Insurer Did Not Act in Bad Faith by Denying Coverage for Claim that Turned On Unsettled Question of Law
Applying Iowa law, a federal district court has held that an insurer did not act in bad faith when denying coverage for expenses relating to an ERISA lawsuit because the claim turned on an unsettled question of Iowa law. Telligen, Inc. v. Atlantic Specialty Ins. Co., 2020 WL 3399916 (S.D. Iowa Apr. 16, 2020).
The insured health management company sought coverage under two claims-made policies for its expenses related to a lawsuit alleging ERISA violations. After the insurer denied coverage for the claims, the insured brought suit for breach of contract, declaratory judgment, and bad faith denial of coverage. The insurer initially moved for summary judgment on the ground that the insured was not entitled to coverage because it provided late notice by failing to report a letter from the Department of Labor announcing its intent to conduct an on-site examination at the insured’s offices. The federal district court denied the insurer’s motion, holding that the Department of Labor’s letter did not constitute a “Fiduciary Claim” requiring notification under the policies. The court did not reach the issue of the insurer’s coverage obligations. The insurer then moved for summary judgment again, seeking judgment as a matter of law on the insured’s claim for bad faith denial of coverage.
The court explained that, to establish a claim for bad faith denial of coverage under Iowa law, the insured must prove (1) the insurer “had no reasonable basis” for denying the claim; and (2) the insurer “knew or had a reason to know that its denial or refusal was without reasonable basis.” The court determined that the insurer had an objectively reasonable basis for denying the insured’s claim because the claim was dependent on an unsettled question of Iowa law, which made it “fairly debatable.” Specifically, coverage depended on whether the Department of Labor’s letter was an investigation “for a Wrongful Act,” and neither party identified controlling or analogous Iowa case law on the meaning of “Wrongful Act” under the policies. The court further determined that the insurer had a “logical basis” for arguing that the insured was required to report the letter and for arguing that the letter commenced a fact-finding investigation “for a Wrongful Act.” The court noted that the insurer cited multiple cases from other jurisdictions in support of its arguments.
In response, the insured argued that, under the contra proferentem doctrine, which provides that ambiguous insurance policies are construed against the insurer, the claim was not “fairly debatable” unless the policy language unambiguously favored the insurer’s position. The court found this argument unpersuasive and inconsistent with the Eighth Circuit’s holding in Penford Corp. v. National Union Fire Insurance Company, which determined that ambiguous policy language is, by definition, “fairly debatable.” The insured further argued that, even if the insurer’s initial denial was “fairly debatable,” the insurer’s continued refusal to pay the claim constitutes bad faith. The court found this argument unpersuasive, as well, because the insurer’s coverage obligations have not yet been determined, so it is not acting in bad faith by withholding payments. The court thus held that the insured’s claim for bad faith denial of coverage failed as a matter of law.