Oftentimes when an insured sues its insurer for breach of contract, it asserts a claim for bad faith.  Insurers should consider severing the claims to avoid prejudice.

In Custom Designs & Mfg. Co. Inc. v. Atlantic States Ins. Co., the plaintiff’s property was destroyed in a fire.  Atlantic States Ins. Co. insured the property.  Following the fire, the plaintiff made a claim under its insurance policy for the loss.

Upon investigation of the loss, Atlantic calculated the plaintiff’s business interruption losses at approximately $1.2 million, which it paid the plaintiff.  The plaintiff disputed this total and a neutral appraiser was retained to calculate the loss.  Ultimately, the appraiser concluded the plaintiff’s losses totaled approximately $2.1 million, almost $900,000 more than Atlantic had calculated.  The plaintiff filed a petition with the court seeking an award for the calculated difference as well as prejudgment interest.  Atlantic paid the difference but refused to pay the prejudgment interest.  Consequently, the plaintiff filed a complaint against Atlantic for breach of contract and bad faith.

In its complaint, the plaintiff contended that Atlantic breached the insurance contract, when it deliberately refused to provide coverage for the plaintiff’s claim.  In respect of its bad faith claim, the plaintiff averred Atlantic failed to properly investigate the plaintiff’s claims, failed to make payment of the prejudgment interest, breached its fiduciary duty, and caused the plaintiff severe financial harm.

In response to the plaintiff’s complaint, Atlantic filed a motion seeking a protective order and to sever the plaintiff’s bad faith claims.  Atlantic argued allowing the plaintiff to conduct discovery, in respect of its bad faith claim, would cause severe prejudice to Atlantic.

Ultimately, the court denied Atlantic’s request for a protective order, concluding Atlantic failed to show the scope of the plaintiff’s requested discovery contained information protected by attorney-client privilege or work product.  Conversely, the court granted Atlantic’s request to sever the plaintiff’s bad faith claim, holding Atlantic could be prejudiced by trying the plaintiff’s breach of contract claim simultaneously with its bad faith claim, as the bad faith claim was not relevant to the breach of contract claim, and the bad faith claim could prejudice and confuse a jury in reaching a verdict.  However, regardless of this holding, the court refused to stay discovery for the bad faith claim.

Thus, as this case illustrates, if a breach of contract and a bad faith claim are both asserted against an insurer, a court may grant an insurer’s motion to sever the bad faith claim, as prior courts have held trying breach of contract claims simultaneously with bad faith claims could result in unnecessary prejudice to an insurer.

Thanks to Colleen Hayes for her contribution to this post.