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.
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.