w w w. d i n s l a w. c o m november 7, 2008 bad faith insurance claims in ohio richard porotsky,...

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November 7, 2008

BAD FAITH INSURANCE CLAIMS IN OHIO

Richard Porotsky, Esq.

Dinsmore & Shohl LLP

255 East Fifth Street

Cincinnati, Ohio 45202

(513) 977-8256

© 2008 Dinsmore & Shohl LLP

Part 1Part 1

Emerging Issues and Current Laws


Does proof of bad faith entitle the policyholder to attorney fees?

Does bad faith require proof of intentional denial?

Can policyholders always obtain privileged and work product materials in discovery?


The Current Bad Faith Standard in Ohio Zoppo v. Homestead Ins. (1994), 71 Ohio St.3d 552, syl

¶1:

─ "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 therefor."

when assessment of coverage is being considered


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 Debateable"

─ "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 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)

─ Cincinnati Ins. Co. v. ACE INA Holdings, Inc. (1st Dist), 175 Ohio App.3d 266, 282, ¶¶57-60 (summary judgment for 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

─ Seems logical, many courts agree

─ A few courts still seem to allow the possibility

Handling claim improperly or treating badly

Controversial and difficult to establish


The Current Bad Faith Standard in Ohio Pre-Zoppo Standards and Lingering Effects

─ Motorists Mutual Ins Co v. Said (1992), 63 Ohio St.3d 690, 590 N.E.2d 1228

─ when the insurer "intentionally" refuses to satisfy a claim or reckless indifference

Zoppo: "Intent is not and has never been an element of the reasonable justification standard."


The Current Bad Faith Standard in Ohio Some courts quote old standards

─ Goins v. Stewart (5th Dist.), 2008-Ohio-4206, ¶45: (requires that the insurer . . . intentionally refuses to satisfy the insured's claim).

─ Mentor Chiropractic v. State Farm (Lake Co. 2000), 139 Ohio App.3d 407: (must prove refusal to pay a claim “totally arbitrary and capricious”).


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

─ Zoppo did not expressly lower standards for punitive damages and attorney fees

─ That standard is separate and distinct


The Current Bad Faith Standard in Ohio Required proof for punitive damage & attorney fees

─ Malice, aggravated or egregious fraud, oppression, or insult. Zoppo, 71 Ohio St.3d at 557

─ "Malice" will often be the easiest to prove

─ conscious disregard for rights and

─ great probability of causing substantial harm


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 certain key suspects, verify alibis, follow up with witnesses,or go Pa.

─ This can also be sufficient for malice


The Current Bad Faith Standard in Ohio Costly Mistake: Goodrich v. Commercial Union Ins

(9th Dist. 2008)

─ Failed to object to jury instructions

─ On appeal, too late

─ Award of $20 million attorney fees despite no proof of malice or punitive damages


Comparative Bad Faith & Related Defenses

"Reasonable justification" - 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

─ Other jurisdictions use this.

─Kransco v. American Empire Surplus Lines Insurance Co. (Cal. 2000), 97 Cal.Rptr.2d 151, 162



Non-cooperation and related defenses

─ Insurers can and should focus upon the policyholder's conduct.

Fraud by the policyholder

Failure to provide timely notice of a claim

Non-cooperation in the investigation or defense



Cooperation required versus third parties

─ Cooperate in the defense or investigation

─ Fair and frank disclosure of information

─ Cannot condition cooperation



Cooperation as to first-party claims—example─ Johnson v. Allstate Insurance Co. (Trumbull Co.), 2002-

Ohio-7156

─ Policyholder provided some financial info + inspection

─ Refused to allow the insurer to inspect a damaged washer, dryer, and computer, claiming discarded

─ Non-cooperation "materially and substantially prejudiced" [the insurer's] ability to properly evaluate


Statutory Bad Faith and Related Law

Statutory Bad Faith

─ R.C. § 1343.03 (interest)

─ R.C. § 3901.20 - .21 (unfair, deceptive acts in business of insurance)

─ O.A.C. §§ 3901-1-07 and § 3901-1-54 (same)

─ R.C. § 1345.01 (Consumer Sales Practices)


Latest Developments on Discovery of Privileged, Work Product Materials Ground-breaking decision, Boone v. Vanliner Ins.

Co. (2001), 91 Ohio St.3d 209

─ “entitled to discover claims file materials containing attorney-client communications related to the issue of coverage that were created prior to the denial of coverage."


Latest Developments on Discovery of Privileged, Work Product Materials Work product doctrine—some Courts find it does

not necessarily protect materials

─ Garg v. State Automobile Mut. Ins. Co. (2nd Dist. 2003), 155 Ohio App.3d 258, ¶16

─ Expands Boone


Latest Developments on Discovery of Privileged, Work Product Materials Other courts fully protect work product

─ Goodrich Corp. v. Commercial Union Ins Co., (9th Dist.), 2008-Ohio-3200, ¶12

─ Rejected Garg's expansive view


Latest Developments on Discovery of Privileged, Work Product Materials Garg's basis for expansion

─ So long as they "may cast light on whether the insurer acted in bad faith."


Latest Developments on Discovery of Privileged, Work Product Materials Example: Scotts Co. LLC v. Liberty Mutual (May 18,

2007), S.D. Ohio No. 2:06-CV-899 (extended Boone)

─ Where the alleged bad faith involves conduct after the denial, the relevant period can be extended

Alleged ongoing campaign to mislead

─ Boone not limited to documents in claim file

Privileged documents outside claim file relevant


Latest Developments on Discovery of Privileged, Work Product Materials Procedural Protections

─ Boone permits delayed disclosure, upon motion

Stay, if release will inhibit the ability to defend

─ Some courts require in camera inspection

─ Immediately appealable


Latest Developments on Discovery of Privileged, Work Product Materials Example re stay and bifurcation: Maxey v. State

Farm (S.D. Ohio 2008), F.Supp.2d

─ Policyholder argued limited resources, extended, duplicative proceedings

─ Court agreed "unnecessary duplication, delay, and expense & does not serve . . . judicial economy.”

─ Denial of stay / bifurcation


Latest Developments on Discovery of Privileged, Work Product Materials Example re stay & bifurcation: Poneris v. Pa. Life

Ins. Co. (Oct. 18, 2007), S.D. Ohio No. 1:06-cv-254

─ Allowing bad faith discovery without bifurcation and without proof of coverage

─ “Sixth Circuit has not specifically foreclosed” bad faith tort claim where contract claim failed


Part 2Part 2

Identifying the Type of Underlying Claim and the Full Damages at Issue


Can third parties claim bad faith?

How far can an insurer’s exposure go beyond policy limits?

Does an insurer ever have to pay for punitive damages against the policyholder?


Differences In Insurer Duties Between First and Third Party Claims First party:

─ policyholder against insurer

Third party:

─ by others alleging liability on the part of the policyholder


Differences In Insurer Duties Between First and Third Party Claims Third-Party Bad Faith Claims?

─ Ohio law: have no duty of good faith vis-à-vis third party


The Insurer’s Responsibilities vis-à-vis the Policyholder Reasonable Justification for Denial

─ Including balanced investigation

─ Must accounts for the interests of policyholder


The Insurer’s Responsibilities vis-à-vis the Policyholder Prompt and Diligent Defense Against a Complaint

─ Must defend against all claims which potentially or even arguably may be covered

─ Duty to defend is broader than duty to indemnify


The Insurer’s Responsibilities vis-à-vis the Policyholder Duty to Defend--One claim-all claims rule:

─ Preferred Mutual Ins. Co. v. Thompson (1986), 23 Ohio St. 3d 78, 80

─ Must defend "both" a covered negligence claim and noncovered intentional tort claim

─ Erie Ins. Exchange v. Colony Development Corp. (Franklin Co. 1999), 136 Ohio App.3d 406, 413 (covered damage to shrubs mixed with non-covered))


The Insurer’s Responsibilities vis-à-vis the Policyholder Duty to Defend: "Scope of the pleadings" rule

─ City of Willoughby Hills v. Cinti Ins. Co. (1984), 9 Ohio St.3d 177, syl.

─ "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"


The Insurer’s Responsibilities vis-à-vis the Policyholder But, the duty to defend is not limitless

─ Cincinnati Ins. Co. v. Anders, 99 Ohio St. 3d 156, 2003-Ohio-3048, at §§ 21 & 51:

─ If conduct in the complaint is indisputably outside the scope of coverage, there is no duty

Homeowner's negligent failure to disclose defect to purchasers not an accident and did not damage the home


The Insurer’s Responsibilities vis-à-vis the Policyholder Right to be Timely Notified of Reservation of Rights

─ Appropriate notice

─ “Potential conflict of interest exists" whenever an insurer assumes control but also "intends to challenge its duty to indemnify

─ Policyholder may be the one to pay the judgment


The Insurer’s Responsibilities vis-à-vis the Policyholder Insurer may waive its coverage defenses it defends

absent reservation of rights

─ Based upon whether the policyholder prejudiced

─ Dietz-Britton: waited two years before it reserved its rights.

─ Waived ability to rely upon exclusion.


Bad Faith Case Study: Advertising Injury Relating to Infringement of Intellectual Property Rights

Westfield Companies v. O.K.L. Can Line (1st Dist. 2003), 155 Ohio App.3d 747

Denied a defense to its local policyholder

Conducted no interviews or other active investigation

Misread the Complaint


“ We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.”

“ We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies.”

“We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.”

“We will have the right and duty to defend the insured against any ‘suit’ seeking those damages.”

‘98 ISO Form: Coverage B Personal and Advertising Injury Liability


Elements to prove coverage for IP claims under “Advertising Injury” provisions

(1) an enumerated offense

(2) advertising activity

(3) causal connection

(4) no applicable exclusions

Westfield v. OKL, (1st Dist.) 2003-Ohio-7151, ¶ 12;


COMPLAINT FILED APRIL 2000

Plaintiff Alcoa alleges:

1. This is an action for patent infringement arising under the Patent Laws of the United States, 35 U.S.C. §§ 271 et seq.; for federal unfair competition arising under the Trademark (Lanham) Act of 1946, as amended, 15 U.S.C. §§ 1121 and 1125; and for unfair competition under the common law of the State of Illinois.

***

3. Defendant . . . (“OKL”) . . . is engaged in the business of manufacturing, marketing, servicing, and selling equipment for use with machinery used in the production of aluminum cans. . . .


9. By about 1993, Alcoa had developed and was manufacturing, marketing, and selling retrofit products, including the ribbed, swept-box shaped, liquid bearing ram support, for converting can bodymaking machines of previous design into machines conforming to the claimed inventions of the ‘167 and ‘131 patents. . . .

***

10. Alcoa’s can bodymaking machines containing the ribbed swept-box shaped fluid bearing ram support and its retrofit and remanufactured products were and are appropriately marked with the ‘167 and ‘131 patent numbers pursuant to 35 U.S.C. § 287.


12. OKL has manufactured and sold . . . retrofit products, and particularly the ribbed swept-box shaped liquid bearing ram support, without license, for the purpose of converting can bodymaking machines of previous design into conformance to the claimed inventions of the ‘167 and ‘131 patents. . . .

***

13. The retrofit and remanufactured liquid bearing ram supports marketed and sold by OKL and Palmer-Tech are not marked with any OKL insignia or other marking identifying OKL as the source of the products. The OKL liquid bearing ram supports are confusingly similar in appearance, shape, and design to the liquid bearing ram support marketed by Alcoa . . .


COUNT I

PATENT INFRINGEMENT -- ‘167 PATENT

14. Alcoa realleges and incorporates by reference ach of the allegations of Paragraphs 1-13 above as if fully set forth herein.

***


COUNT III

FEDERAL UNFAIR COMPETITION

24. Alcoa realleges and incorporates by reference ach of the allegations of Paragraphs 1-13 above as if fully set forth herein.


27. The OKL retrofit and remanufactured liquid bearing ram support products, by reason of their identical distinctive features and similar overall configuration, create a false description, representation, or designation of origin, and results in either actual confusion or a likelihood of confusion among members of the purchasing public as to the origin of OKL liquid bearing ram supports, in violation of Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a).

28. Aware of Alcoa’s trade dress rights and in willful disregard thereof, OKL intentionally and illegally copied the distinctive features and configuration of Alcoa’s liquid bearing ram support.


29. As a result of OKL’s and Palmer-Tech’s wrongful acts, Alcoa has been damaged by loss of sales, revenues, and profits, and loss of business reputation and diminished goodwill among the purchasers and potential purchasers of OKL retrofit and remanufactured liquid bearing ram supports. . .

30. Upon information and belief, OKL and Palmer-Tech will continue their infringement…


1998 ISO Form: Advertising Injury

“14. “Personal and advertising injury” means injury, including consequential “bodily injury”, arising out of one or more of the following offenses:

* * * d. Oral or written publication of material that slanders or libels a

person or organization or disparages…; e. Oral or written publication of material that violates a person’s

right of privacy; f. The use of another’s advertising idea in your

“advertisement”; or g. Infringing upon another’s copyright, trade dress or slogan in

your ‘advertisement’.”


Trade-Dress and Advertising “Trade-dress infringement necessarily involves advertising”

– To cause the customer confusion required under the Lanham Act, one must communicate to intended customers via use of the dress

To the extent that additional “advertisement” is required to trigger coverage, a web page or any traditional printed or broadcast notice qualifies

Westfield v. OKL, at ¶ ¶ 15-17.


Westfield v. OKL result

– Required defense of trade dress and patent suit

– Web site and the marketing allegations triggered defense obligations for advertising injury where enumerated claim existed


Bad Faith Case Study

OKL’s Insurer Found to be Wrong

─ Failed to investigate, applied wrong policy

─ Erroneous argument as to intentional acts,

─ citing authority reversed by Ohio Supreme Court

─ Court awarded the policyholder attorney fees incurred to establish duty to defend


Bad Faith Case Study

First District affirmed the award of OKL’s attorney fees

─ "stubborn propensity for needless litigation."

─ Sorin v. Bd. of Edn. (1976), 46 Ohio St.2d 177:

─ when losing party acts in "bad faith, vexatiously, wantonly, obdurately, or for oppressive reasons."


Bad Faith Case Study: Goodrich Corp. v. Commercial Union Ins. Co. (9th Dist. 2008)

One insurer guilty of bad faith

One insurer absolved of bad faith

Difference in conduct – diligence and investigation


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)

– Punitive damages awarded in underlying case ?

Types of Bad Faith Cases


Bad Faith Refusal to Pay a Covered Claim

– Regardless of excess liability

– Punitive damages due to unreasonable handling

– Distinction between tort liability and punitive damages



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

– Potential for establishing punitive damages

– Lack of good faith in “processing” a claim

– Opinion from coverage counsel aids insurer



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

– Possibly limited to intentional failure to determine whether lawful basis to deny

Or limited to contractual limitations periods



Determining the Insurer's Exposure

Enforcement of Policy Limits

─ Exposure may not be limited to the policy's limit

─ Even absent malice or intent, an insurer could be responsible for more

─ Failure to settle third party claim

─ Responsible for the entire verdict, without regard to policy limits



Punitive Damages

─ If the insurer acted with malice or other intent

─ Punitive damages in policyholder underlying suit

─ Whether the insurer’s excess liability includes liability for those punitive damages?

─ Is it distinct from whether punitive are insurable?



Other States

─ Carpenter v. Automobile Club Interins, Exch. (8th Cir. 1995), 58 F.3d 1296 (Arkansas law) (punitive damages awarded in underlying case.)

─ Paid by insurer; insured "made whole" for "consequential damages” of bad faith



The majority of courts appears to hold that underlying punitive damages cannot be recovered

─ Soto v. State Farm (Ct. App. 1994), 613 N.Y.S.2d 352

─ “still directly attributable to the insured’s immoral and blame-worthy behavior.”



Ohio on Coverage for Punitive Damages

─ Soto closer to the reasoning of Ohio courts

─ Punitive damages have been held uninsurable

─ “Because punitive damages are awarded to punish and deter the tortfeasor . . . there is a different and much stronger policy interest against insurance coverage which would indemnify the tortfeasor against punitive damages.” Harasyn v. Normandy Metals, Inc. (1990), 49 Ohio St.3d 173, 176 & n.3



Attorney Fees and Costs

─ If the policyholder proves bad faith and punitives

─ Some courts may allow other standards

─ Before 1999, Ohio statutory law declaratory judgment

─ It is still arguable that ORC 2721.16 does not supersede the prior authority, Trainor and Allen



Emotional Distress

─ May open the doorway to other tort-based damages, Eastham v. Nationwide (1st Dist. 1990), 66 Ohio App.3d 843


Determining the Insurer's Exposure Interest

─ Prejudgment Interest required under R.C. 1343.03(A)

─ From the time the amount became due and payable.

Goodrich Corp. v. Commercial Union Insurance Co., et al. (9th Dist.), 2008-Ohio-3200, ¶¶ 51-54

"trial court had no discretion to deny Goodrich's request for prejudgment interest."

Prejudgment interest amounted to $20 million

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

Cincinnati, Ohio 45202(513) 977-8256

w w w. d i n s l a w. c o m november 7, 2008 bad faith insurance claims in ohio richard porotsky,...

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