(Article from Insurance Law Alert, October 2024)
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Holding
The Fifth Circuit ruled that a district court erred in finding that an insurer’s conduct was arbitrary and capricious and in awarding bad faith penalties. First United Pentecostal Church v. Church Mutual Ins. Co., 2024 U.S. App. LEXIS 26295 (5th Cir. Oct. 17, 2024).
Background
The coverage dispute arose after two hurricanes struck Louisiana in 2020, causing damage to several buildings owned by a church. Church Mutual sent an inspector to the property and notified the church that it would send a $25,000 advance, but for unexplained reasons, never did. Approximately one month after the inspection, the inspector recommended that Church Mutual issue payment in the amount of $169,592.87, but the insurer did not do so. Several weeks later, after Church Mutual received the engineer’s report, it issued payment in the amount of $166,090.81. It subsequently issued a second payment of $25,741.47 for “recoverable depreciation owed per the certificate of completion.”
The church filed suit, alleging breach of contract based on underpayment of claims as well as violations of state statutory law requiring an insurer to make a written offer to settle any property damage claim and pay the amount of any claim due within 30 days of receipt of proof of loss. See Louisiana Revised Statute § 22:1892. Following a bench trial, the district court concluded that Church Mutual acted in bad faith in failing to make timely payments and violated § 22:1892. The court awarded the church its unpaid losses, statutory penalties, and attorneys’ fees and costs—totaling over $2 million.
Decision
The Fifth Circuit reversed in part, ruling that the district court erred in finding the statutory violation and awarding bad faith penalties, and attorneys’ fees and costs. Section 22:1892 provides that if an insurer fails to pay a claim due within 30 days after receiving proof of loss, and if “such failure is found to be arbitrary, capricious, or without probable cause,” the insurer is subject to penalties, and attorneys’ fees and costs.
Applying a manifest error standard, the Fifth Circuit held that the district court erred in finding Church Mutual’s conduct to be arbitrary or capricious. The court explained that the phrase “arbitrary, capricious, or without probable cause” means a “vexatious” or “unjustified” refusal to pay, without reasonable cause or excuse. Concluding that this standard was not met, the court emphasized that Church Mutual’s internal files indicated uncertainty as to the extent of roof damage and that the insurer was awaiting receipt of the engineer’s final report to determine which damage was preexisting as opposed to hurricane related. The court deemed these coverage issues to be substantial, legitimate and reasonable in the context of Church Mutual’s failure to pay within the statutory time frame.
Comments
The Fifth Circuit’s reversal of the district court’s bad faith trial judgment highlights the narrow circumstances in which bad faith penalties are justified against an insurer. As the court emphasized, when reasonable questions exist as to the extent of covered damage, a delay in payment is not a proper basis for a finding bad faith. Additionally, the decision clarifies that “bad faith should not be inferred from an insurer’s failure to pay within the statutory time limits.”