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29th National Forum on BAD FAITH Claims & Litigation
Jamie R. Carsey
Thompson, Coe, Cousins & Irons, LLP
Procedural Issues In Bad Faith Litigation: Removal from State to Federal Court, Choice of
Law and Jurisdictional Differences for Establishing Bad Faith
Peter J. Barrett, Jr.
Zelle McDonough & Cohen LLP
Jaymeson Pegue
Thompson, Coe, Cousins & Irons, LLP
November 18 - 19, 2014
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Removing Cases From State to Federal Court
• An action in state court may be removed to federal court if “the district courts of the United States have original jurisdiction.” 28 U.S.C. § 1441. Federal courts have subject matter jurisdiction over actions between citizens of different states in which the amount in controversy exceeds $75,000. 28 U.S.C. § 1332(a)(1); Gebbia v. Wal-Mart Stores, Inc., 233 F.3d 880, 882 (5th Cir. 2000).
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Removal: Improper Joinder
However, courts recognize an exception to the complete diversity rule, in the situation where a defendant has been improperly joined in an action. Hornbuckle v. Metropolitan Property and Casualty Insurance Company, 385 F.3d 538, 542 (5th Cir. 2004); Smallwood v. Illinois Cent. R. Co., 385 F.3d 568, 573 (5th Cir. 2004).
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Removal: Improper Joinder
Improper joiner is established where the defendant shows (1) actual fraud in the jurisdictional pleadings of the facts, or 2) the inability of the plaintiff to establish a cause of action against the non-diverse party in state court. Smallwood, 385 F.3d at 573. “[T]he second way of establishing improper joinder stated differently means that there is no reasonable basis for the district court to predict that the plaintiff might be able to recover against an in-state defendant.” Id.; Michaels v. Safeco Ins. Co. of Indiana, No. 13-50321, 2013 WL 5935067, at *3 (5th Cir. Nov. 6, 2013).
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Removal: Improper Joinder
The test for improper joinder is that “there is no reasonable basis for the circuit court to predict that the plaintiff might be able to recover against an in-state defendant.” Smallwood, 385 F.3d at 573; See Lakewood Chiropractic Clinic v. Travelers Lloyds Ins. Co., No. H-09-1728, 2009 WL 3602043, at *1 (S.D. Tex. Oct. 27, 2009). The Court may conduct the test using a Rule 12(b)(6) analysis of the complaint to determine whether the plaintiff states a claim or using a summary inquiry to identify discrete and undisputed facts that would preclude recovery. See id. The failure to specify a legal and factual basis for a claim against a non-diverse party constitutes a failure to state a claim and results in fraudulent joinder of that party. Waters v. Metropolitan Mut. Auto. Ins. Co., 158 F.R.D. 107, 109 (S.D. Tex. 1994).
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Removal: Amount in Controversy
The Court may consider policy limits, penalties, statutory damages, and punitive damages in its analysis of the amount in controversy. St. Paul Reinsurance Co. Ltd. v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998); see Ray v. State Farm Lloyds, 1999 WL 151667, at *2-3 (N.D. Tex. 1999) (finding sufficient amount in controversy in plaintiff’s case against the insurer for breach of contract, bad faith, violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act and mental anguish); Fairmont Travel, Inc. v. George S. May Int’l Co., 75 F.Supp.2d 666, 668 (S.D. Tex 1999) (considering DTPA claims and the potential recovery of punitive damages as part of the amount in controversy).
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Abatement Issues • Typical Arguments In Favor Of Abatement
• Facts that are at issue in the coverage action are in dispute in the underlying action. • D.R. Horton v. Markel, 300 S.W.3d 740 (Tex. 2009); GuideOne v.
Fielder Rd Baptist Churc, 197 S.W.3d 305 (Tex. 2006)
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Additional Arguments In Favor of Abatement
1. Preceding in the dec action will prejudice the insured. US v. Ferndandez 559 F.3d 303, 331 (5th Cir. 2009)
2. Abatement will protect the insured’s fifth amendment right against self-incrimination.
In re Eron Corp., (SD TEX March 25, 2003)
3. A declaration on indemnity coverage issue prior to the resolution of the case may be advisory and premature.
Ruth v. Imperial 579 S.W.2d 523 (Tex.Civ.App. – Houston 1979)
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Reason Not To Abate
• The case can proceed on non overlapping issues, issues not in dispute, or that can be determined by an eight corners rule analysis.
• Insurers are encouraged to seek prompt resolution of coverage disputes. Excess Underwriters v. Frank’s Casing Crew & Rental Tools, 246 S.W.3d 42 (Tex. 2008)
• Coverage disputes can be expeditiously resolved in an action for declaratory judgment while the underlying claim is still pending. Gandy, 925 S.W.2d at 714.
• The duty to indemnify may be justiciable for the insured’s liability is determined. Griffin, 955 S.W.2d at 84.
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Concurrent Litigation Issues
• Federal Abstention • Colorado River Water Conservation Dist. v. United
States, 424 U.S. 800 (1976) (abstention is only appropriate under “exceptional circumstances”
• St. Paul Ins. Co. v. Trejo, 39 F.3d 585 (5th Cir. 1994) 1. Is there a pending state action in which all of the matters can be
fully litigated?
2. Did the plaintiff file suit in anticipation of a lawsuit filed by defendant?
3. Did the plaintiff engage in forum shopping in bringing the suit?
4. Do inequities exist in allowing the dec action to gain precedence in time?
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Trejo Factors Continued 5. Is the Federal Court a convenient forum for the witnesses and
parties?
6. Does retaining the suit in federal court serve the purpose of judicial economy?
7. Is the federal court being asked to construe a state judicial decree involving the same parties and entered into by the other court?
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Choice of Law
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Determining Which State’s Law Applies
• General Rule: Policy is governed by law of the state which the policy stipulates to govern the interpretation and application of the policy.
• Choice of Law Rules
• Lex Loci Contractus
• Significant Contacts
• Government Interest Analysis
• Hybrid
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Lex Loci Contractus
“The law of the place where the contract is made.”
• Domicile of signatories • Place of business • State of incorporation
Criticism: Mechanical and Inflexible. See, e.g., Gilbert Spruance Co. v. Pennsylvania Manufacurers’ Ass’n Ins. Co., 134 N.J. 96, 102 (1993).
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Section 193 of the Restatement
The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which the local law of the other state will be applied.
See, e.g., Specialty Surfaces International, Inc., 609 F.3d 223, 233 (3d Cir. 2010).
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Section 6 of the Restatement – Factors to Consider
(a) The needs of the interstate and international systems,
(b) The relevant policies of the forum,
(c) The relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) The protection of justified expectations,
(e) The basic policies underlying the particular field of law,
(f) Certainty, predictability and uniformity of result, and
(g) Ease in the determination and application of the law to be applied.
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Additional Choice of Law Issues
• Federal v. State
•Breach of Contract v. Bad Faith (Tort)
See, e.g., Good v. Commerce & Indus. Ins. Co., No. 08-10087CIV, 2009 WL 1393423, at *1-2 (S.D. Fla. May 18, 2009) (holding that choice of law provision applied to bad faith claim).
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Choice of Law
If the policy expressly stipulates that it will be governed by the law of the designated state, that state’s law will control, absent circumstances or public policy.
See, e.g., 1 Law and Prac. of Ins. Coverage Litig. § 9:18 (June 2014) (citing law from various jurisdictions).
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Choice of Law Provision
In the event that the insured and the Company dispute the meaning, interpretation or operation of any term, condition, definition or provision of this Policy resulting in litigation, arbitration or other form of dispute resolution, the Insured and the Company agree that the law of the State of [Insert] shall apply and that all litigation, arbitration or other form of dispute resolution shall take place in the State of [Insert].
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Enforcing Choice of Law Clauses
“Florida courts are required to enforce choice of law provisions in contracts unless the law of the foreign state contravenes the strong public policy of Florida . . .” Good, supra, 2009 WL 1393423, at *1-2.
“A choice-of-law provision in a marine insurance contract will be found unreasonable, and therefore unenforceable, only when: (1) its formation was induced by fraud or overreaching; (2) the fundamental unfairness of the chosen law would deprive the plaintiff of a remedy; or (3) the enforcement of the provision would contravene a strong public policy.” Deep Sea Fin., LLC v. British Marine Luxembourg, S.A., No. CV 409-022, 2010 WL 3603794, at *2-3 (S.D. Ga. May 13, 2010)
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Ignoring Choice of Law Clauses
“Choice-of-law and choice-of-forum agreements in liability insurance policies should generally be ignored at least when the insured risk is in this State.”
“A forum-selection clause in a policy of insurance respecting property located wholly within New Jersey which requires litigation elsewhere would appear to be inconsistent” with the law of New Jersey, “at least when dealing with risks located wholly within this State . . .”
Param Petroleum Corp. v. Commerce & Indus. Co., 296 N.J. Super. 164, 170-72 (App. Div. 1997).
Compare, Walters v. American Home Assurance, Civil Action No. 09-4637, 2011 WL 4409170 (D.N.J. Sept. 21, 2011) (New Jersey courts will enforce clearly-stated choice of law provisions if the insured was in a relative strong bargaining position and the insured risk is not located in the state).
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Jurisdictional Differences In Establishing Bad Faith and Litigating Bad Faith Claims
•Varying standards to establish bad faith
•Varying damages available once bad faith is established
• Statutory vs. Common Law claims
•Bench vs. Jury trial?
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Requirements for Imposing Bad Faith Liability Vary Widely
• Bad Faith Liability Usually Requires More than Negligence, Mistake or Poor Judgment
Varying Requirements Include:
Deliberate, knowing or conscious unfair or unreasonable conduct (Ariz., Cal., Colo, Iowa)
Dishonesty or Ill will (Conn., Indiana, NJ) “Clear and Convincing” Proof that Acted in Gross or
Willful Disregard of Insured’s Interests (Penn.)
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Does The Jurisdiction Permit a Direct Third-Party Action for Bad Faith?
• Many of the procedural issues presented will depend on who is bringing the bad faith claim?
• Is the claim brought by the insured?
• Does the jurisdiction permit a claimant against the insured to bring his own claim for bad faith against the insurer?
• If so, will the court sever and stay the third-party bad faith claim?
• Typically, such a claim must be severed and stayed to avoid bias to the insurer, and to protect the insured’s interest in having an adequate defense provided by the insurer
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Bad Faith Claims by the Insured Against Its Insurer • In a wrongful denial of coverage bad faith action, must
the insured prove a breach of contract in order as a predicate to a bad faith claim?
• Yes in some jurisdictions: “A plausible, reasoned legal position that may ultimately turn out to be mistaken… is outside the scope of the punitive aspects of the combined application of G.L. c. 93A and c. 176D.” Guity v. Commerce Ins. Co., 631 N.E.2d 75, 77 (Mass. App. Ct. 1994).
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Bad Faith Claims by the Insured Against Its Insurer (cont.)
• No in others: “[An insurer] may be ‘found liable for bad faith despite the fact that, under the circumstances, the policy did not require it either to defend or indemnify’ the insured.” Manterola v. Farmers Ins. Exch., 200 Ariz. 572, 578, 30 P.3d 639, 645 (App. Div. 2001)
• In a wrongful failure to settle within limits action, however, the standard does not look to whether the insurance contract has been breached.
• More typically, the duty to settle within limits where liability has become clear is derived from the implied covenant of good faith and fair dealing.
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Jurisdictional Differences in Recoverable Damages • Typically, the measure of damages for a wrongful failure
to settle within policy limits claim is the amount of the judgment that exceeds the policy limit.
• Most jurisdictions also permit the award of punitive damages for an insurer’s bad faith conduct
• However, the award of bad faith damages in addition to compensatory damages usually also requires a heightened showing of an insurer’s culpability:
“clear and convincing evidence of malice, oppression or fraud” (CA)
“willful and knowing” violation of Unfair Insurance Claims Practices Act (MA)
“Egregious circumstances” (NJ, NY)
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The Amount of Punitive Damages Available Varies Widely
• Depends on the nature of the claim (e.g., wrongful denial of coverage, wrongful failure to settle within limits, etc.)
• The scope of available punitive damages is often defined (and limited) by statute, compare:
Mass. (permitting a third-party claimant to recover 2-3x the amount of the judgment on an underlying claim), with
Texas (punitive damages capped by statute as 2x compensatories, but not >750k), or NC (maximum of 3x compensatories, or $250k)
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Differences in Availability of Bench vs. Jury Trial
• Many jurisdictions diverge on whether a bad faith plaintiff is entitled to a jury trial
• Conventional wisdom would seem to be that an insured/third-party bad faith claimant would want a jury trial, and that an insurer would prefer a bench trial, but that wisdom may not always hold:
Are juries in that jurisdiction defense-friendly?
Does the jurisdiction afford predictability regarding the judge who would try the bench trial?
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The Critical Importance of the Summary Judgment Motion
• Because of the volatility associated with a bad faith claim against an insurer, the summary judgment process is often a watershed event for the claim
• Bad faith claims tend to be highly documentary, with the claims file being the central narrative of how the claim was handled
• The careful consideration of the documentary and deposition evidence by a judge at summary judgment is frequently an insurer’s best opportunity for prevailing on a bad faith claim
• Equally, avoiding summary judgment is critical for the claimant, and developing disputes of fact in the record evidence is key
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