William T. Barker, Kirk R. Ruthenberg & Kenneth J. Pfaehler on “First-Party Bad Faith in Maryland: Does the New Statute Reach ‘Fairly Debatable’ Claims Denials”

William T. Barker, Kirk R. Ruthenberg & Kenneth J. Pfaehler on “First-Party Bad Faith in Maryland: Does the New Statute Reach ‘Fairly Debatable’ Claims Denials”

 By William T. Barker, Kirk R. Ruthenberg, and Kenneth J. Pfaehler, SNR Denton

In their article “First-Party Bad Faith in Maryland: Does the New Statute Reach ‘Fairly Debatable’ Claims Denials”  appearing in the September/October issue of Coverage, William T. Barker, Kirk R. Ruthenberg & Kenneth J. Pfaehler of SNR Denton initially state that Maryland common law never recognized a cause of action for first-party insurance bad faith. But Maryland created private statutory rights, effective October 1, 2007.  A federal district court has recently decided the first significant case under the statute. Ceclila Schwaber Trust Two v. Hartford Acc. & Indemn. Co., 2009 U.S. Dist. LEXIS 59788 (D. Md. July 14, 2009).  This article reviews that case and analyzes the statutory standard of liability in light of the case. The statute provides both judicial and administrative remedies where a first-party insurer has failed to act in good faith.    The statute provides that “[g]ood faith means an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim.” In analyzing this holding, this commentary begins by reviewing the reasons why the “fairly debatable” rule is a bedrock doctrine of bad faith law elsewhere. Insureds who have suffered losses are especially vulnerable to abusive practices where an insurer exploits the insured’s need for funds by bargaining for a reduced payment, even if there is no real question that benefits are due.  Bad faith law seeks to control this abuse by providing enhanced liability for an insurer which refused a payment it knew or (had it properly investigated) should have known was due. But countervailing concerns limit the basis on which liability can be imposed. Accordingly, almost all jurisdictions recognizing extracontractual liability for bad faith hold that an insurer may safely deny a claim, without exposing itself to bad faith liability, as long as the insured’s entitlement to the benefits withheld is fairly debatable.This article examines the language of the statute and relevant Maryland case law to conclude that, contrary to Ceclila Schwaber Trust Two, this rule ought to be applied under the Maryland statute.

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William T. Barker is a partner in the Chicago office of SNR Denton, with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, duties of insurance defense counsel and regulatory matters. Mr. Barker also provides expert consultant and witness services. Mr. Barker is a member of the Editorial Board of THE NEW APPLEMAN ON INSURANCE LAW and a cochair of the Ethics & Professionalism subcommittee of the ABA Litigation Section Insurance Coverage Litigation Committee. Mr. Barker is a co-author, with Ronald D. Kent, of NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, from which some material in this article is drawn.
 
Kirk R. Ruthenberg is a senior litigation partner who has practiced law at SNR Dentonfor over 27 years, headed the firm's Litigation Practice in the Washington, D.C. office for nearly two decades, and now devotes full time to his litigation practice.
 
Kenneth J. Pfaehler is a partner in the Washington, D.C. office of SNR Denton. Mr. Pfaehler's practice centers on complex litigation matters. He has extensive experience in litigating cases involving insurance coverage and insurance bad faith.