6) Failure to investigate a claim thoroughly before rejecting a settlement offer;

7) Disregarding advice of an adjuster or attorney; 8) Attempting to coerce a contribution from the insured

in order to settle within policy limits;

FACTORS COURTS CONSIDER IN A BAD FAITH CLAIM

9) Serious and recurrent negligence by the insurer; 10)Undue delay in accepting a settlement offer within policy

limits where the potential verdict is high; 11)Refusing to settle within policy limits following an

excessive verdict when the chances of reversal are minimal; and

12)Failing to appeal when the verdict exceeds the policy limits and there are reasonable grounds for an appeal. See Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127, 139 (1986)(applying Michigan law).

FACTORS COURTS CONSIDER IN A BAD FAITH CLAIM

BAD FAITH STANDARD

Insurer should: 1) Conduct a thorough investigation of the claim

immediately; 2) Retain competent counsel to defend the claim if a

defense is warranted; 3) Examine all facts of the claim honestly and fairly; 4) Pay the claim, if it is in the insured’s best interest;

and 5) Communicate with the insured at all times.

THOROUGH INVESTIGATION REQUIRED

Holistic fact analysis The insurer conducts a competent investigation of the claim, when

the insurer “hired independent investigators who interviewed the witnesses, investigated the accident scene, examined the police reports, and obtained medical records.” Ross Neely Sys., Inc. v. Occidental Fire & Cas. Co. of N. Carolina, 196 F.3d 1347, 1351 (11th Cir. 1999)(applying Alabama law).

First-hand knowledge The Wisconsin Supreme Court held that an insurer acted in bad faith

when it failed to interview the man who took the victim to the hospital, the victim’s two sisters, and the victim’s playmates. Hilker v. W. Auto. Ins. Co. of Ft. Scott, Kan., 204 Wis. 1, 231 N.W. 257, 258 (1930) on reh'g, 204 Wis. 1, 235 N.W. 413 (1931).

THOROUGH INVESTIGATION REQUIRED

Competent investigators The investigation should be made by “persons reasonably

qualified to make a decision respecting the risks involved.” Palmer v. Fin. Indem. Co., 30 Cal. Rptr. 204, 208 (Ct. App. 1963).

REVIEW ALL FACTS—even those argued by the opposing side.

COMPETENT COUNSEL

Insurer must comply with knowledgeable counsel’s advice Some courts hold that an insurer must retain and act upon the

opinion of “reasonably qualified legal advisor.” Davy v. Pub. Nat. Ins. Co., 5 Cal. Rptr. 488, 493 (Ct. App. 1960)(applying California law); Netzley v. Nationwide Mut. Ins. Co., 296 N.E.2d 550, 559 (Ohio Ct. App. 1971).

EXAMINING THE CLAIM HONESTLY AND FAIRLY

Remove all bias. Bias may be shown if: 1) The insurer misrepresents the nature of the investigation; 2) The insurer’s employees lie in depositions or to the insured; 3) The insurer dishonestly selects its experts; 4) The insurer’s experts are unreasonable; or 5) The insurer fails to conduct a thorough investigation. Hangarter v.

Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004).

PROTECT INSURED'S INTERESTS EQUALLY

Put yourself in the shoes of the insured In considering settlements offers within policy limits, the

insured must “take into account and give as much consideration to the [insured’s] interests as it gives its own.” Merritt v. Reserve Ins. Co., 110 Cal. Rptr. 511, 521 (Ct. App. 1973)(applying California law).

Reasonably prudent person Insurer should use the “same degree of care and diligence as

a person of ordinary care and prudent should exercise in the management of his own business.” Perera v. U.S. Fidelity and Guar. Co., 35 So. 3d 893, 898 (Fla. 2010).

COMMUNICATE WITH INSURED AT ALL TIMES

Communicate often and include pertinent facts Insurer acted in bad faith by failing to communicate the status

of the case for 18 months. Furthermore, insurer failed to advise as to settlement negotiations, probable outcome of litigation, and possibility of excess judgment. U.S. Fire Ins. Co. v. Morrison Assur. Co., 600 So. 2d 1147, 1151 (Fla. 1st DCA 1992)

Keep it simple Insurer should explain handling of the claim to the insured,

while keeping in mind the insured’s ability to understand complicated proceedings.

CLAIMS WITH POTENTIAL EXCESS EXPOSURE

How to spot a claim with potential excess exposure 1) Consider the merits of the claim. Is liability likely? 2) Examine the policy coverage and limits. What are the potential damages? Do damages exceed the limits of the policy? Does the insured have excess damage coverage? Are there multiple insureds?

3) Are there multiple plaintiffs/claimants, and what are the limits of their policies?

CLAIMS WITH POTENTIAL EXCESS EXPOSURE

Sammy Smoker likes to smoke 4 – 5 cigarettes before she goes to sleep. This Friday night, after a long week of work, Ms. Smoker falls asleep without fully extinguishing her cigarette. She is awaken to the smell of smoke, which appears to be coming from the area where her ashtray is located. Ms. Smoker grabs her dog, Marlboro, and exits her apartment building. She calls 911 from her cell phone once she safely gets out of the building. Unfortunately, by the time that the fire department arrives, the fire has spread to 7 other apartment units, and her condominium's sprinkler system goes off causing damages to the hallways. Ms. Smoker has an insurance policy, which provides her with $300,000 in personal liability coverage. Ms. Smoker is sued by the owners of the 7 other apartments that are damaged, and the condominium association. The total damages claimed are close to $1 million.

E X A M P L E 1

CLAIMS WITH POTENTIAL EXCESS EXPOSURE E X A M P L E 2

Dale Earnhardt III loves fast cars. On a rainy day, he takes his Chevrolet Corvette out for a spin for the first time in months. Mr. Earnhardt exits the highway in a rural area, so that he can "really step on it". While driving near some farms, Mr. Earnhardt runs a stop sign and his vehicle collides with a pickup truck driven by Farmer Jon. Farmer Jon suffers a broken leg, but fortunately does not require any surgery. His pickup truck; however, is totaled. Farmer Jon also is forced to miss work for 4 weeks, so his leg can properly heal. Farmer Jon sues Mr. Earndardt claiming he acted negligently. Farmer Jon is seeking payment of his medical expenses, which total $50,000, his lost wages, which he estimates at $7,000, payment for his pickup truck, which was valued at $32,000, and pain and suffering. Mr. Earndhardt submits the claim to his insurance carrier, which provides him with $500,000 in personal liability coverage.

INITIAL STEPS WHEN RECEIVING A CLAIM THAT PRESENTS POSSIBLE EXCESS EXPOSURE

1) Notify insured, supervisor, and legal department that liability may exceed policy limits

2) Promptly initiate investigation If cannot begin investigation promptly, then

document reasons. Stay proactive on the claim and resolve other matters.

DEVELOPING AN ACTION PLAN TO RESPOND TO CLAIMS THAT PRESENT EXCESS EXPOSURE

1) Maintain a written record of compliance with procedures 2) Record all communication with insured, insured’s

representatives, and plaintiff’s attorney. Document attempts made to investigate or resolve the claim.

3) Inform insured or insured’s representative of any settlement offer and progress made on negotiations Notify insured if claim cannot be settled within policy limits,

and communicate all settlement negotiations Substance of communications should be professional and

cordial

DEVELOPING AN ACTION PLAN TO RESPOND TO CLAIMS THAT PRESENT EXCESS EXPOSURE

4) Promptly respond to communications with plaintiff’s attorney. Attorney demand letters If necessary, ask for an extension of time to respond to

time limit demand and provide justifications for extension. Identify what progress has been made on the claim. Request missing documents from plaintiff’s attorney and additional time to analyze those documents. Before rejecting offer, be sure that proper investigation

has been conducted. If rejecting an offer, provide a thorough explanation.

DEVELOPING AN ACTION PLAN TO RESPOND TO CLAIMS THAT PRESENT EXCESS EXPOSURE

5) Seek advice from an attorney right away! Evidence that the insurer acted in conformity with advice given

by an attorney may: Negate state of mind required to show that insurer acted

unreasonable and in bad faith; or Reduce extra contractual damages

Consider: Did insurer disclose all relevant information to the attorney? Did the insurer act in good faith based on the advice

received? Was the attorney experienced and competent in the

particular area of the law and disinterested in the matter?

INVESTIGATIVE STEPS

Create a complete record of the claim. An incomplete claim file exposes insured to liability.

Collect all relevant documents, such as witness

statements, medical records, etc. Examples of documents that should be collected.

DISCOVERY ISSUES

Insurer’s claim file is discoverable in bad faith action Confer with counsel before reducing any potentially

damaging information to writing in underlying suit Correspondence to and from counsel

LITIGATION STRATEGIES

Coblentz Agreements in Florida When “the indemnitor or liability insurer has notice of a proceeding

against its indemnitee or insured, in the absence of fraud or collusion, is conclusive against the indemnitor or insurer as to all material matters determined therein.” Coblentz v. Amer. Surety Co. of New York, 416 F.2d 1059, 1062-63 (5th Cir. 1969) (emphasis added). Under these circumstances, “the insured’s liability has been

established by the settlement, and the insurer may not later relitigate the issue.” Ahern v. Odyssesy Re (London) Ltd., 788 So. 2d 369, 372 (Fla. 4th DCA 2001); see also Bagley v. W. Cas. & Sur. Co., 505 So. 2d 678, 680 (Fla. 1st DCA 1987).

AVOIDING BAD FAITH CLAIMS - TEN COMMANDMENTS 1) Thou shall collect all facts in a timely manner. 2) Thou shall attempt to schedule the initial inspection as quickly as possible. 3) Thou shall carefully review the insurance policy and, if there is a question, seek

advice to make sure your opinion is the right one. 4) Thou shall listen to the insured’s concerns and give them the same attention

they would give to their own concerns. 5) Thou shall keep the insured or the insured’s representative informed as to the

progress of the adjusting process. 6) Thou shall carefully review damage information. 7) Thou shall keep insured advised as to potential for excess exposure and

specify reasons why a second inspection is required 8) Thou shall treat the insured with respect and understanding. 9) Thou shall remember the duty to act in a good faith manner when adjusting a

loss and making settlement decisions. 10) Thou shall confer with counsel before reducing any potentially damaging

information to writing in underlying suit.

QUESTIONS?

O R L A N D O D . C A B E Z A , E S Q U I R E

J A M E S M . S H A W , E S Q U I R E D E M A H Y L A B R A D O R D R A K E V I C T O R &

C A B E Z A , P . A .

1 5 0 A L H A M B R A C I R C L E

C O R A L G A B L E S , F L O R I D A 3 3 1 3 4

J O S E I . R O J A S , E S Q U I R E R O J A S L A W F I R M , L L P

9 1 0 0 S O U T H D A D E L A N D B O U L E V A R D

M I A M I , F L O R I D A 3 3 1 5 6