march 10, 2009

March 10, 2009 Richard Porotsky, Esq.Dinsmore & Shohl LLP

255 East Fifth StreetCincinnati, Ohio 45202

porotsky@dinslaw.com(513) 977-8256

Bad Faith Title Insurance Claims in Ohio, and Ultimate

Responsibility for Paying Claims

How can bad faith claims arise in the title insurance context?

What is the legal standard in Ohio for holding an insurer liable for bad faith?

Can a title agent be held liable for bad faith? Does a bad faith claim mean that the responsible party is

liable for punitive damages and attorney fees? When a title insurer pays a claim, must it accept final

responsibility for that claim?

Part 1Part 1

Types of Claims / How Insurance Disputes Arise

Types of Claims; Possible Coverage Disputes Many defects are corrected without coverage debate

– failure to pay off prior mortgages and liens;

– failure to pay taxes;

– failure to promptly record a mortgage.

Types of Claims; Possible Coverage Disputes Some claims not covered; buyer / lender assumes risk

– Claims anticipated or excluded

– Dalessio v. Williams (9th Dist. 1996), 111 Ohio App.3d 192 (excluded "plat restrictions;“ garage in violation).

– Kuhn v. Ferrante (Ohio App. 5 Dist.), 2001-Ohio-1970.

Types of Claims; Possible Coverage Disputes Even if insurer initially accepts risk, insurer is not

always "stuck" with the expense – Liability can be shifted – Part VI below.

Types of Claims; Possible Coverage Disputes And, disputes can arise as to insurance coverage for

the claims– Potential bad faith claims.

Part 2Part 2

Two Bad Faith Case Examples

Billboard and Leasing Dispute

Eller Miller Media v. DGE Ltd., (8th Dist.), 2004-Ohio-4748.

– buyer of a commercial building (DGE),

– seller (Pauline DiGeronimo),

– title agency (Surety Title),

– title insurer (Stewart Title Guaranty Company)

Billboard posted on one side Seller’s affidavit

– "no person other than the affiant is in possession or has the right of possession of the property . . .”

Title commitment – did not mention billboards

– provided two exceptions

rights of those in possess’n not shown by public record

matters disclosed by survey or inspection.

After closing:– Eller claimed right to use billboard

– Title policy issued with billboard exception

– Eller sued DGE

– Stewart (insurer) refused defend

Trial Court ruling:– Stewart (insurer) had to defend

– unilaterally exclusion invalid

– Surety (agent) breached its fiduciary duty

– Both Surety and Stewart to pay all DGE's attorney fees

– No claim against Ms. DiGeronimo

Appellate Ruling (minor changes)– Affirmed duty to defend

Cited breadth of the duty to defend

– No breach of fiduciary duty by Surety

– Allowed a claim against Ms. DiGeronimo

DGA’s claim of Bad Faith:– against both Surety and Stewart.

– but not ever added to the complaint.

– Nonetheless, upheld attorney fee award

Unusual award of fees for prosecution

Obscure cases as to wrongful refusal to defend.

2nd Bad Faith Example--Easement Dispute--

Easement Dispute

Brown v. Guar. Title & Trust/Arta, (5th Dist) 1996 WL 488004

– property owner (Ms. Brown)

– her neighbor (Ms. Stepath),

Claimed right to ride horse, build on easement

– Ms. Brown's title insurer (Guarantee Title & Trust).

Easement Dispute

Insurer refused to make a complete defense– Instead, under reservation of rights, paid 1/3 of defense

– Ms. Brown prevailed versus Stepath

Easement Dispute Ms. Brown sought the other 2/3 defense cost--

$15,000– insurer refused– Ms. Brown sued, alleged bad faith. – Jury awarded $47,000, including all the legal fees. – Cited bad faith standard in Zoppo v. Homestead Ins. Co.

(1994), 70 Ohio St. 3d 552. reasonable justification

Easement Dispute

The title insurer argued for no attorney fees– Argued fees are improper absent punitive damages

Yet, Court upheld the fee award– Cited exception for bad faith or malicious conduct

Part 3Part 3

Insurance Principles Applicable to Title Insurance Claims

The Insurer’s Responsibilities vis-à-vis the Policyholder Overview

– the duty to defend a potentially covered claim

– the duty to indemnify for a covered claim

– the duty to investigate in good faith and provide reasonable justification for denial

The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense

Duty to defend is broader than duty to indemnify─ Various rules broaden the duty

─ Must be provided promptly and diligently

Duty to Defend--One claim-all claims rule: ─ Preferred Mutual Ins. v. Thompson (1986), 23 Ohio St. 3d

78 ("both" a covered negligence claim and noncovered intentional tort)

Duty to Defend: "Scope of the pleadings" rule

"Where the insurer's duty to defend is not apparent from the pleadings . . . but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense“

City of Willoughby Hills v. Cinti Ins. Co. (1984), 9 Ohio St.3d 177, syl.

But, the duty to defend is not limitless─ Cincinnati Ins. Co. v. Anders (2003), 99 Ohio St. 3d 156:

─ Homeowner's negligent failure to disclose defect

─ Not an accident; did not damage the home

─ If conduct in the complaint is indisputably outside the scope of coverage, there is no duty

If the insurer breaches and fails to defend– waives policy conditions; policyholder may settle– insurer “violates its duty to defend at its own peril.”

Sanderson v. Ohio Edison Company (1994), 69 Ohio St.3d 582, 586-87, 635 N.E.2d 19, 23-24.

The Insurer’s Responsibilities vis-à-vis the Policyholder -- Defense

But if the insurer defends under reservation of right:– Policyholder not free to settle without insurer consent

– Auto-Owners v. J.C.K.C., Inc. (Ohio App. 9 Dist.), 2004-Ohio-5186

The Insurer’s Responsibilities vis-à-vis the Policyholder -- Indemnity Indemnity obligations arise in various circumstances:

– (1) defends without a reservation & loses

– (2) defends under reservation of rights & loses;

– (3) wrongfully refuses to defend

The Insurer’s Responsibilities vis-à-vis the Policyholder – Reasonable Investigation & Basis for Denial (Duty of Good Faith)

Part 4Part 4

Ohio Bad Faith Law

The Current Bad Faith Standard in Ohio Rationale for the tort

– Economic Inequality

– Hoskins v. Aetna Life Insurance Company (1983), 6 Ohio St.3d 272, 275-77

– Proper incentive to settle claims near liability limits

The Current Bad Faith Standard in Ohio Ohio’s Definition of Bad Faith:

─ "An insurer fails to exercise good faith in the processing of a claim of its insured where its refusal to pay the claim is not predicated upon circumstances that furnish reasonable justification”

─ Zoppo v. Homestead Ins. (1994), 71 Ohio St.3d 552

The Current Bad Faith Standard in Ohio Zoppos's "reasonable justification" standard

─ Similar to negligence ─ Does not warrant punitive damages or atty fees

The Current Bad Faith Standard in Ohio No Bad Faith Where the Issue is "Fairly Debatable"

─ "Genuine dispute over either the status of the law at the time of the denial or the facts giving rise to the claim."

─ Abon v. Transcont'l Ins. Co. (5th Dist.), 2005-Ohio-3052, at ¶¶ 37-46 ("fairly debatable")

The Current Bad Faith Standard in Ohio Thus, when insurer is wrong, summary judgment or

directed verdict still possible─ Helmick v. Republic-Franklin Ins. (1988), 39 Ohio

St.3d 71, 75-76 (reasonably justified to question)─ Schuetz v. State Farm (Franklin Co. Comm. Pls.

2007), 147 Ohio Misc.2d 22, ¶¶83-84 (there are federal circuits that have sided with insurer)

The Current Bad Faith Standard in Ohio "[M]ere refusal to pay insurance is not, in itself,

conclusive”─ Something beyond breach of contract required─ A lack of reasonable justification

The Current Bad Faith Standard in Ohio

Correct Coverage Decisions -- Per Se Reasonable─ Very logical, many courts agree─ A few courts may still allow other rules

The Current Bad Faith Standard in Ohio Relationship of Punitive Damages to Bad Faith

─ The two standards are separate and distinct

The Current Bad Faith Standard in Ohio Required proof for punitive damage & attorney fees

─ Malice, aggravated/egregious fraud, oppression, insult. ─ "Malice" will often be the easiest to prove

─ conscious disregard for rights and─ great probability of causing substantial harm

─ Costly Mistake: Goodrich v. Commercial Union Ins (9th Dist. 2008) ($20 million atty fees despite no proof)

The Current Bad Faith Standard in Ohio Zoppo case shows this malice standard.

─ Failed to conduct an adequate investigation (fire)─ One-sided, failed to locate key suspects, verify

alibis, follow up with witnesses, or go Pa.

Comparative Bad Faith & Related Defenses

─ Comparative Negligence?─ Ohio rejects "reverse bad faith" Tokles & Son v.

Midwestern Indemn (1992), 65 Ohio St.3d 621, 632─ Insurer and insured not on equal footing

Non-cooperation and related defenses─ Insurers can and should focus upon the

policyholder conduct – cooperation required. Fraud by the policyholder Failure to provide timely notice of a claim Non-cooperation in investigation or defense

Non-Cooperation example:─ Johnson v. Allstate Insurance Co. (Trumbull Co.), 2002-

Ohio-7156─ Policyholder provided some financial info + inspection─ Refused to allow inspect damaged washer, dryer, computer─ Non-cooperation "materially and substantially prejudiced"

[the insurer's] ability to properly evaluate

Bad Faith Failure to Settle a Covered Claim, Resulting in Excess Liability

– Liability for entire judgment against the insured– “Incentive” to accept a settlement offer in a case with

damages “near or over its policy limits.” – Adjudicated judgment required (not consent judgment)

Types of Bad Faith Cases

Bad Faith Refusal to Pay a Covered Claim

– Regardless of excess liability

– Punitive damages possible if proven intent or malice

Bad Faith Failure to Defend, Even if Indemnity Is Ultimately Disproven

– Potential for establishing punitive damages

Bad Faith Delay in Payment of a Covered Claim

– Failure to pay undisputed portion of claim where only a set-off issue remained

Fail to Reasonably Handle Non-covered Claim– Bullet Trucking, Inc. v. Glenfalls Ins. Co. (Montgomery

Co. 1992), 84 Ohio App.3d 327

– Criticism and disapproval of Bullet

Part 5Part 5

Defense Counsel and Insured Client Rights

(Potential Source of Bad Faith)

Defense Counsel and Insured Client Rights

Tri-partite Relationship: Conflicts of interest can arise when insurer hires an attorney to defend a policyholder. – settlement

– strategy

– confidentiality

Defense Counsel and Insured Client Rights Rule of Professional Responsibility 1.8 & comments:

– Defense attorneys owe same duties to the policyholder as any client:

– subject only to insurer’s rights, if any, under the policy Lawyer should provide a “Statement of Insured

Client’s Rights” at the start of the engagement

Statement of Insured Clients’ Rights

“An insurance company has retained a lawyer to defend a lawsuit or claim against you. This Statement of Insured Client’s Rights is being given to you to assure that you are aware of your rights . . .”

2. Directing the Lawyer: Your policy may provide that the insurance company can reasonably control the defense of the lawsuit. In addition, your insurance company may establish guidelines . . . that you are entitled to know. However, the lawyer cannot act on the insurance company’s instructions when they are contrary to your interest.

4. Confidentiality: Lawyers have a duty to keep secret the confidential information a client provides, subject to limited exceptions.

However, the lawyer . . . may have duty to share with the insurance company information relating to the defense or settlement . . ..

7. Settlement: Many insurance policies state that the insurance company alone may make a decision regarding settlement of a claim. Some policies, however, require your consent . . . .

Part 6Part 6

Ultimate Responsibility -- Reimbursement of Amounts Paid by

Title Insurers

Re-imbursement of Amounts Paid by Title Insurers

Title Agent’s Contractual, Statutory & Common Law Obligations

– agency agreements – statute permits handling of escrows (R.C. 3953.23(B))

– Statutory duty to separate accounts – Possible negligence when agent mis-applies escrow funds

– Lashua v. Lakeside Title & Escrow (5th Dist), 2004-Ohio-1728.

E&O Coverage of the Title Agency – policies vary

– limits and exclusions

Liability of Other Tortfeasors Who Caused the Claims– title agency employees acting outside scope of duty

– owners or others who provided false affidavit

– must have a deep pocket

Richard Porotsky, Esq.Dinsmore & Shohl LLP255 East Fifth Street

Cincinnati, Ohio 45202porotsky@dinslaw.com

(513) 977-8256

march 10, 2009

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