Insurance Bad Faith in Oregon

Posted on March 21, 2008 in Our Blog

Addendum:

Eastwood v. American Family Mutual Insurance Company

INTRODUCTION

While preparing for a “bad faith” trial recently against American Family, Bill Barton was kind enough to share his original article relating to litigation against insurance carriers, and also reviewed records and met with me on several occasions to help reduce a factually complicated case into understandable trial themes. The case settled during the third day of trial, and Bill asked me to write an addendum to his original article which included the lessons I learned from my case with the hope that it might be useful to someone else at a later date. I can’t thank Bill enough for all of the time and effort he spent assisting me and I am glad to pay it forward in any way possible. I am also thankful to Mark Bocci who spent a great deal of time providing his own valuable insight and guidance. Thank you both for sharing so generously your time and insight.

FACTS

Ivey Eastwood was 17 years old when she purchased an insurance policy with American Family with liability limits of $100,000. Approximately 3 weeks later, on July 9, 2003, Ivey was driving to work and was stopped at an intersection waiting for traffic to clear so she could turn left. As she began to turn left, she struck a car approaching from her right which, in turn, struck Braudilio Vivero, a pedestrian who was waiting nearby for a bus. Mr. Vivero’s leg was eventually amputated as the result of the impact. The car which Ms. Eastwood struck was insured by Country Companies with liability limits of $50,000.

Mr. Vivero retained Charles Robinowitz to represent him. On April 5, 2004, Mr. Robinowitz sent demand letters to both Country Companies and American Family with a 20-day time limit. Country Companies contacted Mr. Robinowitz within three days of receiving the policy limit demand and offered the limits conditioned upon Mr. Robinowitz providing medical documentation of the injury.American Family did not respond to the policy limits demand. Country Companies paid its’ limits of $50,000 in exchange for a full release.

On May 13, 2004, Mr. Robinowitz filed a lawsuit against Ivey Eastwood for $5 Million. After receiving notice of the lawsuit, American Family offered its’ policy limits. Mr. Robinowitz refused to accept the limits, claiming that American Family was negligent in failing to respond to the policy limits demand in a timely manner. Mr. Robinowitz expressed an interest in receiving settlement offers in excess of the policy limits, but American Family refused. American Family claimed that is was not negligent in failing to respond to the limits demand and also argued that Mr. Robinowitz’ client was not prejudiced by the delay. Smith Freed & Eberhard was retained by American Family to defend Mr. Robinowitz’ lawsuit.

Starla Goff, from Smith, Freed advised Ms. Eastwood regarding her excess exposure and I was asked to represent Ms. Eastwood personally with hopes of preventing an excess judgment. I sent repeated letters to American Family requesting that it either settle the claim in excess of the policy limits or otherwise agree to satisfy any judgment which might be entered against Ivey Eastwood. American Family refused to offer more than the $100,000 limits.

I explored the possibility of assigning Ms. Eastwood’s extra-contractual claim to Mr. Robinowitz but was unsuccessful. American Family’s policy contained an “anti-assignment clause” preventing the assignment of the extra-contractual claim without American Family’s express written authority. Another complicating factor was Mr. Robinowitz’ concern that he possess an enforceable judgment against Ivey Eastwood personally, or else American Family would claim that the assignment of her claim was fraudulent and unenforceable. As a solution, Mr. Robinowitz proposed that Ms. Eastwood stipulate to a judgment against her personally in the amount of $3.1 Million which he agreed not to execute upon until after the bad faith claim was resolved. Understandably, Ms. Eastwood would not stipulate to an enforceable judgment of $3.1 Million, and the case went to trial resulting in a $1 Million verdict.

Judgment was entered and American Family again refused to offer more than the policy limits of $100,000. Ms. Eastwood began making payments of $25 a month in return for an agreement not to execute upon the judgment pending the outcome of her claim against American Family. She then filed suit against American Family for breach of contract in addition to negligence and punitive damages. American Family removed the case to Federal Court because the adjuster was not named personally and American Family is an out-of-state corporation.

After several months of discovery and depositions, American Family filed a motion for summary judgment based upon the theory that Mr. Robinowitz’ demand letter was not an unconditional offer to settle which American Family could have accepted because the demand letter did not state that a release would be given in return for payment of the policy limits, nor did the demand letter address how the liens would be paid. American Family also contended that because Mr. Robinowitz conditioned acceptance of the policy limits upon American Family providing a certified copy of the declaration page, as well as a statement of the policy holder identifying any additional potential defendants, the policy limits offer was conditional and non-binding. American Family further contended that their claims adjuster orally offered the policy limits by telephone several months before the policy limits demand was received even though there was no documentation supporting the offer. Judge Haggerty denied American Family’s motion for summary judgment and the case went to trial in October 2007. Prior to trial, American Family satisfied the underlying judgment against Ms. Eastwood in efforts to diminish her economic damages but still contested liability at trial. Prior to trial of the underlying case, Ms. Eastwood began seeking counseling due to the stress of the lawsuit in addition to the unexpected death of her father during the litigation. The case settled the third day of trial for a confidential amount.

LESSONS LEARNED

1. “BAD FAITH”

As indicated in Bill’s materials, the term “bad faith” is a misnomer for extra-contractual claims inOregon. The standard in Oregon is whether the insurer acted as a reasonably prudent insurer under the circumstances then and there existing, not whether its’ subjective intent demonstrated “bad faith” or an intent to injure the policy holder. Defense lawyers like to inject subjective intent into their defense because it raises the bar in terms of the plaintiff’s proof. It is important to make certain that the jury understands from the beginning that the claim is based upon negligence, rather than “bad faith.” This will help to preempt any attempt by the defense to confuse the jurors at a later time by arguing that there was no subjective evidence of “bad faith” or intent on behalf of the insurer to injure its’ policy holder. When corresponding with insurers regarding extra-contractual claims, I suggest avoiding the use of the words “bad faith” and instead characterize the insurer’s actions in terms of negligence. Keep in mind that all of your correspondence may end up as an exhibit at trial and you do not want defense counsel utilizing your own correspondence against you.

2. DEMAND LETTERS

One of the main defenses by American Family was its’ criticism of Charles Robinowitz’ demand letter. American Family claimed that the demand imposed a “unilateral” 20-day demand and did not address whether a release would be provided in return for payment of the policy or liens satisfied.American Family also argued that the letter was not an unconditional offer to settle because it was “conditioned” upon American Family providing a certified copy of their insured’s declaration page, as well as a statement from the insured regarding other potential defendants.

The reality is that language of Mr. Robinowitz demand letter mirrored 99% of the demand letters I have written or reviewed. The letter even went so far as to invite American Family to contact Mr. Robinowitz if there were any questions or concerns with the policy limits demand. Having watched the defense attempt to thoroughly confuse the jury with technical and obscure defenses related to the contents of the demand letter, I suggest making demand letters as concise and as complete as possible. I suggest stating in the demand letter that the policy holder will be released in return for payment of the policy limits and that the liens will be satisfied by the plaintiff. As indicated in Bill’s materials, I think it is wise to comply with all of the carrier’s requests in response to the demand, even the ridiculous, to remove any defense it may raise at a later date that you did not comply with requests for additional information. As Mr. Robinowitz did in his letter, it is effective to invite the carrier to contact you with any questions or concerns or if they need additional time or materials to appropriately respond to your demand.

Keep in mind that the demand letter will likely become an exhibit at trial. I suggest that you keep the tone of the letter professional and accommodating. You want to demonstrate to the jury that you did everything possible to educate the insurer that it was reasonable to pay the limits in order to protect their insured from an excess judgment.

3. CLEARLY DOCUMENT YOUR FILE

It seems self-evident, but send letters confirming the details of all your discussions with claims adjusters, especially discussions related to settlement offers and demands. Also document your own file regarding phone calls with adjusters. The adjuster for American Family claimed that he tendered the limits in a conversation with one of Mr. Robinowitz’ legal assistants several months before a demand was even made. The legal assistant was very detailed in her note taking which was extremely helpful in disproving the adjuster’s claim. A follow-up letter confirming her understanding of the conversation would have been more effective so that no claim could be made at a later date that there was an “understanding” or agreement which never occurred.

When corresponding with carriers, do not assume that anything is “understood.” Keep in mind that a jury of non-lawyers will be faced with deciding whether sufficient information was provided to the carrier so as to trigger an obligation to offer policy limits. Even though lawyers and adjusters are accustomed to the patterns of practice common in our industry and understand that a release will be given in return for payment of policy limits, a creative defense lawyer can create a lot of confusion in the minds of jurors based simply upon what is not documented. Anticipate the potential defenses and address them in your correspondence with the carrier. This is especially true with demands as well as requests for consent to assign extra-contractual claims.

4. CLIENT CARE

Understandably, exposure to excess judgments is extremely stressful for policy holders. Encourage your client to seek counseling if an excess claim is pending against them should they encounter difficulty with coping with the stress. Also, encourage them to seek financial advice regarding the worst potential outcomes, including bankruptcy, so that they understand all potential implications involving the excess claim, both good and bad. In the event of an excess judgment, try to reach an agreement with the judgment creditor on a payment plan while you pursue the extra-contractual claim in the event it has not been assigned. This will help to relieve the pressure on your client and will also show the jury that the carrier’s actions have deeply impacted your client.

5. KEEP IT SIMPLE

As lawyers, we deal with issues of potential excess exposure claims on a routine basis and the claims and settlement process is second nature. For jurors, the rules and regulations relating to insurance and excess liability is confusing and must be made as simple as possible. At Bill’s suggestion, I read Rick Friedman and Patrick Malone’s book Rules of the Road and found it invaluable. I created my own lists of rules of the road (attached). I used the rules during the depositions of all of their claims people and attorneys. I also used the rules as the foundation for each of my expert witnesses’ testimony. Particularly in the insurance context, it is easy to craft rules with which no reasonable witness can argue. It was helpful for the jury. I also created a flow chart documenting how the claims process should work and what happens when it doesn’t work properly.

In my case, I had the unique prospective of two different insurance carriers being involved in the case. County Companies received a policy limits demand and settled the case. American Family did not. I created two different timelines; one for Country Companies which was very short, and the other for American Family that went on for pages. After the 20-day demand period expired from Mr. Robinowitz’ policy limits letter, I was able to tell the jury that everything after that date should never have happened. Keep in mind that you are usually talking about a lawsuit within a lawsuit which can get very confusing. I created a board with the names of all of the parties involved in both lawsuits and tried to keep it in front of the jury so that they could refer back to the board frequently to understand everyone’s role in the underlying case and extra-contractual claim.

I crafted the list of “rules” from statutory and case law as well as the insurance policy itself. I also used American Family’s claims handling manuals and the standards of care within the community. I utilized the list of rules in my opening to explain the obligations of a reasonable insurer and how American Family breached those obligations. I plan on using a similar list in every case I try.

6. STATE V. FEDERAL COURT

American Family removed my case to federal court because I did not name the adjuster personally. This is a mistake I will not make twice. I firmly believe that you are better off in state court with personal injury claims, particularly when damages are based upon emotional distress and punitives. The requirement for a unanimous verdict in federal court increases the likelihood of a mistrial, or worse yet, a defense verdict. This is not to mention the added expense and the amount of work product that is disclosed during the course of discovery in federal court which allows the carrier to strengthen their defenses prior to trial.

7. CONSIDER BOTH BREACH OF CONTRACT AND TORT THEORIES

As noted by Bill is his materials, extra-contractual claims create causes of action based upon breach of contract and tort theories. As part of the breach of contract claim, the policy holder is able to seek attorney fees which greatly increases pressure on the carrier. I

THEMES

1. INSURANCE IS A PROMISE TO PROTECT

An important concept for the jury to understand is the nature of the relationship between the policy holder and the insurer. People purchase insurance for protection. They pay good money for protection and, in return, trust their insurance carrier to live up to its promise to protect. The fiduciary duty created as a result of that trust is a compelling yet confusing theme for jurors. They must understand that as a policy holder, once you pay your money for protection, you no longer have any control over the insurer’s actions. Most auto insurer policies require you to jump through a number of hoops in order to comply with the policy yet you have no control as to what the carrier does to protect you. Unlike medical malpractice policies where a doctor’s consent is usually required, you have no input as a policy holder with an automobile insurer. This lack of control creates the fiduciary duty and insurers must keep policy holders apprised of offers to settle and must consider the policy holder’s interest equal to their own. When developing evidence for trial, explore in detail everything the insurance carrier did to advise the policy holder of the underlying claim and any offers to settle. Look for actions by the insurer which demonstrate that it considered its’ own interests above the policy holder’s. Bill prefers the term “policy holder” to “insured.” I agree. “Policy holder” in my mind creates the image a person holding a promise to protect from the carrier

2. TIME VALUE OF MONEY

The time value of money is another valuable theme at trial. The longer the insurer holds onto its’ money, the more money it makes. In a strange way, bad and unethical claims handling practices which result in a refusal to pay are good business for insurance carriers. It is important that jurors grasp this concept and I suggest using a defense lawyer or an insurance expert to explain it. Keep in mind that insurance carriers are in business and businesses exist to make profits, but not at the expense of their policy holders.

3. THE FINANCIAL IMPACT OF AN EXCESS JUDEMENT ON THE POLICY HOLDER

A policy holder’s damage claim is comprised of the value of the judgment against them; attorney’s fees; the financial impact the judgment may have in the future; the emotional pain and suffering caused by the excess judgment and potential punitive damages. Rational minds agree that an excess judgment is stressful but it is important bring to life the practical impact of an excess judgment on the daily life of the policy holder. In order to demonstrate the practical impact upon Ivey Eastwood, I hired a credit expert who was prepared to explain to the jury exactly how an excess judgment affects credit ratings as well as the potential impact upon job applications.

Defense counsel in the Eastwood case argued that Ivey Eastwood could declare bankruptcy to discharge the excess judgment. While many jurors might find this argument distasteful, keep in mind that there are a number of potential jurors who have declared bankruptcy themselves and do not consider it a “big deal.” It is important to have your client address this issue in terms of their own personal beliefs as to whether bankruptcy is a morally acceptable option. My credit expert was prepared to explain the long term effects of bankruptcy to dispel the belief that bankruptcy, even if it were a morally acceptable option, is a very “big deal.”

Encourage your clients to seek counseling when they experience stress from an excess judgment so that you can document they endured. Ivey Eastwood began seeing a counselor before the judgment was entered against her and continued to see a counselor throughout the pendency of her extra-contractual claim. I also asked a psychologist to perform an independent medical evaluation to further document and substantiate her emotional injury. You cannot assume that the jurors will automatically identify with what your client’s plight unless it is well documented and consistent.

4. PERSONAL AND CORPORATE RESPONSIBILITY

Ivey Eastwood was 17 years old when she purchased her own car and her own insurance. Rather than purchasing the minimum liability limits, she spent extra money for $100,000 worth of coverage when she had nothing to loose. She did so to be a good and responsible citizen. When the jury awarded Mr. Vivero the $1 Million judgment against her, she hugged Mr. Vivero in tears and offered to drive him to work. She even offered to buy him groceries when she could afford to do so because she had nothing else to offer. She began making payments to Mr. Vivero out of her own pocket of $25 – $50 a month. All of Ivey’s actions demonstrated her strong sense of personal responsibility and were in stark contrast to the actions of American Family which offered nothing more than excuses for failing to respond to the policy limits demand in a timely manner. Had American Family conducted its’ business the way Ivey Eastwood conducted her life, the case would have settled before the expiration of the policy limits demand period. Personal responsibility is a great theme to anchor to the breach of contract and breach of fiduciary duty claims. The policy holder dutifully pays premiums with the expectation that they are going to get what is promised. If the policy holder was late with a premium payment, the insurer would cancel the policy. It is ironic that the insurer defines the nature of their relationship with the policy holder by the very terms of its contract, yet when the policy holder abides by every term of the contract and pays premiums in a timely manner, the insurer offers nothing but excuses for why it was reasonable in breaching the contract.

5. INSURERS’ STATUTORY AND CONTRACTUAL DUTIES

The primary sources of the duties owed to the policy holder by the insurer come from the contract itself, the Unfair Claims Settlement Practices Act (ORS 746.230), the common law and the insurer’s own guidelines and claims manuals. The insurer’s guidelines and claims manuals are valuable sources of information regarding internal requirements when processing claims and can be used to form the insurer’s own standard of care. Claims guidelines frequently mirror the requirements of the Oregon Revised Statutes and duties established under Oregon common law. An effective tool for cross examination is to create a list of violations by the insurer based simply upon the insurer’s own claims manual.

A concept which should not be over looked is the insurer’s duty to settle a claim even without having received a policy limits demand. The Unfair Claims Settlement Practices Act, ORS 746.230(1)(f), requires insurers to promptly and equitably settle claims in which liability has become reasonably clear. American Family’s claim that it attempted to settle the underlying claim prior to receiving a policy limits demand backfired because it had to admit that in order to make a policy limits offer, it must have recognized that it was a policy limits case yet American Family had no documentation of an attempt or even an intent to settle the claim before their policy holder was sued. This is a direct violation of the statutory duty to settle.