Archive for Insurance Law

Illinois Fed. Court Holds No ‘Bad Faith Denial Of Coverage’ Against Title Insurers in Illinois

The U.S. District Court for the Northern District of Illinois recently held that a title insurer may exclude coverage under the exception for defects “created, suffered, assumed, or agreed to by the insured claimant” without intentional or wrongful conduct by the insured.

In so ruling, the Court also held that the Illinois statute for bad faith denial of coverage by insurers did not apply to title insurers.

A copy of the opinion in Bank of America, NA v. Chicago Title Insurance Company is available at:  Link to Opinion.

In 2007, a developer sought to purchase real estate in Yorkville, Illinois, to build a shopping center.  The lending bank and the developer entered into a construction loan agreement, which was secured by a construction mortgage, security agreement, assignment of rights and leases and fixture filing on the property.

As part of the project, the developer sold land to an anchor tenant pursuant to a purchase agreement.  Under that purchase agreement, the developer agreed to reimburse the tenant for a portion of a special tax imposed on the property by Yorkville.  The purchase agreement also provided lien rights to the tenant should the developer fail to timely pay the reimbursement, and stated that the developer’s obligation shall be a covenant running with the land and binding the developer’s successors and assigns.

The purchase agreement, development agreement, and the mortgage were recorded in that order.  A title insurer provided title insurance to the bank for the transaction.

The developer defaulted under the construction loan agreement and the bank sued for foreclosure in state court.  With respect to the tenant, the foreclosure complaint alleged that the tenant’s rights were subordinate and inferior to the lien and interest of the bank.  The tenant counterclaimed for a declaration of its rights under the agreements that ran with the land and were binding on the developer’s successors and assigns.  The parties filed cross motions for summary judgment.

The state court in the foreclosure held that the bank’s mortgage had priority, the tenant’s tax reimbursement and lien rights were personal between the developer and tenant, did not run with the property, and would be foreclosed and terminated upon entry of final order of foreclosure.

The state appellate court affirmed in part and reversed in part, agreeing that the bank’s mortgage had priority over any lien of the tenant, but concluded that the tenant’s tax reimbursement and lien rights were covenants that ran with the land binding on the bank and its successors, and were not extinguished, because the bank had actual knowledge of the tax reimbursement and lien rights before the bank recorded the mortgage, and because the mortgage was recorded after the memorandum of agreement and memorandum of development agreement.

As a result of the state appellate court ruling, the bank filed a complaint in federal court against the title insurer.  The bank alleged that due to the state appellate court ruling, it sold the mortgaged property for $1,780,000 less than what it would have sold without the tax obligation.  The title insurer, which represented the bank in the state court action against the tenant, denied coverage and refused to indemnify the bank because it claimed that the bank’s loss was excluded from the policy.

The bank’s complaint asserted a claim for breach of contract (Count I) and a claim titled “bad faith” (Count II).  The title insurer answered Count I, moved to dismiss Count II, and raised a number of affirmative defenses, and filed a counterclaim for declaratory judgment and/or “reformation of the policy to reflect the bargained for coverage.”

The bank moved to strike and/or dismiss the title insurer’s counterclaim and first affirmative, both of which asserted that the underlying policy excluded the bank’s claims.

The title insurer’s motion to dismiss argued that § 155 of the Illinois Insurance Code, which provides a cause of action against insurers for bad faith denial of coverage, did not apply because the Insurance Code specifically exempted title insurance companies.  See 215 ILCS 5/451.  Moreover, the title insurer argued that Illinois law does not provide an independent tort claim for breach of good faith and fair dealing.  See Voyles v. Sandia Mortgage Corp., 196 Ill.2d 288, 297-98 (2001).

The Court granted the title insurer’s motion and dismissed Count II.

Next, the bank’s motion to strike and dismiss the counterclaim and first affirmative defense, argued that: (1) the counterclaim should be stricken because it was duplicative of the title insurer’s first two affirmative defenses, and (2) neither the first affirmative defense nor Count I of the counterclaim, both of which sought to avoid coverage based on an exclusion for encumbrances, stated a cause of action because the title insurer did not allege that the bank’s intentional misconduct or inequitable behavior created the tax encumbrances at issue.  The Court rejected both arguments.

First, the Court determined that the bank suffered no prejudice by having to respond to the counterclaim, even if the counterclaim was duplicative of the title insurer’s first two affirmative defenses.  The issue of whether the exclusion applied was the key issue in this case.  The Court held that striking the counterclaim as redundant will not remove the issue, and would not save the plaintiff any time or money.

Second, the Court held that the title insurance policy excluded from coverage “defects, liens, encumbrances, adverse claims or other matters (a) created, suffered, assumed, or agreed to by the insured claimant.”   The title insurer’s affirmative defense and counterclaim alleged that the bank was aware: (1) of the documents creating the tax encumbrance; (2) that the documents provided for the encumbrance to run with the land; and (3) the documents that created the encumbrance were intended to be and were recorded prior to the bank’s mortgage.

Because the tax encumbrance was recorded before the mortgage, the Court held that the foreclosure could not extinguish it.

The Court also held that the exclusion could be applied without intentional or wrongful conduct by the bank to create the encumbrance.  By agreeing to the order of recordation, the Court found that the bank implicitly agreed that the encumbrance for tax reimbursements would survive a foreclosure.

Accordingly, the Court granted the bank’s motion to dismiss Count I and denied its motion to strike and dismiss the title insurer’s counterclaim and first affirmative defense.

3rd Cir. Holds No TCPA Coverage Under Businessowners Insurance Policy

The U.S. Court of Appeals for the Third Circuit recently held that a businessowners insurance policy did not cover a class action judgment that arose out of unsolicited advertisement communications in violation of the federal Telephone Consumer Protection Act.

A copy of the opinion in Auto-Owners Insurance Company v. Stevens & Ricci Inc. is available at:  Link to Opinion.

A business was solicited by an advertiser who claimed to have a fax advertising program that complied with the TCPA, 47 U.S.C. § 227. The business allowed the advertiser to fax thousands of advertisements to potential customers on its behalf.

Six years later, a class action lawsuit was filed against the business, claiming that the advertisements violated the TCPA, which prohibits the “use [of] any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement …”

In the class action, the class representative asserted that it had neither invited nor given the business permission to send the faxes, and that the unsolicited faxes had damaged the recipients by causing them to waste paper and toner in the printing process, lose the use of their fax machines when the advertisements were being received, and the faxes had also interrupted the class members’ “privacy interest.”

During the time that the unsolicited faxes were sent to the class members, the business was covered by a businessowners insurance policy. The policy obligated the insurer to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’ to which this insurance applies.”

The insurer agreed to defend the business in the class action, but reserved its right to later challenge whether the sending of unsolicited faxes fell within the terms of the insurance policy’s coverage.

One year later, the class action settled and the parties agreed to entry of judgment in favor of the class against the business for $2 million. The class also agreed to seek recovery of the judgment only from the insurer. The trial court entered an order and final judgment approving the settlement and entering the judgment against the business. In its order, the trial court specifically found that the business “did not willfully or knowingly violate the TCPA.”

By that time, the insurer had already filed a declaratory judgment action against the business to clarify its obligations under the policy and seeking a declaration that the policy did not provide coverage for the claims in the class action and that the insurer did not owe the business any duty to defend or indemnify.

The insurer and the class representative each moved for summary judgment in the declaratory judgment action, and the trial court concluded that the sending of unsolicited faxes to the class members did not cause the sort of injury that fell within the policy’s definition of either “property damage” or “advertising injury.” The trial court granted the insurer’s motion for summary judgment and denied the class representative’s cross-motion. The class representative appealed.

On appeal, the class representative first argued that the trial court did not have jurisdiction to hear the case. The insurer had brought its declaratory relief action under the Declaratory Judgment Act, 28 U.S.C. § 2201.

As you may recall, the DJA does not itself create an independent basis for federal jurisdiction, but instead provides a remedy for controversies otherwise properly within the court’s subject matter jurisdiction. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72 (1950).  Declaratory judgment actions do not directly involve the award of monetary damages, but “it is well established that the amount in controversy [in such actions] is measured by the value of the object of the litigation.” Hunt v. Wash. State Apple Advert. Comm’n, 432 U.S. 333, 347 (1977).

In bringing its declaratory judgment action, the insurer had invoked diversity jurisdiction, which requires that the parties must be completely diverse, meaning that “no plaintiff can be a citizen of the same state as any of the defendants,” and that the “matter in controversy exceeds the sum or value of $75,000.” 28 U.S.C. § 1332.

Here, there was no dispute that the parties were completely diverse, because the insurer was based and incorporated in Michigan, while the business was based and incorporated in Arizona, and the class representative was based and incorporated in Pennsylvania.

However, although the business and the class representative were ultimately fighting over the insurer’s obligation to pay a $2 million judgment against the business, that judgment was based on the settlement of the underlying class action lawsuit in which the individual claims of each class member fell well below the $75,000 amount-in-controversy threshold.

In general, the distinct claims of separate plaintiffs cannot be aggregated when determining the amount in controversy. Werwinski v. Ford Motor Co., 286 F.3d 661, 666 (3d Cir. 2002).

The class representative argued that the insurer, by adding up the potential damages owed to each of the various class members, improperly aggregated those claims to cross the jurisdictional threshold. The class representative argued that this action was a multi-party dispute between the insurer and the multiplicity of class claimants.

The insurer disagreed, arguing that the case was only between it and its insured — the business. The insurer argued that in coverage litigation commenced by an insurer, the focus is on the amount the insurer will owe to its insured or the value of its coverage obligation.

Given those two competing positions, the Third Circuit had to decide whether the case was a dispute between the insurer and the many class members (which would give rise to aggregation problems) or a dispute between the insurer and its insured concerning its overall obligation to defend and indemnify under the policy.

The Court had never previously addressed this question, and therefore relied on the opinion of the U.S. Court of Appeals for the Seventh Circuit in Meridian Security Insurance Company v. Sadowski, 441 F.3d 536 (7th Cir. 2006). There, much like this case, an insurer sought a declaratory judgment against its insured to avoid any obligation to defend a class action alleging that the insured had sent unsolicited fax advertisements in violation of the TCPA.

In Sadowski, as in this case, the underlying class action was still pending at the time the declaratory judgment action was filed. In Sadowski, the Seventh Circuit concluded that the district court indeed had diversity jurisdiction, and rejected the very same argument that the class representative advanced in this case.

According to Sadowski, the “insurer [had] not aggregated multiple parties’ claims. From its perspective there was only one claim – by its insured, for the sum of defense and indemnity costs.” The Seventh Circuit thus held that “the anti-aggregation rule does not apply … just because the unitary controversy between these parties reflects the sum of many smaller controversies.”

The Third Circuit adopted the Sadowski reasoning. Viewing this case from the perspective of the insurer at the time of filing of the declaratory judgment complaint, the Court held that the insurer’s quarrel was with the business regarding its indemnity obligation under the policy. According to the Court, the only “amount in controversy” that the insurer was then concerned with was its total indemnity and defense obligation.  Thus, the Court held that the insurer’s dispute was thus with its insured, not the class, and its overall liability was not legally certain to fall below the jurisdictional minimum.

Accordingly, the Third Circuit held that satisfaction of the amount-in-controversy requirement did not violate the anti-aggregation rule, and the trial court had diversity jurisdiction under 28 U.S.C. § 1332.

The ultimate question was whether the sending of the faxes fell under the policy’s definition of either “property damage” or “advertising injury,” as a matter of state law.

First, however, the Court of Appeal had to determine which state’s law to apply. Chamberlain v. Giampapa, 210 F.3d 154, 158 (3d Cir. 2000).

Because the policy did not contain a choice-of-law provision, the Court of Appeals had to apply the choice of law rules of the forum state to determine which state’s substantive law applied. Kruzits v. Okuma Mach. Tool, Inc., 40 F.3d 52, 55 (3d Cir. 1994). As in all applications of state law, the Court’s task was to predict how the state Supreme Court would rule if it were deciding the case. Norfolk S. Ry. Co. v. Basell USA Inc., 512 F.3d 86, 91-92 (3d Cir. 2008).

The insurer urged the Court of Appeal to apply Pennsylvania law, because Pennsylvania was the forum state for both the declaratory judgment case and the class action.

The class representative, however, argued that Arizona law should apply, emphasizing the many connections between the policy and that state – i.e., the business was based and incorporated there; the underwriting file on the policy indicates that the insurance quote was by an agency based in Arizona; the application for insurance was submitted to the insurer’s branch in Arizona and reviewed by an underwriter there; and the decision to insure the business was made entirely within the Mesa, Arizona branch. Essentially, the class representative argued that Arizona law should apply because that is where the insurance contract was formed.

Because the action was filed in the Eastern District of Pennsylvania, the Third Circuit applied Pennsylvania choice-of-law rules.

Before 1964, Pennsylvania courts applied the law of the place where the contract was formed (“lex loci contractus”). That stood in contrast to the rule in tort cases, which required application of the law of the place where the injury occurred (“lex loci delicti”). In Griffith v. United Air Lines, Inc., the Pennsylvania Supreme Court abandoned the “lex loci delicti” rule for torts “in favor of a more flexible rule which permits analysis of the policies and interests underlying the particular issue before the court.”

The Griffith court did not address whether its new flexible approach to choice-of-law questions would also apply to contract claims, thus also displacing the “lex loci contractus” rule. Nor had the Supreme Court of Pennsylvania ever addressed that issue.

The Third Circuit had, however, addressed this issue twice before. Almost 40 years ago, in Melville v. Am. Home Assurance Co., 584 F.2d 1306, 1312 (3d Cir. 1978), it predicted that Pennsylvania would extend its Griffith methodology to contract actions.

More recently, in Hammersmith v. TIG Insurance Co., 480 F.3d 220, 226-29 (3d Cir. 2007), the Third Circuit again concluded that Pennsylvania would apply Griffith’s flexible approach to choice-of-law questions in contract cases, noting that in Budtel Associates, LP v. Continental Casualty Company, the Pennsylvania Superior Court had concluded that the Commonwealth’s precedents mandated that it follow the Griffith rule in the contract law context.

The class representative argued that the previous “lex loci contractus” rule should control and that the Third Circuit should apply Arizona law. The Court rejected the class representative’s arguments, noting that the class representative cited no intervening Pennsylvania authority that called the Court’s prediction in Hammersmith into question. Accordingly, the Court applied Griffith’s flexible choice-of-law analysis.

Under the Griffith approach, “the first step in a choice of law analysis under Pennsylvania law is to determine whether a conflict exists between the laws of the competing states.” If there are no relevant differences between the laws of the two states, the court need not engage in further choice-of-law analysis, and may instead refer to the states’ laws interchangeably.

To determine whether a conflict existed, the Third Circuit had to decide whether Arizona and Pennsylvania law disagreed on the proper scope of the coverage applicable in this case.

The class representative argued that there were two significant conflicts between Arizona and Pennsylvania substantive law. First, it argued that a basic Pennsylvania principle of contract interpretation – that courts enforce unambiguous policy language – did not apply to the interpretation of insurance contracts under Arizona law. Instead, the class representative argued that Arizona courts interpret insurance contracts by looking to the reasonable expectations of the insured.

According to the class representative, in Arizona, even clear and unambiguous boilerplate language is ineffective if it contravenes the insured’s reasonable expectations.

The Third Circuit observed that the class representative was using the “reasonable expectation” test to conduct a 50-state legal survey and to argue that Arizona’s law must be whatever the prevailing legal theory was across the country since that prevailing law is inherently “reasonable.”

The class representative argued that in order for the insurer to show that its policy interpretation was consistent with a reasonable insured’s expectations, the insurer must demonstrate that the interpretation adopted explicitly or implicitly by courts nationwide is unreasonable.

The Third Circuit rejected the class representative’s argument. To begin with, the Court did not agree with the class representative that there was a conflict, noting that both states gave dispositive weight to clear and unambiguous insurance contract language.  But, even if a conflict had existed, the court held that the class representative failed to explain how or why using the “reasonable expectation” test would result in a conflict in the applicable substantive law.

Therefore, the Court rejected the class representative’s argument, noting that the argument misstated the nature of the Court’s inquiry. When sitting in diversity and conducting a choice-of-law analysis pursuant to Pennsylvania conflict principles, the Court’s job is only to evaluate any conflict between the laws of Arizona and Pennsylvania.

The class representative, however, had failed to argue that those two states’ laws were different in any way that actually changed the meaning of either of the relevant terms of the policy: “property damage” or “advertising injury.”

The Court noted that the class representative’s argument was thus not only wrong on the law (the states’ laws did not conflict in how they interpreted insurance contracts), but was also irrelevant because it failed to connect the purported conflict to the applicable law.

The class representative’s second alleged conflict was more tenable and related to the differing interpretations of Arizona and Pennsylvania courts as to the meaning of “property damage.”

The policy required that any covered “property damage” be caused by an “occurrence,” which is defined as an “accident.” The policy did not define the term “accident,” although it did exclude from coverage any property damage “expected or intended from the standpoint of the insured.”

The class representative argued that the two states define an “accident” differently. It argued that the two states’ laws conflicted over whether an insurance policy that covers “accidents” would extend to the “unintended consequences of intentional acts,” in this instance, damage to a fax recipient from an intentionally sent fax.

The class representative argued that Pennsylvania law would result in such damages being excluded from coverage, whereas Arizona law would cover its claim as an “accident.”

Once again, the Court rejected the class representative’s argument, noting that under both Pennsylvania and Arizona law the claim would be excluded from coverage.

The Court relied on the Supreme Court of Pennsylvania case of Donegal Mutual Insurance Co. v. Baumhammers, 938 A.2d 286, 292 (Pa. 2007), where the Supreme Court of Pennsylvania said that when “accident” is undefined in an insurance policy, Pennsylvania courts should treat the term as “refer[ing] to an unexpected and undesirable event occurring unintentionally ….”

Baumhammers stood for the premise that even intentional acts of third parties could still be a covered “accident.” Baumhammers involved a killing spree perpetrated by the son of the insured. The estates of several of the victims sued both the son and his parents, alleging, among other claims, negligence on the part of the parents “in failing to take possession of [his] gun and/or alert law enforcement authorities or mental health care providers about [their son’s] dangerous propensities.” The parents sought coverage under their insurance, which covered claims for bodily injury caused by an “accident.”

The Supreme Court of Pennsylvania held that, with respect to the insured parents, the shootings qualified as an “accident” under the policy, because “[t]he extraordinary shooting spree embarked upon by [the son] resulting in injuries to [the victims] cannot be said to be the natural and expected result of [his parent’s] alleged acts of negligence.” Thus, the injuries were caused by an event so unexpected, undersigned, and fortuitous as to qualify as accidental within the terms of the policy.

Here, by contrast, the Third Circuit noted that the class representative’s claimed injury was the use of ink, toner, and time that was caused by the receipt of junk faxes, which were the natural and expected result of the intentional sending of faxes, a far cry from Pennsylvania’s definition of an “accident.”

Although it did not intend injury, the business clearly intended for the third-party advertiser to send the fax advertisements to the members of the class. The Court, concluding that Pennsylvania courts would reject coverage of the claim, observed that any sender of a fax knows that its recipient will need to consume paper and toner and will temporarily lose the use of its fax line.

The Court rejected the class representative’s argument that Arizona law would cover its claim as an “accident,” noting that Arizona law defines an “accident” much the same as Pennsylvania law, relying on Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d 538, 547 (Ariz. Ct. App. 2007), and Lennar Corp. v. Auto-Owners Ins. Co., 151 P.3d 538, 547 (Ariz. Ct. App. 2007).

Thus, the Court concluded that there was no conflict between Pennsylvania and Arizona law on the question of whether the damage to the class members was covered under the policy’s definition of “property damage,” holding that under either state’s law, there is no coverage because the alleged injury was not the result of an “accident.” It was the foreseeable result of the intentional sending of faxes to the class recipients.

Finally, the class representative argued that coverage was available because the damage to class members from receipt of the junk faxes qualified as “advertising injury” under the policy. Because the class representative did not contend that the Arizona definition of “advertising injury” differed from Pennsylvania, the Court looked solely to Pennsylvania law to answer that question.

The Court again rejected the class representative’s argument, concluding that the claimed injury fell outside of the scope of the policy’s coverage.

The policy defined “advertising injury” as, among other things: “Oral or written publication of material that violates a person’s right of privacy.” Although the policy did not define the term “privacy,” numerous state and federal courts have considered whether violations of the TCPA are covered by insurance policies that include similar or identical language to that at issue.

The Third Circuit relied on the Pennsylvania Superior Court case of Telecommunications Network Design v. Brethren Mutual Insurance Co., which divided “right of privacy” into two broad categories: the privacy interest in secrecy and the privacy interest in seclusion. Secrecy-based privacy rights protect private information, while seclusion-based privacy rights protect the right to be left alone.

Citing Melrose Hotel Co. v. St. Paul Fire & Marine Ins. Co., 432 F. Supp. 2d 488, 502 (E.D. Pa. 2006),aff’d, 503 F.3d 339 (3d Cir. 2007), the Court noted that the TCPA protects only the privacy interest in seclusion by shielding people from unsolicited messages. The content of the messages is immaterial under the TCPA.

Observing that an unsolicited fax intrudes upon the right to be free from nuisance, the Third Circuit held that the purpose of the TCPA is consistent with the type of injury that the class representative alleged in its complaint.

The Court found, however, that the policy’s protection of the “right of privacy” was limited to a privacy interest the infringement of which depends upon the content of the advertisements: in other words, the privacy right to secrecy.

The Court relied on the Pennsylvania Superior Court case of Telecommunications Network Design v. Brethren – a case involving the exact same questions: identical policy language; identical underlying TCPA violation, and identical claimed damages for that violation – in which the state court ruled that the policy did not cover that injury, because the class representative’s allegations in the class action did not relate to the content of the faxed advertisements.  According to the state court in Brethren, the faxes caused the alleged damage because they were received without permission, not because of their content. At no point did the class representative allege that the unsolicited faxes included confidential or otherwise secret information about any of the class members.

Thus, the Third Circuit found that the class representative’s claims were not covered under the policy, and affirmed the judgment of the District Court.

Calif. Supreme Court Holds Atty Fees to be Included in Determining Constitutional Limits of Punitive Damages Awards

The Supreme Court of California recently held that, in determining whether punitive damages awards are within constitutional limits, attorney’s fees may be included in the calculation of the ratio of punitive to compensatory damages, regardless of whether the fees are awarded by the trier of fact as part of its verdict or are determined by the trial court after the verdict has been rendered.

A copy of the opinion in Nickerson v. Stonebridge Life Insurance Company is available at:  Link to Opinion.

The plaintiff suffered a broken leg and was taken to a veterans hospital.  He experienced several complications from his injury and was required to remain in the hospital for 109 days. Following discharge from the hospital, the plaintiff made a claim under his indemnity benefit policy that promised to pay him $350 per day for each day he was confined to a hospital for the necessary care and treatment of a covered injury.

The insurance company determined that the plaintiff’s hospitalization was only medically necessary for the 18 days immediately following the injury.

The plaintiff thereafter filed suit alleging that the insurance company breached the policy by failing to pay him benefits of the full 109 days he was in the hospital, breached the implied covenant of good faith and fair dealing, and acted in bad faith in denying him full policy benefits.

Prior to trial, the parties stipulated that if the plaintiff prevailed in his action, the trial court could determine the amount of attorney’s fees the plaintiff was entitled to under the Supreme Court of California’s prior ruling in Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, as compensation for having to retain counsel to obtain the policy benefits.

The trial court granted the plaintiff’s motion for a directed verdict regarding the breach of contract action, awarding $31,500 in unpaid policy benefits. The jury returned a special verdict finding that the insurer’s failure to pay policy benefits was unreasonable, and finding that the insurer engaged in the conduct with fraud.

The jury awarded $35,000 in compensatory damages and $19 million in punitive damages.  The parties stipulated the amount of attorney’s fees the plaintiff was entitled to under Brandt was $12,500.

The insurer sought a new trial and a reduction in punitive damages, claiming them as unconstitutionally excessive. The trial court agreed and granted the insurer a new trial, unless the plaintiff agreed to a reduced punitive damages award of $350,000. The trial court determined it was bound to reduce the punitive damage award to a ratio of punitive to compensatory damages of 10 to 1. The trial court did not consider the $12,500 in attorney’s fees when calculating the compensatory damages.

The plaintiff rejected the reduced punitive damages award, and appealed the order for a new trial. The Court of Appeal affirmed, and the Supreme Court of California granted review.

As you may recall, in Brandt v. Superior Court (1985) 37 Cal.3d 813, 817, the Supreme Court of California held that when an insurance company withholds policy benefits in bad faith, attorney’s fees reasonably incurred to compel payment of the benefits are recoverable as an element of the plaintiff’s damages.

In addition, the Supreme Court of California looked to the ruling of the Supreme Court of the United States in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), for substantive guideposts that reviewing courts must consider in evaluating the size of punitive damages awards.

Under BMW of North America, Inc. v. Gore, the guideposts are: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Id. at 575.

The main Gore guidepost at issue was the second one – i.e., that damages must bear a reasonable relationship to compensatory damages. The Supreme Court of California previously held that a ratio between the punitive damages award and the plaintiff’s actual or potential compensatory damages significantly greater than 9 or 10 to 1 will be suspect, and subject to appellate scrutiny as a denial of due process.

The Supreme Court of California noted that, under Brandt, attorney’s fees are recoverable as compensatory damages as they represent an economic loss proximately caused by the tort.

Thus, the question for the Court in this case was whether attorney’s fees may be included in the calculation of the ratio of punitive damages to compensatory damages for the purpose of determining whether the punitive damages award exceeds constitutional limits.

The Supreme Court of California held that the Gore guideposts prescribed a set of rules for courts to apply, rather than regulating the jury’s decision making process.

Because the Gore guideposts are designed to govern post-verdict judicial review of the amount of the jury’s award, not the adequacy of the jury’s deliberative process, the Supreme Court of California held there is no apparent reason why a court may not consider post-verdict compensatory damages awards in its calculations to limit punitive damages awards.

The insurer conceded that the third guidepost is aimed at courts, rather than juries.  The insurer also acknowledged that courts have applied the second Gore guidepost to consider not only the compensatory damages awarded by the jury but also the potential harm suffered by the plaintiff, even though the jury was never asked to consider potential harm in rendering the verdict.

Therefore, the Court held, even though the jury did not consider the attorney’s fees, the courts may nonetheless consider them.

In sum, the Supreme Court of California held that attorney’s fees should be included in the calculation of the punitive to compensatory damages ratio by the trial court after the jury renders its punitive damages verdict.

Accordingly, the Supreme Court of California reversed the judgment of the Court of Appeal.

Federal Banking Regulators Issue Joint Final Flood Insurance Rule

The statue of George Washington at the Federal Hall in the financial district of downtown Manhattan, New York

Five of the federal banking regulatory agencies (FDIC, FRB, OCC, FCA, and NCUA) recently issued a joint final flood insurance rule, which among other things:

  1. Requires escrowing of flood insurance payments for non-exempt loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016;
  2. Requires that borrowers be given the option to escrow flood insurance premiums and fees, as to residential loans extant as of Jan. 1, 2016;
  3. Clarifies that regulated lending institutions and servicers acting on their behalf are allowed to charge for lender-placed flood insurance; and
  4. States that the mandatory escrow of flood insurance premiums provisions and the escrow option provisions in this final rule will become effective on Jan. 1, 2016.  All other provisions will become effective on Oct. 1, 2015.

A copy of the final rule is available here.

More specifically, and among other things, the final rule:

  • Requires “regulated lending institutions” (which means any “bank, savings and loan association, credit union, farm credit bank, federal land bank association, production credit association, or similar institution subject to the supervision of a federal entity for lending regulation”) and servicers acting on their behalf to escrow of flood insurance premium payments for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016, unless the loan qualifies for a statutory exception;
  • Provides a new exemption to the flood insurance purchase requirement for any structure that is a part of a residential property, “but is detached from the primary residential structure and does not serve as a residence;”
  • Implements the additional exceptions from the escrow requirement for: “(i) loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided; (ii) loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met; (iii) loans that are extensions of credit primarily for a business, commercial, or agricultural purpose; (iv) home equity lines of credit; (v) nonperforming loans; and (vi) loans with terms not longer than 12 months.”  However, when a regulated lending institution (or a servicer acting on its behalf) determines that an exception no longer applies, the institution must require the escrow of flood insurance premiums and fees;
  • Requires regulated lending institutions and servicers acting on their behalf to provide residential borrowers with loans extant as of Jan. 1, 2016, the option to escrow flood insurance premiums and fees;
  • Provides new and revised sample notice forms and clauses concerning both the escrow requirement, and the option to escrow;
  • Allows an exemption for certain regulated lending institutions with total assets under $1 billion as of July 6, 2012, if “not required by Federal or State law to escrow taxes or insurance for the term of the loan, and did not have a policy of uniformly and consistently escrowing taxes and insurance;”
  • Clarifies that regulated lending institutions and servicers acting on their behalf have the “authority to charge a borrower for the cost of lender-placed flood insurance coverage beginning on the date on which the borrower’s coverage lapses or becomes insufficient;”
  • Specifies the circumstances under which regulated lending institutions and servicers acting on their behalf must terminate lender-placed flood insurance coverage, and refund payments to a borrower;
  • Specifies the documentary evidence regulated lending institutions and servicers acting on their behalf must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage; and
  • Includes technical amendments, such as integrating the OCC’s flood insurance regulations for national banks and federal savings banks, and reference that the “FDIC has integrated its flood insurance regulations for State non-member banks and State savings associations in a separate rulemaking.”

According to the agencies, “the final rule does not address the private flood insurance provisions in the Biggert-Waters Act,” but they “plan to address these provisions in a separate rulemaking.”

The final rule is expected to be published in the Federal Register shortly.

Florida Supreme Court Rules State-Sponsored Property Insurer Immune from Bad Faith Claims

Florida-Supreme-Court-Seal-300The Supreme Court of Florida recently held that first-party insurer bad faith is not a ‘willful tort,’ and that, as a government entity that enjoys broad statutory immunity from suit, Citizens Property Insurance Corporation (“Citizens”) is consequentially immune from statutory first-party bad faith causes of action.

In sum, the Supreme Court determined that the Florida Legislature, when it created Citizens as a property ‘insurer of last resort,’ did not expressly waive Citizens’ statutory immunity from first-party lawsuits arising under Fla. Stat. § 624.155(1), more commonly known as statutory bad faith actions.  Florida does not and has never recognized a common law first-party insurance bad faith cause of action, either in tort or otherwise, and the Supreme Court of Florida opined that the First DCA erred in finding that the Legislature’s express waiver of immunity for “willful tort[s]” in Citizens’ Enabling Statute operated as a waiver of Citizens’ immunity from first-party bad faith claims.

The ruling would affect mortgagees to the extent the risk is insured by Citizens, whether the mortgagee is an additional insured or a loss payee of various sorts, as under this ruling Citizens appears as immune from a mortgagee’s first-party bad faith claim.

However, this ruling does not appear to affect Fla. Stat. 627.428, which allows prevailing insureds to recover their attorney’s fees.

A copy of the opinion is available at: http://www.floridasupremecourt.org/decisions/2015/sc14-185.pdf.

By way of background, the appellee-condo association prevailed in a first-party breach of contract action on the insurance policy against its insurer, Citizens.  Thereafter, the condo association sued Citizens again pursuant to Florida’s bad faith statute, Fla. Stat. § 624.155(1), which creates a private right of action against an insurer who fails to settle an insurance claim “when, under the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests[.]” Fla. Stat. § 624.155(1)(b)1.

Citizens then moved to dismiss the condo association’s complaint, citing its immunity from suit under Fla. Stat § 627.351(6)(s) (“Citizens’ Enabling Statute”).  Citizens’ Enabling Statute provides, in pertinent part, that “there shall be no liability on the part of, and no cause of action of any nature shall arise against … [Citizens] … for any action taken by them in the performance of their duties and responsibilities under [Citizens’ Enabling Statute].”  Fla. Stat § 627.351(6)(s)1.

However, Citizens’ Enabling Statute specifically exempts “any willful tort” from the immunity from suit created by the act.  See Fla. Stat § 627.351(6)(s)1.a.  Because of this, the condo association argued that immunity did not apply and Citizens could properly be sued for its alleged bad faith failure to settle.

The trial court disagreed with the condo association, and dismissed the action with prejudice.  On appeal, the First DCA reversed the trial court, opining that “Citizens immunity does not extend to the ‘willful tort’ of failing to attempt in good faith to settle claims as provided by section 624.155.”  Perdido Sun Condo Ass’n v. Citizens Prop. Ins. Corp., 129 So. 3d 1210 (Fla. 1st DCA 2014).

However, the First DCA certified a district court conflict with the Fifth DCA’s decision in Citizens Prop. Ins. Corp. v. Garfinkel, 25 So. 3d 62 (Fla. 5th DCA 2009), disapproved on other grounds by Citizens Prop. Ins. Corp. v. San Perdido Ass’n, 104 So. 3d. 344 (Fla. 2012), which “held to the contrary that Citizens is statutorily immune.”  Consequentially, the First DCA also certified the following question as being of great public importance:  “[w]hether the immunity of [Citizens], as provided in section 627.351(6)(s), Florida Statutes, shields the Corporation from suit under the cause of action created by section 624.155(1)(b), Florida Statutes, for not attempting in good faith to settle claims?”

In resolving this question in the affirmative, the Supreme Court opined that it found “no support that the Legislature intended for Citizens to be liable for a breach of the duty to act in good faith by allowing its policyholders to bring a statutory first-party bad faith cause of action.”  Simply put, the Supreme Court determined that because the Florida Legislature did not expressly waive Citizens’ immunity from statutory first-party bad faith claims, and further immunized Citizens from “any action taken by [it] in performance of [its] duties … under [Citizens’ Enabling Statute],” it intended for Citizens to be immune from first-party bad faith lawsuits.

The Court quashed the First District Court of Appeal’s opinion below, and noted its approval of the Fifth District Court of Appeal’s decision in Citizens Prop. Ins. Corp. v. Garfinkel.

The Supreme Court also took exception to the First DCA’s determination that “the statutory cause of action for first-party bad faith is a tort, or specifically a “willful tort.”  The Supreme Court expressly noted that unlike common law third-party bad faith, “first-party bad faith actions are purely a creature of statute that did not previously exist at common law.”

Thus, and as the Fifth District stated in Garfinkel, “statutory first-party bad faith causes of action ‘now exist in Florida not because they are torts, but because they are a statutory cause of action.  Accordingly, a first-party bad faith claim cannot be wedged into the statutory exemption for willful torts because it is not a tort of any variety.’”  Garfinkel at 68-69.

As such, the Supreme Court ruled that the condo association’s suit, being a statutory first-party bad faith action was properly dismissed with prejudice by the trial court.  Accordingly, the Supreme Court remanded the case to the First DCA to reinstate the trial court’s order of dismissal.