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.

Bubba Sued With A Declaratory Judgment Action

Bubba had "another one of them envelopes" sitting down at the Post Office. The lady wouldn't let him peek at this one either. He figured it was the "declaration of war suit."  After the EUO, the other lawyer made the comment this might end up as a "dec action."  I had explained to Bubba that insurance companies often file declaratory judgment actions when there is an issue as to coverage.  It allows a judge to decide the question. Our law firm has filed many of them to resolve all sorts of disputes and it's an appropriate method for an insurer to ask the court to make a decision in a fair and impartial way.

One disadvantage to bringing a declaratory judgment action is the potential risk the insured will view it as a hostile act.  Bubba thought suing the policyholder sounded more like "fightin' words" and called it a "declaration of war." Knowing our firm regularly files dec actions for insurance companies didn't really make Bubba feel any happier.  He was ready to "scrap it up!"

Logically, what else can an insurance company do that would be fair?  If the company doesn't believe there is coverage, asking a judge to decide the question is reasonable.  A dec action brings the issue to the court for resolution as opposed to simply saying, "No, we won't pay you."  Franky, our firm believes it is generally a "good faith" practice to ask the court to settle disagreements over coverage.  But, it sometimes results in the insured filing a counterclaim for "bad faith." 

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.

Bubba's Luck: The Fire Burned Down His House

Bubba came to the office last week without an appointment. He was hotter than a firecracker on the 4th of July. He was ranting about wanting to sue his insurance company for "bad fate" and that I could have all of the money from the lawsuit. He said I could put it all in that fancy bank where all the rich lawyers keep their money. After about 15 minutes of non-stop babbling, I got up and started walking out of the office. Bubba said, "Heh! Where ya goin'?" I said, "Bubba, I don't have a clue as to what you're talking about and I am getting some aspirin for a headache that just started." He uttered a few more graphic descriptions about what he planned to do to the poor field adjuster and then blurted out "You can just ask Aunt Pudge!" So I picked up the phone and called Pudge.

On the second day of deer season, Pudge was in her kitchen [she always gets her limit on opening morning]. She has a direct view of Bubba's mobile home from there. She told me that two Rambos [city people who come out during gun season armed to the teeth but who can't tell a deer from a Hereford cow] were walking by when a squirrel ran across the top of Bubba's roof. Both of these Rambos started shooting at the squirrel and one of them actually managed to nick the squirrel's hind leg. The squirrel went "bonkers" and ran down the stove pipe into the wood stove that Bubba had set up in his living room.

Pudge didn't actually see the squirrel run down the stove pipe. She learned about that later on. When they started shooting, she went to get her own gun to let those Rambos know how she felt about trespassers hunting near her house. Pudge used to work for the Oklahoma Department of Corrections (penitentiary) as a sharp shooter. The Rambos quickly realized they were out-gunned and out-numbered as they stumbled and tripped over one another trying to "get out of Dodge." Since Pudge didn't see the squirrel go down the stove pipe, she didn't realize that Bubba's mobile home was about to burn down.

See more after the jump...

It's speculation at this point, but Pudge thinks the squirrel's tail must have caught on fire as it came out the door of the wood stove and started the fire running around inside. After the hunters left, she went to her den to clean her gun and watch video tapes of her favorite TV show, Cops. The fire was well on its way by the time she noticed it.

The way they figured out the squirrel's tail caught fire was that Bubba went looking through the debris to see what could be salvaged. He went to the bathroom to find out how many of his Field and Stream magazines had been destroyed (he keeps them right there by the toilet) when he discovered a squirrel sitting in his toilet. The squirrel didn't have a tail and apparently had crawled into the water to survive. One good look at Bubba, and he hasn't been seen since.

During the investigation, the adjuster discovered that title to the mobile home was not in Bubba's name. The mobile home had originally been purchased by Bull, an ex-brother-in-law of Bubba (that really does resemble some bulls I've seen). Bull sold it to one of Bubba's cousins, Jim Bob, for $100 cash, a .22 rifle, and Jim Bob taking over the payments. Several months later Jim Bob got into financial trouble and couldn't make the payments, he sold it to Bubba for a bottle of Jack Daniels, a bird dog and Bubba taking over the payments. The adjuster reported this ownership situation to the insurance company.

Now things were starting to make a little more sense, Bubba had been mumbling the adjuster said he didn't have "no insurance interest."  In the same breath he kept ranting about having paid his ridiculously high premiums and how they had "rooked" him out of $27.36 a month. He was saying "insurance interest" instead of "insurable interest."  So I could get Bubba out of my office to look into things a little further, I promised to "poke out the adjuster's eyes and rip his tongue out of his throat" when I put him on the witness stand at trial. Bubba smiled with his famous toothless grin and said he would check back later.

I started to work right away because I knew Bubba would be calling me every two to three hours to "see how things were going."  The adjuster, a very pleasant and likeable guy, told me about his investigation and the company's decision to deny the loss for lack of insurable interest.

I asked him if they had considered Gray v. Republic Underwriters Ins. Co., 1995 OK 118, 909 P.2d 776. It was a fire loss case decided by the Oklahoma Supreme Court.

In Gray, a mother secured insurance from Republic, a fire insurer, for property that she did not hold actual legal title but that she paid taxes on, advanced money for its improvement, and had made an oral agreement with her son for repayment of the money she was spending. She thought the property was security for her son's promise to reimburse her. Gray testified that she told her agent about the title being in her son's name when she bought the insurance. The property was destroyed by fire. The claim was denied because legal title was in her son's name and she did not have an insurable interest in the property. The trial court granted a summary judgment in favor of the insurer and the Oklahoma Supreme Court reversed. The Court stated:

Before summary disposition of this case could be effected, the trial judge was duty-bound to ascertain --- from the evidentiary material before him --- that as a matter of law Gray ... did not and could not demonstrate she would gain some economic advantage by the insured property's continued existence or, in the alternative, that she . . . did not suffer some economic detriment from its loss or destruction. The law's "factual expectation" standard, adopted in Snethen, is today the Oklahoma test for use in ascertaining a person's insurable interest. Equating insurable interest with a legally cognizable estate is no longer sanctioned by our jurisprudence.

Insurable interest is defined by statute as, "any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment." 36 O. S. Section 3605 (B). In other words, almost any interest that one can imagine can become insurable.

In Conti v. Republic Underwriters Insurance Company, 1989 OK 128, 782 P.2d 1357, the Oklahoma Supreme Court also addressed insurable interest. The facts in Conti were that the residence was purchased with a Contract for Deed in the name of Conti's father. The entire family considered Conti to be the owner even though the title was in his father's name. The father contacted the agent and requested that insurance be purchased in the son's name as owner and the premiums were paid by the father. The house was destroyed by fire. After trial the case was appealed to our Supreme Court.

In discussing the issue, the Court stated:

It is an accepted fact that the appellee had undisputed possession of the property. Nor is there any question that the appellee enjoyed beneficial ownership, or that he had equitable title by virtue of his contributions and the intent expressed by all parties to the original transaction. It has long been recognized in Oklahoma that an insurer may not escape its contractual obligation to one who has equitable title, beneficial ownership and undisputed possession of property, even though bare legal title rests in another. See: Pease v. Traveler's Fire Insurance Company, 185 Okl. 421, 93 P.2d 536, 538 (1939).

I have to figure out a way to keep Bubba busy while the company has a chance to take a closer look at the law.