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Posts Tagged ‘Bad Faith’

Georgia Supreme Court Overrules Precedent on Attorney’s Fees for Counterclaimants

Posted on: April 8th, 2020

By: Jake Carroll

Georgia law permits the award of attorney’s fees to a claimant where the party defending the claim has “acted in bad faith” in making the contract, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense. O.C.G.A. § 13-6-11. The “bad faith” refers to bad faith in the making or performance of the contract, and may exist whether or not there is a bona fide controversy otherwise existing between the parties.  Thus, “bad faith” relates to the making or performance of the contract and not the conduct of the litigation. The terms “stubbornly litigious” and “unnecessary trouble and expense” relate to the conduct of the litigation and may be found to exist where there is a lack of bona fide controversy.

Both the Georgia Supreme Court and Court of Appeals have repeatedly held that “the award of expenses of litigation under O.C.G.A. § 13-6-11 can only be recovered by the plaintiff in an action under the language of the statute; therefore, the defendant and plaintiff-in-counterclaim cannot recover such damages where there is a compulsory counterclaim.”[1]

However, the decision in SRM v. Travelers overrules prior holdings, and allows a counterclaimant to recover attorney’s fees under O.C.G.A. § 13-6-11, regardless of whether the counterclaim is independent of the plaintiffs claim.

In light of the Travelers decision, claimants should evaluate the potential risk of claims for attorney’s fees from their counterclaimants. In commercial and construction contract disputes, the Travelers decision impacts risk for counterclaims of attorney’s fees based on a claimant’s conduct during litigation, as well as bad faith in making or performing the underlying contract.

For Georgia insurers, this ruling does not call into question the status of Georgia’s insurance bad faith statute, O.C.G.A. § 33-4-6, which is the exclusive remedy for and insurer’s refusal to pay a “covered loss.” Although the claims at issue in SRM were against an insurance company, they involved the calculation of premium as opposed to a coverage issue within the purview of Section 33-4-6. Be sure to follow FMG’s Insurance Coverage and Bad Faith BlogLine for analysis of current state-wide and national trends in insurance litigation.

If you have questions regarding this decision, or any other construction or commercial contract questions, Jake Carroll practices construction and commercial law as a member of Freeman Mathis & Gary’s Construction Law, Commercial Litigation, and Tort and Catastrophic Loss practice groups. Mr. Carroll represents business and commercial entities in a wide range of disputes and corporate matters involving breach of contract and warranty claims, business torts, and products liability claims. He is available at [email protected].

[1] See Byers v. McGuire Properties, Inc., 679 S.E.2d 1 (Ga. 2009); Graybill v. Attaway Constr. & Assocs., 802 S.E.2d 91 (Ga. Ct. App. 2017) (attorney’s fees not permitted on compulsory counterclaim);Singh v. Sterling United, Inc., 756 S.E.2d 728 (Ga. Ct. App. 2014); Sanders v. Brown, 571 S.E.2d 532 (Ga. Ct. App. 2002).

Plaintiffs and Lawmakers Raise Bad Faith Issues in COVID-19 Claims

Posted on: April 3rd, 2020

By: Adrianna Michalska and Eric Retter

Every American is reminded daily that Coronavirus spreads easily and quickly. So has the impact on the insurance industry. How fast? Less than a month after the first U.S. death attributed to the virus on February 29, an insurer already faces a coverage and bad faith lawsuit over a COVID-19-related claim.

While the speed with which the first bad faith case arrived may be unexpected, there was little doubt such cases were coming. Other lawsuits hinted at such claims weeks ago, and state efforts to require carriers to pay business interruption claims—regardless of whether their policies actually cover such claims—may also lead to extra-contractual claims.

Restaurants are leading the charge

Several restaurants have sued their insurers, seeking declaratory judgments for potential business interruption claims in the wake of COVID-19. But Big Onion Tavern Group, LLC et. al. v. Society Insurance, Inc., filed March 27 in the Northern District of Illinois,features the first actual denial of such a claim, which prompted the boilerplate bad faith claim.

On March 15, 2020 Illinois Governor Pritzker ordered all restaurants, bars, and movie theaters to close. Executive Order 2020-07 posits that “frequently used surfaces in public settings, including bars and restaurants, if not cleaned and disinfected frequently and properly, also pose a risk of exposure.” One of the plaintiffs in the Big Onion case, Legacy Hospitality, operates a Chicago restaurant called The Vig. On March 20, Legacy asked Society Insurance to pay a claim resulting from the shutdown. Society denied the claim three days later. The denial stated that there was no direct physical loss or damage to property triggering either a business interruption or civil authority claim (Society also denied claims for spoilage and contamination in the denial letter, attached as an exhibit to the Complaint).

The other restaurant owners who are plaintiffs in the Big Onion do not attach denial letters as exhibits, but each alleges that its claims were similarly denied. All of the plaintiffs rely on an email from Society’s CEO and President dated March 16, averring that it indicates the insurer’s intent to deny all such claims without investigating them. (The last page of the email states that it is a “TEST EMAIL ONLY,” sent for the purpose of testing a draft message.)

Suits seeking declarations that these types of losses are covered have been filed in other jurisdictions. On March 30, our colleague Katie Cusack  reported on a declaratory judgment action that was filed in mid-March in a Louisiana state court by a New Orleans restaurant seeking a declaration of prospective coverage under a business interruption policy based upon events and losses that are not alleged to have occurred. [Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana].

Political pressure mounts

On the same day the Cajun Conti suit was filed, New Orleans TV station WWL4 reported that  Mayor LaToya Cantrell filed an emergency declaration in the same court. That order states that COVID-19 “caus(es) property loss and damage in certain circumstances.” If there were any doubt about her intentions to influence insurance payments, Mayor Cantrell announced that “[w]e have also been very aggressive as it relates to business interruption support and … insurance. We understand pandemic infections are not included in their insurance coverage, which makes this a priority for my administration to push for these reasons at the state and federal level.”

Mayor Cantrell is not the only politician aggressively pressuring insurers. New Jersey introduced a proposed bill in mid-March that would force insurers to cover business interruption insurance even if they expressly excluded virus and bacteria losses in their commercial property policies. Several states have proposed similar legislation, including New York, where Assemblyman Robert C. Carroll planted the notion that it would be “unconscionable” for insurers to rely on such exclusions after they received bailouts in 2008.

Massachusetts has also proposed such a law. Bill SD.2888 would construe any business interruption policy to include among the covered perils loss of use and occupancy, and business interruption directly or indirectly resulting from COVID-19. The bill would require this construction even when the policy contains express language excluding any losses “on account of (i) COVID-19 being a virus . . . ; or (ii) there being no physical damage to the property of the insured or to any other relevant property.”

Proponents of the Massachusetts bill go a step further by trying to tie the bill to Chapter 176D of the General Laws. Chapter 176D concerns Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance. Along with Chapter 93A, it provides relief for bad faith handling of insurance claims. Together, the statutes allow for possible recovery of attorneys’ fees and even double or treble damages for knowing and willful violations.

To date, no state has yet passed bills into law that seek to override policy provisions precluding coverage for business interruptions claims associated with COVID-19. FMG will continue to monitor these bills along with other political efforts that impact the insurance industry and the construction of such provisions in particular.

The FMG #Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include employment issues, the real-world impact of business restrictions, education claims and more.

Additional Information:

The FMG Coronavirus Task Team will be conducting a series of webinars on Coronavirus issues on a regular basis. Topics include employment issues, the real-world impact of business restrictions, education claims and more. Click here to register.

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients.  Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments.  For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

**DISCLAIMER:  The attorneys at Freeman Mathis & Gary, LLP (“FMG”) have been working hard to produce educational content to address issues arising from the concern over COVID-19.  The webinars and our written material have produced many questions. Some we have been able to answer, but many we cannot without a specific legal engagement.  We can only give legal advice to clients.  Please be aware that your attendance at one of our webinars or receipt of our written material does not establish an attorney-client relationship between you and FMG.  An attorney-client relationship will not exist unless and until an FMG partner expressly and explicitly states IN WRITING that FMG will undertake an attorney-client relationship with you, after ascertaining that the firm does not have any legal conflicts of interest.  As a result, you should not transmit any personal or confidential information to FMG unless we have entered into a formal written agreement with you.  We will continue to produce education content for the public, but we must point out that none of our webinars, articles, blog posts, or other similar material constitutes legal advice, does not create an attorney client relationship and you cannot rely on it as such.  We hope you will continue to take advantage of the conferences and materials that may pertain to your work or interests.**

Kentucky Court of Appeals Reminds Plaintiffs They Bear a “Tall Burden” in Proving Bad Faith

Posted on: June 26th, 2019

By: Barry Miller

A Kentucky Court of Appeals decision adopted a federal court’s observation that Kentucky bad faith decisions fall into two broad categories. One category reflects “a more expansive approach to a finding of bad faith,” analyzing facts where the insurer’s conduct was oppressive and the facts establishing liability were clear. The second category represents the “greater number” of Kentucky cases which follow the “standards set forth in the landmark case of Wittmer v. Jones.”

In Wittmer the Supreme Court of Kentucky states three elements that a bad-faith claimant (whether first or third party) must meet: (1) The insurer must be obligated to pay the claim under the terms of the policy; (2) The insurer must have lacked a reasonable basis to delay or deny payment; and (3) The insurer must have known or been conscious of the fact that it lacked a reasonable basis to delay or deny. Later Kentucky cases make it clear that a claimant must show proof of all three.

According to the Messer court, the claimant thought his case fell into the “more expansive” category of bad faith claims, but instead it fell into the second and failed to meet the Wittmer standards. First, the case presented a legitimate coverage question. There was a question about whether the tortfeasor’s use of the insured vehicle was permissive, and if it was not, the claim was excluded. Messer makes it clear that an insurer does not have to prevail on a coverage question to avoid bad faith; the insured’s claim need only be reasonably debatable. Because coverage was debatable here, Messer could not meet the first Wittmer element of proving that Universal was obliged to pay his claim under the terms of its policy.

This was true even though Universal settled the claim against the tortfeasor. Liability also remained in doubt because that settlement occurred before the jury could decide the questions of liability and apportionment. The settlement did not foreclose the liability issue; under Kentucky law “settlements are not evidence of legal liability, nor to the qualify as admissions of fault.” Nor did the insurer’s reserves, which were discoverable, constitute evidence of coverage, liability, or fault.

The Court of Appeals concluded that Messer never produced evidence eliminating the possibility that a jury could have held him 100 percent at fault for causing the accident. Thus, it was reasonable for the insurer, throughout the case, to challenge the allegation that the tortfeasor was not liable for causing the accident, or for Messer’s damages.

Messer has 30 days to ask the Supreme Court of Kentucky for discretionary review. It can take the Supreme Court several months to consider such motions. If the Court of Appeals’ decision is allowed to stand, this opinion represents an important synthesis of Kentucky bad faith opinions that will remind bad faith plaintiffs of the “tall burden of proof” in a bad faith claim.

If you have questions or would like more information, please contact Barry Miller at [email protected].

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].