Bad faith? SEACOR holding empty bag

Did the US Fifth Circuit do damage to the Louisiana Supreme Court’s holding in Louisiana Bag Co., Inc. v. Audubon Indemnity Co., 08-0453 (La. 12/2/2008), 999 So.2d 1104?  By their recent rejection of bad faith claims in SEACOR Holdings, Inc. v. Commonwealth Ins. Co., No. 10-30020, the US Fifth Circuit repudiated some expectations by finding that Commonwealth tendered contract payments based on an erroneous, but not arbitrary , capricious or without probably cause, interpretation of their insurance policy deductible and limit of liability provisions.

Without getting terribly far into the weeds, suffice it to say that SEACOR’s Commonwealth policy contained three relevant deductibles: “Windstorm”; “Named Windstorm”: and “Flood.”  Commonwealth paid SEACOR’s claim based on a cumulative application of the Named Windstorm and Flood deductibles and subject to lower flood limits of liability.  The Fifth Circuit rejected both applications, finding that only the Named Windstorm deductible applied and that the Named Windstorm coverage was the proper limit of liability.  In so doing, the Fifth Circuit went against a popular understanding of Louisiana Bag that any misreading by an insurer of its policy resulting in improperly reduced payments to an insured is conclusively bad faith.  SEACOR made the argument explicit with citation to the Louisiana Supreme Court’s (limited?) admonition that an “insurer bears the risk of interpreting its own policy and will be liable for penalties for its errors.”  Louisiana Bag at 1117.

Writing for the Fifth Circuit panel, Judge Higginbotham observed with doctrinal accuracy that Louisiana does not follow stare decisis – the common law concept of strict adherence to jurisprudential precedent.  He further notes that the “Supreme Court’s guidance on insurer penalties has been less than uniform” and quotes dicta from Louisiana Bag that “when there are substantial, reasonable and legitimate questions as to the extent of an insurer’s liability or an insured’s loss, failure to pay within the statutory time period is not arbitrary, capricious or without probable cause.”  Louisiana Bag at 1114.

As insurance advocates, we are not comfortable with a categorical rule of bad faith and, therefore, welcome the philosophy of SEACOR. Under contract interpretation rules favoring insureds, there must be some allowance for insurer error as to how broadly the rules may apply coverage on a particular claim.  Perhaps a presumption consistent with the general rules of contract interpretation would be appropriate.  The question then would boil down to whether the insurer’s reading of its policy was reasonable even if it turns out not to be a favored reading under governing interpretive principles.  Whether SEACOR was  such a case is fair game for debate.  It seems reasonably clear that Louisiana Bag was not.  SEACOR was, at a minimum, an actual dispute over contract interpretation.  The same may reasonably be denied of Louisiana Bag.

SEACOR Holdings, Inc. v. Commonwealth Ins. Co.