Bad Faith Compendium: Virginia

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The Insurance Coverage Law Information Center
BAD FAITH COMPENDIUM: VIRGINIA
June 9, 2014 William O. Krekstein, Michael S. Savett, and Benjamin R. Messing,
Nelson Levine de Luca & Hamilton
Executive Summary
Insurance bad faith law is like a quilt, a patchwork that varies from square to square – in this instance, common law
decisions, statutes and codes that differ widely from state to state. Insurer conduct that is benign in one jurisdiction may
rise to the level of bad faith conduct in another. In this compendium, the authors review nearly two dozen states where
bad faith issues most often arise and provide a synopsis of pre-litigation claims-handling standards, first- and third-party
claim issues, insurance company defenses, procedural and discovery issues, and the scope of damages. In this 22nd
installment of the compendium, the authors review bad faith law in Virginia.
Virginia
Pre-Litigation: Claims Handling Standards
Standard for making initial coverage determination
An ambiguity, if one exists, must be found on the face of the policy. Nationwide Mutual Ins. Co. v. Wenger, 222 Va. 263,
268, 278 S.E.2d 874, 877 (1981).
Language is ambiguous when it may be understood in more than one way or when it refers to two or more things at the
same time. Lincoln National Life Ins. Co. v. Commonwealth Container Corp., 229 Va. 132, 136-37, 327 S.E.2d 98, 101 (1985).
Doubtful, ambiguous language in an insurance policy will be given an interpretation which grants coverage, rather than
one which withholds it. St. Paul Ins. v. Nusbaum & Co., 227 Va. 407, 411, 316 S.E.2d 734, 736 (1984).
Relevance of extrinsic evidence in making coverage determination
Only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether
there is a duty on the part of the insurer to defend and indemnify the insured. AES Corp. v. Steadfast Ins. Co., 283 Va. 609,
616-17, 725 S.E.2d 532, 535 (2012).
Standard for duty to defend
The duty to defend is triggered when the underlying complaint alleges liability that “potentially or arguably” is covered
by the policy. Donnelly v. Transp. Ins. Co., 589 F.2d 761, 767 (4th Cir.1978).
An insurance company “is excused from its duty to defend the insured only where the complaint against the insured
clearly demonstrates no basis upon which the insurer could be required to indemnify the insured under the policy.” Fuisz
v. Selective Ins. Co. of Am., 61 F.3d 238, 242 (4th Cir.1995).
Standard for duty to indemnify
While the duty to defend is based on the allegations in the underlying complaint, the duty to indemnify relies on litigated
facts. Builders Mut. Ins. Co. v. Futura Grp., L.L.C., 779 F. Supp.2d 529, 532 (E.D. Va. 2011).
“The duty to indemnify ... refers to an insurer’s responsibility to pay a monetary award when its insured has become liable
for a covered claim.” Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 257–58 (4th Cir.2006).
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First party claims handling standards
Insurers have 10 working days from receipt of notification of claim to acknowledge receipt, provide necessary claim forms,
instructions, and reasonable assistance. 14 Va. Code Ann. §5-400-50.
Insurers have 10 working days from receipt of communication (oral or written) reply to all pertinent communications to
which reasonably suggest a response is expected. 14 Va. Code Ann. §5-400-50.
Insurers have 15 working days from receipt of properly executed proof of loss to notify insured of acceptance or denial of
the claim. 14 Va. Code Ann. §5-400-60.
Insurers have 15 working days from receipt of properly executed proof of loss to notify insured more time is needed to
investigate giving the reasons more time is needed. 14 Va. Code Ann. §5-400-60.
Insurers have 45 regular days from the first notification and every 45 day interval thereafter, provide written notification to
a first-party claimant that the investigation remains incomplete and the reasons. 14 Va. Code Ann. §5-400-60.
Is coverage a condition precedent to maintaining a bad faith claim?
Yes. The existence of coverage is a prerequisite to a bad faith claim under Virginia law. Builders Mut. Ins. Co. v. Dragas
Mgmt. Corp., 709 F.Supp.2d 441, 450 (E.D.Va. 2010).
Is bad faith claims handling a recognized cause of action absent finding of coverage?
No. The existence of coverage is a prerequisite to a bad faith claim under Virginia law. Dragas Mgmt. Corp., supra.
First Party
Standard for bad faith
In evaluating the conduct of an insurer, the trier of fact must consider: “whether reasonable minds could differ in the
interpretation of policy provisions defining coverage and exclusions; whether the insurer had made a reasonable
investigation of the facts and circumstances underlying the insured’s claim; whether the evidence discovered reasonably
supports a denial of liability; whether it appears that the insurer’s refusal to pay was used merely as a tool in settlement
negotiations; and whether the defense the insurer asserts at trial raises an issue of first impression or a reasonably
debatable question of law or fact.” CUNA Mutual Ins. Soc’y v. Norman, 375 S.E.2d 724, 727 (Va. 1989).
Statutory bad faith
If a court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make
payment to the insured under the policy, an insured’s exclusive remedy is the recovery of attorney’s fees and costs. Va.
Code Ann. § 38.2-209.
Unfair Insurance Practices Act forbids various insurance practices, including failure in bad faith to settle claims for which
liability is reasonably clear. Va. Code § 38.1–52.9(6); however, there is no private cause of action. A & E Supply Co., Inc. v.
Nationwide Mut. Fire Ins. Co., 798 F.2d 669, 673-74 (4th Cir. 1986).
Bad faith cause of action at common law
A cause of action for bad faith lies within a breach of contract action; there is no independent cause of action in tort for
bad faith involving insurance coverage disputes in Virginia. Botkin v. Donegal Mut. Ins. Co., 2011 WL 1225999 (W.D.Va.
March 29, 2011).
There is a statutory remedy allowing a court to award attorney’s fees and costs if the insurer denies a claim in bad faith.
Va. Code Ann. § 38.2–209 (2007). The statute does not create a cause of action, but is merely a fee-shifting mechanism
allowing for an award of costs and fees if “the court determines that the insurer, not acting in good faith, has either
denied coverage or failed or refused to make payment to the insured under the policy.” Styles v. Liberty Mut. Fire Ins.
Co., 2006 WL 1890104 (W.D.Va. 2006).
Parties to a Bad Faith Cause of Action
Direct action by injured party?
Statutory remedy is limited to policyholder. Va. Code Ann. § 38.2-209.
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Limits on Conduct Evidencing Bad Faith
No limits on conduct during underwriting or litigation.
Proving Bad Faith
Applicable burdens of proof
In pursuing a claim, the plaintiff’s burden of proof is a preponderance of the evidence standard under a remedial statutory
remedy. Nationwide Mut. Ins. Co. v. St. John, 259 Va. 71, 76, 524 S.E.2d 649, 651 (2000).
Evidence supporting bad faith conduct
“Any evidence which demonstrates:
(1) whether reasonable minds could differ in the interpretation of policy provisions defining coverage and exclusions;
(2) whether the insurer had made a reasonable investigation of the facts and circumstances underlying the insured’s
claim;
(3) whether the evidence discovered reasonably supports a denial of liability;
(4) whether it appears that the insurer’s refusal to pay was used merely as a tool in settlement negotiations; and
(5) whether the defense the insurer asserts at trial raises an issue of first impression or a reasonably debatable
question of law or fact.” Norman, supra.
Evidentiary value of expert testimony
Expert testimony is not required.
Defenses Available to Carrier
Fairly debatable standard
In determining whether to award insured attorney fees and costs based on insurer’s failure to act in good faith, court should
consider whether reasonable minds could differ in interpretation of policy provisions defining coverage and exclusions;
whether insurer has made reasonable investigation of facts and circumstances underlying insured’s claim; whether evidence
discovered reasonably supports denial of liability; whether it appears that insurer’s refusal to pay was used merely as tool
in settlement negotiations; and whether defense that insurer asserts at trial raises issue of first impression or reasonably
debatable question of law or fact. Norman, supra.
Reverse bad faith
Not applicable.
Can insurer recoup defense/indemnity payments upon a finding of no coverage?
Recovery of payments is not permitted. Zurich Am. Ins. Co. v. Pub. Storage, 743 F. Supp.2d 548 (E.D.Va. 2010).
Bifurcation/Trifurcation
Procedural Issues
In applying the bad faith statute, Virginia courts have adopted a variety of procedural approaches. Compare U.S. Airways,
Inc. v. Commonwealth Ins. Co., 2004 WL 1094684, at *23–26 (Va. Cir. Ct. 2004) (stating that “a judgment against the insurer
acts as a condition precedent to any claim of bad faith in Virginia” and dismissing U.S. Airways’ § 38.2–209 claim), with
Wilson v. State Farm, No. CL06–2308, 2009 WL 7416543 (Va. Cir. Ct. 2009) (finding a § 38.2–209 claim premature but merely
bifurcating, rather than dismissing, the claim); Styles v. Liberty Mut. Fire Ins. Co., No. 7:06cv00311, 2006 WL 1890104 (W.D. Va.
2006)(declining to dismiss or bifurcate a § 38.2–209 claim).
Stay
Courts have stayed bad faith actions until resolution of the underlying coverage dispute. Mass. Bay Ins. Co. v. Decker, 2012
WL 43614 (W.D. Va. 2012).
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Summary judgment
Under Virginia law, a motion for summary judgment and entry of judgment in favor of the moving party will be granted only
when there are no genuine issues of material fact in dispute. Rule 3:18; Thurmond v. Prince William Prof’l Baseball Club, Inc.,
574 S.E.2d 246 (2003).
Summary judgment is a “drastic remedy” which gives trial courts the authority to end litigation at an early stage as a matter
of law, but “it does not substitute a new method of trial where an issue of fact exists.” Turner v. Lotts, 422 S.E.2d 765, 766
(Va. 1992).
When reviewing the record, the court accepts “those inferences from the facts that are most favorable to the nonmoving
party, unless the inferences are forced, strained or contrary to reason.” Dudas v. Glenwood Golf Club, Inc., 540 S.E.2d 129,
130-31 (Va. 2001).
An alternative unique to Virginia practice is called a plea in bar (in the form of a special plea), which is a defensive pleading
that reduces litigation to a single issue; if proven, it creates a bar to the plaintiff’s right of recovery. Cooper Industries v.
Melendez, 260 Va. 578, 594, 537 S.E.2d 580, 595 (2000).
In Virginia practice, the party asserting the special plea bears the burden of establishing the defense. Whitley v. Comm. of
Virginia, 260 Va. 482, 493, 538 S.E.2d 296, 302 (2000).
Where no evidence is taken on the special plea, the trial court considers solely the pleading in resolving the issue presented
and the facts stated in the plaintiff’s motion for judgment are deemed true. Lostrangio v. Laingford, 261 Va. 495, 544 S.E.2d
357 (2001).
Applicable statute of limitations
Five years for breach of contract claims. Va. Code Ann. § 8.01-246(2).
Judge v. jury
Bad faith is a question of law for the court to resolve after a determination that a wrongful denial of coverage occurred. If a
court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment
to the insured under the policy, an insured’s exclusive remedy is the recovery of attorney’s fees and costs. Va. Code Ann.
§ 38.2-209.
Damages
Consequential damages
An insurer is liable for any “general and consequential damages” that result from its failure to act in good faith, even
damages that exceed the limits of the policy at issue. A & E Supply Co., supra.
Attorney’s fees
If a court determines that the insurer, not acting in good faith, has either denied coverage or failed or refused to make
payment to the insured under the policy, an insured’s remedy is the recovery of attorney’s fees and costs. Va. Code Ann.
§ 38.2-209.
Interest
Prejudgment and post judgment interest may be added to any judgment entered, unless specified by contract otherwise, at
the statutory rate of six percent. § 6.2-302.
Punitive damages
Virginia does not “allow [the imposition of] punitive damages when an insurer, in bad faith, delays or fails to satisfy a claim
against its insured,” regardless of whether the claim is made by the policyholder or a third party. Bettius & Sanderson, P.C. v.
National Union Fire Ins. Co. of Pittsburgh, Pa., 839 F.2d 1009, 1015-17 (4th Cir. 1988).
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Discovery Issues
Discovery of insurer materials
Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the
pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any
other party, including the existence, description, nature, custody, condition and location of any books, documents, or other
tangible things and the identity and location of persons having knowledge of any discoverable matter. It is not ground for
objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated
to lead to the discovery of admissible evidence. Va. Sup. Ct. R. 4:1.
Resort to parol evidence is proper where a latent ambiguity exists in a particular insurance contract. S. Ins. Co. of Virginia v.
Williams, 263 Va. 565, 570, 561 S.E.2d 730, 733 (2002).
Attorney-client privilege
In Virginia, it appears to be “well-settled that between an attorney and his client confidential communications made because
of that relationship and concerning the subject matter of the attorney’s employment, are privileged from disclosure, even for
the purpose of administering justice.” Seventh Dist. Committee v. Gunter, 183 S.E.2d 713, 719 (Va. 1971).
Work product doctrine
Whether a document is privileged under the work product doctrine depends on “[w]hether, in light of the nature of the
document and the factual situation in the particular case, the document can fairly be said to have been prepared or
obtained because of the prospect of litigation. State Farm v. Perrigan, 102 F.R.D. 235, 238 (W.D.Va.1984), This test,
“realistically recognizes that at some point an insurancecompany shifts its activity from the ordinary course of business
to anticipation of litigation, and no hard and fast rule governs when this change occurs.” Id. This distinction lies at the
pivotal point, “where the probability of litigating the claim is substantial and imminent.” Id.
One fact used by many courts in determining whether the work product doctrine applies is the context in which the
materials are prepared. In the case of first party liability, the insurer has a duty to investigate; thus any investigation fulfills
this investigatory duty in the ordinary course of business. In the context of a first party bad faith claim, an investigation of
whether coverage exists is required and the conduct of that much of its investigation is assuredly in the ordinary course of
business, not in anticipation of litigation.
About the Authors
William O. Krekstein and Michael S. Savett are partners at Nelson Levine de Luca & Hamilton. Benjamin R. Messing
is an associate at the firm.
William O. Krekstein is resident in the firm’s Blue Bell, Pennsylvania office and represents both domestic and
international insurers. Mr. Krekstein focuses his practice in a variety of first- and third-party complex coverage and
bad faith disputes under all types of homeowner, commercial property, general liability, builders’ risk and motor
vehicle policies.
Michael S. Savett practices in the firm’s Cherry Hill, New Jersey office, advising insurers on issues involving
commercial liability, environmental, property, directors and officers, and professional liability. Mr. Savett also provides
first- and third-party coverage analysis, litigation management, design and implementation of cost-sharing agreements,
and advice concerning methods of bad faith and coverage dispute avoidance.
Benjamin R. Messing is resident in the firm’s Blue Bell, Pennsylvania office, focusing his litigation practice on complex
insurance coverage matters and insurance fraud.
The authors may be contacted at [email protected], [email protected], and [email protected],
respectively.
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