Insurance Law Hawaii

Damages For Mental Anguish Awardable for Delay in Adjusting Katrina Claim

    In a recent post, we discussed Dickerson v. Lexington Ins. Co., 2008 U.S. App. LEXIS 26504 (5th Cir. Dec. 22, 2008) where the Fifth Circuit determined damages for mental anguish were properly granted based on the insurer's bad faith delay in paying a claim after Hurricane Katrina.  Dickerson controlled a subsequent decision by the Federal District Court in Louisiana when State Farm's motion for summary judgment as to plaintiffs' claims for mental anguish was denied.  See Fasone v. State Farm Fire and Cas. Co., 2009 U.S. Dist. LEXIS 3027 (E.D. La. Jan. 9, 2009).

    In Fasone, plaintiffs sought coverage under their State Farm policy for damages sustained to their home during Hurricane Katrina.  Although coverage for their dwelling was $166,300, State Farm paid only $22,491.17.  The District Court noted in Dickerson, the Fifth Circuit had decided as a matter of law that plaintiffs may seek damages for mental anguish based on an insurer's bad faith failure to timely adjust a claim.  State Farm also challenged the sufficiency of plaintiffs' evidence on mental anguish because no expert testimony was offered.  Again relying on Dickerson, the District Court determined the plaintiff's affidavit describing his mental state and linking specific feelings, such as frustration, anger, and humiliation, to specific acts by State Farm was sufficient to create a genuine issue of material fact.

California Court of Appeal Affirms Bad Faith Ruling for Insurer's Delays

    The California Court of Appeal upheld a bad faith ruling based on the insurer's delay in paying benefits.  See Major v. Western Home Ins. Co., 2009 Cal. App. LEXIS 4 (Cal. Ct. App. Jan. 6, 2009).

    The insureds' home was destroyed by a wild fire in October 2003.  They held a homeowners policy from Western.  The policy provided $193,000 for dwelling, $19,300 for other structures, $135,000 for personal property, $38,600 for living expenses and $18,000 for mortgage disaster protection.  The policy included an "extended replacement cost" provision, promising to pay up to a specified percentage above policy limits to replace damaged property.

    After the home was totally destroyed by the fire, Western used another company, Cambridge, to administer the claims.  Western did not make its first payment until February 2004.  Thereafter, Cambridge assigned a new, inexperienced claims adjuster to the claim.  Western fell two months behind in mortgage payments.  The 77 page inventory sent by the insureds in May 2004 was ignored for over three months despite numerous call and requests from the insureds.  The new adjuster complained to the insureds that it would be a nightmare to have to review the inventory and that the file was 16 inches thick.

    The insureds hired counsel in October 2004.  A supervisor at Cambridge thereafter worked on the file.  Fifteen days later, Western paid personal property benefits the insureds submitted in May.  Subsequently, the insureds submitted receipts for replacement cost of personal property because Western had only paid depreciated value.  The supervisor claimed the receipts had been faxed and she could not read them.  She admitted at trial, however, this statement was false and the receipts had been mailed.  Moreover, the supervisor realized "other structure" benefits had not been paid for the pool and spa, but did not pay these benefits until five months after she began handling the claim. 

    Suit was filed in February 2005.  The jury found in favor of the insureds for breach of contract and bad faith. The total damage award was $1.3, including $450,000 for emotional distress and $646,471 for punitive damages.

    The Court of Appeal affirmed.  There was substantial evidence the insureds suffered significant emotional distress caused by Western's delayed payment of benefits and its refusal to pay amounts clearly covered under the policy. 

    Western argued punitive damages were not warranted because the supervisor and other claims adjusters at Cambridge were not managing agents at Western.  The Cambridge supervisor, however, exercised substantial discretionary authority to pay or not to pay benefits owed the insureds.  In fact, she made the decision to refuse to pay benefits ultimately awarded by the jury based on her untrue statement that the receipts were illegible because they were faxed.  The punitive damages were slightly more than a one-to-one ratio to the tort damages, and therefore not excessive.

    Hawai`i recognizes the tort of good faith and fair dealing against insurers.  Further, Hawai`i courts permit punitive damages in bad faith cases.  See, e.g., The Best Place v. Penn Am. Ins. Co., 82 Hawai`i 120, 920 P.2d 334 (1996).

Hawai`i Supreme Court Reinstates Emotional Distress Claim Against Insurer

    Although the insurer's conduct did not amount to bad faith in Young v. Allstate Ins. Co., No. 26887 (Haw. Sup. Ct. Dec. 26, 2008), the court held plaintiff's allegations of intentional infliction of emotional distress (IIED) were sufficient to survive a motion to dismiss.

    Plaintiff alleged she was stopped in traffic when a car operated by an Allstate-insured driver rear-ended her, destroying her auto. The insured informed Allstate he had fallen asleep and caused the crash.  Plaintiff, who was 84 years old, suffered injuries to her neck, ribs, right knee and thoracic and lumbar spine.

    An Allstate representative contacted Plaintiff the day of the accident, promised she was in good hands, would be provided with quality service, and would not need an attorney. In two subsequent letters, Allstate promised to provide quality service to plaintiff. 

    Plaintiff attempted to resolve her claim against Allstate without the assistance of an attorney.  Although she had already incurred over $6,000 in medical expenses, Allstate offered to settle for only $5,300.  Plaintiff rejected the offer, but was deeply distressed because she felt Allstate was breaking its promises.  She thereafter retained an attorney and sued. The answer alleged plaintiff was negligent and had failed to mitigate her injuries. This caused plaintiff, who was now 87, extreme distress and shame.  Ater taking her deposition, Allstate's attorney indicated he would recommed a policy limits settlement of $25,000.  Allstate, however, refused to increase its offer.  In non-binding arbitration, Plaintiff damages were determined to be $45,000.  Allstate never took the arbitration seriously and appealed the decision, requesting a trial de novo.

    The jury awarded plaintiff $198,971.71.  Fees and costs for the arbitration and pre-judgment interest were also awarded to plaintiff.  Allstate offered to settle for $260,000 if plaintiff would release any claim for bad faith.  Plaintiff refused and sued Allstate for bad faith and other claims. 

    Allstate filed a motion to dismiss, arguing it did not owe a duty of good faith and fair dealing because the parties did not have a contractual relationship by virtue of its promises and letters.  The trial court agreed.  Further, the trial court ruled Allstate's acts were not beyond all bounds of decency nor outrageous.  Therefore, the IIED claim was also dismissed.

    The Supreme Court affirmed dismissal of the bad faith claim.  Plaintiff alleged neither detrimental reliance nor consideration.  Accordingly, there was no contract between plaintiff and Allstate, and the bad faith claim failed.

    Plaintiff did, however, adequately allege a claim for IIED.  In Hawai`i, the tort consists of the following elements: (1) the act allegedly causing the harm was intentional or reckless, (2) the act was outrageous, (3) the act caused, (4) extreme emotional distress to another.  Allstate's insured admitted he caused the accident when falling asleep at the wheel.  Allstate immediately contacted plaintiff and assured her she would be treated fairly.  Nevertheless, Allstate only offered plaintiff a mere $5,300 to settle.  Given these facts, reasonable people could differ as to whether Allstate acted without just cause or excuse and beyond all bounds of decency in the underlying case.  The court determined that upon reading plaintiff's complaint, average members of the community might exclaim, "Outrageous!"  Therefore, the trial court erred in dismissing plaintiff's IIED claim.

Court Awards Damages for Mental Anguish Based on Insurer's Bad Faith

    Interpreting Louisiana law, the Fifth Circuit determined that damages for mental anguish were properly awarded based on the insurer's bad faith.  See Dickerson v. Lexington Ins. Co., 2008 WL 5295389 (5th Cir. Dec. 22, 2008).

    The insured's home was extensively damaged by Hurricane Katrina.  He held a homeowner's policy issued by Lexington.  The insured also had flood coverage and was paid $108,342 for the Katrina flood damage.  The wind damage claim was submitted to Lexington in September 2005.  Five months later, Lexington issued a check for only $11,335. 

    The insured sued, claiming Lexington had breached the contract and had acted in bad faith by failing to pay promptly and in full.  In May 2007, after suit was filed, Lexington sent another adjuster who found the home had suffered far more wind damage than Lexington previously thought.  A month before the bench trial, Lexington sent another check for $103,756. 

    The insured prevailed on all claims at the bench trial.  The court entered a judgment which included damages for bad faith and a recovery of $25,000 for mental anguish.

    Lexington appealed to the Fifth Circuit.  Recall the Fifth Circuit has issued several post-Katrina decisions, interpreting policy provisions favorable to the insurers.  See Leonard v. Nationwide Mut. Ins. Co.,499 F.3d 419 (5th Cir. 2007); Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346 (5th Cir. 2007); Broussard v. State Farm Fire & Cas. Co., 523 F.3d 618 (5th Cir. 2008).

    Here, the Fifth Circuit found in favor of the policy holder.  The court noted under Louisiana law, the insurer owes its policy holders a duty of good faith in settling claims.  Enumerated breaches of the statute included failing to pay a claim within 60 days following receipt of satisfactory proof of loss if the failure is arbitrary, capricious and without probable cause.  By way of comparison, an insurer breaches Hawai`i's Unfair Claim Settlement Practices Act when failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements are completed.  Haw. Rev. Stat. 431:13-10 (a)(11)(E). 

    Lexington did not make any payments until five months after the initial inspection.  Further, it was not until the eve of trial and more than a year and a half after Katrina struck that Lexington finally acknowledged that the property had suffered substantial wind damage and made a substantial payment.

    A review of Louisiana cases demonstrated mental anguish damages had regularly been awarded for breach of the duty of good faith.  Testimony established that a year and a half of fighting with Lexington caused the insured's mental health to deteriorate.  He became increasingly withdrawn and short-tempered.  Instead of living in a trailer provided by FEMA, the insured chose to live an the bathtub showroom of a store and showered with a garden hose while standing on a wooden pallet in an unheated back room.  Although there was no expert or medical testimony to support a claim of mental anguish, the Fifth Circuit confirmed the award because the district court was best positioned to make credibility determinations. 

Washington Court Allows Bad Faith Action for Delay Even if No Coverage

    In a decision policy holders will appreciate, the Washington Supreme Court recently held the insured could pursue bad faith claims for delay in processing the claim even when there is no coverage under the policy.  See St. Paul Fire and Marine Ins. Co. v. Onvia, Inc., 2008 Wash. LEXIS 1055 (Wash. Nov. 26, 2008).

    The case came to the Court on certified questions from the U.S. District Court, Western District of Washington.  St. Paul did not act in bad faith in refusing to defend, settle, or indemnify against a third-party liability claim because there was no coverage under the policy.  But the issue was whether the insured could pursue common law bad faith and claims under the Consumer Protection Act based on St. Paul's delay in handling the claim.

    The insured tendered the suit to St. Paul.  It took nine months for St. Paul to deny coverage and a defense.  The insured settled the underlying suit, which included assigning its rights to sue St. Paul.  The suit for declaratory relief alleged St. Paul violated a number of insurance claims-handling regulations in bad faith, including failing to timely acknowledge and act upon the notice of the claim and tender of defense, and by failing to promptly or reasonably investigate the claim.

    The Court decided St. Paul had acted in bad faith even though there was no coverage under its policy.  Under Washington law (similar to Hawai`i law), every insurer had a duty to act promptly, in both communication and investigation, in response to a claim or tender of defense.  Therefore, a third party insured had a cause of action for bad faith claims handling that was not dependent on the duty to indemnify, settle, or defend.  However, the insured could not take advantage of the remedy of coverage by estoppel with the harm presumed.  Instead, the insured had to prove actual harm and "damages were limited to the amounts incurred as a result of the bad faith . . . as well as general tort damages." 

    The Court also held that the insured could bring suit under the Consumer Protection Act even though there was no duty to settle, indemnify, or defend.  But again, the remedy would be limited to the statutory remedies available to any successful claimant under the Consumer Protection Act.

    Under Hawaii law, a claim for the tort of bad faith does not turn on whether the claim for benefits are due, but instead turns on the conduct of the insurance company in handling the claim.  See Honbo v. Hawaiian Ins. & Guar. Co., 86 Hawai`i 373, 382, 949 P.2d 213, 221 (Haw. Ct. App. 1997)(relying on The Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai`i 120, 132-33, 920 P.2d 334, 346-47 (1996)).  However, a claimant cannot pursue a bad faith claim based purely on a violation of the Hawai`i Insurance Code's Unfair Methods of Competition and Unfair and Deceptive Acts and Practices Chapter, as there is no private cause of action under the Code.  Hough v. Pacific Ins. Co., 83 Hawai`i 457, 470, 927 P.2d 858, 871 (1996).  Hough also held the employee could not maintain an action under Hawaii's Consumer Protection Act, Haw. Rev. Stat. 480-2, because he was the third-party beneficiary of his employer's workers' compensation policy, and therefore not a "consumer" under the statute.  Hough, 83 Hawai`i at 470, 927 P.2d at 871.  Nor could the employee maintain an action based on his third-party beneficiary status because his employer was also not a "consumer" as defined in Haw. Rev. Stat. 480-1.  On the other hand, the workers' compensation statute did not preempt contract or tort actions against the insurer arising out of delays or denials of workers' compensation claims.

Court Ponders Whether the Insurer Bad Faith Committed If No Excess Judgment against Insured

     Does the insurer act in bad faith when there is no excess judgment against the insured?  Further, is there bad faith when the insurer's actions never resulted in the insured's increased exposure to liability for more than the policy limits?  These two issues confronted the Eleventh Circuit in Perera v. United States Fidelity and Guaranty Co., No. 06-00688-CV-T-23 (11th Cir. Oct. 9, 2008). 

     Perera was crushed to death by a piece of equipment while on the job site.  His employer, Estes Express Lines Corp., held three insurance policies: (1) a workers' compensation liability policy issued by United States Fidelity & Guaranty with a $1 million limit after an self-insured retention of $350,000; (2) a CGL policy issued by Cigna with a $1 million limit and $500,000 deductible; and (3) an excess liability policy issued by Chubb with limits of $25 million. 

     Perera's wife sued Estes.  Perera, Estes, Chubb and Cigna eventually reached a settlement of $10 million.  Five million of this was to come from a bad faith lawsuit against USF&G which Estes assigned to Perera.  Perera sued USF&G for breach of contract and bad faith.  The district court granted summary judgment to USF&G on the bad faith claim, holding that without an excess judgment against the insured, there was no cause of action for bad faith.

     On appeal, the Eleventh Circuit agreed there was no excess judgment against the insured.  To constitute an excess judgment, a judgment of more than $25 million would be required.  The court noted at least two Florida cases indicated that an excess judgment is not an essential part of a bad faith claim.  See N. Am Van Lines v. Lexington Ins., 678 S.2d 1325, 1333 (Fla. Dist. Ct. App. 1996); Swamy v. Caduceus Self Ins. Fund, Inc., 648 So.2d 758, 759 (Fla. Dist. Ct. App. 1994).  Given the lack of clarity regarding the necessity of an excess judgment to a bad faith cause of action, the Eleventh Circuit sought guidance from the Florida Supreme Court.  The following question was certified:

     Can a cause of action for bad faith against an insurer be maintained when there is not an excess judgment against the insured?

     USF&G also argued that even if an excess judgment was not required, Perera's bad faith claim was barred because Estes was never exposed to liability in excess of limits of liability in its several policies.  Accordingly, a second question was certified to the Florida Supreme Court:

     Even if an excess judgment is not always required, can a cause of action for bad faith be maintained when the insurer's actions never resulted in increased exposure on the part of the insured to liability in excess of the policy limits of the insured's policies? 

     We will watch for the Florida Supreme Court's response to these issues.

      

Hawaii ICA Remands Case to Consider Whether Insurer Acted in Bad Faith

     After enduring a tortured, ultimately failed attempt to negotiate a settlement under a renter's protection policy, the insured sued.  The trial court granted United Services Automobile Association's motion for summary judgment, but the Hawaii Intermediate Court of Appeals vacated the decision and remanded for a determination of whether USAA's interpretation of its policy language and delay in making payment was in bad faith.  See Flowers v. United Services Automobile Assoc., 2008 Haw. App. LEXIS 449 (Haw. Ct. App. July 30, 2008). 

     The Hawaii ICA first decided whether USAA breached its policy by determining it would not pay the replacement cost of a weight bench that the insured claimed was damaged before shipment, but eventually lost in shipment.  The policy required USAA to pay the full replacement cost of items costing less than $500 to replace.  For an item costing $500 or more to replace, USAA would initially pay the cash value of the allegedly lost or stolen item.  Then, if the policy holder actually replaced the item, USAA would pay the amount withheld for depreciation of the item. 

     Although the weight bench was rusted and missing pieces prior to shipping, the record was unclear as to whether the bench was ever actually delivered.  Consequently, based on the policy language, a genuine issue of material fact existed on USAA's contractual liability for the replacement cost of the weight bench.

     There was also a dispute over whether the policy entitled the insured to actual cash value of missing household items or replacement cost.  USAA initially determined the policy holder was only entitled to actual cash value.  USAA later acknowledged this was an erroneous interpretation of its policy.  Therefore, the ICA agreed there was a genuine issue of material fact as to whether USAA engaged in bad faith in attempting to pay cash value and in delaying payment for replacement cost.  Further, there was a genuine issue of material fact on whether USAA acted in bad faith in denying the insured's claim for the allegedly missing weight bench.

    

Insurer Fails to Dismiss Bad Faith Count on Summary Judgment

     In dual decisions, two motions for partial summary judgment were decided by the federal district court in Louisiana involving State Farm and its insureds.  See Perrien v. State Farm Ins. Co., 2008 U.S. Dist. LEXIS 53820 (E.D. La. July 14, 2008); Perrien v. State Farm Ins. Co., 2008 U.S. Dist. LEXIS 53844 (E.D. La. July 14, 2008).

    The insureds' home sustained significant damage from Hurricane Katrina.  State Farm provided both flood insurance and homeowner's insurance on the property.  State Farm paid policy limits under the flood policy, $152,900 for dwelling damages and $52,900 for contents/personal property.  Under the homeowner's policy, State Farm paid $9,125 for dwelling damages, $400 for contents damages, and $11,564 for Loss of Use of the home.  State Farm denied the remainder of plaintiffs' claim under the homeowner's policy because the additional damage for which recovery was sought had resulted from flood, an excluded peril under the homeowner's policy. 

     The insured filed suit seeking to recover the policy limits under their homeowner's policy as well as asserting a claim for bad faith based on State Farm's arbitrary and capricious failure to timely pay the amounts due to plaintiffs under their homeowner's policy.  In the first decision, State Farm moved for partial summary judgment seeking an order that the insureds could not claim that damages for which they were previously compensated under their flood policy were, in fact, caused by wind.  The motion was granted.  While receipt of money for damages under a flood policy does not preclude plaintiffs from asserting a claim under their homeowner's policy, it does preclude plaintiffs from obtaining a windfall double recovery by now recharacterizing as wind damages those losses for which they have already been compensated by previously attributing them to flood damage.

     State Farm filed a separate motion for partial summary judgment regarding the bad faith claim.  The insureds argued that State Farm's failure to pay damages under the homeowner's policy constituted bad faith because State Farm failed to follow its own Wind/Water Protocol.  The insureds charged State Farm ignored evidence gathered at neighboring homes.  The insureds argued wind damage occurred hours before water arrived, but State Farm chose to withhold this information from its investigators. 

     The court denied State Farm's motion on the bad faith claim.  There were genuine issues of material fact concerning whether State Farm adhered to its Protocol, and what information State Farm's investigators had when they issued their reports. 

    

Insurer's Refusal to Consent to Settlement May Constitute Bad Faith

     The Hawaii Supreme Court determined there was a genuine issue of fact on whether the insurer acted in bad faith in failing to consent to the insured's settlement with a third party tortfeasor.  See Guajardo v. AIG Hawaii Ins. Co., No. 27893 (Haw. Sup. Ct. July 8, 2008).

     The insured had an auto policy with AIG which included $100,000 in UIM coverage.  The policy promised to pay UIM coverage once the under insured tortfeasor's bodily injury limits were exhausted "by payment of judgments or settlements." 

     The insured was injured in an auto accident. The torfeasor, Senaga, was insured for $100,000 in liability coverage through Progressive Insurance.  Progressive agreed to tender its policy limits.  The insured's counsel wrote to AIG, asking for its consent to the settlement.  AIG refused based on its belief that Senaga, who was a deputy attorney general and lived with his parents, had the capacity to earn sufficient future income to pay any excess judgment against him.  Moreover, AIG claimed the policy required the insured to obtain a judgment against Senaga before UIM benefits were paid. Thereafter, the insured continued to apprise AIG of settlement negotiations and to seek consent for the settlement, but AIG maintained its position.

     The insured eventually executed a release of claims against Senaga in exchange for the $100,000 policy limit.  Thereafter, the insured sued AIG for: (1) a declaratory judgment that AIG had an obligation to provide UIM benefits under the policy; (2) tortious breach of the implied covenant of good faith and fair dealing; and (3) punitive damages.  The Circuit Court granted both parties' motions for partial summary judgment.  The court held AIG must pay UIM benefits.  The court also determined AIG had not acted in bad faith.  The Intermediate Court of Appeals affirmed.

     The Supreme Court accepted certiorari and reversed.  AIG had unequivocally withheld its consent to settle.  The policy did not allow AIG to refuse its consent to settle on the basis that the tortfeasor had sufficient assets to allow AIG to recoup the UIM benefits owed to the insured.  Therefore, a genuine issue of material fact existed as to whether AIG's interpretation of its policy was unreasonable because AIG had insisted the insured must obtain a judgment against Senaga.  There was also an issue of fact as to whether AIG's reliance upon an unreasonable interpretation of its policy subsequently caused an unreasonable delay in payment of benefits that warranted recovery of compensatory damages.    

Insurers "No Pay" Attitude

Stripping the job of an insurance company to its basic components reveals a gritty truth: insurance companies make money by collecting more than they pay out.  A successful operation depends on exercising good judgment on what risks to insure (or charging high enough premiums).  Unfortunately, an insurer can also vigorously oppose attempts to obtain coverage -- a "no pay" attitude.  This is a bad business practice -- particularly in states, such as Hawaii, that acknowledge the tort of bad faith -- and disregards the fact that insurance coverage was intended to be a reliable mechanism to transfer of risk.

One example of a "no pay" attitude can be depicted in Hunt Constr. Group, Inc. v. Allianz Global Risks U.S. Ins. Co., 503 F.3d 632 (7th Cir. 2007).  Written by the astute Judge Posner, the facts of the case were as follows:

"Hunt had contracted with Northwest Airlines to build a major terminal facility at the Detroit airport. Heavy rains interfered with the project, causing millions of dollars of loss, including liquidated damages that Hunt had to pay Northwest for delay in the completion of the project caused by the rains. Hunt claimed that this expense was insured under the 'builders risk' policy that Allianz had issued to it, but Allianz persuaded the district court that though called "builders risk" (no apostrophe, though the term could use one), the policy is actually a "fire insurance policy" under Michigan law, which provides that a suit under such a policy "must be commenced within 1 year after the loss or within the time period specified in the policy, whichever is longer." Mich. Comp. Laws Ann. � 500.2833(1)(q). The policy itself specified no time period within which the insured had to sue."

Dryly, Judge Posner observed:

"To call the builders risk policy a fire insurance policy, and subject it to the 19 separate requirements that the statute imposes on 'each fire insurance policy issued or delivered in this state,' id., when the damage for which the insured seeks indemnification was not caused by fire, strains the ordinary meaning of the term 'fire insurance policy.' But the language of insurance contracts is not standard English, so we must press on."

The Seventh Circuit reversed the District Court.  Notable is not that an insurance company would take such a tenuous argument, but that it actually was accepted by the district court.