FEBRUARY 2016 BAD FAITH CASES: COURT EXPLAINS RELATIONSHIP OF COMMON LAW BAD FAITH AND STATUTORY BAD FAITH, AND DISTINCTIONS CONCERNING PRE-CONTRACTUAL CONDUCT AND TYPES OF DAMAGES (Middle District)
In Porter v. Safeco Insurance Company, the court addressed a first party fire loss claim. The insured claimed he paid for coverage for his building, at an excessive premium, and this was a single building for all practical purposes even though it had two addresses and had been separate structures years earlier. After the fire occurred, the insurer took the position that this was two buildings and would only pay for a portion of the loss for half of the building. The insured alleged that even then, the insurer would only pay for a loss that was much less than the value of the insurance coverage being provided.
The insured claimed that the carrier had functionally recognized it was a single building, and also that the carrier had acted in bad faith and fraudulently in inducing the insured to pay a premium to cover a property value that the insurer knew was excessive and would never be in the realm of any loss should a loss arise.
The insured alleged brought breach of contract claims, as well as common law and statutory bad faith claims. On a motion to dismiss, the court recognized that common law bad faith claims cannot be pleaded separately from the underlying breach of contract claim. However, it did not dismiss the actionable common law bad faith claims, but read those claims as if they were part of the breach of contract count. The insured was permitted to pursue compensatory damages for this form of bad faith claim, even if compensatory damages are not permitted under the statutory bad faith claim; and thus the court would not dismiss the compensatory bad faith damages claim in full.
As to the statutory claims, following the Toy case, the court found any alleged fraud in charging premiums or deceptions concerning the amount of coverage needed to be outside the scope of a statutory bad faith claim. A statutory bad faith claim is ultimately based on the denial of a benefit, and, as in Toy, pre-policy alleged fraud is not the denial of a benefit. The court did find these allegations relevant to the breach of contract/common law bad faith count, and thus would not strike them.
The court did recognize a statutory bad faith was pleaded, based on allegations concerning the insurer’s response to plaintiff’s claims for coverage by denying coverage for half of the building, after allegedly conceding its responsibility to cover both sides of the building. Thus, plaintiff alleged a knowing disregard of a duty to provide insurance which the insurer reasonably knew to exist, and thus stated a statutory bad faith claim.