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Third-Party Bad Faith Is Dead Again!

Back in June 2016, we reported on a 3-2 Memorandum Decision of the Supreme Court of Appeals of West Virginia (“WVSCA”) which appeared to be a disguised (and prohibited) third-party bad faith claim under a liability policy.  In State ex rel. State Auto Property Insurance Companies v. Stucky, the Court denied State Auto’s requested relief in prohibition and held that a policyholder states a common law claim for first-party bad faith under a CGL policy when it alleges that its insurer failed to use good faith in defending and settling a claim brought against the policyholder.  In State Auto I, the WVSCA believed that the policyholder’s allegations had been sufficiently pled as a first-party claim to withstand State Auto’s motion to dismiss. Well, the good news is that during its second trip before the WVSCA, State Auto has succeeded in getting the policyholder’s complaint dismissed altogether as a matter of law. 

In State Auto II, State Auto argued that it met its obligations when it defended and indemnified its insured as required under the CGL policy at issue.  State ex rel. State Auto Property Insurance Companies v. Stucky, 2017 WL 4582607 (W.Va. Oct. 10, 2017).  Therefore, the insured “lacked standing to assert common law and statutory bad faith or unfair claims settlement practices regarding how State Auto” defended and settled the underlying lawsuit.  State Auto II, p. 4.  “The settlement was obtained at no cost to [the insured], and no adverse judgment was entered in the circuit court.”  Id. at p. 10.  The WVSCA agreed, reminding us of the prohibition against third-party private causes of action for bad faith in WV and that “ ‘a first-party bad faith action is one wherein the insured sues his/her own insurer for failing to use good faith in settling a claim brought against the insured or a claim filed by the insured.’ ” Id. at pp. 11-12 (citation omitted).  On the record before it, the WVSCA found that State Auto fully defended its insured and reached a settlement with the underlying Plaintiffs for an amount well within the applicable liability policy limits.  “On this record, we cannot see any evidence that State Auto failed to exercise good faith in meeting its obligations under the commercial general liability insured policy.”  Id. at p. 12.

With respect to the insured’s claims against State Auto arising under West Virginia’s Unfair Trade Practices Act (specifically W.Va. Code § 33-11-4 (9) (b), (f), and (g)), the WVSCA noted that none of those subsections applied to the insured’s claims in this case.  Subsections (9)(b) and (9)(f), which require prompt communications with respect to claims and prompt, fair and equitable settlements “are designed to protect plaintiffs who seek liability-related damages from an insured, and are not designed to protect the insured.”  Id. at p. 13.   Likewise, the WVSCA found that subsection (9)(g), which prohibits insurers from compelling insureds to file suit in order to recover amounts due under an insurance policy, had “no application to the circumstances here” because the insured had no “right to ‘recover amounts due’ under the State Auto policy.”  Id. at p. 15. 

Insurers can breathe a sigh of relief from the State Auto II decision because State Auto I had potentially far-reaching consequences even though insurers are allowed to control the investigation, defense, and settlement of third-party claims against insureds.  Unfortunately, State Auto was required to endure the discovery process and seek summary judgment before the WVSCA dismissed the insured’s complaint against it.

Click here to read the full decision.  

© Steptoe & Johnson PLLC. All Rights Reserved.National Law Review, Volume VII, Number 293
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About this Author

Laurie Barbe, insurance claims lawyer, Steptoe Johnson, Morgantown law firm
Member

Laurie Barbe represents insurance companies in response to first and third party insurance claims and defends individuals and businesses in claims involving personal injury, wrongful death, products liability and property damage. She has also been involved in appellate proceedings before the Supreme Court of Appeals of West Virginia and the United States Court of Appeals for the Fourth Circuit.

Key Experience

Provided assistance to insurance companies writing new business in West Virginia to assure their policies are in compliance with applicable laws and regulations

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304-598-8113
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