Notable Developments in Insurance Bad Faith and What It Means For Insurers

Recently, in Security National Ins. Co. v. Construction Associates of Spokane, No. 20-167 (E.D. Wash. Mar. 24, 2022), a Washington federal court concluded that an insurer breached its duty to defend a party as an additional insured and that its conduct amounted to bad faith.

The court, in reaching its decision, pointed to the fact that the adjuster did not consider a relatively recent Washington Supreme Court opinion that dictated that a defense was, in fact, owed. In T-Mobile USA, Inc. v. Selective Ins. Co. of Am., 194 Wn.2d 413, 450 P.3d 150 (2019), the court held that the insurer was bound by the representation of its authorized agent in a Certificate of Insurance that an organization was an additional insured even though the Certificate said that it could not be used to expand coverage beyond that provided in the insurance policy. Before the T-Mobile decision, case law dictated that a Certificate of Insurance could not expand coverage provided by the insurance policy. The court characterized the overlooked decision as a “blockbuster” for coverage law.

In its defense, the insurer argued that the adjuster could not be expected to know the law and perform legal research. But the court disagreed, stating this argument was not enough for it to excuse the lack of a reasonable investigation.

“True, the adjustors are not attorneys in Washington and are presumably not trained in the same kinds of legal research techniques as lawyers. But that does not excuse an adjustor from having at least a baseline understanding of the relevant state’s law necessary to carry out their duties. Instead, it means insurance companies must undertake what in practice are reasonably small steps to ensure adjustors are equipped to make reasonable coverage and defense determinations. Such steps could include teaching adjustors to run case searches or, more likely, supplying adjustors with subscriptions to relevant legal newsletters, a resource most attorneys rely on to keep apprised of legal developments. Regardless, ignorance of the applicable case law, even of a relatively new case law, does not excuse the conduct of adjustors who deny defense or indemnification. Doing otherwise would allow insurance carriers to intentionally stay ignorant and hide behind their ignorance when their claim denials are challenged. Adjustors must equip themselves or else seek out those with the requisite tools and knowledge.”

This was not the only case that recently expanded an insurer’s bad faith exposure.  In Erika McNamara vs. GEICO, the U.S. 11th Circuit Court of Appeals found that its 2019 opinion in Cawthorn vs. Auto-Owners Insurance Co. relied on by the lower federal court and state courts to bar some bad-faith claims was in error. The court held that Cawthorn misinterpreted Florida law and that a consent judgment can, in fact, qualify for excess judgment status. Click here for a more detailed discussion of the McNamara case by Chartwell attorney Anthony Renaldo.

Late last year, the Georgia Supreme Court, in GEICO Indemnity Co. v. Whiteside, 311 Ga. 346, 857 S.E.2d  654  (2021), found that an insurer was liable for an excess verdict against an insured even though the insurer had never received notice that a lawsuit had been filed against the insured. Click here for a more detailed discussion of the GEICO case by Chartwell attorney Robert Luskin.

On January 18, 2022, New Jersey Governor Phil Murphy signed the IFCA into law Senate Bill 1559—known as the “New Jersey Insurance Fair Conduct Act” (“IFCA”) which creates a statutory, individual cause of action for insurance bad faith in the handling and payment of claims for uninsured motorist/underinsured motorist ("UM/UIM") benefits. Under the IFCA, “an individual injured in a motor vehicle accident and entitled to the uninsured or underinsured motorist coverage of an insurance policy” may sue an insurer that has “unreasonably denied” the insured’s claim for UM/UIM benefits. The insured may also bring a lawsuit if he or she “experiences an unreasonable delay for coverage or payment of benefits.” If successful, the insured “shall be entitled to: (1) actual damages caused by the violation of [the IFCA], which shall include, but need not be limited to, actual trial verdicts that shall not exceed three times the applicable coverage amount; and (2) pre-and post-judgment interest, reasonable attorney’s fees, and reasonable litigation expenses.” Only time will tell if the IFCA will expand its scope to other first party claims. For now, it is limited to UM/UIM benefits. Either way, insurers should anticipate an increase of litigation generated by the IFCA.

These recent developments suggest a growing trend of courts and legislatures expanding the scope within which insurers can be exposed to claims of bad faith in certain contexts. Whether it continues in this direction has yet to be seen. It is therefore imperative that claim professionals continue to ask themselves: Are we staying current on changes in the law in a given jurisdiction? Are we being systematically proactive in taking all necessary actions to protect the policyholder where coverage is afforded? Was the claim fully investigated before it was denied? Did we effectively communicate with the insured throughout the entire claims process? Are our efforts fully and adequately documented in the claims file? So long as claims professionals can answer “yes” to each of these questions, then an insured bringing a bad faith claim faces an uphill battle in court no matter which way the law takes us.