Do You Need To Mention Everything In Your Maryland Insurance Administration Bad Faith Complaint?
Fakhoury v. Great Northern Insurance Co., Case 1:12-cv-00268-WDQ, Document 18, (D.Md. 2012): one small unreported step in developing Maryland’s bad faith statute.
In Fakhoury, the insureds had fire insurance on their home. The house burned down in 2009. The insurer denied coverage for two reasons: the insureds had directed someone to light the fire and the insureds had “made false statements, intentionally concealed and misrepresented material facts… and engaged in fraudulent conduct.”
The insureds filed an MIA complaint. In their complaint, they argued that Great Northern lacked any basis for its conclusion that the insureds were responsible for the fire. They lost at the MIA. See our earlier post on wins and losses there.
The insureds then filed a circuit court complaint in Baltimore County. (See our earlier post on the option of proceeding in Circuit Court or the OAH). In their complaint, they alleged for the first time that denying coverage because of material misrepresentations was bad faith.(Parenthetically, concealing material facts is an independent grounds for denying coverage. Great Northern would not even have to show prejudice. In Maryland, insurers may deny coverage for misrepresentations without showing prejudice in first party claims. See Phillips v. Allstate Indemn. Co., 156 Md. App. 729, 747, 848 A.2d 681, 691 (2004) (holding that failing to answer material questions at an examination under oath in a theft-based motorcycle insurance claim breached the duty to cooperate despite lack of showing of actual prejudice.))
Great Northern promptly removed the case to federal court and moved to dismiss the bad faith claims. Great Northern argued that since the insureds had failed to challenge the denial for material misrepresentations before the Maryland Insurance Administration, the insureds had failed to exhaust their administrative remedies. Specifically, it argued that the insureds could no longer challenge the denial for material misrepresentations in the circuit court case. Since this was an independent grounds for the denial, it rendered any bad faith harmless.
The court rejected that argument. It held that since §27-1001 did not require bringing all actions in the complaint, the insureds did not need to “state before the MIA all the reasons they believed that [Great Northern] acted in bad faith.” Insureds merely needed to bring a bad faith complaint to the Maryland Insurance Administration before filing suit. It did not have to be a complete one.
If this case had come out the other way, then insureds would have to tell insurers what they thought was bad faith at the Maryland Insurance Administration stage. Under Fakhoury, they are not required to do that.