When an Insurer Fulfills its Promises There Can Never be “Bad Faith”

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It is Contumacious to Sue an Insurer Who Fulfills all Promises Made by its Policy

An insurance contract is nothing more than mutual promises made by the insurer to the insured and from the insured to the insurer. When an insurer keeps all of the promises it made, settles a claim made against its insured before suit is filed, it has fulfilled all of the promises made by the policy.

In NL Corp., Inc. v. Seneca Specialty Insurance Company, Appellate Case No. 28927, 2021 Ohio 1610, Court Of Appeals Of Ohio Second Appellate District Montgomery County (May 7, 2021) NL sued its insurer for bad faith after it settled a wrongful death claim and obtained a release in favor of NL of all potential claims. Regardless, NL sued only to see Seneca obtain a summary judgment requiring NL to pay its deductible as it promised.

NL Corp., Inc. appealed from the judgment. NL contended that Seneca’s wrongful conduct in handling the matter required NL to retain an attorney, and that Seneca refused to reimburse NL for the attorney’s fees and costs. NL also appealed from the trial court’s granting summary judgment on Seneca’s counterclaim for the deductible owed under the insurance policy, which NL had refused to pay. Seneca contended that, because it paid the claim, NL was obligated to pay the deductible.

Factual Background

NL operates a nightclub in the Dayton area. On May 11, 2014, a patron at the club, Adam Bishop, fell in the parking lot after a confrontation with club security and struck his head on the pavement; he died several days later. The police took witness statements and prepared a police report, and the police were given surveillance video that had recorded Bishop’s fall.

Fearing criminal and civil liability, NL retained attorney Scott Jones. About a month after the incident, NL reported the incident to its insurance company, Seneca. NL, after months of delay and refusal to cooperate, finally gave Seneca the surveillance tape. Seneca advised its insured outlining its preliminary coverage position that it concluded the $250,000 assault-and-battery limit under the policy may apply to the claim and indicated that NL had not cooperated with Seneca’s investigation of the claim.

Seneca maintained that it had no obligation to pay for counsel for NL, because no suit had been filed. Nevertheless, at Jones’s insistence, Seneca appointed attorney David Ross to represent NL in the investigation. But NL was not satisfied. It wanted separate counsel, unbeholden to Seneca, because NL was concerned about a potential conflict of interest between it and Seneca in the event that the Bishop family brought a claim for an intentional tort or over-the-limit coverage questions arose.

Bishop was a resident of Missouri at the time of his death, and under Missouri law, a settlement of a wrongful-death claim had to be approved by a Missouri probate court. A probate case was opened, and on December 15, 2015, the Bishop family’s settlement agreement with Seneca was approved by the court. Seneca paid the family the agreed $250,000 under the policy’s coverage for assault and battery.

After the settlement NL sued Seneca, claiming that Seneca claiming it had breached the insurance policy by refusing to reimburse it for it’s independent counsel, Jones’s, fees and costs. Seneca counterclaimed that NL had refused to pay the $5,000 deductible that it owed under the policy after Seneca made the payment to the Bishop family.

Seneca moved for summary judgment on NL’s claims and on its counterclaim for payment of the deductible. The trial court sustained Seneca’s motion.

Analysis

Other than its failure to mention the affidavit of NL’s expert there was no evidence suggesting that the trial court did not consider the affidavit. Regardless the court had good reason not to consider the expert’s opinion since an expert cannot properly give an opinion on the law that applies in a dispute.

Breach Of Contract, Bad Faith, And The Deductible

NL claimed that Seneca breached the insurance policy by not providing NL an adequate or continuing defense, not adequately and timely investigating the incident and coverage obligations, and refusing to reimburse NL for the attorney fees and costs that it incurred in using independent counsel to protect its interests.

Applying the contract language Seneca agreed to pay those amounts that NL became legally obligated to pay as damages because of Bishop’s injury. Seneca reserved the right and duty to defend NL against any “suit” seeking those damages. In many places, the insurance contract distinguishes between a “suit” and a “claim.” With respect to the Bishop occurrence, Seneca’s contractual duty to defend NL was never triggered because there was never a “suit.” There was only a claim made directly to Seneca by the Bishop family. The probate case in Missouri was a “civil proceeding,” but it did not seek damages, being merely a proceeding to approve the settlement. Therefore, Seneca was not obligated to appoint counsel for NL.

Seneca did not have a contractual duty to reimburse NL for the fees and costs that NL incurred by retaining Jones as its attorney before the occurrence was even reported to Seneca. Under the insurance contract, Seneca agreed to pay reasonable expenses incurred at its request. However, Seneca never asked NL to hire an attorney. The policy, by its terms, NL agreed that it would not voluntarily incur any expense “without our [Seneca’s] consent.” The insurance contract here did not require Seneca to provide NL a defense until there was a lawsuit for damages. While NL’s hiring of an attorney to investigate and prepare for potential litigation might have been a good idea, it was not something for which Seneca was obligated to pay.

A “suit” was needed to trigger Seneca’s obligation to assign counsel for a defense. There was no “suit.” Seneca had no contractual duty to defend NL and no contractual obligation to reimburse NL for the attorney that NL voluntarily retained.

Bad-Faith Claim

The Court of Appeal saw nothing unreasonable about Seneca’s refusal to provide a defense since there was no suit.  NL presented no evidence that anything Seneca did was arguably unreasonable, given the circumstances and undisputed terms of the contract.

The Deductible

As to Seneca’s counterclaim for the deductible that it said NL owed under the insurance contract, NL argued that Seneca’s failure to reimburse it for attorney fees and costs constituted a material breach that relieved NL from paying the deductible.

There was no dispute that an endorsement required NL to pay Seneca a $5,000 deductible. Seneca settled the Bishop family’s claim for the full amount available under the policy’s assault-and-battery coverage, triggering NL’s obligation to pay and protected NL from a judgment in excess of the policy limit. Since the Court of Appeal concluded that Seneca had no obligation to reimburse NL for its counsel’s fees the deductible was owed.

NL failed to produce summary judgment evidence to create a genuine issue of material fact as to whether Seneca breached the insurance contract, whether Seneca acted in bad faith, or that NL did not owe the deductible.  Seneca was not obligated to pay the fees and costs of the attorney that NL voluntarily retained. Further, Seneca did not act in bad faith in its handling of the matter. And, because Seneca paid the claim, NL is obligated to pay the required deductible.

ZALMA OPINION

An insurer that – with little assistance from its insured – kept all the promises made by it in the policy of insurance should be praised for its conduct not sued. But since no good deed goes unpunished it was sued for breach of contract and bad faith by the insured it protected. The Ohio Court properly refused to allow NL to bludgeon its insurer to pay for actions it did not agree to pay by making a claim of bad faith. It failed because the court actually read the policy and found that Seneca did exactly what it promised to do and should have been rewarded for its conduct not accused improperly of wrongdoing.


© 2021 – Barry Zalma

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 52 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 53 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.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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