SEPTEMBER 2014 BAD FAITH CASES: CLAIM FOR BREACH OF THE IMPLED COVENANT OF GOOD FAITH AND FAIR DEALING SUBSUMED IN BREACH OF CONTRACT CLAIM; ECONOMIC LOSS DOCTRINE BARS UTPCPL CLAIM (Middle District)

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In Zeglen v. Northwestern Mutual Life Insurance Company, the case involved a disability insurance policy, and the insured brought action for breach of contract, breach of the implied duty of good faith and fair dealing, statutory bad faith, and under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL).

The court found that the contractual duty of good faith and fair dealing is subsumed in the breach of contract claim, and dismissed that claims, finding it could not stand separately from the breach of contract claim.  The statutory bad faith claim remained.

The court also found that the economic loss doctrine barred the UTPCPL claim under the Third Circuit’s Werwinski case, observing that while this is a subject of dispute since the Pennsylvania Supreme Court has not ruled on it, federal district courts are bound by Third Circuit precedent.

Date of Decision: August 25, 2014

Zeglen v. Northwestern Mut. Life Ins. Co., 3:14-CV-00173, 2014 U.S. Dist. LEXIS 118147 (M.D. Pa. August 25, 2014) (Mariani, J.)

SEPTEMBER 2014 BAD FAITH CASES: IN THIS SUPERSTORM SANDY CASE, INSURED ALLOWED TO PROCEED ON BAD FAITH CLAIM WHERE INSURER REFUSED TO ENGAGE IN APPRAISAL PROCESS, BUT COURT DISMISSES BAD FAITH CLAIM BASED UPON ALLEGED UNDUE INFLUENCE ON INSURED’S ROOFING CONTRACTOR (Philadelphia Federal)

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Currie v. State Farm Fire & Casualty Co., involved damage to the insured’s home from Superstorm Sandy, and a dispute over the homeowner insurer’s payment obligation. The matter was before the court on summary judgment. After finding summary judgment could not be granted on the breach of contract claim, the court then addressed the carrier’s motion for summary judgment on the insured’s two bad faith claims.

First, the insured claimed bad faith for the insurer’s failure to engage in the appraisal process. The insurer’s position was that appraisal was only required where the coverage obligation was agreed upon, but the amount of loss was not; and that the carrier disputed coverage. The court found that the carrier’s position was not actually over coverage differences but over the loss sustained, and allowed the bad faith claim to proceed on that basis.

It granted summary judgment on the second bad faith claim, however. The insured claimed that the carrier had unduly influenced the insured’s roofer to lower its repair estimate. However, the evidence presented on the motion did not support that position. The court also stated that the insureds did not submit “any support for their claim that negotiations regarding the amount of construction repair costs and services to be provided constitutes bad faith conduct on the part of an insurer.”

Date of Decision: August 19, 2014

Currie v. State Farm Fire & Cas. Co., CIVIL ACTION No. 13-6713, 2014 U.S. Dist. LEXIS 117970 (E.D. Pa. August 19, 2014) (Kelly, J.)

SEPTEMBER 2014 BAD FAITH CASES: CPA EXPERT PRECLUDED FROM TESTIFYING ABOUT INSURANCE LAWS AS IRRELEVANT AFTER PRIOR RULING ON BAD FAITH CLAIMS, BUT ALSO BECAUSE OF RISK OF JURY CONFUSION (Western District)

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In United States Fire Ins. Co. v. Kelman Bottles, a case with a lengthy history concerning a number of bad faith claims the insured attempted to assert which were limited by the court, the court addressed numerous motions in limine prior to trial.  This included efforts by the insurer to limit the testimony of one of the insured’s experts, a CPA.  The court allowed testimony on accounting matters, but not matters related to insurance regulations and statutes, specifically, the Unfair Insurance Practices Act, 40 Pa. Stat. § 1171.1 (UIPA), and the Unfair Claims Settlement Practices regulations, 31 Pa. Code § 146.1 (UCSP).

Federal Rule of evidence 403 provides that a “court may exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” The insurer argued that an earlier decision broadly rejecting much of the insured’s bad faith claims mooted the testimony on these subjects.  The insured argued that that “a violation of the UCSP and UIPA is not per se bad faith, and that no such sweeping prohibition for violations of the two exists in the Third Circuit.” The insured attempted to distinguish a prior non-precedential Third Circuit 2002 case which held that “evidence of an insurer’s violation of the UIPA and UCSP was properly excluded under Rule 403 due to risk of prejudice.” The court rejected the insured’s arguments “insofar as evidence of [the insurer’s] violation of the Pennsylvania insurance laws is not relevant to any of [the insured’s] remaining viable claims. Moreover, even if the evidence were probative, the risk of jury confusion is great. Absent relevance and in light of the risk of confusion of issues,” the motion to preclude this testimony was granted.

Date of Decision:  August 8, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 109982 (W.D. Pa. August 8, 2014) (Fisher, J. sitting by designation of U.S. Court of Appeals for the Third Circuit).

SEPTEMBER 2014 BAD FAITH CASES: NO BAD FAITH UNDER PENNSYLVANIA LAW WHERE INSURED FAILED TO DISCLOSE FACTS TO DISABILITY INSURER; NO BREACH OF FIDUCIARY DUTY UNDER NEW JERSEY LAW FOR SAME REASON (Philadelphia Federal)

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In Hayes v. American International Group, a case involving a disability insurance claim, the Magistrate Judge concluded in her Report and Recommendation that there could be no statutory bad faith under Pennsylvania law where the carrier paid total disability benefits for over four years until it learned that the insured had been working over the entire period. Further, a subsequent investigation of the insured, his work-related activities and his earned income, as well as his failure to provide relevant financial information, led to the insurer’s decision to terminate benefits. The insured did not present sufficient evidence to support that the insurer lacked a reasonable basis for denying total or residual disability benefits, or that the insurer disregarded a lack of a reasonable basis for doing so.

The insured also brought a claim for breach of fiduciary duty. The court observed that there was a difference in Pennsylvania and New Jersey law, with Pennsylvania law recognizing only a very limited fiduciary duty in insurers, and New Jersey law recognizing a broader fiduciary duty from insurers to insureds in the processing of first party claims. The court did a conflict of laws analysis, setting out, however, that both parties to the insurance contract owe a fiduciary duty to the other under New Jersey law. In light of that, New Jersey law was not contrary to Pennsylvania’s governmental interests, the conflict was false, and New Jersey law applied.

For the reasons set out above, there could be no breach of fiduciary duty. The insured had repeatedly and consistently reported his lack of income and inability to perform anything but sedentary activities to the insurer. Thus, the court stated that “it cannot be said that [the insurer] exercised bad faith in discontinuing benefits when confronted by evidence that Plaintiff was earning more from his private practice than he was earning before he allegedly became disabled.”

Date of Decision: July 29, 2014

Hayes v. Am. Int’l Group, CIVIL ACTION NO. 09-2874, 2014 U.S. Dist. LEXIS 103564 (E.D.Pa. July 29, 2014) (Hey, U.S.M.J.) (Report and Recommendation)

Other Bad Faith Decisions of Interest from Pennsylvania State Trial Courts

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Following on today’s post concerning bad faith decisions by state trial judges, we note recent postings in the Tort Talk Blog with bad faith decisions emanating from state courts. 

The first is a Monroe County decision, discussed here, granting a motion to sever and stay a bad faith claim in a UIM case.  

The second is actually a non-precedential Superior court opinion, discussed here, which affirmed a trial court’s ruling that there could be no bad faith where it was determined that there could be no coverage.

As always, our thanks to Tort Talk for finding and discussing opinions on the subject.  

SEPTEMBER 2014 BAD FAITH CASES: STATE TRIAL COURT, FOLLOWING SUPERIOR COURT, HOLDS THAT BAD FAITH CAN GO BEYOND A PURE DENIAL, AND CAN INCLUDE BAD FAITH IN INVESTIGATING AND COMMUNICATING WITH INSURED; THEN FINDING THAT SOME OF THESE CLAIMS WERE TIME BARRED, BUT OTHERS MUST BE DETERMINED BY THE TRIERS OF FACT, IN ONLY GRANTING PARTIAL SUMMARY JUDGMENT TO EXCESS CARRIER (Centre County Common Pleas)

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In Mountainside Holdings, LLC v. American Dynasty Surplus Lines Ins. Co., the defendant insurers were excess directors and officers liability insurance carriers at the tertiary level, with primary coverage and the first layer of excess coverage providing $10,000,000 in coverage.  The dispute arose out of underlying claims against the insureds in a qui tam action.  They raised bad faith and breach of contract claims against the insurers.

The court observed that bad faith claims can include more than the pure denial of the claim.  “An action for bad faith may extend to the insurer’s investigative practices. Bad faith conduct also includes lack of good faith investigation into facts, and failure to communicate with the claimant.”  The court then cited an online dictionary definition: “To investigate is ‘to observe or study by dose examination and systematic inquiry.’”

Further, bad faith plaintiffs can attempt to prove bad faith by demonstrating that the insurer violated provisions of Pennsylvania’s insurance statutes or regulations, “even if those provisions do not provide for private rights of action.”

The first legal issue was whether the bad faith claims were time barred, and what acts caused the statute of limitations to begin running.  Plaintiffs attempted to argue that the statute couldn’t begin to run until the $10,000,000 had been paid by the first two lawyers of coverage, and the carrier refused to pay on the third layer, i.e., denied that benefit.  The court looked to the wider definition of bad faith cited above, and the plaintiffs’ own complaint which alleged various failures to investigate, a failure to communicate, interference with plaintiffs’ defense in the qui tam action, as well as a denial.  The court found that these acts triggered the statute of limitations, and these claims were time barred.

As to the remaining bad faith claims which were not time-barred, the court applied the same reasoning, i.e., that pure denial is not the sole source of bad faith, to reject the insurers’ summary judgment motion as to some of the bad faith claims.  First the court agreed that plaintiffs’ claims of interference with the defense in the qui tam case and interference with the other two layers of insurance carriers were attempts to circumvent the court’s prior ruling dismissing their tortious interference claims.  However, on the claims of an “alleged failure to promptly acknowledge and investigate” and alleged wrongful denial of coverage on the basis of a failure to cooperate, issues of fact remained. Going back to the dictionary definition cited that investigate means “to observe or study by close examination and systematic inquiry,” the court found that: “It remains unanswered whether Defendants’ request for more information was a systematic inquiry, or if more was required.”

Date of Decision:  June 30, 2014

Mountainside Holdings, LLC v. Am. Dynasty Surplus Lines Ins. Co., No. 2003-127, COMMON PLEAS COURT OF CENTRE COUNTY, 2014 Pa. Dist. & Cnty. Dec. LEXIS 73 (C.C.P. Centre County June 30, 2014) (Grine, J.)

SEPTEMBER 2014 BAD FAITH CASES: WHERE POLICY CLEARLY EXCLUDES COVERAGE FOR WALL COLLAPSE, WITH NO APPLICABLE EXCEPTION FOR HIDDEN DECAY, THERE CAN BE NO BAD FAITH BECAUSE CARRIER HAD REASONABLE BASIS TO DENY CLAIM (Philadelphia Federal)

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In White v. Metropolitan Direct Property & Casualty Insurance Co., the insureds suffered a wall collapse, which they originally claimed was “sudden and accidental” and the result of a heavy rain (which was later denied by them).  Coverage was denied, and the insureds sued for breach of contract and bad faith.

First, the court found that the policy language of the “weather conditions exclusion” stated that sudden and accidental direct physical loss or damage to the property is not covered in the event of collapse where weather conditions contributed in any way to the collapse. The plaintiffs had originally claimed a weather source for the collapse, and the exclusion applied to a loss if that were the case.

The insureds further claimed that the wall collapse was the result of a structural defect, via use of the wrong type of brick. Such a claim was again subject to an express policy exclusion if defective, faulty, or unsound design, specifications, workmanship, or construction contributed to the collapse.

Lastly, the insureds also claimed decay and deterioration were a source of the collapse, through water infiltration in visibly deteriorated parts of the wall. Again, the policy was clear that only hidden decay would be covered, and because the decay was not hidden, the loss resulting from the collapse was not covered under the hidden decay exception.

After finding no breach of contract, the court addressed the bad faith claim: “The current bad faith claim before the Court cannot get past the initial element—lack of a reasonable basis for denying benefits. As explained in detail above, Defendant’s denial of benefits was not only reasonable, but correct under the Policy language. Absent a showing of an unreasonable denial, Plaintiffs are not entitled to recover on their bad faith claim.”

Date of Decision:  July 29, 2014

White v. Metro. Direct Prop. & Cas. Ins. Co., CIVIL ACTION NO. 13-434, UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, 2014 U.S. Dist. LEXIS 102959, (E.D. Pa. July 29, 2014) (Buckwalter, J.)

SEPTEMBER 2014 BAD FAITH CASES: INSURER DID NOT PROVE INSURED ENTERED SETTLEMENT IN BAD FAITH OR UNREASONABLY; INSURED DID NOT HAVE TO PROVE BAD FAITH TO RECOVER ATTORNEYS’ FEES (New Jersey Federal)

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In The Travelers Property Casualty Co. of America v. USA Container Co., the insured was subject to suit over a spoiled overseas delivery of corn syrup to a European buyer. The carrier declined coverage, but during settlement negotiations between the insured and plaintiff, did make a limited offer to contribute to a settlement, subject to a right of reimbursement. The insured declined, and settled. The insurer later claimed it should not have to reimburse the full settlement, in the context of its declaratory judgment action. The court found that the insurer failed to produce evidence that the settlement was entered in bad faith or was unreasonable, and thus it was liable for the full amount.

The court then analyzed the 7 factor test for determining whether the unsuccessful insurer in the declaratory judgment action was liable for attorneys’ fees under N.J. Ct. R. 4:42-9(a)(6), and observed that the insured need not establish bad faith to recover fees; rather, the presence of bad faith was only one factor to consider.

Date of Decision: July 21, 2014

Travelers Prop. Cas. Co. of Am. v. USA Container Co., Civil Action No. 09-1612 (JLL) (JAD),  2014 U.S. Dist. LEXIS 99635 (D.N.J. July 21, 2014) (Linares, J.)

 

http://docs.justia.com/cases/federal/district-courts/new-jersey/njdce/2:2009cv01612/226740/125/0.pdf?1406123619

In case you missed this Labor Day Weekend Post: WHERE POLICY EXCLUSION WAS CLEAR, AND INSUREDS OFFERED NO ACTUAL FACTS TO MEET THEIR HIGH BURDEN TO PROVE THAT INSURER’S POSITION LACKED A REASONABLE BASIS, SUMMARY JUDGMENT WAS GRANTED TO THE INSURER ON BAD FAITH CLAIM (Philadelphia Federal)

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In Leitner v. Allstate Insurance Company, the insureds alleged bad faith on the basis of improper denial of their claim and/or unreasonable delay in the investigation process.  The court cited the bad faith statute and the standards imposed by case law, emphasizing the “high bar” an insurance bad faith plaintiff had to leap to make out a case.  At issue was whether a loss was sudden and accidental, which would be covered; or was the result of action occurring over time.  The case involved flooding from a burst pipe.

The carrier had the loss inspected and followed up requesting further documentation.  It denied the claim on the basis that there was “seepage or leakage over a period of weeks, months, or years, of water, steam or fuel….”  The insured’s own plumber found the source of the problem two-fold:  the pipe became disconnected due to bad workmanship, and allowed waste to pour into the floor beneath the kitchen; and/or (2) another pipe made of terra cotta running underground just outside the property broke due to age and caused water to accumulate on the basement floor of the property. The plumber could not tell from the condition of the piping how long the problems had existed but he did state that, based mainly on the amount of accumulated waste and other debris, the piping underneath the kitchen had been leaking for “approximately more than a month” and that the outside piping had been leaking for “more than two weeks, definitely” and probably more than a month.  Even altering the number of dwellers using water, his estimate remained that the problems existed for a number of weeks.

The insureds did not offer evidence refuting this testimony or call it into question, which supported the carrier’s position that both the disconnected plastic pipe and the broken terra cotta pipe had been leaking for at least a number of weeks, and therefore the insured’s claim fell within the exclusion.  Thus, by the policy’s clear terms, the insurer’s determination did not lack a reasonable basis, and the bad faith claim was dismissed on summary judgment.

Date of Decision:  July 9, 2014

Leitner v. Allstate Ins. Co., CIVIL ACTION NO. 11-7377, 2014 U.S. Dist. LEXIS 95071 (E.D. Pa. July 9, 2014) (Tucker, C.J.)

2014 SEPTEMBER BAD FAITH CASES: NATIONAL FLOOD INSURANCE ACT PREEMPTS STATE BAD FAITH LAW CLAIMS (New Jersey Federal)

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In Damiano v. Harleysville Insurance Company, the court ruled that the National Flood Insurance Act preempted state bad faith law claims against an insurer.

Date of Decision:  July 17, 2014

Damiano v. Harleysville Ins. Co., Civil Action No. 3:13-cv-07239-FLW-LHG, 2014 U.S. Dist. LEXIS 97988 (D.N.J. July 17, 2014) (Wolfson, J.)