First Things First – Florida Supreme Court Rules Insured is Entitled to Jury Determination of UM Liability and Damages in Excess of Policy Limits Prior to Litigating First-Party Bad FaithBy: Katherine K. Liner, Partner in the Orange County Office
Fridman v. Safeco Ins. Co. of Illinois, 2016 WL 743258 (Fla. 2016) arose out of an insured’s demand for the $50,000 uninsured/underinsured motorist (UM/UIM) limit on his auto policy. The insured filed a Civil Remedy Notice pursuant to Florida’s bad faith statute after the insurer refused to pay the UM/UIM limit and subsequently filed a complaint against the insurer to determine liability under the UM/UIM policy, including the full extent of his damages.
Three years later, on the eve of trial in that lawsuit, the insurer tendered the UM/UIM policy limit and moved for a "confession" of judgment. At the hearing on the motion to confess judgment, the insured’s attorney argued that he intended to file a bad faith action against the insurer, but had not done so due to the understanding that a judgment in excess of the policy limit was needed as a condition precedent.
The trial court denied the motion to confess judgment and allowed the case to proceed to trial. Based on the jury finding the underinsured motorist liable and that the insured sustained damages in the amount of $1 million, final judgment was entered against the insurer for the $50,000 UM/UIM limit, with the court reserving jurisdiction to determine bad faith following the insured’s amendment of the complaint to add the bad faith claim and determination of bad faith damages based on the $1 million jury finding.
The insurer subsequently appealed the trial court ruling, arguing that its motion for entry of confession of judgment should have been granted and the trial court could not reserve jurisdiction to later determine bad faith. The Florida 5th District Court of Appeals vacated the jury’s $1 million verdict based on its view that the judgment on the underinsured’s liability could not exceed the policy limit and that the insured had to seek the full measure of his damages in a subsequent bad faith action.
On review, the Florida Supreme Court reversed the Court of Appeal ruling. Based on Florida law, the Florida Supreme Court found that: (1) the insured is entitled to a jury determination of the full amount of damages before litigating the first-party bad faith claim and his tender of the UM/UIM policy limit did not render moot the jury’s determination of damages; (2) the jury determination of damages is binding on the insurer in a subsequent bad faith action; and (3) the trial court’s procedure of entering the jury verdict as a final judgment and retaining jurisdiction to later consider the bad faith claim appropriately addressed how the parties can review the jury determination of the extent of the damages prior to it being used in the subsequent bad faith litigation as an element of damages.
The Florida Supreme Court explained that if the jury verdict were not binding in the bad faith action, an insurer could confess to judgment for its policy limit at the last hour to avoid a jury determination of damages and it would promote one side or the other trying to take a second bite at the apple and re-litigating the issue of damages.
Breach of the duty to settle generally involves evidence of the insured’s exposure in excess of the policy limit. The case illustrates the application of those principles in the first-party UM/UIM context and emphasizes the fact that a delayed tender of the policy’s limits will not cure a failure to settle situation.
Time Out – Delaware Supreme Court Finds Statute of Limitations for Bad Faith Begins on Final JudgmentBy: James R. Murray, Partner in the Chicago Office
In Connelly v. State Farm Mut. Auto. Ins. Co., 2016 WL 836983 (Del. 2016), a case of first impression in Delaware, the Delaware Supreme Court ruled that an insured’s cause of action for bad faith failure-to-settle accrues on the date that an excess judgment becomes final and non-appealable and not on the date that the insurer rejected an offer to settle within the policy limits.
In the underlying case, the insured rear-ended Christina Connelly. The insured’s insurer appointed counsel to defend him in the personal injury action and assumed exclusive control of his defense. On May 10, 2011, the insurer rejected Connelly’s offer to settle her claim against the insured for $35,000. At trial, the insurer and insured stipulated that the insured’s negligence was the proximate cause of the accident. After trial on damages, the jury awarded Connelly $224,000. The trial judge further awarded pre-judgment interest close to $100,000, costs over $5,000 and post-judgment interest over $10,000. The insurer then paid Connelly about half of the amount of the award.
On April 29, 2012, the 30-day period within which the insured could appeal the judgment expired. On September 3, 2014, Connelly filed suit against the insurer and the insured to collect the full amount of the judgment and later obtained an assignment of the insured’s rights to pursue a bad faith claim against the insurer.
Connelly alleged that the insurer acted in bad faith by wrongfully refusing to settle within the policy limits and, therefore, was liable for the excess judgment. The insurer moved to dismiss Connelly’s bad faith claim on the basis that the suit was barred by the three-year statute of limitations under 10 Delaware Code Section 8106 that began to run either on the date Connelly offered to settle or when the settlement offer expired.
The trial court granted the insurer’s motion to dismiss Connelly’s suit, ruling that the statute of limitations began to run on the date the insurer breached its contractual duties by wrongfully rejecting Connelly’s settlement demand. Connelly filed an appeal.
The Supreme Court of Delaware reversed and held that Connelly’s action accrued after the excess verdict became final and non-appealable. The Court noted that a prior unpublished decision in Hostetter v. Hartford Ins. Co., 1992 WL 179423, supported the position that the statute of limitations for bad faith begins to run on the date the insurer commits the wrongful act. However, the Court disagreed with the prior decision because a majority of courts in other jurisdictions have held that a cause of action for bad faith failure-to-settle only accrues when the judgment becomes final and non-appealable.
The Court further observed that a bad faith failure-to-settle claim requires proof of damages, which can only be established after an excess judgment has been entered against an insured. Finally, the Court observed that ruling that a cause of action accrues before an excess verdict is entered against an insured would possibly put the insured and the insurer at odds in the defense of the case before verdict.
The Court’s ruling in this case, that a cause of action for bad faith failure-to-settle does not accrue until the judgment in excess of the policy limits becomes final and non-appealable, is consistent with breach of contract claims in other settings. That is, before a cause of action for a breach of contract accrues, one must suffer damages.
Do Not Pass Go – Third Circuit Affirms Dismissal of Bad Faith Claim Against InsurerBy: Joanna L. Crosby, Partner in the New Jersey Office
In Hammond v. U.S. Liability Ins. Co., 2016 WL 929288 (3rd Cir. 2016), the insured sought coverage under a Businessowners and Technology Professional Liability policy after he was sued by a technology information company. The technology company asserted ownership rights to certain software as its intellectual property. An amendment to the complaint included claims of breach of contract, conversion and intentional interference with existing and prospective contractual relations. The insurer denied coverage in response to the tender of the original and amended complaints.
In the underlying litigation, the insured asserted a counterclaim. In response, the technology company sought attorney’s fees and costs. The insured maintained that the technology company’s request for attorney’s fees and costs constituted a claim for malicious prosecution and tendered that claim to the insurer. The insurer again denied any obligation to defend or indemnify.
After the insured resolved the litigation with the technology company, it instituted suit against the insurer, alleging that the insurer acted in bad faith when it denied coverage.
Having determined that the insured could not meet his burden to prove bad faith under Pennsylvania law, the 3rd U.S. Circuit Court of Appeals affirmed the District Court’s dismissal of the suit. Specifically, the 3rd Circuit held that the insured could not establish by clear and convincing evidence that the insurer: (1) did not have a reasonable basis for denial of coverage; and (2) knew or recklessly disregarded its lack of reasonable basis in denying the claim.
Further, the 3rd Circuit affirmed the District Court’s determination that the two-year statute of limitations for bad faith claims barred the insured’s suit. Having given the insured definite notice of a refusal to defend or indemnify more than two years before the insured sued the insurer, the statute of limitations expired before the suit was filed.
This case illustrates the effectiveness of motions to dismiss, which are generally met more liberally than summary judgment motions. Here, the insured had a difficult burden that the insurer could show at the outset he would not be able to meet.
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