Insurance Bad Faith Report, April 2025

New Jersey District Court Rules Individual Adjuster Not Fraudulently Joined
Hersh v. State Farm Fire & Cas. Co., No. 24-6809 (ZNQ) (JTQ), 2025 U.S. Dist. LEXIS 4451 (D.N.J. Jan. 9, 2025).

The insureds sued their homeowners insurer and an individual adjuster in state court, alleging breach of contract, bad faith, and fraud on the basis that the insurer and adjuster wrongly decreased the value of the claim. The defendants removed the case to New Jersey District Court, contending that plaintiffs fraudulently joined the adjuster to defeat diversity jurisdiction. The district court disagreed, ruling that plaintiffs alleged a colorable claim of fraud and observing that the fraudulent joinder standard is a higher burden than the Rule 12(b)(6) dismissal standard. Thus, allegations that the adjuster had “improperly and fraudulently denied coverage” by claiming “incorrectly, inaccurately, falsely and without basis that the water damage occurred before the policy became effective” were sufficient. The court remanded the case. Read the decision.

Montana District Court Allows Jury to Consider Punitive Damages Claim Based on Defending Insurer’s Knowledge of Weak Defenses
UMIA Ins., Inc. v. Arguelles, No. CV 20-177-BLG-TJC, 2025 U.S. Dist. LEXIS 10537 (D. Mont. Jan. 21, 2025).

A doctor and his clinic were the subject of multiple federal investigations and malpractice claims based on the doctor’s fraudulent diagnoses allegedly intended to perpetuate a healthcare fraud scheme. The doctor’s professional liability insurer defended the malpractice claims under a reservation of rights and estimated less than a 10% chance of defeating the claims. The malpractice claims were mediated and ultimately settled, with both the insurer and the doctor funding the settlements. In the follow-on declaratory judgment action, the doctor asserted claims for breach of contract, statutory bad faith, and punitive damages based on his contribution to the settlements. Finding factual disputes that precluded summary judgment, the district court allowed the punitive damages claim, which required a showing of actual malice, to proceed based on the allegation that the insurer had been well aware of facts harmful to the defense but allowed the claims to continue to be litigated. However, the district court rejected the doctor’s argument that the insurer should have fully funded the settlements and then sought recoupment. Read the decision.

Fifth Circuit Affirms Dismissal of Bad Faith Claim Without Leave to Amend
Spinosa v. Foremost Ins. Co. Grand Rapids Mich., No. 24-30472, 2025 U.S. App. LEXIS 1746 (5th Cir. Jan. 27, 2025).

When the insured brought a bad faith claim against his homeowners insurer, the Louisiana District Court dismissed the complaint because it contained only conclusory allegations that the insurer failed to “thoroughly investigate” the property damage and pay the requested amounts. Finding that the insured failed to offer specific factual allegations to support the bad faith claim, the district court also declined leave to amend. The Fifth Circuit affirmed, noting that the insured’s promise of a “general curative amendment” to the complaint, without specifics, was insufficient. Read the decision. 

Western District of Washington Finds Breach of Fiduciary Duty Claim Duplicative of Bad Faith Claim
Bowles v. Allstate Veh. & Prop. Ins. Co., No. 2:24-cv-01642-TL, 2025 U.S. Dist. LEXIS 21742 (W.D. Wash. Feb. 6, 2025).

When the insured’s home was damaged, the property insurer allegedly undervalued the loss. The insured brought suit alleging breach of contract, breach of the duty of good faith, and breach of fiduciary duty. The insurer moved to dismiss the claim for breach of fiduciary duty, arguing, in part, that it was duplicative of the breach of the duty of good faith claim. In granting the motion to dismiss, the court observed that Washington courts had yet to recognize breach of fiduciary duty as an independent claim in the insurance context. Because the insured failed to explain how the two claims differed and cited no supporting authority, the court determined the claims were duplicative. Read the decision.

Eastern District of Pennsylvania Finds Insurer’s Litigation Conduct Not Evidence of Bad Faith
Rocco v. Farmers Ins. Exch., No. 24-209, 2025 U.S. Dist. LEXIS 22116 (E.D. Pa. Feb. 7, 2025).

The insurer moved to dismiss portions of an insured’s complaint that relied on the insurer’s litigation conduct—namely, purported discovery violations and an alleged misrepresentation in the Rule 26(f) report narrative—as evidence of bad faith. In granting the insurer’s motion, the court acknowledged that an insurer’s litigation conduct can be evidence of bad faith, but only where the conduct shows the insurer is “intentionally avoiding its obligation under a policy or is undermining the truth-finding process” and where the conduct reflects on the insurer in its capacity as an insurance company, and not as a legal adversary. The court concluded that there was no such conduct because the insurer’s “bare” discovery violations were not egregious and the Rule 26(f) report only reflected on the insurer in its role as a legal adversary. Read the decision.

California Northern District Finds No Bad Faith Where Insurer Relied on Forensic Accounting Expert
Raison D’Etre Bakery LLC v. Mass. Bay. Ins. Co., No. 23-cv-01401-EMC, 2025 U.S. Dist. LEXIS 22920 (N.D. Cal. Feb. 9, 2025).

When the insured’s production facility and warehouse were damaged by fire, the insurer allegedly undervalued the company’s business income loss. After the insured brought suit alleging breach of contract and breach of the duty of good faith and fair dealing, the insurer moved for summary judgment on both claims. In granting the motion on the bad faith claim, the court noted that although there was a “genuine dispute” over the amount of covered business income loss, the insurer had a reasonable basis for its conclusion because it relied on a forensic accounting expert’s opinion. The court rejected the insured’s argument that the insurer failed to conduct a reasonable investigation because it did not contact one of the insured’s major customers to discuss projected sales when determining the amount of covered business income loss. Instead, the court observed that the insured was in a better position to seek such information from its customer. Read the decision.

Rhode Island Supreme Court Affirms Summary Judgment for Insurer on Bad Faith Claim Over Use of Unlicensed Appraiser
New England Prop. Servs. Grp., LLC v. NGM Ins. Co., No. 2023-238, 2025 R.I. LEXIS 11 (R.I. Feb. 11, 2025).

Following a storm, the insureds assigned all of their rights and benefits regarding their property claim to a general contractor, who subsequently disputed the extent of covered damage suffered at the insureds’ home. The insurer reinspected and issued a supplemental payment, but the parties ultimately proceeded to appraisal. The insurer timely paid the appraisal award, but the general contractor filed suit, seeking a declaratory judgment and alleging claims for breach of contract, bad faith, unjust enrichment, and tortious interference with a contractual relationship. The superior court granted the insurer’s summary judgment motion on the bad faith claim, ruling that the general contractor had not set forth sufficient evidence to demonstrate bad faith. The Rhode Island Supreme Court affirmed, rejecting the general contractor’s argument that the insurer’s use of unlicensed appraisers was enough to support a bad faith claim. Instead, the Rhode Island Supreme Court seemingly approved of the insurer’s investigation timeline and ruled that the use of unlicensed appraisers, without more, was not a sufficient basis for a bad faith claim against an insurer. Read the decision.

Divided Ninth Circuit Court of Appeals Finds Claimant’s Refusal to Provide Medical Records Shields Insurer from Bad Faith Failure to Settle Within Policy Limits
McGranahan v. GEICO Indem. Co., No. 24-1037, 2025 U.S. App. LEXIS 6515 (9th Cir. Mar. 20, 2025).

While defending its insured, a liability insurer requested the claimant’s medical records nine times. Without providing the requested records, the claimant sent a policy limits settlement demand and stating that the medical bills for the claimant exceeded $1 million. In response, the insurer again requested the medical records and advised that it could not accept or reject the settlement demand by the deadline. In the subsequent bad faith suit brought by the insured, the district court granted summary judgment to the insurer. On appeal, the Ninth Circuit Court of Appeals recognized that while breach of the duty to settle could be grounds for a bad faith claim, it was dependent on the reasonable conduct of the insurer under the totality of the circumstances. In affirming summary judgment in favor of the insurer, the Ninth Circuit concluded that the insurer’s ten requests for the medical records was evidence of the insurer’s reasonable conduct under the circumstances. Judge Friedland dissented, pointing out that a jury could have found that the insurer might have taken other steps to investigate the claim, especially when it seemed undisputed that the grave nature of the injuries made it likely that the medical bills would exceed the policy limit. Read the decision.  

Pennsylvania Middle District Court Finds Insurer’s Use of Appraisal Provision Not Grounds for Bad Faith
Belotti v. State Farm Fire & Cas. Co., No. 3:22-CV-1284, 2025 U.S. Dist. LEXIS 54471 (M.D. Pa. Mar. 25, 2025).

The insured’s home was damaged by fire, and the insured made a claim under the homeowners policy. The insurer hired someone to inspect the loss and paid the estimate it was provided, minus the deductible. The insured also hired an inspector, who estimated the loss to be $200,000 higher. Because of the difference, the insurer exercised its appraisal rights under the policy. When the appraisal award exceeded what the insurer originally paid, the insurer paid the difference. The insured sued under Pennsylvania’s bad faith statute, alleging that the insurer’s exercise of the appraisal option was itself bad faith, as it was premature and forced the insured to sue. In granting the insurer’s summary judgment motion, the court found that the insurer’s election to proceed with appraisal could not be grounds for bad faith because the policy expressly provided for appraisal and the insured contractually agreed to it. The court therefore dismissed the bad faith claim. Read the decision.