Clean Up in Aisle Five: 1st Circuit Holds Self-Insured Grocery Chain is Not in the Business of Insurance
By: Stevi A. Siber-Sanderowitz, Associate in New York Office
In Bingham v. Supervalu, Inc., No. 15-1437, 2015 WL 7076938 (1st Cir. Nov. 13, 2015), the U.S. Court of Appeals for the 1st Circuit addressed the issue of what it means to be "in the business of insurance." The 1st Circuit held that, while the defendant grocery store chain acted as a self-insured by negotiating and resolving liability claims against its subsidiaries, the company did not issue policies for profit or assume the risk on behalf of unaffiliated third parties and, therefore, was not in the business of insurance under state insurance law. As a result, the self-insured was not subject to Massachusetts’ "bad faith" laws.
The underlying case involved a personal injury action in Massachusetts state court after a motorized cart struck the plaintiff, Marion Bingham, while she was shopping at a Shaw’s Supermarket. Bingham sued Shaw’s parent company Supervalu, Inc. in federal court, alleging Supervalu violated Massachusetts insurance law by failing to fairly settle the personal injury lawsuit against Shaw’s. In particular, Bingham alleged that Supervalu violated Mass. Gen. Laws ch. 176D, § 3(9)(f) ("Chapter 176D"), which prohibits those "in the business of insurance" from employing "unfair methods of competition and unfair or deceptive acts or practices," including "[f]ailing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear."
Supervalu moved for summary judgment on the grounds that it was not in the business of insurance and thus not subject to regulation under Massachusetts law. The United States District Court for the District of Massachusetts granted Supervalu’s motion for summary judgment, and Bingham appealed. On appeal, the 1st Circuit affirmed and held that Supervalu was not in the business of insurance and thus is not regulated by state insurance laws.
The 1st Circuit found that Supervalu was "self-insured," meaning it "assum[ed] [its] own risk, instead of transferring it to a third-party insurer by means of purchasing insurance coverage." However, the court reasoned that Chapter 176D "cannot legitimately be extended to a self-insurer," such as Supervalu, who administered, negotiated and settled claims made only against its subsidiaries, and had no contractual obligation to settle claims or assume the risk of third-party losses. Relying on the Massachusetts Supreme Judicial Court decision in Morrison v. Toys "R" Us, Inc., 806 N.E.2d 388 (2004), the 1st Circuit found that Supervalu did not act as an insurer because it did not sell insurance policies for profit and was not contractually obligated to settle claims against its subsidiaries. Rather, Supervalu operated a centralized risk management system to negotiate and settle claims made against any of its subsidiaries that were below the limits of its applicable insurance coverage. Thus, Supervalu was not "in the business of insurance" as that term is contemplated under Massachusetts law.
Supervalu highlights the difference between self-insureds and an entity engaged in the business of insurance and the fact that the former is not subject to a contractual obligation to settle claims. Thus, claimants will face an uphill battle asserting a claim for bad faith, depending on the definition of who is an insurer under the applicable state laws.
Federal Magistrate Denies Insurance Adjusting Company’s Motion to Intervene In Insured’s Bad Faith Suit Against Insurer
By: James R. Murray, Partner in the Chicago Office
In Lois Breech v. Liberty Mutual Fire Insurance Company, 2015 WL 6859676, Case No. 2:15-cv-2633 U.S. Dist. Ct. S.D. Ohio (11/09/2015), the magistrate issued a report and recommendation that the District Court deny an insurance adjusting company’s motion to intervene in its client’s bad faith action on the basis that it had not established it was entitled to intervene as of right.
Finnicum Adjusting Company (Finnicum) entered into a contract to help the plaintiff, Lois Breech, adjust a claim for damage to Breech’s home caused by wind and water. The contract called for Breech to pay Finnicum 14% of the proceeds of the recovery from Breech’s insurer, Liberty Mutual Fire Insurance Company (Liberty Mutual). Liberty Mutual allegedly paid Breech a total of $19,528.91 for damages to the home. Breech allegedly refused to pay Finnicum the amount due under the contract for adjusting services. In addition to the dispute with Finnicum, Breech had a dispute with Liberty Mutual over the amount of its loss and filed an action in federal court for breach of contract and bad faith against Liberty Mutual. Thereafter, Finnicum filed a Motion to Intervene in that action, contending it was entitled to intervene as of right and/or that it was a necessary party to the federal court action.
The motion was presented to the magistrate to prepare a report and recommendation. The magistrate noted that under Fed. R. Civ. P. 24 (a) intervention as of right is only established where: (1) the application is timely filed; (2) the applicant has a substantial legal interest in the case; (3) the applicant’s interest will be impaired without intervention; and (4) the existing parties will not adequately protect its interests. While it was assumed that the application was timely, the magistrate ruled that Finnicum did not have a substantial interest in the case because the dispute between Breech and Liberty Mutual involved the contractual relationship of the parties to the insurance contract, while Finnicum’s dispute related to a separate adjusting contract with Breech.
The court also noted that Breech had not assigned its rights to its recovery from Liberty Mutual to Finnicum. Further, the court concluded that Finnicum’s right would not be impaired if it were denied intervention because Finnicum’s interests sounded in a separate contract and any ruling in Breech’s suit could not affect Breech’s legal contractual obligation to Finnicum. Because it found that two of the four required elements for intervention were lacking, the magistrate did not address the other factors.
The court also rejected Finnicum’s argument that it satisfied the permissive intervention requirements of Fed. R. Civ. P. 24(b)(1)(b), which requires there be at least one common question of law or fact. Specifically, the magistrate ruled that the claim for breach of the adjusting contract did not share any common issues of law or fact with Breech’s claim for insurance coverage from Liberty Mutual.
Finally, the court rejected Finnicum’s claim that it was a necessary party to the Breech’s action under Fed. R. Civ. P. 19. The court held that Finnicum’s claim against Breech was not related to Breech’s claim for breach of contract against Liberty Mutual. Consequently, the magistrate recommended that the Motion to Intervene be denied.
An entity that claims a financial interest in the outcome of an insured’s litigation with an insurance company, is not necessarily entitled to intervene and become a party to the coverage litigation. Even though the private adjusting company may be a witness in the action, its right to recover from the insurance proceeds is a separate issue that needs to be litigated in a separate action.
Coal in its Stocking: Other Policyholder Lawsuits Against Insurer Alleging Insurer Refused to Provide Coverage Stymie Insurer’s Motion to Dismiss Unfair Practices Act ClaimsBy: Joanna Crosby, Partner in the New Jersey Office
In Thurston Foods, Inc. v. Wausau Business Ins. Co., 2015 WL 6551787 (D. Conn. 10/29/2015), the United States District Court for the District of Connecticut denied a commercial property insurer’s motion to dismiss claims that the insurer violated the Connecticut Unfair Insurance Practices Act (CUIPA) and Connecticut Unfair Trade Practices Act (CUTPA) where the policyholder plaintiff’s complaint alleged frequency of the insurer’s conduct and general business practice in refusing coverage by citing to other lawsuits against the insurer.
The plaintiff, Thurston Foods, Inc. (Thurston) filed suit against Wausau Business Insurance Company (Wausau) for breach of contract, bad faith and violation of the CUIPA and CUTPA. Thurston alleged that Wausau improperly refused to afford coverage for damage to its commercial building caused when ice and snow accumulated on the roof and caused damage to the roof, ceiling tiles, signage, freezer and freezer floor.
Wausau moved to dismiss the CUIPA and CUTPA claims. Thurston countered that the complaint contained sufficient allegations that Wausau engaged in alleged misconduct as a general business practice. Particularly, Thurston referenced in its complaint five lawsuits against Liberty Mutual Insurance Company and/or its subsidiaries (Wausau is a subsidiary of Liberty) wherein the policyholders had alleged refusal to properly handle claims.
Despite Wausau’s efforts to distinguish those five suits based on the status and type of policy, the District Court denied Wausau’s motion to dismiss finding the plaintiff had raised "at least an inference that defendant had a general practice of unfair claims settlement."
With the ease of internet searches for other lawsuits, insurers are likely to see more frequent citation to other cases within a complaint when a policyholder files a bad faith suit that includes violation of any state’s unfair trade or settlement practices acts. Given the standard and discretion with which court’s view motions to dismiss, however, insurers should pursue such motions where appropriate.
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