Bad Faith Claim and the Duties of an Excess Insurer

State Farm was the excess insurer offering auto coverage for an insured who caused a serious auto accident. Several issues were involved in the lawsuits that followed this accident, but one of the main issues here dealt with the duties of an excess carrier and claims of bad faith. The case is State Farm Mutual Automobile Insurance Company v. Mendoza, 2006 WL 44376 (D. Ariz.). Note that this case is not reported in F.Supp.2d.

One of the main subjects discussed by the court in this case was the duty of equal consideration. Also known as the duty to settle, this doctrine imposes liability for excess judgments on insurance companies that wrongly reject reasonable settlement demands, and thereby expose their insureds to losses above the policy limits. The court found that State Farm owed its insured a duty of equal consideration as a matter of law. As to whether State farm breached that duty is a matter for the trier of fact to discern.

Another point to consider here was the fact that State Farm argued it had no duties to its insured because it was the excess insurer, and the primary insurer (Allstate) did not pay its policy limits until several months after the insured executed an agreement. State Farm said that as the excess carrier, it had no duty to pay until the primary insurer paid its policy limits, but this court did not agree.

This court found that, while Arizona courts had not precisely defined when an excess insurer's duty to evaluate a settlement offer arose, when a primary insurer and/or the insured is willing to settle and makes that fact known to the excess insurer, the excess insurer's coverage is triggered. In this case, Allstate offered its policy limits and so, State Farm's duty was triggered.

Another issue arose in that there were multiple claimants. State Farm argued that it had not duty to settle because it never had the opportunity to settle all claims. The court said that when there are multiple claims against an insured and the policy limits are not sufficient to settle all claims, the insurer has a duty to manage the insurance proceeds in a manner reasonably calculated to protect the insured by minimizing total liability. The insurer's duty in a multiple claimants case should be to use the policy limits to purchase for the insured release from as much liability as possible. To this end, the insurer must first investigate the claims and determine their individual expected costs, ignoring policy limits. It should then accept those settlement offers that provide the insured the maximum relief from liability for each settlement dollar paid.

Now, after the court listed these various duties, the end decision was that whether State Farm breached its duties to the insured was an issue for the trier of fact to consider and decide.

Bad Faith Claims and Time Limits

This case deals with a claim of bad faith made against State Farm and is based on an eight year old claim. The insured, a homeowners association, filed an action against State Farm alleging claims for breach of contract and breach of the implied covenant of good faith and fair dealing, eight years after the insured itself had withdrawn the initial property damage claim. The case is 1231 Euclid Homeowners Association v. State Farm Fire and Casualty Company, 135 Cal.App.4th 1008 (2006).

The lawsuit against State Farm stems from the 1994 Northridge earthquake. The insured's building was slightly damaged; in fact, it was determined that the damage sustained was largely cosmetic and totaled an amount that was well below the deductible on the policy. The insured then withdrew the claim and State farm closed its file. This was all confirmed in writing between the insured and the insurer.

However, the state legislature later passed a law extending the statute of limitations for filing suit against an insurance company for damages arising out of the Northridge earthquake. The insured took advantage of this extension and served notice on State Farm in 2002 of a lawsuit alleging bad faith dealings in failing to pay for the earthquake damages. State Farm responded to this complaint by filing a motion for summary judgment. State Farm contended that the insured had withdrawn its claim in early 1994, and thus, as a matter of law, the insurer could not be liable for breach of either an express or an implied term of the insurance policy. The trial court granted summary judgment to State Farm and this appeal followed.

The appeals court noted that the policy required the insured to provide prompt notice of the claimed loss, including a description of the lost or damaged property. In addition, the insured was required to provide a timely submission of a sworn statement of loss. Given the unrebutted evidence that State Farm was advised on or about February 18, 1994 that the claim for which a notice had previously been given was withdrawn, the court found that neither of the conditions was ever met. Indeed, said the court, the voluntary withdrawal of a damage claim by the insured arguably has the same legal consequence as the failure to file any claim at all, or after filing a claim, the failure or refusal to provide the insurer the information necessary to adjust the claim. When this happens, the insurer can not be faulted for closing its file.

The record clearly demonstrated to the court that State Farm had every justification to conclude that the insured had independently determined that whatever damage its building may have sustained by the earthquake, it did not exceed the policy deductible; and, for nearly eight years thereafter, the insured did nothing further about the property damage claim. So, although the insured alleges that State Farm breached the contract of insurance, there was no factual basis that the court found for such a conclusion. What the record shows was that State Farm accepted the insured's claim withdrawal and took no further action; it did not at any time fail or refuse to provide demanded policy benefits; it simply closed the claims file at the insured's request.

Addressing the law passed by the legislature, the court said that it did not give or create any rights for the insured beyond a one year window to file any claim it might otherwise have. It reopened the filing window for a one year period to those otherwise viable cases that had become time barred. The law did not allow finding coverage for property damage that did not initially exist.

Moreover, the court went on, State Farm would sustain substantial prejudice if after eight years of silence, the claim against it was allowed to proceed. After all, as a result of the voluntary claim withdrawal, State Farm had no reason to conduct an appropriate investigation, and trying to do that eight years after the fact would be impossible. It was clear to the appeals court that the insured's failure to provide a timely notice of claim and proof of loss violated the conditions of the policy and State Farm was prejudiced thereby. The failure of the insured in this respect is a complete defense to the breach of contract claim by the insured against State Farm. And, since State Farm was not in breach of contract and owed no policy benefits to the insured, its failure to pay such benefits cannot serve as a basis for a claim for bad faith.

The judgment of the trial court was affirmed.

One More Bad Faith Claim

The insured brought an action against its insurer seeking a declaration that the insurer had an obligation to reimburse the insured for damage to the warehouse roof. The insured also sought damages for breach of contract under Maryland law, and bad faith damages under Pennsylvania and Indiana law. The case is Cecilia Schwaber Trust Two v. Hartford Accident and Indemnity Company, 437 F.Supp.2d 485 (2006).

On or about February 16, 2003, a blizzard resulted in the accumulation of snow and ice on the roof of a warehouse owned by the insured. About one month later, leaks were discovered in the roof and a subsequent investigation revealed damage to the roof and supporting structures caused by the blizzard. Replacement of the entire roof was required and the insured filed a claim with Hartford . Hartford denied the claim and a lawsuit was filed.

This claim was unique in that count one alleged breach of contract under Maryland law. Count three alleged bad faith under Pennsylvania law. And count four alleged bad faith under Indiana law. The insured proceeded in this manner allegedly due to the fact that the claim handling operations took place in those various states. But this led the court to recognize that the plaintiffs were attempting to bring in Pennsylvania law and Indiana law in order to circumvent Maryland law which provides no cause of action for insurer bad faith in first party property cases. In actuality, the plaintiffs were Maryland residents pursuing a claim for damage to a Maryland property under an insurance contract they admit is governed by Maryland law. The court dismissed counts three and four.

Auto Theft Rates

Claims Magazine has reported that the National Insurance Crime Bureau (NICB) released its annual auto theft rates recently, and the results show that the western states have the highest auto theft rates in the nation. Las Vegas holds the number one spot, but

California holds most of the rest of the top ten auto theft areas.

To determine the rankings, the NICB said it reviewed data supplied by the National Crime Information Center for each of the nation's 361 metropolitan statistical areas. The rate was determined by the number of vehicle theft offenses per 100,000 inhabitants, using the 2005 census population estimates.

The following areas are the top ten in numerical order: Las Vegas/Paradise, Nev.; Stockton, Calif.; Visalia/Porterville, Calif.; Phoenix/Mesa/Scottsdale, Ariz.; Modesto, Calif. ; Seattle/Tacoma/Bellevue, Wash.; Sacramento/Arden-Arcade/Roseville, Calif.; Fresno, Calif.; Yakima, Wash.; Tucson, Ariz.

AAIS Information

The American Association of Insurance Services (AAIS) reports on several developments in its most recent advisory letter.

Revised forms, endorsements, and rating information are to be released for the Difference in Conditions (DIC) section of the AAIS Inland Marine Guide. This release is the latest in a year-long series of updates providing new and revised forms and/or rating information for several of the IM Guide classes. Later this year, the following sections will also see revisions: transit forms and rating; builders risk forms; and mobile equipment coverage form and rating.

AAIS is initiating a countrywide filing for two new endorsements that would add equipment breakdown coverage for a dwelling insured under a policy based on the AAIS farmowners program. The proposed effective date is October 1, 2007.

AAIS is also initiating a countrywide filing of businessowners (BOP) manual supplements that include new terrorism loss costs and rating factors. The new rating information, which has a proposed effective date of October 1, 2007, will address losses arising from both certified and non-certified acts of terrorism, as well as terrorism losses that occur after termination of the federal terrorism reinsurance program. These new loss costs apply to property loss and are based on modeled data developed by one of the nation's leading catastrophe modeling firms.

Also in this area, AAIS is filing revised rating factors to be used in calculating the liability component of BOP premium for terrorism coverage. Procedures for developing the property and liability components are provided in the manual supplements.

Finally, AAIS is inviting property/casualty professionals to submit their observations and concerns regarding emerging exposures through the new AAISalert web page. This page offers a submission form that asks users to describe new exposures, how to address the exposures, and how the AAIS programs would be affected. One need not be a member of AAIS to participate. For more information, contact Mr. Joseph Harrington, AAIS Director of Corporate Communications at [email protected].