Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe

Vol. 7, Iss. 3
April 11, 2018


The Great Bad Faith Myth

Some policyholder counsel have a simple test for whether an insurer committed “bad faith”: anything done by the insurer short of exactly what he or she demanded. The policyholder lawyers in this camp would be well-served to read a state’s actual definition of bad faith. Any state will do. If so, they would see that, in real life, proving that an insurer acted in bad faith, especially when it comes to a claims decision, is a pretty tall order. Bad faith generally requires some pretty egregious conduct on the insurer’s part. But even if this ilk of policyholder lawyers saw this they probably still wouldn’t change their tactic.

It is not unlike a plaintiff’s attorney, with a simple negligence case, who opens up a thesaurus to the word “evil” when drafting a complaint. He or she just can’t help themselves from describing a wayward banana peel as having been the result of conduct that was malicious, wicked and depraved.

In any event, what these huff and puff policyholder counsel don’t understand, or can’t accept, or know, but pretend isn’t so, is that when it comes to an insurer’s claim denial, bad faith is very hard to prove. Even when a court determines that the insurer was flat out wrong, it is still very unlikely that the insurer will be found to have acted in bad faith. The various state standards, for proving bad faith, are just too high. As a result, simply being wrong in a claim denial is rarely bad faith by an insurer. [An insurer that fails to settle a claim, where there was a demand within limits, is a different kind of bad faith, and not what’s being addressed here.]

This reality was on display in Dominick’s Finer Foods v. Indiana Insurance Company, No. 11CH1535 (Ill. Ct. App. Mar. 1, 2018). In simple terms, the court held that the insurer’s claim denial was wrong. Nonetheless, the court had no trouble dismissing the insured’s bad faith claim.

At issue in Dominick’s, not just fine, but Finer Foods, was coverage for Dominick’s, for a claim brought by the estate of an individual, who was shot and killed in the parking lot outside Dominick’s in Chicago. Domininck’s sought coverage from a liability insurer, Netherlands Insurance Company. The insurer disclaimed coverage for a defense. Dominick’s, and others, reached a settlement in excess of $1 million and filed an action seeking a declaration of coverage and damages for the insurer’s alleged bad faith conduct. The trial court ruled for Netherlands. Dominick’s appealed.

Skipping some complexity, what matters for purposes here is this. Dominick’s was a tenant of the Kennedy Plaza Shopping Center. Dominick’s was an additional insured on a liability policy issued by Netherlands Insurance to Kennedy Plaza that provided as follows:

Such person or organization [Dominick’s] is an additional insured only with respect to liability arising out of:

a. Your [Kennedy Plaza] ongoing operations performed for that person or organization; or
b. Premises or facilities owned or used by you [Kennedy Plaza]. ***

The allegations against Dominick’s boiled down to this: Dominick’s knew that there was criminal and gang activity going on near its store and failed to warn patrons and failed to provide adequate security.

Dominick’s argued that it was owed additional insured coverage because its liability was arising out of Kennedy Plaza’s operations performed for Dominick’s or the premises or facilities owned by Kennedy Plaza.

The court held that Dominick’s was entitled to coverage on the basis that “the premises-liability theory fell within the coverage language for ‘liability arising out of [the] premises.’ The sole basis for imposing a legal duty on Dominick’s under this premises-liability theory was its relationship to the ‘premises’—its status as the occupier of the property, on whom both the common law and the Premises Liability Act impose a duty of care. The ‘premises’ is thus directly and indispensably tied to the alleged legal duty on the part of Dominick’s in this case, and duty is a required element of its ultimate ‘liability’ to the plaintiffs in the Gallo litigation.”

The court rejected the insurer’s argument to the contrary, which the court described as a “floodgates argument.” As the insurer saw it, the court’s interpretation would lead to “nearly unlimited” coverage. For example, “‘Dominick’s might fire an employee in the parking lot,’ ‘might discriminate against a customer based on race or age’ there, or ‘might wrongfully use someone’s logo’ on the premises—and all of those acts, under this interpretation, would be covered under the policy.”

However, the court was not persuaded: “[T]hese examples provide the perfect frame of reference for why the interpretation we adopt is reasonable. In those examples given above, even if those events happened to occur on the ‘premises,’ the ‘liability’ of Dominick’s for those acts would have nothing whatsoever to do with the premises. A claim for wrongful termination would not base ‘liability’ on the premises at 3300 West Belmont Avenue but, rather, on the store’s status as an employer and its violation of some state or federal employment law. It would make no difference, from a ‘liability’ standpoint, whether a Dominick’s official fired the employee inside the store, in the parking lot, at a coffee shop down the street, by e-mail, or at a visit to the employee’s home.” (emphasis added).

The court also rejected the insurer’s argument that “the phrase ‘arising out of the premises’ in an insurance policy means that the loss occurred due to some defect in the premises,’ and because no such defect was alleged regarding the premises here, the complaint did not implicate coverage.”

So the insurer lost and it was obligated to provide coverage to Dominick’s for a defense and indemnity.

The opinion contains a lot more analysis of the “premises” issue, but I omitted it, as it is not relevant to the real point to be made here: despite being wrong on the coverage question, the court held that the insurer did not act in bad faith, which, under Illinois law, requires that the insurer’s conduct was “vexatious and unreasonable,” being based on a totality of the circumstances determination.

The court explained: “[Illinois Insurance Code] [S]ection 155 fees and penalties are not awarded simply because the insurer refuses to settle or was unsuccessful in litigation. Where there is a bona fide dispute concerning coverage, the assessment of costs and statutory sanctions is inappropriate, even if the court later rejects the insurer’s position. Though we have disagreed with Netherlands’s interpretation of the policy language at issue, we do not believe that its position was so unreasonable as to warrant damages under section 155. There is a difference between disagreeing with a party’s position and finding that position so untenable as to be unreasonable and evidence of bad faith. We have held that Netherlands’s position was too narrow to be the only reasonable construction of the policy, in light of the broad language ‘arising out of’ and the broad term ‘liability,’ but it does not follow that Netherlands’s position was, itself, unreasonable. The fact that an able and experienced trial judge agreed with Netherlands is further evidence that Netherlands's arguments and conduct do not warrant sanctions.” (emphasis added).

Knee-jerk bad faith policyholder counsel would be well-served to take note: an insurer’s position can be too narrow to be the only reasonable construction of a policy, but, not itself, unreasonable, to serve as evidence of bad faith.
Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved