JULY 2015 BAD FAITH CASES: INSURED SUED IN PRIVATE ACTION BY CARRIER UNDER NEW JERSEY’S INSURANCE FRAUD PROTECTION ACT MAY DEMAND A JURY TRIAL (New Jersey Supreme Court)

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In Allstate New Jersey Insurance Co. v. Lajara, New Jersey’s Supreme Court ruled that an insured-defendant, subject to private claims for compensatory and punitive damages under the Insurance Fraud Prevention Act, is entitled to a jury trial.

Date of Decision:

Allstate New Jersey Insurance Co. v. Lajara, September Term 2013, 073511, 2015 N.J. LEXIS 797 (July 16, 2015)

JULY 2015 BAD FAITH CASES: PA FEDERAL COURT, APPLYING NEW JERSEY LAW, FINDS HANDLING OF PROPERTY DAMAGE CLAIM “FAIRLY DEBATABLE” AS TO THE SUM DEMANDED, REFUSAL TO ENTER APPRAISAL PROCESS, AND TIMING OF ASKING FOR EXPERT REPORT AFTER SUIT INITIATED (Philadelphia Federal)

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In Beyer v. State Farm Fire & Casualty Company, a Pennsylvania federal court was called upon to apply New Jersey law to a first party property damage claim. Under New Jersey law, bad faith cannot be established if the insurer’s position was “fairly debatable”. In practice this means that if the facts are sufficiently in dispute that an insured could not win a motion for summary judgment on coverage, then the claim is fairly debatable. Under New Jersey law, an insured need not prove any dishonest motive on the insurer’s part, though the insured must prove that the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim.

In this case, the insurer carried out a series of inspections, after some of which the insurer increased its payments to the insureds but did not give the insured all sums sought. The court found that this did not amount to bad faith where the record showed the payments the insurer refused were in dispute. Next the insurer’s refusal to agree to an appraisal on certain items remained the subject of material dispute as to whether there was coverage for those loses, i.e., if there were no coverage an appraisal would be unwarranted. Finally, where the insureds did not request an expert report from the insurer until after litigation had started, any delay in producing that report did not delay the claim processing. Rather, “[a]fter the [insureds] filed suit, the [expert] report became discoverable subject to the applicable rules of civil procedure.” Thus summary judgment was granted on the bad faith claim.

Of considerable interest is the first paragraph of this Opinion, which is quoted here verbatim:
“A property insurance policy for a beach home is a negotiated document through which the insurer, competing against other insurers, will cover certain losses based on its risk assessment. After a loss, repeated negotiations and supplemental insurance payments against the backdrop of disputed claims is often part of the insurance recovery process. The insurer is entitled to dispute coverage for items it believes are not covered so long as its positions are fairly debatable and the insured may challenge such determinations. This process is part of many litigated property loss claims. An insurer timely negotiating but refusing to budge from a position it believes to have merit is not bad faith. Here, the parties disagree as to coverage, submission to appraisal and producing a report. Plaintiffs claim the insurer breached their contract in failing to tender payments. In the accompanying Order, we grant the insurer’s motion for partial summary judgment on the insured’s bad faith claim in Count II of the Complaint as there are no genuine issues of material fact the insurer did not act in bad faith under applicable New Jersey law.”
Date of Decision July 20, 2015
Beyer v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 14-4887, 2015 U.S. Dist. LEXIS 94456 (E.D. Pa. July 20, 2015) (Kearney, J.)

JULY 2015 BAD FAITH CASES: COURT FINDS INSURER DID NOT ACT IN BAD FAITH BY TERMINATING COVERAGE AFTER INSURED FAILED TO PAY MONTHLY DEDUCTION AND PAY RESTITUTION (Middle District)

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In Morris v. American National Insurance Group, the District Court adopted the Report and Recommendation of the Magistrate Judge, finding that the insurer did not act in bad faith when it terminated coverage after the insured failed to pay the monthly deduction and failed to make restitution within the allowable grace period.

After the insurer terminated the life insurance policy it had previously issued to its insured, the insured filed suit, alleging breach of contract, bad faith, and asking for a declaratory judgment. The insurer moved for summary judgment.

In granting summary judgment in favor of the insurer, the court found that the insurer did not act in bad faith because termination of coverage was proper and in accordance with the unambiguous terms of the policy agreement. Specifically, the insured failed to pay the monthly deduction due on June 22, 2012, and failed to make restitution within the 61-day grace period that began on June 22, 2012. Thus, the court found that the insurer had a reasonable basis for terminating coverage according to the plain language of the policy.

The Magistrate Judge’s Report and Recommendation had stated that in opposing summary judgment, the insured still had to meet the high burden for establishing bad faith “because the court must view the evidence presented in light of the substantive evidentiary burden at trial.”  The insured could not “overcome his burden of establishing that [the insurer] did not have a reasonable basis for terminating his Policy, as [the insured] failed to make proper premium payments in a timely manner.”

Date of Decision: May 28, 2015 (Report and Recommendation), July 7, 2015 (District Court opinion adopting Report and Recommendation)

Morris v. Am. Nat’l Ins. Corp., CIVIL ACTION NO. 4:13-CV-2236, 2015 U.S. Dist. LEXIS 88093 (M.D. Pa. July 7, 2015) (Brann, J.)

Morris v. Am. Nat’l Ins. Corp., CIVIL ACTION NO. 4:13-CV-2236, 2015 U.S. Dist. LEXIS 88447 (M.D. Pa. May 28, 2015) (Mehalchick, U.S.M.J.) (Report and Recommendation)

JULY 2015 BAD FAITH CASES: (1) INSURANCE BAD FAITH STATUTE DOES NOT APPLY TO SURETIES; (2) PRINCIPLES ALLOWING AWARD OF ATTORNEY’S FEES FOR BAD FAITH CONDUCT IN BRINGING/DEFENDING/PURSUING LITIGATION CANNOT BE USED TO END RUN THE INSURANCE BAD FAITH STATUTE (Philadelphia Federal)

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In Board of Trustees, Roofers Union Local 30 v. Liberty Mutual Insurance Company the court reiterated, with thorough citation of authority, that Pennsylvania’s insurance bad faith statute does not apply to sureties.

The court also made clear that a plaintiff cannot use the argument that it is entitled to attorney’s fees under a bad faith, wanton, oppressive, and vexatious conduct theory, as such extraordinary relief from the “American Rule” that each side pays its own attorney’s fees in the absence of a statute or contract allocating fees, addresses an entirely different context than the insurance bad faith statute. This exception, as set forth in federal case law cited by the court, “deals with either bad faith initiation/defense of the lawsuit or conduct of the party or its attorney during the course of the litigation—it is not intended as an end run around the insurance bad faith statutes or to punish bad faith that does not involve willful abuse of the judicial process.”

Though not mentioned in this federal opinion discussing Third Circuit case law on awarding attorney’s fees in this limited context, the same argument would likely apply to Pennsylvania statutes 42 Pa.C.S. §§ 2503(6)(7)(9), on the right to receive attorney’s fees as taxable litigation costs:

“The following participants shall be entitled to a reasonable counsel fee as part of the taxable costs of the matter: (6) Any participant who is awarded counsel fees as a sanction against another participant for violation of any general rule which expressly prescribes the award of counsel fees as a sanction for dilatory, obdurate or vexatious conduct during the pendency of any matter.   (7) Any participant who is awarded counsel fees as a sanction against another participant for dilatory, obdurate or vexatious conduct during the pendency of a matter. (9) Any participant who is awarded counsel fees because the conduct of another party in commencing the matter or otherwise was arbitrary, vexatious or in bad faith.”

Date of Decision:   July 14, 2015

Bd. of Trs. v. Liberty Mut. Ins. Co., CIVIL ACTION NO. 15-2820, 2015 U.S. Dist. LEXIS 91723 (E.D. Pa. July 14, 2015) (Buckwalter, J.)

PENNSYLVANIA SUPREME COURT ADOPTS FAIR AND REASONABLE STANDARD FOR INSURED’S UNILATERALLY SETTLING CLAIMS WHERE: (1) THE INSURER REFUSES TO SETTLE, (2) THE INSURER HAS ISSUED A RESERVATION OF RIGHTS LETTER ON CLAIMS AT ISSUE, AND (3) COVERAGE IS ULTIMATELY DUE (Pennsylvania Supreme Court)

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In Babcock & Wilcox Co. v. American Nuclear Insurers, Pennsylvania’s Supreme Court had to determine under what circumstances an insured being defended under a reservation of rights could settle with a claimant, absent the insurer’s agreement, and later recover the settlement proceeds from the insurer. The Supreme Court ruled that: (1) where an insurer defends subject to a reservation of rights; (2) the policy is ultimately found to cover the relevant claims that were settled; (3) then the insured may accept a settlement over the insurer’s refusal; (4) where the settlement is fair, reasonable, and non-collusive.  As discussed below, the Court recognized that lower courts will have to look at the specific nature of the rights reserved in applying these principles.

Analytically, the insurer’s failure to settle within policy limits under these circumstances, i.e., rejecting a fair and reasonable settlement while maintaining a reservation of rights, is a breach of its contractual duty.  The burden of proof is on the insured to make this case, and factors to consider include “consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and whether there is any evidence of fraud or collusion on the part of the insured.” The Supreme Court more generally stated the “risks of going to trial” had to be evaluated. The Court rejected two contrary possibilities.  First, it rejected the insurer’s arguments that the insured must prove bad faith, rather than the settlement’s fairness and reasonableness.  Second, the Supreme Court vacated the Superior Court’s ruling that had provided the insured with two options: (1) accept a defense subject to a reservation of rights, and be required to prove insurer bad faith to recover on any unilateral settlement; or (2) reject the insurer’s offer of a defense under a reservation of rights, hire counsel at the insured’s own expense, and then settle and recover from the insurer under a fair and reasonable standard if coverage is otherwise due.  As to defects in the Superior Court’s analysis, the Supreme Court accepted (1) the legal argument that the insured could breach the insurance contract by rejecting a defense offered by the insurer; and (2) the practical argument that many insureds could not even afford to hire private counsel to pursue this route.

In evaluating the insurer’s responsibility to reimburse the insured, the Court accepted a distinction between a “soft” reservation of rights and a “hard” reservation of rights.  A “soft” reservation of rights involves circumstances where an insured is reserving rights which are “unlikely to alter the interests of the parties”; whereas with a “hard” reservation of rights “the insurer views the claims as possibly covered, requiring a defense, but ultimately unlikely to be covered by the policy, such as when intentional actions are also pled in negligence.”

The Court agreed “that not all reservations of rights are equal…. [and] [t]he mere fact that an insurer restates that it will not cover what the insurance policy does not cover, where it arguably might be part of the damages sought, does not automatically result in allowing the insured to settle the entire suit. Parties and courts may need to consider whether a particular reservation of rights justifies diverging from the contract’s cooperation clause,” i.e., does the insurer’s specific reservation of rights in a particular case permit a court to allow the insured to unilaterally settle the entire case, contrary to the insured’s normal contractual duty to cooperate in any settlement with the insurer and to only settle with the insurer’s consent.

[Note: By way of one hypothetical, assume a case is brought in negligence, but the claimant is also seeking punitive damages, which is possible under Pennsylvania law.  The insurer issues a reservation of rights solely on the punitive damages claim.  The insurer refuses to settle at the underlying plaintiff’s demand number because it concludes that there is a reasonable chance for a defense verdict on the covered claim.  The insured later settles unilaterally at that same demand number because of the concern over punitive damages, which are clearly not covered under the policy.  Thus, there could be an issue under as to whether the fair and reasonable standard even applies because the claim motivating the settlement of the entire case was not a covered claim.]

Date of Decision:  July 21, 2015

Babcock & Wilcox Co. v. American Nuclear Insurers, No. 2 WAP 2014, 2015 Pa. LEXIS 1551 (Pa. 2015)

The dissent can be found here.

JULY 2015 BAD FAITH CASES: INJURED PLAINTIFF CANNOT BRING BAD FAITH CLAIM AGAINST THE DEFENDANT’S INSURER WITHOUT AN ASSIGNMENT FROM THE DEFENDANT-INSURED (Philadelphia Federal)

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In Westport Insurance Corporation v. Mylonas, the insurer brought a declaratory judgment action its insured, and an underlying plaintiff with a judgment against the insured, seeking to limit coverage to an amount less than the judgment.  The plaintiff brought a bad faith counterclaim against the insurer, alleging that it had unreasonably eroded the policy limits in defending the underlying action.  The underlying plaintiff agreed to dismiss that counterclaim with prejudice, but then later sought a dismissal without prejudice.  The insurer opposed the later effort, and the court ruled for the insurer, dismissing the bad faith count with prejudice.

Among other reasons given, the court found that the underlying plaintiff had no standing to bring such a claim because there was no privity between that plaintiff and the defendant’s insurance company.  Nor was there an assignment from the insured to the injured plaintiff, and the court made clear that a “third party may not maintain a bad faith action against a tortfeasor’s insurer without first obtaining an assignment from the tortfeasor.” Thus, this was not a technical defect that could be cured, and dismissal with prejudice was warranted.

Date of Decision: July 15, 2015

Westport Ins. Corp. v. Mylonas, CIVIL ACTION NO. 14-5760, 2015 U.S. Dist. LEXIS 92039 (E.D. Pa. July 15, 2015) (Slomsky, J.)

JULY 2015 BAD FAITH CASES: FIRST PARTY BAD FAITH PLAINTIFF FAILED TO PLEAD FACTS MEETING STANDARDS FOR A PLAUSIBLE CAUSE OF ACTION; AND INSTEAD PLEADED FACTS THAT MADE THE INSURER’S CONDUCT REASONABLY DEBATABLE, RENDERING ANY EFFORT TO ADD A BAD FAITH CLAIM FUTILE (New Jersey Federal)

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In Mitra v. Principal Ins. Co., the insured sought to amend his complaint against his disability insurer, to add a claim for breach of the implied covenant of good faith and fair dealing.  The insurer opposed on a number of grounds, including failing to plead a plausible claim and legal futility.

The insured alleged the new claim as based upon his being “diagnosed by two (2) independent qualified physicians with a legitimate illness, which rendered [him] totally disabled and completely unable to work,” undue delay in taking longer than the “pre-established 45-day waiting period to respond to [the insured’s] request for reconsideration,” and an alleged unreasonable IME being required before rendering a decision.

The court applied the first party bad faith standard found in Pickett v. Lloyd’s: “to show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.”  More “specifically, in the insurance context, a bad faith claim is premised on the insurer’s failure to investigate an insured’s claim for benefits.’” A plaintiff claiming bad faith must be able to establish “a right to summary judgment on his insurance coverage claim” to prevail on the bad faith claim.

The court found that the proposed amended complaint added no new factual allegations to take the case into the realm of bad faith; and in fact, the proposed pleading “catalogue[d] the many steps that [the insurer] took to investigate his claim.” Further, the proposed amended complaint relied upon “mere ‘labels and conclusions’ leaving numerous factual issues unresolved,” contrary to the teachings of Twombly/Iqbal.  Moreover, the proposed amendment itself “evidence[d] the many material issues of disputed fact surrounding [the insurer’s] investigation into [the insured’s] claims.” Thus, “[t]he uncertainty of the facts surrounding [the] denial of [the] claim is ‘fairly debatable,’ which would preclude summary judgment as a matter of law.” The presence of these disputed facts required dismissal, as they made the bad faith claim futile.

Date of Decision:  July 7, 2015

Mitra v. Principal Ins. Co., Civil Action No. 15-1259 (CCC), 2015 U.S. Dist. LEXIS 89532 (D.N.J. July 7, 2015) (Clark, III, U.S.M.J.)

JULY 2015 BAD FAITH CASES: COURT SEVERS AND STAYS FIRST PARTY BAD FAITH CLAIM (New Jersey Federal)

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In Beachfront North Condominium Association v. Lexington Insurance Company, the New Jersey federal court granted the insurer’s motion to sever the breach of contract and bad faith actions, and to stay the bad faith claim.  The case involved a first party claim by a condominium association for Hurricane Sandy-related wind damage on its properties.

First, the court found the two claims were significantly different from each other, and that viewing them as separate “promotes judicial efficiency and economy.” Second, the two claims required the testimony of different witnesses and different documentary proof.  By way of example, the insured sought documents “concerning all of defendant’s employees, company guidelines, claims handling procedures, confidential employee salary information, and other subject areas not directly relevant to plaintiff’s first-party claim.” Such discovery “distracts from and will undoubtedly delay the resolution of the primary focus of the case, i.e., whether plaintiff’s first-party claim should be paid and if so the amount of the payment.”

Third, the insured would not be prejudiced by severing and staying the bad faith claim. The insured did “not know if upon the presentation of more evidence its coverage claim will still be denied, let alone whether [the insured] acted or will act in bad faith. As such, plaintiff’s bad faith claim could be premature.” Moreover, if the insured did win the contract claim, it could still pursue its bad faith claim, and the court expected the bad faith claim to be expeditiously resolved.

Fourth, the court found the insurer would be prejudiced under the circumstances at hand. The insured had propounded extensive written discovery on its bad faith claim, and the carrier would suffer a “significant expenditure of time and money, generally rendered needless if the insurer prevails.” Judicial economy and efficiency for all parties would be promoted by avoiding expensive and time-consuming discovery on plaintiff’s bad faith claim. The court also found that litigating the “bad faith claim, and the related discovery disputes arising therefrom, will significantly delay the final resolution of plaintiff’s breach of contract claim,” which should be the focus of the case.

Finally, the court noted that this was not a cookie cutter analysis to be applied in every case.  Rather, it made “clear that it is not ruling that in every case a plaintiff’s bad faith claim should be severed and stayed until its first-party claim is decided. Every case is different and must be decided on its own facts. Here, the balance of interests falls in [insurer’s] favor. In another case the balance could be different.”

Date of Decision: June 24, 2015

Beachfront North Condo. Ass’n v. Lexington Ins. Co., Civil No. 14-6706 (RBK/JS), 2015 U.S. Dist. LEXIS 84074 (D.N.J.  June 24, 2015) (Scheinder, U.S.M.J.)

JULY 2015 BAD FAITH CASES: SUPERIOR COURT FINDS (1) INSUREDS WAIVED APPELLATE REVIEW OF BAD FAITH CLAIMS BASED UPON DEFICIENCIES WITHIN INSUREDS’ Pa.R.A.P. 1925(b) STATEMENT; (2) INSUREDS’ BAD FAITH CLAIMS ARE TIME-BARRED IN ANY EVENT (Superior Court of Pennsylvania, Non-Precedential)

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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 insureds raised bad faith and breach of contract claims against the insurers. The trial court granted summary judgment for the insurers.

The insureds presented several issues for consideration on appeal.  However, the Superior Court found the issues waived due to the insureds’ deficient Pa.R.A.P. 1925(b) statement. The appellate court agreed with the trial court’s holding that the insureds’ Pa.R.A.P. 1925(b) statement was “too vague to allow the Court to respond.”

Nevertheless, the court went on to address the merits of summary judgment on the bad faith claim. It found that the insureds’ bad faith issues failed. The insureds specifically averred that the insurers “acted in bad faith when they denied coverage in their May 17, 1999 letter….” In upholding summary judgment on statute of limitations grounds, the court stated that statutory bad faith claims are subject to a two-year statute of limitations. Because the insureds began this action on January 14, 2003, all alleged bad faith allegations occurring prior to January 14, 2001 were time barred. Thus, the claim that the insurers acted in bad faith on May 17, 1999 when they issued their coverage denial letter was time-barred, even if the insureds had not waived their issues for appellate review.

Note: This is an unpublished decision, and cannot be used as precedential authority.

Date of Decision: June 25, 2015

Mountainside Holdings v. Am. Dynasty Surplus Lines Ins. Co., No. 1243 MDA 2014, Superior Court of Pennsylvania, 2015 Pa. Super. Unpub. LEXIS 1929 (Pa. Super. Ct. June 25, 2015) (Allen, J.)

JULY 2015 BAD FAITH CASES: (1) COURT DISMISSES BREACH OF IMPLIED DUTY OF GOOD FAITH AND FAIR DEALING CLAIM BECAUSE (i) IT CANNOT BE PLEADED SEPARATELY FROM A BREACH OF CONTRACT CLAIM AND (ii) BECAUSE THE ALLEGATIONS SUPPORTING THAT CLAIM WERE IDENTICAL TO THOSE SUPPORTING THE STATUTORY BAD FAITH CLAIM; AND (2) COURT ENTERS JUDGMENT FOR INSURER ON BAD FAITH CLAIM AFTER FINDING THAT INSURED, AS ASSIGNEE, RELEASED INSURER FROM ANY CLAIMS (Eastern District)

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In Charbonneau v. Chartis Property Casualty Company, the court dismissed an assignee’s claims for breach of implied duty of good faith and fair dealing because it could not be pleaded separate from the breach of contract claim, and because it duplicated the statutory bad faith claim; and then dismissed the statutory bad faith claim because the assignor insured had released that claim in settling with the insurer.

The plaintiff had been living as a tenant in a historic home that was destroyed by fire. The plaintiff attempted to exercise an option under her lease to buy the property from the owner, who was involved in negotiations with his homeowner’s insurer in connection with the loss. After the homeowner reached a settlement with his insurer that would pay the property owner $18.5 million as a result of the fire, litigation ensued between the property owner and the plaintiff.

The plaintiff ultimately received $11 million of the $18.5 million settlement and title to the property, and an assignment of claims from the homeowner-insured.

The plaintiff then filed an action against the insurer, “claiming that [the insurer’s] dealings with [the property owner] were improper and that she, as assignee, has been wrongly denied millions of dollars in additional insurance proceeds owed to her to cover the cost of rebuilding” the property. The insurer filed a motion for summary judgment.

In entering judgment for the insurer on the breach of implied duty of good faith and fair dealing claim, the court stated that the duty of good faith and fair dealing “does not allow for a cause of action separate and distinct from a breach of contract claim.” Here, the plaintiff did just that by bringing a breach of implied duty of good faith claim as a cause of action independent of her breach of contract claim.

Further, the court pointed to Third Circuit case law for the proposition that “a party is not entitled to maintain an implied duty of good faith claim where the allegations of bad faith are ‘identical to’ a claim for ‘relief under an established cause of action.’” The court found that here, “the allegations of bad faith that [the insured] uses to support her implied duty of good faith claim are identical to those with which she supports her § 8371 claim … which is indeed an established cause of action.” Thus, because the allegations of implied bad faith duplicated the allegations of statutory bad faith, the court entered judgment for the insurer on the implied duty of good faith claim.  [This same court made a similar ruling in May of this year.]

The court next addressed the insured’s statutory bad faith claim. The insured argued that as an assignee of the property owner, she has an interest in the proceeds of the policy and could therefore sue the insurer for refusing to pay those proceeds.  While the case law allows for such an assignment, in settling with the insurer, the property owner insured had released the insurer “from any claims, demands, damages, actions or other forms of proceedings of any kind whatsoever of or for bad faith, including but not limited to claims under 42 Pa.C.S. § 8371, arising in any way” out of the property fire. Thus, because the plaintiff stood in the shoes of the insured who could not bring such a claim himself, she could not prevail on the statutory bad faith claim. Alternatively, as there was no genuine dispute of material fact that the insurer’s refusal to pay the insured was either frivolous or unfounded, the court entered judgment for the insurer on the statutory bad faith claim.

Date of Decision: July 1, 2015

Charbonneau v. Chartis Prop. Cas. Co., Civil Action No. 13-4323, 2015 U.S. Dist. LEXIS 85428 (E.D. Pa. July 1, 2015) (Yohn, J.)