Appeals Court Confirms Good Faith Efforts in Win for Insurers

In a dispute arising from hurricane damage to a home on the Carolina coastline, a team of Phelps lawyers convinced a three-judge panel at the Fourth Circuit Court of Appeals to affirm the trial court’s dismissal of the plaintiffs’ claims.

The Fourth Circuit’s decision serves as a helpful reminder of several principles common to lawsuits by policyholders against insurers for “bad faith” denials of claims in North Carolina — providing an outline of the duty of good faith and fair dealing in the context of an insurance contract under North Carolina law. 

The case involved a home on the North Carolina coastline damaged by Hurricane Florence in 2018. Initially, the covered damage to the house appeared minor. The insurers paid the owners of the house an initial undisputed amount of loss. The owners claimed they made repairs. Yet, after additional water damage was discovered following a second storm, the owners engaged an engineer, who assessed the hurricane damage to be more severe than initially believed. The insurers made additional undisputed payments to the owners as the parties learned more. After the parties agreed to submit the case to a neutral appraisal panel, the insurers paid the full appraisal amount determined by the panel. Despite the award being paid, the owners still sued the insurers.

Among their claims: one for alleged “bad faith” denial of an insurance claim and one for alleged violation of North Carolina’s Unfair and Deceptive Trade Practices Act (UDTPA). The Fourth Circuit’s opinion offered two examples of what the insurer had done that showed the insurers had not acted in bad faith and three examples of what the insurers had not done that would have shown otherwise. 

First, the Fourth Circuit pointed out what the insurers had done right: after the initial assessment of the damages turned to be out too low, the insurers continued to update their assessment to reflect the facts as new information came to light. Second, and more importantly, the insurers made significant payments beyond its initial assessment both before submitting the case to the appraisal panel and afterward. A willingness on the part of the insurers to take new information into account and act on it was considered by the court to be consistent with good faith — not its opposite.

In rejecting the owners’ arguments and affirming the District Court’s ruling, the Fourth Circuit distinguished several cases relied upon by the owners. First, the court pointed out that the case before it was unlike one cited by the owners where the insurers chose to disregard new information obtained by the owners at the express request of the insurers. Second, the court noted that there had been no allegation of dishonesty or subterfuge by the insurers at all, unlike in a case cited by the owners where an adjuster allegedly omitted certain information in an assessment to decrease the insurer’s exposure. Third, the court distinguished a case where all that was alleged was that the insurers had refused to pay a claim for which it knew it was liable.

Notably, the court reiterated that simply because an insurer is required to pay more in an appraisal does not mean that the insurer acted in bad faith before the appraisal and relatedly that “a mere disagreement between a policy holder and an insurance company does not transform a run-of-the-mill insurance dispute into [a UDTPA claim].”

Ultimately, the court’s decision reaffirms the principle that common sense and freedom from hindsight bias reign in determining whether an insurance claim has been handled in good faith under North Carolina law, offering several helpful examples of actions to not only emulate — but also avoid — to limit liability for “bad faith” claims. We caution that the decision is unpublished and thus cannot be cited as binding precedent, but it nonetheless offers guidance as to how the Fourth Circuit evaluates bad faith under North Carolina law.

The Phelps team was led by Raleigh partners Kevin O’Brien and Anna Cathcart and associate Machaella Reisman.