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W W
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March 10, 2009 Richard Porotsky, Esq.
Dinsmore & Shohl LLP
255 East Fifth Street
Cincinnati, Ohio 45202
(513) 977-8256
Bad Faith Title Insurance Claims in Ohio, and Ultimate
Responsibility for Paying Claims
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How can bad faith claims arise in the title insurance context?
What is the legal standard in Ohio for holding an insurer liable for bad faith?
Can a title agent be held liable for bad faith?
Does a bad faith claim mean that the responsible party is liable for punitive damages and attorney fees?
When a title insurer pays a claim, must it accept final responsibility for that claim?
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© 2009 Dinsmore & Shohl LLP
Part 1Part 1
Types of Claims / How Insurance Disputes Arise
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Types of Claims; Possible Coverage Disputes
Many defects are corrected without coverage debate
– failure to pay off prior mortgages and liens;
– failure to pay taxes;
– failure to promptly record a mortgage.
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Types of Claims; Possible Coverage Disputes
Some claims not covered; buyer / lender assumes risk
– Claims anticipated or excluded
– Dalessio v. Williams (9th Dist. 1996), 111 Ohio App.3d 192 (excluded "plat restrictions;“ garage in violation).
– Kuhn v. Ferrante (Ohio App. 5 Dist.), 2001-Ohio-1970.
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Types of Claims; Possible Coverage Disputes
Even if insurer initially accepts risk, insurer is not always "stuck" with the expense
– Liability can be shifted – Part VI below.
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Types of Claims; Possible Coverage Disputes
And, disputes can arise as to insurance coverage for the claims
– Potential bad faith claims.
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© 2009 Dinsmore & Shohl LLP
Part 2Part 2
Two Bad Faith Case Examples
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Billboard and Leasing Dispute
Eller Miller Media v. DGE Ltd., (8th Dist.), 2004-Ohio-4748.
– buyer of a commercial building (DGE),
– seller (Pauline DiGeronimo),
– title agency (Surety Title),
– title insurer (Stewart Title Guaranty Company)
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Billboard and Leasing Dispute
Billboard posted on one side
Seller’s affidavit
– "no person other than the affiant is in possession or has the right of possession of the property . . .”
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Billboard and Leasing Dispute
Title commitment
– did not mention billboards
– provided two exceptions
rights of those in possess’n not shown by public record
matters disclosed by survey or inspection.
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Billboard and Leasing Dispute
After closing:
– Eller claimed right to use billboard
– Title policy issued with billboard exception
– Eller sued DGE
– Stewart (insurer) refused defend
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Billboard and Leasing Dispute
Trial Court ruling:– Stewart (insurer) had to defend
– unilaterally exclusion invalid
– Surety (agent) breached its fiduciary duty
– Both Surety and Stewart to pay all DGE's attorney fees
– No claim against Ms. DiGeronimo
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Billboard and Leasing Dispute
Appellate Ruling (minor changes)
– Affirmed duty to defend
Cited breadth of the duty to defend
– No breach of fiduciary duty by Surety
– Allowed a claim against Ms. DiGeronimo
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Billboard and Leasing Dispute
DGA’s claim of Bad Faith:
– against both Surety and Stewart.
– but not ever added to the complaint.
– Nonetheless, upheld attorney fee award
Unusual award of fees for prosecution
Obscure cases as to wrongful refusal to defend.
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2nd Bad Faith Example--Easement Dispute--
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Easement Dispute
Brown v. Guar. Title & Trust/Arta, (5th Dist) 1996 WL 488004
– property owner (Ms. Brown)
– her neighbor (Ms. Stepath),
Claimed right to ride horse, build on easement
– Ms. Brown's title insurer (Guarantee Title & Trust).
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Easement Dispute
Insurer refused to make a complete defense
– Instead, under reservation of rights, paid 1/3 of defense
– Ms. Brown prevailed versus Stepath
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Easement Dispute
Ms. Brown sought the other 2/3 defense cost--$15,000
– insurer refused– Ms. Brown sued, alleged bad faith. – Jury awarded $47,000, including all the legal fees. – Cited bad faith standard in Zoppo v. Homestead Ins. Co.
(1994), 70 Ohio St. 3d 552. reasonable justification
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Easement Dispute
The title insurer argued for no attorney fees
– Argued fees are improper absent punitive damages
Yet, Court upheld the fee award
– Cited exception for bad faith or malicious conduct
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© 2009 Dinsmore & Shohl LLP
Part 3Part 3
Insurance Principles Applicable to Title Insurance Claims
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The Insurer’s Responsibilities vis-à-vis the Policyholder
Overview
– the duty to defend a potentially covered claim
– the duty to indemnify for a covered claim
– the duty to investigate in good faith and provide reasonable justification for denial
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The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense
Duty to defend is broader than duty to indemnify
─ Various rules broaden the duty
─ Must be provided promptly and diligently
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Duty to Defend--One claim-all claims rule:
─ Preferred Mutual Ins. v. Thompson (1986), 23 Ohio St. 3d 78 ("both" a covered negligence claim and noncovered intentional tort)
The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense
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Duty to Defend: "Scope of the pleadings" rule
"Where the insurer's duty to defend is not apparent from the pleadings . . . but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense“
City of Willoughby Hills v. Cinti Ins. Co. (1984), 9 Ohio St.3d 177, syl.
The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense
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But, the duty to defend is not limitless
─ Cincinnati Ins. Co. v. Anders (2003), 99 Ohio St. 3d 156:
─ Homeowner's negligent failure to disclose defect
─ Not an accident; did not damage the home
─ If conduct in the complaint is indisputably outside the scope of coverage, there is no duty
The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense
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The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense
If the insurer breaches and fails to defend
– waives policy conditions; policyholder may settle– insurer “violates its duty to defend at its own peril.”
Sanderson v. Ohio Edison Company (1994), 69 Ohio St.3d 582, 586-87, 635 N.E.2d 19, 23-24.
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The Insurer’s Responsibilities vis-à-vis the Policyholder -- Defense
But if the insurer defends under reservation of right:
– Policyholder not free to settle without insurer consent
– Auto-Owners v. J.C.K.C., Inc. (Ohio App. 9 Dist.), 2004-Ohio-5186
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The Insurer’s Responsibilities vis-à-vis the Policyholder -- Indemnity Indemnity obligations arise in various circumstances:
– (1) defends without a reservation & loses
– (2) defends under reservation of rights & loses;
– (3) wrongfully refuses to defend
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The Insurer’s Responsibilities vis-à-vis the Policyholder – Reasonable Investigation & Basis for Denial (Duty of Good Faith)
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Part 4Part 4
Ohio Bad Faith Law
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The Current Bad Faith Standard in Ohio
Rationale for the tort
– Economic Inequality
– Hoskins v. Aetna Life Insurance Company (1983), 6 Ohio St.3d 272, 275-77
– Proper incentive to settle claims near liability limits
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The Current Bad Faith Standard in Ohio Ohio’s Definition of Bad Faith:
─ "An insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification”
─ Zoppo v. Homestead Ins. (1994), 71 Ohio St.3d 552
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The Current Bad Faith Standard in Ohio Zoppos's "reasonable justification" standard
─ Similar to negligence
─ Does not warrant punitive damages or atty fees
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The Current Bad Faith Standard in Ohio No Bad Faith Where the Issue is "Fairly Debatable"
─ "Genuine dispute over either the status of the law at the time of the denial or the facts giving rise to the claim."
─ Abon v. Transcont'l Ins. Co. (5th Dist.), 2005-Ohio-3052, at ¶¶ 37-46 ("fairly debatable")
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The Current Bad Faith Standard in Ohio Thus, when insurer is wrong, summary judgment or
directed verdict still possible
─ Helmick v. Republic-Franklin Ins. (1988), 39 Ohio St.3d 71, 75-76 (reasonably justified to question)
─ Schuetz v. State Farm (Franklin Co. Comm. Pls. 2007), 147 Ohio Misc.2d 22, ¶¶83-84 (there are federal circuits that have sided with insurer)
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The Current Bad Faith Standard in Ohio "[M]ere refusal to pay insurance is not, in itself,
conclusive”
─ Something beyond breach of contract required
─ A lack of reasonable justification
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The Current Bad Faith Standard in Ohio
Correct Coverage Decisions -- Per Se Reasonable
─ Very logical, many courts agree
─ A few courts may still allow other rules
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The Current Bad Faith Standard in Ohio Relationship of Punitive Damages to Bad Faith
─ The two standards are separate and distinct
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The Current Bad Faith Standard in Ohio Required proof for punitive damage & attorney fees
─ Malice, aggravated/egregious fraud, oppression, insult.
─ "Malice" will often be the easiest to prove
─ conscious disregard for rights and
─ great probability of causing substantial harm
─ Costly Mistake: Goodrich v. Commercial Union Ins (9th Dist. 2008) ($20 million atty fees despite no proof)
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The Current Bad Faith Standard in Ohio Zoppo case shows this malice standard.
─ Failed to conduct an adequate investigation (fire)
─ One-sided, failed to locate key suspects, verify alibis, follow up with witnesses, or go Pa.
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Comparative Bad Faith & Related Defenses
─ Comparative Negligence?
─ Ohio rejects "reverse bad faith" Tokles & Son v. Midwestern Indemn (1992), 65 Ohio St.3d 621, 632
─ Insurer and insured not on equal footing
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Comparative Bad Faith & Related Defenses
Non-cooperation and related defenses
─ Insurers can and should focus upon the policyholder conduct – cooperation required.
Fraud by the policyholder
Failure to provide timely notice of a claim
Non-cooperation in investigation or defense
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Comparative Bad Faith & Related Defenses
Non-Cooperation example:─ Johnson v. Allstate Insurance Co. (Trumbull Co.), 2002-
Ohio-7156
─ Policyholder provided some financial info + inspection
─ Refused to allow inspect damaged washer, dryer, computer
─ Non-cooperation "materially and substantially prejudiced" [the insurer's] ability to properly evaluate
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Bad Faith Failure to Settle a Covered Claim, Resulting in Excess Liability
– Liability for entire judgment against the insured– “Incentive” to accept a settlement offer in a case with
damages “near or over its policy limits.” – Adjudicated judgment required (not consent judgment)
Types of Bad Faith Cases
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Bad Faith Refusal to Pay a Covered Claim
– Regardless of excess liability
– Punitive damages possible if proven intent or malice
Types of Bad Faith Cases
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Bad Faith Failure to Defend, Even if Indemnity Is Ultimately Disproven
– Potential for establishing punitive damages
Types of Bad Faith Cases
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Bad Faith Delay in Payment of a Covered Claim
– Failure to pay undisputed portion of claim where only a set-off issue remained
Types of Bad Faith Cases
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Fail to Reasonably Handle Non-covered Claim
– Bullet Trucking, Inc. v. Glenfalls Ins. Co. (Montgomery Co. 1992), 84 Ohio App.3d 327
– Criticism and disapproval of Bullet
Types of Bad Faith Cases
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Part 5Part 5
Defense Counsel and Insured Client Rights
(Potential Source of Bad Faith)
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Defense Counsel and Insured Client Rights
Tri-partite Relationship: Conflicts of interest can arise when insurer hires an attorney to defend a policyholder.
– settlement
– strategy
– confidentiality
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Defense Counsel and Insured Client Rights Rule of Professional Responsibility 1.8 & comments:
– Defense attorneys owe same duties to the policyholder as any client:
– subject only to insurer’s rights, if any, under the policy Lawyer should provide a “Statement of Insured
Client’s Rights” at the start of the engagement
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Statement of Insured Clients’ Rights
“An insurance company has retained a lawyer to defend a lawsuit or claim against you. This Statement of Insured Client’s Rights is being given to you to assure that you are aware of your rights . . .”
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Statement of Insured Clients’ Rights
2. Directing the Lawyer: Your policy may provide that the insurance company can reasonably control the defense of the lawsuit. In addition, your insurance company may establish guidelines . . . that you are entitled to know. However, the lawyer cannot act on the insurance company’s instructions when they are contrary to your interest.
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Statement of Insured Clients’ Rights
4. Confidentiality: Lawyers have a duty to keep secret the confidential information a client provides, subject to limited exceptions.
However, the lawyer . . . may have duty to share with the insurance company information relating to the defense or settlement . . ..
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Statement of Insured Clients’ Rights
7. Settlement: Many insurance policies state that the insurance company alone may make a decision regarding settlement of a claim. Some policies, however, require your consent . . . .
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Part 6Part 6
Ultimate Responsibility -- Reimbursement of Amounts Paid by
Title Insurers
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Re-imbursement of Amounts Paid by Title Insurers
Title Agent’s Contractual, Statutory & Common Law Obligations
– agency agreements – statute permits handling of escrows (R.C. 3953.23(B))
– Statutory duty to separate accounts – Possible negligence when agent mis-applies escrow funds
– Lashua v. Lakeside Title & Escrow (5th Dist), 2004-Ohio-1728.
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Re-imbursement of Amounts Paid by Title Insurers
E&O Coverage of the Title Agency
– policies vary
– limits and exclusions
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Re-imbursement of Amounts Paid by Title Insurers
Liability of Other Tortfeasors Who Caused the Claims
– title agency employees acting outside scope of duty
– owners or others who provided false affidavit
– must have a deep pocket
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W W
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Richard Porotsky, Esq.Dinsmore & Shohl LLP255 East Fifth Street
Cincinnati, Ohio [email protected]
(513) 977-8256