w w w. d i n s l a w. c o m march 10, 2009 richard porotsky, esq. dinsmore & shohl llp 255 east...

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March 10, 2009 Richard Porotsky, Esq.

Dinsmore & Shohl LLP

255 East Fifth Street

Cincinnati, Ohio 45202

[email protected]

(513) 977-8256

Bad Faith Title Insurance Claims in Ohio, and Ultimate

Responsibility for Paying Claims

© 2009 Dinsmore & Shohl LLP

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?


Part 1Part 1

Types of Claims / How Insurance Disputes Arise


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.



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.



Even if insurer initially accepts risk, insurer is not always "stuck" with the expense

– Liability can be shifted – Part VI below.



And, disputes can arise as to insurance coverage for the claims

– Potential bad faith claims.


Part 2Part 2

Two Bad Faith Case Examples


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)



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 . . .”



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.



After closing:

– Eller claimed right to use billboard

– Title policy issued with billboard exception

– Eller sued DGE

– Stewart (insurer) refused defend



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



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



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.


2nd Bad Faith Example--Easement Dispute--


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).


Easement Dispute

Insurer refused to make a complete defense

– Instead, under reservation of rights, paid 1/3 of defense

– Ms. Brown prevailed versus Stepath


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


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


Part 3Part 3

Insurance Principles Applicable to Title Insurance Claims


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


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


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)



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.



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




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.


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


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


The Insurer’s Responsibilities vis-à-vis the Policyholder – Reasonable Investigation & Basis for Denial (Duty of Good Faith)


Part 4Part 4

Ohio Bad Faith Law


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


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


The Current Bad Faith Standard in Ohio Zoppos's "reasonable justification" standard

─ Similar to negligence

─ Does not warrant punitive damages or atty fees


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")


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)


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


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


The Current Bad Faith Standard in Ohio Relationship of Punitive Damages to Bad Faith

─ The two standards are separate and distinct


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)


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.


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



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



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


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


Bad Faith Refusal to Pay a Covered Claim

– Regardless of excess liability

– Punitive damages possible if proven intent or malice



Bad Faith Failure to Defend, Even if Indemnity Is Ultimately Disproven

– Potential for establishing punitive damages



Bad Faith Delay in Payment of a Covered Claim

– Failure to pay undisputed portion of claim where only a set-off issue remained



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



Part 5Part 5

Defense Counsel and Insured Client Rights

(Potential Source of Bad Faith)


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


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


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 . . .”



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.



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 . . ..



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 . . . .


Part 6Part 6

Ultimate Responsibility -- Reimbursement of Amounts Paid by

Title Insurers


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.



E&O Coverage of the Title Agency

– policies vary

– limits and exclusions



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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Richard Porotsky, Esq.Dinsmore & Shohl LLP255 East Fifth Street

Cincinnati, Ohio [email protected]

(513) 977-8256

w w w. d i n s l a w. c o m march 10, 2009 richard porotsky, esq. dinsmore & shohl llp 255 east...

Documents

dinsmore shohl llp n

dinsmore shohl llp billboard

leasing dispute n billboard

digeronimo slide

exceptions n rights

n sellers affidavit

risk claims

billboard title policy