- Bad Faith is Bad Enough for Insurers, But Let's Add Punitive Damages
- October 31, 2012 | Author: Collin J. Hite
- Law Firm: Hirschler Fleischer A Professional Corporation - Richmond Office
Policyholders rely heavily on bad faith claims in coverage litigation to not only get the insurer's attention, but press for favorable settlements due to the risk of high jury awards if the bad faith claim gets that far in litigation. A recent firm insurance alert highlighted the pleading requirements for such claims and discussed using a formula of: who, what, where, when and how. (available at www.hf-law.com)
In a recent case out of the United States District Court of Idaho, a policyholder was allowed to amend its bad faith lawsuit to also assert a punitive damages claim against the insurer. Empire Lumber Co. v. Indiana Lumbermans Mut. Ins. Co., 2012 WL 4470876 (D.Idaho September 27, 2012). The coverage dispute involves a first-party fire loss. Empire Lumber's sawmill burned to the ground on November 4, 2008. The policyholder filed a claim with Indiana Lumbermans, and the problems apparently began.
Empire filed an insurance coverage action over a dispute with the insurer as to the value of the loss. Not much of a surprise when the insured and insurer do not agree. But during the course of litigation Empire Lumber learned a whole lot about how its claim was being adjusted.
Lindsay Cunningham, hired by the insurer, recommended within a month of the loss that the value was over $9 million and payment be made;
The insurer's adjuster noted that value on April 1, 2009, and had authorization to pay the insured $7.5 million the same day;
On April 9, 2009, the adjuster indicated to the reinsurer that $7.7 million had been paid to the insured on a retention of $6 million; and
Indiana Lumbermans used the reinsurance money for its own operating expenses.
The value of the adjustment, when it could be paid, and what was available from reinsurers all came out in discovery. The problem with all of this is that Indiana Lumbermans had actually only paid its insured $200,000 when it sought payment from the reinsurers. While subsequent payments were made the dye was cast as to bad faith, and now resulting in a claim for punitive damages. The insured moved to amend its complaint to add the extra-contractual damages claim.
The insurer argued against the amendment by asserting that it had paid the claim in full. The court disagreed. Magistrate Judge Ronald Bush noted in his well-reasoned opinion that the insurer's action in adjusting the claim, "can reasonably be argued to represent an extreme deviation from reasonable standards of conduct, performed willfully and deliberately" so as to support adding the punitive damages claim. The standard for punitive damages in Idaho is a defendant (a) acting in a manner that was an extreme deviation from reasonable standards of conduct, and (b) acting with a state of mind exhibiting malice, oppression, fraud, gross negligence, wantonness, etc." By using the reinsurance funds for itself instead of passing them on to the insured, the court reasoned that a jury could conclude Indiana Lumbermans was acting to protect itself at the expense of the insured. The act of handling the claim was separate from the dispute over the value of the loss.
This case continues to highlight the need for articulate pleading in insurance coverage cases. Circling back to our recent article on bad faith and pleading standards, Empire Lumber's motion to amend clearly met the standard of asserting who, what, where, when and how Indiana Lumbermans acted in bad faith towards its policyholder. Complaints must allege sufficient details to support a level of proof for bad faith and punitive damages. While "who, what, where, when and how" may not be the standard of pleading in bad faith across the country, it does provide an excellent list of factual information needed to support such claims. It is not uncommon to see pleadings simply list the sections "unfair claim settlement practices" statutes. That will likely not cut it when faced with a motion to dismiss.
No doubt bad faith gets an insurer's attention. However, if an insured can go further and specifically seek punitive damages they can get in the driver's seat of the coverage litigation.