All Class Construction v. Mutual Benefit Insurance: Three Interesting Points For §27-1001 Case Law
Another unreported Federal decision on Maryland’s First Party Bad Faith regime, §27-1001. This one involves a motion to dismiss for failure to state a claim, a clarification of a not-particularly-obscure point about §27-301 et seq. (the Unfair Claim Settlement Practices statute), and confirmation of a prior decision about aggregation. Not in that order.
The citation is All Class Construction v. Mutual Benefit Insurance, 1:13-cv-03358-JKB (Bredar, J.) (February 26, 2014).
(As we’ve mentioned previously, the United States District Court for the District of Maryland hands down more available insurance bad faith opinions in this state than the State Courts. This is another example of the trend.)
All Those Facts
Unfortunately, this case gets a little factually intense.
All Class Construction involves a coverage dispute over whether Mutual Benefit had a duty to defend All Class Construction under a CGL for (perhaps not surprisingly) “personal and advertising injury”. All Class Construction filed a DJ against Mutual Benefit seeking defense and indemnity for an underlying lawsuit. They skipped the MIA because the aggregate policy limits exceeded $1,000,000, but see below. The Court eventually found that there was no coverage.
The underlying law suit is actually irrelevant to the bad faith issues, which is what I care about today. It involved employment and trade secret related claims by two plaintiffs against a wide variety of defendants including the insured. All Class Construction tried to get coverage for advertising injury. Mutual Benefit denied the claim and did not tender a defense. All Class eventually settled it themselves for more than $300,000 in damages and more than $150,000 in attorneys fees. After the case settled, All Class filed a §27-1001 bad faith action combined with a coverage DJ to try to get Mutual Benefit to pay.
Aggregation of Limits For Avoiding The Mandatory MIA §27-1001 Action Allow Stacking Exposure From Different Plaintiffs
The Court first considered how the aggregation limits applied. Mutual Benefit argued that since there was a million dollar per person limit, the case required an MIA action. The Court rejected that argument. It held that since there were two Underlying Plaintiffs (WGG Inc. and Window Specialist Inc.) and both were subject to the General Aggregate Limit of two million dollars, the million dollar limit had been passed.
This is actually an expansion of existing precedent. In Bierman v. United Farm Family Ins. Co,, the District Court for Maryland held that an insured could stack different limits and look at the maximum the insured could recover. Here, the Court allowed two co-Plaintiffs to stack their separate claims together to get outside the statute.
E.G. Auto policy with limits of 1 million / 3 million. Two plaintiffs. 2 million dollars of exposure. No MIA action.
§27-301 et seq. Unfair Claim Settlement Practices Claims Are Not Actionable In Civil Suits.
The Court held that Plaintiffs cannot assert §27-301 et seq. in civil suits. This point is more obvious. Plaintiffs tried to make claims under §27-301 et seq. This was probably because §27-301 et seq. defines a much wider array of bad faith practices than merely acting without good faith. The Court did not let them. §27-301 et seq provides an additional administrative bad faith. Essentially, it is a parallel bad faith action. It therefore cannot be asserted in a private cause of action.
Including a “Reasonable Explanation For Denial Of Coverage” In A Denial Letter Is Grounds For Getting a 12(b)(6) Dismissal of the §27-1001 Bad Faith Claim Without Leave To Amend
The Court then decided to dismiss the bad faith claim under FRCP 12(b)(6). I.E. Failure to state a claim. Arguably, this is dicta since the Court clearly states that since it finds there is no coverage, it does not need to reach the point. But instead of cutting to the that resolution, it proceeds to analyze whether a bad faith claim is possible even if there were coverage.
Plaintiff had claimed that Mutual Benefit acted in bad faith by taking up an improper coverage opinion. The Court therefore considered Mutual Benefit’s two denial letters. The “original” (dated June 11) denied coverage, but did not explain why very well. According to the Court, “the explanation [in the letter] seems more than a bit off target”. (Op., 11.) Mutual Benefit sent a second denial letter that “while somewhat incomplete, does provide a reasonable explanation for Mutual Benefit’s denial of coverage”. (Id.) It directly addressed the advertising injury claims, quoted the applicable definitions, “state[d] clearly” that none of the claims were covered, listed exclusions, cited case law about some points, and disclaimed coverage of punitive damages. This second letter “suffices as a reasonable explanation for denial of coverage.” (Op. 11-12). The two letters therefore “do not support a reasonable inference of lack of good faith.” (Op. 12.) The Court therefore dismissed the bad faith action for failing to state a claim upon which relief could be granted.
Where to start? Apparently, the Court held that a denial letter with a reasonable but incorrect denial prevents bad faith claims based on coverage. Reasonability apparently means resembling an actual coverage opinion. Being correct is apparently not a factor. In principle, I hear that. Being wrong is not the same thing as acting bad faith. But the way the opinion sounds, superficially-reasonable means no bad faith. That’s a little strong.
(I also recall that the MIA decided a case that way (coverage but no bad faith) once back in 2012. I’ll blog about that soon.)
Or maybe this only seems strange because the judge called it a 12(b)(6). Considering that the judge makes factual determinations about what is reasonable and what isn’t, this is arguably a mislabeled summary judgment. As a summary judgment decision, it’s troubling that the judge did not allow discovery, but otherwise more expected.
Or maybe we should just write this off as dicta. The Court decided to grant Summary Judgment to Mutual Benefit on coverage. The Court admits that precludes the bad faith action. It implicitly figures into any reasonability analysis even if not directly discussed. (Or rather, this case can be factually distinguished from any case where the coverage position turned out to be wrong. This is therefore a bad case to cite about whether a mistaken coverage position was bad faith.)
The opinion also has a discussion of why there is not coverage. At least for now, that’s outside our concern. We’ve talked too much already.