Law Updates


Good Faith Statute Requires Insurers to Make Informed Judgments as to Insurance Coverage Prior to Denying Claims

Cecilia Schwaber Trust Two v. Hartford Accident & Indem., Co., No. JFM-06-0956 (D. Md. July 2009)

(August 7, 2009) Tamiya N. Wilkes, Associate.

For more information, contact Paul Farquharson

Maryland’s good faith statute now provides insureds with a right to file first-party claims against insurers for failure to act in good faith. Md. Code. Ann., Cts. & Jud. Proc. § 3-1701. Specifically, the good faith statute provides that if the plaintiff in action seeking “to determine coverage that exists under [an] insurance policy,” can show that “the insurer failed to act in good faith” with respect to an insurance claim, the plaintiff may recover expenses and litigation costs, including reasonable attorneys’ fees, as well as interest on those costs. Md. Code Ann., Ins. § 27-1001(e)(2)(ii); Md. Code Ann., Cts. & Jud. Proc. § 3-1701(d)(1)-(2).

Similar to the good faith that is owed by insurance companies to their insureds when faced with an opportunity to settle a claim by a third party within the limits of the insured’s policy, under the new statute, good faith is defined as making “an informed judgment based on honesty and diligence supported by evidence the insurer knew, or should have known, at the time the insurer made a decision on a claim.”

In Cecilia Schwaber Trust Two v. Hartford Accident & Indem., Co., the Defendant Hartford Insurance Company (“Hartford”), issued an insurance policy providing coverage for the Cecilia Schwaber Trust Two’s (“the insured”) warehouse in Baltimore, Maryland. During the coverage period, a large snowstorm caused snow and ice to accumulate on the roof of the warehouse. About a month after the snowstorm, the warehouse roof began to leak.

The insured filed an insurance claim with Hartford, which was initially denied in full. Hartford later amended its full denial and agreed that approximately five percent of the loss was covered by the policy. Hartford concluded that the remaining ninety-five percent of the loss was caused by (1) faulty workmanship/ maintenance and (2) wear and tear, and was therefore excluded from coverage.

The insured filed suit alleging lack of good faith on the part of Hartford. The insured then filed a motion for summary judgment arguing that the two policy exclusions cited Hartford in support of the its denial coverage did not apply. The insured’s motion for summary judgment was denied as to the issue of the faulty workmanship and wear and tear exclusions.

Hartford then filed a motion for partial summary judgment arguing that the court’s denial of the insured’s motion for summary judgment demonstrated, as a matter of law, that the insured had no viable claim under the good faith statute.

Hartford argued that if a Plaintiff’s claim for summary judgment is denied than it follows that: (1) the question of coverage is fairly debatable; and (2) that the insurer has at least made an informed judgment based on honestly and diligence supported by evidence the insurer knew, or should have known, at the time the insurer made a decision on the claim; in other words, that the insurer acted in good faith.

Hartford urged the United States District Court for the District of Maryland to adopt the Wisconsin “fairly debatable” standard for evaluating claims under the good faith statute. The Wisconsin “fairly debatable” standard dictates that where a claim is not fairly debatable, an insurer’s refusal to pay would be bad faith, however, when a claim is fairly debatable, the insurer is entitled to debate it and will not be subject to liability for acting in bad faith in doing so. In order to prove bad faith, the Wisconsin standard requires plaintiffs to show (1) the absence of a reasonable basis for denying benefits of the policy and (2) the defendant’s knowledge of, or reckless disregard for, the lack of a reasonable basis for denying the claim.

Hartford further argued that a bad faith claim must be dismissed before trial if summary judgment cannot be granted for plaintiff on the underlying claim. The court stated that the denial of the insured’s motion for summary judgment does not necessarily lead to the conclusion that Hartford acted in good faith as required by the statute.

The court held that there is no indication that the Maryland General Assembly intended to construe the good faith statute in the narrow manner urged by Hartford. Unlike the Wisconsin “fairly debatable” standard, Maryland’s good faith statute, requires an informed judgment based on honesty and diligence supported by evidence that the insurer knew, or should have known, at the time the insurer made a decision on the claim. The Maryland statute focuses on the actions taken by the insurer in forming a judgment as to coverage, as well as what the insurer knew, or should have known, at the time it denied coverage to its insured.