Insurance - Bad Faith

An apartment complex sustained a fire loss to its business and hired a public adjuster to assist in preparing the property damage claims. Subsequently, the apartment complex assigned its interest in the bad faith claims against the insurance company and insurance agency to the public adjusting company and, in turn, the public adjuster filed suit alleging bad faith. The insurance company and agent filed motions for summary judgment in the trial court and prevailed. The public adjuster appealed.

On appeal, the Oklahoma Court of Civil Appeals found that the trial court properly granted summary judgment and held:

1) summary judgment for the insurer was appropriate because a bad faith claim arises from a tort and, under Oklahoma law, a tort cause of action is not assignable; and

2) summary judgment for the insurance agency was appropriate because, under Oklahoma law, an insured cannot bring a bad faith claim against an insurance agency or its agent because they are not parties to the insurance contract.

 

, 2013 OK CIV APP 67, 307 P.3d 400.

United Adjustment Services, Inc. v. Professional Insurors Agency, LLC

Bad Faith Action For Damages Claimed By A Homeowner

A husband and wife purchased a home in which the mortgage holder carried the property insurance policy in the name of the mortgage company. At some point, the couple’s home was damaged by a water leak resulting in significant flooding to their home. The homeowners submitted a claim to the insurance company requesting payment for the damages. When the insurance company failed to timely pay the damages and restoration costs, the homeowners filed suit in Federal court for bad faith and breach of contract alleging: (1) the insurer failed to properly adjust the claim, and (2) failed to timely pay for emergency remediation services and restoration expenses.

The insurance company filed a motion to dismiss for failure to state a claim upon which relief can be granted arguing that since the Plaintiffs were not the named insured or beneficiaries under the insurance policy and had no legal basis to file the lawsuit or recover under the insurance policy.

The Federal court granted the motion to dismiss agreeing with the insurer and dismissed the lawsuit. The court said that the insurance policy clearly existed between the mortgage holder and the insurance company to protect the lender’s interest in the property and that the lender was clearly the primary beneficiary of the insurance policy. Finally, the court noted that the policy is unambiguous that the Plaintiffs are not parties to the insurance policy and have no coverage for their property. Lumpkins v. Balboa Ins. Co., 812 F.Supp.2d 1280 (Okla. 2011).

Forced placed insurance is typically purchased by a lender to protect its interest when the homeowner who borrowed the money fails to carry insurance. These contracts have terms that differ from traditional homeowners’ coverage.

Litigation Misconduct In Bad Faith Litigation

An insurance company was sued for breach of contract and bad faith and received summary judgment by the trial court. The insured appealed to the Oklahoma Court of Civil Appeals who affirmed in part and reversed in part the trial court’s ruling holding that while a breach of contract did exist since the insurer denied coverage for a covered loss, the insurer was not guilty of bad faith as it had a reasonable basis for denying the claim. The appellate court remanded with instructions to find in favor of the insured on the breach of contract claim and to set the case for trial regarding the damages.

During the litigation of the remanded action, the insurer conducted discovery regarding the insured’s damages and made offers of judgment which were not accepted by the plaintiff. Instead, the plaintiff filed a separate lawsuit for bad faith claiming the insurer acted in bad faith for allegedly failing to properly investigate the plaintiff’s claims after the action was remanded. The insurer again moved for summary judgment and prevailed. The insured once again appealed and the Oklahoma Court of Civil Appeals affirmed summary judgment holding:

[o]nce a court . . . proceeding is commenced seeking insurance benefits, normal claim handling is superseded by the litigation proceeding. Allan D. Windt, 2 Insurance Claims and Disputes 5th: Representation of Insurance Companies & Insureds, § 9:28 (Database updated March 2012). The article continues:

The insurer retains counsel, and the insurer then relies upon its counsel to handle discovery in the context of the litigation proceeding. Accordingly, properly analyzed, an insurer cannot be guilty of bad faith because it does not conduct its own investigation, but instead relie[s] upon its counsel to conduct an investigation that is appropriate in a litigation context.

Andres v. Oklahoma Farm Bureau Mut. Ins. Co., 290 P.3d 15, 2012 OK CIV APP 93.

The appellate court went on to say "[s]ee Sims v. Travelers Ins. Co., 2000 OK CIV APP 145, ¶¶ 9-12, 16 P.3d 468, 471-72 (holding that an insurer’s litigation conduct could not be used as evidence of bad faith or to form the basis for a bad faith claim)" and "to hold an insurer’s acceptable litigation tactics as evidence of bad faith would be to deny the insurer a complete defense." Andres v. Oklahoma Farm Bureau Mut. Ins. Co., 2012 OK CIV APP 93 at ¶13, 290 P.3d 15.
 

Legal Opinion Stating No Coverage Did Not Prevent Bad Faith Judgment

An Oklahoma insurance company's reliance upon a legal opinion that there was no payment due under the policy did not prevent a judgment for bad faith and punitive damages.  In Barnes v. Oklahoma Farm Bureau Mutual Ins. Co., 2000 OK 55, 11 P.3d 162, the insurer purportedly obtained a legal opinion from an Oklahoma lawyer before refusing to pay UIM coverage.  The case was submitted to the jury on the issue of bad faith as well as punitive damages and an award entered in favor of the plaintiffs.

Oklahoma Farm Bureau Mutual Insurance Company was sued by its insured, Julie Barnes, for underinsured motorist (UIM) benefits and for breach of the implied duty of good faith and fair dealing in failing to pay her claim.  The trial judge granted partial summary judgment to Barnes for the $15,000.00 of UIM policy limits and submitted the remainder of the damages to a jury.  The jury awarded an additional $10,000.00 in actual damages and $1.5 Million in punitive damages.  Additionally, the trial court granted her $300,000.00 in attorney fees.

Barnes had been injured in a head on collision with another vehicle and her injuries were extensive.  The other driver had liability coverage of $10,000.00 per person and Barnes had uninsured motorist/underinsured motorist coverage with Oklahoma Farm Bureau and another $25,000.00 with State Farm Mutual Automobile Insurance Company. 

Barnes incurred $15,000.00 in medical bills and lost over $10,000.00 in wages.  She submitted a claim for UIM benefits to both of her insurers.  The claims not being timely paid, Barnes filed suit.

Eventually, the tortfeasor tendered its $10,000.00 of liability limits, but Oklahoma Farm Bureau refused to waive subrogation and further refused a proper substitution under 36 O.S. § 3636(E).  Likewise, the insurer refused to pay the $15,000.00 in UIM benefits claiming it was entitled to the liability coverage from the tortfeasor.

State Farm, unlike the other insurer, evaluated Barnes' claim to be at least $50,000.00 and paid its full UIM limits of $25,000.00 without claiming entitlement to a portion of the liability policy.  State Farm elected not to substitute its own $10,000.00 payment for the tentative settlement from the tortfeasor and instead waived any right at subrogation.

The main defense to the bad faith claim was that Oklahoma Farm Bureau reasonably relied upon the advice of its legal counsel concerning the proper interpretation of 36 O.S. § 3636(E) and, therefore, its behavior in litigating the issue was a legitimate dispute.

The Oklahoma Supreme Court stated:

In a tort case against an insurer for breach of the implied duty of good faith and fair dealing (i.e. for bad faith) it is the unreasonableness of the insurer's actions that is the essence of the tort. Conti v. Republic Underwriters Ins. Co., 1989 OK 128, 782 P.2d 1357, 1360; Alsobrook v. National Travelers Life Ins. Co., 1992 OK CIV APP 168, 852 P.2d 768, 770. Although reliance on the advice of counsel can be a defense to a bad faith suit, the reliance on counsel's advice must be reasonable. Durbin and Loy, Current Status of Good Faith Law in Oklahoma, supra, 24 Okla. City U.L.Rev. at 169-170. Particularly applicable here is the following statement made by the United States Court of Appeals for the Fifth Circuit concerning the advice of counsel defense in bad faith insurance claim litigation:

[I]t is simply not enough for the carrier to say it relied on advice of counsel, however unfounded, and then expect that valid claims for coverage can be denied with impunity pursuant to such advice. The advice of counsel is but one factor to be considered in deciding whether the carrier's reason for denying a claim was arguably reasonable. We believe that where, through verbal sleight of hand, the advising attorney concocts an imagined loophole in a policy whose plain language extends coverage, such advice is heeded at the carrier's risk.

Szumigala v. Nationwide Mutual Ins. Co., 853 F.2d 274, 282 (5th Cir.1988). Further, even where there has been no judicial interpretation of a relevant statutory provision, the reasonableness of reliance on advice of counsel will normally be a fact question where counsel misreads the plain language of a statute. Murphree v. Federal Ins. Co., 707 So.2d 523, 532-535 (Miss.1997).

In short, the Oklahoma Supreme Court held the opinion of the attorney was not reasonable and the insurer should not have relied upon advice that it knew or should have known from its own judgment was patently wrong.

Failure To Obtain A Legal Opinion Can Be Bad Faith

Bad faith can result in Oklahoma from failing to obtain a legal opinion before denying coverage.  In Harrell v. Old American Ins. Co., 1991 OK CIV APP 91, 829 P.2d 75, a claims examiner failed to seek legal advice regarding a coverage question before denying payment.  The Oklahoma Court of Appeals said it was reasonable to infer the lack of a legal opinion was either because the examiner knew there was coverage or she did not want confirmation the claim was not properly excluded under the terms and conditions of the policy.  The Court determined the trial court was justified in submitting the issue of punitive damages to the jury. 

Some advantages to obtaining a legal opinion as to whether coverage exists before issuing a denial are:

  • demonstrates good faith on the part of the insurer
  • having an objective, third person gives a different perspective
  • qualified, competent Oklahoma attorneys give insight into the law
  • the cost for a legal opinion is substantially less than a bad faith award 

Oklahoma Attorneys Often Use Bad Faith To Increase Damage Awards

Oklahoma lawyers suing insurance companies for breach of contract in first-party cases find themselves limited by the damages which can be awarded for breach of contract.  Under 23 O.S. § 21, the measure of damages for breach of contract is the amount which will compensate a party for the damage.  In Osborn v. Comanche Cattle Industries, Inc., 1975 OK CIV APP 67, 545 P.2d 827, the Oklahoma Court of Appeals explained the reason for limiting damages:

This interest is given legal protection to achieve the paramount objective of putting the promisee injured by the breach in the position in which he would have been had the contract been performed.  

The law philosophically intends for people who have been harmed to receive compensation, not a windfall.  The concept can be illustrated by the employment relationship.  People are paid (compensated) for the work they do -- an employee receives a windfall if the business owner decides to give him a new Porsche!

Bad faith allegations asserted in Oklahoma courts allow the plaintiff lawyer to ask for money in addition to what might be recoverable under the insurance policy such as:

  • financial losses
  • embarrassment and loss of reputation
  • mental pain and suffering
  • punitive damages

Oklahoma plaintiff attorneys file bad faith claims to try to recover for damages not available under the terms of the insurance policy.  Although it is technically "compensation" for damages, a bad faith claim places the insurance company at greater risk than just what the policy covers.  Problems develop when unscrupulous attorneys or vindictive insureds falsely accuse the insurer of wrongdoing simply as leverage to get their claim paid.  Oklahoma judges, however, protect insurance companies from paying damages for bad faith if the underlying disagreement is a legitimate dispute.