The first award of bad faith damages in Minnesota’s Federal District Court after an evidentiary hearing was entered on Tuesday. There have been a number of awards in state court since the statute was enacted, but this is the first ruling of its kind in Federal Court. On April 21, 2020, Judge Schiltz issued an order in Selective Insurance Company of South Carolina v. Amit Sela. The order, in addition to confirming $493,789 in hail loss damages stemming from a prior jury trial, awarded $214,394.50 in bad faith damages pursuant to Minnesota Statute §604.18. This case is a vindication for Mr. Sela, who was accused of fraud by his insurance carrier and forced to prove he did nothing wrong, when all he wanted was payment for his hail-damaged property. Instead of protection, he got unfounded accusations. The opinion addresses a number of important issues apart from being the first of its kind in the Minnesota Federal District Court.

Appraisal Award and its Effect on Recovery of Bad Faith Damages

First, while there was a jury trial on the issue of insurance coverage, the parties agreed to submit to appraisal to determine damages.  Selective argued that the appraisal precluded the award of bad faith damages. The Court disagreed, pointing out that initially “Sela demanded that Selective agree to appraisal of his insurance claim, and Selective refused.” (Opinion at 30, n. 14, emphasis in original).

Bad Faith Standard

Second, the Court addressed the two-prong test for proving bad faith: the existence of an objective reasonable basis to deny the claim, and the subjective prong of whether the insurer knew of, or acted in reckless disregard to, the lack of reasonable basis.

Objective Prong

As to the first prong, the Court recognized that expert testimony was not necessary unless the issue was so esoteric that jurors of common knowledge would not be able to form a valid judgment. The Court then analyzed the investigation of Selective, who had accused its policyholder of Fraud. The court pointed out that the primary fraud investigator admitted that “’she did not care’ what Mr. Sela may or may not have told people,” that she ignored photos of “some of the most critical evidence,” and didn’t understand the relevance of evidence that was provided to her. The Court then pointed out that reliance on Selective’s retained expert was not appropriate. The expert was tainted by being provided with an anonymous letter, containing significant false statements that Selective knew to be false, and furthermore was not provided with all of the relevant evidence, even when the expert stated that “what could have changed his opinion would have been if Sela produced some evidence from some company to show work done,” the very evidence that Selective had been provided. Finally, the Court pointed out that nobody at Selective bothered to read the report.

Subjective Prong

The subjective prong of the bad faith statute requires the insurer to knowingly ignore, or recklessly disregard a lack of objective basis to deny a claim.  Here the Court pointed out that the primary adjuster admitted that he didn’t do any investigation into fraud, the basis for the denial, yet he was one of the individuals who approved counsel’s decision to deny Sela’s claim based on fraud. The fraud investigator, as mentioned above, ignored evidence and what she was actually told by the policyholder, and ignored everything he said even when she had objective evidence corroborating it. The Court also pointed out that the investigator failed to reach out to people who had relevant information. Selective hired an expert, but then never read the report issued by the expert. The Court then described the fact that the basis for Selective’s allegations of fraud kept changing, and new allegations were raised at trial that were not in its Second Amended Complaint, even after being admonished to “clearly and specifically identify each instance.” The Court went so far as to state “Selective should be embarrassed. Any reasonable insurer that denied its insured . . . indemnification on the basis of fraud would have no difficulty identifying (1) who made that decision and (2) the fraudulent statements.”

Taxable Costs

The Court next allowed taxable costs which it determined to be one-half of the actual cash value awarded by the appraisal panel, minus the highest settlement offer, not to exceed $250,000.

Pre-Award Interest

Next the Court applied Minnesota’s Pre-award interest statute, 549.09, from the date the original claim was submitted to Selective. Again, Selective claims that because of the appraisal, and a jury did not award the damages, pre-judgment interest should not be allowed. The Court rejected that approach recognizing that when the jury found no fraud, “the jury necessarily found – as a matter of law and logic – that Selective breached the insurance contract and had to pay damages to Sela.” The court recognized that a claim made by an insurance agent was a “written notice of claim” as required by statute because it clearly was a demand for payment

Interest on ACV or RCV

Finally, the Court recognizes that the appraisal award provided amounts for both actual cash value and replacement cost value. The court awarded interest on the ACV, but also specifically held that should the policyholder become entitled to replacement cost after repairs are made, that interest on that higher amount would also be allowed.