Allegations Of Bad Faith Against Insurer Allowed To Proceed

The U.S.D.C. for the District of Maryland recently issued a Memorandum Opinion (“Opinion”) denying Indian Harbor Ins. Co.’s motion to dismiss a bad faith cause of action brought against it by its policyholder. In Grimberg v Indian Harbor, the policyholder submitted a claim for Rectification Coverage to cover the cost of replacing defective walls installed by the policyholder’s sub-contractor. The insurer denied coverage. The policyholder then filed a complaint for, among other things, Statutory Lack of Good Faith and Common Law Bad Faith Denial of Insurance Claim. The court dismissed, with prejudice, the Common Law Bad Faith Denial of Insurance Claim and allowed the policyholder to replead the Statutory Lack of Good Faith claim. The insurer again moved to dismiss. In denying the partial motion to dismiss, the court found that the Maryland Regulations require an insurer to complete its investigation within a 45-day period, and if an insurer does not complete its investigation within this timeframe, it must notify its policyholder, in writing, of the actual reason why it needed additional time.

The court noted that one basis for a lack of good faith can be an insurer’s lack of diligence, which can be expressed by, among other things, an insurer’s failure to act within a required timeframe for processing claims. Here, it was undisputed that Indian Harbor did not act within the allotted time frame. In dismissing the insurer’s argument that, when the totality of circumstances was taken into account, (the delay occurred during the holidays, there was a lot of information that needed to be gathered, etc., etc.) it did not act in bad faith, the court stated, “The totality of the circumstances is not, however, before the court at this posture. All that is before the court for the purpose of resolving this motion is [policyholder’s] amended complaint and the documents attached and integral thereto”]. So, insurers beware. Even though there may be reasons or excuses for delaying an investigation, when there is a statutory regulation requiring a specific timeframe in which to respond to a policyholder’s claim, the insurer ought to comply. This is true, especially in jurisdictions like Maryland, where a “totality of circumstances” standard applies.

The case is John C. Grimberg, Co., Inc. v Indian Harbor Ins. Co., Case 8:22-cv-02713 U.S.D.C. District of Maryland