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Covenant Judgment Settlements In Washington Do Not Automatically Constitute A Waiver Of Attorney-Client Privilege And Work Product Protection When The Insured's Claims For Bad Faith Against The Insurer Are Assigned To The Adverse Party

In Steel v. Philadelphia Indemnity Co., 381 P.3d 111 (2016), a daycare center employee was convicted of child rape and child molestation while working at a daycare center. The parents brought a negligence action against the center. The daycare center had $1 million in coverage. Plaintiffs offered to settle for $4 million, which was rejected by Philadelphia. As trial approached, the insureds entered into a $25 million covenant judgment settlement with the plaintiffs. As part of the settlement the insureds received a covenant not to execute and the plaintiffs received an assignment of the insured's bad faith claims.

Timely Offering Policy Limits Does Not Immunize Insurer From Bad Faith Exposure

The California Supreme Court in Barickman v. Mercury Casualty Co., 2 Cal. App. 5th 508 (2nd Dist. 2016) held that the insurance carrier was liable for bad faith failure to settle, notwithstanding the fact that the carrier offered its policy limits to the claimants in a timely manner in exchange for a full release of civil liability. The court found that the insurer's failure to do "all within its power to effect a settlement" could constitute bad faith, notwithstanding the fact that the insurance company offered its policy limits to the injured claimants in exchange for a full release of liability. The insurance company had refused to consent to additional language in the release designed to preserve the claimant's rights to receive criminal restitution from the insured tortfeasor.

California Court of Appeals Fixes Punitive Damage Ratio and Bad Faith Cases

Historically the United States Supreme Court has admonished trial courts with the high court's observation that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." State Farm Mut Automobile Ins. Co. v. Campbell, 538 U.S. 408, 424 (2003). The California Supreme Court has taken a different view of what the proper ratio of punitive to compensatory damages should be. In Simon v. Sao Paolo U.S. Holding, Inc.. 35 Cal. 4th 1159 (2005) the California Supreme Court upheld a ten-to-one ratio. The California Supreme Court observed that the one-to-one ratio of the Campbell decision would not be applied, with the court suggesting that a ratio of nine or ten-to-one would be the point in California where a punitive damage award became constitutionally suspect and required special justification. Simon, 35 Cal. 4th at 1182.

INSURANCE COMPANY RELIANCE UPON IME REPORT TO SUPPORT RULE 12 B6 MOTION TO DISMISS IN BAD FAITH CASE DID NOT REQUIRE DISMISSAL

The South Dakota Supreme Court in Mordhorst v. Dakota Truck Underwriters and Risk Administrative Services 886 N.W.2d 322 (S.D 2016) recently found that a rule 12-B6 motion to dismiss was not appropriate in a worker's compensation bad faith case notwithstanding the insurer's reliance upon an IME report finding that the injured employee was not injured.

A 10-to-1 RATIO OF COMPENSATORY DAMAGES TO PUNITIVE DAMAGES WAS RECENTLY PERMITTED BY THE CALIFORNIA COURT OF APPEALS IN AN INSURANCE BAD FAITH CASE

The California court of appeals in Nickerson v. Stonebridge Insurance Co. 5 Cal App, 5th 1,209 Cal Rptr. 3d 690 (2d Dist., November 3, 2016) recently found that the Court was constrained by case law in California and the California constitution from allowing a punitive damage award to be more than 10 times greater than the compensatory damage award. In calculating the compensatory damage award within the ratios denominator, the trail court properly excluded and the court of appeals held that it was proper to excluded contract damages and potential damages to others from the equation. However, the court found that the award of attorney fees in favor of the insured and compelling the insurer to pay contract benefits (so called Brandt fees) should be included in the ratios denominator.

THE CALIFORNIA COURT OF APPEALS FINDS THAT A 10:1 RATIO OF COMPENSATORY DAMAGES TO PUNITIVE DAMAGES IS APPROPRIATE IN AN INSURANCE BAD FAITH CASE AND THAT THE RATIO SHOULD BE NO HIGHER

In Nickerson v. Stonebridge Life Ins. Co., 5 Cal.App.5th 1, 209 Cal.Rptr.3d 690 (2nd Dist. 2016), the California Court of Appeals recently reduced a $19M punitive damages award in an insurance bad faith case to $475,000 applying a 10:1 ratio of compensatory damages to punitive damages.

IN THE STATE OF WASHINGTON INSUREDS DO NOT WAIVE ATTORNEY-CLIENT AND WORK-PRODUCT PRIVILEGES WHEN THEY SEEK THE COURT'S APPROVAL OF A COVENANT JUDGMENT SETTLEMENT WHICH ASSIGNS TO THE ADVERSE PARTY THE INSURED'S BAD FAITH CLAIM AGAINST THE INSURER

In Steel v. Philadelphia Indemnity Ins. Co., 195 Wash.App. 811, 381 P.3d 111 (Wash. App. 2016), the Washington Court of Appeals held that insurance companies do not waive attorney-client privilege or work product protection when their insured enters into a covenant judgment settlement that is subject to judicial determination as to reasonableness. In Steel, a day care center's employee was convicted of child rape and child molestation of two children at the day care center. At the time, the defendants were insured under a Philadelphia Indemnity policy providing $1M in coverage. Plaintiffs offered to settle their claims for $4M which was rejected by Philadelphia. Shortly before trial was scheduled to begin, the insureds entered into a $25M covenant judgment settlement with the plaintiffs, receiving a covenant not to execute in return, for an assignment of the insureds' bad faith claims against Philadelphia.

CALIFORNIA COURT OF APPEALS FINDS THAT AN EXCESS INSURER CAN SUE A PRIMARY INSURER FOR BAD FAITH FAILURE TO SETTLE UNDER AN EQUITABLE CONTRIBUTION THEORY TO RECOVER THE EXCESS INSURER'S CONTRIBUTION TO SETTLEMENT OF A CLAIM AGAINST THE INSURED

The California Court of Appeals recently held that an excess judgment was not a necessary element to an equitable subrogation claim brought by an excess insurer against a primary insurer when the primary insurer failed to settle the underlying case. In ACE American Ins. Co. v. Fireman's Fund, 2 Cal.App.5th 159, 206 Cal.Rptr.3d 176 (2d Dist. 2016), the Court held that the excess insurer could sue the underlying primary insurer for bad faith failure to settle under equitable contribution when the excess insurer contributed to a settlement of the claim against its insured. In this case, the Court held that the absence of a litigated judgment did not preclude the excess insurer from establishing the damages element of a claim for bad faith failure to settle under an equitable subrogation theory. The Court held that an excess insurer, when faced with a primary insurer's unreasonable refusal to pay a settlement demand within policy limits could contribute to the settlement on behalf of its insured and then sue the primary insurer to recover the amount of the settlement.

THE 10TH CIRCUIT COURT OF APPEALS FINDS THAT COLORADO'S "FAIRLY DEBATABLE" DEFENSE IS NOT ABSOLUTE

In The Home Loan Investment Co. v. St. Paul Mercury Ins. Co., 827 F.3d 1256 (10th Cir. 2016), the Tenth Circuit Court of Appeals held that a property insurance company's denial of a fairly debatable claim was not per se reasonable. The insurer, St. Paul Mercury Ins. Co., argued that because its coverage decision was "fairly debatable," it was, as a matter of law, not unreasonable. St. Paul argued that a claim's fair debatability was outcome determinative because, under Colorado law, an insurance company could not act unreasonably in denying a fairly debatable claim. In response, the insured argued that a claim's "fair debatability" was merely one factor in the overall analysis of whether the insurer acted reasonably in delaying or denying coverage. The Tenth Circuit rejected St. Paul's argument.

INSURANCE COMPANIES HAGGLING OVER RELEASE LANGUAGE CAN RESULT IN BAD FAITH LIABILITY

In Barickman v. Mercury Cas. Co., 2 Cal.App.5th 508, 206 Cal.Rptr.3d 699 (2d Dist. 2016), an insurance company's refusal to consent to additional release language which was designed to preserve the claimant's rights to receive criminal restitution from the insured tortfeasor caused the case not to settle and, as a result, it was found that the insurance company breached the implied covenant of good faith and fair dealing by not doing all that it could do within its power to effectuate the settlement.

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