10/22/2014
Bad Faith Strategies
2014 Advanced Insurance
Seminar
TOPICS
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What is Bad Faith?
Standard
Types of Bad Faith
g to Avoid Bad Faith
Insurer Strategies
Policyholder Bad Faith Discovery
Bifurcation
Bad Faith Damages
What is Bad Faith?
• It arises out of the relationship between the
insured and insurer.
▫ “[R]ather
[R]ather, the liability arises from the breach of
the positive legal duty imposed by law due to the
relationships of the parties.”
 Captain v. United Ohio Ins. Co., Case No. 09CA14,
2010 Ohio 2691, P. 22, 2010 Ohio App. LEXIS 2197
(Highland Cty. App. June 3, 2010).
▫ There are no third-party bad faith claims.
▫ There are no reverse bad faith claims in Ohio.
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What is Bad Faith?
• Insurer has a common law duty to act in good faith and
fair dealing.
▫ Private Right of Action vs. Administrative Remedy.
 NAIC Model Rule 900.
900
 Ohio Admin Code. §3901-1-07 and R.C. 3901.20 and 3901.21.
▫ There is no statutory cause of action for bad faith in Ohio.
 Strack v. Westfield Cos., 33 Ohio App.3d 336, 338 (1986).
• Bad faith claims are independent, common law tort
claims that exist “irrespective of any liability arising from
a breach of the underlying contract.”
 Staff Builders, Inc. v. Armstrong, 37 Ohio St.3d 298, 302
(1988).
What is Bad Faith?
• To prevail on a claim of bad faith, the
policyholder must prove by a preponderance of
the evidence that:
▫ (1) the carrier owed the policyholder a duty of
good faith;
▫ (2) the carrier breached its duty of good faith; and
▫ (3) as a direct and proximate cause of the carrier's
breach of its duty, the policyholder suffered
damages.
• What constitutes a breach of the duty of good
faith and fair dealing is a fact intensive inquiry.
Bad Faith Standard
• Many states require that the insured prove that the
insurance carrier had intentional wrongdoing in
order to sustain a bad faith claim.
• Ohio Standard: the carrier’s conduct was without
reasonable justification:
▫ “an insurer fails to act in good faith in the processing
of a claim of its insured where its refusal to pay the
claim is not predicated upon circumstances that
furnish reasonable justification therefor.”
 Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552, 554
(1994).
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Bad Faith Standard
• Fairly Debatable.
▫ “Where a claim is fairly debatable the insurer is entitled to
refuse the claim as long as such refusal is premised on a
genuine dispute over either the status of the law at the time
of the denial or the facts giving rise to the claim.”
 Tokles & Son, Inc. v. Midwestern Indem. Co, 65 Ohio St.3d
621, 630 (1992).
• Arbitrary and Capricious.
▫ “An insurer lacks reasonable justification for denying a
claim when its refusal to pay is predicated on an arbitrary
or capricious belief that the insured is not entitled to
coverage.”
 Hoskins, 6 Ohio St.3d at 277.
Types of Bad Faith
• Ohio courts have recognized two types of bad
faith claims:
▫ (1) bad faith denial; and
▫ (2) bad faith claims handling.
• Primary/Excess Carriers.
Types of Bad Faith
• Bad Faith Denial: Was the insurer reasonably
justified in its denial of the claim?
▫ Bad faith denial claims require the insured to
prove that the insurer’s denial of coverage was not
reasonably justified; and
▫ This type of claim is akin to proving a breach of
contract claim against the insurer.
 Essad v. Cincinnati Cas. Co., 7th Dist., No. 00CA199,
2002 Ohio App. LEXIS 7285, *30-31 (April 16,
2002).
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Types of Bad Faith
• Bad Faith Claims Handing: Did the insurer
adequately and promptly investigate the
claim?
l i ?
▫ Inadequate investigation;
▫ Oppressive; dishonest; exploitative conduct; and
▫ Delayed or prolonged investigation (“foot
dragging”).
Types of Bad Faith
• Bad faith claim handling claim exists
independently from the breach of the contract
claim:
 Essad, 2002 Ohio App. LEXIS 7285 at *20-21; Bullet
Trucking, 84 Ohio App.3d 333; Cammarata v. State
Farm Florida Insurance Company, No. 4D13-185
(Fla. 4th Dist. September 3, 2014).
 But see Toledo-Lucas County Port Auth. v. Axa
Marine & Aviation Ins. (UK) Ltd., 220 F.Supp.2d
868, 873 (N.D. Ohio 2002) (“[A]n insured may not
maintain a claim of bad faith in the absence of
coverage under the policy.”)
Types of Bad Faith
• Unreasonable refusal to defend and/or indemnify.
• Unjustified delay in providing a defense.
• Failure to properly investigate the facts relevant to the duty to
defend, coverage, liability of the insured, and damages .
p
g terms of the p
policy.
y
• Misrepresenting
• Failure to properly notify the policyholder of a reservation of rights
or possibility of an excess verdict.
• Post-claim underwriting, including threats of rescission.
• Failure to keep the policyholder informed of settlement demands.
• Disregard of defense counsel's advice or failure to seek defense
counsel's advice regarding merits of defense and settlement.
• Negotiating settlement agreement that is prejudicial to the rights of
the policyholder:
 But See Society Ins. v. Bodart,, 2010 AP2442 (June 7, 2012). A Wisconsin
appellate court allowed an insurer to settle the covered the claims and
cease providing a defense, even though noncovered claims remained.
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Insurer Strategies to Avoid
Bad Faith
• Timely issue reservation of rights letter, coverage
opinion, defense, and payment.
• Duty to Defend/Duty to Indemnify.
• Conduct thorough investigation:
•
•
•
•
▫
▫
▫
▫
Request and review policy;
Analysis of relevant documents;
Capable reviewers, adjusters, experts; and
Interview witnesses.
Follow claims handling/processing guideline.
Provide complete and proper defense.
Fair settlement strategies.
Communicate with insured.
Policyholder Bad Faith Discovery
• When?
▫ Early: Serve written discovery with Complaint or
at Case Management Conference.
Conference
• Who?
▫ Insurer;
▫ Broker; and
▫ Third party administrator.
Policyholder Bad Faith Discovery
• Policy.
• Policy materials.
• Pre-denial claims documents and information Claims
handling
g file.
• Claim file.
• Underwriting file.
• Marketing materials.
• Reserve settings.
• Reinsurance agreements and communications.
• Claims handling guidelines, manuals, memoranda, handouts,
and training materials.
• Positions taken in similar matters.
• All Correspondence.
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Policyholder Bad Faith Discovery:
Boone v. Vanliner
• Ohio is one of the few states in which claims file
documents and information related to the insurer’s
alleged bad faith are not protected by work product
or the
h attorney-client
li
privilege:
i il
▫ “[C]laims file materials that show an insurer’s lack of
good faith in denying coverage are unworthy of
protection.”
 Boone v. Vanliner Ins. Co., 91 Ohio St.3d 209, 213
(2001); and
 See also Dennis v. State Farm Ins. Co., 143 Ohio App.3d
196, 203 (Mahoning Cty. App. 2001) (the principle in
Boone extends to deposition testimony).
Policyholder Bad Faith Discovery:
Boone v. Vanliner
• Policyholders can obtain information in the predenial claim file including:
▫ Correspondence;
▫ Memoranda;
d
▫ research prepared by both inside and outside counsel
regarding the carrier’s assessment of coverage;
▫ reasons for denying coverage; and
▫ whether the carrier anticipates litigation regarding the
coverage.
• Determining the appropriate “cut-off” date.
•
Unklesbay v. Fenwick, et al, 167 Ohio App.3d 408, 418 . (Ohio Ct. App.,
Clark County 2006) (payment of benefits).
Policyholder Bad Faith Discovery:
Boone v. Vanliner
• Is Boone limited?
▫ R.C. § 2317.02(A)(2) states that: “An attorney,
concerning a communication made to the attorney by
a client in that relationship or the attorney’s
attorney s advice to
a client, except that if the client is an insurance
company, the attorney may be compelled to testify,
subject to an in camera inspection by a court, about
communications made by the client to the attorney or
by the attorney to the client that are related to the
attorney’s aiding or furthering an ongoing or future
commission of bad faith by the client, if the party
seeking disclosure of the communications has made a
prima facie showing of bad faith, fraud, or criminal
misconduct by the client.”
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Policyholder Bad Faith Discovery:
Boone v. Vanliner
• No, continue to follow Boone.
• The Ohio Supreme Court found that the “the
privilege does not attach when [the Boone]
exception applies.”
 Squire, Sanders & Dempsey, LLP v. Givaudan Flavors
Corp., 127 Ohio St.3d 161 (2010); and
 See also Little Italy Development, No. 1:11cv112, 2011
U.S. Dist. LEXIS 119698 (N.D. Ohio October 17, 2011) (“It
is well settled that subsection (A)(1) does not apply to the
production of documents…The Court finds that a plain
reading of the language of subsection (A)(2) compels the
same result.”)
Policyholder Bad Faith Discovery
• Underwriting file:
 See Brecek & Young Advisors, Inc. v. Lloyds of
London Syndicate
y
2003,
3, 2010 U.S.
U Dist. LEXIS
114401 (D. Kan. Oct. 27, 2010) (granting insured’s
motion for production of insurer’s underwriting files
where interpretation of key policy term was at issue).
Policyholder Bad Faith Discovery
• Reserve Settings:
▫ Evidences the carrier’s understanding and assessment of
the risks it insured and the likelihood of coverage therefore
under the policy:
 See Insurance Company of North America v. UNR Industries,
Inc., 1994 U.S. Dist. LEXIS 17295 (S.D.N.Y. 1994); Society Corp. v.
American Cas. Co. of Reading, PA, 1991 U.S. Dist. LEXIS 21180
(N.D. Ohio 1991) (holding that reserve information is relevant to
discover statements made about coverage and to show the
insurer’s valuation of the underlying claim); Champion
International Corp. v. Liberty Mut. Ins. Co., 128 F.R.D. 608, 612
(S.D.N.Y. 1989) (finding the reserve information sufficiently
relevant to justify production where policyholder sought such
documents to investigate what statements were made about
coverage); Kan Di-Ki LLC v. Indian Harbor Insurance Co., case
number 1439418 (Cal. Superior July 30, 2014).
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Policyholder Bad Faith Discovery
• Reinsurance agreements:
▫ Courts, including the Northern District of Ohio, have
compelled the production of reinsurance agreements and
communications related to policies:
 Bondex International Inc. et al. v. Hartford Accident and
Indemnity Co. et al., No. 03-1322 (N.D. Ohio 2006); see also
National Union Fire Ins. Co. of Pittsburgh v. Continental
Illinois Corp., 116 F.R.D. 78, 84 (N.D. Ill. 1987) (holding that
reinsurance agreements must be disclosed); Tardiff v. Knox
County, 224 F.R.D. 522 (D. Me. 2004) (reinsurance
agreements fall within the scope of Rule 26(a)(1)(D) initial
disclosures and must be produced); Missouri Pac. R.R. Co. v.
Aetna Cas. & Sur. Co., 1995 U.S. Dist. LEXIS 22157 (N.D. Tex.
1995) (same); American Colloid Co. v. Old Republic Ins. Co.,
1993 U.S. Dist. LEXIS 8417 (N.D. Ill. 1993) (same).
Policyholder Bad Faith Discovery
• Claims handling guidelines and training materials:
▫ Insured is entitled to know whether the proper procedures with regard to
its claim were followed:
 See, e.g., Safeguard Lighting Systems, Inc. v. North American Specialty
4 U.S. Dist. LEXIS 26136
3 (E.D.
(
Pa. 2004)
4) ((unreported)
p
)
Ins. Co.,, 2004
(requiring insurer to produce any materials, including claims manuals,
used by or given to claim handlers in connection with plaintiffs’ claims);
Young v. Allstate Ins. Co., 2011 U.S. Dist. LEXIS 85135 (S.D. W. Va. Aug.
2, 2011) (insurer required to produce information relating to the training
of defendant's adjusters concerning uninsured motorist and unfair trade
practice claims); Kelly v. Provident Life & Accident Ins. Co., 2011 U.S.
Dist. LEXIS 66066 (S.D. Cal. June 20, 2011) (Plaintiff entitled to the
knowledge of the corporation and the corporation's positions on matters
clearly relevant and discoverable including training documents or all
claims handling documents); BASF AG v. Great Am. Assur. Co., 2005 U.S.
Dist. LEXIS 34139 (D. Ill. 2005) (unreported) (granting insured’s motion
for the production of insurer’s underwriting and claims manuals, and
materials relating to the drafting, development, and interpretation of the
policies).
Policyholder Bad Faith Discovery
• Positions in similar cases.
• Insured is entitled to discovery regarding similar
claims:
 Hadi v. State Farm Ins. Cos., 2007 U.S. Dist. LEXIS
79268 (S.D. Ohio Oct. 11, 2007) (requiring insurer to
produce information concerning other lawsuits against it
in which plaintiffs have made bad faith claims similar to
the one advanced by plaintiff in that case); and
 First Coast Energy LLP v. Mid-Continent Casualty Co.
(Fla. MD May 5, 2013) (the carrier has to produce all of
the materials in the other policyholders’ files, including
work product and excluding only any material subject to
the attorney-client privilege.)
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Bifurcation
• Insurers seek to avoid discovery obligations by
bifurcating the trial and/or discovery relating to
bad faith claims.
claims
• Bifurcation is the exception, not the rule –
courts generally disfavor piecemeal litigation:
 Chubb Custom Ins. Co. v. Grange Mut. Cas. Co., No.
2:07-cv-1285, 2008 U.S. Dist. LEXIS 91496 at *5-*6
(S.D. Ohio Nov. 3, 2008) (“Bifurcation is the
exception to the general rule that disputes should be
resolved in a single proceeding.”)
Bifurcation
• Insurer argues that it would expedite litigation
because if the breach of contract claim fails, the bad
faith claim necessarily fails.
• However, this argument fails with respect to a claim
for bad faith claims handling:
▫ A claim for bad faith claims handling exists
independently from the contract claim:
 General Electric Credit Union, 2009 U.S. Dist. LEXIS
96085, *11-*12.
▫ The bad faith claim survives even if the policyholder
fails to prove that the carrier breached the insurance
contract by wrongly denying coverage.
Bifurcation
• Insurers argue that bifurcation will allow for judicial
economy and efficiency.
• However, the information is interwoven and/or the same
as breach of contract information:
▫ This causes two rounds of discovery; and
▫ As the Bondex court explained:
 [e]ven if the trial itself is ultimately bifurcated, allowing all discovery to be
conducted before the initial trial will avoid delaying the ultimate
resolution of this litigation by enabling the second trial to commence
quickly, if such a trial is necessary, perhaps before the same jury which
heard the first phase of the litigation. . . . On balance, the prejudice to
plaintiffs from such a protracted stay outweighs prejudice, if any, to
defendants from commencing discovery on all claims at this time.
Moreover, waiting to conduct discovery on the bad faith issues until after
[the trial date] could result in unnecessary duplication, delay, and expense
and does not serve the interest of judicial economy.
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Bifurcation
• Insurers argue that production of bad faith
discovery will cause prejudice.
• However, bald assertions of prejudice are
insufficient.
insufficient
• There must be specific facts supporting an insurer’s
allegation of prejudice:
 See, e.g., Valley Ford Truck, Inc. v. The Phoenix Ins. Co.,
No. 1:10-CV-02170, 2011 U.S. Dist. LEXIS 29210, *4-*5
(N.D. Ohio March 7, 2011); General Electric Credit
Union, 2009 U.S. Dist. LEXIS 96085; Bondex Int’l, Inc.
v. Hartford Accident & Indem. Co., 2004 U.S. Dist.
LEXIS 28795 (N.D. Ohio Feb. 19, 2004).
• Utilize confidentiality agreement.
Bad Faith Damages
• A breach of the duty of good faith exposes
a carrier to a claim for extra-contractual
damages.
• Compensatory and Punitive Damages:
▫ To act as a deterrent to and remedy for the
unfair claims practices of carriers.
Bad Faith Damages
• Compensatory Damages:
▫ Emotional Distress:
 See LeForge v. Nationwide Mut. Fire Ins. Co., 82 Ohio App.3d
692, 700-701 (Clinton Cty. App. 1992); Eastham v. Nationwide
Mut. Ins. Co.,
C 66 Ohio
Ohi A
App.3d
d8
843 ((Hamilton
il
C
Cty. A
App. 1990).
)
▫ Economic damages:
 Asmaro v. Jefferson Ins. Co., 62 Ohio App.3d 110, 574 N.E.2d
1118 (1989) (economic harm includes compensation for lost
profits, loss of a business, lost rents, and loss of the use of
property.)
▫ Litigation costs:
 Spadofore v. Blue Shield, 21 Ohio App.3d 201, 204 (1985).
▫ Interest:
 Clevenger v. Westfield Companies, 60 Ohio App.2d 1, 395
(1987) and R.C. 1343.03(C).
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Bad Faith Damages
• Punitive damages:
▫ Punitive damages may be recovered “against an insurer that
breaches its duty of good faith in refusing to pay a claim of its
insured upon proof of actual malice, fraud or insult on the part of
the insurer.
insurer ”::
 Zoppo, 71 Ohio St.3d at 557.
▫ In order to obtain punitive damages, an insured must prove that
the insurance carrier acted with actual malice (i.e., hatred, ill will,
or with a conscious disregard for the rights and safety of others.):
 Id.; Staff Builders, Inc., 37 Ohio St.3d at syllabus; Hoskins, 6 Ohio
St.3d at 277.
▫ Attorney fees may be awarded as an element of compensatory
damages where the jury finds that punitive damages are
warranted:
 Zoppo, 71 Ohio St.3d at 558.
Bad Faith Damages
• Attorney fees:
▫ Coverage attorneys fees may be awarded as an
element of compensatory damages where the jury
finds that punitive damages are warranted:
 Zoppo, 71 Ohio St.3d at 558.
▫ Remember to produce redacted fees as part of
damages; and
▫ Engage expert on reasonableness of fees.
John F. Kennedy
• “In our system of free enterprise, insurance holds a
place of special importance. This is a segment of
American industry with which a high percentage of
our citizens
ii
are associated.
i d In
I a very reall sense
insurance sets standards of performance
and responsibility for all American
business. Surely Americans derive their image of
business most often from the relations which they
establish with insurance agents. The varied services
performed by American insurance can do much to
carry forward our traditions of freedom.”
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Bad Faith Strategies
Stacy RC Berliner
2330 One Cleveland Center
1375 East 9th Street
Cleveland, OH 44114
(216) 456-3840
(216) 456-3850
[email protected]
12
Bad Faith Strategies
Akron Bar Association – Advanced Issues in Insurance Coverage
October 31, 2014
Stacy RC Berliner
I.
IDENTIFYING BAD FAITH CLAIMS
A.
Establishing a Bad Faith Claim
In Ohio, the relationship between an insurance carrier and its insured gives rise to an
insurance carrier’s duty to its policyholder to act in good faith in the handling and payment of the
insured’s claims. “Bad faith” occurs when an insurer breaches that duty of good faith and fair
dealing. Hoskins v. Aetna Life Ins. Co., 6 Ohio St.3d 272, syllabus (1983). In Ohio, 1 bad faith
claims are independent, common law tort claims that exist “irrespective of any liability arising
from a breach of the underlying contract.” Staff Builders, Inc. v. Armstrong, 37 Ohio St.3d 298,
302 (1988). 2 One does not have to have a breach of contract claim for coverage to bring a bad
faith claim; “[r]ather, the liability arises from the breach of the positive legal duty imposed by
law due to the relationships of the parties.” Captain v. United Ohio Ins. Co., 4th Dist., No.
09CA14, 2010 Ohio 2691, P. 22, 2010 Ohio App. LEXIS 2197 (4th Dist. June 3, 2010), citing
Hart v. Republic Mut. Ins. Co., 152 Ohio St. 185, 276 (1949) 3.
1
Many jurisdictions do not recognize a separate tort action for an insurer’s failure to honor its good faith
obligations. See e.g. Twin City Fire Ins. Co. v. Colonial Life & Accident Ins. Co., 839 So.2d 614, 616-17 (Ala.
2002); Continental Cas. Co. v. City of Jacksonville, No. 3:04-cv-1170-J-20 MCR, at 44 n.23 (M.D. Fla. Sept. 18,
2007); American Nat’l. Red Cross v. Travelers Idem. Co., 896 F.Supp. 8, 12 n.4 (D.D.C. 1995).
2
There is no statutory cause of action for bad faith in Ohio. Strack v. Westfield Cos., 33 Ohio App.3d 336, 338
(1986); Furr v. State Farm Mut. Ins. Co., 128 Ohio App.3d 607, 616-617 (6th Dist. 1998) (Ohio’s unfair insurance
practices statute (R.C. 3901.20 and 3901.21) and the related Ohio Administrative Code regulations do not create a
private cause of action, and they are not to be considered to establish standard of care relating to insurer’s conduct);
see also Retail Ventures, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, Case No. 2:06-CV-00443, 2007
U.S. Dist. LEXIS 26990, 2007 WL 943011 (S.D. Ohio March 27, 2007) (striking paragraphs referencing the Ohio
Administrative Code from a complaint as immaterial to bad faith claim); Singh v. Ins. Co., 2013 U.S. Dist. LEXIS
161701 (S.D. Ohio Nov. 13, 2013).
3
See also General Elec. Credit Union v. National Fire Ins. of Hartford, No. 1:09-cv-143, 2009 U.S. Dist. LEXIS
96085 (S.D. Ohio Sept. 30, 2009) (“bad faith failure to investigate properly exists independent of a contractual
obligation for coverage” and “[t]herefore, contrary to Defendant’s assertion, resolution of the breach of contract
claim will not necessarily preclude all remaining claims as a matter of law.”); Westfield Ins. Co. v. Sack, 3d Dist.,
To prevail on a claim of bad faith, the policyholder must prove by a preponderance of the
evidence that: (1) the carrier owed the policyholder a duty of good faith; (2) the carrier breached
its duty of good faith; and (3) as a direct and proximate cause of the carrier's breach of its duty,
the policyholder suffered damages. What constitutes a breach of the duty of good faith and fair
dealing is a fact intensive inquiry.
Many states require that the insured prove that the insurance carrier had intentional
wrongdoing in order to sustain a bad faith claim. In Ohio, however, to establish a breach of the
duty of good faith and fair dealing, a policyholder must demonstrate that the carrier’s conduct
was without reasonable justification. Zoppo v. Homestead Ins. Co., 71 Ohio St.3d 552 (1994).
In Zoppo, the Ohio Supreme Court reaffirmed the standard enunciated in Hart that “an insurer
fails to act in good faith in the processing of a claim of its insured where its refusal to pay the
claim is not predicated upon circumstances that furnish reasonable justification therefore.”
Zoppo, 71 Ohio St.3d at 554; Hart v. Republic Mut. Ins. Co., 152 Ohio St. 185, 188 (1949).
Zoppo overruled two previous holdings requiring the policyholder to prove intentional conduct
on behalf of the insurer: Motorists Mutual Ins. Co. v. Said, 63 Ohio St.3d 690 (1992) and Slater
v. Motorists Mutual Ins. Co., 174 Ohio St. 148 (1962).
“Fairly debatable” and “arbitrary and capricious” may provide guidance as to what is
“reasonable justification.” Corbo Properties LTD v. Seneca Ins. Co., No. 1:09 CV 0501, 2011
U.S. Dist. LEXIS 26021, *8 (N.D. Ohio Feb. 17, 2011). “Where a claim is fairly debatable the
insurer is entitled to refuse the claim as long as such refusal is premised on a genuine dispute
over either the status of the law at the time of the denial or the facts giving rise to the claim.”
Tokles & Son, Inc. v. Midwestern Indem. Co., 65 Ohio St.3d 621, 630 (1992), quoting Motorists
Mut. Ins. Co. v. Said, 63 Ohio St.3d 690, 699-700 (1992). 4 Denial of a “fairly debatable” claim
would be “reasonably justified.” Corbo Properties, 2011 U.S. Dist. LEXIS 26021, *8. “An
insurer lacks reasonable justification for denying a claim when its refusal to pay is predicated on
an arbitrary or capricious belief that the insured is not entitled to coverage.” Hoskins, 6 Ohio
St.3d at 277. “An arbitrary and capricious denial is not reasonably justified.” Corbo Properties,
2011 U.S. Dist. LEXIS 26021, *8.
No. 4-07-11, 2007 Ohio App. LEXIS 6104, at *8 (Dec. 26, 2007) (“Generally, breach of contract claims and bad
faith claims are independent of each other, even if they are based on the same alleged conduct of the insurer…”);
Klein v. State Farm Fire & Cas. Co., 250 Fed. Appx. 150, 156-57 (6th Cir. 2007) (recognizing that a bad faith claim
against an insurer is “independent of the contract of insurance”); Stevenson v. First American Title Ins. Co., 5th
Dist., No. 05-CA-39, 2005 Ohio App. LEXIS 5825 (Nov. 30, 2005); Klein v. State Farm Fire & Cas. Co., 250 Fed.
Appx. 150, 156-57 (6th Cir. 2007) (recognizing that a bad faith claim against an insurer is “independent of the
contract of insurance”). But see Pasco v. State Auto Mut. Ins. Co., 10th Dist. No. 99 AP-430, 999 Ohio App. LEXIS
6492 at *15, 17 (Dec. 21, 1999) (finding that bad faith claim, which was not separately pleaded, is dependent on the
existence and breach of a policy duty); Toledo-Lucas County Port Auth. v. Axa Marine & Aviation Ins. (UK) Ltd.,
220 F.Supp.2d 868, 873 (N.D. Ohio 2002) (“[A]n insured may not maintain a claim of bad faith in the absence of
coverage under the policy.”); Paul v. State Farm Mut., 2014 U.S. Dist. LEXIS 37202 (N.D. Ohio Mar. 19, 2014)
(dismissing bad faith claim based upon insured’s admission that “If there is no breach, there is no bad faith.")
4
Although Tokles was overruled to the extent it relied on the erroneous “intent” standard applied in Said, Ohio state
and federal courts have continued to rely upon Tokles for its “fairly debatable” test. See e.g., Corbo Properties,
2011 U.S. Dist. LEXIS 26021, *9-*10 and the authorities cited therein.
2
C.
Types of Bad Faith Conduct
Ohio courts have recognized two types of bad faith claims: bad faith denial and bad faith
claims handling. Bad faith denial claims require the insured to prove that the insurer’s denial of
coverage was not reasonably justified; this type of claim is akin to proving a breach of contract
claim against the insurer. Essad v. Cincinnati Cas. Co., 7th Dist., No. 00CA199, 2002 Ohio
App. LEXIS 7285, *30-31 (April 16, 2002); Bullet Trucking, Inc. v. Glen Falls Ins. Co., 84 Ohio
App.3d 327, 333 (2d Dist., App. 1992). For bad faith claims handling, the insured need only
establish that the insurer had no reasonable justification for their inadequate investigation;
delayed or prolonged investigation (“foot-dragging”); oppressive, dishonest, exploitative
conduct, etc. This type of bad faith claim exists independently from the breach of the contract
claim. Essad, 2002 Ohio App. LEXIS 7285 at *20-21; Bullet Trucking, 84 Ohio App.3d 333;
compare Pasco v. State Auto Mut. Ins. Co., 10th Dist. No. 99 AP-430, 999 Ohio App. LEXIS
6492 at *15, 17 (Dec. 21, 1999) (finding that bad faith claim, which was not separately pled, is
dependent on the existence and breach of a policy duty); and Toledo-Lucas County Port Auth. v.
Axa Marine & Aviation Ins. (UK) Ltd., 220 F.Supp.2d 868, 873 (N.D. Ohio 2002) (“[A]n insured
may not maintain a claim of bad faith in the absence of coverage under the policy.”)
An insured should be mindful of the following acts, as they may indicate bad faith
conduct on behalf of the insurer:
•
Unreasonable refusal to defend and/or indemnify;
> So long as the complaint contains allegations that potentially fall within
the scope of coverage, the insurer has a duty to defend the suit in its
entirety. Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d 177, 179
(1984); Zalac v. St. Paul Fire and Marine Ins. Co., 10th Dist., No.
97APE04-544 (Nov. 18, 1997) (reversing summary judgment in favor of
insurer regarding bad faith refusal to defend).
•
Unjustified delay in providing a defense;
> Unklesbay v. Casity Fenwick, et al., 167 Ohio App.3d 408, 414 (2d Dist.
2006) (bad faith refusal to pay does not require an outright denial of a
claim; an insurer’s “foot-dragging” in the claims handling process can
support a bad faith cause of action).
•
Unjustified delay in paying a claim;
> See, e.g., Mundy v. Roy, 2006 Ohio 993, P18 (2d Dist. Mar. 3, 2006);
Zaycheck v. Nationwide Mut. Ins. Co., 9th Dist., No. 23441, 2007 Ohio
App. LEXIS 3065, *14 (June 29, 2007) (question of fact as to whether
insurer delayed payment of a claim in bad faith when it had documentation
it needed three years before payment was made); Stefano v. Commodore
3
Cove East Ltd., 145 Ohio App.3d 290, 295 (9th Dist. 2001) (bad faith for
insurer to delay payment after admitting liability). But see Vargo v. State
Auto Mut. Ins. Co., No. 4:09CV2304, 2011 U.S. Dist. LEXIS 796, *30-31
(N.D. Ohio Jan. 5, 2011) (insurer did not act in bad faith by delaying
payment of claim or changing adjusters when insured failed to provide
necessary documentation); Fry v. Walters & Peck Agency, Inc., 141 Ohio
App.3d 303 (6th Dist. 2001) (bad faith claim failed where the insured
caused the delay in payment).
•
Failure to properly investigate the facts relevant to the duty to defend, coverage,
liability of the insured, and damages;
> See, e.g., Zoppo, 71 Ohio St.3d 555-556 (insurer ignored relevant facts
and did not follow credible leads, but instead focused on developing only
facts that would absolve it from coverage); Staff Builders, 37 Ohio St.3d
303 (“It is abundantly clear that information relevant to the claim was
either reviewed by persons unskilled in its evaluation or disregarded by
those who possessed such skills.”); Stefano, 145 Ohio App.3d 295
(cursory investigation only before denying claim); Ohio Nat'l Life Assur.
Corp. v. Satterfield, 194 Ohio App.3d 405, 415 (9th Dist. May 4, 2011)
(upholding finding of bad faith because insurer failed to investigate, relied
upon overturned law, failed to adhere to internal claim manual procedures,
and “did not even mention the possible application of the incontestability
clause [which was required by statute and prohibited insurer’s ability to
contest application two years after inception] in the letter it sent to Mrs.
Satterfield.”); compare Dorsey v. Campbell Hauling, 10th Dist., No.
02AP-961, 2003 Ohio App. LEXIS 3036 (10th Dist. June 26, 2003)
•
Failure to properly notify the policyholder of a reservation of rights or possibility
of an excess verdict;
> Britton, 139 Ohio App.3d 44 (finding that when an insurer assumes
control of a defense for an insured but intends to challenge its duty to
indemnify, it must protect its position by reserving its rights.)
•
Failure to provide timely coverage position;
> Brit Ins. Holdings N.V. v. Krantz, 2012 U.S. Dist. LEXIS 1398, *17 (N.D.
Ohio Jan. 5, 2012) (“It cannot be said that defendants’ allegations – that
plaintiffs intentionally delayed and manipulated the timing of their
coverage decision and settled [the underlying case] knowing they would
later take the position that there was no coverage under the Policy – are
insufficient as a matter of law to state a bad faith claim.”)
4
•
Unreasonable demands for information;
> Zaycheck v. Nationwide Mut. Ins. Co., 2007 Ohio App. LEXIS 3065, *14;
Bucci v. Nationwide Ins. Co., 7th Dist. 1991 Ohio App. LEXIS 6296, *19
(Dec. 20, 1991) (“Nationwide made numerous burdensome requests for
information in an attempt to prove this allegation, all without formally
denying the claim, leaving Bucci with the hope that it would eventually be
paid”)
•
Negotiating settlement agreement that is prejudicial to the rights of the
policyholder;
> Insurers must act in good faith in settling claims and act in the interest of
the policyholder equally to its own interest. Netzley v. Nationwide Mut.
Ins. Co., 34 Ohio App.2d 65, syllabus (2d Dist. 1971). See, e.g., CSS Pub.
Co., Inc. v. American Economy Ins. Co., 138 Ohio App.3d 76, 86-87 (3d
Dist. 2000) (evidence revealed that the insurer took a “get tough” position
and foresaw a “potential bad faith award”; representatives at the meeting
with the insureds would “put the pressure, keep them moving, keep them
squirming,” and planned next to demand that “they either take what we
offer or they don’t get anything”).
•
Bad faith post-litigation conduct; and
> Spadafore v. Blue Shield Ohio Medical Indem. Corp., 21 Ohio App.3d 201
(1985); Zaychek, 2007 Ohio App. LEXIS 30653, *7-8 (“We begin by
disagreeing with Nationwide's assertion that only conduct prior to the
filing of the complaint can be considered as evidence of bad faith…”);
Westfield Companies v. O.K.L. Can Line, 155 Ohio App.3d 747 (1st Dist.
2003) (affirming award of fees a policyholder incurred in connection with
a declaratory judgment action where the insurer “acted with stubborn
propensity for needless litigation.”); ACMAT Corp. v. Greater New York
Mut. Ins. Co., 282 Conn. 576, 591 n.11 (2007) (recognizing that Ohio
permits awards of attorneys fees in bad faith or vexatious litigation to
prevailing policyholders).
•
Disregard of defense counsel's advice or failure to seek defense counsel's advice
regarding merits of defense and settlement.
> Dietz-Britton., 130 Ohio App.3d 337 (disregarding counsel’s advice to
settle raised a question of fact on bad faith), compare Miskins v.
Metropolitan Prop. & Liab. Ins. Co., 8th Dist., No. 59273 (January 9,
1992).
5
II.
BAD FAITH DISCOVERY SOUGHT BY A POLICYHOLDER
A.
Pre-Denial Claims File
In Ohio bad faith discovery, policyholders are entitled to discover the entire claims file
through the date of denial. Pre-denial claims documents and information are not protected by
attorney-client privilege or work product doctrine. 5 Boone v. Vanliner Ins. Co., 91 Ohio St.3d
209, 213 (2001); cf Breech v. Turner, 127 Ohio App.3d 243 (4th Dist. 1998) (prohibiting
discovery of claim file absent bad faith claim). Thus, policyholders can obtain information in the
pre-denial claim file including correspondence, memoranda, and research prepared by both
inside and outside counsel regarding the carrier’s assessment of coverage, reasons for denying
coverage, and whether the carrier anticipates litigation regarding the coverage. Ohio is one of
the few states in which claims file documents and information related to the insurer’s alleged bad
faith are not protected by the attorney-client privilege. Id. Garg v. State Auto Mut. Ins., 155
Ohio App.3d 58 (2003) (finding that work product is also discoverable where bad faith is
alleged). “[C]laims file materials that show an insurer’s lack of good faith in denying coverage
are unworthy of protection.” Boone, 91 Ohio St.3d 213. See also Dennis v. State Farm Ins. Co.,
143 Ohio App.3d 196, 203 (7th Dist. 2001) (the principle in Boone extends to deposition
testimony); R.C. § 2317.02(A)(2). 6
Some insurers argue that Boone was limited by the enactment of R.C. § 2317.02(A)(2).
The Ohio Supreme Court, however, has recognized the continuing viability of Boone despite any
revisions to R.C. § 2317.02 in Squire, Sanders & Dempsey, LLP v. Givaudan Flavors Corp., 127
Ohio St.3d 161, ¶¶33, 47 (2010) (finding that common law, including Boone, “define[s] the
scope of protections afforded to attorney-client communications by R.C. 2317.02(A) . . . because
the privilege does not attach when an exception applies.”); see also Little Italy Development, No.
1:11cv112, 2011 U.S. Dist. LEXIS 119698 (N.D. Ohio October 17, 2011) (“It is well settled that
subsection that subsection (A)(1) does not apply to the production of documents…The Court
finds that a plain reading of the language of subsection (A)(2) compels the same result.”);
Creatore v. Assurance Co. of America, No. 5:09-CV-1877, 2010 U.S. Dist. LEXIS 114852 (N.D.
Ohio Oct. 28, 2010) (Boyko, J.); Valley Ford Truck, Inc. v. The Phoenix Ins. Co., No. 1:10-CV02170, 2011 U.S. Dist. LEXIS 29210 (Mar. 7, 2011) (Gwin, J.); see also DeMarco v. Allstate
Ins. Co., 2014-Ohio-933, P24 (Ohio Ct. App., Cuyahoga County Mar. 13, 2014).
In an effort to prevent a policyholder from obtaining the information permitted by Boone,
carriers may seek to bifurcate the trial and discovery. Hahn’s Electric Co. v. Cochran, 10th
Dist., No. 01AP-1391 (2002) (staying discovery pending coverage determination); Scott Elliot
5
Disputes often arise regarding the appropriate denial/“cut-off” date. Unklesbay, 167 Ohio App.3d 418.
6
R.C. § 2317.02(A)(2) states that: “An attorney, concerning a communication made to the attorney by a client in
that relationship or the attorney’s advice to a client, except that if the client is an insurance company, the attorney
may be compelled to testify, subject to an in camera inspection by a court, about communications made by the client
to the attorney or by the attorney to the client that are related to the attorney’s aiding or furthering an ongoing or
future commission of bad faith by the client, if the party seeking disclosure of the communications has made a prima
facie showing of bad faith, fraud, or criminal misconduct by the client.”
6
Smith, LPA v. Travelers Cas. Ins. Co. of Am., 2014 U.S. Dist. LEXIS 4612 (S.D. Ohio Jan. 14,
2014) (lifting stay of bad faith discovery after liability was established but while motion for
certification was pending because stay of discovery is discretionary and insurer “did not have an
unqualified right to a bifurcation and stay of Plaintiffs' bad faith claim.”) Bifurcation is the
exception, not the rule – courts generally disfavor piecemeal litigation. Chubb Custom Ins. Co. v.
Grange Mut. Cas. Co., No. 2:07-cv-1285, 2008 U.S. Dist. LEXIS 91496, *5-*6 (S.D. Ohio Nov.
3, 2008) (“Bifurcation is the exception to the general rule that disputes should be resolved in a
single proceeding.”) The decision to bifurcate should be grounded in the facts and circumstances
of each case, taking into consideration: (1) whether bifurcation would be conducive to the
expedition of litigation and to efficient judicial administration; (2) whether bifurcation would
prejudice the parties; and (3) whether the issues sought to be tried separately are significantly
different. General Elec. Credit Union v. National Fire Ins. of Hartford, No. 1:09-cv-143, 2009
U.S. Dist. LEXIS 96085, *5 (S.D. Ohio Sept. 30, 2009). In fact, “[f]ederal courts have long
adhered to the rule that bifurcation should be ordered only in exceptional cases because the
piecemeal trial of separate issues in a single lawsuit or the repetitive trial of the same issue in
severed claims is not to be the usual course.” Id., quoting Wright & Miller, Federal Practice
and Procedure § 2388, at 474 (2d Ed. 2006). Courts have routinely denied insurer’s attempts to
bifurcate bad faith claims from the contract claims. Id. See also, e.g., General Elec. Credit
Union, 2009 U.S. Dist. LEXIS 96085; Maxey v. State Farm Fire & Cas. Co., 569 F.Supp.2d 720
(S.D. Ohio 2008); Professionals Direct Ins. Co. v. Wiles, Boyle, Burkholder & Bringardner Co.,
LPA, No. 2:06-cv-240, 2008 U.S. Dist. LEXIS 109215 (S.D. Ohio Oct. 27, 2008); Steinberger v.
State Farm Auto. Ins., 2010 U.S. Dist. LEXIS 100552, 2010 WL 3603791 (S.D. Ohio 2010),
[*3] aff'd, Oct. 27, 2010 (unreported) (Black, J.), Stafford v. Jewelers Mut. Ins. Co., 2012 U.S.
Dist. LEXIS 87237, *2-*3 (S.D. Ohio June 25, 2012); but see Hahn’s Electric Co., 10th Dist.,
01AP-1391; Garg, 155 Ohio App.3d 258.
Insurers make several arguments in favor of bifurcation. The most common argument is
that bifurcation would be economical and efficient, because if the breach of contract claim fails,
the bad faith claim necessarily fails. Although this argument is popular among insurers, and may
have traction with regard to bad faith denial claims, it fails with respect to a claim for bad faith
claims handling. As explained above, a claim for bad faith claims handling exists independently
from the contract claim. General Electric Credit Union, 2009 U.S. Dist. LEXIS 96085, *11-*12.
Accordingly, the bad faith claim survives even if the policyholder fails to prove that the carrier
breached the insurance contract by wrongly denying coverage. And courts have found that
bifurcation will not result in efficiency or economy in light of the potential for having two rounds
of discovery, two rounds of dispositive motions, and two trials. See, e.g., Valley Ford Truck,
Inc. v. The Phoenix Ins. Co., No. 1:10-CV-02170, 2011 U.S. Dist. LEXIS 29210, *4 (N.D. Ohio
March 7, 2011); Creatore v. Assurance Co. of America, 2010 U.S. Dist. LEXIS 114852 (N.D.
Ohio Oct. 28, 2010) (“Also, no economy and convenience will be promoted by separating bad
faith and breach of contract claims.”); Wolkosky v. 21st Century Centennial Ins. Co., 2010 U.S.
Dist. LEXIS 79643 (S.D. Ohio July 14, 2010) (rejecting insurer’s claim of prejudice, jury
confusion, prejudice and convenience and economy and denying motion to stay and bifurcate a
bad faith claim). As the Bondex court explained:
7
[e]ven if the trial itself is ultimately bifurcated, allowing all discovery to be
conducted before the initial trial will avoid delaying the ultimate resolution of this
litigation by enabling the second trial to commence quickly, if such a trial is
necessary, perhaps before the same jury which heard the first phase of the
litigation. . . . On balance, the prejudice to plaintiffs from such a protracted stay
outweighs prejudice, if any, to defendants from commencing discovery on all
claims at this time. Moreover, waiting to conduct discovery on the bad faith issues
until after [the trial date] could result in unnecessary duplication, delay, and
expense and does not serve the interest of judicial economy.
Bondex, 2004 U.S. Dist. LEXIS 28795, *15-6 (N.D. Ohio Feb. 19, 2004).
Another common insurer argument in favor of bifurcation is prejudice. Producing the
insurer’s privileged claims files will prejudice their ability to defend the breach of contract or
other claims asserted by the insured. Bald assertions of prejudice are insufficient; rather, there
must be specific facts supporting an insurer’s allegation of prejudice. See, e.g., Valley Ford
Truck, Inc. v. The Phoenix Ins. Co., No. 1:10-CV-02170, 2011 U.S. Dist. LEXIS 29210, *4-*5
(N.D. Ohio March 7, 2011); General Electric Credit Union, 2009 U.S. Dist. LEXIS 96085;
Bondex Int’l, Inc., 2004 U.S. Dist. LEXIS 28795; compare Ferro Corp. v. Continental Cas.
Corp., No. 1:06-CV-1955, 2008 U.S. Dist. LEXIS 108010, *14 (N.D. Ohio Jan. 7, 2008) (after a
review of documents submitted in camera, the court found that the defendants would be unfairly
prejudiced and that the unique facts in that case justified bifurcation of the bad faith claim and a
stay of discovery on that issue); Libbey Inc. v. Factory Mut. Ins. Co., No. 3:06-CV-2412, 2007
U.S. Dist. LEXIS 45160, *30-*31 (N.D. Ohio Jun. 21, 2007). Further, any prejudice of the
insurers must be weighed against the prejudice that bifurcation would cause the policyholder. In
most circumstances, a properly drafted confidentiality agreement will relieve any prejudice
asserted by the insurance carrier. 7
B.
Other Relevant Discovery
In addition, in many circumstances, policyholders may want to see the following
information:
•
Underwriting Material
> An underwriting file may be relevant in disputes regarding reformation,
qualified named insureds, interpretation of key policy terms, etc. See
Brecek & Young Advisors, Inc. v. Lloyds of London Syndicate 2003, 2010
U.S. Dist. LEXIS 114401 (D. Kan. Oct. 27, 2010) (granting insured’s
motion for production of insurer’s underwriting files where interpretation
of key policy term was at issue).
7
Further, to prohibit prejudice, many courts conduct an in camera inspection of the documents requested.
McHenry v. General Acc. Ins. Co., 104 Ohio App.3d 350 (1995).
8
•
Claims Handling Materials
> An insured is entitled to know whether the proper procedures with regard
to its claim were followed. See, e.g., Safeguard Lighting Systems, Inc. v.
North American Specialty Ins. Co., 2004 U.S. Dist. LEXIS 26136 (E.D.
Pa. 2004) (unreported) (requiring insurer to produce any materials,
including claims manuals, used by or given to claim handlers in
connection with plaintiffs’ claims); Young v. Allstate Ins. Co., 2011 U.S.
Dist. LEXIS 85135 (S.D. W. Va. Aug. 2, 2011) (insurer required to
produce information relating to the training of defendant's adjusters
concerning uninsured motorist and unfair trade practice claims); Kelly v.
Provident Life & Accident Ins. Co., 2011 U.S. Dist. LEXIS 66066 (S.D.
Cal. June 20, 2011) (Plaintiff entitled to the knowledge of the corporation
and the corporation's positions on matters clearly relevant and
discoverable in including training documents or all claims handling
documents); BASF AG v. Great Am. Assur. Co., 2005 U.S. Dist. LEXIS
34139 (D. Ill. 2005) (unreported) (granting insured’s motion for the
production of insurer’s underwriting and claims manuals, and materials
relating to the drafting, development, and interpretation of the policies).
•
Reinsurance Agreements
> Courts have compelled the production of reinsurance agreements and
communications related to policies. Bondex International Inc. et al. v.
Hartford Accident and Indemnity Co., et al., No. 03-1322 (N.D. Ohio
2006); see also National Union Fire Ins. Co. of Pittsburgh v. Continental
Illinois Corp., 116 F.R.D. 78, 84 (N.D. Ill. 1987) (holding that reinsurance
agreements must be disclosed); Tardiff v. Knox County, 224 F.R.D. 522
(D. Me. 2004) (reinsurance agreements fall within the scope of Rule
26(a)(1)(D) initial disclosures and must be produced); Missouri Pac. R.R.
Co. v. Aetna Cas. & Sur. Co., 1995 U.S. Dist. LEXIS 22157 (N.D. Tex.
1995) (same); American Colloid Co. v. Old Republic Ins. Co., 1993 U.S.
Dist. LEXIS 8417 (N.D. Ill. 1993) (same).
•
Reserve Information
> Reserve information is relevant to evidence of the carrier’s understanding
and assessment of the risks it insured and, therefore, the likelihood of
coverage under the policy. See Insurance Company of North America v.
UNR Industries, Inc., 1994 U.S. Dist. LEXIS 17295 (S.D.N.Y. 1994);
Society Corp. v. American Cas. Co. of Reading, PA, 1991 U.S. Dist.
LEXIS 21180 (N.D. Ohio 1991) (holding that reserve information is
relevant to discover statements made about coverage and to show the
insurer’s valuation of the underlying claim); Champion International
Corp. v. Liberty Mut. Ins. Co., 128 F.R.D. 608, 612 (S.D.N.Y. 1989)
9
(finding the reserve information sufficiently relevant to justify production
where policyholder sought such documents to investigate what statements
were made about coverage).
•
Positions in similar cases
> An insured is entitled to discovery regarding similar claims. Hadi v. State
Farm Ins. Cos., 2007 U.S. Dist. LEXIS 79268 (S.D. Ohio Oct. 11, 2007)
(requiring insurer to produce information concerning other lawsuits
against it in which plaintiffs have made bad faith claims similar to the one
advanced by plaintiff in that case).
III.
BAD FAITH DAMAGES
“[A]n insurer who acts in bad faith is liable for those compensatory damages flowing
from the bad faith conduct of the insurer and caused by the insurer’s breach of contract.” Zoppo,
71 Ohio St.3d 558; St. Paul Fire and Marine Ins. Co. v. Onvia, 165 Wn. 2d 122 (Wash. 2008)
(finding that the insured must show actual harm and may recover for proven damages.) This
may include compensatory damages. Asmaro v. Jefferson Ins. Co., 62 Ohio App.3d 110, 574
N.E.2d 1118 (6th Dist. 1989) (economic harm includes compensation for lost profits, loss of a
business, lost rents, and loss of the use of property); costs for emotional distress (See LeForge v.
Nationwide Mut. Fire Ins. Co., 82 Ohio App.3d 692, 700-701 (12th Dist. 1992); Eastham v.
Nationwide Mut. Ins. Co., 66 Ohio App.3d 843 (1st Dist. App. 1990), but see Ohio National Life
Assurance Corp. v. Satterfield, 9th Dist., No. 25282, 2011 Ohio App. LEXIS 1811, *22-23 (May
4, 2011) (upholding rejection of insured’s request for damages for emotional suffering when
insured proffered no medical evidence other than her own testimony)); economic damages
(Asmaro v. Jefferson Ins. Co., 62 Ohio App.3d 110, 574 N.E.2d 1118 (6th Dist. 1989) (economic
harm includes compensation for lost profits, loss of a business, lost rents, and loss of the use of
property.); litigation costs (Spadofore v. Blue Shield, 21 Ohio App.3d 201, 204 (10th Dist.
1985)); and interest (Clevenger v. Westfield Companies, 60 Ohio App.2d 1, 395 (9th Dist. 1987);
R.C. § 1343.03(C) (providing for prejudgment interest when the losing party has not made a
good faith effort to settle the case)).
Punitive damages may be recovered “against an insurer that breaches its duty of good
faith in refusing to pay a claim of its insured upon proof of actual malice, fraud or insult on the
part of the insurer.” Zoppo, 71 Ohio St.3d 557. In order to obtain punitive damages, an insured
must prove that the insurance carrier acted with actual malice (i.e., hatred, ill will, or with a
conscious disregard for the rights and safety of others.) Id.; Staff Builders, Inc., 37 Ohio St.3d
syllabus; Hoskins, 6 Ohio St.3d 277; Bucci v. Nationwide Ins. Co., No. 90CA83, 1991 Ohio App.
LEXIS 6296 (Mahoning Cty. Dec. 20, 1991). Attorney fees may be awarded as an element of
compensatory damages where the jury finds that punitive damages are warranted. Zoppo, 71
Ohio St.3d 558.
663217
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THE DUTY TO DEFEND
•
•
Broader and distinct from duty to indemnify
Triggered under pleadings test. Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio St.3d
177 (1984)
–
When duty to defend not apparent from pleading,
pleading but allegations do state a claim which is potentially or
arguably within policy coverage, or where there is some doubt as to whether a theory of recover within the
policy coverage has been pleaded, insurer must accept defense of claim.
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5/1/08
WHERE COMPLAINT STATES COVERED AND UNCOVERED CLAIMS
•
•
Ohio law requires carrier to defend both covered and non-covered claims stated in a
complaint until such time as the claims triggering a defense under the pleading test are
resolved
resolved.
Limited exception where covered claims and uncovered claims arise from separate and
distinct occurrences. Sanborn Plastics Corp. v. St. Paul Fire and Marine Ins. Co., 84
Ohio App.3d 302 (1993).
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5/1/08
LIMITATIONS TO DUTY TO DEFEND
•
•
Insurer not required to defend a complaint where subject matter is unequivocally
outside of coverage. Preferred Risk Ins. Co. v. Gill, 30 Ohio St.3d 108 (1987).
Plaintiff’s phasing of cause of action may not be dispositive of determination of defense
obligation where policy’s
policy s duty to defend does not include an obligation to defend
against “groundless, false, or fraudulent” claims and the underlying facts depicted in
the complaint only describe an uninsured course of conduct (i.e. intentional conduct).
–
–
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Preferred Risk Ins. Co. v. Gill
Twin Maples Veterinary Hosp. v. Cincinnati Ins. Co., 159 Ohio St.3d 590.
5/1/08
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IS GILL STILL GOOD LAW?
•
•
•
•
In Cincinnati Ins. Co. v. Colelli & Assoc., Inc., 95 Ohio St.3d 325, the Ohio Supreme Court
reversed a case on authority of Willoughby Hills v. Cincinnati Ins. Co. and held that “the holding in
Preferred Risk Ins. Co. v. Gill, 30 Ohio St.3d 108 (1987), is limited to its facts.
In Cincinnati Ins. Co. v. Anders, 94 Ohio St.3d 321 (2003), Ohio Supreme Court reiterated that the
holding in Gill is good law and emphasized the significance of a policy which does not obligate a
carrier to defend against “groundless, false, or fraudulent claims.”
The Anders court specifically held that holding in Gill “is still the law if the conduct alleged in a
complaint is indisputably outside the scope of coverage, there is no duty to defend.”
Limited to cases with substantially similar fact pattern.
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5/1/08
CONSEQUENCES OF RESERVATION OF RIGHTS LETTER ON
APPOINTMENT OF COUNSEL
•
•
•
•
Reservation of rights letter reserves carrier’s right to deny coverage at a later point in time even
though it provides a defense.
Carrier’ss provision of a defense for prolonged period of time in absence of reservation of rights can
Carrier
lead to waiver of policy defenses to both duty to defend and duty to indemnify. Turner Liquidating
v. the St. Paul Surplus Lines Ins. co., 93 Ohio App.3d 292 (1944).
As a general proposition, a carrier’s issuance of a reservation of rights does not impact its right to
select counsel. Redhead Grass, Inc. v. Buckeye Union Ins. Co., 135 Ohio App.3d 316 (1994).
VIEW IN OTHER STATES
Armstrong Cleaners, Inc. v. The Erie Ins. Exch., 364 F.2d 797 (S.D. Ind. 205).
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5/1/08
RESERVATION OF RIGHTS AND RIGHT TO REIMBURSEMENT OF DEFENSE
•
•
General Ohio position, No.
United Nat. Ins. Co. v. CST Fitness Corp., 304 F.3d 414 (6th Cir. Ohio).
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5/1/08
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CONFLICTS ARISING FROM TRIPARTITE RELATIONSHIP BETWEEN
INSURANCE COMPANY/RETAINED COUNSEL/AND THE INSURED
Insurer
Insured
•
•
•
Retained Counsel
Law recognizes a “common interest” which lasts during course of litigation.
Communication by retained counsel to carrier and insured protected under
attorney/client privilege.
Superior relationship is that between retained counsel and insured.
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5/1/08
CONFLICTS THAT CAN ARISE IN THE TRIPARTITE RELATIONSHIP WHEN
DEFENSE GIVEN UNDER RESERVATION OF RIGHTS
•
Trial strategy and impact on existence of covered and non-covered claims.
–
–
•
•
•
1. Summary judgment motion practice on covered claims
2 Submission of jury interrogatories to separate findings between covered and uncovered claims
2.
Claims exposure for uninsured risks.
Demands in excess of coverage.
Privileged communications impacting coverage issues.
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5/1/08
QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 1
• Counsel is retained to defend an insured where the carrier has issued a reservation of
rights. Retained counsel learns of a fact during the course of interview with the insured
which would be dispositive of a coverage dispute.
dispute Should retained counsel convey
such information to the carrier? What, if anything, must retained counsel do before
conveying this information?
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5/1/08
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QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 2
• Retained counsel is defending an insured who is being provided a defense under a
reservation of rights. Retained counsel believes he can file a motion for summary
judgment which will,
will more likely than not,
not result in the dismissal of all potentially
covered claims. Can retained counsel file the motion? What, if anything, must
counsel do before filing such a motion?
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5/1/08
QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 3
• Retained counsel is defending an insured under a reservation of rights and is apprised
by the carrier that the insured has issued a letter to the insurer raising issues
concerning retained counsel’s
counsel s defense strategy.
strategy In the same correspondence
correspondence, the
insured advises the carrier that retained counsel’s conduct is inconsistent with the
carrier’s obligation to provide a defense under the policy and infers that the carrier is at
risk for bad faith. The insurer has asked defense counsel to respond to the issues
raised by the insured. Can/should defense counsel respond to the allegations
asserted by the insured as the request of the insurer? Can/should retained defense
counsel continue to participate in the defense on behalf of the insured?
Recommended courses of action?
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5/1/08
QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 4
• Retained defense counsel learns that the insured’s personal counsel is communicating
with plaintiff’s counsel with respect to establishing a course of conduct to “set up” the
carrier for a potential bad faith claim in order to sway the carrier to effectuate a
settlement. Can retaining counsel report this activity to the carrier? What should
retained counsel do?
www.reminger.com
5/1/08
4
10/22/2014
QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 5
• Retained counsel is advised by the insured during the course of a settlement
conference that if the case is not settled in response to a demand within policy limits,
the insured intends to instruct retained counsel to confess judgment based upon what
he discussed with plaintiff’s counsel that plaintiff will not go after the insured personally
and only go after the potentially available insurance policy proceeds. Can retained
counsel discuss this situation with the carrier? What should retained counsel do?
www.reminger.com
5/1/08
QUESTIONS ON TRIPARTITE RELATIONSHIP
Hypothetical No. 6
• Retained counsel is defending an insured under a reservation of rights. Prior to a
settlement conference, the carrier advises the insured that it expects the insured to
contribute toward a settlement due to the existence of coverage issues.
issues Can retained
counsel provide advice to either the insured or the insurer with respect to either party’s
settlement posture?
www.reminger.com
5/1/08
5
DUTY TO DEFEND
ISSUES
Presented by:
Clifford C. Masch
October 31, 2014
I.
THE DUTY TO DEFEND
Under Ohio law, the insurer’s duty to defend is both broader than and distinct from the
duty to indemnify. Cincinnati Ins. Co. v. BCPS Holdings, Inc., 115 Ohio St.3d 306 (2007).
Under the standard “pleading test” set forth in Willoughby Hills v. Cincinnati Ins. Co., 9 Ohio
St.3d 177 (1984), when an insurer’s duty to defend is not apparent from the pleadings in the
action against the insured, but the allegations do state a claim which is potentially or arguably
within the policy coverage, or where there is some doubt as to whether a theory of recovery
within the policy coverage has been pleaded, the insurer must accept the defense of the claim.
If a complaint sets forth both covered and uncovered claims, Ohio law requires the carrier
to defend all claims in the policy until such time as the claims implicating coverage can be
resolved. Preferred Mutual Insurance Co. v. Thompson, 23 Ohio St.3d 78 (1986). A narrow
exception to this general principle was recognized in Sanborn Plastics Corp. v. St. Paul Fire and
Marine Insurance Company, 84 Ohio App. 3d 302 (1993). In Sanborn, the plaintiff alleged two
separate and distinct events which allegedly caused pollution: one which arose from a gradual
release of pollution into the environment over many years and one which was alleged to arise
from a separate and distinct episodic event involving a ruptured pipe. Under these unique
circumstances, the Sanborn court held that the carrier did not have to defend the gradual
pollution claim based on the policy pollution exclusion but did have an obligation to defend the
separate episodic event. The court justified this holding on the fact that the two claims arose
from separate and distinct “occurrences.”
While the duty to defend is broad, it is not without its limits. An insurer is not required to
defend any claim that is clearly and undisputedly outside of the contracted policy coverage.
Preferred Risk Ins. Co. v. Gill, 30 Ohio St.3d 108 (1987). In discussing this principle, the Gill
2
Court noted a distinction between insurance policies which linked the carrier’s obligation to
provide a defense to include “groundless, false, fraudulent claims,” versus a policy where the
duty to defend obligation is not similarly linked to defend groundless, false, or fraudulent claims.
In Gill, the policyholder pled guilty to aggravated murder and was subsequently named a party to
a civil action with respect to claims for wrongful death and for negligent infliction of emotional
distress. The carrier filed a declaratory judgment action seeking a termination that it had no duty
to defend the negligence claim as the true facts of the case unequivocally depicted an uninsurable
intentional tort.
The Gill court granted the carrier summary judgment in the declaratory
judgment action reasoning as follows:
This is not a case where the insurer has promised in the insurance policy to
defend any suit against the insured alleging injury within coverage, even if
such suit is groundless, false or fraudulent. The policy at bar contains no
such representation. On this basis, the instant cause is distinguishable
from Willoughby Hills v. Cincinnati Ins. Co. (1984), 9 Ohio St.3d 177, 9
OBR 463, 459 N.E.2d 555, which held that the insurer has a duty to
defend where the allegations of the underlying complaint state a claim
potentially or arguably within coverage. Id. at syllabus. In Willoughby
Hills, the insurance policy provided that the company would undertake the
defense of any suit alleging injury or property damage within coverage,
even if any of the allegations of the suit are groundless, false or fraudulent
* * *” Id. at 177, 9 OBR at 463, 459 N.E.2d at 556.
A similar provision existed in analogous cases wherein we held that the
insurer’s duty to defend depend solely on the allegations of the underlying
complaint. See, e.g. Motorists Mutual v. Trainor (1973), 33 Ohio St.2d
41, 42, 62 O.O.2d 402, 403, 294 N.E.2d 874, 876; Lessak v. Metropolitan
Cas. Ins. Co. (1958), 168 Ohio St. 153, 157, 5 O.O.2d 442, 445, 151
N.E.2d 730, 734; Socony-Vacuum Oil Co. v. Continental Cas. Co. (1945),
144 Ohio St. 382, 384, 29 O.O. 563, 564, 59 N.E.2d 199, 200; BloomRosenblum-Kline Co. v. Union Indemnity Co. (1929), 121 Ohio St. 220,
222, 167 N.E. 884. Where the insurer represents to its insured that it will
undertake the defense of any claim asserting injury within coverage, even
where the claim is false or fraudulent, the duty to defend may arise solely
from the allegations of the underlying complaint, regardless of the true
facts as they are known to the insurer. However, since the appellee herein
has promised only to defend claims for bodily injury or property damage
“to which this coverage applies,” the true facts are determinative of the
3
duty to defend. Where the true facts are such that the insured’s conduct
was outside the coverage of the policy, the claim is not one “to which this
coverage applies,” and the insurer has no obligation to defend the insured.
It is important to note that the reasoning applied in Gill has been since been limited to the
facts of the case. In a subsequent decision by the Ohio Supreme Court in Cincinnati Ins. Co. v.
Anders, 99 Ohio St.3d 156 (2013), the Court made it clear that while Gill remains good law, the
principles set forth in that case should be limited to cases which are substantially similar to Gill.
II.
CONSEQUENCES OF A CARRIER’S ISSUANCE OF A RESERVATION
OF RIGHTS AND THE APPOINTMENT OF COUNSEL
A reservation of rights letter from an insurer is a notice to the policyholder that even
though the insurer is proceeding to handle the claim under the policy, certain losses may not be
covered by the terms of the policy. By such a letter, the company preserves or “reserves” its
right to deny the coverage at a later date based upon the terms of the policy. Masteloone v.
Lightening Rod Mut. Ins. Co., 175 Ohio App. 3d 23, 2008-Ohio-1-311. In Redhead Grass, Inc.
v. Buckeye Union Insurance Company, 135 Ohio App. 3d 316 (1999), the court held that when
an insurer provides a defense to its insured under a reservation of rights, the insurer did not have
an obligation to pay for legal expense incurred by the policyholder when it retained its own
separate personal counsel. As a consequence, the majority view in Ohio is that an insurer
retains its right to select counsel in providing a defense to its insured even when the defense is
provided under a reservation of rights.
However, courts have recognized that a carrier may be deemed to waive its rights to
assert policy defenses after defending a claim for a period of time without first assessing a
reservation of rights. In Turner Liquidating v. The St. Paul Surplus Lines Ins. Co., 93 Ohio
App. 3d 292 (1994), the court held that when the carrier provided a defense to the insured for
over one year without the issuance of a reservations of rights, the carrier created an irrevocable
4
conflict by controlling the defense without advising its insured about potential cover5age issues
through a reservation of rights. Thus, the court held the carrier will be deemed to waive its right
to disclaim a duty to defend or to indemnify.
While the majority position in Ohio is that a carrier may select counsel to defend its
insured under a reservation of rights, other states have recognized such situations may create a
conflict thereby entitling the policyholder to select independent counsel to provide a defense at
the carrier’s expense. An example of this position may be found in Armstrong Cleaners, Inc. v.
The Erie Ins. Exch., 364 F.2d 797 (S.D. Ind. 2005). In Armstrong, the insured, a dry cleaner,
was sued with respect to pollution and ground water contamination claims by virtue of its dry
cleaning operations. The carrier issued a Reservation of Rights Letter, specifically citing the
policy pollution exclusion and the intended and expected exclusion. The carrier then retained
counsel to defend Armstrong with respect to the claims at issue. Armstrong rejected this offer,
demanding that it be given the opportunity to select counsel of its own choosing to defend the
case.
In analyzing the issues surrounding the selection of counsel dispute, the Armstrong court
first discussed the potential existence of a conflict of interest based upon the carrier’s coverage
position with respect to the carrier’s reliance on the policy pollution exclusion, the court found
no “substantial risk” of a conflict of interest based, reasoning:
Similarly, in the circumstance of this case, Erie’s reliance on the
pollution exclusion does not pose a significant risk of impairing the
defense attorney’s representation of Armstrong. There are two
reasons.
First, under controlling Indiana law, as Erie
acknowledged in its Reservation of Rights and concedes, the
pollution exclusion is not enforceable. See America States Ins. Co.
v. Kiger, 662 N.E. 2nd 945 (Ind. 1996). Erie indicated that
Reservation of Rights only as a precaution to protect its rights in
the event that Indiana law on the issue might change. Second,
even if the law were to change so that the exclusion became
5
enforceable, it is unlikely that the defense of the underlying lawsuit
would affect the success of the coverage defense. If the alleged
contamination of the groundwater was caused by chemicals
released by Armstrong’s business, the pollution exclusion would
appear to apply, at least if it were enforceable. In other words, the
existence of the issue does not pose a significant risk that the
defense’s representation of Armstrong would be impaired by
counsel’s relationship with the insurer.” Id. at 809-810.
However, that the Armstrong Court went on to conclude that there was a significant risk
of a conflict of interest based upon the carrier’s cited reliance on the intentional act exclusion. In
finding that this policy defense justified the insured’s right to choose its own counsel, the
Armstrong court held:
“The Court is confident that there is a ‘significant risk’ of such a
conflict here. In preparing the State Farm case for defense,
attorneys for Armstrong must investigate the facts and conduct
discovery to learn as much as they can and how and why the
groundwater came to be so contaminated as state authorities have
demanded it to be cleaned up. In preparing for trial, the
Armstrong’s attorneys will need to be ready for the remedial
portion of the case. They and the Armstrong cannot afford to
assume that they will win on causation issues. Armstrong’s
attorneys will need to go back through the years of records and will
need to interview former employees and other witnesses. Also, the
Armstrong’s attorney will need to keep Erie advised of the
progress of the case and how the facts they learn may affect
settlement or other strategic and tactical decisions.
Such information could easily work to the detriment of the
Armstrong’s in the coverage disputes with Erie. In preparing for
trial on the remedial issues, the applicable law makes directly
relevant the same facts and circumstances that are likely to be most
relevant in deciding Erie’s coverage defense based on the
definition of occurrence and on the exclusion for intended or
suspected injuries – the degree of care exercised by Armstrong and
their state of mind toward possible environmental harm. Also, of
course, one must keep in mind that Erie apparently felt it had
sufficient information about the situation at the Elliston location to
reserve its rights based on the “expected or intended” exclusion
and the definition of occurrence. The prominence of these same
factual and legal issues in the remedial portion of the underlying
litigation, together with the specific terms of Erie’s Reservation of
6
Rights, means that the undisputed facts show a significant risk that
the attorney selected by the insurer will be materially limited in
their representation of Armstrong.” Id. at 815-816.
In sum, some states recognize that the policy defenses identified in the reservation of
rights could create an insurmountable conflict with respect to the litigation strategy to be
presented on behalf of the insured. The analysis set forth in the Armstrong case may give rise to
some consideration as to which potential defenses should be indicated in a reservation of rights
letter. For example, in a situation where policy contains a very strong pollution exclusion and
the focal point of the underlying the claim involves a pollution claim, the carrier may want to
consider whether it is necessary to assert the potential application of the intended and expected
exclusion in the reservation of rights letter. Under the analysis applied in Armstrong, the citation
of the exclusion could give rise to an insured’s demand that they choose independent counsel
because of the perceived insurmountable “conflict”.
III.
RESERVATION OF RIGHTS AND REIMBURSEMENT OF DEFENSE
COSTS
In United National Insur. Co. v. SST Fitness Corp., 304 F.3d 414 (6th Cir. Ohio 2002),
the court reviewed a situation where the carrier defended a claim under a reservation of rights,
which included an express reservation to recoup any defense costs incurred in the matter. The
insured never expressly objected to this condition set forth in the reservation of rights letter.
The carrier thereafter instituted a coverage litigation seeking a determination that it
owned no defense or indemnity obligation for the claims in the issue and sought to be reimbursed
for all defense costs provided under the reservation of rights. After the SST court concluded that
the carrier owed no coverage for the claim, it approved the carrier’s request for reimbursement of
defense costs based on the following reasoning:
7
We agree that allowing an insurer to recover under an implied in fact
contract theory so long as the insurer timely and explicitly reserved its
right to recoup the costs and provided specific and adequate notice of the
possibility of reimbursement promotes the policy of ensuring defenses are
afforded even in questionable cases. When an insurer conditions payment
of defense costs on the condition of reimbursement if the insurer had no
duty to defend, the condition becomes part of an implied in fact contract
when the insured accepts payment, when faced with a reservation of
rights, the insured can choose to: 1) decline the offer, pay for the defense,
and seek to recover on the policy; 2) decline the offer and file a
declaratory judgment actio; or 3) accept the offer subject to the reservation
of rights.
Because SST entered into an implied in fact contract by accepting the
defense costs subject to a reservation of the right to recoupment if a court
determined that United National had no duty to defend SST and a court
found United National had no duty to defend, United National is entitled
to reimbursement of its defense costs and prejudgment interest.
It is important to note that the SST holding on reimbursement of defense costs was
predicated, in part, on the fact that the insured did not expressly object to the carrier’s claimed
right to seek reimbursement of defense fees. To date, no Ohio state court has formally adopted
this holding.
IV.
CONFLICT OF INTEREST ARISING FROM THE TRIPARTITE
RELATIONSHIP BETWEEN THE INSURANCE COMPANY, RETAINED
DEFENSE COUNSEL AND THE INSURED
As a general rule, insurance defense counsel routinely and necessarily represents the
interest of both the insurer and the insured who both have an interest in the successful defense of
the claim.
Although the representation of the two clients is not unusual, the manner in which
this representation arises is distinguished from other situations. This distinction creates what is
appropriately characterized as a tripartite relationship. Legal Malpractice, 4th Edition, Mallen &
Smith, Sec. 28.C, “the relationship of counsel for the tripartite relationship” e.g. 487; United
States Fidelity & Guaranty Co. v. Pietrykoski, 6th Dist. Ct. of Appeals (2000), 2000 WL 204475.
8
The “tripartite relationship” arises when an insurer hires a lawyer to represent an insured
with respect to a matter which is covered or potentially covered under the policy between the
carrier and the insured. The defense obligation contained in most policies of insurance provides
that the insurer has the right to select and control the insured’s defense. Thus, when the insurer
selects counsel to defend the insured, the three-way relationship between the insurer, defense
counsel and insured is commonly referred to as the “tripartite relationship.”
This relationship
has been defined as “a loose partnership, coalition or alliance directed toward a common goal,
sharing a common purpose which lasts during the pendency of the claim or litigation against the
insured.” Robert v. Girbreath, caught in crossfire preventing and handling conflicts of interest:
guidelines for Texas Insurance defense counsel, 27 Tex. Tech. L.Red. 139, 144-45 (1996)
quoting Am. Mut. Liad. Ins. Co. v. Superior Court, 113 Cal. Rptr. 561, 571 (Cal. Ct. App. 1974).
An inherent danger in tripartite relationship is that defense counsel “may be tempted to
help the client [the insurer] who pays the bills, who will send further business, and with whom
long-standing personal relationships have developed.
Swiss Reinsurance American Corp. v.
Roetzel & Andress, 163 Ohio App.3d 336 (2005), citing Pine Island Farmers Co. v. Ernstad &
Riemer, P.A. (Minn. 2000), 649 N.W.2d 441, 445. When dealing with the rendering services
under a tripartite relationship, it is important to bear in mind the principle that an agent cannot
“serve two masters whose interest are incompatible, but he can properly serve both parties so
long as the duties are consistent.
Swiss Reinsurance at ¶ 20; Johnson v. Enpry British &
Mercantile Ins. Co. (1902), 66 Ohio St. 6, 14. Thus, the existence of the tripartite relationship
can become strained in situations where interest of the insurer and the interest of the insured
become divergent.
9
In Swiss Reinsurance American v. Roetzel, the insurer retained an attorney to represent
the interest of its insured, Dr. Robinson, in a malpractice case.
As trial approached, defense
counsel repeatedly confronted the carrier, urging that the matter be settled based upon the
strength of plaintiff’s case. Along the same lines, the insured, Dr. Robinson, likewise demanded
that the matter be settled. Dr. Robinson hired personal counsel who sent a demand letter to the
carrier to resolve the matter.
Contrary to the request of defense counsel and the insured, the
carrier continued to take the position that the case should be tried.
In addition, the carrier
continually questioned the defense counsel’s billing statement and reporting habits. As a result
of the friction between the defense counsel and the carrier and in response to a “bad faith letter”
written by Dr. Robinson’s private counsel, the carrier hired separate counsel to evaluate the case.
The carrier ultimately decided to replace retained defense counsel with new counsel prior to the
trial. The replacement counsel concurred with prior counsel’s recommendation that the case be
settled for up to $2 million before trial, but nevertheless expressed the opinion that he could
present a viable defense at trial if necessary. The carrier again chose to go forward with the trial.
After day two of the trial, the carrier ultimately settled the matter for $2,200,000.
Based on the foregoing, the carrier and the carrier’s re-insurer instituted a malpractice
action against the first retained defense counsel. In evaluating this claim, the Swiss Re court
recognized that under the typical situation, a defense counsel retained to defend a policyholder
by an insurer maintains a tripartite relationship with respect to both the insurer and the insured.
Nevertheless, the court found that this relationship can be severed in situations when a conflict
arises between the interest of the insured and the interest of the insurer.
The Swiss Re court
concluded that defense counsel’s relationship between the insurers became affectively severed,
reasoning:
10
Accordingly, we find that a clear conflict existed between the interests of
Dr. Robinson and Frontier. This conflict was evident for the first time in
April, 1997 when Dr. Robinson’s counsel sent his first demand letter
demanding that the matter be settled. While Frontier asserts that such a
letter is common in the industry, such a claim does not change the reality
that the letter demanded settlement. We note that Frontier is “hardly a
neophyte in these matters.” Continental Cas. Co. v. Pulman, Camley,
Bradley & Reeves (C.A.2d 1991), 929 F.2d 103, 106. The record reflects
that Frontier was aware of the conflict that arose when [defense counsel]
refused to place Frontier’s interest in a proceeding to trial in front of Dr.
Robinson’s interest in the settlement. Frontier evaluated its options and
hired its own counsel because of the persistent conflict between Dr.
Robinson’s desire to settle. Accordingly, we find that the active conflict
between the insured and the insurer prevents a finding that Frontier was
[defense counsel’s] client.
Based upon the foregoing, the Swiss Re court refused to recognize that the carrier had a
right to pursue a direct malpractice claim against defense counsel.
It should be noted that the Swiss Re decision has more recently been limited to the unique
facts of that case. In Carolina Cas. Ins. Co. v. Gallagher Sharpe, U.S. Dist. Court, Northern
Dist. of Ohio Case No. 1:10-cv-02492, 2011 WL 4633869, the court held that Swiss Re decision
was limited by that particular fact pattern when analyzing a motion to dismiss a direct
malpractice claim filed by an insurer against retained defense counsel. In denying the motion,
the Carolina Casualty court held:
It is telling that the language in Roetzel does not state that the person
alleging privity has the burden of proving a mutuality of interests. The
Roetzel court merely examined the facts of the case and found that a very
drastic conflict of interest existed. The court explained that the facts
asserted in Roetzel manifest that no mutuality of interests existed between
the parties because of the drastic conflict of interest. Swiss Reinsurance
Am. Corp, 163 Ohio App.3d at 346, 837 N.E.2d 1215. Here, in contrast to
Roetzel, the docket reflects that there is no clear conflict of interest
between Carolina and Goodman. Absent a conflict of interest and coupled
with inferential allegations asserting mutuality of interests, the facts
convincingly suggest privity.
In accordance with the Rule 12(b)(6) standard, the Court finds that it is
plausible that privity exists between Carolina and the defendants.
11
The tripartite relationship can also be strained by virtue of various rights which may be
asserted by the carrier, including the right to control the defense, audit the legal expenses of the
attorney, and give directions pertaining to the defense of the insured.
Under the majority
approach characterized as a “2-client model” or a “dual client doctrine,” both the insurer and the
insured are considered clients of the attorney, and the insurer, as a client, has a fundamental
interest in how the appointment of counsel handles the defense. These contractual rights of the
carrier must nevertheless be weighed against the interests of the insured who is considered the
primary client in the tripartite relationship who has an obvious interest in the outcoming
litigation. See Professional Rule of Conduct, Rule 1.8(f) and mandatory Statement of Client’s
Rights.
The tripartite relationship can be impacted by a number of situations which can create a
potential conflict between the insurer and the insured.
A.
ISSUANCE OF A RESERVATION OF RIGHTS
With the issuance of a reservation of rights, an insurer undertakes an insured’s defense
while reserving its rights to assert coverage positions at a later point in time, including the
potential withdrawal from the defense or the denial of any indemnity obligation. Under Ohio
law, it is well settled that an insurer may retain defense counsel to defend an insured even though
a defense is provided under a reservation of rights. Red Head Brass, Inc. v. Buckeye Union Ins.
Co., 135 Ohio App.3d 616. Thus, “the mere fact that certain claims fell outside of the policy
coverage, as explained in the reservation-of-rights letter, did not obligate [the carrier] to pay for
[the insured’s] privity legal expenditures because [the insurer] through [retained defense counsel]
was able to defend [the insured]. Red Head at 626-627.
12
Nevertheless, with the issuance of a reservation of rights, retained defense counsel must
become vigilant in recognizing an action taken in the defense of the claim which could have a
direct impact on the subject matter of any potential coverage issue between the insured and the
insurer.
Good practice would require defense counsel to first address with the client insured.
The potential impact that certain actions may have with respect to an existing coverage issue
while defense counsel should make the insured aware of the potential ramifications, it must be
remembered that retained defense counsel cannot become directly involved in the actual
coverage dispute between the insured and the insurer. This would create a direct conflict
prohibited under the Rules of Professional Conduct.
B.
WHERE PROPOSED DAMAGES EXCEED COVERAGE
Under Ohio law, the mere fact that a complaint seeks damages in excess of policy limits
and/or seeks damages which may be not covered under the policy (i.e. punitive damages) does
not impair the carrier’s contractual right to select counsel to represent the insured under the
policy.
However, retained counsel must be cognizant of his client’s potential uninsured
exposure when evaluating risks associated with taking the matter to trial and/or making
settlement recommendations.
C.
CONFLICTING OPINIONS ON THE DIRECTION OF THE
DEFENSE BY THE CARRIER AND THE INSURED
In situations where the carrier and the insured are in disagreement as to the correct
position to take in the defense of a matter, defense counsel must remember that the insured is the
primary client in the tripartite relationship. Nevertheless, retained counsel should never advocate
his or her responsibility to give the best advice with respect to the provision of legal
representation.
Good practice is to make sure that all defense strategy recommendations,
liability analysis, and settlement analysis are shared with both the insurer and the insured.
13
Counsel must remember that he may have an obligation of confidentiality to the insured even in
the context of the tripartite relationship.
D.
ETHICAL CONSIDERATIONS
1.
(f)
V.
Ohio Rule of Professional Conduct, Rule 1.8 Conflict of
Interest; Current Clients; Specific Rules.
A lawyer shall not accept compensation for representing a client from
someone other than the client unless divisions (f)(1) to (3) and, if
applicable, division (f)(4) apply:
(1)
the client gives informed consent;
(2)
there is no interference with the lawyer’s independence of
professional judgment or with the client-lawyer relationship;
(3)
information relating to representation of a client is protected as
required by Rule 1.6:
(4)
if the lawyer is compensated by an insurer to represent an insured,
the lawyer delivers a copy of the following Statement of Insured
Client’s Rights to the client in person at the first meeting or by
mail within ten days after the lawyer receives notice of retention
by the insurer.
STATEMENT OF INSURED CLIENT’S RIGHTS
An insurance company has retained a lawyer to defend a lawsuit or claim against you.
This Statement of Insured Client’s Rights is being given to you to assure that you are aware of
your rights regarding your legal representation.
1.
Your lawyer: Your lawyer has been retained by the insurance
company under the terms of your policy. If you have questions
about the selection of the lawyer, you should discuss the matter
with the insurance company or the lawyer.
2.
Directing the Lawyer: Your policy may provide that the insurance
company can reasonably control the defense of the lawsuit. In
addition, your insurance company may establish guidelines
governing how lawyers are to proceed in defending you –
guidelines that you are entitled to know. However, the lawyer
14
cannot act on the insurance company’s instructions when they are
contrary to your interest.
3.
Communications: Your lawyer should keep you informed about
your case and respond to your reasonable requests for information.
4.
Confidentiality:
Lawyers have a duty to keep secret the
confidential information a client provides, subject to limited
exceptions. However, the lawyer chosen to represent you also may
have duty to share with the insurance company information
relating to the defense or settlement of the claim. Whenever a
waiver of lawyer-client confidentiality is needed, your lawyer has a
duty to consult with you and obtain your informed consent.
5.
Release of Information for Audits: Some insurance companies
retain auditing companies to review the billing and files of the
lawyers they hire to represent policyholders. If the lawyer believes
an audit, bill review, or other action initiated by the insurance
company may release confidential information in a manner that
may be contrary to your interest, the lawyer must advise you
regarding the matter and provide an explanation of the purpose of
the audit and the procedure involved. Your written consent must
be given in order for an audit to be conducted. If you withhold
your consent, the audit shall not be conducted.
6.
Conflicts of Interest: The lawyer is responsible for identifying
conflicts of interest and advising you of them. If at any time you
have a concern about a conflict of interest in your case, you should
discuss your concern with the lawyer. If a conflict of interest
exists that cannot be resolved, the insurance company may be
required to provide you with another lawyer.
7.
Settlement: Many insurance policies state that the insurance
company alone may make a decision regarding settlement of a
claim. Some policies, however, require your consent. You should
discuss with your lawyer your rights under the policy regarding
settlement. No settlement requiring you to pay money in excess of
your policy limits can be reached without your agreement.
8.
Fees and Costs: As provided in your insurance policy, the
insurance company usually pays all of the fees and costs of
defending the claim. If you are responsible for paying the lawyer
and fees and costs, your lawyer must promptly inform you of that.
9.
Hiring your own Lawyer: The lawyer hired by the insurance
company is only representing you in defending the claim brought
15
against you. If you desire to pursue a claim against someone, you
will need to hire your own lawyer. You may also wish to hire your
own lawyer if there is a risk that there might be a judgment entered
against you for more than the amount of your insurance. Your
lawyer has a duty to inform you of this risk and other reasonably
foreseeable adverse results. (Emphasis added).
Comments to Rule 1.8.
[12A] Divisions (f)(1) to (f)(3) apply to insurance defense counsel
compensated by an insurer to defend an insured, subject to the unique
aspects of that relationship. Whether employed or retained by an
insurance company, insurance defense counsel owes the insured the same
duties to avoid conflicts, keep confidences, exercise independent
judgment, and communicate as a lawyer owes any other client. These
duties are subject only to the rights of the insurer, if any, pursuant to the
policy contract with its insured, to control the defense, receive information
relating to the defense or settlement of the claim, and settle the case.
Insurance defense counsel may not permit an insurer’s right to control the
defense to compromise the lawyer’s independent judgment, for example,
regarding the legal research or factual investigation necessary to support
he defense. The lawyer may not permit an insurer’s right to receive
information to result in the disclosure to the insurer, or its agent, of
confidences of the insured. The insured’s consent to the insurer’s payment
of defense counsel, required by Rule 1.8(f)(1), can be inferred from the
policy contract. Nevertheless, an insured may not understand how defense
counsel’s relationship with and duties to the insurer will affect the
representation. Therefore, to endure that such consent is informed, these
rules require a lawyer who undertakes defense of an insured at the expense
of an insured at the expense of an insurer to provide to the client insured,
at the commencement of representation, the “Statement of Insured Client’s
Rights.”
Some of the most important points denoted in the comments is that the existence of the
tripartite relationship does not abrogate the attorney’s obligation to maintain confidences of the
insured. This obligation could relate to instances where the lawyer learns of information from
the insured client which may impact a coverage issue between the insured and the insurer. The
comments further indicate that the retained defense counsel has an obligation to identify and
advise with respect to a perceived a potential conflict of interest. This obligation would extend
to conflicts on potential coverage issues. While retained counsel must alert the insured client as
16
to the existence of a potential conflict involving a coverage issue, counsel cannot take an active
role on the coverage issue as that would involve an obvious conflict of interest.
2.
[c]
Rule 5.4 Professional Independence of a Lawyer
A lawyer shall not permit a person who recommends, employs, or pays the lawyer
to render legal services for another to direct or regulate the lawyer’s professional judgment in
rendering such legal services.
Official Comment
[1]
The provisions of this rule express traditional limitations on
sharing fees. These limitations are to protect the lawyer’s professional
independence of judgment. Where someone other than the client pays the
lawyer’s fee or salary, or recommends employment of the lawyer, that
arrangement does not modify the lawyer’s obligation to the client. As
stated in division (c), such arrangements should not interfere with the
lawyer’s professional judgment.
[2]
This rule also expresses traditional limitations on permitting a third
party to direct or regulate the lawyer’s professional judgment in rendering
legal services to another. See also Rule 1.8(f) (lawyer may accept
compensation from a third party as long as there is no interference with
the lawyer’s independent professional judgment and the client gives
informed consent).
3.
The Bd. of Commissioners on Grievances and Disciplinary
Advisory, Opinion, 2000-3.
In this advisory opinion, the panel addressed the question of whether it was proper for an
insurance defense attorney to abide by an insurance company’s litigation management guidelines
while representing an insured. After looking at disciplinary and advisory rules dealing with an
attorney’s obligation with respect to potentially differing interests, avoiding influence by others
other than the client, and the loyalty to the client, avoiding influence by third parties and
attorneys, and/or compensation from others other than the client. The panel reasoned:
•
In conclusion, it is the Board’s view that it is improper under DR
5-107(B) for an insurance defense attorney to abide by an
17
insurance company’s litigation management guidelines in the
representation of an insured when the guidelines interfere with the
professional judgment of the attorney. Attorneys must not yield
professional control of their legal work to an insurer.
•
Guidelines that restrict or require prior approval before performing
computerized or other legal research are an interference with the
professional judgment of an attorney. Legal research improves the
competence of an attorney and increases the quality of the legal
services. Lawyers must be able to research legal issues when they
deem necessary without interference by non-attorneys.
•
Guidelines that dictate how work is to be allocated among defense
teams members by designating what tasks are to be performed by a
paralegal, associate, or senior attorney are an interference with an
attorney’s professional judgment.
Under the facts and
circumstances of a particular case, an attorney may deem it
necessary or more expedient to perform a research task or other
task, rather than designate the task to a paralegal. This is not a
decision for others to make.
The attorney is professionally
responsible for the legal services. Attorneys must be able to
exercise professional judgment and discretion.
•
Guidelines that require approval before conducting discovery,
taking a deposition, or consulting with an expert witness are an
interference with an attorney’s professional judgment. These are
professional decisions that competent lawyers make on a daily
basis.
•
Guidelines that require an attorney’s approval before filing a
motion or other pleadings are an interference with an attorney’s
professional judgment.
Motion by motion evaluation by an
insurer of an attorney’s legal work is an inappropriate interference
with professional judgment and is demeaning to the legal
profession.
If an insurer is unsatisfied with the overall legal
services performed, the insured has the opportunity in the future to
retain different counsel.
•
Other guidelines may or may not interfere with an attorney’s
professional judgment. Insurance defense counsel must exercise
discretion in making those determinations.
•
Attorneys must provide reasonable and necessary services at
reasonable fees. Attorneys should communicate with the insurer
regarding the status of the representation. The board encourages
18
attorneys to cooperate with insurers, but attorneys must not
advocate control of their professional judgment to non-attorneys.
4.
The Board of Commissions on Grievances and Discipline,
Opinion 2000-2.
In this case, the panel reviewed the following advisory question:
Is it proper for an insurance defense attorney to submit legal bills incurred
in defending an insured to an outside auditing company hired by the
insurer?
Considering disciplinary rules and ethical considerations dealing with the preservation of
confidence and secrets of a client, and disclosure to certain outside agencies, the advisory
opinion reads as follows:
In conclusion, the Board advises that under DR 4-101(B)(3) and DR 4101(c)(1), an attorney may not submit detailed legal bill to an outside
audit company hired by an insurer without first obtaining client consent
after full disclosure. Full disclosure includes informing the client of the
type of information required by the insurer in the billing invoice, the type
of supporting documentation, if any, required by the audit, and that waiver
of attorney/client privilege might be raised as a consequence. Whether
the submission of legal bills to an audit company waives the
attorney/client privilege or work product doctrine is a question beyond the
scope of this opinion.
5.
Defense Counsel’s Actions Potentially Impacting Coverage
Issue
In Parsons v. Continental Nat’l Amer. Group, 113 Ariz. 223 (Ariz. 1976), the insurer,
CNA, appointed defense counsel to defend its insured, in connection with their son’s alleged
assault on three neighbors.
The defense attorney’s discovery lead counsel to believe that the
boy’s attack in the neighborhood was an intentional act and so informed CNA. The CNA claims
representative then sent the insureds a reservation of rights letter, stating that the act involved
might have been intentional and that their policy specifically excluded liability for bodily injury
19
caused by an intentional act.
The case went to trial and the plaintiffs received a $50,000
directed verdict against the insured’s son which was in excess of the $25,000 policy limit.
The carrier subsequently successfully defended the plaintiff’s attachment action against
the policy by asserting an intentional act exclusion defense.
On appeal, the judgment holder
contended that CNA was estopped from denying coverage and waived the intentional acts
exclusion because the company exploited a fiduciary relationship between defense counsel and
the insured to develop its coverage defense. The Parson’s court agreed, first noting that the
defense counsel had obtained privilege and confidential information from his client by virtue of
the attorney/client relationship concerning the type of intent involved in the underlying tort
action. Based on this finding, the court held:
When an attorney . . . uses the confidential information between an
attorney and the client to gather information so as to deny the insured
coverage under the policy in the garnishment proceeding, we hold that
such conduct constitutes a waiver of the policy defense, and is so contrary
to public policy and the insurance company that the insurance company is
estopped as a matter of law from disclaiming liability under an
exclusionary clause in the policy.
VI.
CONCLUSION
The tripartite relationship remains a largely ill-defined relationship which can create
friction under certain circumstances. The best practice is to maintain open communications with
both the insurer and client with respect to a recommended defense strategy, liability analysis, and
settlement recommendations. Retained counsel should be cognizant of those situations where he
may learn of confidential communications from the client which can adversely impact a
coverage issue. Counsel should not hesitate to recommend that the insured client retain personal
counsel in situations where the insured is exposed to the potential of uninsured liability due to a
carrier’s issuance of a reservation of rights or the insured’s exposure to liability beyond a
20
policy’s limits. The presence of personal counsel in these situations can often alleviate some of
the “conflict concerns” which can arise in the course of the tripartite relationship.
21

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