The Supreme Court of Appeals of West Virginia has made it harder for policyholders to prevail on claims of common law bad faith against insurers in that state. In State of West Virginia ex rel. State Auto Property Insurance Companies v. Stucky, No. 17-0257, 2017 WL 4582607 (W. Va. Oct. 10, 2017), West Virginia’s highest court held that an insurance company cannot be held liable for bad faith regardless of its dilatory conduct, so long as it ultimately defends and indemnifies its policyholder.  As the dissent in Stucky observed, however, “[t]his over-simplified approach is myopic.”

In Stucky, the policyholder was a construction company that allegedly damaged a couple’s home.  The construction company, though, believed it “was insured for the damage to the … property under a commercial general liability policy ….”

Although the company’s insurer initially agreed “that it would handle the claim,” the insurer nevertheless allegedly “conducted a series of inspections and investigations, thereby delaying a potential settlement of the plaintiffs’ lawsuit, increasing the amount of the plaintiffs’ property damage, and resulting in the lawsuit filed against [the construction company] by the plaintiffs.”

Indeed, the third parties whose home allegedly was damaged by the construction company sued that company in West Virginia state court. In turn, the construction company filed a third-party complaint against its insurer. The insurer then moved for summary judgment, and the trial court denied that motion because it found that there were “unresolved questions of fact.”

The Supreme Court of Appeals, however, granted the insurer’s writ of prohibition:

In this proceeding, we are asked to determine whether [the policyholder’s] first-party bad faith claim should be permitted to go forward.  The record, however, establishes that [the policyholder] was fully defended by its insurer … throughout the lawsuit filed by the plaintiffs.  [The insurer] also reached and paid a settlement of $325,000 to the plaintiffs, an amount well within the $1,000,000 policy limit.  The defense and indemnification were provided at no cost to [the policyholder], and no judgment was entered against [the policyholder] by the circuit court.  On this record, we cannot see any evidence that [the insurer] failed to exercise good faith in meeting its obligations under the commercial general liability insurance policy.

In a well-reasoned dissent, Justice Workman, joined by Justice Davis, took the majority to task for its “myopic” approach. They delivered a blistering rebuke to the majority’s “suggest[ion] that an insurer only has two duties under the commercial general liability policy – provision of a defense and indemnification – and that eventual satisfaction of those two duties precludes any recovery in a bad faith action”:

The majority in the present case draws the line injudiciously by essentially agreeing with [the insurer’s] assertion that provision of a defense and indemnification are sufficient, regardless of the manner in which such things are accomplished. However, paying in the end may not always be sufficient; an insurer must also adhere to its duty of good faith  and fair dealing throughout the process.  This is particularly imperative where the insured incurs damages of his own, as a result of any bad faith or unreasonable delay, in addition to the amount of indemnification.

The dissenting justices continued, explaining the additional damages the policyholder had alleged in Stucky:

The allegations made by the insured below were that the insurer acted in bad faith in acknowledging and then denying coverage; by failing to resolve a claim where liability was clear for seven years; by causing the insured to lose the sale of a house that was affected by the slide, as well as to incur additional mortgage and finance charges, attorney’s fees and other out-of-pocket expenses; by causing the insured to be sued both in a declaratory relief proceeding wherein the insure[r] denied coverage after first  acknowledging it and the ultimate civil action; by firing both an independent adjuster and an engineer, each of whom recommended payment of the claim early on; and by causing the insured to suffer other consequent damages as the result of the long delay and obstreperousness of the insurer in failing to meet its obligations under the insurance contract in a timely manner. …

Justices Workman and Davis, however, were not yet done, explaining:

We have also consistently recognized that “[a] policyholder buys an insurance contract for peace of mind and security, not financial gain, and certainly not to be embroiled in litigation. The goal is for all policyholders to get the benefit of their contractual bargain ….”  “[W]hen an insured purchases a contract of insurance, he buys insurance – not a lot of vexatious, time-consuming, expensive litigation with his insurer.”  Thus, an insurer should not be permitted to unjustifiably delay or impede resolution of a claim in a manner that causes additional damages to its insured (internal citations and footnote omitted).

“Critically,” they then added, “the ultimate financial satisfaction is not singularly dispositive in bad faith cases.”

Or, at least, it should not be.