How often do insurance companies act on a second opinion looking for a way to deny coverage for a large loss? This was the situation in a recent lawsuit that resulted in the insurer being liable for $44 million. The facts summarizing the “shopping” for a new expert opinion regarding a boiler and machine loss were described by the court:
On September 21, 2018, four of Mesta Press’ sixteen tie rods cracked and the plaintiff discovered cracks in two of its four columns. The plaintiff filed an insurance claim, which the defendant acknowledged on September 25, 2018. The defendant initially hired Engineering Design & Testing Corporation (̵6;ED&T’) to evaluate the cause of the damage and the cost of repairs. On October 9, 2018, ED&T sent an email to the defendant’s adjuster stating that: ‘Regarding the cause, our preliminary understanding is that one of the tie rods cracked as a result of fatigue … causing the other tie rods to crack and the columns to crack.’ Ten days later, the adjuster generated a report recommending that defendant set aside $56 million to cover losses.
Defendant then wrote off ED&T and retained Failure Analysis & Prevention, Inc. (“FAP”) to further “investigate the cause of the failure of the tie rods and the cracking of the columns.”1
It is quite clear that the adjusters in the home office were not happy with a proposal to reserve the loss for $56 million. So why not round up another friendly engineering company that might have the right thinking?
The new engineering firm investigated for over 20 months. A duty of good faith is to investigate the claim immediately and not to delay. Most casual readers of the blog would believe that there is performance-oriented adjustment going on and a delayed injury determination as the basis for a bad faith claim. Eventually the insurer denied the claim:
On July 14, 2020, the defendant sent a letter to the plaintiff rejecting its entire claim. The letter cited the FAP’s conclusions that (1) “the tie rods failed as a result of the failure to properly pre-tension the tie rods in accordance with the manufacturer’s approved 2008 guidelines”; and (2) cracking in the columns was “fatigue cracking that had occurred during operation of the press” and “was not related to, or exacerbated by, failure of the tie rods.”
Adopting these conclusions, the defendant established that the “improper execution” and “gradual
Deterioration exclusions exclude coverage for the broken tie rods under the All-risk policy, and the “gradual deterioration” exclusion excludes coverage for the cracked columns under the All-risk policy. According to the approval, according to the letter, damage to the tie rods and pillars did not result from an “accident” because it occurred over time and is therefore not covered.2
Before the jury ever started, the federal court dismissed the bad faith cause of action:
However, the plaintiff’s evidence is not sufficient for a jury to find that the defendant acted unreasonably or in bad faith. At most, it indicates that the defendant breached the insurance contract by making a mistake or being negligent; but mere mistake and negligence do not constitute bad faith. “There is no factual suggestion in this record that (1) [Defendant] ever misrepresented the nature of its investigation activities, (2) provided false documents or testimony, (3) did not honestly select independent expe1is to make appropriate loss evaluations, (4) relied on expert reports that were not reasonable, or, (5 ) failed to conduct a thorough investigation.’… As such, the only reasonable inference from the evidence is that the defendant did not act in bad faith, even if it was wrong to deny coverage to the plaintiff.3
This case prompts insurers to try again, in an investigation that will find a way to deny a large value claim.
History repeats itself, first as tragedy, then as farce.
1 Weber Metals, Inc. v. Ace American Ins. Co.No. 2:21-cv-05995 (CD Cal. July 1, 2022).