The owner of a fire-damaged warehouse in Florida is battling in the Fifth Circuit to revive a claim alleging that a broker and insurer negligently failed to procure adequate insurance for the warehouse—by arguing that the lower court should have applied a different state’s law to its summary judgment determination. The warehouse owner leased the warehouse to a Florida-based produce distributor, which in turn procured a $5 million insurance policy from Alterra American Insurance Co. A fire later caused $10 million worth of damage to the warehouse, toward which Alterra paid the $5 million policy limit.
In a July 5, 2016 opinion in Home Loan Inv. Co. v. St. Paul Mercury Ins. Co., the United States Court of Appeals for the Tenth Circuit addressed claims for bad faith delay or denial of coverage under Colorado law in connection with a fire loss under a foreclosed property protection policy. After a jury verdict in favor of the Insured on its breach of contract and statutory bad faith claims, the Insurer moved for judgment as a matter of law (JMOL) regarding the statutory bad faith claim. When its motion was denied, the Insurer appealed.
The Insurer argued in its JMOL and on appeal that because its coverage decision was “fairly debatable,” as a matter of law its coverage decision could not be unreasonable (as required for liability under the bad faith statute). The Insurer contended that denial of a fairly debatable claim is per se reasonable. However, the Tenth Circuit was persuaded by recent opinions from the Colorado Court of Appeals stating that “fair debatability is not a threshold inquiry that is outcome determinative as a matter of law; it is not necessarily sufficient, standing alone, to defeat a bad faith claim.” Accordingly, the Tenth Circuit upheld the district court’s denial of Insurer’s JMOL.
The Insurer also argued that the bad faith statutes applied only to claims-handling activities, and not underwriting activities. Relying on the purpose of the statutes and their broad language, the Tenth Circuit rejected the Insurer’s argument.
Finally, the Insurer contended that the district court erred in awarding damages for breach of contract plus the statutory penalty equal to two times the covered benefit. Relying on the plain language of the statute and Colorado appellate decisions, the Tenth Circuit affirmed the district court’s award of damages.
The decision in Home Loan Inv. Co. should serve as a reminder for policyholders that they may still be able to assert a claim for unreasonable denial of coverage even if an insurance company characterizes their claim as “fairly debatable.” Further, insureds may be able to challenge both the underwriting and claims-handling procedures of an insurer under state statutes. Consultation with experienced coverage counsel can help ensure that clients take advantage of all the statutory protections and remedies available.
Last week’s torrential rains have caused widespread flooding in West Virginia and surrounding areas. It is important that policyholders in these and other areas remain mindful of the substantial benefits that may be available to them for resulting economic and physical losses under ordinary business insurance policies. Policyholders also should be mindful of the interplay between coverage for flood under business insurance policies and assistance that may be available from state and federal agencies (e.g., FEMA). Finally, policyholders should stand ready to enforce their rights when insurers attempt to limit coverage for flood, since insurer tactics sometimes do not hold water.
For a summary of coverages that may be available to victims of flooding (directly and indirectly), see our recent flood-damage Insurance Alert.
An article by Hunton lawyers Walter Andrews and Mike Levine, titled Insurance Planning for 2016: Top Ten Real Estate Liability Concerns, was recently published in the Spring 2016 issue of The Real Estate Finance Journal. The article addresses ten recurring liability concerns facing real estate professionals, investors, developers, lenders, owners and managers, and the associated insurance issues. The article addresses ways commercial insurance can be used to mitigate potential liability for those involved in complex real estate transactions. Andrews and Levine, along with the other members of Hunton’s insurance team, counsel and represent the interests of real estate professionals and other commercial policyholders concerning their insurance programs and the availability of insurance coverage.