Insurer Bad Faith Set-Up Defense and "Reverse Bad Faith" - - PowerPoint PPT Presentation

Insurer Bad Faith Set-Up Defense and "Reverse Bad Faith" Claims: Insurer vs. Policyholder Perspectives

Navigating Insurer Defenses Against Policyholders in Bad Faith Litigation Today’s faculty features:

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WEDNESDAY, JANUARY 29, 2014

Presenting a live 90-minute webinar with interactive Q&A Robert D. Chesler, Shareholder, Anderson Kill, Newark, N.J. Paul R. Koepff, Partner, Clyde & Co US, New York

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Insurer Bad Faith Set-Up Defense and "Reverse Bad Faith" Claims: Insurer vs. Policyholder Perspectives

Webinar

January 29, 2014

Presented by:

Robert D. Chesler

Shareholder, Anderson Kill

Paul R. Koepff

Senior Equity Partner, Clyde & Co

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Disclaimer

The views expressed by the participants in this program are not those of the participants’ employers, their clients, or any other organization. The opinions expressed do not constitute legal advice, or risk management advice. The views discussed are for educational purposes only, and provided only for use during this session.

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The Fundamental Basis For A Reverse Bad Faith Claim

• The basis a claim of reverse bad faith is

that every insurance contract contains an implied covenant of good faith and fair dealing, which applies to both insurer and insured.

– Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654, 658, 328 P.2d 198, 200 (1958). – Brassil v. Maryland Cas. Co., 210 N.Y. 235, 241, 104 N.E. 622 (1914).

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No Statutory Basis For Reverse Bad Faith Claims

• Aside from the state of Tennessee, it appears that there

are no state statutes expressly authorizing a reverse bad faith claim. R. Steven Rawls and Gary L. Printy, Who Killed Reverse Bad Faith? And Why It Could Make A Comeback, 25-18 Mealey's Litig. Rep. Ins. Bad Faith 16 (2012).

• Tenn. Code Ann. § 56-7-106 allows an insurer to recover up to 25%
• f the amount claimed by an insured if the insured did not bring a

suit against the insurer in good faith and caused the insurer to suffer damages and unnecessary expense.

• Adams v. Tennessee Farmers Mut. Ins. Co., 898 S.W.2d 216, 219

(Tenn. Ct. App. 1994) (holding that statute allowed defendant insurer to collect from plaintiff insured the expenses it incurred in defending the insured’s bad faith claim).

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Status of a Claim of Reverse

Bad Faith

• Every court that has ruled on reverse

bad faith has rejected it, either at the trial or appellate level. Those trial courts that have accepted it have been reversed.

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Status of a Claim of Reverse Bad Faith

• An insurance policy is a contract, but it is a certain kind of
• contract. Insurance policies are adhesion policies, prepared by

company experts, with no opportunity for the policyholder to

• negotiate. As a result courts have developed rules to try to

balance the playing field. These mechanisms include that (1) ambiguities are construed narrowly against the insurance company (2) terms in an insurance policy are given their

• rdinary, commonly used meaning, and (3) policies are

interpreted pursuant to the objectively reasonable expectations

• f the insured. It is in this context that the insured’s bad faith

cause of action developed.

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Status of a Claim of Reverse Bad Faith

• These circumstances give rise to a higher duty on the

part of the insurance company to the insured. For example, take the insurance company’s obligation to settle a case within the policy limits. This obligation is not found in the insurance policy. It is based on the extra-contractual relationship that courts have developed to protect the insured. This is also the basis for the court’s recognizing a bad faith cause of action on the part of the insured against the insurance company.

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Status of a Claim of Reverse Bad Faith

• None of the equities that led to a bad faith cause of

action on the part of policyholders exist for the insurance company. No public policy exists to create a reverse bad faith cause of action.

• Reverse bad faith is essentially a way to intimidate

the insured

• Every contract has a covenant of good faith and fair
• dealing. No case law where insurer has relied on that

covenant to assert reverse bad faith.

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Judicial Treatment Of Reverse Bad Faith Claims

• In California Cas. Gen. Ins. Co. v. Superior

Court, 173 Cal. App. 3d 274, 276, 218 Cal. Rptr. 817, 818 (Cal. Ct. App. 1985), the California Court of Appeals allowed an insurer to assert a defense of “comparative bad faith” against its insured’s bad faith action.

– The court held that the duty of good faith arose from the parties’ contractual relationship, but the breach of such duty is governed by tort principles. – This allowed the insurer to bring a comparative bad faith claim against its insured and argue that the insured’s bad faith should be weighed against that of the insurer’s.

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Judicial Treatment Of Reverse Bad Faith Claims (cont.)

• Kransco v. Am. Empire Surplus Lines Ins. Co., 23 Cal.

4th 390, 405, 2 P.3d 1, 11 (2000) reversed the ruling in California Cas. Gen. Ins. Co. that an insurer could raise comparative bad faith as a defense.

– The California Supreme Court held that an insurer and insured’s duties of good faith were not equivalent due to the inherent unequal footing of the parties. – The insured’s duty of good faith was held to be purely based on the insurance contract, while the insurer had an additional duty sounded in tort. – While the insurer can still bring breach of contract claims against its insured, and an insured’s fraud is still grounds for tort damages, the claim of reverse bad faith was eliminated by this decision.

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Judicial Treatment Of Reverse Bad Faith Claims (cont.)

• In Snap-on Tools Corp. v. First State Ins. Co., 175 Wis. 2d 622, 502

N.W.2d 282 (Wis. Ct. App. 1993), an insurer asserted a bad faith counterclaim to its insured’s claims for breach of the insurance contract and bad faith.

• The trial court granted the insured’s pre-trial motion for summary

judgment on its breach of contract claim, and held that the insurance policy covered the claim at issue.

• A jury ruled that the insured acted in bad faith and awarded the insurer

$500,000 in compensatory damages and $4 million in punitive damages.

• On appeal, the Wisconsin Court of Appeals reversed the summary

judgment ruling siding with the insurer and holding that the acts of the insured at issue were excluded from coverage. This ruling mooted all the

• ther issues and reversed the jury’s findings on the insured’s bad faith.

The appellate court declined to consider the issue of reverse bad faith.

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States that have specifically denied a reverse bad faith cause of action

• Oklahoma – First Bank of Turley v. Fidelity and Deposit
• Ins. Co., 928 P.2d 298 (Okla. 1996)
• “[Reverse bad faith] creates an independent tort that

allows an insurer to seek affirmative relief for an insured’s breach of the duty of good faith and fair dealing.”

• “We hence hold that an insured’s misperformance of its

contractual duty is neither a “free-standing” ex contractu breach nor a civil harm actionable in tort as an incident of the insurer/insured status.”

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States that have specifically denied a reverse bad faith cause of action

• Iowa – Johnson v. Farm Bureau Mut. Ins. Co., 533

N.W.2d 203 (Supreme Court Iowa 1995).

• “[The insurer] argues that we should recognize a

cause of action for ‘reverse bad faith’ when an insured brings a frivolous bad faith claim against the insurer.”

• “However, we are aware of no jurisdiction that has

adopted the tort of reverse bad faith.” “…sanctions under Iowa Rule of Civil Procedure 80(a)provide an adequate remedy to insurance companies when an insured files a frivolous bad faith claim.”

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States that have specifically denied a reverse bad faith cause of action

• Ohio – Tokles & Sonv Midwestern
• Indem. Co., 605 N.E.2d 936 (Ohio

1992)

• “Midwestern argues that even if we do

not recognize the new tort of reverse bad faith, its counterclaim alleges fraud.”

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Pros And Benefits Of Asserting A Reverse Bad Faith Claim

• The insurer can combat the insured’s bad faith claim

by attacking the insured’s actions and motivation for bringing the claim.

• The insurer can attempt to recover costs spent in

defending the underlying complaint from the insured.

• The action may discourage insureds from asserting

frivolous bad faith claims against the insurer or trying to “set up” bad faith claims with claimants through a consent judgment.

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Cons And Disadvantages Of Asserting A Reverse Bad Faith Claim

• There is a potentially large expense of prosecuting a reverse

bad faith claim involving significant discovery.

• If the underlying action is still active, the insured will not be

inclined to cooperate and assist the insurer’s defense of the claim.

• It may be easier for the insurer to assert coverage defenses,

(e.g. failure to cooperate / provide notice), or bring a common law fraud claim against its insured.

• If the insurer brings a reverse bad faith counterclaim to its

insured’s bad faith action or raises reverse bad faith as an affirmative defense, the attack on the insured could sour a judge or jury and harm the insurer’s case.

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Recent Developments And Potential Developments

• In Rhodes v. USAA Cas. Ins. Co., 2011 PA Super 105,

21 A.3d 1253, 1264 (Pa. Super. Ct. 2011), the insurer sought to place the conduct of the insured at issue when defend a bad faith claim.

– The court rejected the insurer’s argument and held that the insured’s actions had nothing to do with the analysis of whether the insurer acted in good faith: “the relevant inquiry in a bad faith case is whether the insurer had a reasonable basis for its

• conduct. The state of mind of the insured is irrelevant.”
• This is the biggest danger an insurer faces in attempting

to prove a reverse bad faith claim or assert such a defense – that the court will deem the question of an insured’s conduct immaterial to the insurer’s actions.

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Recent Developments And Potential Developments (cont.)

• Some courts still dismiss out of hand all reverse bad faith claims.

Houchin v. Allstate Indem. Ins. Co., 4:07-CV-00071-M, 2012 WL 2430474 (W.D. Ky. June 26, 2012) (dismissing insurer’s counterclaim for reverse bad faith because “[t]he Court is not aware of any jurisdiction that has recognized a cause of action for reverse bad faith”).

• However, some courts are more amenable, though positive language

has thus far been only dicta. Callahan v. Norfolk & Dedham Grp., NOCV2007-0265, 2009 WL 3282941 (Mass. Super. Aug. 6, 2009) (noting that the insurer’s defense of reverse bad faith “need not be reached in deciding the merits of the [insured]'s case” because the insured’s claims for unfair claims settlement practices were dismissed). In Callahan, the court did not rule on the insurer’s reverse bad faith defense but did deny the insured’s motion to strike the insurer’s defense, and noted that “the insurer's action in raising this issue, in the circumstances presented here, was not inappropriate.” Id. at *9.

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Recent Developments And Potential Developments (cont.)

• In Shannon v. New York Cent. Mut. Ins. Co., 3:13-CV-

1432, 2013 WL 6119204 (M.D. Pa. Nov. 21, 2013), a third party claimant asserted bad faith claims against an insurer (assigned from the insured). The insurer’s answer included allegations that the plaintiff’s attorney “orchestrated” a “bad faith set-up” to obtain punitive

• damages. The court allowed the insurer’s affirmative

defense to stand, holding that it was relevant to an analysis of the insurer’s actions.

• This can be seen as a cracking open the door to

“reverse bad faith” or “bad faith set-up” defenses and claims.

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Tips For Insurers In Preserving And Demonstrating Reverse Bad Faith

• Insurers should take sufficient steps to handle claims

properly and timely

• Insurers should document their files on a

contemporaneous basis to document wrongful conduct by the insured

• Insurers should communicate to the insured where the

insured is not acting appropriately

• Consider using outside resources to investigate and

further document the insured’s actions

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Insurer’s remedies

• Fraud – perfectly honest people feel that it is okay to cheat an

insurance company. Exaggerating loss in first party claims such as fire. Insurers will investigate these claims and refuse to pay, but rarely sue. State insurance fraud statutes are another avenue.

• Abuse of process – frivolous suits
• Duty to cooperate – fraternizing with the enemy
• Insured is sued solely on intentional wrongdoing cause of
• action. Can he call up adversary and suggest adding a

negligence cause of action?

• Insured has $1,000,000 policy and adversary has claim of

$1,200,000. Can the insured suggest to adversary that demand

• f $950,000 might be a good idea?

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Insured’s remedy

• Don’t overreach or commit fraud
• Be careful of communications with

adversary.

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Robert D. Chesler

Shareholder, Anderson Kill rchesler@andersonkill.com

Paul R. Koepff

Senior Equity Partner, Clyde & Co paul.koepff@clydeco.us