Presenting a live 90-minute webinar with interactive Q&A Insurer Bad Faith Set-Up Defense and "Reverse Bad Faith" Claims: Insurer vs. Policyholder Perspectives Navigating Insurer Defenses Against Policyholders in Bad Faith Litigation WEDNESDAY, JANUARY 29, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert D. Chesler, Shareholder, Anderson Kill , Newark, N.J. Paul R. Koepff, Partner, Clyde & Co US , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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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 5
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. 6
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). 7
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% of 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). 8
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. 9 9
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 ordinary, commonly used meaning, and (3) policies are interpreted pursuant to the objectively reasonable expectations of the insured. It is in this context that the insured’s bad faith cause of action developed. 10 10
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. 11 11
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. 12 12
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. 13
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. 14
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 other 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. 15
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.” 16 16
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