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FMG Law Blog Line

Posts Tagged ‘Bad Faith’

The Cannabis Industry Takes Another Step Towards Mainstream

Posted on: November 12th, 2018

By: David Molinari

In 1996, the People of the State of California first passed an initiative to legalize medicinal cannabis. The legislature toyed with drafting the statutory framework regulating the medical cannabis industry. Finally, in 2014 the first “legal” medicinal dispensaries began to open throughout the state. The economic impact of medicinal cannabis was so significant that four years later recreational cannabis was overwhelmingly voted into existence. The cannabis industry has elbowed its way to the table claiming a seat alongside tech industry, manufacturing industry and agricultural industry. One tell-tale sign that the cannabis industry has taken steps toward mainstream, its “inventory” is an insurable commodity under a commercial property and general liability insurance policy.

Green Earth Wellness Center operated a retail medical marijuana business and an adjacent growing facility. Atain Specialty Insurance Company issued Green Earth a commercial property and general liability insurance policy. A wildfire broke out and advanced toward Green Earth’s business. Although the fire did not destroy the business, smoke and ash from the fire overwhelmed Green Earth’s ventilation system; causing damage to Green Earth’s marijuana plants. Green Earth made a claim under the policy for loss of its inventory due to the smoke and ash which Atain denied.

Separately, thieves entered Green Earth’s growing facility and stole some of the marijuana plants. Again, Green Earth made a claim under its policy and again Atain denied the claim. Green Earth eventually commenced an action for breach of contract and bad faith. Atain filed a Motion for Summary Judgment raising, among other issues, that in light of federal law and federal public policy, it was illegal for Atain to pay damages to marijuana plants and products. Atain argued that the application of an exclusionary provision in the policy for contraband or property in the course of an illegal transportation or trade requires that coverage be denied; even if the policy would otherwise have provided coverage.

The Court noted that the policy itself did not define the term “contraband.” The Court acknowledged application of federal law, particularly 21 U.S.C. 841(a)(1) that makes possession of marijuana for distribution a federal crime. However, the Court took note that such a federal prohibition has become more “nuanced” as an increasing number of states have enacted regulations for medicinal and recreational cannabis. Enforcement of the Controlled Substance Act in states that have enacted statutes regulating use and distribution is at times ambivalent and erratic. Other than pointing to the federal criminal statutes, Atain offered no evidence that the application of existing federal public policy would result in criminal enforcement against Green Earth. Atain also failed to assert Green Earth’s operations were in violation of state law.

In rejecting Atain’s public policy and illegality defense to coverage for inventory damage, the Court turned to the parties’ intention regarding coverage of Green Earth’s marijuana. The evidence suggested that the parties mutually intended to include coverage for the marijuana plants constituting Green Earth’s inventory. Atain drafted the medicinal marijuana dispensary supplemental application form that asked several questions about inventory: Such as, how much inventory is displayed to customers, how much inventory is kept on the premise during non-business hours and whether the inventory is stored in a locked safe. Before entering the policy, Atain knew Green Earth was operating a cannabis business. Atain knew or should have known at the time of the policy inception that federal law (at least nominally) prohibited such a business; but Atain nevertheless elected to issue the policy and collect premiums.  Atain never sought to disclaim coverage for Green Earth’s inventory before the claims were made. By issuing the policy and taking premiums, it was clear that the carrier would not raise the contraband exclusion to marijuana inventory.

The Court assumed Atain had legal counsel and obtained opinions and assurances from its own legal counsel before embarking on the business of insuring marijuana operations. The Court viewed the case as a breach of contract action. Atain, through its policy, made contractual promises and then breached them refusing to entertain Atain’s argument that the Court must declare the policy unenforceable as against public policy. It was irrelevant under the Court’s analysis that possession and sale of marijuana was a federal crime or that marijuana should under a public policy argument be determined an uninsurable commodity.

The lesson for insurers: the cannabis industry is an expanding multi-billion-dollar industry where entrepreneurs will spend money on insurance premiums to protect its investment and inventory. A carrier entering a policy knowing the insured’s business is cannabis very well may be obligated to cover claims or face the risk of damages for breaching the policy.

If you have any questions or would like more information, please contact David Molinari at [email protected].

The Bad Faith Trap: Evidentiary Concerns In Defending “Failure To Settle” Claims

Posted on: October 19th, 2018

By: Phil Savrin

It is commonly known in our industry that even an insurer that has accepted coverage for a liability claim can nevertheless be exposed to liability beyond the limits of the policy if it fails to settle the claim. The reason for this rule is that an insurer’s contractual agreement to protect the insured’s financial interest extends to safeguarding the insured from a judgment outside the monetary coverages of the policies. Many courts hold that the insurer cannot “gamble” with the insured’s money, which it could be doing in circumstances where the liability exposure exceeds the limits of the policy. As with many such aspirations, however, the devil is in the details in terms of how the rule is applied.

The easy case is where the insured is clearly liable for the claim asserted and the damages clearly exceed the limits of the policy. In that circumstance, it is only a matter of time before a judgment is entered in excess of the limits of the policy. At the other end of the spectrum, where it is clear that the insured is not liable – or that the damages are clearly within the limits of the policy – the insurer is “gambling” with its own funds and should not be exposed to an extra-contractual claim. The challenging case falls between these two extremes, where a jury is not expected to find liability, or award damages exceeding the policy limits, but might do so.

However the insurer may have gotten there, if it is facing an extra-contractual claim then it is likely that the unanticipated has occurred. For this reason, clever (some might say crafty) attorneys may try to make the offer difficult to accept or may not provide full and complete information, with the goal of setting up the insurer for a bad faith claim down the road or gaining leverage during settlement discussions. This tactic may be employed particularly where the limits are woefully insufficient such that there is no other means of a financial recovery.

To counter these efforts, any demand for policy limits should be regarded as the time bomb that it is. If the decision is made not to accept the demand, an explanation should be provided as to why liability or damages are uncertain as well as coverage concerns that may need to be taken into consideration. If applicable, the response to a demand can include requests for evidence or witnesses to be produced for examination and leave open the possibility of further settlement discussions as the investigation proceeds. The letter should be prepared as though it is being presented to a jury, for that may be precisely its purpose; because hindsight is 20-20, being able to clearly reconstruct the “lay of the land” is critical to defending the reasonableness of the decision at the time it was made in these challenging situations.

If you have any questions or would like more information, please contact Phil Savrin at [email protected].

Qualified Immunity Applied to Employment

Posted on: October 3rd, 2018

By: Owen Rooney

In Kramer v. Cullinan 878 F.3d 1156 (9th Cir., 2018) the Ninth Circuit reversed the denial of a Motion for Summary Judgment, holding that that the employer’s public statement was not “stigmatizing” and defendant was entitled to qualified immunity.

Plaintiff served in dual roles as Executive Director of Public Radio and a related Foundation. He reported to Southern Oregon University President Cullinan who became concerned that plaintiff was engaged in costly projects and a potential conflict of interest existed in plaintiff serving in both capacities. The University system conducted an asset liability investigation which concluded that the projects could cause a financial strain on the university and that the projects were not aligned with the university’s interests. Plaintiff resisted the university’s efforts to remove him from both roles by trying to have the Board pass resolutions to keep him in both positions. The university president sought advice of counsel who authored a letter urging the Foundation not to adopt plaintiff’s resolutions and also raising the potential liability of plaintiff and the Directors. The letter was given to the Board members prior to voting on plaintiff’s resolutions, a meeting at which the press was present.  At the meeting, President Cullinan spoke, again raising the issue of possible legal liability, but expressing hope for an amicable resolution.

Thereafter, plaintiff’s annual appointment was not renewed. Following the grievance procedure, plaintiff filed suit, alleging, among other things, a civil rights violations for deprivation of his liberty without due process. The District Court granted summary judgment as to all claims except the civil rights cause of action. In reversing, the Ninth Circuit held that the letter did not actually impute bad faith, willful or wasteful conduct. Rather, the letter in question stated that “if” plaintiff had engaged in bad faith, willful or wasteful conduct, he would not be entitled to indemnity.

Secondly, the Court recognized that an employer’s statement about an employee may implicate a liberty interest. Thus, an employee charged with fraud, dishonesty or immoral conduct is entitled to a name-clearing hearing under the 14th Amendment. The Court also held that prior legal precedent was not sufficient to put the university president on notice that her conduct violated plaintiff’s constitutional rights because the prior cases did not involve the conditional language at issue here.

The take away is that qualified immunity is still alive in the Ninth Circuit and is applicable in an employment context.

If you have any questions or would like more information please contact Owen Rooney at [email protected].

Is Georgia Game for Growing Bad Faith Liability?

Posted on: July 17th, 2018

By: Jessica Samford

As discussed in my last blog on bad faith, seeking bifurcation can be a proactive means to distinguish the issue of coverage from the issue of bad faith and appropriately manage the all too often unwieldy discovery process before it’s too late.  A recent case in Georgia is an interesting illustration of an insurer’s attempt to bifurcate issues after the discovery stage in a bad faith failure to settle claim in particular and is yet another cautionary example for insurers to carefully consider the increasing potential for extracontractual liability in Georgia.  Whiteside v. GEICO Indem. Co., 2018 U.S. Dist. LEXIS 87868, *3-*4 (M.D. Ga. May 25, 2018).

In that case, the trial court declined to bifurcate the issues of liability and proximate cause of damages at the trial stage as requested by Geico, which sought to have a jury determine whether or not Geico could be held liable for bad faith failure to settle before being presented with evidence of the default judgment entered against Geico’s insured of almost $3 million and causation of same.  Separation of liability and damages issues was not warranted according to the trial court because facts relating to Geico’s claim handling were relevant to both, and Geico’s concerns could be handled through proper jury instructions, special interrogatories, and the verdict form.  See also Whiteside v. GEICO Indem. Co., 2018 U.S. Dist. LEXIS 52761 (M.D. Ga. Mar. 29, 2018).  The trial court did, however, bifurcate the claim for punitive damages from the rest of the jury trial.

The result was a jury verdict of $2 million against Geico for failing to settle in response to a bicyclist’s demand for the $30,000 policy limit based on medical bills of almost $10,000 following a motor vehicle accident.  Previously, Geico had argued there was no coverage due to the insured’s failure to notify Geico of the subsequent lawsuit she was served.  Whiteside v. GEICO Indem. Co., 2017 U.S. Dist. LEXIS 203617, *6, 2017 WL 6347174 (M.D. Ga. Dec. 12, 2017).  Notwithstanding such a flagrant breach of the policy’s notice conditions, the trial court did not see coverage as being an issue since that coverage defense did not exist at the time Geico responded to the demand by offering to settle for about half the limits instead.

These unusual circumstances are certainly noteworthy, and extracontractual damages such as these are becoming less uncommon in Georgia bad faith cases.  FMG’s Insurance Coverage and Bad Faith BlogLine has already geared up to cover the Georgia Supreme Court’s upcoming rulings after granting cert on the scope of what triggers failure to settle liability in Georgia, not to mention the proposed changes to the Restatement of the Law of Liability Insurance and their impact.  Whatever is in the cards for extracontractual liability in Georgia, the risks presented by settlement demands should be evaluated in light of these current trends.

If you have any questions or would like more information, please contact Jessica Samford at [email protected].

Georgia Supreme Court Grants Certiorari In Failure to Settle Case

Posted on: June 25th, 2018

By: Bill Buechner

The Georgia Supreme Court recently granted an insurer’s petition for certiorari in a bad faith failure to settle case to consider what constitutes an offer to settle a claim within policy limits and whether an insurer’s duty to settle arises only when the claimant presents a valid offer to settle within policy limits.  First Acceptance Ins. Co. of Georgia, Inc. v. Hughes, 2018 Ga. LEXIS 407 (June 4, 2018).

In Hughes, the insured caused an automobile accident that resulted in his death and injured others, including the claimants (a mother and her minor child, who sustained a traumatic brain injury).   The limits on the policy were $25,000 per person and $50,000 per accident.   After the insurer sent a letter to the claimants’ counsel (and other injured parties) requesting a settlement conference, the claimants’ counsel sent a response letter to the insurer on June 2, 2009 stating that they were “interested in having their claims resolved within your insured’s policy limits and in attending a settlement conference[.]”  The 6/2/09 letter from the claimants’ counsel also explained that the claimants had uninsured/underinsured motorist coverage in the amounts of $100,000 per person and $300,000 per accident.  The 6/2/09 letter continued:

Of course, the exact amount of UM benefits available to my clients depends upon the amount paid to them from the available liability coverage.  Once that is determined, a release of your insured from all personal liability except to the extent other insurance coverage is available will be necessary in order to preserve my clients’ rights to recover under the UM coverage and any other insurance policies.  In fact, if you would rather settle within your insured’s policy limits now, you can do that by providing that release document with all the insurance information as requested in the attached, along with your insured’s available bodily injury liability insurance proceeds.

The accompanying letter from the claimants’ counsel, also dated June 2, 2009, requested various insurance information within 30 days and stated that “[a]ny settlement will be conditioned upon [the] receipt of all the requested insurance information.”

Counsel for the insurer did not consider the letter from the claimants’ counsel as an offer to settle within policy limits and thus did not respond to the letter.   On July 10, 2009 (38 days later), the claimants filed a lawsuit.  On July 13, 2009 ( 41 days later), counsel for the claimants sent a letter to the insurer stating that the 6/2/09 offer to settle within policy limits was withdrawn.  The claimants thereafter obtained a jury verdict in July 2012 awarding $5,334,220 in favor of the minor child.

An administrator for the insured’s estate filed a lawsuit against the insurer asserting that the insurer negligently or in bad faith had failed to settle the minor child’s claim within policy limits.   The trial court granted summary judgment in favor of the insurer, but the Court of Appeals reversed and concluded that there were material issues of fact as to whether the 6/2/09 letters from the claimants’ counsel offered to settle the minor child’s claims within policy limits and whether the offer included a 30-day deadline for a response.  Hughes v. First Acceptance Ins. Co. of Ga., Inc., 343 Ga.App. 693, 697, 808 S.E.2d 103 (2017).

The Georgia Supreme Court granted the insurer’s petition for certiorari and stated that it was particularly concerned with (1) whether there were material issues of fact as to whether the 6/2/09 letter from the claimants’ counsel offered to settle the minor child’s claim within the policy limits and established a 30-day deadline to accept the offer; and (2) whether the insurer’s duty to settle arises “when it knows or reasonably should know settlement within the insured’s policy limits is possible with an injured party or only when the injured party presents a valid offer to settle within the insured’s policy limits?”

The Georgia Supreme Court’s rulings on these issues likely will have a significant impact on Georgia insurers and their exposure to negligent or bad faith failure to settle claims.  Oral argument has been scheduled for September.

If you have any questions or would like more information, please contact Bill Buechner at [email protected].