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NOVEMBER 2014 BAD FAITH CASES: INSURER EXPOSED TO BAD FAITH CLAIM BY USING INSURED IN CLAIMS HANDLING PROCESS INSTEAD OF PAYING FOR THIRD PARTY TO DO THE WORK (WHERE INSURED FELL THROUGH A ROOF) (Western District)

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In Selmek v. State Farm Fire & Cas. Co. the insurance adjuster had asked for some assistance from the insured in inspecting a damaged roof and securing it from further damage, as a result of which the insured fell through the roof.  The insured brought claims for negligence and bad faith.  The Court found that the insurer had a contractual duty of good faith to inform the insured that under the policy the insurer had to pay for a third party contractor to take on these sorts of risks in securing the property.  The insured alleged that the insurer had the insured take on these tasks to improperly save money by not hiring a contractor, as required under the policy.  This sufficiently stated a statutory bad faith claim.

Date of Decision:  September 20, 2014

Selmek v. State Farm Fire & Cas. Co., No. 14-388, 2014 U.S. Dist. LEXIS 162294 (W.D. Pa. Sept. 20, 2014) (Fischer, J.)

NOVEMBER 2014 BAD FAITH CASES: NAMING WRONG INSURER WITHIN INSURANCE GROUP AS DEFENDANT REQUIRES DISMISSAL OF CLAIMS (New Jersey Federal)

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In Klein v. Hanover Insurance Company, the court addressed the not infrequent situation where an insurance company is part of a family or group of insurers, and either the group name or another member of the group is named as a defendant.  In this breach of contract/breach of the covenant and good faith and fair dealing case, the insurer named on the policy was issued by Citizens Insurance Company, which was part of the Hanover Insurance Group, Inc. However, the insured named Hanover Insurance Company, another member of Hanover Insurance Group, as the defendant.  The court dismissed the claims as the Hanover Insurance Company was not a party to the insurance contract.

Date of Decision:  October 27, 2014

Klein v. Hanover Insurance Company, Civil Action No.: 14-1055, 2014 U.S. Dist. LEXIS 152407 (D.N.J. Oct. 27, 2014) (Cecchi, J.)

NOVEMBER 2014 BAD FAITH CASES: INSURED FAILED TO PLEAD SUFFICIENT FACTS TO MAKE OUT BAD FAITH CLAIM WHERE PARTIAL PAYMENT MADE BY CARRIER, BUT LEAVE TO AMEND GRANTED (Middle District)

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In Stephens v. State Farm Fire & Cas. Co., a husband and wife brought suit against their homeowners’ insurance carrier alleging breach of contract, statutory bad faith, and a claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.  Plaintiffs alleged they suffered concurrent losses to their home via theft, vandalism, and water damage.  An adjuster visited the property to view the damages and evaluate the claimed losses, and, based on that evaluation, the carrier paid some benefits toward the claimed losses.   Plaintiffs then filed suit against the insurer.

Plaintiffs initially brought their action pro se, however, four days prior to the statute of limitations, they moved for leave to amend and filed an amended complaint.  In the bad faith count of the amended complaint, Plaintiffs alleged the insurer only paid them partial benefits on their claim, and that the claims had been given three different claim numbers despite being related to concurrent loss events.  The carrier opposed the motion for leave, arguing the amended complaint was untimely and futile since the claims raised by the plaintiffs failed as a matter of law.

The Magistrate Judge’s Report and Recommendation, later adopted by the District Court, denied the carrier’s motion as to lack of timely filing because Plaintiffs filed their motion and amended complaint prior the deadline, albeit four days prior.  It did, however, grant the motion with respect to futility on the bad faith count.  The court found two key problems with plaintiffs’ bad faith claim.  First, it faced a “threshold factual hurdle,” as Plaintiffs received a partial payment of their claim under the policy, which the court found to be inconsistent with a claim of complete bad faith on the part of the insurer.  Secondly, the claim failed as a matter of law, because Plaintiffs merely made conclusory allegations that the partial payment constituted a breach of the contract, and therefore the carrier had engaged in bad faith conduct.  The court determined that without a factual basis to support the claim, established case law required the complaint be dismissed.

The district court judge adopted the magistrate’s opinion, and dismissed the claim without prejudice, allowing Plaintiffs the opportunity to further amend the claim and articulate a factual basis to support the bad faith allegations against the carrier.

Date of Decision: September 12, 2014

Stephens v. State Farm & Cas. Co., Civil Action No. 1:14-CV-160, 2014 U.S. Dist. LEXIS 147953 (M.D.Pa. Sept. 12, 2014) (Carlson, U.S.M.J.)

Adopted in Stephens v. State Farm Fire & Cas. Co., NO. 1:14-CV-160,2014 U.S. Dist. LEXIS 147180 (M.D. Pa., Oct. 16, 2014) (Conner, J.)

NOVEMBER 2014 BAD FAITH CASES: CARRIER’S INVESTIGATION AND DENIAL OF UIM BENEFITS FOLLOWING PAYMENT OF FIRST PARTY MEDICAL CLAIM NOT BAD FAITH; NEITHER LENGTH OF INVESTIGATION ALONE NOR DISPUTING CAUSATION AFTER NOT MAKING IT AN ISSUE IN ORIGINAL CLAIM CREATE BAD FAITH PER SE (Middle District)

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In Shaffer v. State Farm Mut. Auto. Ins. Co., plaintiff and his wife brought a bad faith claim against their carrier after being denied UIM coverage, following payment of medical coverage on a first party claim.  The claim resulted from a motor vehicle accident in which the other driver was primarily at fault.  After the collision, the carrier conducted an internal arbitration, but declined to award to damages to either party.  At that time, Plaintiff sought conservative medical treatment under his policy, but declined to file a UIM claim.  Over the next year, the carrier repeatedly requested documentation from Plaintiff regarding his medical treatment, including a completed application for benefits, and medical record authorizations, but Plaintiff failed to return the application, authorization, or any medical records to the carrier.

Eventually, Plaintiff’s counsel informed the carrier Plaintiff required back surgery, and indicated the carrier would be sent a copy of the bill for the surgery, and requested he be advised if Plaintiff’s medical coverage was close to being exhausted.  Shortly after the surgery, Plaintiff’s counsel and the carrier discussed the possibility of a UIM claim for the first time, but Plaintiffs’ counsel merely indicated he would contact the carrier in the future if he felt a UIM claim was necessary.  The carrier received a final treatment bill, and medical records indicating the back surgery’s success; thus, having received no contact in over six months from Plaintiff or his counsel, the carrier closed the file.

Five months later, Plaintiff settled his claim against the other driver for $72,500 of the driver’s $100,000 policy limit, and then filed a claim for UIM coverage under his own policy.  Plaintiffs’ auto policy provided coverage for medical payments and $100,000 in UIM coverage, and allowed for “stacked” UIM coverage, yielding $200,000 in total UIM coverage.  Plaintiff presented the carrier with over 800 pages of medical records to the carrier both pre-dating and post-dating his treatment for the injuries related to the accident, and then provided the carrier with a $250,000 demand, requesting the carrier tender $100,000, the amount of one of the policy limits.

Two months later, plaintiff gave his statement under oath and finally provided all signed medical authorizations.  The carrier then began collecting the medical records, which took another ten months, due in part to Plaintiff’s withdrawal of his initial demand to add additional injuries to his claim.  After compiling all the records, the carrier had its orthopedic expert review the records and write a report evaluating the claim.  The expert concluded most of the injuries were chronic, and not materially or substantially changed by the accident, and that Plaintiff would have eventually needed the back surgery regardless of the crash.

Based on this report, the carrier set a reserve range of $0 to $40,000, and offered Plaintiff $10,000 to settle the claim.  Plaintiff rejected the offer, and one year later filed a lawsuit alleging the carrier violated Pennsylvania’s bad faith statue through its delay in investigating and evaluating the UIM claim.

The court found Plaintiffs’ bad faith claim without merit and dismissed it on summary judgment.  Although the carrier closed the file in December of 2010, it did not become aware of Plaintiffs’ intention to file a UIM claim until April of 2011.  After receiving the claim, a UIM adjuster was immediately assigned, and the carrier spent two years collecting medical records, obtaining plaintiff’s statement under oath, and arranging for review of Plaintiff’s medical records by its expert.  The court conceded that two years was a long time for claim investigation, but noted a long investigation period does not in and of itself constitute bad faith, absent obfuscation, dishonesty, or malice on the part of the carrier. Plaintiff also argued the carrier’s questioning of causation in the UIM claim was improper because it did not question causation in the first party claim; however, case law has established payment of first party benefits does not constitute an admission of causation in subsequent claims.  Therefore, the carrier was free to investigate causation of the UIM claim.

Finally, no evidence existed that the carrier did not conduct its investigation in a reasonable manner, even if the carrier did not move as quickly as Plaintiffs would have liked, or anticipate the UIM claim even before Plaintiffs’ counsel notified the carrier of the claim.

Date of Decision: Oct. 20, 2014

Shaffer v. State Farm Mut. Auto. Ins. Co., Civil Action No. 1:13-cv-01837, 2014 U.S. Dist. LEXIS 149095 (M.D.Pa. Oct. 20, 2014) (Rambo, J.).

NOVEMBER 2014 BAD FAITH CASES: EXCESS INSURER HAD NO DUTY TO POST APPEAL BOND AND COULD NOT BE LIABLE IN BAD FAITH FOR FAILING TO DO SO; COURT OBSERVES THAT PROOF OF BAD FAITH IS MORE DIFFICULT WHERE LAW AT ISSUE ON COVERAGE IS UNSETTLED (Philadelphia Federal)

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In the most recent decision in Charter Oak Ins. Co. v. Maglio Fresh Food, which has been discussed at length in previous postings in 2013 and 2014, the Court addressed claims against the excess insurer after holding a short non-jury trial.  It concluded that under the unique circumstances of that case, the excess insurer did not owe a duty to post a supersedeas bond for purposes of the insured’s taking an appeal of a jury verdict that would likely put the insured out of business. The court found that any duty to post a bond was not clearly either within the realm of the duty to defend or the duty to indemnify, being a kind of hybrid.  However, the larger issue was that the excess insurer’s duty to make any payment was not triggered, because even though underlying carrier paid out its full policy limits, it did not do so in connection with the one covered claim. Thus, its full limit was not exhausted for purposes of triggering the excess insurer’s duties concerning the covered claim.

The court discussed bad faith throughout its opinion, in dicta and on the issue at hand.  As to the latter, as no duty was triggered to post the bond, there could be no bad faith in refusing to do so.  The Court also observed that because the lawsuit presented questions of unsettled law, this made it more difficult for the insured to show bad faith because “an insurer’s denial of a claim does not constitute bad faith if it is based on a reasonable legal position in an unsettled area of the law.”

The Court more generally provided its observations on the differences and commonalities between contract based bad faith claims and statutory bad faith, which is tort based in nature.

Date of Decision:  September 9, 2014

Charter Oak Ins. Co. v. Maglio Fresh Food, CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 125621 (E.D. Pa. September 9, 2014) (Baylson, J.)

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH IN UIM CASE WHERE INSURER CORRECTLY DETERMINED COVERAGE BASED ON INSUREDS’ CONTRACTUAL CHOICE TO LIMIT UIM AMOUNTS, AND WHERE NO OTHER FORM OF BAD FAITH ASIDE FROM COVERAGE DENIAL WAS PLEADED (Philadelphia Federal)

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In Davis v. Allstate Property & Casualty Company, the UIM plaintiff brought claims for breach of contract and bad faith, based upon an alleged failure to pay $600,000 in connection with a fatal car accident.  The court found, however, that the insureds had complied with all the requirements necessary under Pennsylvania’s Motor Vehicle Financial Responsibility Act to reduce their policy’s underinsured motorist coverage to $15,000 per person and $30,000 per accident, and thus the insurer correctly denied claims in excess of the contractually agreed upon coverage amount.  The claim for breach of an implied covenant of good faith and fair dealing was likewise dismissed, because Pennsylvania law precludes that claim from proceeding independently of the contract claim on which it is based.

Further, there could be no statutory bad faith for denying coverage in these circumstances.  The court stated:  “When an insurer makes a correct determination of the amount owed under a policy, it has a reasonable basis for denying an insured’s claims for a higher amount,” and “plaintiff’s bad faith claim fails as a matter of law because a correct determination of coverage precludes a bad faith claim predicated on a theory that the insurer unreasonably denied coverage.”

Nor, was any other form of bad faith pleaded. The court stated that “Pennsylvania law does not limit bad faith claims to unreasonable denials of coverage. A bad faith [claim] can have various other bases, including an insurer’s lack of investigation, lack of adequate legal research concerning coverage, or failure to communicate with the insured.” However, no factual averments were pleaded to support even the inference that the insurer did not conduct an investigation, failed to conduct adequate legal research, or did not communicate with the insured.

That being said, the bad faith claims were dismissed without prejudice for plaintiff to file a second amended complaint which adequately sets forth her bad faith claims.

Comment:  This latter point raises the debated issue of whether a poor claims handling practice that may even be a violation of the UIPA, but which in no way results in, or is connected to, the actual delay or denial of a benefit because no benefit is owed under the policy, can constitute statutory bad faith.  See, e.g., Berks Mut. Leasing Corp. v. Travelers Prop. Cas., NO. 01-CV-6784,2002 U.S. Dist. LEXIS 23749, footnote 8 (E.D. Pa.  Dec. 9, 2002) (Yohn, J.) (“Accordingly, I find plaintiff’s interpretation of the statute unpersuasive. Instead, I conclude that Section 8371   is limited to causes of actions arising out of the bad faith handling or payment of claims and does not apply to conduct unrelated to the denial of a claim. In so holding, I join other courts that have expressly embraced this interpretation of Section 8371.”); Focht v. State Farm (“In this regard, it is relevant that the District Court for the Eastern District of Pennsylvania has held that, in determining whether a defendant had a “reasonable basis” for denying an insurance claim, the test elucidated in Terletsky “is an objective one” and that as long as “a” reasonable basis exists to deny the claim, “there cannot, as a matter of law, be bad faith.”); but see Shannon v. New York Cent. Mut. Ins. Co. (“Given the remedial purpose underpinning the Bad Faith Statute, we are not persuaded that permitting an insurer to evade its statutory obligation due to some fortuitous fact to which it was oblivious is consistent with the legislature’s intent.”).

Date of Decision: September 30, 2014

Davis v. Allstate Prop. & Cas. Co., Civil Action No. 13-cv-07038, 2014 U.S. Dist. LEXIS 138022 (E.D. Pa. September 30, 2014) (Knoll Gardner, J.)

OCTOBER 2014 BAD FAITH CASES: COURT REFUSES TO BIFURCATE BAD FAITH AND UIM CLAIMS WHERE SIGNIFICANT FACTUAL OVERLAP EXISTS (Middle District)

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In Hoffer v. Grange Insurance Company, the court addressed the insurer’s request to bifurcate the bad faith and UIM claims.  The insured had settled with the other driver and made a UIM claim to his carrier. The insurer denied the claim on the basis that the insured was the one responsible for the collision.  The insured alleged that the carrier failed to objectively and reasonable evaluate the claim, misrepresented the investigation that occurred, and ignored relevant information from official reports in denying the claim without justification.  He brought claims for breach of contract and statutory bad faith.

The court observed the following general legal principles regarding the law of bifurcation: (1) a court may bifurcate separate claims or issues “[f]or convenience, to avoid prejudice, or to expedite and economize,” Fed. R. Civ. P. 42(b), subject to the court’s “informed discretion,”;  (2) “[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”; (3) proper analysis requires the court to “weigh the various considerations of convenience, prejudice to the parties, expedition, and economy of resources,”; (4) bifurcation is not meant to be routine practice, citing the advisory committee note to Fed. R. Civ. P. 42(b); and (5) the moving party bears the burden of showing that bifurcation is appropriate.

The court further observed that bad faith and UIM claims are separate and distinct, and that a plaintiff could lose a UIM claim and still win the bad faith claim.

In this case, the court found that there would be substantial overlap in the discovery relevant to the two claims because they are based upon the same set of facts and they both turn on the determination of responsibility for the collision at issue.

In response to the carrier’s concerns that discovery would reveal documents protected from discovery in the breach of contract claim because they could be discovered in the bad faith case, which worked a prejudice, the court found that: (1) litigating insurers do not automatically waive attorney-client and work product privileges by defending against bad faith claims; and (2) that motions in limine and jury instructions may serve to limit the use of evidence introduced at trial.

Thus, the court ruled that the insurer failed to demonstrate that bifurcation was appropriate and denied the motion to bifurcate the litigation and to stay the bad faith claim.

Date of Decision:  September 29, 2014

Hoffer v. Grange Ins. Co., CIVIL ACTION NO. 1:14-CV-0262, 2014 U.S. Dist. LEXIS 137078 (M.D. Pa. Sept. 29, 2014) (Conner, J.)

OCTOBER 2014 BAD FAITH CASES: NEW JERSEY TRIAL JUDGE DISMISSES BAD FAITH CLAIM WHERE DISPUTED FACTS WOULD NOT PERMIT INSURED TO OBTAIN SUMMARY JUDGMENT ON SUBSTANTIVE COVERAGE CLAIMS (New Jersey Law Division, Bergen County)

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In Omega Financial Services v. Aspen Specialty Insurance Company, a New Jersey Superior Court Law Division case, the court addressed whether a mortgage broker’s claims for indemnification were excluded under its professional liability policy, as well as the insured’s bad faith claim.  The insurer had filed a motion for summary judgment.  After a close analysis on the coverage issues, including whether the insured subjectively and objectively knew that the claim at issue could arise at the time it filled out its application failing to indicate the existence of the claim at issue, the court found summary judgment for the insurer inappropriate.  There were disputed issues of fact that a jury would have to decide as to the insured’s knowledge, as well as the nature of a putative regulatory investigation.

For the same reasons, however, the insured’s bad faith claim could not proceed. An insured claiming bad faith must be able to establisha right to summary judgment on the substantive coverage claim, as a predicate to assert a claim for insurer bad faith in refusing to pay.  No jury could reasonably find that the insured could have established a right to summary judgment as a matter of law on its claim for payment “based on the closely contested issues of fact in this case.”

The insured detailed its efforts to investigate the claim prior to denial, and the court’s “close rulings” in denying the insurer summary judgment “underscore the reasonableness of [the insurer’s] denial of coverage, and the extent to which [the insured] is relying on the deferential summary judgment standard to proceed to trial.”

Date of Decision:  September 22, 2014

Omega Fin. Servs. v. Aspen Specialty Ins. Co., DOCKET NO.: BER-L-7903-12, SUPERIOR COURT OF NEW JERSEY, LAW DIVISION, BERGEN COUNTY, 2014 N.J. Super. Unpub. LEXIS 2333 (N.J.L.Div. September 22, 2014) (Polifroni, J.)

OCTOBER 2014 BAD FAITH CASES: NO BAD FAITH CLAIM STATED FOR DENIAL OR DELAY ON DISABILITY POLICY WHERE MATERIAL ISSUES OF FACT CONCERNING RELIANCE ON CONSULTANTS AND CAUSES OF DELAY MADE OUTCOME “FAIRLY DEBATABLE”; NO STATUTORY ATTORNEY'S FEES AVAILABLE ON FIRST PARTY CLAIMS (New Jersey Federal)

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In Onex Credit v. Atrium 5 Ltd., a company has purchased a disability policy on its CEO.  The policy provided that if the terms were met, the company could receive a large lump sum payment.  There were numerous conditions and exclusions, and after a lengthy investigation by the carrier’s representative coverage was denied.  The company brought suit for breach of contract, bad faith (breach of the implied covenant of good faith and fair dealing), and also sought statutory attorney’s fees.

As to the bad faith claim, the company argued that there was a bad faith delay, and a bad faith refusal to pay.  To show a bad faith denial of payment, an insured must show that the insurer lacked a “fairly debatable” reason for denying coverage and that it knew or recklessly disregarded the absence of a reasonable basis to deny the claim.  To establish an unreasonable delay case, the delay must be shown to be lacking any valid reason, and that the insurer knew or recklessly disregarded the fact that there was no valid reason justifying the delay.  These tests are essentially the same. Thus, to make out a case, the insured has to show that it would be entitled to summary judgment on the bad faith claim, i.e., there can be no material issues of disputed facts that would favor the insurer in precluding summary judgment on the bad faith issue.

In this case, there were disputed issues of material fact as to the reasonableness of the insurer’s denial, specifically concerning its reliance on third party consultants in reaching a conclusion as to their qualifications and findings.  On the delay claim, the court found that the insured overstated the delay by one year and that its objection to producing certain documents resulted in another 6 month delay.  The insurer had promised at one point a decision in 30 days, and had not requested the belatedly produced documents until a year after the original claim.  The court indicated that a jury could find that, at most, this was the result negligence or mistake, which do not constitute bad faith.

The court rejected the argument that there was a need for more discovery concerning the consultants, as this simply circled back to establishing the presence of disputed facts that would not permit a grant of summary judgment in the insured’s favor.  Thus, the company could not overcome the fairly debatable obstacle to relief.  The same result applied to the delay issue, as the reasons for the delay were fairly debatable, and neither negligence nor mistake could make out bad faith. Finally, the court would not entertain the statutory attorney’s fee claim under Rule 4:42-9(a)(6), in connection with having to bring suit to enforce coverage.  This court found that this rule did not apply in the first party context.

Date of Decision:  September 26, 2014

Onex Credit v. Atrium 5, Civil Action No. 13-5629 (ES),  2014 U.S. Dist. LEXIS 135778 (D.N.J. September 26, 2014) (Salas, J.)