No Bad Faith in Uninsured Motorist Claim Where Damages in Dispute

This Tuesday, the 11th Circuit affirmed a summary judgment granted in favor of State Farm, holding that State Farm was not legally obligated to pay the claim since the amount of damages was in dispute.

Alabama law states that there can be no breach of an uninsured motorist contract, and therefore no claim for bad faith, unless and until the insured proves that he is “legally entitled” to recover. In this case, the record established that the other driver was at-fault. However, the analysis did not stop there.

The Court provided that, to establish that a plaintiff is “legally entitled” to recover, both liability and damages must be proved. Here, the record was clear that State Farm disputed the amount of damages claimed by plaintiff. As such, his claims for breach of contract and bad faith were properly dismissed as premature.

The case is Broadway v. State Farm Mut. Ins. Co., 2017 U.S. App. LEXIS 5350 (March 28, 2017).

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11th Circuit To Hear Dispute Over Notice Requirements After Dismissal Without Prejudice

Since 2008, litigation has been ongoing between G.M. Sign, Inc. and Brink’s Manufacturing Co. over allegations that Brink’s violated the Telephone Consumer Protection Act by sending out unsolicited faxes without any ability by the recipient to opt out of receiving the faxes.  The original 2008 lawsuit was dismissed without prejudice in 2009.

G.M. Sign immediately filed an identical suit in Illinois State Court, which settled for $22.54 million.  As part of the deal, G.M. Sign was assigned Brinks’ insurance rights under its policy with St. Paul Fire & Marine Insurance Co.  However, Brink’s did not tender the defense of the action brought in Illinois State Court and did not otherwise provide notice to St. Paul of the fact that the suit had been re-filed.

In 2014, G.M. Sign went after St. Paul in Georgia federal court.  St. Paul responded that it was not required to cover the claim brought in Georgia because, after the 2009 dismissal without prejudice, it did not receive notice of ongoing or re-filed litigation between the parties.  St. Paul maintained that Brink’s failure to provide notice deprived St. Paul of the ability to consider any settlement demand or otherwise resolve the 2009 action.

G.M. maintains that, since the second suit is identical to the first suit, and since St. Paul knew of the first suit, then notice was adequately provided.

Judge Eleanor Ross, serving the Northern Federal District of Georgia, ruled that a dismissal without prejudice “means the suit is over.”  Therefore, an insured must provide notice of a re-filed claim or other litigation, no matter how similar to the first lawsuit it may be.  Because no such notice was provided in this case, Judge Ross relieved St. Paul from having to provide coverage.

The case has made its way to the 11th Circuit Court of Appeals: G.M. Sign, Inc. v. St. Paul Fire & Marine Ins. Co., 1:14-cv-02977.

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In Georgia, Coverage for Lead Paint Exposure Excluded as Pollutant Under CGL Policy

This month, the Georgia Supreme Court held that a CGL policy did not provide coverage for brain damage to a child as a result of exposure to lead paint in a rental home.

The suit arose out of a toddler suffering brain damage due to exposure to lead paint in a rental home. The home was insured by a CGL policy issued to the landlord, and the insurer filed a declaratory judgment action arguing that there was no coverage for the claim because bodily injuries due to exposure to pollutants were excluded. Summary judgment was granted to the insurer in the trial court, but the Court of Appeals reversed, holding that the policy did not specifically exclude lead paint as a pollutant. On certiorari, the Georgia Supreme Court reversed the Court of Appeals, agreeing with the trial court that the pollution exclusion barred coverage for the claim.

Specifically, the policy excluded coverage for “(1) ’bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ (a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.” “Pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

Ruling for the insurer, the Supreme Court acknowledged that the question of whether lead paint was a pollutant was one of first impression in the State, but it held that prior cases excluding coverage for different pollutants (such as carbon monoxide) under policies with similarly broad language were controlling. In keeping with those cases, the Court held that “lead present in paint unambiguously qualifies as a pollutant” and “the plain language of the policy’s pollution exclusion thus excludes [the claim] from coverage.” Key in this ruling was the Court’s lengthy discussion of the history and purpose of pollution exclusions in CGL policies.

The case discussed herein is Georgia Farm Bureau Mut. Ins. Co. v. Smith, No. S15G1177 (Ga. March 21, 2016). Please contact us if you would like a copy of the case or have any questions.

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Christmas Comes Early to Crum & Forster in East Bridge Lofts Action – $2 Million Coverage Ruling Reversed

After ruling against Crum & Forster in November 2015 and ordering the insurer to pay $2 million of a $55 million judgment to its insured, South Carolina District Court Judge Richard Gergel reversed his ruling, in an order on the insurer’s motion to reconsider.

In November, Judge Gergel considered competing summary judgment arguments relating to the insurer’s denial of coverage to its insured, Creekstone Builders, Inc., in an underlying construction defect action, which resulted in a $55 million verdict against Creekstone. Crum & Forster denied coverage based on an exclusion in Creekstone’s CGL policies for work performed in South Carolina – an exclusion about which Crum & Forster insisted Creekstone was repeatedly warned before entering the contracts.
While the Judge refused to grant summary judgment on whether Crum & Forster acted in bad faith in denying coverage based on the exclusion, the Judge did rule that Crum & Forster could not enforce the exclusion for Creekstone’s South Carolina operations. Judge Gergel reasoned that enforcing the exclusion for South Carolina operations against a company that was licensed only to do business in South Carolina, created illusory coverage and an ambiguity in the policies, which must be resolved in favor of the insured. Ultimately the Judge concluded that a jury must decide who should pay the $55 million judgment; however, Crum & Forster must pay the $2 million in coverage limits under the policies issued to Creekstone.

But last week, the Judge reconsidered his November ruling, and reversed his earlier decision on whether Crum & Forster can be held legally responsible for the $55 million state court verdict in part or in whole.

In reversing his decision and finding that the SOE in the policies at issue preclude coverage for Creekstone’s South Carolina operations, the Judge considered extrinsic evidence regarding the parties’ intention to exclude South Carolina operations from coverage, which was not considered prior to the November ruling against Crum & Forster. Based on his extensive review of the extrinsic evidence presented that Creekstone had knowledge of the SOE in the policies, the Judge held that “no reasonable jury could find that the parties intended the policies at issue to cover Creekstone SC’s South Carolina operations.”

Concluding that, as a matter of law, the coverage provided under the policies was not illusory and that the SOE in the policies at issue precluded coverage for Creekstone’s South Carolina operations, Judge Gergel granted summary judgment in favor of Crum & Forster as to Plaintiffs’ declaratory judgment claim, Plaintiffs’ breach of contract claims, Plaintiffs’ reformation claim, Plaintiffs’ bad faith denial of coverage claim, and Plaintiffs’ bad faith failure to settle claim.

This ruling comes as good news for those who seek to rely on extrinsic evidence to resolve a coverage dispute. While South Carolina, historically speaking, has been a state slow to embrace the “reasonable expectations” doctrine of interpreting insurance policies, rulings such as this one and similar state court decisions suggest that our Courts may be moving in that direction, at least when the policy at issue contains ambiguities that cannot be resolved by looking at the policy alone. See Bell v Progressive Direct Ins. Co., 407 S.C. 565, 757 S.E.2d 399 (2014), reh’g denied (May 7, 2014) (applying a modified version of the reasonable expectation doctrine in interpreting insurance contracts and explaining the Court “will look to the reasonable expectations of the insured at the time when he entered into the contract if the terms thereof are ambiguous or conflicting, or if the policy contains a hidden trap or pitfall, or if the fine print takes away that which has been given by the large print.”).

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Insurer Owes Builder Partial Coverage for $55 Million Judgment.

An insurer who denied coverage in a case which resulted in a $55 million judgment found itself on the losing end of an order in the coverage action related to that judgment. Last week South Carolina District Court Judge Richard Gergel found against Crum & Forster, ordering it to pay $2 million of a $55 million judgment to its insured, Creekstone Builders, Inc., a Texas entity. Judge Gergel also ruled that a jury will be allowed to decide whether Creekstone’s insurer is liable for bad faith. Creekstone SC I, LLC a South Carolina company, performed a renovation to the East Bridge Lofts between 2004 and 2006. Between June 2006 and August 2010 Crum & Forster issued CGL policies to Creekstone Builders and Creekstone SC. However the policies included an exclusion for work in South Carolina.

In the underlying action, East Bridge Lofts POA filed suit against Creekstone SC in Charleston County Circuit Court. When the case went to trial the jury found developers East Bridge Lofts LLC and the Creekstone entities guilty of negligence, breach of warranty, breach of fiduciary duty, unfair trade practices and reckless negligence claims. According to federal filings, Creekstone’s carrier, Crum & Forster, did not participate in the underlying suit other than to attend mediation where it is alleged that they failed to make a meaningful offer. Following the $55 million judgment East Bridge and both Creekstone entities brought an action in federal court for bad faith and breach of contract against Crum & Forster. A subsequent pleading added a claim for reformation of the policies. Monday’s ruling reflects the Court’s answer to cross motions for summary judgment.

In the coverage action Crum & Forster argued that Creekstone was repeatedly warned of the exclusion for work in South Carolina and that Creekstone could have done work in other states which would have been covered under the policy. Further, Crum & Forster argued that Creekstone SC was dormant when the policies were issued. Judge Gergel found that excluding coverage for work in South Carolina while insuring a South Carolina corporation which was licensed only to do business in South Carolina created an ambiguity which must be resolved in favor if the insured, thereby ordering Crum & Forster to pay its $2 million in policy limits. But the case is not over. The Judge also ruled that the outstanding Bad Faith claims are issues of fact for the jury. Thus, whether Crum & Forster will ultimately be held responsible for the entire $55 million remains to be seen.

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Bad Faith Claims: Extra-Contractual Liability in Georgia

FEBRUARY 05, 2015 / LOCATION: ATLANTA, GA

Fred Valz will be co-presenting “Plaintiff and Defense Perspectives”, as part of a number of sessions in The Seminar Group’s  Bad Faith Claims: Extra-contractual Liability in Georgia seminar, to be held in Atlanta on Thursday, February 5th and Friday, February 6th, 2015.

The full two-day seminar is available live and on demand, and offers:

GA CLE: 11.7 Credits, including 1.0 Hour of Ethics and 1.0 Hour Professionalism
GA Insurance: 14.0 Hours
IRMI: 7.0 Hours of CRIS Recertification Credits

Event Details/Registration

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First Lattes, Then Legal Precedent: Waiver Of Attorney-Client Privilege In Bad Faith Cases

What happens in Washington may not stay in Washington.  Earlier this year, the Washington Supreme Court addressed the scope of the attorney-client privilege and work product for an insurer defending against a bad faith claim brought by its insured. See Cedell v. Farmers Ins. Co. of Washington, 176 Wash. 2d 686, 295 P.3d 239 (2013).  In that case, the insured filed suit against his homeowners insurer for bad faith when it refused to pay his fire loss claim for a year after the loss. The insurer retained coverage counsel to assist in its evaluation of the claim. During discovery, the insurer produced a heavily redacted copy of its claim file, including a privilege log that cited the attorney-client privilege and work product as bases for more than 200 redactions and withholdings. The insured filed a motion to compel, claiming that the attorney-client and work product privileges did not apply in bad faith litigation. The insurer moved for a protective order.

The trial court conducted an in cameralock and chainreview of the redacted documents and decided that the attorney-client privilege would never apply because “[i]n the context of a claim arising from a residential fire, the insurer owes the insured a heightened duty—a fiduciary duty, which by its nature is not, and should not be adversarial.” The trial court also found that the insured was entitled to the insurer’s work product and awarded sanctions and attorney’s fees against the insurer.

On appeal, the Washington Supreme Court held that when an insured brings a first-party bad faith claim against its insurer, attorney-client privilege and work product protection are presumptively not relevant to claims adjustment communications.  The court in Cedell outlined a process by which the insurer may overcome this presumption:

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Federal Court Requires Heightened Degree Of Specificity In Denial Letters

Last year, the Georgia courts warned insurers that they would not be permitted to rely on coverage defenses that were not specifically outlined in the reservation of rights letter. Hoover v. Maxum Indemnity Co., 291 Ga. 402 (2012).  The rationale is that an insured should be fairly informed of its rights when the insurer is still in control of the defense of a case.  Georgia courts have not spoken directly to the specificity required in a denial of coverage.  Indeed, such stringent requirements would seem unnecessary; if the insurer is denying coverage outright, rather than reserving its rights, the insured is responsible for his own defense once coverage is denied.

However, a recent opinion issued by the United States District Court for the Northern District of Georgia strongly suggests that the same rules of specificity apply to coverage denials.  Moon v. Cincinnati Ins. Co., 2013 WL 300872 (N.D.Ga. 2013).  In Moon, lessees of a residence brought a bad faith action in state court against the lessor’s liability insurer because the insurer refused to defend the lessees in an underlying tort lawsuit arising out of a child’s drowning in a swimming pool at the residence while the lessee was babysitting. The insurer initially issued a bi-lateral reservation of rights (signed by the lessees) but later denied coverage, stating as the only basis for the denial the fact that the lessees were not insureds under the lessor’s policy.  The bad faith action was removed to federal court.

In considering the parties’ cross-motions for summary judgment, the court looked at the issue of whether the insurer was confined to the coverage defenses specifically outlined in its denial letter or whether it could avail itself of other defenses.  Relying on the Hoover analysis, the court in Moon ruled that the insurer

chose to deny coverage outright as opposed to seeking a declaratory judgment action after filing its reservation of rights. A reservation of rights is only available to an insurer who undertakes a defense while questions remain about the validity of coverage. Thus, the reservation of rights was extinguished when [the insurer] denied coverage because a reservation does not exist so that an insurer who has denied coverage may continue to investigate to come up with additional reasons on which the denial could be based.

Id.  The court then ruled that that the insurer had failed to “properly reserve its rights [to assert additional defenses] when it denied [the insured’s] claims on [specific grounds] and refused to undertake a defense” and was thus constrained to the coverage defenses specifically asserted in the denial letter.

At present, it does not appear that this issue is pending before any state trial or appellate courts – leavingMoon as the only legal authority on point.  While federal trial court opinions are not binding precedent on the state courts of Georgia, they may be considered persuasive authority and insurers, as well as coverage counsel, should keep a weathered eye on the horizon for new developments along this line.

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Important Things to Know About Declaratory Judgment Actions in Georgia

Declaratory judgment actions are important tools for insurers.  A declaratory judgment action allows an insurer to obtain a ruling on whether a loss is covered under its policy without subjecting itself to a bad faith suit for failure to defend or failure to indemnify.  There are several important things to know about declaratory judgment actions in Georgia.     

1.  If a claim has been denied, the insurer cannot file a declaratory judgment action in a Georgia state court.

The Georgia courts have concluded that once an insurer denies coverage for the claim, no “justiciable controversy” exists.  Thus, the courts have held that the Georgia Declaratory Judgment Act bars a declaratory judgment action if the insurer has already denied coverage. See Adams v. Atlanta Cas. Co., 225 Ga.App. 482, 484 S.E.2d 302 (1997)

Georgia’s federal courts, however, have construed the federal Declaratory Judgment Act more broadly, and have generally found that an insurer may bring a federal declaratory judgment action even if it has already denied coverage to the insured. See, Am. Ins. Co. v. Evercare, 699 F.Supp.2d 1355 (N.D. Ga. 2010);Liberty Mut. Ins. Fire Ins. Co. v. Coker, No. 3:11-CV-66, 2011 WL 5553033 (M.D. Ga. Nov. 15, 2011)

2.  The insurer should seek to stay underlying litigation after filing a declaratory judgment action.

In Richmond v. Georgia Farm Bureau Mutual Insurance Co., 140 Ga.App. 215, 231 S.E.2d 245 (1976), the Georgia Court of Appeals outlined the proper course of action for an insurer that institutes a declaratory judgment action.  Under Richmond, the insurer should seek to stay any pending underlying litigation against the insured until the coverage issues have been decided.  The motion to stay the underlying case serves several valuable functions, including preventing counsel hired to defend the insured from continuing to accrue fees and preventing the underlying litigation from going to trial before the declaratory judgment action is ready for disposition.

3.  Discovery disputes are likely to arise.

Discovery disputes often arise in declaratory judgment actions.  These disputes generally occur when an insured seeks production of the insurer’s claims notes made in the course of its investigation of either a first-party or third-party claim.  The insurer may be able to successfully argue that the claims notes are irrelevant where the issue is one of interpretation of the policy language.  The insurer may also be able to successfully argue that the claims notes are protected by the attorney-client or work product privileges.  However, the insurer should be aware that it may have to produce certain portions of its claims notes, and adjusters and other employees who make entries in the claims notes should be cognizant of that fact once a coverage question arises.

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Summary Judgment Denied to Insurer on Bad Faith Claim

In Lloyd’s Syndicate No. 5820 d/b/a Cassidy Davis v. AGCO Corp., the Georgia Court of Appeals affirmed the denial of the insurer’s motion for summary judgment on the issue of bad faith under O.C.G.A. § 33-4-6.

The insured, AGCO Corporation, manufactures and sells agricultural equipment.  With the purchase of a spray applicator known as the RoGator, AGCO offered extended protection plans (“EPP”). Warranty Specialists sold the EPPs to AGCO and administered the claims.  A master liability policy was secured from Cassidy Davis to provide coverage to AGCO for liability incurred under the EPP offered to its customer.

When wheel motors on the RoGators began to malfunction, claims were filed under the EPP and Warranty Specialists initially paid the claims.  But, when the volume of claims continued to rise, Warranty Specialists ceased processing and paying claims.  As a result of Warranty Specialists actions, AGCO paid the claims and then sued Warranty Specialists, seeking relief pursuant to O.C.G.A. § 33-4-6.  The Georgia Court of Appeals affirmed the trial court’s denial of summary judgment to Cassidy Davis on the bad faith claim arising under O.C.G.A. § 33-4-6.

In its motion, Cassidy Davis argued that AGCO was legally barred from recovering for bad faith because AGCO had not made a demand for payment pursuant to O.C.G.A. § 33-4-6 and thus failed to trigger any duty for Cassidy Davis.  Cassidy Davis relied upon the language of the master liability policy that the insurer ‘agrees to indemnify [AGCO] for all sums which [AGCO] shall be held legally liable to pay in respect to the contractual liability’.  Cassidy Davis argued that the phrase, “legally liable,” meant a judgment must be obtained.  And, since no judgment was obtained at the time demand for payment was made – no payment was due and Cassidy Davis could not be in bad faith – as a matter of law.

The Court of Appeals, however, found that ‘indemnify’ “has been defined as ‘to reimburse another for a loss suffered because of a third party’s or one’s own act or default.’”  The court also noted that indemnify has also been defined as “’a duty to make good a loss, damage or liability incurred by another.’”  The Court rejected the argument that a judgment was a condition precedent.

As a judgment against AGCO was not required before a demand for payment could be made, AGCO’s demand for reimbursement satisfied the provisions of O.C.G.A. § 33-4-6.  According to the Court of Appeals, the term ‘indemnify,’ as used in the contract of insurance “is broad enough to include any liability, not just liability resulting from a judgment.”  Thus, Cassidy Davis was not entitled to summary judgment on the bad faith claim.

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