Homeland Insurance Company of New York v. Corvel Corporation

Citation: Not availableDocket: N11C-01-089 ALR

Court: Superior Court of Delaware; January 4, 2018; Delaware; State Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

CorVel Corporation and Homeland Insurance Company of New York filed cross-motions for summary judgment in a Delaware Superior Court case. CorVel alleges that Homeland acted in bad faith, violating the Louisiana Bad Faith Statute by misrepresenting key facts regarding insurance coverages. Homeland disputes both the relevance of the Louisiana statute and the validity of CorVel's bad faith claim.

CorVel, a Delaware corporation managing a Preferred Provider Organization (PPO) network, entered into several PPO agreements in Louisiana, which are subject to specific notice requirements under the Louisiana PPO Statute. Homeland, a New York-based insurer, issued a Managed Care Organizations Errors and Omissions Liability Policy to CorVel for the period from October 31, 2005, to December 1, 2007. This was a claims-made policy that required any claims to be reported during the policy period or within 90 days after.

In December 2006, a Louisiana hospital initiated a class action arbitration against CorVel for allegedly violating the Louisiana PPO Statute’s notice requirements. On March 28, 2007, CorVel notified Homeland of this claim, providing relevant documentation. In December 2010, CorVel requested Homeland's permission to settle the arbitration for the policy limits, but Homeland refused to consent and did not issue a coverage determination to CorVel. The court granted CorVel's motion for summary judgment in part and denied Homeland's motion in part.

Homeland initiated a declaratory judgment action in Delaware on January 10, 2011, asserting that the Louisiana Arbitration Action was not covered under its policy for four reasons: 1) a prior proceedings exclusion; 2) the claim was made before the policy period; 3) CorVel's non-compliance with reporting requirements; and 4) the action sought penalty damages not covered by the policy. On March 24, 2011, CorVel was involved in a Louisiana class action regarding similar violations and later agreed to settle both the Louisiana Arbitration Action and the class action, resulting in a $9 million settlement and an assignment of its insurance claim against Homeland.

The Delaware and Louisiana courts subsequently issued conflicting rulings on the insurability of damages under the Louisiana PPO Statute. On June 13, 2013, the Delaware court ruled that such damages were uninsurable penalties, but the Louisiana court disagreed, deeming them covered damages. This led to the Delaware Supreme Court, on April 2, 2015, reversing the lower court's decision in favor of the Louisiana interpretation.

On May 8, 2015, CorVel filed a breach of contract action against Homeland for failure to indemnify and defend, later amending it to include a bad faith claim. The Delaware actions were consolidated on July 7, 2015. Subsequently, on January 21, 2016, the Louisiana court granted summary judgment in favor of the Louisiana Class, affirming that coverage existed under the Homeland Policy, rejecting Homeland's arguments regarding prior claims, and confirming that the claims were made and reported within the policy period.

On February 5, 2016, a Louisiana trial court ruled in favor of the plaintiff class, awarding $10 million plus interest. Homeland appealed this decision, prompting the Louisiana Court of Appeal to affirm the ruling on December 29, 2016, which found coverage. Homeland's subsequent Application for a Writ of Certiorari was denied by the Louisiana Supreme Court on April 13, 2017. Following this, on April 21, 2017, Homeland paid a total of $12,439,383.56 to the class to satisfy the judgment.

On July 6, 2017, an office conference clarified the status of the Delaware Consolidated Action, concluding that the Louisiana ruling made Homeland’s coverage claims moot. The court lifted the stay, allowing only the bad faith claim to proceed. CorVel sought summary judgment, claiming Homeland acted in bad faith under the Louisiana Bad Faith Statute, while Homeland also moved for summary judgment, arguing the statute was inapplicable and disputing the merits of CorVel's claim.

The court stated that it would grant summary judgment where no genuine issue of material fact exists, requiring the moving party to initially prove their case. In instances where both parties submitted cross-motions for summary judgment, those motions would be treated as a stipulation for decision on the merits. 

Regarding the choice of law, both parties presented conflicting views. Homeland argued for the application of Delaware law based on a concession made by CorVel during a related appeal, which the court rejected, asserting that the concession was limited to the context of the appeal and did not apply to the bad faith claim determination.

Homeland contends that Delaware law governs based on the Delaware Supreme Court’s ruling in *Certain Underwriters at Lloyds, London v. Chemtura Corporation,* which addressed the applicable law for an insurance policy covering nationwide risks. The Superior Court initially applied the Second Restatement’s 'most significant relationship' framework, focusing on the 'site-of-the-risk.' It concluded that the law of the states where claims arose would apply on a claim-by-claim basis. The Delaware Supreme Court reversed this decision, advocating for a consistent application of one body of law to avoid divergent interpretations based on the location of litigation. Homeland argues that Louisiana law should not apply simply because the claims arose there, asserting that Delaware law should govern consistently. However, this argument is deemed flawed since *Chemtura* involved multiple states, while CorVel's case pertains solely to a claim in Louisiana regarding a Louisiana statute. Additionally, *Chemtura* dealt with coverage disputes, whereas this is a bad faith claim following coverage determination.

CorVel invokes *Premier Parks, Inc. v. TIG Insurance Company,* asserting that Louisiana law is the law of the case, as prior rulings have applied Louisiana law to coverage claims. However, unlike *Premier Parks,* no prior choice of law determination has been made for the bad faith claim. The court notes that previous choices regarding coverage do not dictate the law applicable to the bad faith claim, necessitating a new choice of law analysis.

As Delaware is the forum, the court will utilize Delaware's choice of law standards, which assess the 'most significant relationship' under the Second Restatement framework. The court will consider different factors based on whether the dispute concerns contract or tort, recognizing that bad faith claims are typically founded in contract law.

The Court will utilize the Second Restatement’s choice of law framework for resolving contract disputes, which involves a three-step analysis. First, it assesses whether the parties established a choice of law in their contract; in this case, Homeland and CorVel did not make such a determination, leaving the contract provisions ineffective for dictating choice of law for the bad faith claim. Second, the Court identifies an actual conflict between Delaware and Louisiana laws, as both states have distinct criteria for bad faith claims. Delaware law requires proof of a lack of reasonable justification for an insurer's refusal to fulfill obligations, while Louisiana law is governed by a statute that defines bad faith conduct without a reasonable justification requirement and mandates damages and potential penalties for bad faith. 

Consequently, the Court must identify which state has the 'most significant relationship' to the bad faith claim by evaluating five Contract Factors: place of contracting, place of negotiation, place of performance, location of the subject matter, and the parties’ domiciles and business locations. The nature of the insurance policy complicates this analysis; it was issued to cover nationwide risks, creating ambiguity regarding the place of contracting and performance. The Court will apply the Contract Factors alongside the general choice of law principles articulated in the Second Restatement, which emphasize the needs of interstate systems, forum policies, and the protection of justified expectations, among other considerations, to determine the applicable law for the bad faith claim.

CorVel is incorporated in Delaware with its principal business in California, while Homeland is incorporated in New York and had its main office in Massachusetts when it filed a Declaratory Judgment Action in Delaware. Due to the lack of a clear location for the contract subject matter and the absence of shared significant locations between the parties, the Court determined that the Contract Factors do not indicate which state has the "most significant relationship" to the bad faith claim. The Court then applied general choice of law principles from the Second Restatement, emphasizing the importance of state policies and interests. Louisiana has a strong interest in applying its law to the bad faith claim because the underlying coverage claim was initiated by a Louisiana hospital under a Louisiana statute, which is not applicable outside Louisiana. The Court contrasted this with Delaware's minimal connection, noting that CorVel's incorporation in Delaware was the only link to that state. Consequently, the Court concluded that Louisiana holds the "most significant relationship" to the bad faith claim and will apply the Louisiana Bad Faith Statute.

According to the Louisiana Bad Faith Statute, insurers owe a duty of good faith and fair dealing to their insureds, which includes the obligation to adjust claims fairly and promptly. Breaching these duties can result in the insurer being liable for damages. Specific actions, such as knowingly misrepresenting facts or policy provisions, constitute a breach. Additionally, claimants may receive penalties of up to twice the damages or $5,000, whichever is greater. The Court must determine three key issues: whether Homeland acted in bad faith by knowingly misrepresenting coverage-related facts; the actual damages sustained by CorVel if bad faith is established; and whether the Court or a jury should decide on the imposition of discretionary penalties against Homeland, including the amount of such penalties.

Homeland is alleged to have acted in bad faith by knowingly misrepresenting that CorVel failed to report the Louisiana Arbitration Action in accordance with the Homeland Policy's reporting requirements. CorVel asserts this constitutes a violation of the Louisiana Bad Faith Statute. The court will determine the issue of Homeland’s bad faith as no material facts are in dispute regarding the misrepresentation. According to the Homeland Policy, the Underwriter is obligated to pay for claims first made during the policy period if reported within the policy period or within 90 days afterward. A "Claim" is defined as any written notice indicating an intention to hold an insured accountable for a wrongful act during the policy period, which can include arbitration.

The policy was effective from October 31, 2005, to December 1, 2007. CorVel received a notice of intent to initiate a class action arbitration on December 4, 2006, and reported this claim to Homeland on March 28, 2007, through both a phone call and an email that included relevant documents. Despite acknowledging receipt of these materials in January 2011, Homeland subsequently filed a Delaware Declaratory Judgment Action, asserting that CorVel had not complied with the reporting requirements. At the time of filing, Homeland was aware that CorVel had indeed reported the claim during the policy period and had received the relevant documents, thus making its claims of non-compliance a knowing misrepresentation. Homeland contends that its statements were legal arguments rather than factual misrepresentations regarding the timing of the claim.

Homeland argues that any notice provided by CorVel regarding the Louisiana Arbitration Action did not comply with reporting requirements, claiming the action was 'first made' before the policy period of the Homeland Policy. Despite the Louisiana Arbitration Action starting in December 2006, Homeland believes it was similar to prior claims made before the policy period. The Court rejects this argument, noting that Homeland was aware the Louisiana Arbitration Action was initiated during the policy period when it filed the Delaware Declaratory Judgment Action. The Court clarified that Homeland's assertion about the timing of the claim was irrelevant to whether CorVel properly reported it. Homeland had previously contended that coverage was barred due to a prior proceedings exclusion and that the claim was 'first made' before the policy period.

The Court finds that Homeland acted in bad faith by misrepresenting the compliance of CorVel's notice with the policy's reporting requirements. As a result of this bad faith conduct, CorVel is entitled to damages amounting to $9 million, which it paid to settle both the Louisiana Arbitration Action and the Louisiana Class Action. Under the Louisiana Bad Faith Statute, an insurer found to have acted in bad faith is liable for damages resulting from the breach. CorVel does not claim an amount due under the policy but asserts that it suffered actual damages from the settlements. The Court confirms CorVel incurred $9 million in damages due to Homeland's bad faith, as CorVel sought permission to settle for the policy limits but faced a potential judgment of approximately $140 million due to Homeland's misrepresentation, leading to the settlements. Hence, there is a direct causal connection between Homeland’s bad faith and CorVel’s $9 million payment.

Homeland contends that CorVel cannot demonstrate that the $9 million settlement resulted from its misrepresentation, citing three additional grounds for denying coverage in the Delaware Declaratory Judgment Action. Homeland's position implies that the presence of any valid argument against coverage absolves it of liability for CorVel's damages. However, the Court rejects this assertion, emphasizing that the Louisiana Bad Faith Statute aims to penalize insurers for bad faith actions. The Court finds that Homeland acted in bad faith by denying coverage, directly leading to CorVel settling the claims and incurring damages. Consequently, under the Louisiana Bad Faith Statute, CorVel is entitled to a mandatory award of $9 million for actual damages.

Additionally, the Louisiana Bad Faith Statute allows for discretionary penalties against the insurer, up to twice the damages sustained or $5,000, whichever is greater. CorVel argues that the determination of penalties should be made by a jury; however, the Court asserts that it holds the authority to impose such penalties. A precedent from the Louisiana Circuit Court of Appeal establishes that if bad faith is found, the trial court must award damages and has discretion to impose a penalty based on the damages awarded. Thus, the trial court is responsible for deciding on the penalty for Homeland's bad faith conduct.

The Court is tasked with determining whether to impose a penalty on Homeland for bad faith conduct, as defined by the Louisiana Bad Faith Statute, and if so, what the appropriate amount should be. CorVel requests the maximum penalty of $18 million, but the Court decides on a penalty of $4.5 million, which is half of CorVel’s actual damages, aligning with the statute's intent to penalize insurers.

Homeland presents several affirmative defenses against CorVel's motion for summary judgment, including claims related to the statute of limitations, compulsory counterclaims, res judicata, judicial estoppel, and acquiescence. The Court finds these defenses meritless.

Specifically, regarding the statute of limitations, the Court applies Delaware’s three-year statute for contract claims to CorVel's bad faith claim. Homeland argues that the claim arose when CorVel settled with the Louisiana Class on June 23, 2011, implying the claim was filed too late. However, the Court disagrees, stating that damages could not be determined until a coverage decision was made. Under Louisiana law, bad faith claims are derivative and dependent on a valid underlying claim for insurance coverage, meaning CorVel did not incur damages immediately upon the settlement or Homeland's prior legal actions.

CorVel's payment of $9 million to the class on June 23, 2011, does not affect its ability to pursue a bad faith claim under the Louisiana Bad Faith Statute, as a valid coverage claim was necessary for such a claim to exist. CorVel filed its bad faith claim on June 9, 2015, but the Louisiana trial court did not recognize coverage until January 21, 2016, thus meeting the statute of limitations requirements. 

Homeland contends that CorVel should have included its bad faith claim in its responsive pleading to the Delaware Declaratory Judgment Action, asserting it had a valid coverage claim in 2011 when the Louisiana Class made its claims. However, CorVel argues it did not possess a valid claim at that time due to having assigned its insurance claims to the Louisiana Class as part of the settlement. 

The court agrees that CorVel's bad faith claim was not ripe until coverage was determined, and since the Delaware Declaratory Judgment Action was unresolved on the merits when CorVel filed its claim, Rule 13(a) does not preclude it. The court emphasizes that a claim that is not ripe cannot be considered a compulsory counterclaim under Rule 13(a), reinforcing that the principles behind this rule are preserved as the cases were ultimately consolidated for resolution. Additionally, the court finds that CorVel's bad faith claim is not barred by res judicata.

A prior judgment involving the same parties or those in privity can bar a subsequent suit on the same cause of action under the doctrine of res judicata, which requires the satisfaction of five criteria: (1) jurisdiction of the original court over the subject matter and the parties, (2) identical parties or privity in the current case, (3) the same cause of action or issues, (4) the issues must have been decided on the merits, and (5) a final decree in the prior action. Homeland argues that CorVel’s bad faith claim is barred because it relates to the same transaction as issues resolved in the Louisiana Coverage Action; however, the court finds that not all five criteria are met. While the Louisiana court had jurisdiction and issued a final decree, questions remain regarding the privity between the Louisiana Class and CorVel, and whether the coverage issues were the same. Importantly, the coverage issues were decided in favor of the Louisiana Class rather than adversely, meaning res judicata cannot bar CorVel's claim. 

Additionally, the court addresses the doctrine of judicial estoppel, which prevents a party from changing its position if it has successfully maintained that position in a legal proceeding. Homeland contends that CorVel should be estopped from pursuing its bad faith claim due to a change in the Louisiana Class’s position regarding when claims were first made. However, the court rejects this argument, concluding that CorVel is not barred by judicial estoppel from asserting its claim.

Homeland Insurance contended that the Louisiana Class initially claimed that the claims against CorVel were "first made" during the Executive Risk policy period but later altered their stance to assert the claims were "first made" during the Homeland Policy period. The court acknowledged that Louisiana courts had previously dismissed similar arguments from Homeland regarding judicial estoppel and decided to adhere to those rulings.

Regarding CorVel's bad faith claim, the court evaluated Homeland's defense based on the doctrine of acquiescence, which requires proving that the plaintiff remained silent about their rights, among other criteria. Homeland argued that CorVel's failure to assert its coverage position between March 2007 and December 2010 constituted acquiescence, referencing a June 2007 letter that did not mention the Louisiana Arbitration Action. The court rejected this argument, stating that CorVel fulfilled its reporting obligation by notifying Homeland of the arbitration action in March 2007 and was not mandated to demand coverage or correct Homeland's misstatements as per the policy terms.

The court found that Homeland acted in bad faith by misrepresenting facts regarding coverage compliance and ruled in favor of CorVel, awarding $9 million in damages and an additional $4.5 million penalty under the Louisiana Bad Faith Statute. The court also determined that Homeland's defenses lacked merit, resulting in partial summary judgment for CorVel and partial denial for Homeland. The judgment was entered for CorVel against Homeland for the specified amounts.