Written by Brian Snyder, Esq.
Edited by Bill Pfund, Esq.
Virginia Federal Court Upholds Bad-Faith Claim Against 1st-Party Insurer
First-party bad faith claims arise when an insurer refuses to a pay a claim without a reasonable basis or even if the insurer has a reasonable basis for denial, failing to properly investigate the claim in a timely manner. Va. Code § 38.2-209 allows insured to recover cost and reasonable attorney’s fees in declaratory action if trial court determines that insurer was not acting in good faith. Under Va. Code § 8.01-66.1A, the insured’s evidentiary burden is preponderance of evidence standard. An insurer which is found to have operated in bad faith could be liable for damages far in excess of the policy limits.
Recently, in Great Am. Ins. Co. v. GRM Mgmt., LLC, the United States District Court for the Eastern District of Virginia, Richmond denied an insurer’s motion to dismiss a bad-faith claim arising out of the insurer’s denial of its insureds’ claim for property damage and loss of business income following the theft of rooftop air conditioning units from the insureds’ hotel. The ruling is significant because it illustrates that Virginia law supports first-party bad faith claims against insurers.
The case involved a business insurance policy issued by Great American Insurance Company (“GAIC”) to GRM Management, LLC, and SN Holdings (“Insureds”) covering the Richmond Magnuson Grand Hotel and Convention Center (“Hotel”). The loss involved the theft of multiple HVAC units from the roof of the Hotel and resulting in further damage to the property and loss of business income. GAIC investigated the loss and subsequently issued five reservation-of-rights letters, eventually, barring coverage for the claim under an employee theft exclusion.
GAIC subsequently filed suit seeking a declaratory judgment of no coverage under the policy. The Insureds responded with counterclaims alleging breach of contract and breach of GAIC’s duty of good faith and fair dealing. GAIC moved to dismiss the counterclaims and for judgment on the pleadings. The court determined that the Insureds made out a prima facie claim for breach of contract because they alleged that GAIC had not paid the claims for property damage, missing property, and loss of business income. More notably, the District Court sustained the Insureds’ bad-faith claim.
The District Court found that good faith is implied in insurance contracts, as in other contracts. GAIC argued strongly that Virginia expressly disallows bad-faith claims in the first-party context relying on the “oft-cited” Supreme Court of Virginia opinion in Ward’s Equip., Inc. v. New Holland N. Am., Inc., in which the court held that “when parties to a contract create valid and binding rights, an implied covenant of good faith and fair dealing is inapplicable to those rights.” However, the District Court held that “it is clear that the court was not saying in Ward’s Equipment that an implied duty of good faith and fair dealing did not exist at all under Virginia law. Rather, the Court was saying that an implied duty of good faith and fair dealing must yield to the express terms of the contract when the latter might be conceived as inconsistent with the former.”[1] The District Court further noted that “[a]lthough ‘Virginia law on the implied duty of good faith and fair dealing is not exceptionally clear,’ the Fourth Circuit and this District Court clearly recognize such a duty.”[2] As the District Court could not find a Virginia case repudiating the duty of good faith and fair dealing, it upheld the Insureds’ bad-faith claim.
This opinion clarifies an area of Virginia insurance law, confirming that an insured may indeed assert bad-faith claims against insurers who wrongfully deny coverage for first-party claims, at least in federal courts. While Virginia state courts have recognized the possibility for bad-faith damages in the third-party context, they have not ruled on (and therefore have not eliminated) bad-faith claims in the first-party context.
In order to avoid a possible first-party bad faith claim, you must do more than just act reasonably, you must be able to prove you acted reasonably. It is important to keep accurate and complete records of the claim as the litigation can occur years later; date stamp all materials received into the file; keep accurate phone memorandums, even with attempted phone calls; and make notations of any activity undertaken with the claim. Assume that in the event of litigation everything in the claims file will be discovered by the insured.
[1] United Guar. Residential Ins. Co. of N.C., 806 F. Supp. 2d at 894-95. See also Mortgs. Unlimited, Inc., 2012 U.S. Dist. LEXIS 74106, 2012 WL 1942056, at *3
[2] Stoney Glen, LLC v. S. Bank & Trust Co., 944 F. Supp. 2d 460, 465 n.6 (E.D. Va. 2013).