Prior Favorable Coverage Determination is Evidence of Good Faith
The United States District Court for the District of Nevada, applying Nevada law, has held that the court’s prior favorable coverage determination was evidence that an insurer did not act in bad faith when refusing to defend or provide coverage under a policy. My Left Foot Children’s Therapy, LLC v. Certain Underwriters at Lloyd’s London, 2019 WL 1810956 (D. Nev. Apr. 23, 2019).
An occupational therapy business purchased a policy requiring an insurer to defend the business in connection with any qui tam suit with defense limits up to $2 million per claim. The policy also contained a Billing Errors Endorsement, which indemnified the business for up to $25,000 for losses related to qui tam claims. During the policy period, the business was named as a defendant in a qui tam action. The business timely notified the insurer of the action, and the insurer extended $25,000 of coverage. The business filed suit against the insurer, and the district court granted summary judgment in favor of the insurer, finding the endorsement limited the insurer’s liability to $25,000. The business appealed, and the Ninth Circuit reversed, finding the policy provided up to $2 million per claim to defend the qui tam action. The business then filed an amended complaint in the suit against the insurer, asserting (1) breach of contract; (2) violations of the Unfair Claims Settlement Practices Act § 686A.310(1)(e)-(f); and (3) breach of the implied covenant of good faith and fair dealing.
In the resulting litigation, the court denied the insurer’s motion to dismiss, except as to the portion of the bad faith claim based on the insurer’s conduct prior to the Ninth Circuit’s mandate, which was dismissed. First, as to the breach of contract claim, the court agreed with the business that it was irrelevant whether the insurer’s failure to defend the action and to extend $2 million of coverage were based on a reasonable interpretation of the policy taken in good faith. Second, as to the violations of the Unfair Claims Settlement Practices Act, the court agreed with the business that neither the reasonableness of the insurer’s coverage position nor the prematurity of the claims were bases for dismissal.
Third, as to the bad faith claim, the court dismissed the claim to the extent that it was based on the insurer’s failure to defend or provide coverage before the Ninth Circuit issued its mandate. The court cited both its previous decision, in which it found that the insurer’s coverage position was at least reasonable, and the Ninth Circuit’s memorandum opinion, which did not reverse on the reasonableness point but instead found the policy ambiguous. In looking to its previous decision, the court relied on Morris v. Paul Revere Life Ins. Co., 135 Cal. Rptr. 2d 718 (Cal. Ct. App. 2003), in which the California Court of Appeals found that “the fact that a court had interpreted that law in the same manner as did the insurer, whether before or after, is certainly probative of the reasonableness, if not necessarily the ultimate correctness, of its position.” The court thus found that the insurer had a reasonable basis for its coverage position and dismissed the portion of the claim that was based on the insurer’s position prior to the Ninth Circuit ruling. But the court did not dismiss the portion of the claim alleging that the insurer acted in bad faith after the Ninth Circuit’s mandate, finding that a reasonable juror could infer bad faith from the insurer’s delay in providing payments.