JULY 2013 BAD FAITH CASES: INSURER’S MOTION TO DISMISS BAD FAITH CLAIM BASED ON FAILURE TO ISSUE RESERVATION OF RIGHTS DENIED (Western District)
The court denied plaintiff’s motion to dismiss defendants’ counter claim for bad faith. Plaintiff-insurer initially brought suit against its insured. Defendant-insureds then filed a counter-claim against their insurer, alleging bad faith for plaintiff-insurer’s denial of coverage after agreeing to provide coverage and a legal defense without issuing a reservation of rights letter.
Plaintiff-insurer initially agreed in writing on May 12, 2011, to defend defendant-insureds without issuing a reservation of rights letter, then, 165 days later, reversed its position and issued a reservation of rights letter. Defendant-insureds were forced to hire private counsel to avoid inherent conflicts of interest and identified the insurer-retained counsel in the underlying action as a fact witness in the current case.
Plaintiff-insurer’s actions also putatively threatened privileged attorney-client communications. Defendant-insureds claimed to have detrimentally relied on plaintiff’s initial assurance of coverage and to have been prejudiced by plaintiff-insurer’s reversal of position.
Relying on precedent from district courts in Ohio, Washington, Florida, and South Carolina, the Western District determined an insurer’s delay in issuing a reservation of rights letter could, under some circumstances, support a claim for bad faith or estoppel. On this basis, the court denied plaintiff-insurer’s motion to dismiss, determining the issue could not be appropriately resolved at that stage in the litigation.
While the court acknowledged some of defendant-insureds’ claims of bad faith might be susceptible to dismissal at the 12(b)(6) stage, the claims regarding plaintiff-insurer’s change in position, detrimental reliance and prejudice were not. Consistent with that finding, the court granted defendant-insured’s request for leave to amend their counterclaim.
The court declined to rule on which damages would potentially be available if the claims survived a motion to dismiss due to a complex choice-of-law issue that would need to be resolved.
