Hunton Insurance Recovery Blog

Insurance is bought and sold under the assumption that insurance contracts will be interpreted and honored based on the parties’ negotiated language and that insurers will investigate and adjust claims in good faith based on that language. Coverage disputes should not become a game of shifting the goal post and post-hoc justifications looking to deny, rather than honor, the purchased coverage. Two recent disputes—Cook Brothers Construction, LLC v. Frankenmuth Insurance Co., and Constantino v. Paul Revere Life Insurance Co.—highlight different ways courts are asked to resolve these disputes and hold insurers accountable if justifications for coverage denial under a broad reservation of rights may amount to bad faith or unfair practices.

A Commercial General Liability (CGL) Insurer’s “Shifting Pattern of Denial”

In Cook, a general contractor seeks nearly $600,000 in coverage under a commercial general liability policy. In a recently filed amended complaint pending in Tennessee federal district court, the policyholder alleges breach of contract and requests declaratory relief arising from the insurer’s coverage denial for claims related to a subcontractor’s floor installation work.

The insurer is alleged to have issued a “pattern” of four coverage denials over the course of a year, “each time advancing a materially different legal theory.” The original denial was under a Your Work/Your Product exclusion; the next “pivoted” to a failure to establish “property damage” for defective workmanship; then concluded that damages to remedy the defective workmanship were not recognized under governing law; and finally asserted for the first time that the policyholder had breached the policy by assuming obligations without consent.

The policyholder alleges: “This shifting pattern of denial demonstrates that [the insurer]’s claims handling was not the product of good faith evaluation of the policy and applicable law, but rather a post hoc search for justifications to support a predetermined denial.” Although the claims have not been adjudicated, the dispute highlights how shifting positions can compound and present a moving target for policyholders to navigate, all while the insurer not only refuses to provide coverage but also scrutinizes the policyholder’s conduct in coordinating the unfunded defense.

An Insurer’s “Moving Target” and Delays Result in Bad Faith Liability

Another recent Massachusetts appellate decision illustrated the consequences of similar insurer practices. In Constantino, the Massachusetts Appeals Court affirmed a finding that a disability insurer violated Massachusetts’ unfair and deceptive trade practices statute after repeatedly denying medical benefits to a physician who lost function of his feet.

After presenting medical records, the insurer shifted its interpretation of the policy’s loss of use requirement from “total” to “practical” to “meaningful” use. The physician eventually received the benefits owed, but only after hiring counsel to dispute the denial. Despite providing coverage, the court rejected the insurer’s characterization of its conduct as a good-faith disagreement of policy interpretation. The record of shifting positions, coupled with an “indefensibly aggressive approach to the interpretation of the Policy” during a two-year period of delay, supported findings of unreasonable investigation and delay warranting bad faith liability.

Discussion

Together, the cases show why policyholders should pay attention not only to an insurer’s ultimate coverage position, but also to how it gets there. Those positions can evolve as new facts emerge, but shifting rationales without materially changed facts raise broader questions about the adequacy and reasonableness of the insurer’s investigation and claims handling. For policyholders:

1. Track the insurer’s position over time. A coverage position may legitimately evolve as new facts emerge. But Constantino shows that shifting interpretations without new facts can create a “moving target” and support a finding of unreasonable claims handling. Cook Bros. similarly alleges four materially different grounds for denial over roughly a year.
2. Push for specific answers. Ask the insurer to identify the policy language, facts, and investigation supporting its position. In Cook, for example, the policyholder alleges that the insurer repeatedly failed to address a potentially significant coverage argument and initially denied coverage without inspecting the affected properties.
3. Preserve the claims-handling record. Keep copies of call notes, denial and reservation of rights letters, and other insurer communications. Comparing those communications may explain a logical progression of analysis, but it also can reveal unexplained changes, unanswered arguments, or new defenses asserted only after earlier ones are challenged. Having the right information can help support waiver, estoppel, or bad-faith arguments months or years down the road.
4. Do not treat a denial as the end of the claim. Continue pressing legitimate coverage arguments and consider escalating stalled claims before delay creates additional costs or prejudice. Constantino is a particularly stark example: the insurer ultimately paid after counsel became involved, based on information it already possessed.

Broad reservations of rights letters do not limitless opportunities to amend, supplement, and withdraw coverage defenses as a claim develops. Policyholders should investigate the timing, consistency, and factual support for insurer positions to properly evaluate the insurer’s claim-handling practices and potential bad faith claims based on unreasonable denials, delays, and similar unfair claims settlement practices.