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Insurance Bad Faith - Articles - Part 2

$16 Million Verdict Stands in Allstate Bad Faith Suit

July 31, 2008

An appeals court has upheld a bad faith insurance jury award against Allstate Insurance, letting stand a $16 million verdict against the company. Like the Missouri jury that originally found against Allstate, a three-judge appeals panel did not believe the insurance company’s assertion that its failure to settle the claims of two car accident victims in a timely manner was not intentional.

The Allstate lawsuit originated from a March 2000 car accident, involving a collision between a pickup truck and a subcompact vehicle. The pickup truck was driven by Wayne Davis Jr., who was intoxicated when he smashed into a car carrying Edward Johnson and his wife, Virginia. The Johnsons survived, but their medical bills totaled over $320,000.

Although the Johnsons agreed to settle for Davis’ insurance policy limit of $50,000, Allstate failed to respond to them regarding the settlement offer until 6 months later, after the statutory 60-day limit for accepting had passed.

The Johnsons then sued Davis, who agreed to a judgment in excess of $5 million. However, the Johnsons also agreed not to collect on that judgment in return for Davis assigning to them of most of his claim against Allstate for its refusal to settle. The Johnsons and Davis both sued Allstate in circuit court, alleging the insurer had acted in bad faith when it did not respond in a timely fashion to the Johnsons’ initial settlement offer.

Allstate’s lawyers claimed that the company lost the offer letter and responded 6 months later because it was waiting to receive the Johnsons’ medical records. The company additionally argued that it couldn’t be certain that the crash had caused the Johnsons’ injuries, despite the fact that they had to be cut from the wreckage and airlifted to a local hospital, where they were placed in intensive care.

The jury found that Allstate had acted in bad faith and awarded compensatory damages of $5.8 million plus interest to the Johnsons. It also ruled in a 10-2 vote in favor of a $10.5 million punitive damages award.

Allstate appealed, but on Tuesday a three-judge panel of the Missouri Court of Appeals held that the jury’s verdict was justified.

“Allstate’s failure to recognize the severity of the Johnsons’ injuries and the probability that the claim would far exceed Davis’s policy limits; its failure to investigate the claim and respond to the demand in accordance with insurance industry standards and its own good faith claim handling manual; and its failure to advise Davis of the demand, his likely exposure for an excess judgment, and his right to retain counsel, are all circumstances supporting a reasonable inference that Allstate’s refusal to settle was in bad faith,” Judge Paul Spinden wrote in the panel’s decision.

Allstate has not yet announced if it will further appeal the case.

Fraud Claim Rejected in Hurricane Katrina Lawsuit

April 22, 2008

A federal judge on Monday dismissed a key Hurricane Katrina lawsuit alleging fraud against State Farm Fire & Casualty Co. The suit was filed by Biloxi, Mississippi couple Thomas and Pamela McIntosh, after State Farm blamed most of the damage to their home on Katrina's storm surge, and paid them only $36,228. Dozens of lawsuits were filed in the wake of Hurricane Katrina's devastation of the gulf coast on August 29, 2005. Many of them, the McIntosh's included, centered around allegations that State Farm routinely denied claims based on bad faith and fraud.

The McIntosh suit claimed that State Farm, through Alabama-based firm A.E. Renfroe & Company, who provided State Farm with damage assessment reports, produced two separate engineering reports in October 2005, shortly after the Katrina damage occurred. They alleged that State Farm used the two reports to minimize the value of the wind damage sustained by their home and to avoid liability for their claims against their homeowners' policy. The couples' policy did not include coverage for flood damage.

In his Partial Summary Judgment, U.S. District Court Judge L.T. Senter, Jr., says that while the McIntosh's contention that State Farm and A.E. Renfroe worked together to deliberately underestimate the damage to their home would support a finding of bad faith, it is not sufficient to warrant such a finding. A.E. Renfroe & Company, he further finds, cannot have aided and abetted a fraud that did not occur.

Health Insurers Ordered to Reinstate Revoked Policies

April 21, 2008

Three of the leading health insurance companies in California have been ordered to reinstate 26 policies that were revoked because insurers claimed that policyholders lied on their applications. California regulators said the policies were wrongly rescinded for inadvertent errors made on the applications.

A California regulatory agency warned the companies that it will also review thousands of revocations of insurance policies from the past four years, which may lead to many more reinstatements.

Consumer advocates believe that the policy of wrongful rescission by insurance companies is not limited to these 26 cases in California. They say that predatory insurance practices are an industry-wide problem.

These problems occur more often with individual health insurance plans than with group plans. Only about 5% of insurance policies are currently purchased on the individual market. However, a plan proposed by Republican presidential nominee, Senator John McCain, would cause a dramatic spike in individual insurance plans.

McCain proposes converting the tax break that employees currently receive on health insurance benefits into a tax credit to be used to purchase health insurance on the individual insurance market. This would place more individuals at risk of having their policies revoked for inadvertent mistakes on insurance applications.

If what is happening in California is indicative of a more widespread problem in the insurance industry, reform measures will be necessary to prevent predatory insurance practices.

Insurance Companies Fight Law on Punitive Payouts

October 01, 2007

Insurance giants like, State Farm, Allstate, Safeco and Farmers have poured over $8 million into the referendum battle regarding how insurers are required to treat their customers. Their goal is to convince voters to reject a law passed earlier this year that could force insurers to pay up to triple damages and lawyer fees if they fail to pay a legitimate claim and then lose in court.

Supporters of the law claim it forces insurance companies to pay legitimate claims in a timely and fair fashion and frees the courts from relatively minor cases that clog the system for months and even years.

Washington state lawmakers heard so many complaints from policyholders who believed insurers weren't treating them fairly that earlier this year they passed a law called "The Fair Conduct Act." Hearings were held, the bill was revised -- even watered down, and both the House and Senate passed it. The governor readily signed it.

But the very next day a coalition, funded primarily by insurance companies, moved in to stop the law from going into effect by filing petitions for a voter referendum on the law. Representatives of the insurance industry say the law will raise premiums and that the system is working fine as it is. The law, they said, will only make things worse, and they want voters to have the final say.

The campaign to woo voters has already begun. The insurance industry-backed group is already running television commercials depicting greedy lawyers planning to sue and warning consumers that the law will lead to frivolous lawsuits and higher rates.

Former insiders say insurance companies began limiting or denying legitimate claims in minor injury cases and reaped billions in profits as a result. The strategy has tied up courts across the country -- over minor claims, judges told CNN -- for months and even years. How did they do it?

"It really came down to basically three elements: a position of delay, a position of denying a claim and ultimately defending that claim that you're denied," said Jim Mathis, a former insurance industry insider.

But Robert Hartwig, with the industry-backed Insurance Institute, said the strategy was not intended to deny valid claims but to attack fraud, which, he claimed earlier this year, was rampant in minor accident cases. "What insurers are doing is trying to monitor costs. And every insurance company is under the same pressure to do it," Hartwig said.

Miss. Attorney General Sues State Farm

June 13, 2007

Mississippi Attorney General Jim Hood sued State Farm Fire and Casualty Co. on Monday, claiming the company failed to honor an agreement for a mass settlement of claims over Hurricane Katrina damage.

In January, Hood agreed to drop State Farm from a lawsuit his office filed against several insurance companies for refusing to cover damage to homes from Katrina's storm surge.

Hood did that after State Farm settled with lawyers for homeowners on a $50 million payout to about 35,000 southern Mississippi policyholders who hadn't sued the company but could have their claims reopened.

But the pact fell apart after a federal judge refused to endorse it. Hood has said he didn't negotiate the terms of that settlement and shared the judge's concerns about the deal.

The state is seeking compensatory and punitive damages against the Bloomington, Ill.-based insurer for an alleged breach of contract. Hood's office filed the suit Monday in Hinds County circuit court.

"We filed this lawsuit in an effort to help the more than 30,000 Gulf Coast policyholders who have suffered for nearly two years because of State Farm's inaction," Hood said in a news release issued shortly before a news conference.

State Farm and lawyers for policyholders had presented the original agreement for a mass settlement to U.S. District Judge L.T. Senter Jr., who is presiding over hundreds of lawsuits that Mississippi homeowners filed against their insurers after the Aug. 29, 2005, storm.

Senter refused to sign off on the deal, however, saying he needed more information about how many policyholders would benefit from the mass settlement and how much money they would be guaranteed.

After that deal fell apart, State Farm made a similar agreement with Mississippi Insurance Commissioner George Dale. That pact also calls for the company to reopen and possibly pay tens of thousands of claims, but it isn't subject to judicial oversight.

A State Farm spokesman said Monday that the company's settlement with Dale is "moving forward."

But Hood said that process is not moving fast enough, resulting in a little more than 300 reevaluations so far.

Katrina Lawsuit to go to Appeal

June 06, 2007

In November, a judge gave hope to homeowners trying to collect insurance money for flood damage caused by Hurricane Katrina. Now, that decision is under scrutiny.

U.S. District Judge Stanwood Duval Jr. sided with policyholders who argued that language excluding water damage from some of their insurance policies was ambiguous.

Duval said the policies did not distinguish between floods caused by an act of God - such as excessive rainfall - and floods caused by an act of man, which would include the levee breaches following Katrina's landfall.

Duval allowed a lawsuit against The Allstate Corp. (nyse: ALL - news - people ), The St. Paul Travelers Companies Inc. and other insurers to proceed, but said the issue of "flood exclusion" could be appealed immediately by the companies.

A hearing on the appeal will be held Wednesday at the 5th U.S. Circuit Court of Appeals. A three-judge panel was scheduled to hear arguments from lawyers for policyholders and several insurance companies.

Insurers say their homeowner policies do not cover damage from any type of flooding, including water from the levees that broke in the aftermath of the Aug. 29, 2005, storm.

The insurance industry stands to lose an estimated $1 billion in Louisiana if policyholders successfully challenge companies' refusal to cover damage from levee breaches, said Robert Hartwig, chief economist at the industry-funded Insurance Information Institute in New York.

In court papers, a lawyer for policyholders with consolidated cases against insurers said Duval properly concluded that the definition of "flood" in policies is limited to "naturally occurring events."

But plaintiffs' attorney John Ellison accuses insurers of purposely not defining the term 'flood' and deliberately drafting vague policy language "to frustrate the reasonable expectations of Louisiana homeowner policyholders from whom they collected premiums for years."

Lexington Insurance Co. attorneys argue that punishing insurers for failing to define common words like "flood" could force them to engage in "defensive over-specification, which would inevitably lead to longer policies that are less comprehensible to most policyholders."

Duval agreed last year to dismiss State Farm Insurance Cos. from the litigation. He ruled that State Farm's policies included language that clearly excluded all flood damage, regardless of the cause.

First Katrina Homeowner´s Insurance Lawsuit Begins

July 06, 2006

Attorneys carried files and exhibits into a federal courthouse Monday for what they expect to be a groundbreaking trial on whether insurance policyholders who lost homes inHurricane Katrina are entitled to recover losses that insurance companies claim were caused by flooding.

"A journey of a thousand miles begins with one step, and this is the first step," plaintiffs' attorney Richard "Dickie" Scruggs said as he arrived in court. "It's one case. If you win it, it's a huge win. If you lose it, you spin it the best way you can."

The lawsuit was filed on behalf of police Lt. Paul Leonard, who had taken out homeowner's insurance with Nationwide Mutual Insurance Co. long before Katrina pulverized his Pascagoula house on Aug. 29.

After the storm, Nationwide blamed the damage on water, not wind. The insurer said Leonard's policy didn't cover floods.

Joe Case, a spokesman for Nationwide, downplayed the impact one case could have on others pending against Nationwide and other insurance companies.

"Right now we are focused on what this trial is about," Case said Monday after entering the courthouse that's still surrounded by Katrina destruction. "We look at each claim on a case-by-case basis."

Leonard and his wife, Julie, say Nationwide denied their claim without thoroughly investigating the damage to their house, which is several hundred yards from the Mississippi Sound near the eastern end of the state's shoreline.

The Leonards, who purchased their policy more than a decade ago, also say their insurance agent had assured them they didn't need to buy flood insurance for their home because their policy would cover all hurricane damage.

"The goal here is to make my home whole again," said Leonard, whose house sustained an estimated $100,000 in damage. "If it helps someone else, that's great. But I'm fighting for my family's future."

Scruggs is no stranger to high-profile court fights. He helped secure the landmark, multibillion dollar settlement with tobacco companies in the late 1990s.

"Everyone is going to be watching the result of this," Scruggs said of the trial, which is expected to last a week or two. "It won't be binding for other cases, but the precedential effects of this will be enormous because it's the first one."

While Nationwide homeowners' policies cover wind damage, the Columbus, Ohio-based insurer argues that damage from flood water, including wind-driven storm surge, is excluded from coverage.

"Essentially, the Leonards are asking the court to change their contract after the fact," Case had said earlier. "They're asking for flood damage to be covered, and they didn't purchase flood insurance, regrettably."

Scruggs represents around 3,000 policyholders on Mississippi's Gulf Coast, including his brother-in-law, U.S. Sen. Trent Lott, R-Miss., whose Pascagoula home was demolished by Katrina on Aug. 29.

Scruggs also has filed against other insurers, including Allstate Insurance Co., Metropolitan Life Insurance Co., State Farm Insurance Cos. and United Services Automobile Association.

Mississippi Attorney General Jim Hood also is suing insurance companies, arguing they should pay for all of Katrina's property damage, whether it was caused by wind or wind-driven water.

Dr. Robert Hartwig, chief economist for the Insurance Information Institute in New York, warned that a victory by the Leonards would "create chaos in insurance markets all over the country" because it would send a message that contracts can be "retroactively rewritten" after a disaster.

"That creates an impossible business environment," he said.

Scruggs and other plaintiffs' hope that winning this and a handful of other cases would pressure insurers into settling thousands of other Katrina-related lawsuits. "The outcome will at least set the tone for future cases," Scruggs said.

Hartwig, however, downplayed that scenario. "Insurers will be looking at every single case on its merits," he said.

$3 Million Bad-Faith Verdict; Jury: Auto Insurer 'Willful, Wanton' in Refusing Claim

November 12, 2005

A Boulder, Colorado jury has awarded a former University of Colorado math professor nearly $3 million in what is believed to be the state’s largest bad-faith verdict against an auto insurer over lost wages.

Dominic Peressini, 39, had asked for 85 percent of his actual lost wages, or $125,000, during a year-long sabbatical following a 2003 automobile accident that left him with a brain injury and mangled arm.

The six-member jury, after a four-day trial, found Peressini’s insurer, American Family Mutual Insurance Co., liable for breach of contract and awarded $1.1 million in punitive damages and $1.1 million for pain and suffering, in addition to lost wages. The jury found that American Family’s refusal to pay Peressini’s claim was “willful and wanton”, which triples the lost wages award to $375,000.

American Family must also pay the plaintiff's attorney fees and 18 percent annual interest on the three-year-old wage award.

Madison, Wis.-based American Family, the country's 10th- largest car insurance provider, maintained Peressini's claim had not been formally denied but that the case was still under investigation.

Underwriting issues became a major focus of the plaintiff's case.

A former American Family nurse case manager in Denver portrayed the insurer as a callous claims adjuster, with the Colorado office under intense pressure to reduce personal injury protection payouts.

Jurors were told about a senior case manager who kept on her desk a battery-operated "if pigs could fly" toy, used as an office joke each time a rejected claim brought the staff closer to its cost-cutting goal.

Introduced was a 2003 Colorado business plan that called for reducing claims payouts by 28 percent to match the lower claims-loss ratios of American Family's competitors.

Peressini said he recently retired from his tenured professorship at Colorado and is still struggling with memory and cognitive problems from the 2003 accident. He has relocated to Spokane, Wash., where he has family and volunteers as a math tutor for high school athletes.

"Never in my life would I expect a verdict to come out like this - over a million dollars," he said. "I'm a pretty simple person. All I wanted is what I needed."

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