Volume 10 • Issue 32 • Spring 2012

INSIDE THE SPRING EDITION: “First Look” is, and always has been, committed to providing you with timely, relevant insurance-related information through in-depth analysis of current issues and summaries of recent court decisions. We at “First Look” are pleased to announce that the 2013 issues will broaden and expand that commitment by comparing and contrasting the law of six (6) different jurisdictions on issues important to the insurance industry.

“WHAT TO EXPECT WHEN YOU’RE INSURING”

Each issue will feature an article by an attorney licensed in Kentucky, Maryland, Ohio, Pennsylvania, Texas and West Virginia, on the same topic, followed by a chart summarizing the relevant law of those jurisdictions. We hope you find this format entertaining and informative and welcome your thoughts on suggested topics. This issue provides a “First Look” at the various extra-contractual causes of action that can be filed against insurers. Michelle E. Piziak, Esq. [email protected] To receive “First Look” electronically: • Visit our website at www.steptoe-johnson.com • Click on Know-How and complete the registration form You will then receive “First Look” electronically and be given access to our electronic archive of useful insurance information.

WHAT TO EXPECT WHEN YOU’RE INSURING Page 2 STATE BY STATE CHART Page 7 S&J FIRST PARTY TEAM Page 8 This newsletter is a periodic publication of Steptoe & Johnson PLLC’s First Party Team and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer concerning your own situation and any specific legal questions you may have. For further information, please contact a member of the First Party Team. This is an advertisement.

Kentucky, Ohio, Pennsylvania, Texas, and West Virginia

www.steptoe-johnson.com

Susan S. Brewer, CEO

Page 2 • Spring 2013

What to Expect When You’re Insuring in Kentucky... By: Jeffrey K. Phillips The Commonwealth of Kentucky recognizes a common law cause of action for “bad faith,” as well as a statutory “bad faith” claim. First Party Common Law Claims An insured may recover against an insurer both consequential and punitive damages for bad faith in the insurer’s dealing with its own insured. Curry v. Fireman’s Fund Insurance Company, 784 S.W.2d 176 (Ky. 1989). To support a bad faith claim, an insured must first demonstrate a breach of a contractual obligation by the insurer. Davidson v. American Freight Ways, Inc., 25 S.W.3d 94 (Ky. 2000). Second, an insured must show that there was no reasonable basis in law or fact for the insurer’s action. Guaranty Nat. Ins. Co. v. George, 953 S.W.2d 946 (Ky. 1997). Reasonable conduct by an insurer, even if ultimately deemed incorrect, is not sufficient for a bad faith cause of action. Bentley v. Bentley, 172 S.W.3d 375 (Ky. 2005). Third, if the insurer knew that there was no reasonable basis for its conduct, then a bad faith claim may exist. Witmer v. Jones, 864 S.W.2d 885 (Ky. 1993). Third Party Common Law Claims Insurers have no common law duty of good faith or fair dealing to third party claimants. Manchester Insurance & Indemnity Co. v. Grundy, 531 S.W.2d 493 (Ky. 1976). However, an insured may assign its first party bad faith cause of action against an insurer to a third party claimant. Motorists Mutual Insurance Co. v. Glass, 996 S.W.2d 437 (Ky. 1999). Statutory “Bad Faith” Claims A private cause of action is available pursuant to Kentucky’s Unfair Claims Settlement Practices Act; namely KRS 304.12-230. State Farm Mutual Insurance Company v. Reeder, 763 S.W.2d 116 (Ky. 1999). This cause of action is available to both an insured and a third party claimant. Id. KRS 304.12-230 sets forth the separate acts or omissions that constitute statutory bad faith. They are summarized as follows: (1) misrepresenting pertinent facts or insurance policy provisions relating to insurance coverage; (2) failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; (3) failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; (4) refusing to pay claims without conducting a reasonable investigation based upon all available information; (5) failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed; (6) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear; (7) compelling insureds to institute litigation to recover amounts due under insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds; (8) attempting to settle a claim for less than the amount to which a reasonable person would have believed was owed by reference to written advertising material; (9) attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of the insured; (10) making claims payments not accompanied by any statement setting forth the coverage under which the payments are being made; (11) making known the insurers policy of appealing from arbitration awards for the purpose of compelling an insured or claimant to accept settlement less than the amount awarded in arbitration; (12) delaying the investigation or payment of claims by requiring the submission of a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, which contain substantially the same information as the preliminary claim report; (13) failing to promptly settle claims where liability has become reasonably clear, under one portion of the insurance policy coverage, in order to influence settlement under other portions of the insurance policy coverage; and (14) failing to promptly provide a reasonable explanation of the basis in the insurance policy for the denial of the claim or the offer of a settlement. All claims arising under the terms of any contract of insurance shall be paid to the named insured person or health care provider not more than 30 days from the date upon which notice and proof of claim, in the substance and form required by the terms of the policy, are furnished the insurer. KRS 304.12-235(1). If an insurer fails to make a good faith attempt to settle a claim within 30 days, the value of the final settlement shall bear interest at the rate of 12% per year. KRS 304.12-235(2). If an insurer fails to settle a claim within 30 days and the delay was without reasonable foundation, reasonable attorney’s fees may be imposed. KRS 304.12-235(3). When a showing of oppression, fraud or malice is made, punitive damages may be recovered in a “bad faith” case. See Farmland Mut. Ins. Co. v. Johnson, 36 S.W.3d 368 (Ky. 2000).



What to Expect When You’re Insuring in Ohio... By: Lyle B. Brown Bad faith on the part of the insurer is a primary extra-contractual claim that an insured may bring under Ohio law. An insurer has a legal duty to act in good faith when carrying out its contractual responsibilities under an insurance policy, such as handling, evaluating, processing, and paying a claim. Stewart v. Siciliano (Dec. 24, 2012), 11th Dist. App. No. 2011-A-0042, 2012-Ohio-6123, at ¶52; Unklesbay v. Fenwick, (2nd Dist. 2006), 167 Ohio App.3d 408, 2006-Ohio-2630, at ¶14; Ohio Nat’l. Life Assur. Corp. v. Satterfield (9th Dist. 2011), 194 Ohio App.3d 405, 2011-Ohio-

Page 3 2 • Spring Winter 2013 2116, at ¶13. The duty is imposed by law due to the relationship between the insurer and the insured. Captain v. United Ohio Ins. Co. (June 3, 2010), 4th Dist. App. No. 09CA14, 2010-Ohio-2691, at ¶22; Goins v. Stewart (Aug. 18, 2008), 5th Dist. App. No. 08CA002, 2008-Ohio-4206, at ¶43. A bad faith claim sounds in tort, and is not dependent upon an actual breach of the insurance contract. Captain, 2010-Ohio-2691, at ¶22; Goins, 2008-Ohio-4206, at ¶43. A bad faith claim can arise from an insurer’s denial of a claim, refusal to pay a claim, refusal to defend against a third-party claim, delay in the claims handling and evaluation process, and refusal to settle a claim, among other types of conduct. However, not all such circumstances will result in a viable bad faith claim. For example, a bad faith claim will not survive where the insured can prove only that the claim was denied or unreasonably delayed, and cannot prove that the insurer was not justified in its actions. Price v. Dillon (Mar. 13, 2008), 7th Dist. App. Nos. 07-MA-75, 07-MA76, 2008-Ohio-1178, at ¶35 (“A seven-month delay in paying an insurance claim, without more, is not evidence of bad faith.”). In order to defeat a bad faith claim, an insurer must demonstrate that its decision, action, or inaction was reasonably justified under the circumstances. Captain, 2010-Ohio-2691, at ¶26. That means that the insurer’s conduct was not arbitrary or capricious, notwithstanding the insurer’s belief that its conduct was justified. Satterfield, 194 Ohio App.3d 405, 2011-Ohio-2116, at ¶13. See Captain, 2010-Ohio-2691, at ¶30; Dorsey v. Campbell Hauling, Inc. (June 26, 2003), 10th Dist. App. No. 02AP961, 2003-Ohio-3341, at ¶19. Intent does not factor into the reasonable justification standard. Captain, 2010-Ohio-2691, at ¶26; Price, 2008-Ohio-1178, at ¶32. An insurer is more likely to prevail where it can prove that the insured’s claim for coverage was “fairly debatable” and resulted in a genuine dispute over the facts or state of the law. Dorsey, 2003-Ohio-3341, at ¶19. Importantly, the portion of the insurer’s claims files relating to the alleged bad faith is subject to discovery, and is not shielded by the attorney-client privilege or work product doctrine. Stewart, 2012-Ohio-6123, at ¶52; Unklesbay, 2006-Ohio-2630, at ¶15. An insurer found liable on a bad faith claim is subject to an award of compensatory damages arising from the insurer’s breach of its legal duties to its insured. Satterfield, 194 Ohio App.3d 405, 2011-Ohio-2116, at ¶25. Punitive damages, and with them an award of attorney’s fees, are possible where actual malice, fraud, or insult are present. Id. A third-party (such as an injured party) who is not an insured cannot bring a bad faith claim because an insurer has no duty to the third-party to act in good faith with respect to the insurance policy. Intercity Auto Sales, Inc. v. Evans (Mar. 24, 2011), 8th Dist. App. No. 95778, 2011-Ohio1378, at ¶24. However, the third-party can sue the insurer after the third-party has obtained a judgment for damages against the insured. Id., at ¶22. See Ohio Rev. Code § 3929.06 (claim against insurer to reach remaining liability coverage to satisfy the judgment against insured); Ohio Rev. Code § 2721.02 (no claim for declaratory judgment against insurer as to policy coverage until first obtain judgment for damages against insured). Insurers may be held accountable if they engage in certain unfair and deceptive trade practices in the insurance industry. See, e.g., Ohio Rev. Code §§ 3901.20 and 3901.21; Ohio Adm. Code § 3901-1-07. However, Ohio law does not support a private cause of action in favor of an insured with regard to an insurer’s alleged violation of such statutes or regulations. See Strack v. Westfield Cos. (9th Dist. 1986), 33 Ohio App.3d 336; Kimpel v. Dairy Farm Leasing Co. (Jan. 9, 1987), 6th Dist. App. No. WMS-86-8, 1987 Ohio App. LEXIS 5476, at *4-5. See, e.g., Ohio Adm. Code § 39011-54(B) (unfair property/casualty claims settlement practices) (“Nothing in this rule shall be construed to create or imply a private cause of action for violation of this rule.”). For that reason, such violations also cannot serve as the basis of a bad faith claim. Price, 2008-Ohio-1178, at ¶36. Ohio’s Consumer Sales Practices Act (CSPA) has very limited application to insurance-related disputes. For purposes of the Act, the term “consumer transaction” is defined to exclude transactions between insurers and their customers. Ohio Rev. Code § 1345.01(A); see Ohio Rev. Code § 5725.01(C). Ohio state courts similarly have held that “insurance actions are not within the scope of the [CSPA].” Miller v. Geico Indem. Co. (Feb. 28, 2008), 8th Dist. App. No. 89603, 2008-Ohio-791, at ¶17; see Chesnut v. Progressive Cas. Ins. Co. (8th Dist. 2006), 166 Ohio App.3d 299, 2006-Ohio-2080, at ¶¶20-21. However, a court will look at the nature of the insurer’s conduct to determine if the insurer was, at the time, engaged in insurance activities. Thornton v. State Farm Mut. Auto Ins. Co., Case No. 1:06-cv-00018, 2006 U.S. Dist. LEXIS 83968 (N.D. Ohio, Nov. 17, 2006), at *25 (“The Court agrees … that this insurance company exception does not provide a blanket exemption for all activities conduct by an insurance company. Rather, the Court must make a practical inquiry into whether [the insurer] was actually operating as an insurance company in the transaction at issue.”).

What to Expect When You’re Insuring in Maryland... By: Bridget M. Cohee Maryland instituted the first party bad faith claim by statute in October 2007. The Maryland bad faith law allows policyholders to pursue administrative action against their insurers for failure to act in good faith in settling a first party claim under a property and casualty insurance policy. The law empowers the Maryland Insurance Administration (MIA) to impose a penalty of not more than $125,000.00 for each violation of the Unfair Claims Settlement Practices Act, or applicable regulations. The Commissioner may also order as restitution actual damages, litigation costs and expenses, including attorney fees and interest. Maryland does not permit a third-party to bring a cause of action for bad faith absent an assignment. Bean v. Allstate, 403 A.2d 793, 285 Md. 572 (1979). An action for bad faith may be assigned. Medical Mut. Liab. Ins. Soc’y of Maryland v. Evans, 330 Md. 1, 25, 622 A.2d 103, 114 (1993). Administrative action is a prerequisite to filing a private cause of action in Circuit Court. The procedure to pursue a claim for bad faith requires the policyholder to file an administrative complaint with the Maryland Insurance Administration (MIA), attaching all documents the insured submitted to the insurer as proof of the loss, specifying the applicable coverage, the amount of the claim and the amount of the actual damages and costs. The filing of the administrative complaint triggers a thirty (30) day response

Page 4 • Spring 2013 time for the insurance company. The required response should include a written response to the complaint and be accompanied by copies of all documents from the claim file that were considered in making an informed judgment, based on honesty and diligence, and be supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim. See Maryland Insurance Code Ann. § 27-1001. If an insurer withholds documents from production in response to the administrative complaint, the insurer must submit an index and claim privilege or protection as applicable. The MIA, upon an in camera review, will determine whether the documents must be disclosed. If it is determined that the withheld documents should be disclosed, the MIA shall consider the documents as withheld when rendering the decision on the claim. Within ninety (90) days after the filing of the administrative complaint, the MIA must render a decision determining coverage, actual damages, whether the insurer breached its obligation to pay the claim, whether the insurer acted in good faith, and the total award of damages, including actual damages, litigation costs and expenses, interest and attorney fees not to exceed 1/3 of the actual damages. Within 30 days of the MIA decision, either party may request an administrative hearing. The administrative law judge has de novo review. Failure to request an ALJ review within 30 days renders the MIA’s decision as final. Either party may appeal the MIA decision or the decision of the ALJ to Circuit Court. The Circuit Court review is also de novo.



What to Expect When You’re Insuring in Pennsylvania... By: Brian J. Pulito and Thomas J. Sengewalt In Pennsylvania there is no common law cause of action for an insurer’s bad faith denial of coverage. However, for such conduct Pennsylvania does provide a statutory remedy. In 1990, the legislature passed Section 8371 to rectify the lack of a common law remedy for bad faith conduct in denying an insured’s claim. Adamski v. Allstate Ins. Co., 738 A.2d 1033, 1036 (Pa. Super. 1999). The statute holds that in an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take any and all of the following actions: (1) award interest; (2) award punitive damages against the insurer; (3) assess court costs and attorney fees against the insurer. 42 Pa. C.S.A. § 8371. While the statute does not define “bad faith,” a uniform definition has evolved from the course of litigation under the statute. Id. “Bad faith” of an insurer is any frivolous or unfounded refusal to pay proceeds of a policy but it is not necessary that the refusal be fraudulent. Adamski, 738 A.2d at 1036 (quoting Blacks Law Dictionary 139 (9th ed. 1990)). “For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.” Id. To establish bad faith for purposes of the statute, the Court has utilized a two-part test, both elements of which must be established by clear and convincing evidence. Adamski, 738 A.2d at 1036. First, the insurer must have lacked a reasonable basis for denying coverage and second, the insurer knew or recklessly disregarded its lack of reasonable basis. Id. See Terletsky v. Prudential Property & Casualty Ins. Co., 649 A.2d 680 (1994). An insured may validly assign his or her claim for bad faith under Section 8371. Wolfe v. Allstate Property & Cas. Ins. Co., 877 F.Supp.2d 228 (M.D. Pa. 2012) (applying Pennsylvania law). The Pennsylvania Supreme Court held that Section 8371 claims sound in tort rather than contract. Ash v. Cont’l Ins. Co., 932 A.2d 877 (Pa. 2007). Accordingly, under Pennsylvania law, an insured’s claims against his or her insurer, in the nature of breach of contract, breach of fiduciary duty, and bad faith, as well as claims for punitive damages, counsel fees and interest under Section 8371, are assignable. Id. (citing Brown v. Candelora, 708 A.2d 104 (Pa. Super. 1998); Haugh v. Allstate Ins. Co., 322 F.3d 227, 239 (3d Cir. 2003) (emphasis added). In addition, where the insured has not assigned any of his rights against his insurer to a judgment creditor, the judgment creditor may not reach, via garnishment proceedings, more than the applicable limits of the coverage’s provided by the policy insuring against the loss. Id. (citing Adamski v. Miller, 681 A.2d 171 (1996)). As stated above, under Pennsylvania law, the statutory remedy under Section 8371 is the sole remedy for bad faith of an insurer. The Brickman Group, Ltd. v. CGU Ins. Co., 865 A.2d 918, 926 (Pa. Super. 2004). Accordingly, other than an assignment of rights under Section 8371, a third party has no other statutory or administrative remedy for bad faith against an insurer.

What to Expect When You’re Insuring in Texas... By: Seema Mir The saying “everything is bigger in Texas” certainly applies even when it comes to available extracontractual causes of action against insurers. Fortunately for insurers, common law has narrowed methods of insureds’ actual recovery by means of conservative and “we-know-it-when-we-see-it” lottery approaches used in controlling opinions. State Farm Fire & Cas. Co. v. Simmons, 963 S.W.2d 42 (Tex. 1998) (dissent, J. Hecht). Notably, Texas courts have recognized the bad-faith tort only in the first party context. Universal Life Ins. Co. v. Giles, 950 S.W.2d 48, 54 fn. 2 (Tex. 1987). In light of perceived unequal bargaining power between insureds and insurers and as a result of public policy efforts to eliminate abuse by insurers, Texas allows insurers to be subjected to additional damages outside of contractual remedies if insurers do not handle insureds’ claims properly. To establish an insurer’s liability for the Texas tort of a violation of bad faith, the insured must prove: (1) the absence of a reasonable basis for denying or delaying payment of the benefits of the policy and (2) that the carrier knew or should have known that there was not a reasonable basis for denying the claim or delaying payment of the claim. Lyons v. Millers Cas. Ins. Co., 866 S.W.2d 597, 601 (Tex. 1993). See, Arnold v. National County

Page 5 • Spring 2013 Mutual Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987); Giles, 950 S.W.2d at 49. If the insurer has denied what is later determined to be a valid claim under the contract of insurance, the insurer must respond in actual damages up to the policy limits. But as long as the insurer has a reasonable basis to deny or delay payment of the claim, even if that basis is eventually determined by the factfinder to be erroneous, the insurer is not liable for the tort of bad faith. Lyons, 866 S.W.2d at 601. Additional causes of action for extracontractual damages are available statutorily as violations of the Unfair Settlement Practices Act under Chapter 541 of the Texas Insurance Code and the Texas Deceptive Trade Practices Act (DTPA). TEX. INS.CODE ANN. art. 21.21 (Vernon 2005); TEX. BUS. & COM. CODE §§ 17.41-.63, et seq. These statutes allow insureds to sue insurers for all practices constituting unfair methods of competition or unfair or deceptive acts or practices, including the mishandling of insurance claims and settlement acts, as well as the misrepresentation of insurance policies. TEX. INS.CODE ANN. art. 21.21 (Vernon 2005); Giles, 950 S.W.2d at 55-56. Not surprisingly, such claims require the same predicate for recovery as bad faith causes of action in Texas and are in addition to any other remedies permitted by law. Higginbotham v. State Farm Mutual Auto Ins. Co., 103 F.3d 456, 460 (5th Cir. 1997). Some examples of what is considered to be a reasonable basis for denial include a legitimate dispute over the scope of damage to property or the cost of repair; a bona fide dispute over whether a claim is covered; and, if determined that there is no coverage for a claim, the insurer cannot be held liable no matter how poorly it may have handled the claim. Thus, the insurer can avoid bad faith liability if it was “right for the wrong reason.” Evidence that merely shows a bona fide dispute about the insurer’s liability on the contract does not rise to the level of bad faith. Transp. Ins. Co. v. Moriel, S.W.2d 10, 17 (Tex. 1994). Nor is bad faith established if the evidence shows the insurer was merely incorrect about the factual basis for its denial of the claim or about the proper construction of the policy. Lyons, 866 S.W.2d at 601. A primary difference between common law and statutory causes of action for bad faith claims relates to damages. Under common law, punitive damages are theoretically available, but the current standard is so high that plaintiffs rarely meet it. See, e.g., Transp. Ins. Co. v. Moriel, S.W.2d 10, 18 (Tex. 1994) (only “when accompanied by malicious, intentional, fraudulent, or grossly negligent conduct does bad faith justify punitive damages.” Id.). The statutory causes of action, however, are more attractive to plaintiffs because they allow for easier recovery of punitive damages, as well as mental anguish damages, subject to trebling, if the insured is able to prove the insurer acted knowingly. Texas Farmers Ins. Co. v. Cameron, 24 S.W.3d 386 (Tex. App. 2000). The finding of mental anguish against an insurance company can also support a finding of bad faith. Id. Additional damages such as loss of credit standing, physical injury, and other miscellaneous compensatory damages such as lost wages, lost business revenue, and penalties for early withdrawal of investment income are also possible under statutory extracontractual claims. Finally, the Texas Department of Insurance does accept the filing of insurance –related claims, and works with the complainant and the insurance company to resolve the complaint. If the process is unsuccessful, the complainant has the option of pursuing legal action or alternative dispute resolution, but it does not appear that the TDI complaint process is a mandatory prerequisite to filing a lawsuit.

What to Expect When You’re Insuring in West Virginia... By: Michelle E. Piziak The concept of good faith and fair dealing (or the lack thereof being “bad faith”) was an expression of an implied duty in contract law that neither party to a contract would act in such a manner as to deprive the other party of the benefit of the bargain. As the Supreme Court of Appeals of West Virginia noted in Loudin v. Nat’l Liability & Fire Ins. Co., 228 W.Va. 34, 716 S.E.2d 696, n. 9 (2011), “[t]he duty at issue in a bad faith breach of insurance contract claim is the insurance company’s duty to act in good faith and deal fairly with its insured.” [Citations omitted]. This concept has evolved into the catch phrase of “bad faith”. However, in West Virginia, the doctrine of common “bad faith” is normally seen only in the context of excess verdicts or when an insured “substantially prevails” over his or her insurer. Of course, since the duty arises out of the existence of an insurance contract, West Virginia does not recognize a third-party common law cause of action for bad faith. Elmore v. State Farm Mut. Auto. Ins. Co., 202 W. Va. 430, 504 S.E.2d 893 (1998).1 Also noteworthy, when a named insured files a claim with his or her insurer alleging that another insured under the same policy caused him or her bodily injury, the named insured is a first party claimant in any subsequent “bad faith” suit. See, Loudin, supra at 703. The two common law causes of action will be examined separately hereafter. Substantially Prevail Whenever an insured sues his own insurance company and substantially prevails, he is entitled to recover the reasonable value of his attorney fees in vindicating his claim, damages for net economic loss caused by the delay in settlement, and damages for aggravation and inconvenience. Hayseeds, Inc. v. State Farm Fire & Casualty, 177 W. Va. 323, 352 S.E.2d 73 (1986). These types of damages are recoverable in the context of all first-party claims, including uninsured and underinsured motorist claims. Marshall v. Saseen, 192 W. Va. 94, 450 S.E.2d 791 (1994); Hadorn v. Shea, 193 W. Va. 350, 456 S.E.2d 194 (1995). Notably, however, the United States District Court for the Southern District of West Virginia recently limited Hayseeds claims to first-party claims for first-party coverages, not first-party claims for third-party liability coverage. Graham v. National Union Ins. Co. of Pittsburgh, PA, 2013 WL 870298 (S.D. W.Va. March 7, 2013). Whether an insured has “substantially prevailed” against his insurance carrier in a first-party claim is determined by the status of negotiations between the insured and the insurer at the time negotiations broke down and requires the court to look at negotiations as a whole from the time of the insured event until the final payment of the insurance proceeds.

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Insurers are cautioned that West Virginia law does allow third-parties to sue for alleged discrimination in the settlement of property damage claims under the West Virginia Human Rights Act. Michael v. Appalachian Heating, LLC, 226 W. Va. 394, 701 S.E.2d 116 (2010).

Page 6 • Spring 2013 Miller v. Fluharty, 201 W. Va. 685, 500 S.E.2d 310 (1997). Stated otherwise, “‘[a]n insured ‘substantially prevails’ . . . when the action is settled for an amount equal to or approximating the amount claimed by the insured immediately prior to the commencement of the action. . . .” Hadorn, supra at 198 (citation omitted). This rule applies regardless of whether the claim is resolved by jury verdict or settlement, provided that the settling plaintiff does not expressly waive his right to recover attorney fees. Jordan v. National Grange Mut. Ins. Co., 183 W. Va. 9, 393 S.E.2d 647 (1990). Excess Verdict When an insurer fails to settle a claim made by someone else against its insured within the policy limits and thereby exposes the insured to liability for that portion of a judgment in excess of the policy limits, the insured may have a claim against his insurer for the amount of the excess. See Shamblin v. Nationwide Mut. Ins. Co., 183 W. Va. 585, 396 S.E.2d 766 (1990). Shamblin adopted a hybrid negligence-strict liability standard for determining whether an insurance company has wrongfully failed to settle a case. According to the Court, if an insured demonstrates the failure of his or her insurer to avail itself of an opportunity to obtain a complete release by settling within policy limits, the insurer must then “prove by clear and convincing evidence that: (1) it attempted in good faith to negotiate a settlement; (2) any failure to enter into a settlement . . . was based on reasonable and substantial grounds; and (3) it accorded the interests and rights of the insured at least as great a respect as its own.” Id. at Syl. Pt. 3 (emphasis added). The Shamblin Court further held that punitive damages may be awarded against an insurer who fails to settle a claim within policy limits, “but the policyholder must establish a high threshold of actual malice in the settlement process,” meaning that “the insurer knew that the claim was proper, but . . . nonetheless acted willfully, maliciously and intentionally in failing to settle the claim on behalf of its insured.” Id. at Syl. Pt. 1. Notably, to pursue a Shamblin claim, “there must not only be a negligent refusal to accept a settlement offer by the insurer, but also subsequent harm to the insured. In other words, the insured’s personal assets must be at risk.” Strahin v. Sullivan, 220 W. Va. 329, 647 S.E.2d 765, 771 (2007). Thus, if an insured assigns its rights in exchange for a covenant not to execute, there can be no excess verdict claim. Unfair Claims Settlement Practices In addition to the common-law claims available, insureds2 may pursue a statutory Unfair Claims Settlement Practices claim. The Unfair Trade Practices Act (W. Va. Code §§33-11-1 et seq.) regulates trade practices in the business of insurance. Section 4, subsection (9) deals with unfair claim settlement practices. In addition, the Insurance Commissioner’s regulations amplify those requirements to some extent. Because the language of the UTPA requires a “general business practice”, the Supreme Court of Appeals of West Virginia has held that there has to be a showing of more than one isolated violation of the Act in order for a party to prevail. See Russell v. Amerisure Ins. Co., 189 W. Va. 594, 433 S.E.2d 532 (1993)(per curiam), overruled on other grounds by State ex rel. State Farm Fire & Casualty Co. v. Madden, 192 W. Va. 155, 451 S.E.2d 721 (1994). Nevertheless, it has been held that multiple violations can arise from separate acts in the same claim file. Dodrill v. Nationwide Mut. Ins. Co., 201 W. Va. 1, 491 S.E.2d 1 (1996). The West Virginia Court has also held that a cause of action under the UTPA extends to hold a claim adjuster employed by an insurance company personally liable for violations of the Act. See Taylor v. Nationwide Mut. Ins. Co., 214 W. Va. 324, 589 S.E.2d 55 (2003). In the first-party context, the insured will often have recovered damages for annoyance and inconvenience and attorneys fees as part of her breach of contract claim. In addition, punitive damages are recoverable upon a showing of “actual malice.” Finally, in certain instances, there may also be a claim for loss of consortium presented. Dodrill v. Nationwide Mut. Ins. Co., 201 W. Va. 1, 491 S.E.2d 1 (1996); Poling v. Motorists Mut. Ins. Co., 192 W. Va. 46, 450 S.E.2d 635 (1994) (allowing a loss of consortium claim but holding that the loss of consortium must be shown to have been the result of the tortious claims handling and not the original injury).

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On July 8, 2005, W. Va. Code §33-11-4a went into effect eliminating the statutory private cause of action by third-party claimants. Rather, a third-party claimant’s sole remedy against a person for an unfair claim settlement practice is the filing of an administrative complaint with the Insurance Commissioner. However, a private cause of action still exists for first-party claimants under the UTPA.

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Bad Faith Laws - State by State First Party Common Law

Kentucky

X

Maryland

Ohio

X

Third Party Common Law

First Party Statutory

Third Party Statutory

X

X

Administrative

X

X

X

X

X

Pennsylvania

Texas

X

X

X

West Virginia

X

X

X

Page 8 • Spring 2013

Steptoe & Johnson PLLC’s First Party Team

Team Leaders Melanie Morgan Norris, Of Counsel

Wheeling

304.231.0460

[email protected]

Charleston

304.353.8126

[email protected]

Morgantown

304.598.8113

[email protected]

Wheeling

304.231.0442

[email protected]

Tracey B. Eberling, Member

Martinsburg

304.262.3532

[email protected]

Eric J. Hulett, Member

Martinsburg

304.262.3519

[email protected]

Lucien G. Lewin, Member

Martinsburg

304.262.3528

[email protected]

Ancil G. Ramey, Member

Huntington

304.526.8133

[email protected]

Monté L. Williams, Member

Morgantown

304.598.8142

[email protected]

James M. Wilson, Member

Bridgeport

304.933.8153

[email protected]

Richard M. Yurko, Jr., Member

Bridgeport

304.933.8103

[email protected]

Hannah Curry Ramey, Of Counsel

Huntington

304.526.8132

[email protected]

Jason P. Foster, Associate

Martinsburg

304.262.3543

[email protected]

Carlie M. Lacy Associate

Morgantown

304.598.8152

[email protected]

Michelle E. Piziak, Of Counsel

Team Members Laurie C. Barbe, Member Michelle Lee Dougherty, Member

Fast Facts about Steptoe & Johnson More than 275 attorneys 13 Offices in Kentucky, Ohio, Pennsylvania, Texas and West Virginia Over 30 areas of practice 180 attorneys and 200 paraprofessionals serving the energy industry 12th largest energy law practice in the country - Energy Law 360 Top listed in the U.S. in Oil and Gas Law by The Best Lawyers in America® Top listed in the U.S. in Professional Malpractice by The Best Lawyers in America® Top listed firm in Ohio, Pennsylvania and West Virginia in a combination of areas by The Best Lawyers in America® Two Fellows of the American College of Trial Lawyers Follow us on Facebook, Linkedin and Twitter

Three Fellows of the American College of Labor & Employment Lawyers AV peer-review rated by Martindale-Hubbell, the highest ranking given 88 lawyers recognized in The Best Lawyers in America®

Kentucky, Ohio, Pennsylvania, Texas, and West Virginia

www.steptoe-johnson.com

Susan S. Brewer, CEO