Disciplined in Sophisticated Defense and Insurance Litigation

August 13, 2003 | Publication| Reflections – Thirty Years After Gruenberg v. Aetna Ins. Co.

John V. Garaffa

This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 17, #8, p. 17 (August 13, 2003). © Copyright Butler 2003.

It has long been accepted that parties to an insurance contract have an obligation to deal with each other fairly and in good faith.(1) As early as 1914, this obligation was found to be grounded within an implied covenant within the contract between the insurer and its insured.(2) If a denial of benefits under the policy was ultimately resolved by a suit on the contract of insurance, a policyholder who prevailed would receive the amount due plus interest.(3) The recognition of a cause of action for the tortious breach of the duty of good faith and fair dealing in the context of the first-party contract of insurance(4) is relatively recent.

As early as 1958, the Supreme Court of California had recognized that an insured could sue for damages in contract and tort when an insurance company fails to settle a third party claim against their insured and that refusal resulted in an award in excess of policy limits.(5) Not until 1973, in Gruenberg v. Aetna Ins. Co., did the court expand its earlier decisions and held that an insured could also sue for damages in contract and tort when the insurer breached the contract by failing to pay insurance proceeds due the insured.(6)

The impact of the new cause of action and its underlying rationale has had a fundamental and, after thirty years, still evolving, impact on the relationship between the parties to an insurance contract(7) and those who practice in this area of the law. In the thirty years since the decision, most of the courts in other states have begun their analysis of the issues with a brief discussion of the reasoning in Gruenberg. Some have adopted it, and others have rejected it in preference for more traditional contract principles.(8) While insurance is a specialized area of the law, the complexity of the issues surrounding the tort of bad faith has occupied the attention of courts and commentators as few issues before or since.

At times, the discussion of the remedies available for a breach of an insurance contract has mirrored the larger controversy concerning the continued blurring of lines between contract and tort in American jurisprudence.(9) Some states have taken the position that, as the relationship between the parties is contractual, the remedy for the breach of contract remains the traditional contractual expectations of the parties.(10) Even then, in some states, an expansive analysis of what those expectations are has strained the usual understanding of contractual relations.(11) Following the rationale for the decision in Gruenberg, some states have followed the California court and fashioned a new tort of bad faith premised on the perceived inadequacies of traditional contract remedies in the first-party insurance context. Regardless of their approach, the majority of states now permit insureds to seek extra-contractual remedies when the insurer is found to have committed what the courts perceive as culpable conduct.(12)

A complete analysis of each jurisdiction's approach is beyond the scope of this brief article. Instead, the discussion below will focus on what the rules have become in the thirty years since the Gruenberg decision,(13) address some of the consequences of extra-contractual damages on the insurance industry and touch on some of the implications for attorneys who devote their practice to resolving insurance disputes. Lastly, the article will note some recent developments that have an impact on what the future may hold for litigation of these issues. 

I.   Common Law Approaches

A.   A Tort

From its inception, the concept of liability for the breach of a duty of good faith in the context of a first-party insurance contract was that the action sounded in tort rather than contract. As the California Supreme Court stated:

That responsibility is not the requirement mandated by the terms of the policy itself – to defend, settle, or pay. It is the obligation, deemed to be imposed by the law, under which the insurer must act fairly and in good faith in discharging its contractual responsibilities. Where in so doing, it fails to deal fairly and in good faith with its insured by refusing, without proper cause, to compensate its insured for a loss covered by the policy, such conduct may give rise to a cause of action in tort for breach of an implied covenant of good faith and fair dealing.

Proceeding from pure tort analysis, some courts have found liability for bad faith in the absence of coverage.(14) Other courts have adhered to the expansive language of the Gruenberg court, but nonetheless limited the tort to narrow situations.

A good example of this latter course can be found in the decision of the Idaho Supreme Court in Selkirk Seed Co. v. State Insurance Fund.(15) In Selkirk,(16) the court explained that insurance companies had a duty to act in good faith with their insureds, and that the duty existed independently of both contract and state regulatory statutes. The court noted, "Such a duty is beyond that which the policy imposes by itself – the duty to defend, settle, and pay – but is a duty imposed by law on an insurer to act fairly and in good faith in discharging its contractual responsibilities."(17) The court made it clear that the cause of action existed in first-party actions, where the insured is personally filing a claim for benefits against the insurer under the policy.(18) However, despite its expansive language, the court then asserted that an independent action in tort arises only where the insured can show that the insurer intentionally and unreasonably denied or withheld payment and as a result of the insurer's conduct, the plaintiff was harmed in a way not fully compensable by contract damages.(19) 

B.   A Tort Limited By An Underlying Contract

Some states have expressly limited the independence of the tort of bad faith by holding that, while the tort is based on the implied covenant of good faith and fair dealing, there can be no breach of that covenant if there was not a breach of the contract's express terms. The decision of the United States District Court for the Eastern District of Louisiana in First National Bank of Louisville v. Lustig(20) is instructive. Interpreting Kentucky law, the Federal District Court agreed that Kentucky recognized a cause of action for the bad faith refusal to pay the insured's claim.(21) According to the court, the insured had to prove the following elements to prevail against an insurance company for bad faith:

(1)   the insurer must be obligated to pay the claim under policy terms;

(2)    the insurer must lack a reasonable basis in law or fact for denying the claim; and

(3)   the insurer must have either known that no reasonable basis existed for denying the claim or have acted with reckless disregard for whether such a basis existed.

The plaintiff argued that the basis for the tort of bad faith in the insurance context is the bad conduct of the insurer in its dealings with its insureds and the foreseeable damage to the insured's peace of mind, not the existence of coverage in the contract in a particular claim.(22) The court disagreed, holding the tort recognized by Kentucky was a bad faith action for non-payment of the insured's claim, not the more expansive cause of action urged by the plaintiff.

The plaintiff invited the court's attention to the work of legal commentators and urged the court to expand the tort to address the behavior of the insurer rather than the terms of the contract. The court's response was blunt:

While the court finds this an intriguing academic issue and argument, it cannot base a finding of law on such an amorphous and indeterminate legal conclusion supported by mere inferences the author deducts from a 1973 California case. [The plaintiff] asks the court to take a gargantuan leap to find as a matter of law that coverage under the policy is unnecessary to maintain this bad faith claim for mishandling. While this theory may become the law in the future, it is not grounded in current law and the court, accordingly, cannot justify its adoption.

Some courts, originally enamored with the availability of tort remedies for contractual breaches, now seem uncomfortable with the potential impact of those claims. Nonetheless, some have seemed reluctant to openly restrict them to the insurance context. A case in point is the decision of the Montana Supreme Court in Story v. City of Bozeman.(23) In Story, the court reversed bad faith damages in a construction dispute between the City of Bozeman and a contractor. In doing so it narrowed the scope of the common law tort of bad faith. The court held that "[t]he tort can be pursued in a contractual setting only where 'special circumstances' exist between the parties and the matter is not otherwise controlled by specific statutory provisions."(24) A review of the special circumstances set out by the court makes it clear that they will arise infrequently, if at all, outside an insurance context.(25) 

C.   An Action On The Contract

There are states that have rejected the establishment of a tort of bad faith in the first-party insurance context. The decision of the Maryland Supreme Court in Johnson v. Federal Kemper Insurance Co., 536 A.2d 1211 (Md. 1988), is a good example of the reasoning used in those cases.

While acknowledging the acceptance of the cause of action in third party insurance disputes, the court noted that [the first-party insurance claim] "presents an entirely different situation. The insured retains all rights to control any litigation necessary to enforce the claim. Because it involves a claim by the insured against the insurer, rather than a claim by a third party against both the insurer and insured, there is no conflict of interest situation requiring the law to impose any fiduciary duties on the insurer. Instead, the situation is a traditional dispute between the parties to a contract."

The plaintiff in Johnson also argued that the legislature had signaled its recognition of an independent cause of action for bad faith when it passed a statute regulating unfair claims practices.(26) The court found the existence of the statute ran directly counter to plaintiff's argument. Instead of providing for a separate cause of action, the statute reflected the decision of the state to address abuses within the insurance industry for the public good rather than by rewarding or providing additional compensation to individual plaintiffs.(27) Taken together, the court held, the traditional contract action addresses the expectations of the plaintiff and the fines and other penalties assessed by the state address the public interest in modifying future insurer behavior. As a consequence, the court declined to recognize a specific tort action against an insurer for bad faith failure to pay an insurance claim. 

D.   Standards Of Culpability

1.   Strict Liability

As feared by Justice Roth in his dissent in Gruenberg,(28) there have been those who have argued for strict liability for insurance companies. Thus, the insurer who does not immediately pay every claim on the precise terms requested by the insured would act at its peril with respect to exposure to tort liability. Courts have overwhelmingly rejected this standard, but, as if to justify the fears of Justice Roth, not every one has done so.(29) The West Virginia Supreme Court held that, where an insured "substantially prevails" in a suit against its own insurer for payment of a property damage claim, the insured is entitled to "attorney's fees, consequential damages and other net economic losses caused by the delay in settlement, as well as damages for aggravation and inconvenience."(30) Thus, at least in one jurisdiction, it may be enough for the insurance company to be wrong. 

2.   The Reasonable Basis – What Would The Reasonable Insurer Do?

The majority view on the standard of culpability is the view espoused by the Wisconsin Supreme Court in Anderson v. Continental Insurance Co.(31) After announcing that a cause of action in tort would exist for a bad faith refusal to honor a claim, the Anderson court set forth the following description of the tort, encompassing a subjective component:

To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one. . . .

The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim, i.e., would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances.(32)

Although questions of reasonableness generally must be resolved at trial, the court noted that, on the right facts, they could be an appropriate subject for summary judgment proceedings. Under the test espoused by the Anderson court, if an insurer can show that, even when the facts are viewed in a light most favorable to the plaintiff, a reasonable jury could only conclude that the challenged conduct was reasonable, then summary judgment in accordance with that conclusion can be entered for the insurer.(33) Otherwise, the issue of reasonableness is one for the jury. 

3.   The Reasonable Basis – No Arguable Reason To Deny 
      The Claim

Opposite from the strict liability standard adopted by the West Virginia Court is the "reasonable basis" standard espoused by the Alabama Supreme Court in National Insurance Association v. Sockwell.(34) Though close in terminology to the test used by the Wisconsin Supreme Court in Anderson,(35) the burden of proof has been tipped decidedly in the favor of pre-trial resolution. As the Sockwell court explained, to prevail in a bad faith suit, the plaintiff must prove:

(1)   an insurance contract between the parties and a breach thereof by the defendant;

(2)   an intentional refusal to pay the insured's claim;

(3)   the absence of any reasonably legitimate or arguable reason for that refusal (the absence of a debatable reason);

(4)   the insurer's actual knowledge of the absence of any legitimate or arguable reason;

(5)   if intentional failure to determine the existence of a lawful basis is relied upon, the plaintiff must prove the insurer's intentional failure to determine whether there is a legitimate or arguable reason to refuse to pay the claim.

The standards, like the standards adopted by the Wisconsin Supreme Court,(36) are meant to ensure that bad faith is not used simply to punish bad judgment or negligence. However, that is where the standards diverge. Here the standard requires a dishonest purpose and requires a breach of known duty, (i.e., good faith and fair dealing,) through some actual motive of self-interest or ill will. The requirement that the insurer have "actual knowledge" ensures that the finding of bad faith is based upon the insurer's conscious wrongdoing. In other words, when a claim is "fairly debatable," the insurer is entitled to debate it, whether the debate concerns a matter of fact or law, without fear that it will subject itself to a finding of bad faith. If there is a lawful basis for denial, the insurer cannot be held liable in an action based upon the tort of bad faith as a matter of law.

If the plaintiff wants to proceed on a theory of intentional failure to determine a lawful basis for denial, he or she must prove that the insurer "intentionally failed to determine whether or not there was any lawful basis for refusal." The relevant inquiry is whether the claim was properly investigated and whether the results of the investigation were subjected to an objective evaluation and review. When there is a reckless indifference to the facts or to the proof submitted by the insured, actual knowledge or a reckless disregard of the lack of a legitimate or reasonable basis for refusal may be inferred and imputed to the insurance company by the court or the jury.

The applicable standard for testing the tort of bad faith claim under this test is a directed verdict on the contract claim. As the Alabama Supreme Court noted:

This 'directed verdict on the contract claim' test is not to be read as requiring, in every case and under all circumstances, that the tort claim be barred unless the trial court has literally granted plaintiff's motion for a directed verdict on the contract. . .  Rather, this test is intended as an objective standard by which to measure plaintiff's compliance with his burden of proving that defendant's denial of payment was without any reasonable basis either in fact or law; i.e., that defendant's defense to the contract claim is devoid of any triable issue of fact or reasonably arguable question of law.(37) 

II.   Statutory Approaches

A.   Establishing A Separate Cause Of Action

When the courts refused to recognize the new tort of bad faith, the state legislatures in a number of states passed statutes providing traditional tort remedies for bad faith in the insurance context. In D'Ambrosio v. Pennsylvania Nat. Mut. Cas. Ins. Co.,(38) the Pennsylvania court declined to provide a common law action for bad faith and, in response, the Pennsylvania legislature created a statutory remedy in 42 Pa. C.S.A. § 8371. It provides:

§ 8371. Actions on insurance policies

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1)   Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.

(2)   Award punitive damages against the insurer.

(3)   Assess court costs and attorney fees against the insurer.(39)

Interpreting the Pennsylvania bad-faith statute, the courts have found that "bad faith" is any frivolous or unfounded refusal to pay proceeds of policy.(40) Except in extreme cases, this is a question for the jury.  

B.   Gate-Keeper Statutes

Some state statutes, while providing for a cause of action for bad faith, have provided some procedural hurdles before the cause of action may be filed. These statutes appear to have the laudatory purpose of promoting communication between the insured and the insurer and thus settlement of insurance disputes. Florida's statute is an excellent example of such a provision.(41) The Florida statute provides:

§ 624.155. Civil remedy

(1)   Any person may bring a civil action against an insurer when such person is damaged:

        (a)   By a violation of any of the following provisions by the insurer. . .

In general terms, the various provisions prohibit behavior such as not attempting in good faith to settle claims, not advising the insured the coverage under which payments are being made, failing to promptly settle claims under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage and various unfair trade practices.(42)

What makes the Florida statute interesting are the subsections that prohibit suit until the insurer is given notice and an opportunity to respond. Sections of the statute also prohibit suit if the insurer pays the damages claimed or when the circumstances giving rise to the violation are corrected within the notice period.(43) The Florida courts have further interpreted the statute as prohibiting a suit for bad faith until after the suit for liability on the insurance policy has been resolved in the insured's favor.(44)

Regrettably, anecdotal evidence indicates that the notice requirement of the statute is largely ignored. Plaintiffs' attorneys have little incentive to provide information that might permit an insurer to discern the facts underlying the plaintiff's claims and respond within the notice period. Inquiries concerning notice forms filed under the statute either go unanswered or are met with assertions that the insured's letters concerning the notice are additional evidence of the insurer's bad faith harassment of the insured.  

III.   The Impact On The Relationship Between The Parties

As noted in the above, the creation of a tort of bad faith in the first-party insurance context has had a profound impact on the insurance industry and the parties to disputes over insurance contracts. While the courts have told us there is a duty of good faith and fair dealing, it has been less clear precisely what the duty is or who is bound by it.(45) After three decades, this legal and claims uncertainty continues. 

A.   The Duty Of The Insurer

The nature of the relationship between the insurer and the insured is somewhat uncertain.(46) It has been argued by some that the insurer is a fiduciary with respect to the insured's interests and there is some support for that contention in the third-party context.(47) However, the idea that the insurer, embroiled in a dispute with its insured over the nature or extent of coverage in the first-party context, must act as a fiduciary is completely inconsistent with the concept of the fiduciary relationship and the realities of the marketplace. One group of commentators outlined the problem with the concept of assigning fiduciary duties to parties in an ordinary commercial setting in this way:(48)

The broad imposition of fiduciary duties would be enormously disruptive of ordinary transactions. A fiduciary's power to transact business with his beneficiary is severely limited; he must use utmost good faith and, if he profits from the transaction, the law presumes the agreement was entered into by the beneficiary without sufficient consideration and under undue influence. Most transactions, whether or not they involve insurance, are entered into with the expectation of profit. Thus, a presumption that profits would be illicit and must be disgorged to the other party would bring most business to a halt by destroying any incentive to undertake the risks and expense of the transaction. Moreover, most parties would be extremely reluctant to enter into relationships where they are forbidden to even consider, much less protect, their own interests.

Whatever one may call the relationship, the decision of the Nevada Supreme Court in Powers v. United Services Auto. Ass'n,(49) is instructive concerning what courts might mean when it uses the term fiduciary. It quickly becomes clear that they are using the term rather more loosely, or less technically, than commentators fear. In Powers, the insured brought suit against a marine insurer after it denied his claim for the sinking of his boat and unsuccessfully sought to have him prosecuted for insurance fraud. The Nevada Supreme Court noted that "Not only was the impropriety of USAA's denial of Powers' claim supported by substantial evidence, the jury was shown that USAA manufactured evidence to support its denial of coverage, and then was instrumental in sending this false evidence to the FBI, which resulted in Powers being indicted and eventually acquitted at trial when the falsity of the evidence was uncovered. In all likelihood, this evidence substantially influenced the jury's decision to award punitive damages." The court's observation would seem to be a model of understatement.

In upholding the multi-million dollar verdict for the insured, the Nevada Supreme Court held that the duty owed by an insurance company to an insured is fiduciary in nature and that in order to recover, the plaintiff must establish by a preponderance of the evidence that a fiduciary relationship existed between plaintiff and defendant and that defendant breached a duty to disclose known facts to plaintiff. The court held that a fiduciary relationship exists when one has the right to expect trust and confidence in the integrity and fidelity of another. Finding such a relationship in the insurance context, the court held that "This special relationship exists in part because, as insurers are well aware, consumers contract for insurance to gain protection, peace of mind and security against calamity."

On a practical level, whatever the rhetoric, both parties to the insurance contract know the insurer is not a fiduciary in the classic or legal sense. The typical policy contains exclusions and penalties that make it abundantly clear that the insurer will not pay all requested claims. The provisions set out the steps the insurer may take to verify the loss and investigate the scope of the loss to determine whether or how much of the loss is covered. The typical policy also contains provisions that address what the insured may do if the insurer decides that some or all of the claim will not be paid. Unlike a fiduciary, an insurer engaged in determining and performing its contractual obligations may give consideration to its own interests and the interests of other insureds so long as it gives "at least as much consideration to the welfare of its insured as it gives its own interests" and refrains "from doing anything to injure the right of the insured to receive the benefits of the agreement."(50)  

B.   When Does The Duty End?

While the precise edges of the envelope are unclear, it is clear that the duty of good faith and fair dealing does not end with the denial of coverage and the start of litigation. On a common sense level, if the duty is merely to refrain from acts that unfairly deprive the insured of the benefits of the contract, they should not stop once litigation begins. However, if the plaintiff's cause of action is to be judged at the time the cause of action was filed, it is difficult to understand how evidence of post-filing conduct can be relevant. Despite criticism from commentators, the cases seem in accord in allowing plaintiffs to establish bad faith by presenting evidence of the insurer's acts through litigation.(51)

In Norman v. American Nat. Fire Ins. Co.,(52) the trial court permitted the plaintiff to place the insurance company's post-filing correspondence and memos into evidence on the issue of bad faith. The trial court also imposed statutory penalties of over $105,000 on the insurer, giving great weight to the delay caused by the discovery and trial tactics of the insurer. The appellate court agreed that the strategies and tactics of trial counsel are not an adequate basis for the imposition of statutory penalties unless they violate applicable rules of ethics or procedure, or constitute an attempt to obstruct or deliberately delay the judicial process. The court nevertheless upheld the entire judgment against American National.

Despite the implicit error in the Norman court's methodology, a District Court of Appeal decision in Florida(53) relied on Norman to uphold the admission of an insurer's pleadings as well as the insurer's negative response to a request for admissions tendered by the plaintiff. The insurer's answer to the original complaint asserted numerous reasons why no coverage existed, including expiration of the policy, laches, waiver and estoppel, exclusions, and lack of consideration for issuance of the coverage. Like the strategy and tactics in Norman, there was no evidence that the pleadings or the denial were improper. Rather, the court considered the propriety and reasonableness of the pleadings and the negative response to the request for admission to be questions for the jury.(54)

However ill considered, these decisions caution a sharp defensive shift in litigation behavior that clearly has nothing to do with the inherent good faith of the insurer. It would appear that lawyers would be well advised to draft pleadings, letters and memorandum so they can be understood by the typical juror rather than their putative audiences of client, court or opposing counsel. The primary question may now be how the communication will look blown up on a screen in the courtroom in front of a jury of laypersons. It remains to be seen how the potential litigants will respond to the strictures of such an environment. 

IV.   The Future

Those who after Gruenberg(55) feared tort would swiftly swallow contracts, and those who advocated that position, have been, respectively, elated and disappointed. California, the state court that released the tort of bad faith, has penned it in, allowing it to forage only on the assets of insurance companies.(56)

For the "outer limits" of punitive damages perhaps we can consider the claim of the plaintiff in Ferguson v. Lieff, Cabraser, Heimann & Bernstein LLP.(57) In Ferguson, class action clients alleged their attorneys' malpractice cost them the chance to recover punitive damages in litigation. The California court seemed bemused by the claim and held the plaintiffs could not recover the "lost" punitive damages in a suit against the attorney because making the attorney liable for punitive damages serves no societal purpose and imposes a heavy social cost. In light of the impact of Gruenberg and its progeny, such restraint and balancing should be appreciated however late and unexpected it might be.

The Gruenberg court and the courts that have followed its reasoning sought to remedy what they saw as the inherent injustice of the traditional contract remedies available to insureds. From the beginning, it has been recognized that the potential of litigation and extra-contractual remedies would have a profound impact on the claims process.(58) If unpredictable damage awards for the few are left unchecked, economic realities may mean that insurance as we have come to know it may soon be unavailable to the many. The Supreme Court's decision in Campbell may have reduced that uncertainty but the future still remains unclear.(59) While California courts and a handful of others initially embraced a broader independent contract-tort claim for breach of the covenant of good faith,(60) most other jurisdictions steadfastly refused to create a new cause of action outside of an insurance context.(61)

As the decisions in Hawaii, Pennsylvania and Minnesota have indicated, the acceptance of tort damages as the trend in contractual disputes may be turning as the societal costs mount but it is too soon to tell.(62) What is clear is that, thirty years after its arrival, the doctrine of extra-contractual damages for bad faith in first-party insurance disputes has dramatically changed the insurance arena. What seems certain is that the laws of the marketplace will continue to assert themselves and, as in the more general tort arena, the awards to the few will ultimately be paid by the many. Insurance companies, like manufacturers and health care providers before them, will attempt to factor the less certain risks of litigation and runaway damage awards into the risks of the originally insured loss.

As in any area of human endeavor, there will always be disputes over the proper resolution of insurance contracts. The courts should remain available for those consumers who believe an insurer has made an improper decision as to the scope of coverage. However, the continued viability of insurance as a consumer product requires that the resolution of such a dispute should not be transformed into a potential windfall for the insured and his or her counsel. One solution is for more courts or legislatures to follow the example of Alabama(63) and establish clearer threshold tests for the litigation of bad faith and thus make the disputes more subject to resolution by the courts in motions for summary judgment. Until that happens, the insurance industry and consumers must hope that juries will begin to be more predictable about the acts that warrant a finding of bad faith and what awards are appropriate when it is found. The experience of the last thirty years makes that seem a slender reed on which to lean. 

Endnotes

1.Germania Ins. Co. v. Rudwig, 80 Ky. 223 (1882).

2.Brassil v. Maryland Casualty Co., 104 N.E. 622 (N.Y. 1914).

3.Insurance Co. v. Piaggio, 83 U.S. (16 Wall.) 378 (1872).

4.Third party insurance typically protects the insured against claims of parties outside the contractual relationship between the insured and the insurer which may be made against the insured. First-party insurance is any form of insurance which results in coverage of a loss to the insured, as opposed to coverage against liability claims brought by others against the insured.

5.Crisci v. Security Ins. Co., (1967) 66 Cal. 2d 425, 58 Cal. Rptr. 13, 426 P.2d 173, and Comunale v. Traders & General Ins. Co., (1958) 50 Cal. 2d 654, 328 P.2d 198.

6.Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

7.The dissent by Justice Roth seems, in retrospect, to have been remarkably prescient:

"It is respectfully suggested that the majority have advised an insurer that if it expects to avoid a Crisi or Fletcher lawsuit, there is only one safe course: pay all claims and investigate afterwards, assuming of course, payment doesn't waive that right." Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

8.A majority of jurisdictions now recognize some form of common law bad faith in the first-party context. See N. Goldberg, T. Segalla, R. Cohen, "Can the Puzzle Be Solved: Are Punitive Damages Awardable In New York For First-Party Bad Faith?" 44 Syracuse L. Rev. 723, 729 (1993)(citing as examples Alabama, Alaska, Arizona, Colorado, Connecticut, Delaware, Idaho, Iowa, Kentucky, Nebraska, Nevada, North Carolina, North Dakota, Ohio, Oklahoma, New Mexico, Rhode Island, South Carolina, South Dakota, Texas, and Wyoming).

9.See William S. Dodge, "The Case for Punitive Damages in Contracts," 48 Duke L.J. 629, 637-38 (1999).

10.Johnson v. Federal Kemper Insurance Co., 536 A.2d 1211 (Md. 1988).

11.David Tartaglio, "Note, The Expectation of Peace of Mind: A Basis for Recovery of Damages for Mental Suffering Resulting from the Breach of First-Party Insurance Contracts," 56 S. Cal. L. Rev. 1345 (1983) But see the decision of the Hawaii Supreme Court in Best Place v. Penn-America Insurance Company Inc., 82 Hawaii 120, 920 P.2d 334 (Haw. 1996), rejecting the notion that first-party insurance contracts are bought for peace of mind.

12.See Seth William Goren, "Looking For Law In All The Wrong Places: Problems In Applying The Implied Covenant Of Good Faith Performance," 37 U.S.F. L. Rev. 257 (2003) at footnote 76.

13.Gruenberg v. Aetna Insurance Company, 510 P.2d 1032 (Cal. 1973).

14.See 29 TILJ 740 "Truly Extracontractual Liability – Insurer Bad Faith In The Absence Of Coverage, Bad Faith Actions Liability & Damages," § 5A:2, § 5A:2. Bad Faith in the Absence of Coverage (2002).

15.Selkirk Seed Co. v. State Insurance Fund, 22 P.3d 1028 (Idaho 2000).

16.The court had earlier defined the tort of bad faith in the insurance context in White v. Unigard Mut. Ins. Co., 112 Idaho 94, 730 P.2d 1014 (1986), and much of its discussion flows from the earlier case.

17.Selkirk Seed Co. v. State Insurance Fund, 22 P.3d 1028 (Idaho 2000) citing White v. Unigard Mut. Ins. Co., 112 Idaho 94, at 96, 730 P.2d 1014 at 1016 (Idaho 1986).

18.Id.

19.Id.

20.832 F. Supp. 1065 (E.D. La.).

21.Curry v. Fireman's Fund Ins. Co., 784 S.W.2d 176, 178 (Ky. 1989).

22.Plaintiff asked the court to adopt the reasoning of Steven S. Ashley in his article, "Bad Faith Liability in the Absence of Coverage; A Response," 7 Bad Faith Law Report, No. 1 (1986).

23.242 Mont. 436, 791 P.2d 767 (1990); see also Thomas v. Northwestern Nat'l Ins. Co., 292 Mont. 357, 973 P.2d 804, 810 (1998).

24.Thomas, 973 P.2d at 810, citing Story, supra.

25.The court in Story adopted five elements to be applied in determining whether special circumstances exist that would give rise to a special relationship between the parties:

(1)   the contract must be such that the parties are in inherently unequal bargaining positions;

(2)   the motivation for entering the contract must be a non-profit motivation, i.e., to secure peace of mind, security, future protection;

(3)   ordinary contract damages are not adequate because

(a)   they do not require the party in the superior position to account for its actions, and

(b)   they do not make the inferior party "whole;"

(4)   one party is especially vulnerable because of the type of harm it may suffer and of necessity places trust in the other party to perform;

(5)   the other party is aware of this vulnerability.

26.Md. Ann. Code Art. 48A, § 230A Unfair Claim Settlement Practices (1986 Repl. Vol.).

27.The court held that the provision specifically "states that it provides administrative relief only, id., § (f)(1)(i), and that it is not to be construed to provide or deprive any private right or cause of action to" any claimant. Id., § (f)(2)(i). Therefore, it cannot be said to create a separate cause of action for appellant in this case.

28.Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

29.Dianne K. Dailey and Linda M. Bolduan, "First-Party Bad Faith," 29-WTR Brief citing Austero v. National Cas. Co., 148 Cal. Rptr. 653, disapproved of on other grounds and Egan v. Mutual of Omaha Ins. Co., 620 P.2d 141 (Cal. 1979).

30.Miller v. Fluharty, 500 S.E.2d 310 (W. Va. 1997).

31.Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 271 N.W.2d 368 (Wis. 1978).

32.Ibid. at 376-77.

33.See also the opinion of the Alaska Supreme Court in Hillman v. Nationwide Mutual Fire Insurance Company, 855 P.2d 1321 (Alaska 1993).

34.National Insurance Association v. Sockwell, 829 So. 2d 111 (Ala. 2002).

35.Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 271 N.W.2d 368 (Wis. 1978).

36.Id.

37.Safeco Insurance Co. of America v. Sims, 435 So. 2d 1219, 1224 (Ala. 1983)(concurring opinion of Justice Jones).

38.D'Ambrosio v. Pennsylvania Nat. Mut. Cas. Ins. Co., 431 A.2d 966 (Pa. 1981), citing Strutz v. State Farm Mut. Ins. Co., 609 A.2d 569, 415 Pa. Super. 371, Super. 1992, appeal denied, 615 A.2d 1313, 532 Pa. 657.

39.42 Pa. C.S.A. § 8371.

40.Younis Bros. & Co. v. CIGNA Worldwide Ins. Co., 899 F. Supp. 1385, (E.D. Pa. 1995), affirmed, 91 F.3d 13, certiorari denied, 117 S. Ct. 737, 519 U.S. 1077, 136 L. Ed. 2d 677.

41.F.S.A. § 624.155.

42.See F.S.A. §§ 624.155, 626.9541(1)(i), (o), or (x); 626.9551; 626.9705; 626.9706; 626.9707; and 627.7283.

43.F.S.A. § 624.155 (2)(d).

44.Talat Enterprises, Inc. v. Aetna Cas. and Sur. Co., 753 So. 2d 1278 (Fla. 2000), United States District Court interpreting Nevada law to require a resolution of coverage issues before a suit for bad faith could be maintained.

45.Douglas R. Richmond, "Trust Me: Insurers Are Not Fiduciaries to Their Insureds," Richmond, 88 KY. L.J. 1 (1999-2000), (citing Tamar Frankel, "Fiduciary Law," 71 Cal. L. Rev. 795 (1983).

46.There is support for the more expansive view that the parties to an insurance contract owe duties not only to each other but to the larger society itself. An example of this sentiment is set out in Haw. Rev. Stat. § 431:1-102 (1993):

The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception and practice honesty and equity in all insurance matters. Upon the insurer, the insured and their representatives rests the duty of preserving inviolate the integrity of insurance.

47.Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

48.William T. Barker, Paul E.B. Glad, and Steven M. Levy in their article, "Is An Insurer A Fiduciary To Its Insureds?" 25 Tort & Ins. L.J. 1 (1989), citing Committee on Children's Television, 35 Cal. 3d at 222, 673 P.2d at 676, 197 Cal. Rptr. at 799, McCullogh v. Rogers, 431 So. 2d 1246, 1248 (Ala. 1983); Prueter v. Bork, 105 Ill. App. 3d 1003, 1005, 435 N.E.2d 109, 112 (1st Dist. 1981); Von Hake v. Thomas, 705 P.2d 766, 769 (Utah 1985).

49.Powers v. United Services Auto. Ass'n, 962 P.2d 596 (Nev. 1998), rehearing denied but decision clarified in Powers v. United Services Auto. Ass'n, 979 P.2d 1286 (Nev. 1999).

50.Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 820, 620 P.2d 141, 146, 169 Cal. Rptr. 691, 696 (1979). See also Coppage v. Fireman's Fund Ins. Co., 379 F.2d 621, 623 (1967) (Tennessee law); Potomac Ins. Co. v. Wilkins Co., 376 F.2d 425, 427-28 (10th Cir. 1967) (Colorado law); Equity Gen. Ins. Co. v. C & A Realty, 148 Ariz. 515, 518, 715 P.2d 768, 771 (Ariz. Ct. App. 1985); Davis v. Cincinnati Ins. Co., 160 Ga. App. 813, 815, 288 S.E.2d 233, 237 (1982). Cited in William T. Barker, Paul E.B. Glad, and Steven M. Levy in their article, "Is An Insurer A Fiduciary To Its Insureds?" 25 Tort & Ins. L.J. 1 (1989).

51.See Smith v. Allstate Ins. Co., 52 Fed. Appx. 349 (C.A. 9 Cal. 2002)(Allstate found to have breached the covenant of good faith and fair dealing by failing to re-visit claims after learning that it had closed claims based on fraudulent information supplied to it by its own agents).

52.555 N.E.2d 1087 (Ill. App. 5 Dist. 1990).

53.Home Ins. Co. v. Owens, 573 So. 2d 343, 344 (Fla. Dist. Ct. App. 1990).

54.Id.

55.Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

56.As noted in Seth William Goren, "Looking For Law In All The Wrong Places: Problems In Applying The Implied Covenant Of Good Faith Performance," 37 U.S.F. L. Rev. 257 (2003):

The golden age of the ever-expanding contract-tort claim for breach of the implied covenant of good faith began its decline in Foley v. Interactive Data Corp., 765 P.2d 373 (Cal. 1988). There, the California Supreme Court distinguished an employment relationship from an insurance relationship and found that a contract-tort bad faith claim could not arise in a typical employment relationship. 765 P.2d at 396. After Foley, California courts essentially limited contract-tort claims to insurance cases.

57.Ferguson v. Lieff, Cabraser, Heimann & Bernstein LLP Cal., No. S10444, 6/9/03.

58.See footnote 7 above.

59.See John and William Lewis, "The Campbell Cap," Mealey's Litigation Report-Insurance Bad Faith (May 21, 2003).

60.See, e.g., Dare v. Mont. Petroleum Mktg. Co., 687 P.2d 1015, 1020 (Mont. 1984)(holding that tort liability may be imposed for breach of an employment contract's implied covenant of good faith and fair dealing); K Mart Corp. v. Ponsock, 732 P.2d 1364 (Nev. 1987)(finding that tort damages were available for breach of the covenant of good faith in an employment context); Wilder v. Cody Country Chamber of Commerce, 868 P.2d 211, 221 (Wyo. 1994)("[R]ecovery of damages is permitted for tortious conduct which arises out of a contractual relationship of employment in breach of the implied covenant of good faith and fair dealing").

61.See, e.g., Kennedy Elec. Co., v. Moore-Handley, Inc., 437 So. 2d 76, 81 (Ala. 1983)("We are not prepared to extend the tort of bad faith beyond the area of insurance policy cases at this time."); Oldenburger v. Del E. Webb Dev. Co., 765 P.2d 531 (Ariz. Ct. App. 1988)(refusing to extend tort of bad faith to real estate contract); Aluevich v. Harrah's, 660 P.2d 986, 987 (Nev. 1983)(refusing to extend tort of bad faith to commercial leasing contract); Rodgers v. Tecumseh Bank, 756 P.2d 1223, 1226 (Okla. 1988)(refusing to extend tort of bad faith to commercial lending contract); see also E. Allan Farnsworth, "Contract is Not Dead," 77 Cornell L. Rev. 1034, 1037 (1992).

62.See Grant Gilmore, "The Death of Contract 103 (1974)." See also Jeffery O'Connell, "The Interlocking Death and Rebirth of Contract and Tort," 75 Mich. L. Rev. 659, 661 (1977).

63.Safeco Insurance Co. of America v. Sims, 435 So. 2d 1219, 1224 (Ala. 1983)(concurring opinion of Justice Jones).

September 08, 2015 PublicationThe Ongoing Struggle Over Removal Of First-Party Bad Faith Cases In Florida

The critical fact that seems to have been glossed over by all of the courts considering this question is the fact that once a final judgment has been entered by a Florida trial court, the court loses jurisdiction to do anything further.

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April 27, 2015 PublicationRicky's Believe It Or Not: Part Two

In the January 26, 2015 edition of this publication, I shared a collection of excerpts from documents authored by attorneys. Given the sheer volume of paper which crosses my desk in reviewing claims for coverage and bad faith, I inevitably come across some very humorous (though not intentionally so) mistakes in the various documents reviewed. This month, I share some of the funniest entries I've seen in deposition transcripts and medical records.

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January 26, 2015 PublicationRicky's Believe It Or Not

As an attorney for more than sixteen years, and a practitioner of insurance bad faith for nearly eleven years, I have seen virtually every kind of bad faith set-up one could imagine. I have shared my observations through various articles published in this fine periodical as well as other publications. The law of insurer bad faith is obviously one which is constantly in flux. Therefore, it would be a simple matter to wax eloquent upon the latest pronouncement from the high court of one of our many state and federal courts. However, I feel compelled to digress from the usual stately discussion of the intricacies of bad-faith law and share some of the more amusing things I have come across during my review of tens of thousands of documents contained in claim files, medical records and correspondence, done in connection with representing insurers in this field.

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December 22, 2014 PublicationChallenging Consent Judgments As Unreasonable Or Tainted By Bad Faith

Generally, if an insurance company refuses to defend its insured against a claim, the insured may protect himself by entering into a stipulated agreement with the claimant and holding the insurance company responsible for paying the claimant the agreed-to amount.

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November 24, 2014 PublicationThe Coverage Action 'Fixed' Bad Faith Damages: Are The Total Damages Binding?

Florida state and federal courts struggle with excess damage verdicts in first-party bad-faith actions arising out of uninsured motorist/underinsured motorist (UM) coverage. Recent case decisions produce mixed results for insurers. But mention UM coverage, bad faith, and total damages, and Florida Statute Section 627.727(10) immediately comes to mind. Comments by two judges framed the Section 10 debate.

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October 27, 2014 PublicationThree Is A Crowd: Revisiting The Third Party Beneficiary Doctrine

This article examines the third party beneficiary doctrine in conjunction with the approaches courts follow with regard to the collection of an excess judgment from a liability insurer.

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September 22, 2014 PublicationCourts' Different Views On Additional Insureds' Duties Under Liability Policy Notice Provisions

Liability policies typically require the insured to provide prompt notice of a claim or suit. Notice is regarded as a condition precedent to the insurer's duty to defend or indemnify. The notice provisions in a typical liability policy seem straightforward. However, issues surrounding notice become complicated when an additional insured, who is typically not a party to the insurance contract and sometimes unnamed in a policy, is involved. Under those situations, courts have had to address, among other issues, the sophistication and resources of the additional insured, whether the additional insured is aware that coverage potentially exists or even that policies potentially exist, whether the jurisdiction requires the additional insured to actually tender the claim or suit or whether another insured's tender of the claim or suit is sufficient and whether there was late notice or no notice at all by the additional insured. Different jurisdictions have reached different results. 

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August 25, 2014 PublicationWall Of Confusion: GEICO General Insurance Company v. Bottini And Its Ill-Begotten Progeny

On July 20, 2012, a three-judge panel of Florida's Second District Court of Appeal released what, on its face, appeared to be a relatively innocuous opinion in Geico General Insurance Company v. Bottini . The Bottini appeal arose as a result of Geico's appeal of a jury verdict in the amount of $30,872,266 rendered against it in an uninsured/underinsured motorist (‘‘UIM'') case. Consistent with precedent, the trial court entered a judgment against Geico in the amount of the policy's limit of liability, $50,000. Because the huge verdict had the effect of fixing the plaintiff's damages in a subsequent bad faith case, Geico naturally sought review of that verdict. The panel opinion concluded simply, ‘‘Based on the evidence presented, we are satisfied that even if Geico were correct that errors may have affected the jury's computation of damages, in the context of this case and the amount of the judgment, any such errors were harmless.''

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June 26, 2014 PublicationUninsured Motorist Bad-Faith Claims: Separate Action, Separate Trial, Separate Damages

First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.

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May 22, 2014 PublicationBurden Of Proof Issues In Consent Judgments

When a carrier refuses to defend its insured, the insured may consent to entry of a stipulated judgment. 1 In most jurisdictions the insured (or claimant) bears the burden of proof to show coverage exists as a prerequisite to recovery of an excess judgment. 2 The burden of proving coverage for a consent judgment can sometimes create problems. Consent judgments raise many other issues beyond the scope of this article. 3  

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April 25, 2014 PublicationAn Insurance Carrier's Good Faith Obligations Toward Its Insureds In Liability Settlements Where Not All Of the Insureds Are Released

Generally, liability insurers must secure a release of all of their insureds when settling claims against their insureds. However, some courts have recognized circumstances where an insurer may settle for an insured at the exclusion of another while still maintaining its good faith duties toward all of its insureds. Other courts have seemingly rejected the notion that an insurer can ever settle for one of its insureds at the exclusion of others. These release issues occur most prevalently in automobile accidents involving insured owners and additional insured drivers.  

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March 27, 2014 PublicationAnother Item For Your Checklist: The Bad Faith Concerns Related To Overreaching Proposed Releases

A common scenario: claimant's counsel issues a time limit demand for policy limits and the insurer decides to accept the demand and tender the limits. Once the decision is made to accept the demand, the insurer should go through its checklist of concerns to make sure that each element of the time demand is met, while ensuring that the insured is adequately protected.

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March 13, 2014 PublicationBad Faith And Ordinary Negligence: Distinguishing The Excusable From The Culpable

Bad faith and ordinary negligence typically involve two very different standards of care. In most jurisdictions, courts agree that proof of bad faith requires a showing of insurer culpability greater than ordinary negligence.

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December 19, 2013 PublicationRecent Cases Discussing The Advice Of Counsel Defense: The Good, The Bad, And The Discovery

The gravamen of a third-party claim of bad faith is that the insurer failed to settle a claim against an insured when it had the opportunity to do so. The essence of the claim is that the insurer acted solely on the basis of its own interests, failed to properly and promptly defend the claim, and thereby exposed the insured to an excess judgment. However, a claim based on insurer negligence is insufficient to establish bad faith

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November 21, 2013 PublicationThis Mediation Is Confidential, Right?

Mediation is an effective dispute resolution tool because it allows participants to openly discuss all aspects of a dispute without the fear of recourse or retribution. Confidentiality is a critical component of this process. Litigants and insurers participating in mediation often proceed under the assumption that all communications and conduct occurring during mediation will be cloaked with protection. However, exceptions to confidentiality are slowly eroding what is commonly referred to as the absolute ‘‘mediation privilege.''

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October 24, 2013 PublicationSeparating Fact From Fiction: Strategies For Contesting The Excess Consent Judgment

Few legal maneuvers generate greater skepticism – among courts and insurers – than the excess consent judgment, an increasingly common settlement device used In liability cases.

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September 26, 2013 PublicationSome Considerations In Addressing Time-Limit Demands

Liability insurance carriers should be prompt and proactive when they receive a time-limit demand from a claimant. Time is usually not on the carrier's side when it comes to these settlement communications.

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August 22, 2013 PublicationCausal Friday: Better To Be Lucky Than Good

Sometimes it is better to be lucky than good, as the insurers in the following cases learned. These cases demonstrate that, even where the facts indicate that the insurer acted in bad faith, it is still possible for the insurer to escape extra-contractual exposure. In the absence of a causal link between the excess judgment and the insurer's actions, bad faith liability cannot exist as a matter of law.

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July 25, 2013 PublicationAn Insurer's Liability For A Hospital Lien After Settlement Of A Claim That Impairs The Lien

Over forty states have hospital lien laws. Those laws typically allow hospitals to recover against parties, including insurers, who impair their liens. In many states, the hospital lien laws do not clearly identify the type and extent of damages a hospital can recover against a party who impairs a hospital lien. The damages a hospital can recover from a party who impairs a lien depends upon the language of the applicable hospital lien law and the courts' interpretations of that law. Results vary from state to state. 

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June 27, 2013 PublicationWhy Sue For Bad Faith When Consequential Damages Are Available?

Bad faith aside, insurers often assume a claim's ‘‘total" exposure under the insurance contract is the policy's limit.  Courts traditionally allow insureds to recover contractual damages based on the limit, plus legal interest.  However, a new trend is emerging in some jurisdictions.

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May 23, 2013 PublicationIs The Bad Faith Claim A Part Of The Package?

In an effort to create yet another way to present a claim for bad faith against an insurance company, plaintiff attorneys have been submitting ‘‘package deal'' demands on behalf of multiple claimants who have all incurred damages as a result of the same occurrence.

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April 25, 2013 PublicationRevisiting The Litigation Privilege And Its Application In Bad-Faith Cases

Over the last 25 years, courts have wrestled with the issue of whether to apply an absolute privilege to preclude bad-faith lawsuits based on an insurance company's conduct during the litigation of an underlying first-party or third-party claim. Some courts still refuse to recognize a bad-faith claim against an insurance company based upon its post-litigation conduct.  However, the prevailing trend seems to suggest that courts will find that some of the insurer's conduct remains relevant and admissible, while the conduct of the insurer's attorneys in defending the claim remains privileged.

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March 28, 2013 PublicationWho Is Entitled to the Claims File?

The United States Supreme Court has recognized the "attorney-client privilege" as "one of the oldest recognized privileges for confidential communications," the purpose of which is to encourage "full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and the administration of justice."

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February 28, 2013 PublicationNavigating The Southern Bad-Faith Buffet: Extra-Contractual Liability In The Absence Of Breach Of Contract

In the Southeast, catastrophic natural disasters have become all too common, and the physical and financial consequences are borne by the entire region. Five of the top ten costliest hurricanes to hit the United States have impacted North Carolina, and with approximately $159.6 billion in insured coastal assets, North Carolina continues to have significant loss exposure.

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January 31, 2013 Publication‘Bad-Faith' Discovery: Claim Files, Training Materials, Personnel Files, And The Kitchen Sink

A recent discovery order in the federal court case of Signature Development, LLC v. Mid-Continental Casualty Company is illustrative of our liberal discovery. Note, this liability insurer has yet to be found liable or guilty of any wrongdoing.  Signature alleges, however, that the corporate defendant insurer breached the contract of insurance, committed ‘‘bad-faith,'' breached its fiduciary duty to its insured, committed unfair trade practices, intentionally inflicted emotional distress and vexatiously refused to pay. Based upon these allegations alone, the court addressed the scope and burden of discovery. 

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November 21, 2012 PublicationMediation (Resolving Cases With Extra-Contractual Exposure)

By definition, mediation begins with ‘‘me.'' Once conflicting parties have resorted to litigation, they naturally act purely in their own respective self-interest. When a mediation involves allegations of insurer ‘‘bad faith,'' this is especially so. The parties are initially polarized. 

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October 25, 2012 PublicationSquare Pegs In Round Holes: When The Adjustment Process Meets The Evidence Code

If given the chance, most property adjusters would skip the aspect of their job involving litigation. Avoiding lawyers, depositions, and, of course, trials would alleviate much stress. Unfortunately, dealing with lawyers and litigation is an unavoidable job hazard for most adjusters.

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September 27, 2012 PublicationThe Troubles Of Trafalgar : Bad Faith In the Absence Of Breach Of Contract

How can a first-party insurer be legally liable for insurance ‘‘bad faith'' if it has already been found not to be liable for breach of the insurance contract? According to at least one Florida appellate court, by paying an Appraisal Award timely.

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August 23, 2012 PublicationScary Stuff: Insurance Claim Files And Exceptions To The Attorney-Client Privilege

Are all attorney-client communications contained in such claim files that were thought to be confidential now discoverable because the insurer lost the underlying first-party claim, litigation, or appeal

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July 26, 2012 PublicationThe Vanishing Right To Federal Jurisdiction In Bad Faith Claims In Florida

On April 25, 2012, the United StatesDistrict Court for the Southern District of Florida issued its opinion in Moultrop v. GEICO General Ins. Co., remanding a bad faith claim to state court pursuant to the one-year ‘‘repose'' provision of 28 U.S.C. § 1446(b). The Moultrop decision is one more in a growing line of cases which refuse insurers access to a federal forum based on the repose provision, under the anomalous reasoning that the right to removal expired before the cause of action for bad faith accrued. Unfortunately for the insurers, 28 U.S.C. section 1447(d) precludes appellate review of an order granting a motion to remand.

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May 24, 2012 PublicationProtecting Confidential Communications: Application Of The Attorney-Client Privilege In First-Party Insurance Bad-Faith Cases

Discovery of the insurance company's entire claim file—including confidential communications between the insurer and its attorney—is often the first target on the insured's agenda in a first-party bad-faith lawsuit. In any other context, a party's request for discovery of the opposing party's confidential attorney-client communications would be viewed by courts as a brazen and inappropriate attempt to obtain information obviously protected by the attorney-client privilege; however, in the context of bad-faith litigation, this type of request has been dignified by courts who often look for ways to permit discovery of the insurer's attorney-client communications.

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April 26, 2012 PublicationCreative Methods Used To Set-Up ‘Bad Faith' Claims — Use Of Multiple Coverage Demands

In the past decade, the bad-faith environment has rapidly shifted from a useful tool used by consumers to protect themselves from arguably egregious actions to an elaborate trap set by personal injury plaintiff attorneys to reap outrageous awards from seemingly innocent conduct by claims professionals. Insurance companies now fear multi-million dollar verdicts based on policies written for insureds who did not want more than the absolute minimum coverage allowed. Based on technicalities, clever plaintiff attorneys attempt to convince courts to rewrite insurance policies, allowing for unlimited recoveries.

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March 22, 2012 PublicationA Liability Insurer's (Almost Absolute) Right To Settle Claims Without The Insured's Consent

Many cases hold that a liability insurer can settle a claim against its insured without the insured’s consent because the policy language gives an insurer the right to settle even when an insured may not want to settle.1 For the most part, courts in California, Florida, and Louisiana allow insurers to settle claims without the insured’s consent where the policy gives the insurer the right to settle as it deems expedient. However, courts may nonetheless consider whether a settlement may have adversely impacted the insured to determine whether an insurer acted in good faith.

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February 23, 2012 PublicationBullock v. Philip Morris USA, Inc.: Where ‘Reprehensibility' As An Exception To Constitutional Protections And the Ratio Guidepost Includes The Wealth Of The Defendant

On November 30, 2011, the California Supreme Court exercised its discretion and let stand a $13.8 million punitive damage award that was more than 16 times the compensatory damages awarded by the jury. The case, Bullock v. Philip Morris, 1 (Bullock) involved a smoker diagnosed with lung cancer who filed suit against the cigarette manufacturer, seeking damages based on products liability, fraud, and other theories.

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January 26, 2012 PublicationWho Killed Reverse Bad Faith? And Why It Could Make A Comeback

In every state in the union an insured can seek some form of compensation for an insurer’s ‘‘bad faith’’ in adjusting a claim.Yet only one state, Tennessee, currently allows an insurance company to recover damages caused by the insured’s bad faith.This imbalance has allowed ‘‘bad faith’’ litigation to become big business.The tendency of courts to treat insureds like a disadvantaged class has created an uneven playing field for insurance companies in claims adjustment.

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December 22, 2011 PublicationA Wolf In Sheep's Clothing (Insurers Should Be Vigilant In Florida)

[ Editors note: Alan J. Nisberg, Esq., is a partner with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial and appellate attorney, specializing in extra-contractual, class action and complex coverage litigation. This commentary, other than the quoted material, expresses the authors opinions -  not the opinions of Butler or Mealey's. Copyright © 2011 by the author. Responses are welcome. ] 

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November 23, 2011 PublicationProximate Causation In Third-Party Bad Faith: Not Every Bad Decision Is A Bad-Faith Suit

Proximate causation is an element of a claim for bad faith. An often-overlooked element, but an element nonetheless. Even claims with grievous claim-handling errors and high excess judgments can still be very defensible if there is no proximate causation between the two. This article examines the element of the bad-faith cause of action that is most often glossed over. 

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October 27, 2011 PublicationRecent Application Of State Farm v. Campbell In Bad-Faith Cases

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 25, #10 (September, 2011). © 2011 

[ Julie A. Simonson is an associate with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. She is active in the firm's Extra-Contractual and Liability Departments. Any commentary or opinions do not reflect the opinions of Butler or Mealey's. Copyright © 2011 by Julie A. Simonson. Responses are welcome. ]

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August 25, 2011 PublicationApplying The Litigation Privilege In Bad-Faith Cases

[BrianD.Webb,Esq.,is a partner with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial and appellate attorney specializing in extra-contractual and complex coverage litigation. This commentary expresses the author's opinions–not the opinions of Butler or Mealey's. Copyright#2011 by Brian D. Webb. Responses are welcome.] 

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July 28, 2011 PublicationThe Insurer's Bill Of Rights (A Balance Of Power)

[Editor's Note: Alan J. Nisberg is a partner in the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee, and Miami. He is an experienced trial attorney and appellate lawyer, specializing in extra-contractual, class action, and complex coverage litigation. This commentary, other than the quoted material, expresses the author's opinions - not the opinions of Butler or Mealey's. Copyright#2011 by the author. Responses are welcome.] 

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June 23, 2011 PublicationChoice-Of-Law Principles Affecting Insurance Bad-Faith Claims

[R. Steven Rawls is a partner and Ryan K. Hilton is a senior associate with the law firm of Butler Weihmuller Katz Craig LLP, which has offices in Tampa, Chicago, Charlotte, Mobile, Tallahassee, and Miami. This commentary expresses the author's opinions–not the opinions of Butler or Mealey's. Copyright © 2011 by R. Steven Rawls and Ryan K. Hilton. Responses are welcome.] 

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February 24, 2011 PublicationThe Duty to Initiate Settlement Negotiations: Where Does it Begin and How Far Does it Go

In some jurisdictions, including Florida, the courts recognize a duty in some circumstances for a liability insurer to initiate settlement negotiations with a third-party claimant before the claimant has ever made a demand. This duty is a relatively recent invention in the common law and has yet to be fully defined. While most articles on the subject tend to focus on whether or not this duty should exist in the first place, this article skips that threshold question and delves into the particulars that apply in the jurisdictions that recognize it. What triggers the duty? What is required of the insurer to discharge it? What are the defenses to a claim for bad-faith failure to initiate settlement negotiations? This article tackles these emerging questions and more in attempt to define this nascent duty.

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December 23, 2010 PublicationDoes Policy Reformation Create A Retroactive Bad-Faith Claim?

[Editor's Note: Laura A. Turbe-Capaz is a senior associate in the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee, and Miami. She is an experienced trial attorney in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Copyright#2011 by Laura A. Turbe-Capaz. Responses are welcome.] 

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December 09, 2010 PublicationSplitting The Baby: The Insurer's Duty To Notify The Insured Of The Need For An Allocated Verdict

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #15 (December 9, 2010). © 2010  

[Editor's Note: Fay E. Ryan is a partner the Tampa office of Butler Weihmuller Katz Craig LLP, which also has offices in Chicago, Charlotte, Mobile, Tallahassee and Miami. She is an experienced trial attorney in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Kimberly N. Gorak is a senior associate in the Tampa office of Butler , also practicing in the firm's Extra-Contractual, Third-Party Coverage, and Liability Departments. Any commentary or opinions do not reflect the opinions of Butler or Mealey's. Copyright © 2010 by Fay E. Ryan and Kimberly N. Gorak. Responses are welcome .]

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November 24, 2010 PublicationPitfalls For The Unwary: The Use Of Releases To Preserve Or Extinguish Any Potential Bad-Faith Claims Between The Primary And Excess Insurance Carriers

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #14 (November 24, 2010). © 2010 

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September 23, 2010 PublicationWe Said What We Meant And We Meant What We Said! — Enforcing Contract Language Despite Assertions Of Bad Faith And Insurer 'Misconduct' During The Adjustment Of The Claim

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #10 (September 23, 2010). © 2010  

[Editor's Note: John V. Garaffa is a Partner and Jason M. Seitz is an associate with the law firm of Butler Weihmuller Katz Craig LLP in Tampa, Florida.  Any commentary or opinions do not reflect the opinions of Butler or Mealey's Publications. Copyright © 2010 by Jason M. Seitz and John V. Garaffa. Responses are welcome.]

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August 26, 2010 PublicationChinese-Drywall Cases And Their Impact On Liability-Insurance Carriers In Settling Multiple Claims In Good Faith Against Their Insureds In Certain State Courts

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #8 (August 26, 2010). © 2010  

[Editor's Note: Steve Rawls is a partner and Ryan K. Hilton is a senior associate with the law firm of Butler Weihmuller Katz Craig LLP in Tampa, Florida. Any commentary or opinions do not reflect the opinions of Butler or Mealey's Publications. Copyright © 2010 by R. Steve Rawls and Ryan K. Hilton. Responses are welcome.]

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July 29, 2010 PublicationBad Faith - Variations On A Theme

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #6 (July 29, 2010). © 2010  

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May 27, 2010 PublicationBad Faith and Beyond: A Business Law Primer For Insurers

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 24, #2 (May 27, 2010). © 2010  

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May 13, 2010 Publication(Almost) Twenty Years After Powell: Case Studies On A Liability Insurer's Duty To Initiate Settlement Negotiations

The Florida Third District Court of Appeal’s 1991 decision in Powell v. Prudential Property & Casualty Insurance Co. recognized a duty, in some circumstances, for a liability insurer to initiate settlement discussions with a third-party claimant who has not made a demand. The case proved to have a strong ripple effect, bringing about a sea change in bad-faith jurisprudence for the next twenty years. This article examines the expansion of Powell from a unique facts-driven anomaly to an entire branch of bad-faith jurisprudence and discusses early indications that the courts may be retreating again to applications more in line with the original case.

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March 25, 2010 PublicationBreaking Down Privileges: Discovery of the Claim File In Florida Bad-Faith Actions

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 23, #22 (March 25, 2010). © 2010  

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February 25, 2010 PublicationExtracontractual Recovery Without Bad Faith

Insurance intermediaries (insurance agents and insurance brokers) are especially vulnerable to claims by insureds. While bad-faith actions continue to be the favored method of pursuing recovery beyond a policy limit, some litigants turn to claims against insurance intermediaries (and the insurers they represent) for extracontractual recovery. In addition to bad-faith law, insurers need to know what kinds of claims can be brought in relation to the procurement of the insurance policy itself and what defenses can be raised. This article delves into this often-misunderstood area of the law and illuminates some legal issues with which every insurer should be familiar.

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January 28, 2010 PublicationA Look Back At Some Of 2009s Significant Bad Faith Decisions

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 23, #18 (January 28, 2010). © 2010

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October 22, 2009 PublicationDoes An Insured Owe A Duty Of Good Faith To Its Insurer When The Insured Is Responsible For Defense Costs In A Self-Insured Retention?

Many businesses are increasingly utilizing insurance policies with large self-insured retention endorsements in order to exercise better control over the defense of claims. In these circumstances, an issue may arise regarding whether an insured who is responsible for defense costs under a self-insured retention ("SIR") owes a duty of good faith to its insurer.

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August 27, 2009 PublicationFairly Debatable?

On August 5, 2009, the South Dakota supreme court joined an exceedingly small minority of courts in the United States that have imposed a duty to conduct a reasonable investigation into first-party claims in order to avoid "bad-faith" liability.2 As they say, the road to Hell is paved with good intentions. This decision certainly affirms the truth of that old saw

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July 30, 2009 PublicationWrit Of Certiorari Dismissed As Improvidently Granted -- The Ambiguous End To Philip Morris USA, Inc. v. Williams

On March 31, 2009, the United States Supreme Court dismissed, as improvidently granted, a writ of certiorari in Philip Morris USA, Inc. v. Williams. While the reason for the court's action remains a mystery, it seemed to signal an end to the court's interest in the central constitutional issue in the case: punitive damages. Unfortunately, the court's decision to abandon the issue leaves both the litigants and observers wondering what, if anything, had been gained by years of decisions, reversals and remands.

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April 23, 2009 PublicationArbitrary and Capricious

In Grilletta v. Lexington Insurance Company,8 the United States Court of Appeals for the Fifth Circuit reviewed the insurer's handling of a Hurricane Katrina property claim.9 Mr. Xavier Grilletta and Mr. Randy Lauman owned a vacation lakehouse on the southeastern shore of Lake Pontchartrain, a lake bordering New Orleans to the north. 

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March 26, 2009 PublicationFlorida's Bad Faith Quagmire: Is Summary Judgment Ever Available?

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #22 (March 26, 2009).

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February 26, 2009 PublicationIs Abnormal Becoming The New Normal In Alabama?

This is one of a series of articles originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 22, #20 (February 26, 2009).

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November 25, 2008 PublicationUnreasonable Consent Judgments; What Next?

The scene is all too familiar: an insured, disenchanted with its insurer's refusal to defend an action the insured believes is within coverage, decides to enter into a "consent judgment" with the plaintiff, in return for which, the plaintiff agrees only to pursue satisfaction of the "judgment" against the insurer. 

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August 28, 2008 PublicationTorts for Tots (Bad Faith And Other Independent Torts)

The responsibility of caring for a child is not one to be taken lightly. Our society demands vigilance from those who bring new life into rld, and rightly so. We are held to a higher standard in dealing with our offspring than with others. The special relationship between a parent and a child is built upon trust and an expectation that one (the parent) will give security tothe other (the child). So too is the bond between insurer and insured.

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July 15, 2008 PublicationExxon Shipping Co. v. Baker: Sailing Into The Confluence Of Common Law And Constitutional Standards For Punitive Damages

On June 25, 2008, the United States Supreme Court issued its much anticipated opinion in Exxon Shipping Co. v. Baker. The Supreme Court reduced the punitive damage award from $2.5 billion dollars to $507 million dollars, an amount approximately equal to the jury's award of compensatory damages. While the decision certainly warmed the hearts of Exxon's previously discomfitted stockholders, the Court's opinion provides only limited encouragement to defendants involved in the current punitive damage lottery.

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June 17, 2008 PublicationConsequential Damages Under the Insurance Contract -- The New "Bad Faith?"

The ability of an insured to recover consequential damages under an insurance contract allegedly caused by failure or delays in the insurer making payments has traditionally been controversial. Jurisdictions have been divided in their approach as noted in the following annotation cited by the district court in Indiana

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January 22, 2008 PublicationRipe for Campbell Review: A Florida Uninsured Motorist Claimant's Statutory Right to Recover Excess Verdict Damages in a Bad Faith Action

In many jurisdictions, jurors can award punitive damages to punish or penalize an insurer for improper claims handling, in addition to any compensatory damages caused by an insurer’s bad faith. Such jury awards of punitive damages now are subject to scrutiny under State Farm Mutual Automobile Insurance Company v. Campbell.1 As a result of Campbell, insurers have one final check against excessive punitive damages awards by juries.

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December 18, 2007 PublicationPunitive Damages - the Rationale of Ratios

Since the Supreme Court’s decision in State Farm Mutual Automobile Insurance Company v. Campbell, courts have struggled to define when the Campbell court’s presumptive limit of 9 to 1 ratio of punitive damages to compensatory damages is appropriate. The Supreme Court stated that the "most important indicium of the reasonableness of a punitive damages award" was the highly subjective measure of the "degree of reprehensibility." Wrestling with such an amorphous concept trial courts and appellate courts have sought to justify various punitive damage awards on the basis of a sliding scale, doing little more than subjectively comparing the "reprehensibility" in the case being reviewed, to other recent cases decided before it. The result is a marked disparity from one court to the next as to what constitutes behavior falling within the five (5) factors of reprehensibility discussed in Campbell.

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July 24, 2007 PublicationOxymoronic ("Tortious Breach of Contract")

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 21, #6, p. 32 (July 24, 2007).

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June 19, 2007 PublicationWilliams v. Philip Morris Inc. II – The Fog of Legal Rationale

On February 20, 2007, the United States Supreme Court issued its much-anticipated second opinion in the negligence and fraud suit brought by the widow of Jesse Williams against Philip Morris. Mrs. Williams had asserted that the company had purposefully taken actions to obscure the dangers of smoking and, as a result, her husband was deceived into believing smoking was not harmful, a 47 year delusion that ultimately led to his illness and death.

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March 20, 2007 PublicationCaveat Insuror

On December 21, 2006, the Florida Supreme Court released its opinion in Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co.[FN1] In Dadeland, a bare majority of the high Court, led by Justice Lewis, held that an obligee under a performance bond qualifies as an "insured" within the meaning of section 624.155, Florida Statutes (1999). The Court's decision resulted from the following question certified to it by the Eleventh Circuit Court of Appeals:

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September 19, 2006 PublicationRemanded in Light of State Farm v. Campbell: The Opportunity For Further Illumination Presented by Williams v. Philip Morris Inc.

On May 30, 2006, the U.S. Supreme Court again granted a petition for writ of certiorari in the ongoing dispute between Philip Morris and the widow of Jesse Williams, an Oregon resident who died of lung cancer after smoking cigarettes for about 47 years.

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June 15, 2006 PublicationSelected Third-Party Bad Faith Liability Standards Governing Failure to Settle Cases

Under liability insurance policies, insurance companies assume the obligation of defending their insureds. In so doing, carriers can settle and foreclose their insured's exposure or refuse to settle, leaving the insured potentially exposed to damages that exceed the policy limits.  Most courts find that this obligation places insurers and insureds in a fiduciary (or fiduciary-type) relationship.  Accordingly, courts recognize that an insurer owes a duty to the insured to refrain from acting solely on the basis of the insurer's own interests in settlement. This duty extends to situations where an insurer has an opportunity to settle a third-party liability claim against its insured within policy limits and requires an insurer to pay an excess judgement against an insured, where the carrier in good faith should have settled.
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April 18, 2006 PublicationAchilles' Heel: First-Party Property "Bad-Faith" Damages

Insurance "bad-faith" is recognized throughout the United States. In the setting of first-party property insurance, the relationship between the insured and insurer commences contractually. However, that contractual relationship can also provide exposure for tort damages in a first-party "bad-faith" action. Indeed, the threat of facing a first-party property "bad-faith" tort action commonly influences insurers to resolve litigation out of fear, rather than for substantive purposes based on the merits. One of the "Achilles' Heels" of such causes of action is the inability of the insured to prove any measurable "bad-faith" damages. The identification and measurement of "damages" in first-party property "bad-faith" actions varies greatly depending on the jurisdiction. This commentary will discuss certain jurisdictional differences relating to damages in first-party "bad-faith" actions, exclusive of punitive damages.[FN1]

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February 21, 2006 PublicationThe Implied Covenant of Good Faith and Fair Dealing

Until the 20th Century, insurance contracts were treated the same as any other contract, with recovery generally limited to the damages contemplated by the parties when they entered into the contract. Insurance contracts, like any other, were enforced by their explicit terms, and courts were reluctant to substitute their own judgment for the terms upon which the parties agreed absent some independent tort or injustice. By the end of the 19th Century, however, the judiciary in the United States began to recognize a general obligation of good faith performance implied in every contract.  By the 1930s, the implied covenant of good faith became a standard doctrine. This duty of good faith and fair dealing originated to resolve disputes over agreements that were not explicit on pivotal contract terms, or left discretionary power in the hands of one of the contracting parties.

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June 07, 2005 PublicationAn Insurer's Liability For Punitive Damages In An Excess Judgment

Ging v. American Liberty Insurance Company, 423 F.2d 115 (5th Cir. 1970) is a case often cited for the proposition that third party insurers who act in bad faith could be held liable for punitive damages awarded against their insureds. However, the strength of this proposition appears to depend upon the extent to which a jurisdiction would permit the insurability of punitive damages. Those jurisdictions that permit coverage for punitive damages would also likely permit recovery of those damages later as a result of the carrier's bad faith. Jurisdictions whose public policy precludes insuring against punitive damage awards, may be more reluctant to permit recovery in a later bad faith action, depending upon the nature of the liability giving rise to the punitive damage award.

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April 19, 2005 PublicationDetours: Campbell Stops At The Willow Inn

Dealing with punitive damage claims is like driving down a road that is constantly under repair. The road is dangerous, uncomfortable, and full of detours. Although the United States Supreme Court has issued a rather clear and accurate map to help us through this rocky road, in some respects the map is already outdated, just as the road darkens and your interior auto light dims.

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March 22, 2005 PublicationThe Timely Demise of Excess Judgments (Probate Nonclaim Statutes)

Imagine your insured is at fault in an accident that kills her and causes devastating injury to another individual. You (the insurer) fail to meet a settlement demand within policy limits. Liability is clear and excess exposure is inevitable. The claimant files a civil lawsuit naming the "estate" of the insured as the defendant. However, the estate of the insured is not set up yet. Having no entity to actually serve with the complaint, the claimant petitions the probate court for administration of the decedent's estate, has a personal representative appointed, and immediately serves legal process on that representative. A multi-million dollar excess judgment is obtained in the civil action.

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January 18, 2005 PublicationPiece Of Mind: The Utah Supreme Court's Response To Campbell

Given that the Utah Supreme Court (“Utah”) previously reinstated a $145 million punitive damages award in favor of the Campbells, it is not surprising that on remand from the U.S. Supreme Court, this same state high court goes to great lengths to justify the largest punitive damages award it believes could possibly survive further constitutional review.

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November 16, 2004 PublicationHospital Lien Laws and Personal Injury Settlements

Many jurisdictions have hospital lien laws. These laws ensure payment to hospitals for the beneficial services they provide. Some jurisdictions liberally interpret these laws so that technical deficiencies in establishing or seeking enforcement do not defeat payment to the hospitals. Other jurisdictions are less likely to ignore such deficiencies.

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July 07, 2004 PublicationThe Continuing Need for De Novo Review of Punitive Damage Awards -- Liggett Group, Inc. v. Engle

In Liggett Group Inc. v. Engle, the Florida's Third District Court of Appeal reversed the largest punitive damage award in history. The circumstances of the award indicate it would have bankrupted the defendants and was, in essence, a civil death sentence. If that were the only error, Engle would merely mark another notch in the continued upward spiral of American jury awards. However, the compounded procedural and constitutional errors in Engle make it particularly useful for those who wish to examine the pros and cons of the current system of punitive damages. 

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January 21, 2004 PublicationDo Liability Insurers Have A Duty To Make An Offer Where There Is No Claim Against The Insured?

A liability insurer has a duty to handle and settle claims made against its insured in good faith. Courts have grappled with whether this duty requires an insurer to make a settlement offer when there is no claim against the insured.

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October 15, 2003 PublicationJuggling Multiple Claims With Inadequate Limits

Everyone knows that an insurer has to act in good faith to its insured when settling claims with third parties. However, when an insurer is faced with multiple claims exceeding the limits of coverage, the insurer is faced with tough choices. Insurers are frequently called upon to defend these choices in “bad-faith” actions. Can an insurer get summary judgment on the issue of “bad-faith” in multiple claimant/inadequate limits cases? Will the insurer be forced to litigate the “bad-faith” issue through a trial? This article attempts to answer these questions and provide guidance to insurers on meeting their duty of good faith when met with multiple claims, the sum total of which exceed policy limits.

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July 16, 2003 PublicationWhat is a "Reasonable" Settlement When There Are Multiple Claimants?

Sometimes several people sustain injuries in an accident. This article addresses a recent decision of Florida's Fourth District Court of Appeal, Farinas v. Florida Farm Bureau General Insurance Company, that discusses what liability insurers should do when several people sustain injuries in an accident caused by the insured and the value of most, if not all, of each individual claim exceeds policy limits. This article discusses the basis for the Farinas holding and identifies some questions raised by Farinas.

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June 18, 2003 PublicationAppraising Windstorm Claims

Once again the annual “hold-your-breath” season is upon us. In Hartford, New York, and London weather channels are beating “sitcoms” on the “Nielson” ratings. Internet strikes on weather.com are out-numbering those for kournikova.com – well, maybe this is a slight exaggeration. But the point remains; that is, CAT losses, especially windstorm, commonly called Hurricanes, make or break a property insurer's profitability, not just in the year of the occurrence, but typically with a two to three year tail.

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April 16, 2003 PublicationThe Current State of Comparative Bad Faith

In most every jurisdiction, the basis for a claim of insurer bad faith is the recognition of a duty of good faith and fair dealing inherent in any contract of insurance. See, e.g., Boston Old Colony v. Gutierrez, 386 So. 2d 783 (Fla. 1980). The focus in such cases is usually the question of whether or not the insurer has violated that duty. Inevitably, the question arises as to whether or not the actions of the insured can be considered bad faith and, if so, whether such actions can be raised as an affirmative defense to a claim of insurer bad faith. 

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March 19, 2003 Publication"Advice of Counsel" – Defense or Defeat

The involvement of legal counsel to provide advice concerning the settlement of property and liability claims has become increasingly commonplace. This is primarily due to the general proliferation of litigation and specifically "bad-faith" claims. As the involvement of legal counsel becomes more prevalent, so does the "defense" of "advice of counsel." This commentary will address this so-called "defense" in the context of "bad-faith" cases.

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February 19, 2003 PublicationInstitutional Bad Faith: Individual Or Class Action Litigation (All For One? - Or - One For All?)

In 1844, Alexandre Dumas, one of the most famous French writers of the nineteenth century, shared his vision of comradery and unified ambition. In his classic, The Three Musketeers, set under the seventeenth century rule of Louis XIII, a small association of elite combatants swore their allegiance to a common purpose . . . and to each other: All for one, and one for all! Is this sense of nobility and uniformity present in the battle cry of plaintiff lawyers brandishing their swords in modern day litigation against the insurance industry?

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January 22, 2003 PublicationAnger And Punishment

Horace once wrote: “Anger is a brief madness.” Such human condition apparently has not changed in over 2000 years.

USA Today's January 9, 2003 editorial page began with the topic sentence: “Horror stories abound about huge damage awards turning courts into lotteries, transforming plaintiffs and their lawyers into instant winners.” In addressing a recent Ohio Supreme Court decision, the editorial stated

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December 18, 2002 PublicationCan It Be 'Bad Faith' For An Insurer To File A Declaratory Action?

In recent months, insurance company clients of the author have faced allegations that the filing of a declaratory action, by an insurer, to determine or cut off coverage, is bad faith. This is a somewhat novel and, as it turns out, disfavored cause of action. To begin with, a “declaratory judgment action is the preferred manner of deciding a dispute between an insured and insurer over the construction and effect of the terms of the insurance contract.”

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October 23, 2002 PublicationTime Bombs

Insurers find nothing more frustrating than paying for unearned indemnification dollars. In a first-party context this may result from unreported values causing a deflated premium. In other words, the insurer's actual exposures require more premium than charged -- usually over many policy years. In a third-party context this unearned protection is the result of an excess judgment that the liability carrier is required to pay. In most jurisdictions this is the consequence of the liability insurer's failure to settle within policy limits when it had the opportunity to do so. 

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September 18, 2002 PublicationSpoliation As Bad Faith

What happens when an insurer's employee, insured, adjuster or attorney alters or destroys critical evidence? Can spoliation of evidence also constitute bad faith? Although there is no published decision directly on point, it appears that some courts may be willing to extend an insurer's exposure to include extra-contractual damages for such conduct

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April 17, 2002 PublicationSeventh Circuit Court Of Appeals Finds "Independent" Insurance Broker To Be Intermediary Of Insured, Barring Coverage And Bad Faith Claims

The Seventh Circuit recently addressed the question of whether an independent insurance broker, who provided clients to the insured, was their intermediary, thus barring coverage and bad faith claims. (First Insurance Funding Corporation v. Federal Insurance Company, No. 01-2855 (7th Cir. March 28, 2002)).

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November 21, 2001 PublicationRecognizing Subtle Exposures To Avoid Bad Faith Claims

“The insurer does not . . . insure the entire range of an insured's wellbeing outside the scope of and unrelated to the insurance policy, with respect to paying third party claims. It is an insurer, not a guardian angel.”

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October 17, 2001 PublicationJustices: Please Take This Case!

Two recent state court decisions jeopardize the right of insurers to consult legal counsel when considering whether to pay or deny the claim of a policyholder. The Arizona and Ohio state supreme courts have issued opinions eroding, even abrogating, the attorney client and work product privileges. In one of these decisions, Boone v. Vanliner, 744 N.E.2d 154 (Ohio 2001), the insurer has petitioned the United States Supreme Court to issue the writ of certiorari, hear the case and reverse the Ohio Supreme Court. The undersigned urges the United States Supreme Court to take the Vanliner case for the reasons stated below.

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September 19, 2001 PublicationAdditional Insured Coverage And Bad Faith

Coverage determinations regarding the nature of policy duties that liability insurers owe to additional insureds may create bad faith exposure for the unwary insurer. Bad faith liability frequently arises when an insurer fails to recognize the scope of defense and indemnification obligations it owes to an additional insured. Issues also arise when additional insureds compete with named insureds for limited policy proceeds which cannot adequately protect the interests of both. This article highlights the source of the dilemma – the scope of the coverage afforded to an additional insured – and provides illustrations of bad faith exposure in the wake of claims asserted against additional insureds.

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April 18, 2001 PublicationResolution of the Underlying Claim as a Prerequisite to Bad Faith

In every jurisdiction that has considered the issue, a claim for bad faith does not accrue until there has been a final determination of the underlying claim for insurance benefits or third party damages. Taylor v. State Farm Mutual Automobile Ins. Co., 913 P.2d 1092 (Ariz. 1996); Blanchard v. State Farm Mutual Automobile Ins. Co., 575 So. 2d 1289 (Fla. 1991). Thus, before a plaintiff can sue an insurance company for bad faith, he must first finally resolve the claim which he contends the insurance company failed to settle in good faith. What constitutes a resolution of that claim varies with the type of claim asserted and the jurisdiction in which it is brought, but it can generally be broken down into three categories: excess judgment, settlement of the underlying claim, and judgment below policy limits.

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March 21, 2001 PublicationDiminished Value In Auto Damage Claims

We have seen, in recent years, a spate of actions for bad faith, and class actions, on the issue of so-called diminished value. These suits claim payment by the insurance company of the actual cash value of a property loss - or the cost to repair a loss - does not make the insured whole. This is because of some intangible quality in the property that cannot be restored by repair. Before the loss it was pristine or original. Afterward it is corrupted or compromised. It is worth less in the market.

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February 21, 2001 PublicationPossible Bad Faith In The Allocation Of Coverage For Third Party Continuous Loss Claims

An insured causes damage or injury that results in a third party claim for continuous loss spanning three years. The third party makes a claim under the policy in effect at the time of the loss. The policy covers the same three years as the loss and provides $300,000.00 for each year. In other words, the policy provides a total of $900,000.00 aggregate coverage over three years. We will assume the claim is settled for $300,000.00.

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October 24, 2000 PublicationRaising the Coverage Defense in the Bad Faith Case

In representing insurers in bad faith litigation, from time to time one will find a coverage issue that was not raised in the underlying litigation. The question to be addressed in this article is whether the coverage issue may be raised for the first time as a defense to the bad faith litigation.

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August 22, 2000 PublicationIs It Bad Faith to Settle Covered Claims Only?

It is beyond dispute that the duty to defend, under liability insurance, is contractual, and is broader than the duty to indemnify. National Grange Mut. Ins. Co. v. Continental Cas. Ins. Co., 650 F. Supp. 1404 (S.D.N.Y. 1986). Even if some allegations of the complaint clearly are outside the scope of coverage, the insurance company is obligated to defend the entire suit. Id. See also, Aerojet-General Corp. v. Transport Indemnity Co., 948 P.2d 909 (Cal. 1997).

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July 25, 2000 PublicationLevel The Playing Field: Abate Or Stay The Bad Faith Action Pending Resolution Of The Underlying Liability Or Coverage Case

Before resolution of a first-party action for coverage or a third-party action to establish an insured's liability, a plaintiff will often initiate an action for bad faith. By doing so, the plaintiff attempts to gain an unfair advantage in discovery and at trial. This article outlines some of the reasons why the bad faith action should be abated in its entirety or, at the very least, stayed pending resolution of the underlying claim.

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June 20, 2000 PublicationThe Public Adjuster's Perspective

Mr. Lesser is a prominent public adjuster. His business office is located in Miami Beach, Florida. The views and opinions stated by Mr. Lesser in this interview are his own. Neither Mr. Craig, nor Butler , necessarily approve or agree with any of them.

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May 19, 2000 PublicationContractors' Bonds: Who Can Sue The Surety For Bad Faith?

A contractor's performance and payment bond creates rights and obligations among three parties ­ the principal, the obligee and the surety. The principal may be the general contractor or a subcontractor. The obligee (under a performance bond) usually is the owner of the project or (under a payment bond) the subcontractors, materialmen and equipment suppliers. The surety most often is an insurance company or financial institution engaged, among other things, in the business of issuing performance and payment bonds.

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April 18, 2000 PublicationThree Reasons Why Loss Reserves Ought Not Be Admissible In A Bad Faith Case

In the trial of a bad faith case, plaintiff often tries to put into evidence the reserves the insurance company set for the claim. This article contends that evidence ought not be admissible. It will outline three reasons why not.

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March 01, 2000 PublicationIssue Revisited: Who Can Sue The Surety For Bad Faith Under A Construction Bond?

In this journal, in May 2000, the author discussed the then recent decision in Ginn Construction Co. v. Reliance Insurance Co., 51 F. Supp. 2d 1347 (S.D. Fla. 1999). He argued that, contrary to a suggestion in Ginn, an obligee under a general contractor's performance bond ought not be allowed to sue the surety for bad faith. This article will look at some decisions handed down since. The trend is toward no bad faith liability by a surety to either an obligee or a principal under a surety bond.

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February 15, 2000 PublicationPerfunctory Defense

per-func-to-ry   per-fúngk'te­re   adj.   Done or acting routinely andwith little interest or care. The American Heritage Dictionary, NewSecond College Edition (1983).

The Scenario

Consider a common scenario. An insurance company issues a liability policy. The policyholder does something, or fails to do something, as a result of which a partyis injured. The injured party becomes the plaintiff, and the policyholder the defendant,in a tort action. The insurance company reviews the tort action and sees right awaythat probably it is not covered. It retains a defense attorney to handle the tort action butsends a reservation of rights letter to the policyholder and files a separate declaratoryaction to determine coverage. So far so good. See, e.g., Insurance Co. of the West v.Haralambos Beverage Co., 195 Cal. App. 3d 1308, 1319 (1987).

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December 21, 1999 PublicationMalicious Defense

This is one of a series of articles under the by line "Butler on Bad Faith" originally published in Mealey's Litigation Report: Insurance Bad Faith, Vol. 13, #16, p. 25 (December 21, 1999). © Copyright Butler 1999.

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November 16, 1999 PublicationWhy A First Party Insurer Is Not A Fiduciary

Courts, commentators, lawyers and others have applied the word "fiduciary" to insurance companies and insurance claims in a loose manner. The result has been bad law and confusion over if and when an insurer is a fiduciary. This article will argue that an insurer does not, and ought not, owe a fiduciary duty to an insured who has presented a first party claim.

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October 19, 1999 PublicationThe Duty of Good Faith: Continuing Into Litigation

First-party bad faith cases are typically based on conduct or events (e.g., settlement offers, investigations and evaluations) occurring during the time period after a claim is made but before any litigation is commenced. Once a breach of contract or declaratory action is filed, it is generally understood that the insured and insurer stand in an adversarial relationship which presumably entitles each party to zealously pursue its litigation tactics and strategy. Thus, courts generally will not permit an insurer's litigation conduct to be admitted as evidence of bad faith. Over the years, however, a significant number of courts have held an insurer owes a continuing duty of good faith to an insured throughout the litigation process and, therefore, an insurer's post-filing conduct may be admitted as evidence of bad faith. This article is a brief review of some of the leading cases addressing the continuing duty of good faith and its ramifications affecting insurance companies and defense counsel.

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September 21, 1999 PublicationGood Faith Settlement of Claims in Excess of Policy Limits Against Multiple Insureds

Introduction

Insurers and insureds alike may find themselves in the dark when claims against multiple insureds exceed policy limits. Only a few jurisdictions explicitly have addressed how policy proceeds should be allocated in this situation. The jurisdictions that have addressed the issue have split into two general camps. Some hold that carriers must allocate proceeds proportionately among all insureds. Other jurisdictions hold that a carrier need only act in "good faith" and may settle on behalf of fewer than all insureds. The manner of proportional allocation and the characteristics of a "good faith" settlement under such circumstances are not well described in the case law.

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August 17, 1999 PublicationMultiple Claims Exceeding the Policy Limits

When courts and state legislatures expand the duties owed by liability insurers to insureds there is a commensurate expansion of the grounds for extracontractual claims. One area of expansion has been in cases involving multiple third-party claimants - with liability clear and damages exceeding the policy limits. These cases make difficult issues for claims professionals.

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July 20, 1999 PublicationAdvice of Counsel: Insurance Companies' First and Last Line of Defense / Mealey's Litigation Reports: Bad Faith

The dynamic nature of bad faith law throughout the country practically mandates that insurers have ongoing legal advice to protect the interests of the company, the shareholders and all insureds. Such advice can prevent unwitting misconduct by the insurer. The "advice of counsel defense" in the context of insurance bad faith litigation issimply an insurer asserting, as proof that it did not act in bad faith, that it reasonably relied on the advice given by its legal advisors.

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July 01, 1999 PublicationStandard of Care in First Party Bad Faith Actions: Is "Fairly Debatable" Fair?

Since the early 1970s, when first-party bad faith actions came into being, a considerable body of law has developed on the standard of care for insurers to avoid liability. In creating and defining such standards, courts have struggled to balance the interests of insureds and insurers. This article is a general review of those decisions and standards.

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March 16, 1999 PublicationStatute of Limitations in a Bad Faith Action: Which One Applies and When Does It Accrue?

Determining which statute of limitations governs a cause of action against an insurer for bad faith is complicated. It depends on whether the action is a first or third party action. It depends also on whether the controlling jurisdiction deems the action to be one sounding in tort or contract.

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January 19, 1999 PublicationDuty of Insurers to Advise Insureds of Policy Benefits

This article considers whether an insurer has a duty to advise an insured of policy benefits not claimed. Some courts require insurers to protect an insured's interests affirmatively by informing the insured of available benefits. Other courts have refused to impose this duty upon insurers. Recent cases suggest a trend toward imposing this duty.

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December 15, 1998 PublicationFederal Preemption of Extracontractual Claims Under Flood Insurance Policies

During the past year, numerous areas in the United States have experienced severe and, at times, unprecedented flooding. Whether the flooding occurred as a result of the active Atlantic hurricane season or the effect of "El Nino" on national weather patterns, the result for insurers is the same: an increase in the number of claims under flood insurance policies. With this comes a corresponding increase in the likelihood of extracontractual or bad faith claims.

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December 14, 1998 PublicationSupplement to Federal Preemption of Extracontractual Claims Under Flood Insurance Policies

This is a supplement to the December 1998 article published in Mealey's Litigation Reports: Bad Faith on "Federal Preemption of Extracontractual Claims Under Flood Insurance Policies" following the U.S. Third Circuit Court of Appeals reversal of its decision on rehearing in Van Holt v. Liberty Mutual Fire Insurance Co. This supplement was originally published in Mealey's Litigation Report: Bad Faith, Vol. 12, #18, p. 27 (Jan. 19, 1999). Copyright Butler 1999.

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November 17, 1998 PublicationThe Expanding Scope of Discovery in Bad Faith Cases

Bad faith litigation is complex and the stakes are high. In such cases, the discovery process has become critical as litigants struggle for advantage. The litigation often raises issues outside the facts of the particular case or claim. The conduct of the insurance company as a whole sometimes is placed on trial.

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October 20, 1998 PublicationDoes a Liability Insurer Have a Duty to Initiate Settlement Negotiations?

Liability insurance policies typically provide the insurer with complete control over the defense and settlement of third-party claims against the insured. This control imposes upon the insurer a duty to exercise good faith in settling claims. When the claimant makes a reasonably prudent offer to settle within the policy limits, courts generally agree the good-faith duty owed an insurer will require the insurer to settle the case. 

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August 18, 1998 PublicationChoice of Law in Bad Faith Cases

The substantive law of bad faith is not uniform from state to state. Some states treat bad faith as a breach of contract; some as a tort. In some states, punitive damages are available. In others, they are not. Some allow claims for emotional distress, while others reject them.

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July 21, 1998 PublicationRecovery of Damages for Emotional Distress in Tort, Contract and Statutory Bad Faith Actions

Emotional distress damages may be the most significant aspect of any bad faith action in jurisdictions that allow them. This article outlines the several theories that justify the recovery of such damages. It discusses also the impact of a recent Florida Supreme Court decision which authorized recovery for emotional distress under that state's bad faith statute.

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