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March 10, 2009

Bad Faith Title Insurance Claims in Ohio, and Ultimate Responsibility for Paying Claims . March 10, 2009. Richard Porotsky, Esq. Dinsmore & Shohl LLP 255 East Fifth Street Cincinnati, Ohio 45202 porotsky@dinslaw.com (513) 977-8256.

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March 10, 2009

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  1. Bad Faith Title Insurance Claims in Ohio, and Ultimate Responsibility for Paying Claims March 10, 2009 Richard Porotsky, Esq. Dinsmore & Shohl LLP 255 East Fifth Street Cincinnati, Ohio 45202 porotsky@dinslaw.com (513) 977-8256

  2. How can bad faith claims arise in the title insurance context? • What is the legal standard in Ohio for holding an insurer liable for bad faith? • Can a title agent be held liable for bad faith? • Does a bad faith claim mean that the responsible party is liable for punitive damages and attorney fees? • When a title insurer pays a claim, must it accept final responsibility for that claim?

  3. Part 1Types of Claims / How Insurance Disputes Arise

  4. Types of Claims; Possible Coverage Disputes • Many defects are corrected without coverage debate • failure to pay off prior mortgages and liens; • failure to pay taxes; • failure to promptly record a mortgage.

  5. Types of Claims; Possible Coverage Disputes • Some claims not covered; buyer / lender assumes risk • Claims anticipated or excluded • Dalessio v. Williams (9th Dist. 1996), 111 Ohio App.3d 192 (excluded "plat restrictions;“ garage in violation). • Kuhn v. Ferrante (Ohio App. 5 Dist.), 2001-Ohio-1970.

  6. Types of Claims; Possible Coverage Disputes • Even if insurer initially accepts risk, insurer is not always "stuck" with the expense • Liability can be shifted – Part VI below.

  7. Types of Claims; Possible Coverage Disputes • And, disputes can arise as to insurance coverage for the claims • Potential bad faith claims.

  8. Part 2Two Bad Faith Case Examples

  9. Billboard and Leasing Dispute • Eller Miller Media v. DGE Ltd., (8th Dist.), 2004-Ohio-4748. • buyer of a commercial building (DGE), • seller (Pauline DiGeronimo), • title agency (Surety Title), • title insurer (Stewart Title Guaranty Company)

  10. Billboard and Leasing Dispute • Billboard posted on one side • Seller’s affidavit • "no person other than the affiant is in possession or has the right of possession of the property . . .”

  11. Billboard and Leasing Dispute • Title commitment • did not mention billboards • provided two exceptions • rights of those in possess’n not shown by public record • matters disclosed by survey or inspection.

  12. Billboard and Leasing Dispute • After closing: • Eller claimed right to use billboard • Title policy issued with billboard exception • Eller sued DGE • Stewart (insurer) refused defend

  13. Billboard and Leasing Dispute • Trial Court ruling: • Stewart (insurer) had to defend • unilaterally exclusion invalid • Surety (agent) breached its fiduciary duty • Both Surety and Stewart to pay all DGE's attorney fees • No claim against Ms. DiGeronimo

  14. Billboard and Leasing Dispute • Appellate Ruling (minor changes) • Affirmed duty to defend • Cited breadth of the duty to defend • No breach of fiduciary duty by Surety • Allowed a claim against Ms. DiGeronimo

  15. Billboard and Leasing Dispute • DGA’s claim of Bad Faith: • against both Surety and Stewart. • but not ever added to the complaint. • Nonetheless, upheld attorney fee award • Unusual award of fees for prosecution • Obscure cases as to wrongful refusal to defend.

  16. 2nd Bad Faith Example--Easement Dispute--

  17. Easement Dispute • Brown v. Guar. Title & Trust/Arta, (5th Dist) 1996 WL 488004 • property owner (Ms. Brown) • her neighbor (Ms. Stepath), • Claimed right to ride horse, build on easement • Ms. Brown's title insurer (Guarantee Title & Trust).

  18. Easement Dispute • Insurer refused to make a complete defense • Instead, under reservation of rights, paid 1/3 of defense • Ms. Brown prevailed versus Stepath

  19. Easement Dispute • Ms. Brown sought the other 2/3 defense cost--$15,000 • insurer refused • Ms. Brown sued, alleged bad faith. • Jury awarded $47,000, including all the legal fees. • Cited bad faith standard in Zoppo v. Homestead Ins. Co. (1994), 70 Ohio St. 3d 552. • reasonable justification

  20. Easement Dispute • The title insurer argued for no attorney fees • Argued fees are improper absent punitive damages • Yet, Court upheld the fee award • Cited exception for bad faith or malicious conduct

  21. Part 3Insurance Principles Applicable to Title Insurance Claims

  22. The Insurer’s Responsibilities vis-à-vis the Policyholder • Overview • the duty to defend a potentially covered claim • the duty to indemnify for a covered claim • the duty to investigate in good faith and provide reasonable justification for denial

  23. The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense • Duty to defend is broader than duty to indemnify • Various rules broaden the duty • Must be provided promptly and diligently

  24. The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense • Duty to Defend--One claim-all claims rule: • Preferred Mutual Ins. v. Thompson (1986), 23 Ohio St. 3d 78 ("both" a covered negligence claim and noncovered intentional tort)

  25. The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense • Duty to Defend: "Scope of the pleadings" rule "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“ City of Willoughby Hills v. Cinti Ins. Co. (1984), 9 Ohio St.3d 177, syl.

  26. The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense • But, the duty to defend is not limitless • Cincinnati Ins. Co. v. Anders (2003), 99 Ohio St. 3d 156: • Homeowner's negligent failure to disclose defect • Not an accident; did not damage the home • If conduct in the complaint is indisputably outside the scope of coverage, there is no duty

  27. The Insurer’s Responsibilities vis-à-vis the Policyholder--Defense • If the insurer breaches and fails to defend • waives policy conditions; policyholder may settle • insurer “violates its duty to defend at its own peril.” • Sanderson v. Ohio Edison Company (1994), 69 Ohio St.3d 582, 586-87, 635 N.E.2d 19, 23-24.

  28. The Insurer’s Responsibilities vis-à-vis the Policyholder -- Defense • But if the insurer defends under reservation of right: • Policyholder not free to settle without insurer consent • Auto-Owners v. J.C.K.C., Inc. (Ohio App. 9 Dist.), 2004-Ohio-5186

  29. The Insurer’s Responsibilities vis-à-vis the Policyholder -- Indemnity • Indemnity obligations arise in various circumstances: • (1) defends without a reservation & loses • (2) defends under reservation of rights & loses; • (3) wrongfully refuses to defend

  30. The Insurer’s Responsibilities vis-à-vis the Policyholder – Reasonable Investigation & Basis for Denial (Duty of Good Faith)

  31. Part 4Ohio Bad Faith Law

  32. The Current Bad Faith Standard in Ohio • Rationale for the tort • Economic Inequality • Hoskins v. Aetna Life Insurance Company (1983), 6 Ohio St.3d 272, 275-77 • Proper incentive to settle claims near liability limits

  33. The Current Bad Faith Standard in Ohio • Ohio’s Definition of Bad Faith: • "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” • Zoppo v. Homestead Ins. (1994), 71 Ohio St.3d 552

  34. The Current Bad Faith Standard in Ohio • Zoppos's "reasonable justification" standard • Similar to negligence • Does not warrant punitive damages or atty fees

  35. The Current Bad Faith Standard in Ohio • No Bad Faith Where the Issue is "Fairly Debatable" • "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.), 2005-Ohio-3052, at ¶¶ 37-46 ("fairly debatable")

  36. The Current Bad Faith Standard in Ohio • Thus, 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)

  37. 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

  38. The Current Bad Faith Standard in Ohio • Correct Coverage Decisions -- Per Se Reasonable • Very logical, many courts agree • A few courts may still allow other rules

  39. The Current Bad Faith Standard in Ohio • Relationship of Punitive Damages to Bad Faith • The two standards are separate and distinct

  40. The Current Bad Faith Standard in Ohio • Required proof for punitive damage & attorney fees • Malice, aggravated/egregious fraud, oppression, insult. • "Malice" will often be the easiest to prove • conscious disregard for rights and • great probability of causing substantial harm • Costly Mistake: Goodrich v. Commercial Union Ins (9th Dist. 2008) ($20 million atty fees despite no proof)

  41. 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 key suspects, verify alibis, follow up with witnesses, or go Pa.

  42. Comparative Bad Faith & Related Defenses • 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

  43. Comparative Bad Faith & Related Defenses • Non-cooperation and related defenses • Insurers can and should focus upon the policyholder conduct – cooperation required. • Fraud by the policyholder • Failure to provide timely notice of a claim • Non-cooperation in investigation or defense

  44. Comparative Bad Faith & Related Defenses Non-Cooperation example: • Johnson v. Allstate Insurance Co. (Trumbull Co.), 2002-Ohio-7156 • Policyholder provided some financial info + inspection • Refused to allow inspect damaged washer, dryer, computer • Non-cooperation "materially and substantially prejudiced" [the insurer's] ability to properly evaluate

  45. 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)

  46. Types of Bad Faith Cases • Bad Faith Refusal to Pay a Covered Claim • Regardless of excess liability • Punitive damages possible if proven intent or malice

  47. Types of Bad Faith Cases • Bad Faith Failure to Defend, Even if Indemnity Is Ultimately Disproven • Potential for establishing punitive damages

  48. 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

  49. 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

  50. Part 5Defense Counsel and Insured Client Rights (Potential Source of Bad Faith)

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