Last month, as Hurricane Maria bore down on Puerto Rico, we
reposted our Puerto Rico claims checklist and an analysis of causation under Puerto Rico law. In Maria’s devastating aftermath, many Puerto Ricans
are still focused on necessities, and filing an insurance claim for damage to
their home or business is not top of mind. But as recovery efforts gain
momentum, the claims will begin to come in. Now is the time to review our posts
from last month and consider how Puerto Rico law may apply to handling Maria insurance
claims.
Sources of Puerto Rico insurance law
In their September 19, 2017 post, my colleagues Anaysa Gallardo Stutzman, José Umbert and Hernán Cipriotti explained that Puerto Rico’s legal system is modeled on
the Spanish civil code. In Puerto Rico, the Civil Code (codified as Title 31 of
the Puerto Rico statutes) is the primary source for contract and property law.
Insurance is governed by the Puerto Rico Insurance Code (Title 26), which
includes an Unfair Claim Adjustment Practices Act. See 26 L.P.R.A. § 2716a. Key provisions from section 2716a and
related statutes are addressed in the Puerto Rico claims checklist reposted here on September 19 by Jonathan MacBride.
The Puerto Rico statutes do not
address insurance bad faith specifically. But, as explained below, a provision
of the civil code targeting bad faith in the fulfillment of contractual
obligations has been applied to insurance contracts.
Puerto Rico’s statutes are
interpreted and applied by the Puerto Rico courts (which operate in Spanish),
and the federal courts (operating in English). The federal courts often rely on
local legal opinions, and all courts look to other U.S. jurisdictions for
persuasive precedent. With relatively few insurance cases decided under Puerto
Rico law, certain issues have not been definitively addressed. Insurance bad
faith in a property insurance context is one of those issues. Every case is
unique, and specific facts of a particular case may lead to expected outcomes.
But two leading cases outside of the property insurance sphere provide
guidance on insurance bad faith claims under Puerto Rico law. Their analysis
suggests that damages for bad faith are not recoverable under Puerto Rico law
in the absence of coverage and a breach of contract.
Event Producers Inc. v. Tyser & Company
In 1992, Event Producers, Inc. bought insurance against
rain at a venue where the company was producing a series of outdoor concerts. Coverage
would be triggered if an independent observer hired by the insurers measured
rainfall above a certain amount at the venue on the concert dates. The observer
certified that rainfall exceeded that level on two of the dates. The insurers
investigated the claim due to concerns that the observer may have been induced
to provide a fraudulent certification. The insureds sued, seeking payment of
the claim and alleging bad faith. Event
Producers, Inc. v. Tyser & Co., 854 F. Supp. 35, 36-37 (D.P.R. 1993), aff’d 37 F.3d 1484 (1st Cir. 1994).
The insurers’ investigation was inconclusive, and they
ultimately paid the insurance claim, leaving only the bad faith claim before
the court. The insureds argued that because the insurers hired the observer, the
insurers were not entitled to corroborate the observer’s certification or
investigate the claim, and that the delay in paying the claim constituted bad
faith. Id. at 37-38.
The court began its discussion by noting that “Puerto Rico
courts have not yet decided whether a tort action will lie for an insurer’s
wrongful refusal to pay an insurance claim. Prior federal courts that have
grappled with this question have decided that it is likely that Puerto Rico
courts would limit such actions to the law of contract.” Id. at 38. The court discussed precedent from other U.S.
jurisdictions in light of the unique history and character of Puerto Rico law, and
concluded that (1) Puerto Rico’s Supreme Court would sanction a bad faith
action against an insurer; (2) “[t]he standard would be either conscious
wrongdoing, reckless indifference or the lack of a reasonable basis for denying
[the] claim”; and (3) “the Puerto Rico courts would place especial emphasis on
the willful nature of the insurer’s failure to pay on a claim, given the
importance of Spanish law antecedents in Puerto Rico.” Id. at 39-40.
In the end, the court rejected the insured’s bad faith
claim, concluding that the actions of the insurers did not rise to the level of
any of the three potential standards, and the insureds had not even alleged
conscious wrongdoing by the insurers. Id.
The court also held that the right of insurers to investigate claims is implied
by the fact that Puerto Rico’s Insurance Code governs such investigations. Id.
Oriental Financial Group v. Federal
Insurance Company
In 2008, the federal district court looked directly to the
Civil Code provision governing bad faith in contractual relations, and applied
it to an insurance bad faith claim. The case arose from the denial of coverage
under a policy covering losses resulting from dishonest acts of an employee. The
insureds sought payment for losses covered by fidelity bonds underwritten by
the insurer, plus damages resulting from breach of contract, bad faith (“dolo”
in Spanish), and breach of the covenant of good faith and fair dealing. The jury
found for the insured on the “dolo” claim, and the insurer filed a motion to
set that verdict aside. Oriental Fin. Grp., Inc. v. Fed. Ins. Co., 598
F. Supp. 2d 199, 202-03 (D.P.R. 2008).
Setting the framework for discussion, the court noted that
Puerto Rico has no specific statute for bad faith refusal to settle a claim,
but an insured may compel specific performance and recover foreseeable damages
by filing an action under the Civil Code’s contract-law provisions. If bad
faith is alleged, the insured’s recovery may include consequential damages resulting
from the contract breach. Id. at 206 n.6, 224 (citing 31 L.P.R.A. § 3024).
The court explained the nature of such “dolo” claims:
Under Civil Law, the English language notion of “bad
faith” is encapsulated by the concept of “dolo.” Dolo entails a malicious
intent to do harm, and is thus differentiated from mere negligence. Under
Puerto Rico contract law, bad faith (“dolo”) can be manifested in the
performance of an obligation. A party acts with bad faith (“dolo”) when it
knowingly and intentionally, through deceitful means, avoids complying with its
contractual obligation.
Id. at 218-19
(quotations and citations omitted). Furthermore, dolo is never presumed, and
the party asserting a dolo claim has the burden of proving the claim by direct
or circumstantial evidence. Id. at
219.
After a detailed analysis of the evidence, the court set aside
the jury’s verdict, ruling that the evidence presented could not establish bad
faith. Id. at 224. In the process,
the court strongly suggested that an insurance bad faith claim may not succeed
if there is no coverage, because “a finding of bad faith (‘dolo’) must be based
on evidence that a party avoided compliance with its contractual obligation and
that it did so through deceitful means. The act of denying coverage . . . is
not by itself an act of bad faith.” Id. at
221.
Conclusion
That Puerto Rico does not have a
statutory provision authorizing insurance bad faith claims should not be taken
to mean that such claims cannot be asserted – and asserted successfully. The
requirements of an insurance bad faith claim are not entirely clear under
Puerto Rico law. But provisions of Puerto Rico’s Civil Code governing contractual
relationships provide a framework that may allow insureds to recover both
foreseeable and actual damages if the insured can prove that an insurer
wrongfully denied a covered insurance claim, and did so in bad faith.
