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Increasingly, state and federal courts are granting summary judgment to resolve claims alleging the denial of insurance coverage in bad faith. This trend is important to insurance carriers and policyholders alike. The alternative to summary judgment, a jury trial on a bad faith claim, has, in several recent instances, resulted in extracontractual damages — including punitive damages — against insurance carriers. Cases like these illustrate what can happen if a bad faith claim reaches a jury. For insurers facing bad faith cases, summary judgment motions are thus both useful and important. A NEW CLAIM Traditionally, if an insurance carrier breached its duty to defend or indemnify a policyholder, the carrier would be liable only for contract damages under the policy. But over the past 20 years or so, many states have developed causes of action for wrongful or tortious denial of insurance coverage — also known as “first party” bad faith — that allow policyholders to recover extracontractual damages from an insurance carrier. Some states have created a first-party bad faith cause of action by statute, while in other states it has been judicially created. Judicially created bad faith causes of action have been developed under both contract and tort theories. Although the details differ among the states, a broad consensus standard for first-party bad faith appears to have emerged. In most states that recognize this type of claim, an insurance carrier may be liable for bad faith if (1) it denies insurance coverage to its policyholder without a reasonable basis and (2) the carrier knows or has reason to know that it lacked a reasonable basis to deny coverage. To support an award of punitive damages for bad faith, most states require additional evidence of intent or malice beyond the evidence necessary to support the bad faith claim itself. Moreover, in some states, claims for bad faith or punitive damages must be proved by the higher standard of clear and convincing evidence (rather than a mere preponderance). Courts have recognized generally that an insurance carrier may successfully defend a first-party bad faith claim on the grounds that the existence or scope of insurance coverage is “fairly debatable” (or, in some states, is in “genuine dispute”). If the existence or scope of coverage is fairly debatable, the carrier has a reasonable basis to deny coverage and cannot be held liable for bad faith. Thus, an insurance carrier will not be liable for bad faith if it can demonstrate that its denial of coverage was based on a reasonable interpretation of unsettled law or a reasonable analysis of operative facts. The first-party bad faith cause of action is generally intended to compensate policyholders when the insurance carrier acted intentionally or recklessly to deny coverage. The cause of action is not intended to transform every dispute between an insurance carrier and a policyholder into a bad faith claim. Nonetheless, many policyholder attorneys routinely assert a cause of action for bad faith in coverage cases, including those cases where the insurer plainly had a reasonable basis to deny coverage or where there is a genuine dispute. Regardless of the merits of such claims, at least some policyholder attorneys believe that asserting a bad faith claim, in addition to the standard declaratory judgment and breach-of-contract claims, will provide the policyholder with additional leverage in litigating and settling the dispute. Indeed, a study published last June in the University of Chicago’s Journal of Legal Studies suggests that settlement payments in coverage disputes are generally higher in jurisdictions that recognize bad faith claims, without regard to the merits of those claims. SYMPATHETIC SITUATION Fortunately, it appears that many courts throughout the country — both state and federal — recognize that bad faith claims are routinely tacked on to coverage claims as a matter of course and often lack sufficient merit to create a genuine dispute of material fact for a jury. Since May of this year, more than 10 courts — from New Jersey to California — have issued written opinions entering or upholding the entry of summary judgment against policyholders in bad faith cases. Of course, this may be the result of non-meritorious bad faith cases becoming more frequent given the incentives to file bad faith claims or of courts becoming more aggressive in deciding bad faith cases on summary judgment. In either event, the breadth of precedent is generally a favorable development for insurance carriers. By the nature of the “fairly debatable” or “genuine dispute” doctrine, the standard for policyholders to defeat summary judgment in a bad faith case is unusually high. As a general rule, if a plaintiff can demonstrate a genuine issue of material fact, summary judgment will be defeated. The opposite is true for bad faith claims. Where the substantive standard is “fairly debatable” or in “genuine dispute,” merely proving the existence of a genuine issue of material fact proves only that the insurance carrier had a reasonable basis to deny coverage and thus cannot be liable for bad faith. The policyholder instead must prove the absence of a genuine dispute over the coverage issue. In fact, some courts have reasoned that if the policyholder cannot succeed on the underlying coverage issue as a matter of law, then summary judgment for the insurance carrier on the bad faith claim is appropriate. This analysis holds true whether the fairly debatable issue is one of law or of fact. Moreover, some courts suggest as a general matter that whether a claim is subject to a reasonable dispute should be decided as a matter of law. This reasoning makes summary judgment a particularly powerful tool for insurance carriers in first-party bad faith cases. BEWARE INDIANA The apparent trend of courts granting summary judgment to insurance carriers does not suggest that all bad faith claims are failing on summary judgment or that all bad faith claims are non-meritorious. At first glance, a June 29 decision by the Indiana Supreme Court, Monroe Guaranty Insurance Co. v. Magwerks Corp., suggests that not all courts are in concurrence with the trend. The policyholder in Monroe Guaranty sued its insurance carrier, alleging that the carrier had denied coverage in bad faith. The carrier had denied coverage on various grounds. By the time of the litigation, it was defending the claim based on a policy provision different from those on which it had originally denied coverage. The trial court granted summary judgment to the plaintiff on the coverage issue and permitted the bad faith claim to be decided by the jury. The jury returned a verdict of $5.1 million, including $4 million in punitive damages, against the insurance carrier. The carrier appealed up to the Indiana Supreme Court. The Indiana Supreme Court found that the coverage issue was fairly debatable and, accordingly, summary judgment should not have been granted to the policyholder on coverage. But the court also found that, despite the genuine dispute regarding coverage, the jury’s punitive damages award should stand. The court reasoned that if the evidence of bad faith involves more than simply the denial of coverage, the insurance carrier may still be liable for bad faith even though the coverage issue was fairly debatable. The court recognized, however, that where the sole issue was a dispute over coverage, summary judgment would be appropriate. The policyholder in Monroe Guaranty introduced evidence that the insurance carrier had “manufactured” an excuse to deny coverage. Among other factors, the court considered that the insurance carrier had initially denied coverage on the basis of different policy provisions than the one that the court found to be fairly debatable. The court also may have been influenced by the fact that a jury had reviewed all the evidence against the insurance carrier and decided that it had acted in bad faith. Although the outcome in Monroe Guaranty was different from that in the majority of recent first-party bad faith cases, the decision is relatively narrow. It is not likely to prevent insurance carriers from obtaining summary judgment in Indiana state courts where appropriate. AT TRIAL Summary judgment is by no means the only way in which insurance carriers can win bad faith suits. Insurers do take bad faith cases to trial, and they are successful. For example, in late 2004, in Jones v. Continental Casualty Co., a Tulsa, Okla., jury found in favor of the insurer on all counts, rejecting the plaintiff’s claim for uninsured motorist benefits and his claim that the insurer denied benefits in bad faith. (Our firm successfully defended the insurer in this case.) On the other hand, insurers are not always successful in these high-stakes trials. For example, shortly after the Jones case ended well for the insurer, another Oklahoma jury in 2004 returned a $44 million damages award against an insurer in a bad faith case. And a California jury recently returned a verdict of $9.9 million against an insurance carrier for wrongful failure to defend its policyholder against a claim of negligence. Although the jury awarded the plaintiff only $52,000 in contract damages, it awarded $1.5 million in emotional distress damages and $8.3 million in punitive damages. Thus, to prevent non-meritorious bad faith claims from ever reaching a jury and to minimize the risk and cost of taking a bad faith case to trial, insurance carriers wield a critical weapon in the motion for summary judgment.
William H. Briggs Jr., a partner in the D.C. office of Ross, Dixon & Bell, advises insurance carriers in complex coverage disputes, including bad faith lawsuits. Edward B. Mullen, an associate in the firm’s Chicago office, litigates disputes over insurance coverage and alleged bad faith.

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