What Risk Do Marine Underwriters Face For Bad Faith Claims in Virginia?
Like most states, Virginia has comprehensive legislation governing the actions of insurers and the content of insurance policies. Insurers of commercial vessels (as opposed to private pleasure boats), however, are not covered by the Virginia Code. Sections 38.2-126 and 38.2-300 of the Virginia Code, providing for regulation of the insurance industry, expressly limit the regulation of marine insurance to policies covering “private pleasure vessels.” When we consider coverage and settlement questions, however, prudence suggests nonetheless reviewing the issues as if the commercial marine policy is subject to Virginia law. This leads to consideration of at least two possible theories of recovery against the insurer.
1. Bad Faith Denial of Coverage, Refusal to Settle or Failure to Defend. Section 38.2-510 of the Code of Virginia imposes on all insurers an obligation to act in good faith with respect to coverage decisions, investigation and defense of claims, and settlement practices. If a court finds the statute has been violated, then a carrier’s exposure is limited to reimbursing the assured for the costs and reasonable attorneys fees incurred in a coverage action (plus the exposure for the underlying claim). There is no tort liability, and no liability for punitive damages. Even if an insurer has not acted in good faith, the courts in Virginia have been clear in their pronouncements that the statute does not provide a private cause of action. Instead, the exposure for costs and fees is an item of damages recovered in an action for breach of the insurance contract. See, e.g. Virginia Code section 38.2-510(B); A & E Supply Co. v. Nationwide Mutual Fire Ins. Co., 798 F.2d 669, 676 (4th Cir. 1986); Saint John’s African Methodist Episcopal Church v Guideone Specialty Mutual Insurance Company, 902 F. Supp.2d 783 (E.D. Va. 2012). Thus far, Virginia courts have held fast in concluding that tort liability for breach of contract will rarely be recognized.
“[A] claim for bad faith may only be brought once judgment has been entered
against an insured…. Once such a judgment is entered, the determination of whether a plaintiff has the right to recover attorneys’ fees and costs under § 38.2–209 is a matter for the court, not the jury.”
2. Implied duty of good faith and fair dealing. Though a popular theory of recovery elsewhere, there is some dispute about whether Virginia courts will recognize breach of an implied duty of good faith and fair dealing as an independent cause of action, and in what context. The courts have generally concluded even if such a duty exists, it can be used only to support a claim for breach of contract, not a separate and independent tort claim. See, e.g. Stoney Glen, LLC v. Southern Bank and Trust Co., 940 F.Supp.2d 460 (E.D.V a. 2013), Jones v. Fulton Bank, 2013 WL 3788428 (E.D. Va. 2013).
“Virginia law … does not recognize the implied covenant of good faith and fair dealing in contracts outside of those governed by the Uniform Commercial Code…”
“Under Virginia law, every contract contains an implied covenant of good faith and fair dealing; however, a breach of those duties only gives rise to a breach of contract claim, not a separate cause of action….”
So, then, what happens when plaintiff’s counsel in a Jones Act case begins to throw around the “bad faith” words, or when coverage really does not exist for a hapless vessel or marina owner? If a marine insurer is confident in its evaluation of the claim or coverage issues, it should not lose any sleep fearing it will face exposure for tort damages, or even punitive damages, when litigating in Virginia. Even if things go very badly, the insurer’s exposure for having acted in bad faith is limited to damages for breach of contract. In most cases, this means it will have to pay the underlying claim and costs of defense (for which it would have been liable in any event), plus reimbursing the insured for the fees and expenses accompanying the coverage action. Overall, this reduces the price of poker considerably when making coverage and settlement decisions.