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Douglass Wins Summary Judgment in a Novel Bad Faith Case

July 20, 2011

Michael C. Douglass (Partner–San Francisco) obtained summary judgment in the United States District Court of Arizona on behalf of an insurance company. The case involved allegations of bad faith and breach of contract arising from an errors and omissions policy for an insurance agent/broker. Summary judgment was granted in favor of the insurance company, so that all causes of action and the plaintiff's claims, which exceeded $1 million, were dismissed in their entirety.

 

The case presented novel legal claims and issues, in that the plaintiff was suing as the successor-in-interest to the insured, the agent/broker, via a stipulated judgment and assignment of claims that attempted to manufacture a professional negligence claim. The stipulated judgment arose from a prior case in which the plaintiff had alleged that the insured caused his personal injuries during a jet-ski accident. The stipulated judgment contained an admission of liability by the insured that the insurance company, which he solely owned, committed professional negligence by failing to procure adequate insurance coverage for the jet-ski accident with the plaintiff. In short, the insured manufactured a professional liability claim against Wilson Elser's client, the insurance company, by admitting that he, as the agent of his own insurance company, failed to procure adequate coverage for himself and, in turn, committed professional negligence against himself.

 

After removing the case to federal court, Mr. Cawley successfully argued that the entirety of the plaintiff's case was based on a faulty premise of professional negligence that was not recognized under Arizona law. Specifically, they argued that the law does not recognize a "duty to oneself" such that the insured, as the agent of his own insurance company, could not have committed professional negligence against himself. Additionally, they pointed out that the insurance contract only covered insurance services provided to "others."

 

The court agreed on both points and acknowledged that the stipulated judgment was a scam designed to tap into the professional liability policy in order to provide coverage for a personal injury claim. The court concluded that, "The law recognizes no liability of the [insured] to himself and gives no remedy for it." The court also confirmed that the plaintiff's claim fell outside the insurance contract and that there was no viable claim for bad faith against Wilson Elser's client, the insurance company, as a result. The strong language of the court's order will make it extremely difficult for the plaintiff to be successful in an appeal.

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