Extra! Extra! Extracontractual Liability and Claims Handling Newsletter (Volume 9, Issue 3, March 2012)

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The Seventh Circuit Holds That Under Indiana Law Policyholders Are Contractually Required to Perform Their Specific Duties After a Loss, and Finds That State Farm’s Delay in Making a Coverage Determination While Completing Its Investigation Was Not Bad Faith as a Matter of Law
Authored By:
Colleen M. Costello, Associate in the Chicago Office

In Foster v. State Farm Fire and Casualty Co., Case No. 11-3100, 2012 U.S. App. LEXIS 5513 (7th Cir. March 16, 2012), the United States Court of Appeals for the Seventh Circuit, applying Indiana law, upheld the district court’s grant of State Farm Fire and Casualty Company’s (“State Farm”) motion for summary judgment on the grounds that: 1) the insured homeowners, (the “Fosters”), breached their insurance contract by failing to comply with “Your Duties After Loss;” and 2) State Farm’s delay in deciding coverage was not in bad faith.

On January 3, 2009, the Fosters’ house was severely damaged by a fire. The next day, Mrs. Foster submitted a claim to State Farm under the family’s homeowners’ policy. State Farm immediately began its investigation and promptly requested documents and authorizations. Based upon its initial interviews, State Farm discovered that the Fosters had several personal and business financial accounts and that they had been involved in multiple lawsuits.

At the end of January, State Farm sent a letter to the Fosters restating its initial requests for information and documents. In early March, State Farm wrote again to the Fosters reminding them of their contractual obligations, including the “Your Duties After Loss” policy provisions. The “Your Duties After Loss” provision requires the Fosters to provide State Farm with records and documents that it requests, to submit to examinations under oath, and to submit a proof of loss within 60 days after the loss. In mid-March, State Farm’s fire investigator had concluded that the fire was intentionally set. Thereafter, State Farm informed the Fosters that there was a question as to whether the loss was accidental as it relates to a named insured, and State Farm requested additional documents, including detailed phone records, bank account transaction histories, tax returns and mortgage information.

The Fosters requested a 60-day extension for filing their proof of loss, which State Farm granted, while restating its previous request for documents. A few days after, the Fosters hired a new attorney, and State Farm granted them until August 5, 2009, to file their proof of loss, while again stating that the documents already in the Foster’s possession should be produced as quickly as possible to facilitate the claims process.

On May 20, 2009, the Fosters provided State Farm with phone bills and a signed medical release. The Fosters informed State Farm at the beginning of July that they were close to obtaining the information and documents that it had requested in its prior letters. The Fosters produced some additional documents in July but many requests remained outstanding. On August 5, the Fosters produced close to 1,000 pages of documents, including their proof of loss. State Farm then took the examinations under oath (“EUO”) of the Fosters. Based upon the statements made by the Fosters about previously undisclosed bank accounts and business dealings, State Farm requested additional documents and set forth requests that had not yet been complied with.

At her EUO, Mrs. Foster agreed to reconvene for her EUO on a later date after State Farm had received the additional and previously requested documents, which State Farm confirmed in writing. On October 1, the Fosters sent a status report in which they reported that they were either looking into the requests or had already sent the requests to the financial institutions for responsive documents. On December 2, State Farm sent correspondence to the Fosters stating that it was concerned with the lack of documents provided since the last session of Mrs. Foster’s EUO. On December 11, the Fosters responded that they were disturbed by State Farm’s unsupported allegations, and they stated that they were firmly establishing a “reasonableness boundary” regarding State Farm’s copious and unreasonable requests. The Fosters concluded the letter by giving State Farm until December 23, 2009, to make a coverage determination. The Fosters also stated that they had until January 23, 2010, to sue under the contract per the policy’s “Suit Against Us” provision, which was one year after the date of loss.

On December 15, 2009, State Farm responded by refusing to provide a coverage decision on December 23, 2009. State Farm emphasized the Fosters prior acknowledgment that documents were outstanding, and the Fosters agreement to continue the EUO of Mrs. Foster. State Farm also specifically informed the Fosters that under Indiana law an insured has a minimum of two years from the date of loss to bring an action. On December 30, 2009, the Fosters filed suit against State Farm for breach of contract and bad faith delay.

The Seventh Circuit examined Indiana law as set forth by the Indiana Supreme Court in Morris v. Economy Fire & Cas. Co., 848 N.E.2d 663 (Ind. 2006). The Seventh Circuit court noted that, in Morris, the Indiana Supreme Court made clear that “Your Duties After Loss” provision is not a cooperation clause that requires only the policyholder’s reasonable assistance with the investigation of a claim. Instead, the Morris court found that it is an entirely separate provision that explicitly requires a policyholder to perform specific duties. The Morris court stated that an insured cannot impose prerequisites on his or her performance of their duties under that provision. Although the Seventh Circuit reasoned that a policyholder could theoretically object to the number or frequency of requests, it found that the Fosters could not because they unambiguously agreed to produce documents and complete Mrs. Foster’s EUO.

The Fosters further complained that they did not breach the contract because State Farm had everything that the Fosters possessed. The Seventh Circuit assumed that this is true, but noted that the Fosters had a duty to acquire and deliver requested documents concerning their financial condition and a possible arson suspect, which they failed to do as a matter of law. The Seventh Circuit also rejected the Fosters claim that they were forced to sue State Farm because the one-year suit limitations period in their contract was about to expire. The Seventh Circuit rejected this argument because they faced no such risk under Indiana law, as they were informed by State Farm. Further, the court emphasized that it was the Fosters’ responsibility to understand the law or ask for a tolling agreement.

Finally, the Seventh Circuit noted that if State Farm wrongfully “slow-walked” the Fosters’ request for coverage, State Farm could be liable for the tort of insurance bad faith. The court held, however, that State Farm was entitled to judgment as a matter of law because there was no evidence of “dishonest purpose, moral obliquity, furtive design, or ill will” as required under Indiana law. The record revealed nothing other than State Farm’s attempt to investigate a substantial claim following an intentionally set fire. The Seventh Circuit cautioned that its conclusion should not be over-read, as it did not understand Morris to “license badgering and irrelevant demands for documents and information or endless EUOs” but only to require policyholders to perform their specific “duties after loss.”

Tressler Comments:  In Foster, the insurer issued numerous requests for documents and information and examinations under oath. The Seventh Circuit acknowledged the need for substantial requests, but it is important to note that its ruling was based upon the size and circumstances of the claim and the insureds’ agreement to provide such information.

Decision Worth Noting...
Authored By:
Thomas G. Drennan, Partner in the Chicago Office

In Tucker v. AIG, Inc., 2012 U.S. Dist. LEXIS 28177 (D. Conn. March 2, 2012), the United States District Court for the District of Connecticut addressed the appropriate scope of deposition testimony with respect to litigation involving allegations of bad faith and reckless claims handling. In Tucker, the defendant insurers filed a Motion for Reconsideration relating to the court’s prior rulings on the insurers’ Objections to Re-Notice of Depositions. The defendants objected to several of the court’s rulings, including the court’s decision to allow the plaintiff (who had filed suit to collect from the insurers a $4 million judgment against her former employer) to seek information in depositions relating to other claims of bad faith and reckless claim handling. The insurers argued that Connecticut state and federal decisions addressing the standard of proof for such claims operated to rule out the plaintiff’s reliance on allegations in order to prove a “general business practice” under the applicable statutory provision. The defendant insurers argued that mere allegations of bad faith claims handling are not sufficient to establish that an insurer committed or performed the acts in question, and therefore could not support the plaintiff’s purported right to seek information regarding other claims and other complaints of reckless claim handling and/or bad faith.

The court denied the insurers’ Motion for Reconsideration, and held that the plaintiff could seek information regarding other claims of reckless claim handling and/or bad faith. The court relied on the broad scope of discovery, and the fact that such evidence need not ultimately be admissible in order to be subject to discovery. The court stated that “it logically follows that where there are numerous, similar complaints of unfair practices, one may, upon further investigation, compile the necessary facts to determine whether such practices occurred.”

Tenth Circuit Upholds Dismissal of Bad Faith Claim Arising Out of an Insurer’s Denial of UIM Coverage
Authored By:
Joanna L. Crosby, Partner in the New Jersey Office

In Halstom v. Great Northwest Insurance Company, 2012 U.S. App. Lexis (10th Cir. February 2, 2012), the Tenth Circuit Court of Appeals upheld the grant of summary judgment in favor of an Underinsured Motorist insurance carrier. Applying Oklahoma law, the court rejected the arguments of Plaintiff insured that her UIM insurer acted in bad faith in the handling of her claim.

Plaintiff was involved in a motor vehicle accident in April 2008. She was offered full limits from the tortfeasor’s $25,000 auto policy. Plaintiff sought UIM coverage from her own insurer Great Northwest, which had issued a policy providing $100,000 UIM limits. When Great Northwest evaluated the insured’s claim, wherein she claimed that she injured her knee in the motor vehicle accident, the insurer questioned the causal relationship between the alleged injury and the motor vehicle accident. When the insurer offered plaintiff only $5,000 to avoid potential litigation expenses, she filed suit and alleged bad faith in the breach of the implied covenant of good faith and fair dealing. Plaintiff claimed the insurer failed to evaluate her claim, failed to make any attempts to resolve the claim, and forced her to file the action to resolve her claim. Plaintiff sought compensatory and punitive damages and counsel fees.

On appeal from an order granting summary judgment to the insurer, the Tenth Circuit affirmed the dismissal of the bad faith suit. Particularly, the court discussed the insured’s burden under Oklahoma law to establish a breach of the duty of good faith and fair dealing. The insured was required to show (1) she was covered under the liability policy; (2) the insurance company’s actions were unreasonable under the circumstances; (3) the insurer failed to deal fairly and in good faith toward her; and (4) the breach of duty was the direct or proximate cause of damage to her. Examining the evidence that was before the trial court, the Tenth Circuit found that Great Northwest had a legitimate basis to question the UIM coverage because while the insured claimed injury to her knee necessitating surgery for a meniscal tear, her immediate complaints after the accident did not include any claim of injury to the knee, any bruising or swelling. It was only two to three weeks after the accident while at yoga that plaintiff claims she experienced pain. Plaintiff later sought medical attention and subsequently underwent the surgery.

During discovery in the Declaratory Judgment action, the insurer conducted the deposition of plaintiff’s doctor who admitted that his notes as to the knee problems and plaintiff’s motor vehicle accident were based solely on the information from the insured and the physician admitted reasonable doubt as to causation.

Concluding that Great Northwest had a legitimate basis to deny coverage, it rejected the insured’s argument that the insurer acted in bad faith.

Tressler Comments:  Here the insurer obtained a good result despite the fact that an independent adjuster valued the claim at $60,000 to $90,000. While the insured argued that the insurer acted in bad faith by not accepting the valuation, the court held that the preliminary question was one of coverage under the UIM policy based upon the causation issue. Bad faith cases can be defeated with the right facts and law, and here the court held that the insurer had properly disputed coverage.

Decision Worth Noting...
Authored By:
Thomas G. Drennan, Partner in the Chicago Office

The United States District Court for the District of South Carolina recently addressed allegations of bad faith in connection with a fire loss. In Certain Interested Underwriters at Lloyd’s London v. Cooper, 2012 U.S. Dist. LEXIS 21136 (D. S.C. February 21, 2012), the insureds suffered a fire loss to their property. The property was formerly operated as a night club, had continued to be operated as a “teen club,” and was sometimes rented out for private parties. According to the Fire Marshall, who investigated the cause of the fire, the fire was “intentionally set with an open flame and a poured ignitable liquid.”

The insurer argued that the Fire Marshall’s conclusions precluded coverage under the commercial property insurance policy at issue. The insurer also argued that the insureds had made misrepresentations on the application for insurance, which described the property as vacant, and which also stated that no bankruptcies, tax, or credit liens had been filed against the applicant in the last five years (which was apparently not true). The insurer filed suit seeking a declaratory judgment against the insureds, and moved for partial summary judgment seeking to rescind the policy. One of the insureds filed a counterclaim for breach of contract and bad faith, while the other insured did not respond to the complaint.

The court held that the insurer was not entitled to partial summary judgment on the issue of rescission, as there was an issue of material fact as to whether the insureds made false statements on the insurance application with the intent to deceive. The court also addressed a motion to strike filed by one of the insureds, which sought to preclude the testimony of the Fire Marshall on the grounds that the insurer had not provided the summary disclosure of the subject matter on which the witness was expected to testify, as required by the amended Federal Rule of Civil Procedure 26(a)(2)(C). The court ruled that since the federal rule had changed only recently (effective December 1, 2010), and after the court had entered the scheduling order setting forth the expert disclosure deadlines, the motion to strike was denied.

Finally, the court addressed the insurer’s motion for partial summary judgment on the bad faith counterclaim. The court noted that under South Carolina law, the elements of a bad faith claim are: 1) the existence of an enforceable, mutually binding contract of insurance between the parties to the lawsuit; 2) the insurance carrier’s refusal to pay benefits or perform obligations under the contract; 3) which results from the insurance carrier’s bad faith or unreasonable action that breaches the implied covenant of good faith and fair dealing; and 4) that proximately causes damage to the insured. The court held that, considering the evidence of potential arson and the alleged misrepresentations in the policy application, the insurer did not act unreasonably. Accordingly, the court granted the insurer’s motion for partial summary judgment on the bad faith claim. 

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