SEPTEMBER 2016 BAD FAITH CASES: MERE MISTAKES ARE NOT BAD FAITH (New Jersey Federal)

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The federal district court observed that mere mistakes cannot be the basis for bad faith claims under New Jersey law. Opposing the insurer’s summary judgment motion, the insureds asserted 4 bases for bad faith. Of the four grounds asserted for bad faith, two were unsupported and on the other two, the plaintiffs themselves conceded were mistakes by the insurer.  The mistakes included an incorrect date that was corrected; and a statement that the policy lapsed, but the policy was not treated as lapsed.

Date of Decision: July 12, 2016

Andrews v. Merchs. Mut. Ins. Co., 2016 U.S. Dist. LEXIS 89997 (D.N.J. July 12, 2016) (Rodriguez, J.)

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SEPTEMBER 2016 BAD FAITH CASES: SUPREME COURT TO RULE ON ELEMENTS OF STATUTORY BAD FAITH CLAIMS

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The Pennsylvania Supreme Court had granted an appeal on the following issue:

AND NOW, this 30th day of August, 2016, the Petition for Allowance of Appeal is GRANTED, LIMITED TO the issue[s] set forth below. Allocatur is DENIED as to all remaining issues. The issue[s], as stated by petitioner, is:

Whether this Court should ratify the requirements of Terletsky v. Prudential Property & Casualty Insurance Co., 649 A.2d 680 (Pa. Super. 1994), appeal denied, 659 A.2d 560 (Pa. 1995), for establishing insurer bad faith under 42 Pa.C.S. § 8371, and assuming the answer to be in the affirmative, whether the Superior Court erred in holding that Terletsky factor of a “motive of self-interest or ill-will” is merely a discretionary consideration rather than a mandatory prerequisite to proving bad faith?

Rancosky v. Washington National Insurance Company, 28 WAP 2016 (Pa. Aug. 30, 2016).

Terletsky has been the gold standard for section 8371 bad faith for over 20 years, and two of its criteria have not been controversial: “to recover under a claim of bad faith, the plaintiff must show that the defendant did not have a reasonable basis for denying benefits under the policy and that defendant knew or recklessly disregarded its lack of reasonable basis in denying the claim.” This standard is common in other jurisdictions as well.

There has been dispute over other language in Terletsky, i.e., what was the Superior Court intending when it talked about showing the insurer’s self-interest or ill will. Is this a third element, or is it merely a reference to evidence that can establish the second element?

At least since the Superior Court’s 2007 decision in Greene v. USAA, and as more recently reiterated in Mohney v. American General Life, and the Superior Court’s own Rancosky decision, the trend has been to find ill-will is not a third requirement. Rather, it is evidence relevant to proving Terletsky’s second element. By contrast, there is case law apparently still treating self-interest and ill will as a third element of proof. The Supreme Court will now resolve the issue, and presumably address the non-controversial elements as well.

As to those “non-controversial” two elements, these are expressly based upon denial of a benefit. However, courts more and more often appear to have gone beyond the need for a benefit to be denied in allowing a bad faith claim to proceed, apparently contrary to the Supreme Court’s 2007 Toy decision. In that case,  benefit was defined as failure to pay claims or provide a defense; with matters such as poor claims handling practices being evidentiary in nature, and not a cognizable basis for statutory relief in and of themselves. Thus, this is an issue that the Supreme Court may have to address again, as Toy is not frequently referenced by the lower courts in their consideration of what it means to deny a benefit as a basis to bringing a statutory bad faith claim.

Date of Decision: August 30, 2016

Rancosky v. Washington National Insurance Company, 28 WAP 2016 (Pa. Aug. 30, 2016) (appeal granted per curiam).

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AUGUST 2016 BAD FAITH CASES: INSURER MUST ALWAYS SHOW INTENT IN VOIDING A POLICY BASED ON MATERIALLY FALSE STATEMENTS (Middle District)

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The insurer brought a declaratory judgment claiming that there was no policy coverage under a fraud and concealment exclusion, based on an inaccurate statement made at an examination under oath. The insurer asserted that the exclusion applied irrespective of the insured’s state of mind in making a false statement, i.e., false statement = no coverage independent of intent. The policy language apparently embodied this position.

The court still rejected it, finding that the weight of case law requires some level of intent, with the applicable test being that to void a policy for a false statement the insurer must show: “(1) the representation was false; (2) the insured knew it to be false when made or acted in bad faith; and (3) the representation was material to the risk being insured.” The court stated that Pennsylvania law “does not allow an insurer to rescind an insurance policy because of innocent mistakes by the insured, even if those mistakes involved misrepresentations of material facts.”

As the insured’s state of mind remained at issue, judgment on the pleadings for the insurer could not be granted.

Date of Decision: July 7, 2016

Cincinnati Ins. Co. v. Drenocky, No. 15-762, 2016 U.S. Dist. LEXIS 87711 (M.D. Pa. July 7, 2016) (Conner, J.)

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AUGUST 2016 BAD FAITH CASES: PLAINTIFF GIVEN CHANCE TO AMEND BAD FAITH CLAIM, IF COUNSEL CAN DO SO WHILE MEETING RULE 11 STANDARDS (New Jersey Federal)

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In Product Source International, LLC v. Foremost Signature Insurance Co., the insured sought defense and indemnification for personal and advertising injury from a trademark infringement suit, and brought a bad faith claim. The insurer moved to dismiss. The court refused to dismiss the insured’s coverage claims, but did dismiss the bad faith claim without prejudice.

The court observed that a New Jersey bad faith plaintiff must show (1) absence of a reasonable basis to deny benefits; and (2) knowing or reckless disregard of its lack of a reasonable basis to deny that benefit. If there is a reasonable basis to deny benefits, or where coverage is “fairly debatable”, there cannot be bad faith. “Under this ‘fairly debatable’ standard, a plaintiff can only succeed on a bad faith claim against his insurer if he can establish that he would be entitled to summary judgment on the underlying claim —- that there are no factual issues over whether the plaintiff is entitled to insurance coverage under his policy.”

In its complaint, the plaintiff pleaded that there was no reasonable basis to deny defense and indemnification, referencing specific policy provisions covering trademark infringement claims. However, the court found that the plaintiff did “not adequately set forth the second element required … Defendants’ knowledge or reckless disregard for the fact that they had no reasonable basis for their denial of insurance benefits.” An allegation that the claim process was delayed with knowledge or reckless disregard that there was no valid basis is a legal conclusion, not a factual allegation under Twombly/Iqbal. Thus, the bad faith claim was dismissed without prejudice, leaving plaintiff an opportunity to re-plead; but in so ordering the court allowed the plaintiff time to cure while stating “if Plaintiff is able to do so consistent with counsel’s obligations under Rule 11….”

Date of Decision: July 6, 2016

Prod. Source Int’l, LLC v. Foremost Signature Ins. Co., No. 15-8704, 2016 U.S. Dist. LEXIS 87030 (D.N.J. July 6, 2016) (Simandle, J.)

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AUGUST 2016 BAD FAITH CASES: INSUREDS’ ATTORNEY WHO CARRIED OUT CLAIM NEGOTIATION WITH CARRIER WAS A CENTRAL FACT WITNESS, AND WAS DISQUALIFIED BY THE COURT, AFTER THE COURT RAISED THE ISSUE SUA SPONTE (Philadelphia Federal)

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In this UIM bad faith case, the insured’s counsel was also the sole person who communicated with the claims adjuster in attempting to negotiate the UIM claim. The parties were over $1,000,000 apart in settlement negotiations, and the insureds subsequently brought a breach of contract and bad faith action. The same counsel who negotiated with the insurance carrier also represented the insureds in bringing the bad faith claim.

There was no question that this counsel’s testimony was critical to both the insured’s affirmative claims for bad faith relief and the insurer’s defense. Further, counsel’s testimony conflicted with the adjuster’s going directly to the evidence of bad faith in the claims handling process. After summary judgment was denied and the case was to head to trial, the court sua sponte raised the issue as to whether counsel had to be disqualified under Rule of Professional Conduct 3.7 because counsel was to be a witness. Counsel was a solo practitioner.

The court disqualified counsel. The court found that “equities plainly weigh in favor of disqualifying” counsel, and that allowing counsel to handle the case as a lawyer and be a principal witness would “compromise the integrity of the tribunal.” As “a solo practitioner and sole counsel for the plaintiffs, [counsel] cannot effectively represent her clients while she is testifying at trial.” The court found “a real danger that the finder of fact would be unable to discern when she is acting in her role as an attorney and when she is testifying as a fact witness.”

Although the insurer did not move to disqualify counsel “in previously moving to obtain [counsel’s] deposition and in its brief on the current subject matter, [the carrier] has taken the position that [counsel’s] conversations with [the adjuster] render her a central fact witness in this case.” While recognizing disqualification would burden the insured: “This burden on the plaintiffs is minimal in comparison to the numerous factors weighing in favor of disqualification.” “Moreover, the plaintiffs and [counsel] knew that [counsel’s] testimony would be a central issue when they filed this lawsuit.” Of significance, the insureds would not be left without an attorney to go to trial. “At a hearing on this subject, [counsel had] informed the court that she would be able to assist the plaintiffs in locating a new attorney without much trouble.

Date of Decision: June 30, 2016

Adeniyi-Jones v. State Farm Mut. Auto. Ins. Co., No. 14-7101, 2016 U.S. Dist. LEXIS 85053 (E.D. Pa. June 30, 2016) (Bartle, J.)

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JULY 2016 BAD FAITH CASES: NO BAD FAITH BECAUSE OF EXCLUSION ON SOME CLAIMS, AND NO FACTS OF BAD CLAIMS HANDLING ON OTHERS (Middle District)

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Myerski v. First Acceptance Ins. Co., involved the most common form of bad faith litigation, UM/UIM claims, as well as other claims. There was an issue in the case about whether the injured driver was excluded under his mother’s policy because he lived in the same house and/or used her car frequently. The record showed the insurer reasonably asserted the exclusion’s application.

The court then looked at the claims handling. There was no bad faith in the back and forth between the insured’s counsel and the carrier, with the court going through the details of each communication; the rapidity in which suit was filed; and the ongoing nature of the investigation. The court then stated: “The question remains whether bad faith may be found in Defendants’ initial handling of the case.” The above cited exclusion did not apply to either PIP or UM/UIM claims. The plaintiff argued that the insurer had “arbitrarily denied coverage without any justification and delayed in allegedly opening a pip claim until 4 months after the accident,” and had “made verbal affirmations that they were denying all of the Plaintiff’s claims based on an exclusion which does not apply to such claims and cannot be relied upon by the Defendants to deny coverage.” However, under the facts of record, the case did not “support the conclusion that any refusal to pay the property damage claim constituted bad faith.

After another detailed analysis, the court further rejected the insured’s argument to have stated a claim for wrongful refusal to pay claims for first party medical benefits and uninsured motorist benefits. However, the communications from the insured to the insurer did not establish a clear and convincing case that demand had been made specifically on these two issues and then been denied in bad faith.

Finally, the court denied a distinct breach of the contractual covenant of good faith and bad dealing claim, as “Plaintiff’s claim for a breach of the covenant of good faith and fair dealing is properly dismissed because Plaintiff also asserts a breach of contract claim seeking PIP and UM benefits.”

Date of Decision: June 10, 2016

Myerski v. First Acceptance Ins. Co., 3:16-CV-488, 2016 U.S. Dist. LEXIS 76201 (M.D. Pa. June 10, 2016) (Conaboy, J.)

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JULY 2016 BAD FAITH CASES: A LOW BUT REASONABLE LOSS ESTIMATE CANNOT BE BAD FAITH (Western District)

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In Gowton v. State Farm Fire & Casualty Company the insured’s sole allegation of bad faith was a conclusory averment that a refusal to pay in the amounts alleged due was bad faith. The complaint also averred at one point that the insurer relied on loss calculations that were unsupportable, without any explanation of why they were inadequate. Under Pennsylvania case law, a low but reasonable estimate of a loss is not bad faith. Thus, an unsupported claim that an insurer estimated low, by itself, cannot be bad faith. The court dismissed with leave to file an amended complaint.

Date of Decision: June 29, 2016

Gowton v. State Farm Fire & Cas. Co., No. 15-1164, 2016 U.S. Dist. LEXIS 84454 (W.D. Pa. June 29, 2016) (Bissoon, J.)

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JULY 2016 BAD FAITH CASES: BAD FAITH CLAIM AGAINST INSURER CONCERNING CRIMINAL CLAIMS AGAINST INSURED FOR HAVING MADE AN INSURANCE CLAIM IS NOT TOLLED UNTIL VINDICATION UNLESS INSURER INSTIGATED CRIMINAL PROCEEDING (Superior Court of Pennsylvania) (not precedential)

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In Fieldhouse v. Metropolitan Property and Casualty Insurance Company, the court provides an overview on when tolling applies to the bad faith statute of limitations where the issue involves criminal charges against an insured for a false insurance claim. The court points out that tolling applies if the insurer instigates the criminal proceeding, until the time when the insured successfully defends against the criminal charges. However, where the criminal process is not initiated through the insurer’s effort, there is no tolling.

Date of Decision: June 21, 2016

Fieldhouse v. Metro. Prop. & Cas. Ins. Co., No. 3056 EDA 2015, 2016 Pa. Super. Unpub. LEXIS 2166 (Pa. Super. Ct. June 21, 2016) (Bowes, Mundy, Musmanno, JJ.) (not precedential)

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JULY 2016 BAD FAITH CASES: REASONABLE INVESTIGATION ELIMINATES BASIS FOR BAD FAITH CLAIM, AS INSURED COULD NOT SHOW BY CLEAR AND CONVINCING EVIDENCE THAT INSURER HAD “NO GOOD REASON” TO DENY COVERAGE (Philadelphia Federal)

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Dougherty v. Allstate Property & Casualty Company involved a claim for water damage from burst pipes. The insurer took the position that the insured failed to properly maintain his furnace, leading to freezing and the burst pipes. The insurer asserted a frozen pipe exclusion and a maintenance failure exclusion. The insured brought breach of contract and bad faith claims. The court granted summary judgment to the insurer on both counts.

On the bad faith count, the court used a “no good reason” to deny coverage standard as a means of measuring bad faith. Thus, it was not unreasonable to focus the investigation on the furnaces’ condition “given that the water damage to the property occurred in January in Pennsylvania in an unoccupied property where the gauge on the oil tank read empty at the time of the loss (even though the gauge was later determined to be faulty).” The furnace had failed due to a clogged nozzle. The insured offered no evidence to show why the insurer should have concluded that “the discharge of water caused the furnace to malfunction and not the other way around.” The court also noted that the “plaintiff testified that he has no evidence that anyone [had] any ill will towards him or that anyone … tried to influence [the expert’s] conclusions.”

Date of Decision: May 5, 2016

Dougherty v. Allstate Prop. & Cas. Ins. Co., No. 14-7270, 2016 U.S. Dist. LEXIS 59667 (E.D. Pa. May 5, 2016)

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JULY 2016 BAD FAITH CASES: COURT RETAINED JURISDICTION OVER INSURER’S DECLARATORY JUDGMENT ACTION, REFUSING TO ABSTAIN UNDER SUMMY/REIFER (Western District)

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In Westport Insurance Corp. v. Hippo, the insured defendant was subject to a professional malpractice action in state court. The insurer brought a declaratory judgment action in federal court, seeking a ruling of no duty to defend or indemnify the state court action. The insured then brought its own declaratory judgment and bad faith action against the insurer in state court. The insured further asked the federal court to decline jurisdiction over the insurer’s declaratory judgment action. The court applied the 8 part Reifer test and decided to exercise jurisdiction over the insurer’s declaratory judgment action.  [Note: Reifer had seemed to indicate additional factors, beyond the Third Circuit’s seminal Summy decision, favoring the exercise of jurisdiction over declaratory judgment actions, though it was a matter clearly to be weighed carefully on either side].

Other 2016 post-Reifer decisions show most district courts declining jurisdiction over insurance declaratory judgment actions, at least in opinions available on Lexis. See, e.g., Kline v. Travelers Personal Security Ins. Co. (Middle District), Rachel II, Inc. v. State National Ins. Co. (Eastern District), Liberty Insurance Corp. v. Higgenbotham, No. 2:16-cv-38 (Western District March 24, 2016), Firemen’s Insurance Co. v. B. R. Kreider & Son, Inc. (Eastern District), Steadfast Insurance Co. v. Environmental Barrier Co. (Western District), Easterday v. Federated Mutual Ins. Co. (Eastern District), State Farm Mutual Automobile Ins. Co. v. Biddle (Western District).

In one other Western District case, the court did retain jurisdiction, Rafferty v. Metropolitan Life Ins. Co.

Date of Decision: April 28, 2016

Westport Ins. Corp. v. Hippo, 2016 U.S. Dist. LEXIS 56573 (W.D. Pa. April 28, 2016) (Gibson, J.)

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