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First Party vs. Third Party – Who can sue for bad faith?
December 30, 2014
For the purpose of those individuals who undertake direct representations of insurers, it is significant to be able to recognize who can sue an insurer (their clients) for bad faith. Nine years have passed since the legislative abrogation of third party bad faith. In the third party bad faith realm, typically an aggrieved party’s only remedy for issues related to the handling of their claim is by way of an administrative complaint with the West Virginia Offices of the Insurance Commissioner. See generally W. Va. Code § 33-11-4a.[1] However, such is not the case for individuals or entities identified as first party insureds or otherwise first party claimants. While first party insureds do a have a remedy of filing an administrative complaint with the West Virginia Office of the Insurance Commissioner, they also have the remedy of pursuing a direct cause of action against the insurer within our court system.[2]

Typically the difference between a first party claimant and a third party claimant may appear obvious. The practitioner should initially look to the policy language. In reviewing the policy language, the practitioner should look to who meets the definition of an “insured” under the terms and conditions of the policy. If it is any type of insurance other than liability insurance, then the policy will probably call for the payment of some benefit to a person who meets the definition of an “insured” under the policy. Anyone who meets the definition of an insured is a first party claimant, as to that specific claim. As for liability insurance, these policies likewise contain definitions of who is an insured. Anyone who meets the definition of who is an insured is a first party claimant, as to that specific claim. The practitioner should always be aware of the most recent developments and changes in the law, for like Alice said in Lewis Carroll’s Alice’s Adventures in Wonderland, “How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.” Such may be the case as to who may sue for bad faith, but following is an attempt to provide the most up to date analysis.

Recent opinions from the West Virginia Supreme Court of Appeals (as set forth below) have placed emphasis on the definitions promulgated under the West Virginia Code of State Rules to define a claimant’s status as either first or third party. Section 114-14-2.3 defines the term “first-party claimant” as:
 
2.3. “First-party claimant” or “Insured” means an individual, corporation, association, partnership or other legal entity asserting a right to payment under an insurance policy or insurance contract arising out of the occurrence of the contingency or loss covered by such policy or contract.

Section 114-14-2.8 defines the term “third-party claimant” as:
 
2.8. “Third-party claimant” means any individual, corporation, association, partnership or other legal entity asserting a claim against any individual, corporation, association, partnership or other legal entity insured under an insurance policy or insurance contract of an insurer.[3]

One might wish to rely upon policy language and regulatory definitions to completely define what it means to be a first party claimant. However, as is typically the case, such reliance may be misguided as the definition is not that clear.

Following are the most recent opinions involving the Supreme Court of Appeals of West Virginia’s analysis and holdings on who can sue for bad faith.
 
Loudin v. National Liability & Fire Ins. Co., 228 W.Va. 34, 716 S.E.2d 696 (2011)
 
Think definition of first party claimant!
 
Loudin addressed an unusual scenario where an injured named insured under the National Liability policy sued an unnamed insured (by policy definition) under the very same policy for allegedly causing him injury. While on its face it appeared that the named insured’s claim against the unnamed insured was a third-party claim, the West Virginia Supreme Court of Appeals concluded otherwise.

In Loudin, the person who bought the insurance policy was injured by the negligence of a permissive driver of the policyholder’s vehicle. The policyholder made a liability insurance claim against the negligent permissive user. The issue, therefore, was whether the policyholder claimant was a first or third party claimant for the purposes of litigating a bad faith claim against the insurer? In spite of the predominance of court holdings nationwide that the policyholder in this circumstance was deemed a third party, the West Virginia Supreme Court of Appeals disagreed and found that the policyholder was a first party claimant.
 
[I]nsofar as National took the position that William Loudin was a non-named insured or beneficiary under the policy when he caused injury to Mr. Thomas Loudin, the Loudins could be considered third party claimants. However, we equally find that under the definition of first party claimant provided by the commissioner's rule and this court's definition of the same, the Loudins also fall within the definition of first party claimants.

Loudin at 228 W. Va at 39, at 716 S.E.2d at 701.
 
The Court considered the regulatory definition of a first party claimant as well as the fact that the policyholder who paid for the insurance was involved in a dispute with his insurer. This fact, according to the Court, should give the policyholder the right to sue the insurance company for bad faith.

Loudin has led to a number of other cases. It has been said that “position determines perspective.” In keeping that maxim in mind, the cases that follow Loudin have either expanded the definition of a first party claimant or have otherwise clarified the definition of a first party claimant.
 
Goff v. Penn Mut. Life Ins. Co., 229 W.Va. 568, 729 S.E.2d 890 (2012)

Beneficiary of life insurance proceeds are first party claimants.

Goff is a life insurance case where the named, primary beneficiary of a life insurance policy sought to “stand in the shoes of the decedent insured” for purposes of asserting an action for the insurer's violation of the statutory duty of good faith and fair dealing under W. Va. Code § 33-11-4(9). Goff, 229 W. Va. at 570, 729 S.E.2d at 892. Our Court found that the beneficiary had the right to pursue a statutory bad faith claim against the insurer, but that right did not arise simply because he “was the individual receiving the proceeds.” Id. at 574, 729 S.E.2d at 896. Rather, the Court found that a life insurance policy “is clearly a first-party contract.” Goff, 229 W. Va. at 573-74, 729 S.E.2d at 895-96 (citing Fuller v. Nationwide Ins. Co., No. 1:08-CV-129 TS, 2009 U.S. Dist. LEXIS 20999 (D. Utah Mar. 16, 2009)). In purchasing a life insurance policy, the decedent “sought to provide financial security to [the beneficiary] upon her demise as well as to gain the peace of mind that such a gift provides the donor.” Goff, 229 W. Va. at 574, 729 S.E.2d at 896. The Court stated its narrow holding as follows:
 
Accordingly, we hold that upon the death of the insured, a primary beneficiary of a life insurance policy has standing to bring a statutory bad faith claim against the insurer pursuant to West Virginia Code § 33-11-4(9). In bringing such a suit, the beneficiary stands in the shoes of the insured in asserting a first-party type of statutory bad faith action.
 
Goff, 229 W. Va. at 574, 729 S.E.2d at 896.
 
Salmons v. State Farm Mut. Auto Ins. Co., 2013 WL 2462190 (W. Va. June 7, 2013 Memorandum Decision)
 
Just because you have the same insurance as the party that hit your
car does not make you a first party claimant!
 
In Salmons, the insured claimant, Patricia Salmons, was injured in a motor vehicle accident with a tortfeasor. The tortfeasor just happened to have insurance coverage with the same insurer as the tortfeasor as Ms. Salmons. As part of her lawsuit, Ms. Salmons brought a first party bad faith action (asserting both common law and UTPA violations) against her insurer. Ms. Salmon’s claim was unsuccessful as she was deemed to not be a first party claimant.

The Court found that a plaintiff that merely happens to have the same auto insurance company as a tortfeasor against which he/she is making his/her liability claim does not qualify as a first party claimant and, therefore, may not pursue a private action for either common law bad faith or violation of the UTPA against the insurance company.
 
Dorsey v. Progressive Classic Ins. Co., 232 W.Va. 595, 753 S.E.2d 93 (2013)
 
Med pay may open the door to first party claimant status.
 
In Dorsey, Progressive attempted to assert that a person who met the definition of an “insured” under the medical payments portion of the policy was not a first party claimant because that person did not pay for the insurance policy. The West Virginia Supreme Court of Appeals rejected the argument and allowed Dorsey to sue for bad faith. The Court applied the Insurance Commissioner's regulations to find that a guest passenger in an insured automobile qualified as a “first-party” claimant for purposes of bringing a “bad faith” claim against an insurance company. While Dorsey, the guest passenger, did not pay the insurance premiums and was not specifically listed on the insurance policy declarations, the Court recognized that a controlling issue was the fact that a claim was being asserted directly for benefits under the insurance policy, stating:
 
Thus Dorsey, who never asserted any claims against the named insured and only asserted a claim under the policy, has the characteristics of a first-party insured.
 
Dorsey at 232 W. Va. 595, 753 S.E.2d 93, 98 (2013)[4]
 
Conclusion
 
The issues as to who may qualify as a first party claimant and thus “who can sue for bad faith” continue to evolve. As further evidence of this evolution, there is currently an appeal pending before the 4th Circuit Court of Appeals wherein the plaintiffs appealed a ruling from the Hon. Chief Justice Robert Goodwin from the U.S.D.C. of Southern West Virginia on the issue of:
 
2. Whether the court erred in finding that a victim of predatory lending who is protected by a mortgage broker bond issued pursuant to W. Va. Code 31-17-4, is not a first-party claimant for purposes of the applicability of the substantially prevailing doctrine and the availability of bad faith damages?

Rhodes v. Hartford Fire Insurance Company, 2013 WL 3878349 (C.A.4)
 
Practitioners should proceed with caution when these questions and issues arise regarding the status of a claimant. Pay attention to the Commissioner’s regulations and policy definitions as your map to the correct answer. Finally, give heed to the sage advice oft attributed to the great former Yankee’s catcher Yogi Berra, “If you don't know where you're going, when you get there you will be lost!”

[1] One exception to the general prohibition of third party claimant lawsuits against insurers can be found in Michael v. Appalachian Heating, LLC, wherein the Supreme Court of Appeals held in Syllabus Point 8 that “[T]he prohibition of a third-party law suit against an insurer under W. Va.Code § 33–11–4a(a) (2005) (Repl.Vol.2006), does not preclude a third-party cause of action against an insurer under W. Va.Code § 5–11–9(7)(A) (1998) (2006) of the West Virginia Human Rights Act.”
[2] The significant judicial and legislative history of first and third party bad faith is not addressed in this notebook article.
[3] As a practice pointer, the West Virginia Offices of the Insurance Commissioner, maintains an Insurance Rules Index which can be found at http://www.wvinsurance.gov/PolicyLegislation/InsuranceRules.aspx. Note that the Commission “cannot guarantee the accuracy or completeness of the site’s contents.”
[4] As a practice point, at the recent Litigation CLE in Canaan Valley, Prof. Thomas Cady astutely noted that many business commercial general liability (“CGL”) policies may have “med pay” coverage available to people who are injured on a business premise. Practitioner should carefully review these CGL policies in premises liability cases.

 
Insurance Glen A. Murphy
304.340.3840
gmurphy@spilmanlaw.com