Is an insurer exposed to bad faith if it relies upon its own mistake to withhold payment under the policy? The court answered yes in Lundy Enterprises, LLC v. Wausau Underwriters Ins. Co., No. 06-3509, 2009 U.S. Dist. LEXIS 121295 (E.D. La. Dec. 30, 2009).
Wausau provided commercial property coverage for the insured's Pizza Hut locations and an office building. Although the policy included a "Flood Coverage Endorsement" providing coverage for certain flood occurrences, the endorsement excluded properties in certain flood zones. Prior policies issued to the insured did not include the flood zone exclusions. The insured later discovered that the current policy was not supposed to have the flood zone exclusions and that Wausau made a mistake in writing the policy.
Wausau denied coverage for certain locations damaged in identified flood zones after Hurricane Katrina. Subsequent to the hurricane, however, Wausau amended the flood endorsement to retract the exclusion of properties in these flood zones.
The insured sued, claiming that Wausau relied in bad faith upon its own mistake in writing the policy to deny flood coverage. In its motion for partial summary judgment, Wausau argued its mistake could not be in bad faith because the Louisiana statute required a knowing act. Further, the insured could not prove Wausau's actions were arbitrary and capricious.
The court refused to dismiss the bad faith claim, however. The insured's claim for bad faith was not based on Wausau's making a mistake in writing the policy, but rather on Wausau's reliance upon its own mistake in withholding payment under the policy, and failing to pay under circumstances that were unreasonable, arbitrary, and without probable cause. These issues could not be resolved on a motion for summary judgment.
