By Jennifer Yu Sacro and William T. Barker, Attorneys, SNR Denton
In Haley v. Allstate Insurance Co., a Washington federal court held that an insurer may incur bad faith liability in the course of defending an uninsured motorist action filed by its insured if the insurer fails to present at trial evidence that could have enlarged the insured’s monetary recovery against the insurer. While the court subsequently reconsidered in view of additional facts, it did not retract the court’s original analysis. This commentary critically examines the court’s analysis in light of other cases addressing the limits of an insurer’s duty of good faith and fair dealing towards its insured while the parties are in direct litigation.
Haley was injured by an uninsured motorist (“UM”). An Allstate policy provided property, medical and UM coverage. After Allstate began making payments for medical benefits, it suspended the payments pending independent medical examinations (“IMEs”) by two physicians. While both physicians believed that Haley reached the maximum medical improvement and required no further treatment, their reports differed as to which of Haley’s injuries were caused by the accident on a “more probable than not” basis. Allstate then closed Haley’s medical benefits claim based on the IME reports. Following failed negotiations regarding the settlement of Haley’s UM claim, Haley sued Allstate in state court for UM benefits. The suit resulted in a monetary judgment between Haley’s settlement demand and Allstate’s offer.
Haley filed a separate action for Allstate’s alleged bad faith handling of her medical benefits and UM claims, including Allstate’s failure to affirmatively present to the jury an IME report that was favorable to Haley. In partially denying Allstate’s summary judgment motion, the court found that Haley’s claim that Allstate’s failure to present the IME report constituted bad faith was potentially viable. Although the two IME reports both concluded that Haley reached the maximum medical improvement, they were not redundant because the second IME report could have supported greater economic damages. Allstate also could not assert the attorney work product doctrine as a basis for withholding the second IME report. While “[a] UM insurer ‘stands in the shoes’ of the tortfeasor and is entitled to assert the same liability defenses that the tortfeasor could,” Allstate “[could ]not leverage its dual-role as adversary and insurer solely to attempt to reduce the award available to the plaintiff in UM litigation.” Allstate’s “selective assertion of the privilege over one report and not the other” -- in essence, its failure to present Dr. James’ IME report into evidence -- thus, raised a “genuine issue of material fact regarding whether Allstate breached its duty of good faith towards the Plaintiff.”
The commentary first reviews the law of bad faith liability in the context of UM claims, generally, and UM coverage litigation, in particular. As the commentary explains:
Courts agree that the duty of good faith continues even after litigation has begun. The primary meaning of that statement is that the insurer has a continuing duty to pay the claim if (during coverage litigation) the claim ceases to be fairly debatable. Similarly, it has a continuing duty to investigate if new information comes into its possession indicating the possible existence of other information that might support the claim. The mere fact that payment could have been obtained (or was obtained) by filing a summary judgment in the coverage litigation does not convert the nonpayment from actionable claim settlement conduct to litigation conduct, governed by different standards. “Concluding that the duty of good faith does not end with the filing of a complaint does not . . . require courts . . . to alter the normal rules of litigation.”
The commentary traces the root of the Haley court’s analysis to a Washington Supreme Court decision, Ellwein v. Hartford Accident & Indemnity Co., which held that a carrier commits bad faith by utilizing against its insured an expert that the carrier initially retained in the course of its claim investigation. The commentary notes that, setting aside whether the reasoning in Ellwein was justified, “Haley took Ellwein and bad faith liability for litigation conduct to a new level, though the reconsideration probably renders its reasoning dictum.”
The commentary concludes:
The standard for bad faith liability that Haley initially announced seems incompatible with the adversarial nature of UM coverage litigation. Carriers in coverage litigation with their insureds in Washington would have a difficult time discerning the lines of what is and is not permissible advocacy. This would impair their ability to subject fairly debatable claims to full adversarial testing, testing which the law of bad faith is structured to permit.
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William T. Barker is a partner in the Chicago office of SNR Denton, L.L.P., with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and a Consulting Author of the New Appleman Insurance Law Practice Guide. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He was a Contributing Editor and then Editor of Bad Faith Law Report until that publication merged with Insurance Litigation Reporter, where he is currently Senior Contributing Editor and Editorial Board Director. He has been described as the leading lawyer commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). Mr. Barker is a member of the American Law Institute.
Jennifer Yu Sacro is a member of SNR Denton US LLP's litigation practice in Los Angeles. Ms. Sacro specializes in insurance coverage and bad faith actions, insurance-related class action litigation, defense of toxic tort and other environmental claims, and California Business and Professions Code Section 17200 cases. She has served as liaison counsel in several multi-party insurance coverage actions. Ms. Sacro is a Vice Chair of the ABA Tort Trial and Insurance Practice Section ("TIPS") Insurance Coverage Litigation Committee, a member of the ABA TIPS Leadership Academy, and is a Board member of the Philippine American Bar Association. Ms. Sacro graduated from UCLA School of Law in 2000.
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