Bad Faith - Federal Court Holds That Insured Can Maintain Bad Faith Claim Under Rhode Island Law Against An Independent Claims Administrator
Last week, the U.S. District Court for the District of Rhode Island addressed what it termed “novel and interesting” insurance law issues, including whether “an independent claims administrator can be liable to
an insured for bad faith claims handling.” It held, in Robertson Stephens, Inc. v. Chubb Corp. , C.A. No. 05-360 S, 2007 WL 476328 (Feb. 14, 2007), that that such a claim could be maintained by an insured.
The case involved a complex set of corporate relationships. Robertson Stephens, Inc. (“RSI”), an investment and securities firm, was wholly owned by Robertson Stephens Groups, Inc. (“RSGI”). RSGI was,
in turn, wholly owned by FleetBoston Financial Corporation (“Fleet”). FFG Insurance Company (“FFG”) was a captive insurance company of Fleet. Federal Insurance Company (“Federal”) was FFG’s
claim administrator, and by separate agreement, one of its reinsurers.
Three contracts ultimately gave rise to the suit. FFG issued a policy to Fleet, its owner, that covered all of Fleet’s subsidiaries, including RSI (“the Policy”). FFG entered a claim administration agreement
with Federal, by which it delegated to Federal authority to review, evaluate and settle claims and make coverage determinations under the Policy. Under this agreement, FFG remained liable for the payment of claims. Lastly, Federal
entered into a facultative reinsurance agreement with FFG to reinsure 30 percent of the losses under the Policy.
In 2002, RSI announced that it was ceasing operations and winding down. RSI and Fleet were later sued for breach of employment agreements. Fleet tendered the claim to FFG, but neither Federal nor FFG responded. While RSI and Fleet
were negotiating a settlement, Federal mistakenly denied coverage. RSI and Fleet settled the suit and brought an action against, among others, Federal for bad faith, tortious interference with contract and negligence. Federal then
moved to dismiss under Rule 12(b)(6).
The court determined that Rhode Island law applied and rejected a claim by RSI and Fleet (the “Plaintiffs”) for bad faith under Rhode Island General Laws § 9-1-33(a). Based on the plain language of the statute,
the court held that such a claim could be brought only against the insurer, FFG, and not the independent claims administrator, Federal.
It also determined, however, that despite a “muddied” precedential history, common law bad faith was still viable in Rhode Island. Citing authority from outside of Rhode Island, the court held that Plaintiffs could
bring a common law bad faith claim against an independent claim administrator. It reasoned that, because FFG ceded all authority under the Policy to Federal except the authority to pay claims, Federal owed the insured Plaintiffs
a duty of good faith and fair dealing under the Policy. The court stated that Federal’s interests as both the independent claim administrator and a reinsurer of the policy converged to give it a financial incentive to deny
and limit claims to prevent it from incurring liability as a reinsurer. On this basis, the court found that the Plaintiffs could assert a common law bad faith claim against the independent claims administrator despite not having
asserted this specific claim in their complaint.