| Q&A of the Week |
Coinsurance Clause and Actual Cash Value
A California subscriber recently asked the following question:
I was recently discussing the application of coinsurance with an independent adjuster friend of mine. We were discussing the fact that the insured would be better off claiming the loss at actual cash value (ACV) versus replacement cost. The policy coverage afforded a replacement cost coverage option and an 80 percent coinsurance policy requirement. The insured in this case was way underinsured. I demonstrated to my friend that the policy limit would be achieved at ACV, using a theoretical Fair Market Value/ACV as the basis for the coinsurance calculation of the ACV amount required to be carried. My friend mentioned later that he reviewed the policy and there was nothing to be found in the policy that required a coinsurance calculation to comply with the requirement if the insured elected to take ACV only. Does the coinsurance clause in a policy that affords a loss measure at replacement cost become inactive when the claim is made at ACV only or should the coinsurance clause still be applied using ACV values? Is the coinsurance clause waived at ACV?
ANSWER: Unless wording in the policy states otherwise, generally, the coinsurance clause applies whether ACV or replacement cost valuation is chosen. The ISO CP 00 10 states that if a coinsurance percentage is shown in the declarations, the clause applies. |
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| Litigation Watch |
Bad Faith Discussion
The estate of a tort victim, as the insured's assignee, commenced an action against the insurer alleging that bad faith caused an excess judgment. This case is Welford v. Liberty Insurance Corporation, 2016 WL 3360431.
This third-party bad faith case arises out of a fatal car accident. Mottsey was insured by Liberty under an auto policy with bodily injury limits of $10,000 per person and $20,000 per accident. The auto was a Mercury Sable and was used by Mottsey's daughter, Mayhair.
On the evening of February 26, 2009, Mayhair and her boyfriend were driving on Country Road 95-A. The boyfriend, Middleton, was driving the car with permission of Mayhair. Zisa came up behind them and tried to pass. At that time, three pedestrians were walking along the road. Zisa hit all three pedestrians, killing two and injuring the third. The police were called to the scene. The police report stated that the pedestrians were responsible for the accident and no charges were filed.
Lawyers for the deceased and the injured pedestrian started an investigation. A call was made to the owner of the Sable, Mottsey, on May 7, 2009. After that call, Mottsey contacted her insurer, Liberty, and this was the first time that Liberty learned of the accident. This entire bad faith case claim hinges on that May 7th call.
In October, 2009, Mottsey was served with a complaint and she notified Liberty. The insurer initiated settlement discussions and offered the full policy limits of $20,000. The plaintiffs refused the settlement offer and the case went to trial. The jury came in with a judgment against Mottsey and Mayhair in the amount of $100,000. Kerrigan, the attorney for the estate of Welford, one of the two pedestrians killed in the February accident, spoke to Mottsey about pursuing a bad faith case. Mottsey assigned her rights against Liberty to the Welford estate and a bad faith case was filed.
The United States District Court for the Northern District of Florida noted that the purpose of an insurer's obligation to act in good faith is to protect an insured from an excess verdict. To exercise good faith, an insurer must exercise the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. In sum, the court said, the essence of an insurance bad faith claim is that the insurer acted in its own best interests, failed to properly and promptly defend the claim, and thereby exposed the insured to an excess judgment.
The court pointed out that in the typical bad faith case, the insurer was given a time-limited settlement offer or demand by the plaintiff and it refused to settle for coverage limits within that given time and this later resulted in a judgment that exceeded the coverage limits. In this case, there was no settlement offer or demand, but this lack of a formal offer to settle by the plaintiff does not automatically preclude a finding of bad faith. Bad faith may be inferred from a delay in settlement negotiations that is willful and without reasonable cause. Where liability is clear and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations.
Now in any bad faith case, the court continued, the insured must prove that the alleged bad faith caused the excess judgment. In this instance, the bad faith claim depends on Mottsey's May 7th phone call to Liberty. Kerrigan argued that this call meant that Liberty had a duty to investigate the accident. Moreover, if Liberty had conducted an investigation, it would have been required to initiate settlement discussions. Liberty disagreed and said that it was not required to initiate settlement talks because Middleton was not clearly liable for the crash.
The court said that Kerrigan cited no case where an insurer committed bad faith by failing to investigate an accident when the insured vehicle was not involved and its own insureds insist they were merely eyewitnesses. The only way that Liberty could have acted in bad faith here is if Liberty had an affirmative duty to initiate settlement negotiations and this affirmative duty would exist only where liability is clear. The court declared that, by any objective measure, liability was not clear on the facts of this case.
The court said that there was no evidence that Liberty put its own interests ahead of its insured, and in fact, Liberty did offer its full policy limits. The failure of the insurer to investigate the accident following the May 7th call from the insured was at most, negligence and negligence is not bad faith. The court granted the insurer's motion for summary judgment.
Editor's Note: This case is offered to present a good discussion of bad faith. The U.S. District Court explained that in order for an insurer to fulfill its obligation to act in good faith, it does not have to act perfectly, prudently, or even reasonably. Rather, insurers must refrain from acting solely on the basis of their own interests in settlement. |
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| Fraud of the Week |
Agent Fraud – Florida
AMOUNT: $48,000
An unlicensed person acting as an insurance agent was arrested following activity that resulted in the theft of at least $48,500 in escrow payments from 10 South Florida homeowners. The phony agent conducted insurance-related business in Florida without the proper licensing, including submitting numerous fake insurance certificate forms to financial institutions across South Florida to obtain homeowners' insurance escrow funds, and instructing banks to make the escrow payments out to his illegitimate businesses. The checks were then deposited into his personal bank account. The phony agent was charged with 72 counts of fraudulent activity, including 12 counts each of unlicensed insurance activity, unlicensed insurance activity as an affiliated party, engaging in activity without certification, organized scheme to defraud, grand theft, and uttering a forged instrument. His bond is set at $360,000. Investigators believe there are more victims of this fraudulent conduct. |
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