Insurers Aren’t Required to Tell Insureds That They Filed a Claim Under the Wrong Policy

By Steven Plitt | June 20, 2013

Most jurisdictions hold that every contract form contains an implied covenant of good faith and fair dealing that prohibits either contracting party from preventing or injuring the other party’s right to receive the agreed benefits of the contract. Practical Tools for Handling Insurance Cases, § 2:2, p. 2-4 (Thomson Reuters 2011).

The covenant is implied as part of insurance policies and fills the void created by the parties’ unequal bargaining power and insurance companies’ control over claim processing. The majority of states recognize a private cause of action for breach of the duty of good faith and fair dealing.

Oftentimes the covenant of good faith and fair dealing becomes the portal by which insureds seek to expand their rights under the insurance policy. This has resulted in a plethora of litigation. Most of the reported litigation follows predictable patterns of attempted expansion. However, some attempted expansions of the covenant can be frivolous in nature. One such frivolous attempt to expand the covenant of good faith and fair dealing is reflected in the recent Utah Court of Appeals decision of Colony Ins. Co. v. Human Ensemble, 299 P.3d 1149 (Utah Ct. App. 2013).

In the Human Ensemble case, the insured, Human Ensemble, owned a commercial property. Human Ensemble purchased two insurance policies to protect its interests. The first policy was a general liability policy issued by Scottsdale Insurance Company. The second policy was a first-party property damage policy issued by Colony Insurance Company. The policies were purchased through a single independent agent. One of the principals of Human Ensemble, Gibbs Smith, signed the application for the property damage coverage with Colony. Smith and another Human Ensemble principal, Gary Justesen, signed policy disclosures on the Scottsdale liability policy which described the policy’s scope of coverage. In addition, the Scottsdale policy itself identified commercial general liability in its coverage parts and expressly excluded commercial property damage as “NOT COVERED.” All of the policy declarations and forms addressed general liability only.

In late December 2005, a toilet overflowed in a building owned by Human Ensemble. Cleanup efforts stalled and the commercial tenants of the building sued Human Ensemble for damages because the tenants were required to relocate, incurring moving expenses, increased rent, lost profits and other damages. For some unexplained reason Human Ensemble submitted a claim to Scottsdale for the cleanup expenses at the property and no claim was submitted to Colony, the property damage insurer. At about the same time, Scottsdale agreed to defend Human Ensemble against the liability claims filed by the tenants. Six weeks later, Scottsdale advised Human Ensemble that it was a general liability insurer and that it would not cover Human Ensemble’s first-party property damage claim because the Scottsdale policy was not a property damage policy. This lead to a lawsuit being filed by Human Ensemble alleging that Scottsdale breached the liability policy’s implied covenant of good faith and fair dealing for the six week delay gap between Human Ensemble’s submission of the cleanup cost claim and Scottsdale’s disclosure of no coverage.

In the ensuing litigation, Human Ensemble alleged that Scottsdale breached the implied duty to investigate which is part of the covenant of good faith and fair dealing, by failing to notify Human Ensemble for over six weeks that its general liability policy did not provide coverage for first-party property damage. Human Ensemble did not allege that Scottsdale failed to adequately inquire into what caused the water leak or the nature and extent of the resulting damage.

According to Human Ensemble, if Scottsdale had diligently investigated the facts to determine whether the claim was valid, it would have realized earlier that the Scottsdale insurance policy did not cover first-party property damage but only liability claims. As such, Human Ensemble argued that the duty to investigate was not limited to the facts underlying the claim itself but required the insurer to examine its policy’s coverage upon receiving a claim and to promptly notify the insured if the claim did not fit within the policy’s general scope of coverage.

The Utah Court of Appeals explored the nuances of the scope of the implied covenant of good faith and fair dealing regarding whether a claim fits within the purchased coverage:

When a claim appears at least nominally to fall within the scope of the subject matter of the policy, it makes sense to expect the insurer not only to investigate the underlying facts, but also to promptly determine whether the claim ought to be denied because of some exclusion or exception in the policy. Such an interpretation of the implied duty to diligently investigate ensures that an insured, who reasonably might expect a property damage policy to cover damages to personal property from a water damage incident, is timely put on notice that the insurer considers the damages to fall under an exclusion or exception, for example, where the policy excludes damages to property owned by third parties. The insurer may be in an advantaged position with regard to understanding the details of coverage, and recognition of such a duty ensures that the insurer does “not … intentionally or purposely do anything [that] will destroy or injure the [insured]’s right to receive the fruits of the contract.”

Colony Ins. Co. v. Human Ensemble, 299 P.3d at 1154, citing United States Fid. & Guar. Co. v. U.S. Sports Specialty, 2012 UT 3, 270 P.3d 464 (2012).

However, the Court was not persuaded that the duty extended so far as to encompass an obligation to inform insureds of the general type of policy that the insured has purchased. If the insured maintains an expectation in that regard, it did not fall into the same category as the insured’s expectation that the insurer will fulfill its duty to diligently investigate the facts and circumstances of a claim that at least arguably falls within coverage in order to properly defend or resolve the claim.

The Court found that while it is reasonable to expect insurers to determine early in the process whether an insured’s claim falls within the general subject matter of the liability policy or involved a subject, such as a property damage claim, which was outside the broad scope of the liability policy, that expectation did not arise from a duty owed to the insured but from a sense of the insurer’s own self-interest.

The Court in Colony Ins. Co. found that Human Ensemble purchased the liability policy from Scottsdale in the first place and that Human Ensemble also purchased a separate property damage policy from Colony. Under that circumstance, it was reasonable to expect that Human Ensemble would be responsible for keeping track of which insurance company provided which type of coverage just as it would be for Scottsdale to do so. The facts were undisputed that Human Ensemble was aware that it purchased two policies.

In essence, Human Ensemble was asking for the imposition of an additional duty upon Scottsdale whereby Scottsdale would become legally responsible to Human Ensemble for Human Ensemble’s own error in filing its property damage claim with the wrong insurer and under the wrong policy. Imposition of that type of obligation would extend the duty of good faith and fair dealing beyond its intended purpose of protecting the express covenants and promises of the contract.

The Colony Ins. Co. case is yet another example of a frivolous attempt by an insured to use the implied covenant of good faith and fair dealing both as a sword and a shield to protect its own error in misunderstanding the type of insurance coverage it purchased.

The case is presented here not because of its legal significance in terms of expanding the nuanced contours of the covenant of good faith and fair dealing but rather because it demonstrates the fidelity of the court in maintaining the scope of the implied covenant of good faith and fair dealing against unreasonable and unwarranted expansion.

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About Steven Plitt

Steven Plitt is the current successor author to Couch on Insurance, 3d. He maintains a national coverage practice with The Cavanagh Law Firm. He has been listed continuously as one of Arizona's 50 lawyers by Southwest Super Lawyers. He can be reached To read additional articles by Steven Plitt, go to More from Steven Plitt

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