Insurance Law Hawaii

Hawaii ICA Affirms Denial of Summary Judgment on Bad Faith Claim

   Following the jurisprudence set forth by the Hawaii Supreme Court, the Intermediate Court of Appeals affirmed the trial court's rejection of the insured's claim for bad faith. Stewart v. State Farm Mut. Auto. Co., 2012 Haw. Ct. App. LEXIS 148 (Haw. Ct. App. Feb. 10, 2012).

   The ICA agreed with the insured that the trial court had improperly determined that a bad faith claim can arise only if the insurer owed the insured a duty to pay and the insurer delayed or denied payment. The trial court's reasoning departed from the Supreme Court's decision in Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 133, 920 P.2d 334, 347 (1996). The Supreme Court previously held that, under some circumstances, an insured may pursue a bad faith claim even where there is no coverage under the policy.

   Nevertheless, the end result in dismissing the bad faith claim was correct. The insured alleged that the insurer failed to promptly and thoroughly investigate his claim before consenting to his settlement with the other driver's insurer. The insured, however, never complained about the insurer's pre-settlement investigation. The undisputed facts demonstrated that the insurer requested information from the insured regarding his injuries and his lost wages, performed an asset check of the other driver and had an adjuster speak with the other driver's carrier to ascertain that he had few assets to satisfy a potential judgment. This pre-settlement investigation fit the guidelines for UIM investigations established by the Hawaii Supreme Court.

   Therefore, the insured failed to show the existence of a genuine issue of material fact to establish that the insurer committed bad faith in the handling or investigation of the UIM claim. Consequently, the trial court properly granted summary judgment.

   Thanks to Keith K. Hiraoka, counsel for the insurer, for forwarding this case to me.

Hawaii ICA Affirms Determination of No Bad Faith

   Shilo Willis was injured when the uninsured car in which she was a passenger was struck by another vehicle. Willis v. Swain, 2012 Haw. Ct. App. LEXIS 131 (Haw. Ct. App. Feb. 3, 2012). Willis was enrolled under a "certificate policy" which was provided under Hawaii's Joint Underwriting Plan (JUP) to drivers receiving public assistance benefits. Although the JUP certificate policy provided personal injury protection benefits and bodily injury coverage, Willis's certificate policy with First Insurance did not include uninsured motorist (UM) coverage.

   Willis sustained bodily injuries, received medical treatment, and incurred medical bills. Her claim was assigned to First Insurance pursuant to Haw. Rev. Stat. sec. 431:10C-408. The case had previously been before the Hawaii Supreme Court, which vacated the circuit court's grant of summary judgment in favor of First Insurance. The Supreme Court determined that First Insurance was to pay appropriate beneifts under the assigned claim program. The Supreme Court did not address Willis's other claims, including a claim for bad faith.

   On remand, First Insurance paid benefits under the JUP assigned claims program and then moved for summary judgment with respect to the bad faith claim. The circuit court granted the motion, holding that as a matter of law there was no bad faith claim in the absence of a contract.

   The Supreme Court affirmed the dismissal of the bad faith claim. In Simmons v. Puu, 105 Hawaii 112 (2004), the court had determined that a contract must underlie the tort of bad faith. Here, Willis did not have an insurance contract on which to rely, but constructed an argument that statutory provisions related to assigned claims under the JUP established First Insurance's duty of good faith and fair dealing. The court was not persuaded. Therefore, the claims for bad faith failed as a matter of law for lack of an underlying contract. The circuit court's final judgment was affirmed.

   Thanks to my Damon Key blogging colleague, Mark Murakami (www.hawaiioceanlaw.com) for the heads up on this case.

Economic or Physical Loss Not Required to Recover Emotional Distress Damages Caused by Bad Faith

   In perhaps its most significant insurance coverage decision since Young v. Allstate, 119 Haw. 403, 198 P.3d 666 (2008), the Hawaii Supreme Court ruled that an insured need not prove economic or physical loss caused by the insurer's bad faith in order to recover emotional distress damages. See Miller v. Hartford Life Ins. Co., 2011 WL 6811570 (Haw. Dec. 28, 2011).

   Hartford issued a long-term care policy to Penelope Spiller. In 2007, after she suffered a seizure and was diagnosed with lung cancer that metastasized to her brain, Hartford determined she was eligible for benefits. A year later, however, her benefits were terminated. Hartford determined Ms. Spiller was no longer "cognitively impaired" or incapable of performing two Activities of Daily Living as required by the policy.

   Thereafter, Ms. Spiller repeatedly sought reinstatement of her benefits. Phone conversations between Ms. Spiller and a Hartford employee became increasingly contentious. Hartford denied an internal appeal of the termination of benefits.

   On January 23, 2009, however, benefits were restored. Nevertheless, in July 2009, Ms. Spiller sued in state court for bad faith, negligence, and intentional infliction of emotional distress. She sought damages for the emotional distress incurred during the period that her benefits were denied, together with punitive damages.

   The case was removed to federal court. The district court issued certified questions to the Hawaii Supreme Court. The Hawaii Court addressed one of the questions, revised to read, "If a first-party insurer commits bad faith, must an insured prove the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith?"

   The Hawaii Supreme Court first surveyed its jurisprudence on bad faith. Under the leading case, Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996), and subsequent cases, the Court intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss.

   Nonetheless, Hartford urged the Court to rely on California law, under which economic or financial loss was required before an insured could recover emotional distress damages for bad faith. Ms. Spiller, on the other hand, urged the Court to follow Colorado's lead in rejecting California's economic loss requirement for the recovery of emotional distress damages in insurer bad faith actions. In Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409 (Colo. 2004), the Colorado court held that in a tort claim against an insurer for bad faith, the insured could recover damages for emotional distress without proving substantial property or economic loss. Otherwise, the insurers would be encouraged to unreasonably refuse to pay, or delay payment of, a valid claim and then avoid liability for bad faith emotional distress damages by making payment at the last minute.

   The Hawaii Supreme Court determined the Colorado view was more compatible with Best Place. In Best Place, the Court made clear its intent to make available to the insured a broader range of compensatory damages, including damages for emotional distress, that were generally not available in actions based solely on breach of contract.

Florida Court Prevents Simultaneous Trial of Breach of Contract And Bad Faith Issues

   Landmark American Insurance Company successfully moved to dismiss four of the insured's six counts. Landmark Am Ins. Co. v. Studio Imports, Ltd., Inc., Nos. 4D10-5001 and 4D10-5073 (Fla. Dist. Ct. App. Nov. 16, 2011). The trial court did not dismiss the breach of contract claim and the bad faith claim. Because both claims were to be tried simultaneously, Landmark appealed.

   The back story included extensive damage to the insured's commercial property caused by Hurricane Wilma in 2005. The insured claimed Landmark took too long to reimburse for losses, which caused additional damages, such as loss of good will, a damaged reputation with customers, and ruined business relationships.

   The appellate court agreed the breach of contract and bad faith claims could not be tried together under Florida law. Where causes of action for both the underlying damages and bad faith were brought in the same action, the appropriate method was to abate the bad faith action until coverage and damages were determined. Consequently, the trial court order was reversed so the underlying issue could be determined prior to the bad faith claim.

Bad Faith Seminar a Success

   Thanks to all who attended yesterday's seminar on Insurance Bad Faith Claims in Waikiki, hosted by Sterling Education Services.  We had an astute, engaged audience, which made the event a success.

   Attached is the Bad Faith Power Point for my topics, Development of the Tort of Bad Faith and Elements of a Bad Faith Case.  Attached here is the recently issued decision, Lennar Corp. v. Transamerica Ins. Co., 2011 Ariz. App. LEXIS 123 (Ariz. Ct. App. July 5, 2011), we discussed yesterday on the bad faith consequences of neglecting drafting history and case law from other jurisdictions regarding construction defects.

Insurer May Be In Bad Faith Despite Trial Court's Holding of No Coverage for Construction Defects

   After the trial court determined the insurers had no coverage obligations for alleged construction defects, a ruling that was subsequently reversed, it was still possible to demonstrate the insurers acted in bad faith.  See Lennar Corp. v. Transamerica Ins. Co., 2011 Ariz. App. LEXIS 123 (Ariz. Ct. App. July 5, 2011).

   Lennar oversaw construction of a large housing development.  In September 1998, several homeowners sued Lennar for construction problems in their homes. 

   Lennar tendered the claims to several insurers.  Transamerica Ins. Co. (TIG) and United States Fidelity & Guaranty Company (USF&G) filed for a declaratory judgment that they had no duty to defend or indemnify Lennar.  Lennar answered and counter-claimed for bad faith.

   In July 2003, the trial court granted summary judgment in favor of the insurers.  It decided that the defects did not constitute an "occurrence" within the meaning of the policies.  The Arizona Court of Appeals reversed, however, holding the homeowners' allegations of damage resulting from faulty construction were sufficient to allege an "occurrence" under the policies. (Lennar I). 

   The insurers eventually filed a second motion for summary judgment on the bad faith claim.  They argued that, as a matter of law, the trial court's initial ruling that there was no occurrence meant the insurers had a reasonable basis for denying coverage.  The trial court agreed and entered summary judgment in the insureds favor.  Lennar appealed.

    The appellate court reasoned that the fair debatability of the insurers' coverage positions turned, in large part, on the interpretation of the standard language in the form policies issued to Lennar.  While the trail court's initial determination that there was no occurrence may be relevant to the reasonableness of the insurers' coverage position, the appellate court's contrary conclusion and reversal was also relevant. Further, when the policies were written on a standard industry form, evidence of how these insurers, other insurers and other courts have interpreted the policy language could bear on whether these insurers acted reasonably in disputing coverage.

   Therefore, whether the insurers acted reasonably was for a jury to resolve.  The trial court could admit extrinsic evidence such as judicial decisions interpreting the policy language and evidence of the understandings of these insurers and of the insurance industry in general concerning the meaning of the disputed policy language.

   The court also considered whether the insurer reasonably investigated and handled the claims.  The insurers argued they fulfilled their duty of good faith and fair dealing by filing a declaratory judgment action on the disputed policy interpretation issue, but they could otherwise disregard their continuing claims-handling obligations. The appellate court disagreed.  Beyond the meaning of "occurrence," the insurers argued other coverage questions existed about the nature of the defects and when damage occurred. 

   In response to the summary judgment action, Lennar offered evidence the insurers breached their duty to investigate those issues and handle its claims in a reasonable fashion while the declaratory judgment action proceeded.  For example, TIG and USF&G did not offer any amount toward Lennar's defense or settlement, instead contending that coverage under the policies appeared remote.  The insurers conceded they did not independently investigate the homeowners' claims.

   Therefore, summary judgment granted to the insurers on the bad faith issue was reversed and remanded.

Employer's Bad Faith Claim against State Compensation Board Survives Demurrer

   The insured employer adequately pled its claims against the California State Compensation Insurance Fund (SCIF), allowing it to survive a demurrer.  Edward Carey Constr. Co. v. State Compensation Insurance Fund, 2011 Cal. App. LEXIS 457 (Cal. Ct. App. March 25, 2011, certified for publication April 20, 2011).  

   Edward Carey Construction Co. (CCC) had a workers compensation policy from SCIF.  During the policy period, CCC's employee, Edward Carey, suffered a work-related injury. When notified of the injury, SCIF respond that the policy had been cancelled.  As a result, CCC was required to pay for Carey's medical treatment not covered by his health insurance.  CCC also had to hire counsel to obtain benefits under the policy.

   CCC was successful in obtaining a ruling in arbitration that its policy with SCIF was in full force and effect at the time of Carey's injury.  When SCIF refused to reimburse CCC's attorney fees for the arbitration and the full amount of benefits owed under the policy, CCC filed suit.

   SCIF filed a demurrer, arguing that the Workers Compensation Appeals Board had exclusive jurisdiction over the claims alleged in the complaint.  The trial court granted the demurrer.

   The Court of Appeals reversed.  The court relied on a host of cases addressing similar issues, including Courtesy Ambulance Serv. v. Superior Court, 8 Cal. App. 4th 1504 (1992), Sec. Officers Service, Inc. v. State Compensation Ins. Fund, 17 Cal. App. 4th 887 (1993), and Maxon Indus., Inc. v. State Compensation Ins. Fund, 16 Cal. App. 4th 1387 (1993). These cases established that the insured employer had different and distinct rights against its workers' compensation carrier than an employee claimant.  Moreover, as a party to the insurance contract, the employer could sue for breach of contract if the insurer failed to perform.  This included suing under"bad faith" principles for tortuous breach of the implied covenant of good faith and fair dealing.  Legal fees incurred in enforcing its rights under the policy were also recoverable by CCC.

Policyholder Fails to Build Adequate Record to Support Bad Faith Claim

   The importance of careful preparation and documentation was the take away lesson in a Texas bad faith case, C.K. Lee v. Catlin Specialty Ins. Co., 2011 U.S. Dist. LEXIS 19145 (S.D. Tex. Feb. 28, 2011).

   C.K. Lee owned a commercial shopping center in Houston. Catlin issued a commercial property policy to Lee.  On September 12, 2008, Hurricane Ike hit and caused substantial property damage throughout the Texas Gulf Coast area. On September 24, 2008, Lee submitted a claim for damage to the roof of his shopping center to Catlin.

   Catlin hired Engle Martin to represent its interests in adjusting the claim.  Engle Martin eventually adjusted over 200 Ike-related claims for Catlin.

   In November 2008, Engle Martin and Emergency Services Inc., retained by Lee, inspected Lee's property. Engle Martin observed evidence of roof repairs that had apparently been made both before and after Hurricane Ike.  Engle Martin decided it was necessary to use an infrared scan of the roof to help identify which damages, if any, were attributable to wind and which, if any, were attributable to sub par, prior repairs or natural deterioration.

   Engle Martin retained Project, Time & Cost (PT&C) to conduct the infrared inspection. PT&C's inspection determined there was no wind-related damage to the roof and no breaches or openings created by wind. Instead, the roof had exceeded its life expectancy and was in need of replacement due to normal wear and weathering. Consequently, Catlin decided that the damage to Lee's roof was not caused by winds from Hurricane Ike.

   Meanwhile, Lee's contractor, Emergency Services, prepared a report estimating that the total cost of repairing the roof would be $871,187. Engle Martin's estimate for repair of the roof was $22,864.

   Lee filed suit for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code.  Catlin moved for summary judgment on all claims but breach of contract, arguing that because there was a bona fide dispute concerning the cause of the damages and whether they were covered under the policy, there was no evidence of bad faith or violations of the Texas Insurance Code.

   The court granted the motion on the bad faith claims. Under Texas law, an insurer was in bad faith if it failed to settle the claim even though it knew or should have known that it was reasonably clear that the claim was covered. Evidence that merely showed a bona fide dispute about the insurer's liability on the contract was not bad faith. But denying a claim solely in reliance on an expert's report did not shield the insurer from bad faith liability if there was evidence that the report was not objectively prepared or the insurer's reliance on the report was unreasonable.

   Here, the insurer had an independent adjuster and a roof consultant conduct three inspections of the roof. After Engle Martin inspected, it called in PT&C, who conducted the infrared inspection. PT&C then went back to reinspect the roof. Reports were filed after each inspection. Each inspection determined there was no wind-related damage.

   Nevertheless, Lee argued there was a genuine issue of mater fact as to both the objectivity of the reports and the reasonableness of Catlin's reliance on them. Lee argued that Catlin failed to reconcile the contradictions of the conclusions found in reports of its experts with those of Lee's expert, Emergency Services. Moreover, Engle Martin's report was biased because it had a financial interest in preparing reports that favored Catlin's position.

   The record, however, did not contain a report with conclusions that conflicted with those of Engle Martin and PT&C. Lee's experts had not submitted anything relating to the cause of the damage, but had only submitted an estimate for repairs. Therefore, there was nothing in the record to show that Catlin's decision to believe its own experts, rather than other experts, was unreasonable. Moreover, there was no evidence that the investigations were outcome-oriented or that Catlin expected to receive reports concluding that the claim should be denied. Nor did Lee submit anything to show Catlin's experts were unqualified. Therefore, Lee failed to raise a genuine issue of material fact in support of its contentions that Engle Martin's reports were not objectively prepared or that Catlin's reliance on the reports was unreasonable.

   Regarding Lee's claims under the Texas Insurance Code, Lee argued the insurer was required to notify the insured within fifteen business days whether the claim was accepted or denied and the underlying reasons for a rejection. Catlin argued Lee had failed to submit invoices for prior roof repairs and other documentation that had been requested. But Catlin had not demonstrated such evidence was necessary for it to make a determination on coverage. Accordingly, there was a genuine issue of material fact as to whether Catlin's delay in notifying Lee of its decision was warranted on the basis that it had not received all items, statements, and forms that were required for it to determine coverage and the amount of loss.

Insured Must Reimburse for Uncovered, Settled Claims

   If the insurer notifies the insured it intends to settle a claim, but will then seek reimbursement if the claim is not covered, can the insured avoid having to reimburse the insurer?  The California Court of Appeal answered no in Am. Modern Home Ins. Co. v. Fahmian, 2011 Cal. App. LEXIS 420 (Cal. Ct. App. April 8, 2011).

   Fahmian was the owner of Provident Housing, Inc., a company that built homes.  Fahmian had a homeowner's policy with American Modern which specifically excluded coverage for any liability arising out of Fahmian's business. 

   Fahmian and Provident were sued by plaintiff for insuries suffered from being shot in the eye by a nail gun.  Fahmian tendered the suit to American Modern, which accepted under a reservation of rights. 

   The plaintiff's lawyer presented a settlement demand to American Modern for policy limits - $300,000.  On July 1, 2005, American Modern informed Fahmian in writing that it intended to accept the demand unless Fahmian either agreed to undertake his own defense or waive any potential claims based on the failure to settle the plaintiff's action within the policy limits.  The letter further advised that plaintiff's demand would expire on July 8, 2005, and that Fahmian had to respond to American Modern by 4:00 p.m. on July 6, 2005.  Although he received the letter, Fahmian never bothered to read it.

   When American Modern did not hear from Fahmian by July 8, 2005, it accepted the policy limits settlement demand.

   Thereafter, American Modern sued Fahmian, seeking a declaration that the underlying action was excluded under the policy, and for reimbursement of the money it paid to settle that action.  A jury found that American Modern was not entitled to reimbursement because it had not provided Fahmian "sufficient time" to make a reasoned reply to the offer to assume his own defense if the disagreed with the decision to settle.  The trial court entered a minute order stating that because American Modern did not give Fahmian a reasonable amount of time to decide, Fahmian was not liable to the insurer. The trial court did not make any declaration of rights as requested in the complaint.

   The appellate court reviewed the requirements in Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489 (2001) for seeking reimbursement for noncovered claims included in a reasonable settlement payment.  First, the insurer had to make a timely and express reservation of rights.  Second, an express notification to the insureds of the insurer's intent to accept a proposed settlement offer was required.  Third, the insurer had to make an express offer to the insureds to assume their own defense when the insurer and insured disagreed whether to accept the proposed settlement. 

   Absent from the list was a requirement of sufficient time for the insured to consider the notice of intent to settle and offer to the insured the ability to assume its own defense.  Accordingly, the appellate court reversed and directed the trial court to enter judgment in favor of American Modern declaring that the underlying suit was not covered by the policy and that American Modern was entitled to reimbursement from Fahmian of the $300,000 paid to settle.

   Thanks to Damon Key blogging colleague, Robert Thomas (www.inversecondemnation.com), for sending the case may way.

Bad Faith Suit Pursued After Settlement Dismissed

   Can an insured settle a disputed claim with its first party insurer and then sue the insurer for allegedly fraudulently inducing a settlement of the claim for less than it is worth?  The California Supreme Court answered no in Village Northridge Homeowners Assoc. v. State Farm Fire and Cas. Co., 2010 Cal. LEXIS 8304 (Cal. Aug. 30, 2010).

   The 1994 Northridge earthquake caused damage to property owned by the Village Northridge Homeowner's Association.  State Farm made several payments to the Association, totaling about $2,068,000.  In 1996 and 1998, the Association sought additional benefits based on an assessment by a public adjuster.  State Farm reinspected the property and concluded that some additional damage was earthquake related, while some damage was not.  Consequently, State Farm paid an additional $7466.34.

   In 1999, although both parties continued to dispute the amount owed under the policy, a settlement was reached, with State Farm paying an additional $1.5 million.  Under the settlement, the Association released State Farm from all known or unknown claims related to the earthquake.

   Subsequently, the Association sued State Farm, alleging that the $1.5 million additional settlement was grossly deficient and represented only a partial payment of an alleged total loss of $8 million.  The trial court dismissed the complaint.  The Court of Appeal reversed, concluding that the Association could avoid the release, keep the settlement proceeds and sue for fraud by affirming the agreement that it wished to invalidate.

   On appeal to the Supreme Court, State Farm argued if an insured could settle a disputed claim, keep the money paid, and the sue without seeking to rescind the settlement agreement, no insurer would be willing to settle a disputed claim.  On the other had, the Association asked, "How was the policy favoring settlement furthered by refusing a remedy at law to victims of fraud in connection with a fraudulently induced settlement?" 

   The Supreme Court was not receptive to the Association's argument.  The court was not refusing a legal remedy to victims of fraud because they still had the option of rescinding the contract and the suing for damages.  To allow the Association to settle with State Farm and sign a release, keep the money, and then sue State Farm for alleged fraud without rescinding the release would violate the terms of the bargain and frustrate its purpose.