Policyholders frequently rage against an insurer’s claims handling tactics, only to find that the law makes it very difficult to prove bad faith against an insurance company. Three recent cases from different jurisdictions indicate that establishing bad faith may now be easier.
Acacia Research Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, Case No. CV 05-501 PSG (C.D.Ca. 2008) highlights the type of facts and circumstances that a court may find constitute bad faith on the part of an insurance carrier in denying an insured’s claim as well as the damages that could result therefrom.
In Acacia, the plaintiffs were insured under a Directors, Officers and Corporate Liability Insurance Policy (“D&O”) issued by National Union Fire Insurance Company, which provided coverage to the corporate entities as well as their respective directors and officers. Prior to the inception of this policy, the insured hired a new Vice President of Research and Development and Chief Technology Officer. He agreed that all of his inventions while in the insured’s employ would be assigned to the insured. These inventions subsequently resulted in two patents, both of which were issued during the D&O policy period. Thereafter, a suit was commenced against the insured by Nanogen, Inc. (“Nanogen”), claiming that the disputed technology was wrongfully assigned.
Following the commencement of that action, the insured notified its D&O carrier of the claim. Approximately two weeks later, on or about December 15, 2000, the insurer transmitted a written acknowledgment of receipt of the claim and a representation that its preliminary coverage evaluation would be forwarded “in the near future.” However, two days prior to the drafting of that correspondence, the claims handler for the insurer opined in an internal e-mail that the claim “does not appear to be covered.” By March 2001, the claims handler had not taken any action other than to acknowledge receipt of the claim and request a copy of the policy. The claim was then reassigned, and thereafter the insurer requested additional information from its insured. The insured promptly responded to that request and reiterated its willingness to fully cooperate with the investigation. The insured subsequently transmitted correspondence to its insurer in April and May 2001 requesting a status of the claim but received no response.
The insurer subsequently removed that claims handler from the claims department in May 2001. However, the insurer did not reassign the claim until August 2002, by which time the insured had settled the matter directly with Nanogen. In January 2003, the new adjuster verbally represented that the settlement was not a covered loss since the policy did not cover patent or breach of contract claims. However, that adjuster subsequently acknowledged at a deposition that there was no breach of contract exclusion contained within the policy and that he reached his opinion without sufficient information about the insured‘s coverage.
The insurer again reassigned the claim in May 2003. On November 3, 2003, the insurer sent its first and final coverage letter to the insured denying coverage based upon, inter alia, the insured's alleged failure to cooperate. On these facts, the court concluded that the insurer improperly and unreasonably withheld in bad faith benefits otherwise due to the insured under the policy. As such, the insured was entitled to all damages proximately caused by that conduct, regardless of whether they could have been anticipated. The court ordered the insurer to reimburse the insured for the amount of the settlement, defense costs and interest.
Following the submission of a claim, an insurer is obligated to timely and diligently investigate, evaluate and adjust claims in good faith. Insureds and their counsel must be cognizant of the applicable “prompt-pay” and other statutory guidelines regarding claims processing and not accept unreasonable delays or unjustifiable coverage positions by the insurer.
Bi-Economy Market, Inc. v. Harleysville Insurance Co., 10 N.Y. 3d 187 (2008) and Abercrombie & Fitch v. Federal Insurance Co., 2008 U.S. Dist. LEXIS 18597 (S. D. Ohio 2008) both share a basic fact — in each case, the insurer simply failed to fulfill its contractual obligation without justification. In Bi-Economy, the insured’s business was destroyed. Its property insurance policy required the insurer to pay twelve months of business interruption. The insurer only paid for seven months. New York’s highest court, reversing the appellate court, found the insurer liable for consequential damages, namely the value of the business. As the dissent emphasized, Bi-Economy was a major break with New York’s traditional antipathy to extra-contractual damages in insurance cases.
In Abercrombie & Fitch, the D&O policy required the insurer to advance defense costs to the insured. If the insurer and insured could not agree on the allocation of defense costs, the insurer still had to pay the uncontested amount. Instead, Federal paid nothing. The court denied Federal’s motion to dismiss the insured‘s bad-faith count.
These cases demonstrate an increasing willingness by courts to hold insurers to their contractual promises, and to punish them for egregious violations of their fiduciary duty.