MAY 2012 BAD FAITH CASES: BAD FAITH CLAIM CANNOT BE RAISED AGAINST THIRD PARTY ADMINISTRATION WHICH DID NOT TAKE ON ROLE OF AN INSURER (Philadelphia Federal)

Published on May 18, 2012 in Coverage Issues and General Bad Faith and Litigation Issues. Closed
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In McLaren v. AIG Domestic Claims, Inc., the court dismissed an insured’s bad faith and breach of contract claims. The suit arose from an underlying negligence claim against the insured party, a nurse. She was insured by National Union Fire Insurance Company (NUFI). Although insured by NUFI, the claim against her was administered by AIG, a wholly owned subsidiary of NUFI.
AIG appointed her with defense counsel, and communications with NUFI went through AIG. The underlying case proceeded through a four-week trial, which resulted in a mistrial. The case was settled. Prior to settlement, she had signed a consent to settle, which gave AIG authority to settle up to policy limit; but she claimed this consent was coerced and she later withdrew the consent. She notified her personal legal counsel that she would refuse to consent to a settlement and that counsel likewise gave notice that the consent was withdrawn. However, settlement negotiations continued post-trial to at least some degree, and the plaintiffs in the negligence action took the position that they accepted a purported settlement offer from appointed defense counsel, which was later opposed by that counsel as well. The plaintiff moved to enforce and the state court enforced the settlement against the insured.
The insured/plaintiff claimed that the report of the settlement caused her harm, and she brought this suit. It included among other things a bad faith claim against AIG, whom she claimed she always believed to be her insurer. She claimed that AIG acted in bad faith and breached the terms of its policy by agreeing to an unauthorized settlement. She claimed that the act was not in her best interested and that in settling AIG breached its duty of good faith and fair dealing. She also alleged that AIG knew or recklessly disregarded the fact that there was no reasonable basis to settle for her $500,000 policy limits. Moreover, she claims that as a result of the settlement, her professional reputation as a midwife is forever tarnished.
AIG was not her insurer, and she claimed she was still entitled to relief under Pennsylvania’s bad faith statute because AIG was NUFI’s “alter ego”, was its agent and/or was her de factor insurer. However, her only contract was with NUFI as an insurer, and the court rejected all of these arguments. Thus, AIG was not an insurer in this matter and as such could not be subject to a statutory bad faith claim. Specifically, the court held that AIG, a non-party to the insurance contract who administered the claim, did not meet the criteria for being deemed an insurer. It did not issue an insurance policy or collect premiums, or assume certain risks and contractual obligations in exchange for those premiums. Concomitantly the court found in the absence of a privity of contract there was no basis for a breach of contract claim; and that the agent of a disclosed principal could not be sued for the breach of a contract between that principal and another with whom it had contracted.
Date of Decision: March 30, 2012
McLaren v. AIG Domestic Claims, Inc., No. 10-cv-04224, 2012 U.S. Dist. LEXIS 44808, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Mar. 30, 2012)

MAY 2012 BAD FAITH CASES: COURT GRANTS SUMMARY JUDGMENT FOR CARRIER WHERE “INHERENT RISK” EXCLUSION APPLIED TO FURNACE CONTAINING DEFECT KNOWN TO INSURED (Western District)

Published on May 18, 2012 in Coverage Issues. Closed
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In U.S. Fire Ins. Co. v. Kelman Bottles, the court heard cross-summary judgment motions between an insured glass-maker and its two carriers to determine the scope of coverage. While the insured asserted breach of contract claims against both carriers, it alleged bad faith conduct against its “all-risk” insurer for denying coverage.
The insured is an industrial glass-maker who operates a large furnace for melting glass. The company needed to replace the furnace every nine years and last replaced it in January 2004. In 2009, the furnace leaked and the insured replaced portions of the unit, but not the entire thing. In March 2011, there was a severe leak in the furnace that destroyed some of the insured’s property. This blog will only discuss the bad faith claim against the insured’s “all-risk” carrier, rather than the insured’s “equipment breakdown” carrier, because the latter only covered “sudden and accidental” breakdowns.
With respect to the all-risk insurer, the insured alleged breach of contract and bad faith for the carrier’s denial of coverage. However, the insured’s policy contained an “inherent vice exclusion,” which prevented coverage in this case. The court reasoned that, after the loss, the insured admitted that molten glass was an inherent risk to operating the furnace. As such, the insured’s breach of contract claim failed.
However, the insured argued that it should be covered as a “molten material loss” under the policy. The court disagreed, holding that the “molten material loss” clause is predicated upon the loss already being a covered loss under its policy. In this case, the escape of molten glass was an inherent risk and, as noted, the damage caused by the escape of molten glass is excluded under the policy’s inherent risk exception.
The insured also attempted to argue that it was covered via Pennsylvania’s adoption of the “Current Causation Doctrine,” which means that if two or more causes concurrently caused the insured’s loss and one of the causes is covered, the carrier must provide coverage. However, the court rejected this theory, holding that the only way coverage would be available is if “the inherent risk of operating a furnace containing molten glass [was] the proximate cause of the loss.”
Therefore, the court also rejected the insured’s bad faith claim – in the absence of a viable breach of contract suit, the insured was unable to maintain such an allegation.
Date of Decision: April 5, 2012
United States Fire Ins. Co. v. Kelman Bottles, No. 11cv0891, 2012 U.S. Dist. LEXIS 48684, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 5, 2012) (Schwab, J.)

MAY 2012 BAD FAITH CASES: COURT REJECTS BURFORD ABSENTION AS BASIS FOR REMAND IN LIGHT OF CLAIMS SEEKING MONEY DAMAGES (Philadelphia Federal)

Published on May 18, 2012 in Procedural Issues. Closed
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In Borough of Catasauqua v. Darwin Nat’l Assur. Co., the Eastern District of Pennsylvania court addressed an insured borough’s motion to remand, motion for declaratory judgment of rights under its policy, and allegations of bad faith against its carrier. The case stems from underlying copyright infringement litigation between an engineering firm and its builder who were involved in construction on the insured borough’s property. After the plaintiff engineering firm in that case named the insured borough as a necessary party under Federal Rule of Civil Procedure 19, the borough sought a defense from its carrier.
After the carrier refused, the insured sought a declaration of its rights under its policy and alleged bad faith claims against the carrier. The insured also sought to remand the proceedings, which the carrier had removed to federal court. The borough’s argument for remand was that Burford Abstention was appropriate – under such a theory federal courts will remand if a case “involves difficult questions of state law impacting on the state’s public policy.” While the doctrine itself is beyond the scope of this blog, it is worth noting that the court rejected the insured’s argument that a Pennsylvania state court should hear the insured’s bad faith claim under such a theory.
However, the court declined to remand the action based upon the type of relief sought. It ruled that even if Burford Abstention may otherwise be proper, the case would not be remanded because the insured sought money damages rather than equitable relief, which is the only proper scenario for the Burford remand.
Date of Decision: March 29, 2012
Borough of Catasauqua v. Darwin Nat’l Assur. Co., No. 11-cv-03855, 2012 U.S. Dist. LEXIS 46232, U.S. District Court for the Eastern District of P.A. (E.D. Pa. Mar. 29, 2012) (Gardner, J.)

MAY 2012 BAD FAITH CASES: COURT CAN CONSIDER OTHER STATUTES IN FINDING BAD FAITH, CLAIMS HANDLING DELAYS IN BENEFIT CANNOT BE OBVIATED BY LATER PAYMENT, MANUAL ON LITIGATION AND LEGAL FEES ADMISSIBLE AND COURT NEEDS TO CONDUCT IN CAMERA REVIEW (Superior Court)

Published on May 16, 2012 in Claims Handling Procedures, Discovery and Evidence, Lawyer's - Attorney's Fees and Procedural Issues. Closed
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In Berg v. Nationwide Mut. Ins. Co., the Superior Court reversed the trial court’s grant of a directed verdict to the carrier on the insured’s bad faith claim. This was a first party claim against an insurer under Pennsylvania’s bad faith statute, among other claims.
The suit stemmed from faulty repairs to the insured automobile conducted by the carrier’s preferred repair facility. There was a bifurcated trial, the first part being Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) claims before a jury, and the second the issue of treble damages under the UTPCPL and statutory bad (42 Pa.C.S. § 8371) before the judge. The jury found for the insured on the UTPCPL claims, and for the auto repairer and the carrier on the fraud claims and conspiracy claims. The jury awarded $1,925 against the car repair shop and $295 against the insurer.
In the second phase, after a 4 day trial, the trial judge granted a directed verdict to the carrier on statutory bad faith claim and the insured appealed. The crux of the insured’s claim was that the carrier acted in bad faith by “interfering with a total loss appraisal on their vehicle and later returning it to them despite known structural deficiencies that left it in a potentially dangerous condition.” Part of the trial court’s rationale for declining to find for the insured was that such a claim does not “arise under an insurance policy.” The lower court also found that there was no ultimate denial of a benefit. The Superior Court specifically found that such a claim does in fact arise under the insured’s policy with respect to its contractual duties, including good fair and fair dealing, and the carrier’s failure to effectuate a “prompt, fair, and equitable” settlement in the face of a clear statutory and contractual duty.
The Superior Court also found that the violation of other statutes can be used as evidence of violation of the bad faith statute because bad faith conduct may be “defined by reference to violations of statutes related to insurance practices.” Thus, in this case, the jury’s finding that the carrier violated Pennsylvania’s UTPCPL should have been considered as evidence of bad faith, and weighed under the clear and convincing evidence standard applicable to the bad faith statute, rather than the judge ruling on the issue as a matter of law.
The Superior Court also cited additional factors to consider. The carrier had the insured’s car sent to a different repair shop after the initial choice found that the insured’s car could not be repaired. Further, the manner in which the carrier discharged its duty of good faith during the pendency of the carrier’s insurance claim was subject to a bad faith analysis because of allegations that it was the carrier’s practice to vigorously defend small claims regardless of merits to discourage others from bringing suit. The appellate court would have permitted evidence in connection with carrier’s manual concerning that strategy and legal billing.
Further, the appellate court found that the lower court erred in not doing an in camera review on documents that were alleged to be privileged and had been redacted.
Date of Decision: April 17, 2012
Berg v. Nationwide Mut. Ins. Co., No. 12-MDA-2008, 2012 PA Super 88, Superior Court of Pennsylvania (Pa. Super. Ct. Apr. 17, 2012) (Donohue, J.)

MAY 2012 BAD FAITH CASES: COURT DENIES INSURED’S MOTION TO REMAND BASED ON REQUEST TO ABSTAIN FROM HEARING DECLARATORY JUDGMENT (Western District)

Published on May 7, 2012 in Procedural Issues. Closed
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In Ackerman v. Geico General Insurance Company, the court heard the insured’s petition for remand after its carrier removed a declaratory judgment action to federal court. The case arose from a 2008 car accident during which the insured was serious injured. In January 2011, the insured allegedly requested that the carrier pay $100,000 in underinsured motorist coverage provided in the insured’s automobile policy. After the insured filed suit, seeking a declaration of coverage under its policy and alleging breach of contract and bad faith, the carrier removed to federal court.
The insured subsequently moved to remand back to state court, arguing that this was a declaratory judgment case involving only issues of state law pertaining to the interpretation of its policy with the carrier. However, the court disagreed, finding that, although the present action did not involve a federal question, it was properly removed on the basis of diversity. The case was in the nature of a breach of contract claim for money damages, since there was no disputed policy language at issue, and there was no pending parallel state court action that was going to determine underlying issues and rights.
Date of Decision: April 19, 2012
Ackerman v. GEICO Gen. Ins. Co., No. 2:12-cv-00005, 2012 U.S. Dist. LEXIS 54622, U.S. District Court for the Western District of Pennsylvania (W.D. Pa. Apr. 19, 2012) (Hornack, J.).

MAY 2012 BAD FAITH CASES: COURT REMANDS FOR LACK OF JURISDICTION ON BASIS THAT CLAIMS CANNOT BE AGGREGATED AND CONCERN WITH A “REMOVE AND DISMISS” APPROACH BY THE CARRIER (Philadelphia Federal)

Published on May 1, 2012 in Punitive Damages. Closed
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In Cruz v. State Farm Insurance Company, the court denied the carrier’s motion to dismiss and remanded the insureds’ bad faith claims to state court. The case was initially filed in Lehigh County’s Court of Common Pleas as a suit for underinsured motorist benefits by two accident victims insured by the carrier. The carrier then removed the action to federal court on the basis of diversity jurisdiction, alleging that the insured’s punitive damage claims for bad faith would bring the total claims above the jurisdictional requirement of $75,000.
In its original petition for removal, the carrier alleged that each insured party sought $50,000 and punitive damages, contending that this amount in controversy exceeds the jurisdictional requirement of $75,000.00. The court recognized that this is an incorrect understanding of the law, because two separate claims by two distinct plaintiffs may not be aggregated for jurisdictional purposes. However, the court also noted that the carrier has been inconsistent – first they used the projected punitive damage award as the basis for removal, and then second sought to dismiss the suit for damages as baseless. The court rejected these so-called “remove-and-dismiss” tactics and ordered the case to be remanded back to state court.
Date of Decision: April 19, 2012
Cruz v. State Farm Ins. Co., NO. 12-cv-1629, 2012 U.S. Dist. LEXIS 55157, United States District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 19, 2012) (Davis, J.).

MAY 2012 BAD FAITH CASES: COURT RULES THAT BAD FAITH CLAIM MAY NOT BE PREDICATED UPON CARRIER’S CONDUCT IN DRAFTING AN INSURANCE POLICY, BUT REQUIRES DENIAL OF BENEFITS AFTER ISSUANCE OF THE POLICY (Middle District)

Published on May 1, 2012 in General Bad Faith and Litigation Issues. Closed
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In Sewell v. Liberty Life Insurance Company, the court heard a motion to file an amended complaint by the executrix of the insured’s estate. The case arose from an accidental house fire that killed the insured party, prompting his estate to file suit when the carrier denied benefits under the insured’s accidental death insurance policy. The carrier denied benefits because the insured party was allegedly under the influence of an intoxicant at the time of his death.
An exclusion in the insured’s life insurance policy stated that the carrier “shall not be liable for any loss sustained . . . in consequence of the insured’s being intoxicated . . . unless administered on the advice of a physician.”
In the instant action, the executrix of the insured’s estate sought to amend her original complaint to allege bad faith. Specifically, she sought leave to amend her complaint to allege that the carrier acted in bad faith because the terms of her son’s policy were less favorable to him than they were to the carrier. In response, the carrier argued that leave should be denied on the basis that the proposed amendment would be futile. Because the executrix’s proposed bad faith claim was premised upon the carrier’s conduct in drafting the insurance policy, as opposed to the unreasonable denial of benefits, the carrier defended that the proposed amendment should be denied as futile.
Opposing this claim, the estate asserted that Pennsylvania’s bad faith statute encompasses provisions that may be included in the policy and that her son’s policy contained provisions that were overly broad, amounting to statutory bad faith. However, the court disagreed with the insured’s estate, reasoning that leave to amend would be futile because “the essence of a bad faith claim [is] the unreasonable and intentional (or reckless) denial of benefits.”
The court relied upon a recent Eastern District of Pennsylvania decision, Mitch’s Auto Service v. State Automobile, where the court stated that bad faith claims pertaining to “the drafting of policy language itself [are] . . . not actionable.” According to Judge Robreno, who authored that opinion, some courts applying Pennsylvania law have extended bad faith beyond the denial of claims, but such cases all involved “bad faith claims related to specific conduct of the insurer following the issuance of a policy.”
Therefore, the court denied the estate’s motion for leave to amend its complaint because the proposed allegations do not set forth that the carrier acted in bad faith regarding its compliance with the terms of the policy as written. Instead, the estate merely raised a dispute over the provisions of the policy itself, and whether they violated Pennsylvania law. As such, the court found for the carrier, ruling that leave to amend would be futile.
Date of Decision: April 25, 2012
Sewell v. Liberty Life Ins. Co., NO. 3:11-01721, 2012 U.S. Dist. LEXIS 57801, United States District Court for the Middle District of Pennsylvania (M.D. Pa. Apr. 25, 2012) (Caputo, J.)

MAY 2012 BAD FAITH CASES: THIRD CIRCUIT AFFIRMS RECISSION OF INSURANCE POLICY WHERE THE INSURED’S APPLICATION CONTAINED FRAUDULENT STATEMENTS, AND NO BAD FAITH IN CLAIMS HANDLING OR IN REASONABLENESS OF DENIAL (Third Circuit)

Published on May 1, 2012 in Reverse Bad Faith. Closed
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In Sadel v. Berkshire Life Insurance Company of America, the insured appealed a decision from the district court, which granted summary judgment to the carrier and rescinded the insured’s disability insurance policies. The original suit arose from bad faith allegations against the carrier stemming from its failure to pay benefits to the insured.
The insured is a pharmacist who owns two stores in Philadelphia. In 2002, he began to see a social worker to treat a prescription drug addiction. In 2005, the insured purchased disability insurance from the carrier, but failed to disclose to the carrier’s agent information about his treatments for drug use and various mental disorders.
In January 2007, the insured lost several fingers during a robbery of one of his pharmacies. While being treated for his injury, he expressed concern about taking pain medication because of his prior addiction problems. He returned to work for a short time, but eventually stopped working in August 2007. As a result, he filed a disability claim with the carrier, which obtained records from the hospital and physician that treated the insured.
This information revealed the insured’s statements regarding his addiction problem, prompting the carrier to deny coverage because of inconsistencies in the insured’s application. The insured sued for bad faith in Philadelphia’s Court of Common Pleas and the carrier removed to federal court and filed a rescission counterclaim. The district court granted the carrier’s motion for summary judgment, rescinding the policy and refunding the insured his initial premiums. The insured subsequently filed this instant appeal.
The appellate court rejected the insured’s argument that an insurer contesting a disability insurance policy beyond the contestability period must satisfy a “higher burden” than ordinarily required in fraud cases. The contestability period, as contained in the policy, expired on February 5, 2007, over two years before Berkshire filed its rescission counterclaim. Rejecting the insured’s argument, the court ruled that the carrier merely needed to prove that “(1) the insured made a false representation; (2) the insured knew the representation was false when it was made or the insured made the representation in bad faith; and (3) the representation was material to the risk being insured,” in order to rescind the policy. The court affirmed the district court’s ruling that the insured satisfied this standard.
The appellate court also ruled that the insured did not present any evidence that the carrier acted in bad faith when investigating his claims. His primary argument was that the insurer acted with unreasonable delay. However, the court ruled that the delay was actually caused by the insured himself, who failed to provide certain information to the carrier. The court also noted that, because the insured knowingly provided fraudulent misrepresentations on his insurance documents, he cannot establish bad faith on the grounds that the carrier lacked a reasonable basis to deny him benefits.
Date of Decision: March 19, 2012
Sadel v. Berkshire Life Ins. Co. of Am., No. 11-1350, 2012 U.S. App. LEXIS 6455, U.S. Court of Appeals for the Third Circuit (3rd Cir. March 30, 2012) (Rendell, J.).

MAY 2012 BAD FAITH CASES: COURT RULES THAT BAD FAITH DOES NOT EXIST IF CARRIER PREMISES DENIAL OF CLAIMS ON A LAPSE IN PAYMENT OF POLICY PREMIUMS, BUT LATER PAYS THE LIMITS OF THE POLICY PLUS INTEREST (Philadelphia Federal)

Published on May 1, 2012 in Claims Handling Procedures. Closed
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In Sicherman v. Nationwide Life Insurance Company, the court granted the carrier’s motion to dismiss the insured’s suit for violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL), bad faith and breach of contract. The suit stemmed from the carrier’s initial denial of life insurance benefits under a policy held by the insured.
In 2010, the insured began to receive letters from the carrier informing him that his life insurance premium would be increasing. The insured paid this amount along with other amounts owed on his auto and homeowner’s policies. The carrier sent a letter back notifying the insured that money was still owed on the life insurance policy and that it would not accept partial premiums. Months later, the carrier returned the insured’s check because the remainder of the balance had not been paid. Shortly after, the insured was diagnosed with cancer and passed away.
While the insured was sick, the carrier sent him a letter stating that “[y]our policy has lapsed. If you want to reinstate this coverage, please hurry. . . . If you act now and are still insurable, you may have this policy reinstated.” Neither the decedent-insured nor his wife received the letter regarding the policy’s lapse prior to the decedent’s death. When the insured’s wife requested payment of benefits under the policy, her request was denied.
The insured’s wife hired legal counsel, who requested that the denial of payment be reversed. The carrier obliged, awarding the insured’s wife $408,991.27, representing the face amount of the policy plus interest.
In the instant case, the insured’s wife alleged that the carrier misrepresented the terms of the policy and failed to conduct a reasonable investigation into the merits of its life insurance claim. However, the court ruled that the complaint failed to allege facts that demonstrate which terms of the policy were misrepresented or what information should have been considered in making its determination about life insurance benefits.
Moreover, the court reasoned that her claim that the carrier “refused to effectuate a prompt and fair settlement of [her] claim” is belied by the evidence that, upon challenge to the initial decision to deny her claim, the carrier immediately paid the policy limits in full with interest.
The carrier merely premised its initial denial of claims on a lapse in the payment of policy premiums, but ultimately paid the proceeds of the policy at issue in full when that denial was challenged. Because such conduct does not constitute bad faith, the court granted the carrier’s motion to dismiss the complaint.
Date of Decision: April 3, 2012
Sicherman v. Nationwide Life Ins. Co., NO. 11-7227, 2012 U.S. Dist. LEXIS 47630, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 3, 2012) (McLaughlin, J.)

MAY 2012 BAD FAITH CASES: COURT RULES THAT BECAUSE FAULTY CONSTRUCTION WAS NOT AN “OCCURRENCE” TRIGGERING INSURED’S POLICY, BAD FAITH CLAIM WAS NOT POSSIBLE (Philadelphia Federal)

Published on May 1, 2012 in Coverage Issues. Closed
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In Roman Mosaic and Tile Company v. Liberty Mutual Insurance Company, the court granted a carrier’s motion for summary judgment. The case arose from alleged faulty construction performed by the insured, a subcontractor. After his apartment sustained water damage in June 2011, the property owner received benefits from its insurer, which subsequently brought a subrogation claim against the subcontractor, among others.
The subcontractor thereafter brought suit against its carrier in this action seeking defense and indemnification under its CGL policy. That carrier removed this case to federal court and filed a later motion for summary judgment.
They key issue here was whether the damages alleged in the underlying lawsuit constitute an “occurrence,” as defined by the CGL policy issued to the insured subcontractor. If the damage was covered under the policy, the insured might be able to allege that the carrier’s rejection of its insurance claim for a defense was unreasonable, as a predicate to a bad faith claim.
The court reasoned that, despite the insured’s re-styling of the claims against it as mere “negligence” and “the foreseeable consequences of that workmanship,” the claim against the subcontractor/insured was really a claim for poor construction work. There is substantial Pennsylvania law that supports the carrier’s claim that faulty workmanship claims do not involve an “occurrence” under GCL policies. As such, the insured subcontractor was unable to raise a genuine issue of material fact sufficient to defeat the carrier’s summary judgment motion and prove that the carrier acted in bad faith by denying coverage.
Date of Decision: April 5, 2012
Roman Mosaic & Tile Co. v. Liberty Mut. Ins. Co., NO. 11-6004, 2012 U.S. Dist. LEXIS 48354, U.S. District Court for the Eastern District of Pennsylvania (E.D. Pa. Apr. 5, 2012) (Baylson, J.)