Minnesota just made it harder for policyholders to claim ‘bad faith’ – Laws and insurance products


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In the case entitled Fishbowl Solutions v. Hanover Ins. Co., the United States District Court for Minnesota upheld a magistrate judge’s order denying an insured’s motion to amend the complaint to allege “bad faith.” The insured has taken out a technological professional liability insurance policy. When a third-party fraudster gained access to the insured’s emails, the carrier denied coverage stating that the fraudster’s actions did not interfere with business operations under the policy. This denial led to a dispute over the coverage of the claim. During the litigation, the insured attempted to amend his complaint to add a cause of action for “bad faith”. The judge analyzed the proposed modification in accordance with Minn. Stat. section 604.18, which was the legislator’s cause of action for “bad faith”.

The law includes a two-pronged test: whether the carrier had no reasonable basis for denying policy benefits and whether the coverage issues were “substantially questionable.” The judge concluded that although the insured correctly pleaded the first part, he failed on the second part. The basis for this decision was that there was an unresolved legal issue of whether the cover applied to losses caused by a “man in the middle” cyberattack. As a result, the judge concluded that the issue of coverage was “quite moot” and therefore cannot form the basis of a claim of “bad faith”.

Although the district court emphasized that the insured’s position may ultimately be correct with respect to coverage, this is not the norm, as the viability of a “bad faith” claim revolves around the carrier’s interpretation of the policy that creates a “reasonable disagreement” regarding coverage. This position, consistent with the law, makes it difficult to file “bad faith” claims against Minnesota carriers, while clarifying potential arguments for carriers to oppose such motions and claims.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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