Expert Testimony
Supporting Bad Faith in the Absence of Indemnity
Whether an insurance carrier has complied with its good faith obligations owed under an insurance policy is a fact question turning on a multitude of variables and circumstances. This often involves the complex intersection of law and industry standards that are not within the understanding of the general public.
Expert testimony is frequently necessary to establish whether the insurer’s actions were reasonable or outside the bounds of good faith and fair dealing.
Recently, the District Court of Colorado took the opportunity to examine the permitted scope of opinions regarding claims handling under Fed. R. Evid. 702. As a bonus to policy holders and claimants, the Court further allowed a bad faith failure to defend claim to proceed after determining the carrier had no indemnity obligation under the policy.
Lua v. QBE Insurance Corp., 2019 WL 5104477 (D. Colo. Oct. 11, 2019)
Background and Underlying Action
Lua involved a dispute over the sale of a residential property.
Lua purchased a home that was listed by Bowser and his company Bowser, LLC. At the time of the sale, Bowser and his company were insured by QBE under an error and omissions policy.
After the purchase, Lua discovered several apparent defects in the dwelling. As the listing agent, Bowser had filled out the Seller’s Property Disclosure and had failed to identify the alleged defects. Therefore, Lua filed suit against Bowser alleging among other things that Bowser had negligently or intentionally misrepresented the characteristics of the home on the Property Disclosure.
After Lua filed his suit, Bowser tendered the claim to QBE and sought coverage under his policy. QBE denied any coverage, including a defense under a reservation, on the basis that the tender was untimely and that the claims were completely excluded under the terms of a fraud exclusion.
Following QBE’s denial, Bowser agreed to pay $10,000 to Lua, admit liability, submit Lua’s claims to arbitration and assign his claims against QBE to Lua in exchange for a covenant not to execute.
The claims proceeded to arbitration resulting in a substantial award to Lua. However, the arbitrator only awarded damages on the intentional misrepresentation claim.
Coverage and Bad Faith Claim
After the entry of the arbitration award, Lua brought his assigned claims for coverage and bad faith against QBE in an effort to satisfy his judgment. Both QBE and Lua moved for summary judgment on the coverage issues and QBE moved for summary judgment on the bad faith claims.
On the cross-motions for summary judgment the Court determined that:
- QBE had a duty to defend the original claims made in the Underlying Action;
- QBE did not have a duty to indemnify Bowser for the Arbitration Judgment as the intentional misrepresentation claim on which damages were premised fell within the fraud exclusion; but
- The bad faith failure to defend claim could proceed even though the Arbitration Judgment was not covered.
After these findings were entered on October 8, 2019, the Court next took up QBE’s Motion to Exclude Lua’s claims handling expert on October 11, 2019.
Claims Handling Expert Testimony Under Fed. R. Evid. 702
QBE set out several challenges to opinions expressed by Lua’s claims handling expert. These included the expert’s ability to testify about insurance industry custom and standards and whether QBE’s actions violated these standards, whether QBE’s actions violated the Unfair Claims Settlement Practice’s Act, and that the agreement between Bowser and Lua was appropriate.
1. Industry Custom and Standards
QBE’s first challenge concerning industry custom and standards was summarily rejected by the Court and rightfully so. The Court found that testimony concerning custom and standards would benefit the jury and experts are routinely permitted to testify as to whether a defendant’s conduct violated acceptable standards. Further, the fact that many of these standards have been developed by case law and the expert’s understanding and review of the case law would not make such opinions inadmissible. While the Court was obligated to instruct the jury based on the bad faith standard developed throughout case law, the expert would be permitted to testify generally about his understanding of the case law and how it impacts his understanding of the standards that govern the insurance industry. Further, the expert would also be permitted to offer opinions about the reasonableness of Defendant’s actions based on these standards.
2. Unfair Claims Settlement Practice’s Act
QBE’s second challenge focused on the expert’s ability to testify about the standards set out in the Unfair Claims Settlement Practices Act. QBE challenged the admissibility of such testimony on the basis that the Act does not establish a standard of care for bad faith liability and is inconsistent with Colorado bad faith law. The Court mainly rejected this argument on the basis that, while the Act does not establish a standard of care, it is evidence of industry standards. As such, the expert would be permitted to testify that the Act provides evidence of industry standard and whether QBE’s actions comported with the act.
3. Reasonableness of Agreement
Finally, QBE sought to exclude the expert’s testimony that the type of agreement entered into by Bowser and Lua after QBE’s denial of coverage is “generally enforceable…” While at first blush, this would seem to be an issue of law for the trial court, QBE was challenging the reasonableness of the agreement and whether the agreement was the product of fraud and collusion and such issues had not been addressed by the Court. As these were identifiable issues at trial, this opinion properly informed the jury and countered the unreasonableness, fraud, and collusion defenses.
Impact on Future Cases
While only a district court case not yet subject to Circuit Court appellate review, Lua should be used as a guidepost for extra-contractual litigation.
Missouri’s standards for the admission of expert testimony closely mirror those of Fed. R. Evid. 702. Lua provides an in-depth discussion of the proper areas a claims handling expert can address and areas that are routinely challenged by carriers.
Equally important is the Court allowing the bad faith failure to defend claim to proceed in the absence of a duty to indemnify. This is only proper given the nearly universal recognition that the carrier’s obligation to defend and obligation to indemnify are two separate and distinct duties. However, each is governed by the carrier’s overarching implied duty of good faith and fair dealing that is present in every policy. Each obligation is vital to the insured and a carrier’s bad faith in performing either should give rise to extra-contractual liability. Such a position appears in line with Missouri Court of Appeals decisions in Advantage Bldgs. v. Mid-Continent Cas. Co. and Adams v. Certain Underwiters at Lloyd’s of London.
|
|
