Avoid Penalties: Only Assert Bona Fide Disputes!

Denial Based on Reasonable Interpretation of Policy Wording Avoids Penalties

The plaintiff, Jeffrey Patzius, sought sanctions pursuant to section 155 of the Illinois Insurance Code (Code) (215 ILCS 5/155 (West 2016)) against the defendant, American Family Insurance, for what he alleged were the defendant’s vexatious and unreasonable delay in making payment on the plaintiff’s insurance claim. On August 7, 2018, the trial court denied the plaintiff’s request for sanctions, finding that, because there was a bona fide dispute concerning the amount of the loss for which coverage was available, an award of sanctions under section 155 was inappropriate.

BACKGROUND

This matter involves an insurance claim arising out of a January 27, 2016, electrical fire that occurred at rental property owned by the plaintiff in Benld, Illinois. The plaintiff’s son, David Patzius, rented the residence from the plaintiff. Although the fire damage was limited to the bathroom of the residence, the plaintiff claimed that the residence was uninhabitable as a result of the fire and that David and his family had to move out of the home. The plaintiff reported the fire to the defendant, his insurer, and an investigation ensued. During the investigation, it was discovered that the entire residence needed to be completely rewired to comply with the city’s building code. The parties disputed the limitations of the code upgrade coverage.

Based on this policy language, the insurer’s adjuster – Clevlen – indicated that the code coverage only applied to the affected area of the residence (the bathroom) and that the rewiring of the house (excluding the bathroom) would not be covered as part of the damage claim. He also indicated that the cost to rewire the bathroom totaled $417.56. He advised that it was determined that the plaintiff’s total loss for the fire damage to the bathroom was $3808.20. A check was issued to the plaintiff in that amount.

At the request of the insured the trial court entered an order appointing retired Judge Lloyd Cueto as the appraisal umpire in this property-damage claim. On December 22, 2017, the appraisal umpire issued an appraisal award, finding that the plaintiff’s total loss was $55,564.91 (the plaintiff’s net loss was $51,756.71 as $3808.20 had already been paid by the defendant).

Defendant filed a motion to vacate the appraisal award, arguing that contractual disputes concerning coverage and terms within an insurance policy were considered legal disputes that could not be determined by an appraisal award. Thus, the defendant contended that an appraisal award could not determine coverage and could not bind the defendant to making a payment that it was not required to pay under the insurance policy.

The plaintiff filed a petition to confirm the appraisal award, requesting that the trial court adopt the umpire’s appraisal award of $51,756.71. The trial court entered an order granting the defendant’s motion to vacate the December 26, 2017, appraisal award due to the deficiencies in the notice provided to the defendant. The court then remanded the matter back to the parties to properly participate in the appraisal and arbitration process. Afterward retired Judge Cueto again issued his appraisal award, finding that the net loss was $51,756.71.

The plaintiff sued and contended that the defendant was statutorily required to pay the following sanctions: a 60% penalty, his attorney fees, prejudgment interest, the plaintiff’s $277 filing fee, $1800 for the appraisal umpire’s fee, and $1600 for the plaintiff’s appraiser’s fee.

The plaintiff had to pay for the remaining repairs, which included rewiring the house, out of his own pocket because the claim was not resolved in a timely manner. The plaintiff’s counsel contended that the plaintiff had “code coverage” but did not admit the insurance policy into evidence; it was the plaintiff’s position that having “code coverage” meant – contrary to the wording of the policy – that the defendant agreed that the cost of bringing the entire property up to code was covered under his policy.

The only question before the trial court was whether the defendant was liable for penalties and costs for refusal to pay the claim in a timely manner. The trial court entered an order, denying the plaintiff’s request for sanctions.

The trial court found that, assuming the defendant was under an obligation, either statutory or contractual, to tender payment of the appraisal award within 30 days from the issuance of the award, the defendant had not violated that provision. The court concluded that the defendant made a good faith effort to pay the appraisal award within 30 days as evidenced by the draft issued originally on June 14.  The court concluded that the defendant asserted a bona fide defense concerning its obligation to pay for the cost of rewiring the entire residence, and it was not unreasonable to take the position that the fact that the wiring in the house was not code-compliant was a problem that existed prior to the fire and was not caused by a fire that was limited to one bathroom. The court concluded that there was a bona fide dispute concerning the amount of the loss for which coverage was available, and an award of sanctions under section 155 would be inappropriate.

Because the court concluded that the defendant had at least a valid argument, it stood by its decision that the defendant did not engage in unreasonable and vexatious conduct and denied the plaintiff’s posttrial motion.

ANALYSIS

Section 155 does not create a duty to settle a claim, and a delay in settling does not violate the statute where the delay results from a bona fide dispute regarding coverage. Section 155 applies to those situations in which the insurer vexatiously delays or rejects legitimate claims and was meant to discourage insurers from using their superior financial position by delaying payment of legitimate contractual obligations to profit at the insured’s expense. An insurer does not violate section 155 merely by unsuccessfully challenging a claim for coverage.

Thus, where a bona fide dispute concerning coverage exists, section 155 sanctions are inappropriate. A bona fide dispute is one that is real, actual, genuine, and not feigned.  The trial court did not abuse its discretion in finding that the defendant’s conduct in settling the claim was not vexatious and unreasonable; the court did not abuse its discretion in finding that the defendant had a bona fide defense to coverage.

The evidence at the hearing indicated that the fire was limited to the bathroom but that the entire residence needed to be rewired to be code compliant. The defendant, finding that the insurance policy did not cover the cost of the rewiring because that issue existed before the fire, promptly tendered payment to the plaintiff for the cost to repair the bathroom, which included the cost of rewiring the bathroom.

Following the initial claim investigation and throughout the appraisal process, the defendant maintained its position that the rewiring was not covered under the policy. The defendant based its position on the language contained in the insurance policy. As noted by the trial court, it was not unreasonable for the defendant to take the position that the fact that the wiring in the house was not code compliant was a problem that existed prior to the fire and was not caused by a fire that was limited to one bathroom. The appellate court concluded that the defendant had asserted a bona fide defense that had a rational basis in fact; the plaintiff failed to establish that the defendant did anything more than have an honest dispute about its liability under the insurance policy.

Moreover, the trial court did not abuse its discretion in finding that the delay in payment after the appraisal award was not vexatious and unreasonable as the defendant made a good faith effort to make the payment within 30 days of the appraisal award, and any delay was not the sole fault of the defendant.

The full payment was made after the defendant had asserted its disputed coverage defense and after the appraisal determination was issued. The trial court did not abuse its discretion in finding that the plaintiff was not entitled to sanctions pursuant to section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2016)) for the defendant insurance company’s delay in making payment on his insurance claim where the defendant had a bona fide defense regarding coverage.

ZALMA OPINION

The statutory claim for penalties made in this case are a variation on damages available for the tort of bad faith. Like the genuine dispute and fairly debatable defenses available in other states for breach of the covenant of good faith and fair dealing, the bona fide defense protected the insurer from the statutory penalties which were asserted after it paid a claim it probably did not owe for rewiring the entire house that were excluded by the policy wording.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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