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Joanna Roberto wrote a new spotlight post
Editors note: Bad Faith Focus, published by the law firm Goldberg Segalla, provides timely summaries and analyses of bad faith litigation matters throughout the United States. We will be sharing them with you periodically throughout the year.
Wallis v. Centennial Ins. Co.
(E.D., Cal., July 19, 2013)
An insured was issued a professional liability policy by an insurer, and filed suit against the insurer regarding obligation to defend in an underlying lawsuit. The insured brought claims against the insurer and its parent company, alleging that the insurer was a wholly owned subsidiary. The insured claimed the parent company made all of the decisions and took all the actions with regard to the defense in an underlying lawsuit. By alleging certain facts, the court allowed the insured’s claim to go forward on two legal theories: agency and alter ego.
The court allows a breach of good faith and fair dealing claim to go forward against a non-party to a contract if a signing party enters the contract on behalf of a non-signing party. When that occurs, the signing party is said to be the agent of the non-signing party. In parent-subsidiary relationships, agency occurs when the parent controls the subsidiary to the point that it has taken over performance of the subsidiary’s day-to-day operations.
In this case, the court would not dismiss the claims because the insured alleged that once the insurer issued the policy, the parent assumed responsibility for almost everything related to the insured’s defense. This included corresponding with the insured, paying for the defense, and handling the administration of the claims.
The alter ego theory is similar to agency theory. Under alter ego theory, a claim can be brought against a parent when it is abusing the corporate form of its subsidiary.
A party using this theory must prove: (1) that the parent and subsidiary are so united in interests that the two are essentially one company; and (2) that it would be unfair to not allow the claim against the parent.
The court allowed the claims to continue on alter ego theory as well. The insured alleged that the two companies shared a bank account, that the parent company repeatedly stated that it was obligated to pay the insurer’s policy obligations, that the companies shared common officers and directors, and more. According to the insured, it would be unfair for the court to recognize the companies as separate because it would allow the parent company to avoid liability for harm that it caused through the insurer.
Comment: This case illustrates that a claim may be brought against a parent of an insurance company. To receive the benefit of corporate forms, it is important to maintain separate structures and respect corporate forms.
Joanna M. Roberto, a partner in Goldberg Segalla’s Global Insurance Services Practice Group, concentrates her practice in complex insurance coverage and commercial litigation. She serves as coverage counsel for multinational insurance carriers in numerous matters pending throughout the country. Joanna is a Steering Committee member of the national Defense Research Institute’s Insurance Law Committee; chair of the Insurance Coverage Committee in the New York State Bar Association Torts, Insurance, and Compensation Law Section; and a member of the TICL section’s Executive Committee.see less