The ancient maxim “Commodum ex injuria sua nemo habere debet” or “No one should profit from one’s own wrong” does not bar West Virginia policyholders from securing damages from insurers which fail to settle claims against those policyholders quickly enough to prevent suits from being filed by third-party claimants.
On June 14, 2016, in State ex rel. State Auto Property Insurance Companies v. Stucky, the West Virginia Supreme Court held that a policyholder states a claim for first-party bad faith where it alleges its insurer failed to use good faith in settling a claim by someone the policyholder allegedly harmed or injured.
In State Auto, an insured contractor was building a house for its co-defendants. The plaintiffs, adjacent property owners, filed a complaint against the insured contractor alleging that the construction activity caused damage to their property. The contractor then filed a third-party complaint against State Auto arguing that if it had properly and promptly settled the adjacent property owners’ claims, the contractor would not have been subjected to suit.
In 2005, the West Virginia Legislature abolished third-party bad faith claims. W. Va. Code § 33-11-4a. The West Virginia Insurance Commissioner’s unfair trade practices regulations thereafter adopted to define a “third-party claimant” as “any individual, corporation, association, partnership or other legal entity asserting a claim against any individual, corporation, association, partnership or other legal entity insured under an insurance policy or insurance contract of an insurer.” W. Va. C.S.R. § 114-14-2.8. As the State Auto case did not involve a claim by the contractor against its insurer for payment by the insurer to the contractor, but involved a claim by a third-party against the contractor for which the contractor sought a defense and indemnification by its insurer, State Auto argued that it could not be held liable for the manner in which State Auto handled the adjacent property owners’ claims.
In a 3-2 Memorandum Decision, however, a majority held that, “Inasmuch as a private cause of action exists for violations of W. Va. Code § 33-11-4(9), and CMD alleged in its third-party complaint violations of W. Va. Code § 33-11-4(9), we find that CMD set forth sufficient information to outline the elements of a statutory bad faith claim.”
In a dissent by Chief Justice Ketchum, he noted that, “Our law allows only two types of first-party bad faith claims, that is, where an insured (like CMD) sues its insurer (like State Auto),” where (1) “when an insurer fails to use good faith in resolving a ‘loss claim’ filed by the insured” and (2) “as a result of the insurer’s failure to use good faith in settling a lawsuit by a third-party the insured harmed” as a result of “an ‘excess judgment’ against the insured,” neither of which was satisfied because (1) the policyholder filed no claim against State Auto, and (2) State Auto eventually settled the claim against its policyholder and no excess judgment was entered.
In a dissent by Justice Loughry, he echoed, “What the majority has unwittingly allowed by not granting the requested writ of prohibition is the effective sanctioning of a third-party bad faith claim–a claim that is statutorily prohibited.”
The implications of the State Auto decision for insurance companies doing business in West Virginia are profound as anytime a policyholder is subjected to suit, the policyholder can then sue the insurer, even though under most policies it is the insurer which controls the investigation, settlement, and defense of third-party claims, seeking damages as a result of the insurer’s alleged delays in processing not a first-party claim, but a third-party claim.
As the policyholder in State Auto was defended at the insurer’s expense and the third-party claims settled after suit was filed, the policyholder’s damages are unclear, perhaps involving the assertion of annoyance damages, reputational damages, lost profits, attorney fees, and punitive damages, but it is doubtful that the Legislature intended such an outcome when it abolished third-party bad faith suits and it seems unfair to subject an insurer to paying a policyholder damages when it was the policyholder’s own negligence or other actionable conduct that produced a third-party claim simply because the insurer could not settle the claim quickly enough to avoid a lawsuit against the policyholder.