A federal district court in Mississippi has ruled that an insured's bad faith claim against its insurance company could proceed even though the district court dismissed the insured's breach-of-contract claim against the insurer.
The Case
On August 22, 2016, Kate Speed, a tenant in a multi-family residential complex owned by Carleton Holdings, LLC, and managed by Heritage Properties, Inc., sued both entities. She alleged that she had been "exposed to mold and hazardous substances and conditions on the subject premises that proximately caused her emotional and bodily injury."
Upon receipt of the lawsuit, Heritage placed its insurance agent on notice of the claim, which notified the broker, which in turn notified RSG Underwriting Managers, LLC/WKFC Underwriting Managers ("WKFC") on August 31, 2016. According to Heritage, WKFC acknowledged receipt of the claim on behalf of Ironshore Specialty Insurance Company, which had issued Heritage a commercial general liability insurance policy, and then assigned the claim administration to York Risk Services Group.
On September 6, 2016, York sent an "Acknowledgement of Assignment" to Heritage and WKFC. Thereafter, according to Heritage, "neither Heritage, nor the agent . . . nor the broker . . . nor . . . []WKFC[] heard anything further until January 24, 2017[,] when Heritage learned that a default judgment had been taken against [it.]"
Heritage asserted that when it asked York about the default, York initially said that it had sent a letter denying coverage for the claims in Ms. Speed's lawsuit in September 2016. According to Heritage, York said that "the certified letter was unclaimed and returned to [it, so] the certified copy was then sent [to Heritage via] regular mail" on October 12, 2016.
According to Heritage, York later "admitted" that "the disclaimer letter was sent out to Heritage . . . but it was sent regular mail and not certified mail on [September 9, 2016.]"
Heritage filed a lawsuit on July 31, 2017 against Ironshore, York, and WKFC. Among other things, it asserted claims for breach of contract and breach of the duty of good faith and fair dealing.
The defendants moved to dismiss, asserting that Ironshore had no duty to defend Heritage in Ms. Speed's lawsuit and, therefore, that they did not breach the contract or the duty of good faith and fair dealing.
The District Court's Decision
The district court dismissed all claims except the claim for breach of the duty of good faith and fair dealing.
In its decision, the district court first agreed with the defendants that Ironshore had no duty to defend Heritage, given that Ms. Speed's lawsuit alleged exposure to mold and the policy excluded coverage for claims involving an "organic pathogen," such as mold.
The district court next considered Heritage's contention that the defendants had breached the duty of good faith and fair dealing by failing to "promptly and reasonably notify" it that coverage had been denied.
The district court explained that all contracts contained "an implied covenant of good faith and fair dealing in performance and enforcement." Good faith, the district court continued, meant "the faithfulness of an agreed purpose between two parties," while bad faith required a showing of "more than bad judgment or negligence" and implied "some conscious wrongdoing because of dishonest purpose or moral obliquity."
Here, the district court observed, the parties had not addressed the extent to which the failure to provide a declination notice fit within this legal framework – and it said that it was "not inclined to delve too deeply into the legal issue without their input."
The district court then concluded that, accepting the well-pleaded factual allegations of the Heritage complaint as true, Heritage "at this time" had stated "a plausible claim for breach of the duty of good faith and fair dealing as to the alleged failure to notify it of the claim denial."