Arbitrator Rules Delay in Paying Defense Fees Constitutes Bad Faith

Arbitrator Rules Delay in Paying Defense Fees Constitutes Bad Faith

By David A. Gauntlett

INTRODUCTION

Where an insurer withholds policy payments on grounds that are unreasonable or without proper cause, the insurer tortuously breached the implied covenant of good faith and fair dealings. [1] A recent arbitration decision – Independent Physicians Associates Medical Group, Inc. dba AllCare IPA v. Ironshore Specialty Insurance Co .[2] – clarifies why delaying defense fees payments while pursuing another insurer for contribution, or negotiating a settlement of defense fees due, breached of the insurer’s duty of good faith and fair dealing.[3]     

The “Genuine Dispute” Doctrine Only Applies To “First Party Insurance” Disputes

The Arbitrator acknowledged Ironshore’s arguments that:

(1)  Ironshore “reasonably acted when it relied upon State Farm’s representations that led Ironshore to reasonable conclude that State Farm would imminently participate in AllCare’s defense;”

(2)  “Ironshore “believed, based on AllCare’s representations, that Ironshore could reach a settlement with AllCare resulting in a single payment of disputed and outstanding fees;”[4] 

The Arbitrator determined that Ironshore “breached the implied covenant of good faith and fair dealing…[when] it unreasonably and without proper cause withheld payment to AllCare for almost twelve months after it received the post tender-pre ROR invoices from AllCare while it attempted to convince State Farm to take over or participate in the defense of AllCare; and then delayed another two and one half to three months while it tried to negotiate a settlement with AllCare.”[5] The Arbitrator rejected Ironshore’s bad faith standard which was being “unreasonably engaged in a conscious and deliberate act in not timely paying AllCare’s post tender-pre ROR invoices.”[6] The Arbitrator disagreed with this test (citing a first party bad faith case)[7] but referencing Intergulf Development LLC v. Superior Court[8] (a third party case).[9] He ruled that an “[u]reasonable delay in paying policy benefits or paying less than the amount due is actionable withholding of benefits which may constitute a breach of contract as well as bad faith giving rise to damage in tort.”[10] The Arbitrator also distinguished Ironshore’s cases that addressed disputes as to the proper construction of policy language, not circumstances where, as here, the insurer conceded that a defense arose by failed to timely make payment in accordance with it based on extraneous factors.

The Arbitrator cited two unpublished decisions:

First, in Pepsi-Cola Bottling Co. v. Insurance of North America,[11] where the insurer’s contention that the defense fee reimbursement was capped at 12.91% of the total defense costs, the court determined that “an insurer’s failure to pay the full amount of reasonable and necessary defense costs based on the contention that there may be other coverage available is a breach of the duty to defend.”

Second, in Kaufman & Broad Monterey Bay, et al. v. Travelers Property & Casualty Co. of America,[12] the court observed that “‘a belated offer to pay the costs of defense may mitigate damages but will not cure the initial breach of duty.’”

A 15-month delay for reimbursing defense fee payment made by the insured while Ironshore sought to exhaust its discussions for contributions with State Farm was not reasonable and contrary to the common purpose under its policy. Settlement discussions arose only 12 months after Ironshore received the pre tender-post ROR invoices and only after Ironshore concluded State Farm would not assist in or contribute to AllCare’s defense.[13]          

Insurer Conduct May Be Adjudicated To Be “Bad Faith” As A Matter Of Law

The Arbitrator cited Concept Enters., Inc. v. Hartford Ins. Co.[14] where payment of only a small percentage of the defense fees incurred in a mixed action breached the duty of good faith and fair dealing. Equally germane is Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co. where the insurer relied on “coverage position contrary to coverage law.”[15] Both cases evidenced improper insurer reliance on justification for which no evidentiary basis arose.[16] 

CONCLUSION

Proof of conduct entitling the insured to recover its insurance coverage fees (subject to the Brandt limitation) typically requires a trial. But, where legal issues can be resolved as a matter of law, as in Concept Enterprises, Tri-Union, and AllCare, the court may allow adjudication of all facts necessary to address the insured’s entitlement to such recovery for breach of the covenant of good faith and fair dealing. For example, absent the “genuine dispute doctrine” application, the insurer’s assertion that some legal standard, more exacting than “reasonableness,” should be applied evidences such a breach.

If you enjoy this content, you can find my full list of blogs here: https://docs.google.com/document/d/1N3YsMmn0Ii1GqHWSBEE1pPzh1jQbU6htkJZ2e55Y2eM/edit?usp=sharing

[1] Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 573-574 (1973) (Bad faith is established where an insurer “withhold[s] unreasonably payments due under a policy” or “refus[es], without proper cause, to compensate its insured for a loss covered by the policy... in [discharging its contractual responsibilities].”)

[2] Independent Physicians Associates Medical Group, Inc. dba AllCare IPA v. Ironshore Specialty Insurance Co., JAMS Arbitration Reference No. 1210038020, Partial Interim Award No. 2. (Mar. 15, 2022)

[3] Amato v. Mercury Cas. Co., 53 Cal. App. 4th 825, 830, 833 (1997) (Defense duty arose because “facts known to Mercury at the time of its refusal… gave rise to the potential of liability under the policy.”)

[4] AllCare, IPA, Partial Interim Award No. 2, at 4

[5] Id.

[6] AllCare, IPA, Interim Award no. 2, at 5

[7] Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal. App. 4th 335, 347 (2001) (“It is now settled law in California that an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured’s coverage claim is not liable in bad faith even though it might be liable for breach of contract.”)

[8] Intergulf Development LLC v. Superior Court, 183 Cal. App. 4th 16, 20 (2010) citing Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 720, 723 (2007).

[9] My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., Case No. Case No. SACV 19-00680JVS(KESx), 2021 U.S. Dist. LEXIS 59763, *21 (C.D. Cal. Mar. 17, 2021) (“[T]he genuine dispute doctrine is inapplicable in third party cases such as this one because a third party insurer, such as Travelers, ‘must defend a suit which potentially seeks damages within the coverage of the policy’… What is more, ‘it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement.’ Howard v. Am. Nat'l Fire Ins. Co., 187 Cal. App. 4th 498, 530 (2010).”)

[10] AllCare, IPA, Partial Interim Award No. 2, at 6

[11] Pepsi-Cola Bottling Co. v. Insurance Co. of No. Amer., 2010 WL 10875087, *5 (C.D. Cal, December 28, 2010) citing Croskey, Heeseman & Popik, Cal. Prac. Guide: Insurance Litigation (The Rutter Group 2008), at ¶ 7:631 (“Where several insurers share the risk, each owes a duty to defend the entire action ... an insurer who at the outset accepts ‘only its pro-rata share’ of defense costs is in effect breaching its duty to defend.”) (citing Haskel, Inc. v. Sup.Ct. (Aetna Cas. & Sur. Co.) 33 Cal. App. 4th 963, 976 (1995).”)

[12] Kaufman & Broad Monterey Bay, et al. v. Travelers Property & Casualty Co. of America, 2012 WL 2945932, *8 (N.D. Ca., July 18, 2012)

[13] Id. at *10; See also, Browne George Ross LLP v. Lexington Ins. Co., 2012 U.S. Dist. 199489, *7 (C.D. Cal. May 29, 2012) citing Janopaul + Block Cos., LLC v. Superior Court, 200 Cal. App. 4th 1239, 1249 (2011) (“[A]s numerous courts have recognized, ‘[t]o take advantage of the provisions of [section]2860, an insurer must meet its duty to defend and accept tender of the insured’s defense, subject to a reservation of rights.’” (quoting Amtel Corp. v. St. Paul Fire & Marine, 426 F. Supp. 2d 1039, 1047 (N.D. Cal. 2009)); The Housing Group v. PMA Capital Ins. Co.,193 Cal. App. 4th 1150, 1156 (2011)…”)

[14] Concept Enters., Inc. v. Hartford Ins. Co., No. CV 00-7267 NM (JWJx), 2001 U.S. Dist. LEXIS 6901, *24 (C.D. Cal. May 21, 2001) (“In sum, despite Coustic’s repeated requests, Hartford consistently refused to honor its obligation to fund the defense of the entire mixed SAS action, thumbing its nose at three decades of California Supreme Court decisions dating back to Zurich and Hogan. . . . Accordingly, no reasonable jury could fail to conclude that Hartford’s blatant intransigence has breached the covenant of good faith and fair dealing.  Cf. Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc. (C.D. Cal. 1998) 43 F. Supp. 2d 1088 (where Hartford breached duty to defend trademark action, sending bad faith issue to jury because law on which Hartford relied was unclear at time of coverage denial).”)

[15] Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co., 88 F. Supp. 3d 1156, 1175 (S.D. Cal. 2015) (“The court finds the Plaintiff has sufficiently alleged that Defendant withheld benefits unreasonably and without proper cause. See, Align Tech., Inc. v. Fed. Ins. Co., 673 F. Supp. 2d 957, 965 (N.D. Cal. 2009).”)

[16] See, Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 882 (2000) (Bad faith was established when the insurer asserted reliance on an exclusion “faulty workmanship” for which it had no evidence and had not “articulated any factual theory for claiming the exclusion.”)