II. Perspectives on Pre-Trial Practice

II. Perspectives on Pre-Trial Practice

By Robert F. Redmond, Jr.

Williams Mullen

Richmond, Virginia

A. Preliminary Steps for the (Potential) Plaintiff.

Bad Faith Claims in Virginia are governed by 6A Virginia Code § 38.2-510. “Virginia law recognizes a claim for bad faith only if it arises out of statutory or contractual origins”. Wiles v. Boat /U.S. Inc. (E.D. Va. Feb. 20, 2008) citing Bettius & Sanderson, P.C. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 839 F. 2d. 1009, 1016 – 17 ( 4th Cir. 1988); A&E Supply Co. v. Nationwide Mut. Fire Ins. Co., 798 F.2d 669, 676 (4th Cir. 1986)

1. Know the Elements of “Bad Faith”

A “bad faith” action requires that the Plaintiff establish one of the following “business practices” which the statute defines as an “Unfair Claim Settlement Practice”:

• Misrepresentation of pertinent facts or insurance policy provisions relating to coverage ( § 38.2-510(A) (1));
• Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies (§ 38.2-510(A) (2));
• Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies (§ 38.2-510(A)(3));
• Refusing arbitrarily and unreasonably to pay claims (§ 38.2-510(A)(4))( bad faith failure to settle within policy limits) ;
• Failing to affirm or deny coverage within a reasonable time after proof of loss statements have been completed (§ 38.2-510(A)(5));
• Not attempting , in good faith, to make prompt, fair and equitable settlement of claims for which liability has become reasonably clear (§ 38.2-510(A)(6):
• Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds (§ 38.2-510(A)(7));
• Attempting to settle claims for less than the amount reasonably indicated in advertising (§ 38.2-510(A)(8)):
• Attempting to settle claims on the basis of an altered application (§ 38.2-510(A)(9));
• Making claims payments to insureds by accompanied by a statement setting for the coverage from which the payment was made (§ 38.2-510(A)(10));
• Advising insureds of a company policy of appealing arbitration awards in order to compel the insured to accept less than the amount awarded in arbitration (§ 38.2-510(A)(11));
• Delaying the investigation or payment of a claim by requiring both a preliminary and formal proof of claim (§ 38.2-510(A)(12));
• Failing to settle reasonably clear claims under one portion of the policy in order to influence settlement under another portion of the policy (§ 38.2-510(A)(13);
• Failing to promptly provide a reasonable explanation for denial of a claim (§ 38.2-510(A)(14));
• [Other, specific provisions dealing with car repair and HMO referrals ]

2. Know the Standard of Proof for “Bad Faith”

“Virginia Courts establish a ‘reasonableness’ standard to determine whether an insurer is acting in bad faith” Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d 633 (E.D. Va. Feb. 28, 2008)

Key factors in determining whether an insurer is acting in bad faith include:

• Whether reasonable minds could differ in the interpretation of policy provisions defining coverage and exclusions;
• Whether the insurer had made a reasonable investigation of the facts and circumstances of the insured’s claim;
• Whether the evidence discovered reasonably supports a denial of liability;
• Whether the insurer’s refusal to pay was used merely as a tool in settlement negotiations;
• Whether the defense the insurer asserts at trial raises an issue of first impression or reasonably debatable questions of law and fact

Nationwide Mut. Ins. Co. v. St. John. 359 Va. 71 ( 2000); CUNA Mut. Ins. Soc’y v. Norman 237 Va. 33, 38 (1989)

While an insurer’s interpretation of a policy may, ultimately, be incorrect, that fact does not mean that the insurer acted in bad faith. Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d. 633, 646 (E.D. Va. 2008).

The timeliness of an insurer’s investigation and statement of coverage position is also examined from the perspective of “reasonableness”. Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d at 646 (3 month’s delay in advising of coverage position was reasonable)

The insured must prove “bad faith” by a preponderance of evidence.

3. Know the Policy

Virginia follows the “8-corners” rule of coverage interpretation Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d at 639.

“8-Corners Rule”: Combination of

• “Exclusive Pleading” Rule: “an insurer’s duty to defend is determined solely by the claims asserted in the pleading”; and
• “Potentiality” Rule: “an insurer’s duty to defend is triggered if there is any ‘potentiality’ that the allegations in the pleading could state a claim that would be covered by the policy”

Id. at fn 14,citing Solers, Inc. v. Hartford Cas. Ins. Co. 146 F. Supp. 2d 785, 791 (E.D. Va. 2001)

“An insurer is relieved of the duty to defend only when it clearly appears from the initial pleading that the insurer would not be liable under the policy contract for any judgment based on the allegations.”

Reisen v. Aetna Life & Cas. Co. 225 Va. 327 (1983) ( emphasis in original)

It appears that a Complaint attached to a 3rd Party Complaint is not included, in the “8-Corners” Rule; only the 3rd Party Complaint is included. Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d at 641

The duty to defend is broader than the duty to indemnify because the premium paid by the insured “is partly ‘litigation insurance’ designed to ‘protect the insured from the expense of defending suits brought against him’” Id.at 640quoting Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am. 448 F. 3d 252, 258 (4th Cir. 2006).

There may be instances in which an insurer, based on a complaint’s allegations – has a duty to defend, but will ultimately turn out not to have a duty to indemnify.

Virginia does not allow an insurer to rely on extrinsic evidence to avoid the duty to defend. Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. 2d at 642. Additionally, Virginia ( unlike some other states like Maryland) does not appear to permit an insuredto rely on extrinsic evidence to bring a Complaint within coverage if it is not covered under the “8-Corners” Rule. Id.

An insured has the burden to prove, by a preponderance of the evidence, that it is entitled to coverage.Id.at 640. The insurer has the burden of proof to show that a coverage exclusion applies. Id.citing Town Crier, Inc. v. Hume 721 F. Supp. 99, 101 (E.D. Va. 1989).

In Virginia, insurance policies are construed in the same manner as any other contract. However, because insurance policies are drafted by the insurer they are construed against the drafter/ insurer. Ambiguous terms are “construed in favor of coverage or indemnity and against a limitation of coverage”. United Services Auto Assoc. v. Webb 235 Va. 655 ( 1988) It is “incumbent upon the insurer to employ exclusionary language that is clear and unambiguous. Am. Reliance Ins. Co. v. Mitchell 238 Va. 543 (1989)

4. Communicate with the Insurer

• Communicate in writing to the greatest extent possible;
• Log all phone calls and follow up promptly with letters ;
• Promptly respond to all requests for additional information;
• If you get the sense of delay or purposeful neglect, cite to Virginia Code § 38.2-501(A (1 – 14) in letters.
• Remember that Virginia law only requires that the insurer be reasonable under the circumstances -- so: Don’t be unreasonable.

B. Choose the Cause of Action and Establish Damages

1. The Cause of Action:

• 6A Virginia Code §38.2-510 – Unfair Claims Settlement Practices
• Breach of Insurance Contract
• Contractual “Bad Faith”
• If provided for in insurance contract
• Declaratory Judgment
• Breach of the Implied Covenant of Good Faith and Fair Dealing
• Virginia recognizes a separate cause of action for breach of the Implied Covenant of Good Faith and Fair Dealing
• TIG Insurance Co. v. Alfa Laval, Inc.

_____ F. Supp. 2d ______( E.D. Va. March 5, 2008)

6A Virginia Code § 2-209 – Award of Attorney Fees

• This is not a separate cause of action, but rather, a remedy provided under an action brought for bad faith. Structural Concrete Products, LLC v. Clarendon America Insurance Co. _____ F. Supp. 2d _____ (E. D. Va. August 22, 2007); TIG v. Alfa Laval, Inc. supra;
• A claim for attorney fees under 6A Virginia Code § 38.2-209 is not pled separately; instead, it is treated as a request in conjunction with a claim from which it arises” Styles v. Liberty Mutual Fire Insurance Co. ( W.D. Va. July 7, 2006)
• A claim for attorney fees can be pled at the same time as the underlying bad faith action and need not be delayed until after a bad faith judgment Structural Concrete Products, LLC v. Clarendon America Insurance Co. supra.

What Not to Plead: Punitive Damages

• In Virginia, damages for breach of contract are limited to the pecuniary losses sustained and, therefore, punitive or exemplary damages may not be sought. Kamlar Corp. v. Haley, 224 Va. 699, 702 (1983)
• Bad Faith Actions are contract actions, not tort actions. A & E Supply Co, Inc. v. Nationwide Mutual Fire Ins. Co., 798 F. 2d 669, 671 ( 4th Cir. 1986)
• Punitive Damages are not available in Bad Faith Actions. TIG v. Alfa Laval supra.

2. Establishing Damages

• Amounts paid in Judgment in the underlying litigation;
• Settlement Payments in the underlying litigation ;
• Investigation Costs of the underlying litigation ;
• Attorney Fees in the underlying litigation ;
• Issue: How do you fix damages that accrue daily
• Fees and costs in the underlying litigation;
• Expert Witness and consultant fees in the underlying litigation
• Litigation Support Expenses in the underlying litigation
• Attorney Fees and Costs in the coverage litigation
• Same Issue: How do you fix damages in a pending case
• Other consequential damages established by the breach of the duty of good faith and fair dealing
• Pre-Judgment Interest ( must be pled)
• Providing a declaration that the insured is entitled to a defense and indemnity
• Providing an interpretation of the policy that maximizes the insured’s insurance coverage.

B. The Insurer’s Guidelines

1. Preliminary Negotiation Strategies.

• Keep in mind the “reasonableness” under Virginia Law
• 6A Virginia Code § 38.2-510
• Nationwide Mut. Ins. Co. v. St. John. 359 Va. 71 ( 2000)

• Courts will scrutinize the following:
• Whether reasonable minds could differ in the interpretation of policy provisions defining coverage and exclusions;
• Whether the insurer had made a reasonable investigation of the facts and circumstances of the insured’s claim;
• Whether the evidence discovered reasonably supports a denial of liability;
• Whether the insurer’s refusal to pay was used merely as a tool in settlement negotiations;
• Whether the defense the insurer asserts at trial raises an issue of first impression or reasonably debatable questions of law and fact
• Conduct a reasonable investigation
• Do not “investigate to deny”
• Focus on an evenhanded policy interpretation
• Be reasonable in your requests for information from the insured
• Remember the “8-corner” rule
• The Court will not allow use of extrinsic evidence to support a denial of defense
• Remember that the Court will construe policy ambiguities against the insurer and in favor of coverage
• “[Virginia courts must provide policy] interpretation which grants coverage rather than one which withholds it”
• American Rel. Ins. Co. v. Mitchell 238 Va. 543, 546 (1989)
• If denial of coverage is based on an interpretation of an exclusion, keep in mind that the insurer bears the burden of proving that a coverage exclusion applies
• Town Crier, Inc. v. Hume 721 F. Supp. 99 (E. D. Va. 1989)
• If there is a policy ambiguity, strongly consider defending under a reservation of rights
• Capitol Environmental Services v. North River Insurance Co. 536 F. Supp. at 644.

2. Types of Responsive Pleadings

• Rule 12(b)(6)/ Demurrer
• Asserts that the Plaintiff’s Complaint fails to state a claim upon which relief can be granted
• Example: Claim for Punitive Damages
• Bad Faith Actions do not support a claim for punitive damages
• “Pleadings” includes documents attached to the Complaint (i.e. the policy)
• Rule 12(b 1 – 5) Jurisdictional/ Service related Motions
• Generally fact specific
• Motions based on lack of personal jurisdiction (12(b)(2)); improper venue (12(b)(3));insufficient process(12(b)(4)) and insufficient service of process ( 12(b)(5)) are waivedif not made in the initial responsive pleading;
• Know the rules on personal jurisdiction;
• Look for any venue provisions in the policy;
• Rule 12(b)(3) improper venue
• Look for any service issues
• Rule 12(b)(4)- insufficient process
• Rule 12(b)(5) – insufficient service of process
• Rule 12(b)(7) Failure to Join a Required Party under Rule 19
• “Required Party” is a party with an interest in the subject matter of the lawsuit and whose absence may
• Result in prejudice to the absent party’s claimed interest or;
• Result is double liability to an existing party
• May be relevant in cases where the named insured or an additional insured is not a party the case.
• Rule 12(e) Motion For A More Definite Statement
• Can be filed when Complaint is too vague to allow a response
• Must specify the defects in the pleading
• Rule 12( c ) / Motion for Judgment on the Pleadings
• Even if Plaintiff’s Complaint is taken at face value, Insurer still is entitled to judgment
• Generally limited in application
• May apply if claim is clearly not covered
• However, any factual issue will be resolved against the insurer
• Paynter v. Household Life Ins. Co. (E. D. Va. April 28, 2008) (denying Rule 12(c ) motion)
• Plea in Bar/ 12(b)(6)
• Limited to select defenses
• i. e. Statute of Limitations
• Based on Pleadings only
• Answer
• Counterclaim

C. The Use and Selection of Experts [1]

• What the Expert Can Do:
• Offer testimony on Industry Custom and Practice
• Offer testimony on Historical Analysis
• Offer testimony on Underwriting as a discipline
• Offer testimony on Claims Handling as a discipline
• Offer testimony on elements of good faith and fair dealing
• Offer economics testimony on consequential damages caused by failure of good faith and fair dealing
• Offer testimony on reasonableness and diligence of a lost policy search.
• Offer testimony on the reasonableness of attorney fees and costs
• Offer testimony on the segregation of attorney fees and costs
• What the expert cannot do:
• Offer testimony on the construction of the contract
• Offer testimony on whether terms are ambiguous or not ambiguous
• The Selection of Experts
• Sources of Experts:
• A.M. Bests Directory of Recommended Insurance Attorneys and Adjusters, Vol. II.
• ALM EXPERTS: Mid-Atlantic Edition 2007
• Martindale-Hubbell
• Referral’s Generated from Substantive Practice Area Listserves
• Experts to Consider
• Dick Stewart of Stewart Economics
• Doug Talley
• Thomas Baker, Ph.D, University of Connecticut
• Robert Hughes of Hughes and Associates, Texas
• What to look for in an expert
• Jury Appeal
• Credibility
• Knowledge of Industry
• Clean Record

D. Key Tactics in Arbitration and Settlement

• Defense:
• Focus on Motions Practice
• Chip away at the Plaintiff’s Claim
• Use initial Motions to pare down the claim
• Focus discovery on summary judgment facts
• Vigorous use of Request for Admission
• Plaintiffs
• Focus on Discovery
• Request all electronic evidence re claims handling
• Extend the discovery to claims handling procedures in general
• Press for substantially similar denials and approvals of coverage
• Take depositions of corporate witnesses who know about data and IT structure
• Take depositions of corporate witnesses on claim handling procedures
• Develop evidence of pattern and practice of denial of claims
• Develop any evidence of financial incentive for claim denial
• “Run-off” companies
• Interest derived from funds not devoted to claims
• Both Sides
• Don’t try to settle too early
• Both sides can only make a reasonable settlement if they believer that a settlement is the best alternative to trial
• Have a pretrial strategy that focuses primarily on trial
• This will make for a stronger case when settlement naturally arises

E. How-to’s For Establishing Choice of Venue

• Venue Selection Clauses by Policy
• Especially in off-shore reinsurance contracts
• Extremely expensive to litigate/arbitrate in United Kingdom or Bermuda
• Sometimes in Property Insurance contracts
• When the Policy is Silent: Venue Selection by common law
• “First to File” Rule
• Given more weight in federal court than state court
• “Center of Gravity” Analysis
• Where was the policy issued ?
• Where is the Headquarters of the Insured ?
• Where is the underlying dispute?
• Where is the principal place of business of the insured?
• Where was the policy brokered ?
• Which state has the greater interest in the outcome of the litigation?

F. Potentially Explosive Traps to Avoid

• Arbitration in Foreign Jurisdictions
• Hugely expensive
• Electronic Discovery
• Also hugely expensive
• May be amenable to mutual agreement

[1] The Author would like to thank William Passanante of Anderson, Kill and Olick for his contributions to Sections C, E and F