When a property insurer denies a claim and is sued by its insured, the insurer sometimes loses sight of its ongoing duty of good faith and fair dealing to its insured. In other words, an insurer’s good faith obligations to an insured are not placed on hold when the insurer gets sued. Therefore, if an insurer is not careful, their post-litigation conduct will be used to support a cause of action for bad faith. The following case illustrates this issue.

Jim D. Odom and Jeane B. Odom, v. Armed Forces Insurance a/k/a Armed Forces Insurance Exchange – U.S. Dist. Ct., Southern District of Miss., Southern Division – 2006 U.S. Dist. LEXIS 62498

On August 29, 2005, Hurricane Katrina destroyed the home of Jim and Jeane Odom in Diamondhead, Mississippi. At the time of the loss, their home was insured by the Armed Forces Insurance Company. Their policy provided that “surge” was a covered peril, however it excluded losses caused by “flood.” The Johns Eastern Company, an independent adjusting company, was hired by the insurance company to determine the cause of the loss and sent a report to the insurer citing “hurricane damage” as its cause, thereby, potentially triggering coverage under the policy.

The insurer disputed the adjusting company’s findings and retained The Warren Group, Forensic Engineers and Consultants to render a second opinion. The Warren Group concluded that the majority of the damage to the house was the result of a non-covered loss, i.e., “a storm tide contacting the structure and separating it from the slab.”

The Odoms claimed that the adjusting company and engineer failed to contact them (as they believed was promised), and claimed that they never met anyone connected with their insurance company. Moreover, the Odoms obtained a report from another engineering company that attributed their entire loss to “horizontal hurricane winds,” and which stated that “there is no evidence to support a conclusion that the destruction of the Odoms’ residence was the result of storm surge.”

Nevertheless, the Odoms’ claim was denied and they filed suit alleging that their insurer failed to disclose the fact that their policy excluded coverage for flood, and alleged that the insurer had no intention to cover surge, notwithstanding the fact that the policy provided coverage for losses caused by surge. They also claimed that a separate flood policy that they purchased was insufficient in coverage. The insureds further alleged extra-contractual and punitive damage claims in connection with the insurance company’s handling of their claim.

Interestingly, the Odoms’ deposition testimony differed from the allegations contained in their lawsuit. Thus, Mr. Odom testified that he chose to buy insurance from the Armed Forces Insurance Company primarily to obtain a cheaper rate. He also testified that he asked for the same coverage that he had with his previous insurance company. In addition, he admitted that no representations were made by the insurance company about the type of coverage that he was purchasing. Similarly, Ms. Odom admitted that no representations were made concerning the policy before its purchase, and that after having read the policy she agreed that certain types of water losses are excluded.

An Insurer’s Duty to Pay a Claim Doesn’t End Because a Suit has been Filed

Because the insureds admitted that no representations were made by the insurer concerning coverage for water surge, and that after reading the policy they never expected that water damage would be covered, their insurer moved for summary judgment. The insurer also argued that the Odoms should not be allowed to support a cause of action for bad faith by examining the insurance company’s post-litigation conduct.

The court began its analysis of the insurer’s motion for summary judgment by noting that an insurer’s duty to promptly pay a legitimate claim does not end because the insured sues them for nonpayment. Therefore, the court held that the insureds are entitled to take discovery concerning the handling of their claim, both before and after the filing of the lawsuit. It should also be noted that the insurance company made a payment of $94,409.68 to the Odoms prior to the court’s ruling. But the court apparently found that payment to be spurious.

It is unclear what prompted the tender [of $94,409.68] in August 2006, when a report in November, 2005, indicated that damage was due in part to something other than water. Perhaps Defendant acted in good faith, or with a legitimate or arguable reason, but at the same time it could have been looking for a defense, or attempting to use the plaintiffs’ dire financial straits to its advantage (the tender is limited to payment for dwelling and contents losses and no other coverage), (even in case where punitive damages instruction is not warranted, extra-contractual damages may be awarded). While I express no opinion on the merits of any of this, I will observe that the unconditional tender made in August, 2006, does not change any conduct during the preceding eleven months, and does not dispose of the plaintiffs’ extra-contractual claims.

Insured has a Right to Examine an Insurer’s Post-Litigation Conduct

After all the issues were considered, the court granted the insurance company’s motion for summary judgment concerning the coverage related issues, i.e., the court held that there are no genuine issues of material fact as to misrepresentations, justifiable reliance, or any other theory based on the purchase of the homeowners or flood policy that should warrant coverage in this case.

However, the court denied the insurer’s motion for summary judgment as to the extra-contractual and punitive damages claims because first, there was evidence that an independent contractor hired by the insurer had determined that the home was destroyed by hurricane damage, not by flood or surge. In that regard, the court noted that in the vast number of insurance claims related to Hurricane Katrina, an insurer’s evaluation of the loss is typically based only on the physical evidence that remained, since there were rarely no eyewitness accounts. Second, because the insurer hired a contractor to obtain a second, arguably more favorable opinion. Third, the contractor hired by the insureds determined that the home was destroyed due to wind damage, a covered peril; and fourth, although the insurer paid $98,409.00 to the insureds, that payment did not prevent the insureds from pursuing an investigation and a cause of action concerning the insurer’s handling of their claim after suit was filed.

Conclusion

While this case has limited judicial authority, it is an instructive example of how an insurer’s post-litigation conduct might serve as evidence to support the allegations of an insured’s bad faith claim. The moral to this story is that property insurers should recognize that it has a continuing good faith duty to its insureds even during the “heat of battle” of litigation. Moreover, insurers must continually stress to their staff the importance of adhering to their good faith obligations. Such action should help to minimize the insurer’s exposure to allegations of post-litigation bad faith.