JANUARY 2006 BAD FAITH CASES NO BAD FAITH WHERE AGENT HONESTLY MISTAKEN, NO ILL WILL, CARRIER INVESTIGATED & “BOARDED” CLAIM & NEGOTIATED WITHIN REASONABLE INSURANCE PRACTICES (Western District)
In Hartman v. Motorists’ Mutual Insurance Company, the insured suffered property damages from a leaking furnace. The carrier agreed to cover some property losses, but not all, on the basis of a pollution exclusion. The insured refused to accept any sum to settle the claim, less than the cost of repairing all damages.
The Court found the policy ambiguous as to how heating oil would be classified, found the loss fully covered. Alternatively, the Court found coverage due under the “reasonable expectations doctrine,” even if the policy otherwise precluded coverage, because of the representations made by the carrier’s agent concerning coverage for precisely such incidents. However, the Court found that plaintiff did not put on clear and convincing evidence of bad faith.
First, the interpretation of the pollution exclusion clause advanced by the carrier was reasonable, even if the Court did not agree with that interpretation. Further, the carrier began its investigation promptly, made known its position on the pollution exclusion clause after doing a site inspection and research on the interpretation of that provision by other carriers, obtained its own estimate of damages, and convened a board to review and discuss the coverage (“Boarded”), consisting of the claims representative, a branch manager and two supervisors.
There was no evidence of ill-will, and “it is not bad faith to investigate and litigate legitimate issues of coverage.” Even the agent’s alleged carelessness in representing coverage to the insured was found not to have been done in bad faith, but rather appeared to the Judge, as finder of fact, to have been honest mistakes (though somewhat negligent or careless).
The failure to honor its agents mistaken representations was not bad faith as (a) they were not necessarily known to the carrier’s employee and (b) the legal issue of whether those representations were binding was unclear. Nor was the compromise settlement offer a sign of bad faith, as “it is common practice in the insurance industry to attempt to resolve disputed claims by compromise rather than subjecting each and every claim to litigation.” Such a compromise did not evidence bad faith, nor concede coverage.