By William T. Barker, Partner, SNR Denton
In Kartman v. State Farm Mutual Automobile Insurance Co., the Seventh Circuit reversed certification of a class action for allegedly improper adjustment of claims for hailstorm damage to insureds' roofs. In the process, it added weight to the already heavy majority rule that there ordinarily can be no bad faith liability unless some benefits were actually due and were improperly delayed or denied. This commentary examines the case and its implications.
A severe hailstorm in central Indiana produced thousands of claims by homeowners to State Farm Fire & Casualty Co. for damage to their roofs. While State Farm paid millions for these claims, some policyholders were dissatisfied, and several brought this putative class action against several State Farm companies, alleging breach of contract, bad faith, and unjust enrichment. State Farm removed the case to federal court.
The district court declined to certify a damages class, holding that each claim of underpayment required an individualized inquiry on the merits. But it concluded that a class claim for injunctive relief could proceed with respect to whether State Farm should be required to reinspect policyholders' roofs pursuant to some "uniform and objective standard." State Farm appealed and the Seventh Circuit reversed.
For purposes of this commentary, the critical point was that State Farm had no independent duty-whether sounding in contract or tort-to use a particular method to evaluate hail-damage claims. State Farm's alleged underpayment of the plaintiffs' hail-damage claims is a cognizable wrong in both contract and tort, but the method it uses to adjust claims is not independently actionable.
This commentary notes that most jurisdictions hold that a valid claim for policy benefits is a necessary predicate for a bad faith claim, though there is a possible narrow exception to that rule. A few jurisdictions do hold that there can be bad faith liability even though there is no covered claim. Kartman adds weight to the already clear majority in favor of requiring improper denial or delay of benefits actually due, but the court treated the issue summarily. Other courts have examined the issue in more depth.
This commentary collects authorities on that point and explains the reasoning supporting that conclusion.
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). Barker is a member of the American Law Institute and the co- author of New Appleman Insurance Bad Faith Litigation, Second Edition.
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