W W W . D I N S LA W . C O M
BAD FAITH INSURANCE
CLAIMS IN OHIO
November 7, 2008
Richard Porotsky, Esq.
Dinsmore & Shohl LLP
255 East Fifth Street
Cincinnati, Ohio 45202
(513) 977-8256
Part 1
Emerging Issues and Current Laws
© 2008 Dinsmore & Shohl LLP

Does proof of bad faith entitle the policyholder to
attorney fees?

Does bad faith require proof of intentional denial?

Can policyholders always obtain privileged and work
product materials in discovery?
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Zoppo v. Homestead Ins. (1994), 71 Ohio St.3d 552, syl
¶1:
─

"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
therefor."
when assessment of coverage is being considered
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Zoppos's "reasonable justification" standard
─
Similar to negligence
─
Does not warrant punitive damages or atty fees
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

No Bad Faith Where the Issue is "Fairly Debateable"
─
"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.), 2005Ohio-3052, at ¶¶ 37-46 ("fairly debatable")
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

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)
─
Cincinnati Ins. Co. v. ACE INA Holdings, Inc. (1st
Dist), 175 Ohio App.3d 266, 282, ¶¶57-60
(summary judgment for insurer)
© 2008 Dinsmore & Shohl LLP
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
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Correct Coverage Decisions -- Per Se Reasonable
─
Seems logical, many courts agree
─
A few courts still seem to allow the possibility

Handling claim improperly or treating badly

Controversial and difficult to establish
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio


Pre-Zoppo Standards and Lingering Effects
─
Motorists Mutual Ins Co v. Said (1992), 63 Ohio
St.3d 690, 590 N.E.2d 1228
─
when the insurer "intentionally" refuses to
satisfy a claim or reckless indifference
Zoppo: "Intent is not and has never been an element
of the reasonable justification standard."
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Some courts quote old standards
─
Goins v. Stewart (5th Dist.), 2008-Ohio-4206,
¶45: (requires that the insurer . . . intentionally
refuses to satisfy the insured's claim).
─
Mentor Chiropractic v. State Farm (Lake Co.
2000), 139 Ohio App.3d 407: (must prove refusal
to pay a claim “totally arbitrary and capricious”).
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Relationship of Punitive Damages to Bad Faith
─
Zoppo did not expressly lower standards for
punitive damages and attorney fees
─
That standard is separate and distinct
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Required proof for punitive damage & attorney fees
─
Malice, aggravated or egregious fraud, oppression, or
insult. Zoppo, 71 Ohio St.3d at 557
─
"Malice" will often be the easiest to prove
─
conscious disregard for rights and
─
great probability of causing substantial harm
© 2008 Dinsmore & Shohl LLP
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 certain key suspects,
verify alibis, follow up with witnesses,or go Pa.
─
This can also be sufficient for malice
© 2008 Dinsmore & Shohl LLP
The Current Bad Faith Standard in Ohio

Costly Mistake: Goodrich v. Commercial Union Ins
(9th Dist. 2008)
─
Failed to object to jury instructions
─
On appeal, too late
─
Award of $20 million attorney fees despite no
proof of malice or punitive damages
© 2008 Dinsmore & Shohl LLP
Comparative Bad Faith & Related Defenses

"Reasonable justification" - 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
─
Other jurisdictions use this.
─Kransco
v. American Empire Surplus Lines
Insurance Co. (Cal. 2000), 97 Cal.Rptr.2d 151, 162
© 2008 Dinsmore & Shohl LLP
Comparative Bad Faith & Related Defenses

Non-cooperation and related defenses
─
Insurers can and should focus upon the
policyholder's conduct.

Fraud by the policyholder

Failure to provide timely notice of a claim

Non-cooperation in the investigation or
defense
© 2008 Dinsmore & Shohl LLP
Comparative Bad Faith & Related Defenses

Cooperation required versus third parties
─
Cooperate in the defense or investigation
─
Fair and frank disclosure of information
─
Cannot condition cooperation
© 2008 Dinsmore & Shohl LLP
Comparative Bad Faith & Related Defenses
Cooperation as to first-party claims—example
─
Johnson v. Allstate Insurance Co. (Trumbull Co.), 2002Ohio-7156
─
Policyholder provided some financial info + inspection
─
Refused to allow the insurer to inspect a damaged washer,
dryer, and computer, claiming discarded
─
Non-cooperation "materially and substantially prejudiced"
[the insurer's] ability to properly evaluate
© 2008 Dinsmore & Shohl LLP
Statutory Bad Faith and Related Law

Statutory Bad Faith
─
R.C. § 1343.03 (interest)
─
R.C. § 3901.20 - .21 (unfair, deceptive acts in
business of insurance)
─
O.A.C. §§ 3901-1-07 and § 3901-1-54 (same)
─
R.C. § 1345.01 (Consumer Sales Practices)
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Ground-breaking decision, Boone v. Vanliner Ins.
Co. (2001), 91 Ohio St.3d 209
─
“entitled to discover claims file materials
containing attorney-client communications
related to the issue of coverage that were
created prior to the denial of coverage."
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Work product doctrine—some Courts find it does
not necessarily protect materials
─
Garg v. State Automobile Mut. Ins. Co. (2nd Dist.
2003), 155 Ohio App.3d 258, ¶16
─
Expands Boone
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Other courts fully protect work product
─
Goodrich Corp. v. Commercial Union Ins Co.,
(9th Dist.), 2008-Ohio-3200, ¶12
─
Rejected Garg's expansive view
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Garg's basis for expansion
─
So long as they "may cast light on whether the
insurer acted in bad faith."
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Example: Scotts Co. LLC v. Liberty Mutual (May 18,
2007), S.D. Ohio No. 2:06-CV-899 (extended Boone)
─
Where the alleged bad faith involves conduct after
the denial, the relevant period can be extended

─
Alleged ongoing campaign to mislead
Boone not limited to documents in claim file

Privileged documents outside claim file relevant
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Procedural Protections
─
Boone permits delayed disclosure, upon motion

Stay, if release will inhibit the ability to defend
─
Some courts require in camera inspection
─
Immediately appealable
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Example re stay and bifurcation: Maxey v. State
Farm (S.D. Ohio 2008), F.Supp.2d
─
Policyholder argued limited resources,
extended, duplicative proceedings
─
Court agreed "unnecessary duplication, delay,
and expense & does not serve . . . judicial
economy.”
─
Denial of stay / bifurcation
© 2008 Dinsmore & Shohl LLP
Latest Developments on Discovery of
Privileged, Work Product Materials

Example re stay & bifurcation: Poneris v. Pa. Life
Ins. Co. (Oct. 18, 2007), S.D. Ohio No. 1:06-cv-254
─
Allowing bad faith discovery without bifurcation
and without proof of coverage
─
“Sixth Circuit has not specifically foreclosed”
bad faith tort claim where contract claim failed
© 2008 Dinsmore & Shohl LLP
Part 2
Identifying the Type of Underlying Claim
and the Full Damages at Issue
© 2008 Dinsmore & Shohl LLP

Can third parties claim bad faith?

How far can an insurer’s exposure go beyond policy
limits?

Does an insurer ever have to pay for punitive damages
against the policyholder?
© 2008 Dinsmore & Shohl LLP
Differences In Insurer Duties Between First
and Third Party Claims

First party:
─

policyholder against insurer
Third party:
─
by others alleging liability on the part of the
policyholder
© 2008 Dinsmore & Shohl LLP
Differences In Insurer Duties Between First
and Third Party Claims

Third-Party Bad Faith Claims?
─
Ohio law: have no duty of good faith vis-à-vis
third party
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Reasonable Justification for Denial
─
Including balanced investigation
─
Must accounts for the interests of policyholder
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Prompt and Diligent Defense Against a Complaint
─
Must defend against all claims which potentially
or even arguably may be covered
─
Duty to defend is broader than duty to indemnify
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Duty to Defend--One claim-all claims rule:
─
Preferred Mutual Ins. Co. v. Thompson (1986), 23
Ohio St. 3d 78, 80
─
Must defend "both" a covered negligence claim and
noncovered intentional tort claim
─
Erie Ins. Exchange v. Colony Development Corp.
(Franklin Co. 1999), 136 Ohio App.3d 406, 413
(covered damage to shrubs mixed with non-covered))
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Duty to Defend: "Scope of the pleadings" rule
─
City of Willoughby Hills v. Cinti Ins. Co. (1984), 9 Ohio
St.3d 177, syl.
─
"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"
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

But, the duty to defend is not limitless
─
Cincinnati Ins. Co. v. Anders, 99 Ohio St. 3d 156,
2003-Ohio-3048, at §§ 21 & 51:
─
If conduct in the complaint is indisputably outside
the scope of coverage, there is no duty

Homeowner's negligent failure to disclose defect
to purchasers not an accident and did not
damage the home
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Right to be Timely Notified of Reservation of Rights
─
Appropriate notice
─
“Potential conflict of interest exists" whenever
an insurer assumes control but also "intends to
challenge its duty to indemnify
─
Policyholder may be the one to pay the judgment
© 2008 Dinsmore & Shohl LLP
The Insurer’s Responsibilities vis-à-vis the
Policyholder

Insurer may waive its coverage defenses it defends
absent reservation of rights
─
Based upon whether the policyholder prejudiced
─
Dietz-Britton: waited two years before it reserved
its rights.
─
Waived ability to rely upon exclusion.
© 2008 Dinsmore & Shohl LLP
Bad Faith Case Study: Advertising Injury
Relating to Infringement of Intellectual
Property Rights

Westfield Companies v. O.K.L. Can Line (1st Dist.
2003), 155 Ohio App.3d 747

Denied a defense to its local policyholder

Conducted no interviews or other active
investigation

Misread the Complaint
© 2008 Dinsmore & Shohl LLP
‘98 ISO Form: Coverage B Personal and
Advertising Injury Liability
“ We will pay those sums that the
insured becomes legally obligated
to pay as damages because of
‘personal and advertising injury’ to
which this insurance applies.”
© 2008 Dinsmore & Shohl LLP
“We will have the right and duty to
defend the insured against any ‘suit’
seeking those damages.”
Elements to prove coverage for IP claims
under “Advertising Injury” provisions
(1) an enumerated offense
(2) advertising activity
(3) causal connection
(4) no applicable exclusions

Westfield v. OKL, (1st Dist.) 2003-Ohio-7151, ¶ 12;
© 2008 Dinsmore & Shohl LLP
COMPLAINT FILED APRIL 2000
Plaintiff Alcoa alleges:
1.
This is an action for patent infringement arising under
the Patent Laws of the United States, 35 U.S.C. §§ 271
et seq.; for federal unfair competition arising under the
Trademark (Lanham) Act of 1946, as amended, 15
U.S.C. §§ 1121 and 1125; and for unfair competition
under the common law of the State of Illinois.
***
3.
Defendant . . . (“OKL”) . . . is engaged in the business
of manufacturing, marketing, servicing, and selling
equipment for use with machinery used in the
production of aluminum cans. . . .
© 2008 Dinsmore & Shohl LLP
9.
By about 1993, Alcoa had developed and was
manufacturing, marketing, and selling retrofit
products, including the ribbed, swept-box shaped,
liquid bearing ram support, for converting can
bodymaking machines of previous design into
machines conforming to the claimed inventions of
the ‘167 and ‘131 patents. . . .
***
10.
Alcoa’s can bodymaking machines containing the
ribbed swept-box shaped fluid bearing ram
support and its retrofit and remanufactured
products were and are appropriately marked with
the ‘167 and ‘131 patent numbers pursuant to 35
U.S.C. § 287.
© 2008 Dinsmore & Shohl LLP
12.
OKL has manufactured and sold . . . retrofit
products, and particularly the ribbed swept-box
shaped liquid bearing ram support, without
license, for the purpose of converting can
bodymaking machines of previous design into
conformance to the claimed inventions of the ‘167
and ‘131 patents. . . .
***
13.
The retrofit and remanufactured liquid bearing
ram supports marketed and sold by OKL and
Palmer-Tech are not marked with any OKL
insignia or other marking identifying OKL as the
source of the products. The OKL liquid bearing
ram supports are confusingly similar in
appearance, shape, and design to the liquid
bearing ram support marketed by Alcoa . . .
© 2008 Dinsmore & Shohl LLP
COUNT I
PATENT INFRINGEMENT -- ‘167 PATENT
14.
Alcoa realleges and incorporates by
reference ach of the allegations of
Paragraphs 1-13 above as if fully set forth
herein.
***
© 2008 Dinsmore & Shohl LLP
COUNT III
FEDERAL UNFAIR COMPETITION
24.
Alcoa realleges and incorporates by
reference ach of the allegations of
Paragraphs 1-13 above as if fully set forth
herein.
© 2008 Dinsmore & Shohl LLP
27.
The OKL retrofit and remanufactured liquid bearing
ram support products, by reason of their identical
distinctive features and similar overall configuration,
create a false description, representation, or
designation of origin, and results in either actual
confusion or a likelihood of confusion among
members of the purchasing public as to the origin of
OKL liquid bearing ram supports, in violation of
Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a).
28.
Aware of Alcoa’s trade dress rights and in willful
disregard thereof, OKL intentionally and illegally
copied the distinctive features and configuration of
Alcoa’s liquid bearing ram support.
© 2008 Dinsmore & Shohl LLP
29.
As a result of OKL’s and Palmer-Tech’s
wrongful acts, Alcoa has been damaged by loss
of sales, revenues, and profits, and loss of
business reputation and diminished goodwill
among the purchasers and potential purchasers
of OKL retrofit and remanufactured liquid
bearing ram supports. . .
30.
Upon information and belief, OKL and PalmerTech will continue their infringement…
© 2008 Dinsmore & Shohl LLP
1998 ISO Form: Advertising Injury
“14. “Personal and advertising injury” means injury, including
consequential “bodily injury”, arising out of one or more of
the following offenses:
* * *
d. Oral or written publication of material that slanders or libels a
person or organization or disparages…;
e. Oral or written publication of material that violates a person’s
right of privacy;
f. The use of another’s advertising idea in your
“advertisement”; or
g. Infringing upon another’s copyright, trade dress or slogan in
your ‘advertisement’.”
© 2008 Dinsmore & Shohl LLP
Trade-Dress and Advertising

“Trade-dress infringement necessarily involves
advertising”
–
To cause the customer confusion required under
the Lanham Act, one must communicate to
intended customers via use of the dress

To the extent that additional “advertisement” is
required to trigger coverage, a web page or any
traditional printed or broadcast notice qualifies

Westfield v. OKL, at ¶ ¶ 15-17.
© 2008 Dinsmore & Shohl LLP

Westfield v. OKL result
–
Required defense of trade dress and patent suit
–
Web site and the marketing allegations triggered
defense obligations for advertising injury where
enumerated claim existed
© 2008 Dinsmore & Shohl LLP
Bad Faith Case Study

OKL’s Insurer Found to be Wrong
─
Failed to investigate, applied wrong policy
─
Erroneous argument as to intentional acts,
─
─
citing authority reversed by Ohio Supreme Court
Court awarded the policyholder attorney fees
incurred to establish duty to defend
© 2008 Dinsmore & Shohl LLP
Bad Faith Case Study

First District affirmed the award of OKL’s attorney
fees
─
"stubborn propensity for needless litigation."
─
Sorin v. Bd. of Edn. (1976), 46 Ohio St.2d 177:
─
when losing party acts in "bad faith,
vexatiously, wantonly, obdurately, or for
oppressive reasons."
© 2008 Dinsmore & Shohl LLP
Bad Faith Case Study: Goodrich Corp. v.
Commercial Union Ins. Co. (9th Dist. 2008)

One insurer guilty of bad faith

One insurer absolved of bad faith

Difference in conduct – diligence and investigation
© 2008 Dinsmore & Shohl LLP
Types of Bad Faith Cases

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)
–
Punitive damages awarded in underlying case ?
© 2008 Dinsmore & Shohl LLP
Types of Bad Faith Cases

Bad Faith Refusal to Pay a Covered Claim
–
Regardless of excess liability
–
Punitive damages due to unreasonable
handling
–
Distinction between tort liability and punitive
damages
© 2008 Dinsmore & Shohl LLP
Types of Bad Faith Cases

Bad Faith Failure to Defend, Even if Indemnity Is
Ultimately Disproven
–
Potential for establishing punitive damages
–
Lack of good faith in “processing” a claim
–
Opinion from coverage counsel aids insurer
© 2008 Dinsmore & Shohl LLP
Types of Bad Faith Cases

Bad Faith Delay in Payment of a Covered Claim
–
Failure to pay undisputed portion of claim
where only a set-off issue remained
© 2008 Dinsmore & Shohl LLP
Types of Bad Faith Cases

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
–
Possibly limited to intentional failure to
determine whether lawful basis to deny
 Or
limited to contractual limitations periods
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Enforcement of Policy Limits
─
Exposure may not be limited to the policy's limit
─
Even absent malice or intent, an insurer could be
responsible for more
─
Failure to settle third party claim
─
Responsible for the entire verdict, without
regard to policy limits
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Punitive Damages
─
If the insurer acted with malice or other intent
─
Punitive damages in policyholder underlying suit
─
Whether the insurer’s excess liability includes
liability for those punitive damages?
─
Is it distinct from whether punitive are insurable?
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Other States
─
Carpenter v. Automobile Club Interins,
Exch. (8th Cir. 1995), 58 F.3d 1296
(Arkansas law) (punitive damages
awarded in underlying case.)
─
Paid by insurer; insured "made whole"
for "consequential damages” of bad faith
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

The majority of courts appears to hold that
underlying punitive damages cannot be
recovered
─
Soto v. State Farm (Ct. App. 1994), 613
N.Y.S.2d 352
─
“still directly attributable to the insured’s
immoral and blame-worthy behavior.”
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Ohio on Coverage for Punitive Damages
─
Soto closer to the reasoning of Ohio courts
─
Punitive damages have been held uninsurable
─
“Because punitive damages are awarded to punish
and deter the tortfeasor . . . there is a different and
much stronger policy interest against insurance
coverage which would indemnify the tortfeasor
against punitive damages.” Harasyn v. Normandy
Metals, Inc. (1990), 49 Ohio St.3d 173, 176 & n.3
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Attorney Fees and Costs
─
If the policyholder proves bad faith and punitives
─
Some courts may allow other standards
─
Before 1999, Ohio statutory law declaratory judgment
─
It is still arguable that ORC 2721.16 does not
supersede the prior authority, Trainor and Allen
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Emotional Distress
─
May open the doorway to other tort-based
damages, Eastham v. Nationwide (1st
Dist. 1990), 66 Ohio App.3d 843
© 2008 Dinsmore & Shohl LLP
Determining the Insurer's Exposure

Interest
─
Prejudgment Interest required under R.C. 1343.03(A)
─
From the time the amount became due and payable.

Goodrich Corp. v. Commercial Union Insurance
Co., et al. (9th Dist.), 2008-Ohio-3200, ¶¶ 51-54

"trial court had no discretion to deny Goodrich's
request for prejudgment interest."

Prejudgment interest amounted to $20 million
© 2008 Dinsmore & Shohl LLP
W W W . D I N S LA W . C O M
Richard Porotsky, Esq.
Dinsmore & Shohl LLP
255 East Fifth Street
Cincinnati, Ohio 45202
(513) 977-8256