Insurance Bad Faith Report, January 2023

Dykema’s nationally recognized insurance practice is pleased to present its Insurance Bad Faith Report. All of the quarterly Reports, along with complete copies of the decisions reviewed, are available online to access at any time.

Nebraska Supreme Court Clarifies The Assignability Of First-Party Bad Faith Claims
Millard Gutter Co. v. Shelter Mut. Ins. Co., 312 Neb. 606 (Neb. 2022).
Millard Gutter Co. v. Farm Bureau Prop. & Cas. Ins. Co., 312 Neb. 629 (Neb. 2022).

In companion cases involving various assignments of first-party insurance claims to Millard Gutter Company, the Supreme Court of Nebraska held that bad faith tort claims cannot be assigned in the first-party context. In the first of the two cases, Millard Gutter sued Shelter Mutual Insurance Company as “assignee of various insured property owners” who suffered property damage from a storm, asserting claims for both contractual and tortious bad faith. Shelter moved for a more definite statement and moved to dismiss the bad faith claims for lack of standing. The district court granted Shelter’s motions and eventually dismissed the action with prejudice. On appeal, the Nebraska Supreme Court looked to the assignability of other intentional torts under Nebraska law and concluded that while the proceeds from the tort of bad faith could be assigned (absent a statute to the contrary), the right to prosecute or control such an action could not be assigned. Regarding Millard Gutter’s contractual claims for breach of the implied covenant of good faith and fair dealing, the Nebraska Supreme Court also found that an assignment could not create a contractual relationship between the insurer and assignee, and affirmed the dismissal of the contractual bad faith claims. In the second case, Millard Gutter filed suit against Farm Bureau Property & Casualty Insurance Company, making identical claims that arose out of similar circumstances. Referring to the Shelter decision issued the same day, the Nebraska Supreme Court again affirmed that the first-party tort of bad faith could not be assigned for prosecution. Read the decisions here and here.

Middle District Of Louisiana Addresses The Discoverability Of Loss Reserves
eQHealth AdviseWell, Inc. v. Homeland Ins. Co., No. 22-50-BAJ-EWD, 2022 U.S. Dist. LEXIS 189623 (M.D. La. Oct. 18, 2022).

When the insured sought production of Homeland Insurance Company’s loss reserve information in a first-party insurance dispute, Homeland objected, contending that the information was irrelevant and protected by the work product doctrine because the loss reserves were based on counsel’s estimate of anticipated legal expenses, settlement value, length of time to resolve the litigation, geographic considerations, and other facts all in anticipation of litigation. After acknowledging a split in authority regarding the production of loss reserve information in bad faith cases, the district court ultimately found that the information was relevant and subject to production, unless a privilege applied. When analyzing the application of the work product doctrine, the court observed deficiencies in Homeland’s privilege log and ordered the parties to confer after a supplemental log was produced. It further ordered Homeland to produce all loss reserve information generated prior to the date that Homeland asserted the work product doctrine began to run. Read the decision.

Second Circuit Enforces Policy’s Contractual Limitations Period For Both Contractual And Bad Faith Claims
Sportsinsurance.com, Inc. v. Hanover Ins. Co., Nos. 21-1967-cv (L), 21-2063-cv (XAP), 2022 U.S. App. LEXIS 30669 (2d Cir. Nov. 4, 2022).

In January 2016, Sportsinsurance.com, Inc. discovered its CFO was embezzling from the company and subsequently submitted a theft claim to its insurer, Hanover Insurance Company, Inc. Hanover denied the claim in January 2017. After its attempts to seek redress from the CFO failed, Sportsinsurance filed suit against Hanover in March 2020. Hanover contended that the suit was time-barred under the policy’s contractual limitations clause, which required Sportsinsurance to commence legal action within two years after discovering the loss. On interlocutory appeal, the Second Circuit agreed with Hanover, finding that the contractual limitations period was unambiguous and reasonable. Because Sportsinsurance’s bad faith claim derived from the embezzlement, the Second Circuit found that it also was time-barred under the policy’s contractual limitations provision. Read the decision.

Texas Appellate Court Grants Mandamus Relief In Bad Faith Case, Halting Production Of Claim Notes And Communications With In-House Counsel
In re Mt. Valley Indem. Co., No. 09-22-00207-CV, 2022 Tex. App. LEXIS 8329 (Tex. App. Nov. 10, 2022).

In a first-party bad faith case, a Texas state court compelled production of notes and communications between an outside claim adjuster, his supervisor, and in-house counsel. The insurer sought mandamus relief from the appellate court, which stayed the order compelling discovery and allowed the parties to address whether the at-issue documents were privileged. The insurer argued that the work product doctrine applied to certain documents created after it advised the insured of an unjustifiable increase in Loss of Use expenses. The insurer also argued that communications between the adjuster, his supervisor, and in-house counsel were for the purpose of obtaining legal advice in relation to the insured’s claim, especially after the insured hired counsel. In ruling that the lower court had abused its discretion in ordering production of the at-issue documents, the Court of Appeals reasoned that the insurer had made a prima facia showing of work product protection, which could not be overridden by any substantial need of the other party, and that the attorney-client privilege applied to the communications. Read the decision.

California Court Overrides Policy’s Choice-of-Law Provision
Gomez v. Great-West Life & Annuity Ins. Co., No. 21-CV-1324-JAH-WVG, 2022 U.S. Dist. LEXIS 200949 (S.D. Cal. Nov. 3, 2022).

The insured suffered a compensable loss under a long-term disability policy issued by Great-West Life & Annuity Insurance Company.  When Great-West discontinued benefits after concluding that the insured was no longer eligible to receive benefits, the insured brought suit alleging breach of contract and bad faith. Great-West moved to dismiss the bad faith count, as the policy contained an Illinois choice-of-law provision and Illinois law did not recognize the tort of bad faith. The insured opposed, arguing that California law applied. The district court found that while there was a reasonable basis to apply the policy’s choice-of-law provision, California had a fundamental public policy of recognizing the tort of bad faith and applying it over Illinois law’s “inferior remedy.” Because California law applied, the court denied Great-West’s motion to dismiss. Read the decision.

Colorado District Court Permits Bad Faith Claim To Proceed Despite Time-Barred Breach Of Contract Claim
Power Eng’g Co. v. Fed. Ins. Co., No. 21-cv-00345-CMA-NRN, 2022 U.S. Dist. LEXIS 198810 (D. Colo. Nov. 1, 2022).

Power Engineering Company sought coverage under its commercial property policy for hailstorm damage, ultimately filing suit against its insurer, Federal Insurance Company. Federal moved for summary judgment in due course, arguing that the contractual limitations period in the policy applied, requiring dismissal of Power Engineering’s breach of contract and statutory bad faith claims. In response, Power Engineering conceded that the contractual limitations period applied to its breach of contract claim, but it argued that the statutory bad faith claim was independent and should therefore proceed. Noting the absence of Colorado Supreme Court precedent on the issue, the district court predicted that the Colorado Supreme Court would allow the statutory bad faith claim to proceed. It reasoned that while statutory bad faith requires an underlying breach of contract, the dismissal of the time-barred breach of contract claim was not a dismissal on the merits, and thus Power Engineering could still prove the requisite breach of contract required for its statutory bad faith claim. Read the decision.

Second Circuit Affirms Dismissal of Redundant Breach Of Implied Covenant Of Good Faith And Fair Dealing Claim
Hunt Constr. Grp., Inc. v. Berkley Assurance Co., No. 21-2532-cv, 2022 U.S. App. LEXIS 35267 (2d Cir. Dec. 21, 2022).

An insured construction firm sued Berkley Assurance Company after Berkley refused to defend the insured in connection with a construction project. After the district court dismissed the insured’s claim for breach of the implied covenant of good faith and fair dealing, the insured appealed. The Second Circuit affirmed, holding that, under New York law, the insured’s claim was redundant when the alleged conduct was duplicative of the insured’s breach of contract claim. The insured pointed to Berkley’s allegedly wrongful denial of coverage as grounds for its breach of implied covenant claim. But the Second Circuit observed that the breach of contract claims also were premised on the alleged wrongful denial. The Second Circuit further noted that the implied covenant claim was ungrounded from the violation of an intended term in the policy. Read the decision.