This is one of a series of articles originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 22, #24, page 39 (April 23, 2009). © 2009
[Editor’s Note: Christopher M. Ramey is an associate with the law firm of Butler Weihmuller Katz Craig LLP. His practice centers around the litigation of first-party property coverage and bad faith issues. This commentary, other than the quoted material, is the author’s opinion; not his firm’s, and not Mealey’s Publications’. Copyright © 2009 by the author. Responses are welcome.]
Arbitrary, adj. Determined by impulse rather than reason; heavy-handed.1
Capricious, adj. Impulsive and unpredictable; determined by chance, impulse, or whim.2
Louisiana Code dictates that an insurer is liable for statutory penalties for failing to pay a claim within thirty days if that failure was arbitrary and capricious. In particular, Louisiana exposes insurers to a bad faith penalty of 50% the total amount of the property claim when the insurer (1) receives a satisfactory proof of loss,3 (2) fails to pay the claim within thirty days, and (3) acts in an arbitrary or capricious nature by not paying the claim.4
In addition to penalizing the whimsical, impulsive, or unpredictable actions by an insurer, Louisiana law authorizes the use of the penalty when the insurer acts in a “vexatious” manner.5
Vexatious, adj. Lacking a sufficient ground and serving only to annoy or harass when viewed objectively.6
According to the Louisiana Supreme Court, when the insurer is “vexatious,” its actions are “unjustified, without reasonable or probable cause or excuse” and the insurer’s “willful refusal of a claim is not based on a good-faith defense.”7
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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. The lakehouse encompassed approximately 6,000 square feet. This large space was enough to house three kitchens, nine bedrooms, and seven and a half bathrooms. The house also included a large boathouse and pier. Water surrounded the lakehouse on three sides.
Hurricane Katrina struck and destroyed the lakehouse on August 29, 2005. Grilletta and Lauman promptly notified the insurer of the damage and submitted a claim. A look at the insurance policy revealed that most damage was covered, including damage caused by wind. However, the policy excluded “water damage,” defined as damage caused by “flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind.” As summarized by the Court, “if wind destroyed the house, then [the] insurance policy cover[ed] the damage; if water destroyed the house, then [the insurer was] not liable based on the water damage exclusion.”10
The insurer hired an independent adjuster to handle the claim. The adjuster met with the insureds at the property on September 27, 2005. After this initial meeting, the adjuster requested additional information from the insureds that was provided on October 28, 2005. On November 13, 2005, the adjuster submitted a report stating his belief that “[t]he damage appears to be wind related” and ultimately concluded that wind, not water or flood, caused the loss. The adjuster recommended a payment to the insureds for the building policy limit, $400,000, and a substantial payment for lost contents around $140,000.
The insurer did nothing relating to the claim until January 26, 2006 when it hired an engineering firm to analyze the damage to determine causation. The period of inactivity, between its adjuster’s submitted report and the hiring of its engineer, totaled 74 days. The engineering firm retained a meteorologist who opined that the property was hit by winds between 95 and 100 miles an hour with maximum gusts around 116 miles per hour. According to the meteorologist, the high winds may have damaged the roof, doors, and windows. However, the storm surge, estimated around 15 to 16 feet with waves superimposed on top, destroyed the lakehouse. The engineering firm submitted its report with these findings on April 18, 2006.
The insurer then instructed its independent adjuster to readjust the claim based upon the engineering firm’s findings. As wind could have damaged the roof prior to the destruction of the lakehouse by the flood waters, the insurer would pay its insureds for the damage to the roof, siding, interior drywall ceilings and walls, insulation, flooring, cabinets, and contents. This payment occurred on June 5, 2006, when the insurer submitted $311,055.38 to its insureds, $191,674.58 for the house and $119,380.80 for contents.
Grilletta and Lauman filed suit on August 15, 2006, alleging that only wind destroyed the property, that the insurer improperly applied the “water damage” exclusion, and that its handling of the claim was “arbitrary and capricious,” triggering Louisiana’s statutory bad faith penalty.11 At trial, the insureds presented the testimony of engineer Leonard Quick. Quick proffered that high wind forces, most likely from a tornado, struck and destroyed the lakehouse before the maximum storm surge occurred. Quick also found that winds of 125—155 miles per hour struck the property, and, if the tornado did not occur, that these winds destroyed the lakehouse. Quick reached his analysis and conclusions by examining the forensic evidence at the property fourteen months after the hurricane. Quick did not use meteorological data.
The insurer provided the testimony of its two experts at trial. First, a meteorologist testified that he examined the National Weather Service’s Doppler radar and that there was no indication of a tornado during the storm. The meteorologist also testified that according to data from the National Climatic Data Center, the property sustained maximum winds of around 100 miles per hour, with gusts at 129 miles per hour. Such winds, referenced as Category 2 winds on the Saffir-Simpson scale, were not sufficient to destruct the lakehouse. Instead, the storm surge and accompanying waves were responsible as the height of the storm surge, estimated at 15.3 feet, rested against the lowest portions of the lakehouse while waves repeatedly struck the house. The insurer’s engineer then described how this activity led to the lifting of the lakehouse off the foundation, destroying the property. The engineer added that the storm surge destroyed a similar property named “Old Glory” close to the lakehouse.
Weighing this testimony, the underlying court, the U.S. District Court for Eastern Louisiana, found that the insurer did not meet its burden to apply the “water damage” exclusion. Specifically, the trial court ruled that “[a]t best, it is ambiguous as to what caused the destruction of the property,” and awarded the insureds the $400,000 policy limit for property damage.12 Not stopping there, the trial court, despite its finding that the origin of the damage could be ambiguous, also found the insurer liable for bad faith damages. The court held that the insurer had a satisfactory proof of loss when its independent adjuster released his report, which stated that wind caused the damage, on November 12, 2005. After receiving the proof of loss, the insurer did not pay the claim within 30 days as required by the statute. The Fifth Circuit further summarized the lower court’s bad faith finding:
. . .the district court ruled that [the insurer] arbitrarily sat on the claim for over two months before deciding to hire Halliwell Engineering and that [the insurer] had no good-faith basis for delaying payment of the claim. Accordingly, the court awarded penalties on the amount that [the insurer] ultimately tendered on June 5, 2006.13
On appeal, the Fifth Circuit first addressed the insurer’s application of the “water damage” exclusion. To begin, the Court held that it was bound by another recent Louisiana case, Veade v. La. Citizens Prop. Corp.14 In Veade, the facts proved quite similar. Hurricane Katrina destroyed a house near the Grilletta-Lauman lakehouse. At trial, the plaintiff offered the same engineer, Mr. Quick, as in Grilletta. Not surprisingly, Quick opined that high winds or a tornado destroyed the property. The insurance company presented its own experts who found that water caused the damage. The trial court determined the insurer did not meet its burden in applying the “water damage” exclusion and that Quick was “‘an experienced forensic engineer who had conducted many Katrina related claim inspections.”’15 According to the Veade Court, the trial court did not commit “manifest error” in its decision, highlighting the existence of “two opposing theories” as to how the damage occurred.16
After noting that Louisiana law only allowed the Court to review the trial court’s findings of fact17 for “clear error,” the Fifth Circuit called the underlying trial “a battle of the experts.”18 The Court mentioned the insurer’s position that their experts’ meteorological evidence completely discounts Quick’s position that either tornado or winds of 125—155 miles per hour destroyed the house. However, the Court did not agree with the insurer’s assessment.19 Instead, the Court found no clear error by the trial court, summarizing as follows:
Although [the insurer] presented a persuasive argument that the meteorological data suggests that water was the proximate cause of the damage, the district court did not view that evidence as conclusive. Indeed, the main basis of this lawsuit is that it is unclear whether wind or water destroyed the house, and several experts offered differing views. Given that the trial consisted of a battle of qualified experts who all presented plausible theories, the district court was free to choose among these reasonable explanations in rendering its decision. Accordingly, by definition, the district court’s resolution of this issue cannot be clearly erroneous, and we affirm the district court’s ruling.20
Notwithstanding the above, however, the Fifth Circuit then approved the trial court’s application of Louisiana’s “bad faith” penalties. In doing so, the Court apparently did not consider whether the insurer actually received a satisfactory proof of loss when its independent adjuster submitted his report on November 13, 2005. It is not immediately clear whether the insurer objected to this finding. Regardless, the Fifth Circuit held that the trial court did not clearly err in finding the insurer’s failure to pay the claim was “arbitrary and capricious” under the following factual scenario:
By allowing the two and a half month period between receipt of the independent adjuster’s report and when the insurer requested the engineering report, the insurer, at least according to the Fifth Circuit, acted in an arbitrary and capricious manner toward its insured. With this finding, the Fifth Circuit disregarded the insurer’s explanation of the delay. The Court, in a footnote, held:
[The insurer’s] argument that the delay was simply due to the large number of cases it had stemming from Hurricane Katrina is unavailing, as this does not explain why Smith sought an engineering analysis instead of consulting [the independent adjuster’s] report. It also does not explain why Lexington chose not to pay some amount to cover the damage from wind. This delay was the catalyst for the district court’s decision to award statutory penalties, because [the insurer] did nothing with the claim even though the adjuster stated that wind destroyed the entire house.22
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The Fifth Circuit’s application of Louisiana “bad-faith” law presents several problems. The first issue is the federal court’s interpretation of when the insurer received a satisfactory proof of loss. The Fifth Circuit, like the trial court, found that the insurer had sufficient information to act on the claim after its independent adjuster submitted his report. Once the adjuster opined that wind, a covered loss, caused the damage, the 30 day statutory clock began to tick. The insurer, according to this federal court at least, had to pay the claim within 30 days or face scrutiny whether its actions were “arbitrary and capricious” under Louisiana Code.
Is this correct? Should [the insurer] have immediately paid its insureds after receiving this report? What about pursuing an expert opinion? Geographically, water from Lake Pontchartrain surrounded the lakehouse on three sides. As the Fifth Circuit well knows, Hurricane Katrina flooded nearly 80 percent of the New Orleans area.23 Since water levels rose somewhere between ten to fifteen feet at this particular location, not counting the waves created by 100 mile per hour winds, is it not unreasonable for the carrier to believe water played a role in the destruction of the lakehouse? Or is the opinion of the adjuster, who is not an engineer, enough to give the insurer “sufficient information” to pay the claim?
What if [the insurer] procured the engineer’s services within one week of obtaining the adjuster’s report? What about two or three weeks? Would the Fifth Circuit have held that the proof of loss date was whenever it received the engineer’s findings? Probably so. The real issue here is the insurer’s delay. The federal court felt the delay was unacceptable, even in the face of the carrier’s overloaded claims department and the physical conditions of New Orleans at that time. However, to apply the “bad-faith” penalty under Louisiana law, the insurer must, at some point, be deemed to have sufficient information to act on the claim. The court, having large amounts of discretion as both the finder of fact and law in this case, found this point to be the report’s date. The statutory penalties followed. This amount of discretion a Louisiana court has in this regard should not be lost on anyone.
Noting the above, Grilletta creates Louisiana federal court precedence that an insurer receives satisfactory proof of loss if the carrier receives a report from an adjuster – not an engineer, but an adjuster – indicating coverage. Does this mean that the insurer, upon receiving a report from an adjuster suggesting a covered loss, must hire experts, have the experts render their opinion, and pay the loss all within 30 days or the carrier subjects itself to argument that their actions were arbitrary or capricious? It certainly could. Quite simply, this arbitrary opinion could limit the insurer’s ability to consult experts if the insurer’s adjuster believes coverage exists.
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Arbitrary and capricious. Vexatious. These are strong words. By defining an insurer’s bad faith behavior with these words, Louisiana requires more than just “bad,” “poor,” or “wrong” behavior. By the Louisiana Supreme Court’s own definition, if a carrier is “vexatious,” the carrier lacks an excuse for its actions. The carrier cannot justify itself. By being “vexatious,” the carrier’s actions only serve to annoy or harass when viewed objectively. Did the insurer’s actions live up to this description in Grilletta?
The Fifth Circuit found no clear error that the insurer was vexatious by not acting on the adjuster’s report for over two months. Somehow, the insurer’s file examiner never saw the report. It offered an explanation – that, in the aftermath of Katrina, its claim offices were overloaded. The insurer made a mistake. But was the mistake vexatious?24 Did the examiner do this to annoy or harass?
Maybe the insurer could have done a better job adjusting this claim. Certainly the primary file examiner’s ignorance of the adjuster report indicates that. However, the insurer immediately requested an engineer’s report upon noticing the two month delay. This report revealed that the lakehouse was damaged by water. The insured received payment of $311,055.38 because the carrier could not rule out that wind damaged portions of the lakehouse before the water destroyed the property. Yet, because the carrier misplaced the report, it handled the claim in a “vexatious” manner. Unfortunately, this result is an arbitrary and capricious application of Louisiana’s statutory bad faith penalties.