Summary: Fidelity National defended its title insured, Anastasi, for several years before settling the quiet title action filed against him and paying his claim. In the bad faith action that followed, the trial court granted summary judgment which was vacated and remanded by the Intermediate Court of Appeals (ICA) which was in turn vacated and remanded by the Supreme Court of Hawaii.
Anastasi v. Fidelity National Title Insurance Company, 366 P.3d 160 (Hawaii 2016)
Anastasi loaned $2.4 million secured by a mortgage on property on Oahu in 2005. Fidelity National was the title insurance company on that transaction. A quiet title suit was filed in November 2005 which was ultimately settled in 2008. Anastasi then filed a breach of contract and bad faith action against Fidelity in April of 2008. Four months later Fidelity paid Anastasi $2.4 million under the policy. The Hawaii trial court granted summary judgment for Fidelity finding, as a matter of law, that Fidelity had satisfied Hawaii’s good faith requirements.
The claims person for Fidelity was an attorney who served the roles of the claims adjuster and in-house attorney. In the bad faith action multiple documents were withheld from Anastasi. The Supreme Court of Hawaii had to decide whether Hawaii would recognize the presumption that documents prepared before an adverse claims decision was made constituted protected work product. The ICA relied on Harper v. Auto Owners Insurance Co. (S.D. Ind. 1991) to hold that a document or thing prepared before a final decision was reached on an insured’s claim was presumed to have been prepared in the ordinary course of the insurer’s business and not protected work product. The Supreme Court of Hawaii disagreed because Harper imposed a standard not found in Hawaii’s Rule 26. The Court held that the rule “focuses on the purpose of the prepared material and not on when it is prepared.” Accordingly, the Court stated that “when an attorney [employed by an insurance company] is performing both the role of claims adjuster and counsel, courts must determine whether work product created by such an attorney was made in anticipation of litigation.” The Court adopted the “because of” test which considers “whether given the totality of the circumstances it can be fairly said that a document was prepared or obtained because of the prospect of litigation.”
In Hawaii, insurance companies which defend an insured under a reservation of rights must satisfy an “enhanced standard of good faith.” Failing to meet that enhanced standard can result in bad faith “liability of the company, or retained defense counsel, or both.” The enhanced standard of good faith is satisfied by doing three things: (1) thoroughly investigating the cause of the incident as well as the nature and extent of the plaintiff’s damages; (2) retaining competent defense counsel, who “must understand that only the insured is the client”; and (3) “refraining from engaging in any action which would demonstrate a greater concern for the insurer’s monetary interest than for the insured’s financial risk.”
The Supreme Court of Hawaii rejected Fidelity’s argument that the test should not apply to title insurance companies. The Court further rejected Fidelity’s argument that it should have no bad faith exposure because it only exercised its rights under the policy. For that reason it could not be found to have acted unreasonably or in bad faith. The Court disagreed stating that bad faith “implies unfair dealing.… If insurance companies were held to be acting reasonably as a matter of law any time they filed or defended lawsuits under a contractual right to pursue litigation, frivolous lawsuits could be used to unfairly delay payments to insureds for years. Insurance companies must act reasonably even when exercising contractual rights.” Finally, the Court ruled that there was an issue of fact whether Fidelity had “induced [defense counsel] to breach her ethical duties to Anastasi.”
Title insurers in Hawaii are bound by the enhanced duty of good faith whenever they defend one of their insureds under a reservation of rights. Furthermore, the actions of defense counsel and the insurer will be carefully evaluated to determine whether that enhanced standard has been met. However, rather than recognizing the temporal factor of when a final coverage decision has been made in deciding whether the work product doctrine applies, the courts in Hawaii will look to whether the item or document was prepared because of anticipated litigation.
