DECEMBER 2014 BAD FAITH CASES: FEDERAL COURT INTERPRETS STATUTORY REQUIREMENTS OF UNDERINSURED WAIVER REJECTION; INSURED DOES NOT NEED TO DATE FORM FOR IT BE VALID AND INSUREDS’ CLAIMS DISMISSED (Philadelphia Federal)

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Husband and wife plaintiffs allege their vehicle was involved in an accident, the damages resulting from the collision exceeded the amount of insurance recovered from the tortfeasor, that they made a claim to their insurer for underinsured motorist coverage, and that the insurer wrongfully and in bad faith denied coverage on the claim.  The insurer argued Plaintiffs waived underinsured motorist coverage in a waiver, while Plaintiffs assert the waiver failed to comply with the applicable statute, making it ineffective.

Under Pennsylvania law, an insured must affirmatively reject underinsured coverage.  To be effective, the signed rejection must contain the statutorily provided language.  Furthermore, the rejection form must be placed on a separate sheet of paper in prominent type, and it must be “signed by the first named insured and dated to be valid.”  If a purported rejection fails to comply with the statutory requirement, the underinsured coverage will be equal to the bodily injury liability limits.

Plaintiffs argued because the first named insured, the husband-plaintiff, did not date the form himself, but instead the date was printed in the header of the form, along with the names of the insureds and the policy number.

The Court rejected this argument, finding the most natural reading of the provision required the form be signed by the insured, but not that the insured also had to date the form.  The Court found that had the legislature intended to require the insured to date the form, it could have phrased the statute in a way that clearly required it.  Furthermore, the statute provides that the insured must be informed he may reject underinsured motorist coverage by signing the following written rejection form, but makes no mention of dating by the insured.  Therefore, because plaintiff signed the form and it was dated the rejection was valid, and the Court dismissed the claims with prejudice.

Date of decision: December 10, 2014

Lieb v. Allstate Prop. & Cas. Ins. Co., Civil Action No. 14-4225, 2014 U.S. Dist. LEXIS 171359 (E.D.Pa. Dec. 10, 2014) (Rufe, J.).

DECEMBER 2014 BAD FAITH CASES: PENNSYLVANIA SUPREME COURT RULES THAT STATUTORY BAD FAITH CLAIMS MAY BE ASSIGNED, FOCUSING ON LEGISLATIVE INTENT AND REMEDIAL NATURE OF STATUTE (Supreme Court of Pennsylvania)

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In Allstate Property and Casualty Ins. Co. v. Wolfe, the Third Circuit had certified the issue to the Supreme Court of Pennsylvania as to whether an insured may assign the right to recover damages from his insurance company deriving from the insurer’s bad faith toward the insured, under 42 Pa.C.S. § 8371.  District Courts in the Third Circuit had split on the issue of whether relief under section 8371 represented an unliquidated tort claim which could not be assigned under Pennsylvania; a number finding no assignment possible under this theory.  Other Third Circuit and District Court cases found that section 8371 claims could be assigned, following Superior Court precedent.  The parties asserted various policies reasons for and against assignment.

The Supreme Court found that the “most appropriate way to approach the assignability issue is as a matter of statutory construction,” i.e., determining legislative intent.  The Court found it highly important to consider “the extant common law at the time of a statute’s enactment.”  The Court found that section 8371’s statutory language, “[i]n an action arising under an insurance policy,” was significant in interpreting the statute.  It interpreted that phrase as “interweav[ing] the statutory remedial scheme into the array of contract-based actions which already were assignable under the extant common law as of Section 8371’s enactment.”

The Court stated: “As such, to the degree that Section 8371 is regarded as ‘merely provid[ing] an additional remedy and authoriz[ing] the award of additional damages,’ Birth Center, 567 Pa. at 402, 787 A.2d at 386, this would seem to be a simple case. Per this line of reasoning, the Legislature’s mere supplementation of remedies should not be deemed to evince an unstated desire to disrupt the pre-existing degree of latitude in the assignment of underlying actions or to require the splitting of causes of action ….”

The Court then observed that the issue, however, was not so simple because of the intermingling of contract and tort concepts.  The Legislature had left in place the pre-statute Supreme Court case law which had placed a contract overlay on insurance bad faith claims, “but it chose to interpose additional conventions typically associated with tort law….”  The insurer opposing assignment was seen as reasonably relying on that phenomenon in making its argument.  However, it did not carry the day.

The Court ruled that: “On balance … we find that consideration of the occasion and necessity for Section 8371, the object to be attained, the previous legal landscape, as well as the consequences of our interpretation, favor” permitting assignment. The Court did not believe that the Legislature “contemplated that the supplementation of the redress available for bad faith on the part of insurance carriers in relation to their insureds would result either in a curtailment of assignments of pre-existing causes of action in connection with settlements or the splitting of actions.”  The Court observed that if the Legislature found the Court’s interpretation incorrect, it “may seek to implement curative measures pertaining to future cases, subject to constitutional limitations.”

In addition to the holding, it is significant to observe that the Court focused on section 8371 as a remedial law, serving “to supplement the remedies previously available to insureds in certain scenarios involving bad-faith conduct by their insurers, inter alia, by authorizing punitive-damages awards.”

Finally, there is much to be said for what can be achieved through the certification process, where the Third Circuit and Supreme Court work together to clarify issues in the law that otherwise could linger for years.  This is true in any context, but there are other issues in Pennsylvania’s statutory bad faith law, e.g., the split in the various courts over the extent to which the Unfair Insurance Practices Act may be considered in the statutory bad faith cases, in which such a process would be helpful to litigants and lower courts required to follow Pennsylvania.

Date of Decision:  December 15, 2014

Allstate Property and Casualty Insurance Company v. Wolfe, No. 39 MAP 2014 (Pa. Dec. 15, 2014)

DECEMBER 2014 BAD FAITH CASES: COURT WOULD NOT ABSTAIN FROM HEARING BAD FAITH CASE FOR DAMAGES MIXED WITH DECLARATORY JUDGMENT ACTION WHERE NO PARALLEL STATE COURT CASE PENDING (Western District)

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In Tube City IMS Corp. v. Allianz Global Risks US Insurance Company, the insurer removed a case based on breach of contract and bad faith, or in the alternative, a claim that the insurer had to provide coverage based upon its misrepresentations about the scope of coverage.  The insured sought remand on the basis of abstention.  Looking at the law governing abstention in the case of declaratory judgment actions, where there are also money damages claims, the court found no basis for abstention in such cases possible where there was no second parallel state court proceeding pending.  The same logic prevented the application of Colorado River absention.

Dated of Decision:  November 3, 2014, adopted, November 25, 2014

Tube City IMS Corp. v. Allianz Global Risks US Ins. Co., Civil Action No. 14-1245, 2014 U.S. Dist. LEXIS 165654 (W.D. Pa. November 3, 2014) (Mitchell, M.J.), adopted in, Tube City IMS Corp. v. Allianz Global Risks Us Ins. Co., Civil Action No. 14-1245, 2014 U.S. Dist. LEXIS 164495 (W.D. Pa. Nov. 25, 2014) (Cercone, J.)

DECEMBER 2014 BAD FAITH CASES: NO ASSIGNMENT CLAUSE DOES NOT BAR COVERAGE WHERE INSURED UNDERGOES A STATUTORY MERGER; INSURER REQUIRED TO PAY COUNSEL FEES, EVEN IN ABSENCE OF BAD FAITH (New Jersey Federal)

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In Lime Tree Assocs., LLC v. Burlington Ins. Co., the court considered whether an insurer had properly denied coverage under a ‘no assignment’ clause in the policy, where the underlying insured-company underwent a statutory merger, resulting in a surviving LLC.  Under New Jersey law, such a merger entitles the surviving entity to “all of the rights, privileges and powers of each of the partnerships and other business entities that have merged or consolidated, and all property, real, person and mixed, and all debts due to any of those partnerships and other business entities, as well as all other things and causes of action belonging to each of those partnerships and other business entities.”  The insurer denied coverage for a personal injury suit under the ‘no assignment’ clause, as well as under the definition of “insured,” which had been modified by a ‘new entities’ exclusion.

Whether the policy language prevented a transfer of contractual rights following and through a merger is an issue that has not yet been considered by the New Jersey Supreme Court, but has been previously addressed by the Appellate Division of New Jersey and district courts of the Third Circuit.  Those jurisdictions have all held that in order to prevent a transfer of rights through merger or by operation of law, the contract’s language must be explicit – the exclusionary language must have anticipated such a transfer and purposefully prevented it.

Therefore, a generic clause barring assignment would be insufficient to bar coverage; rather, to be given effect, the exclusionary clause must contain language that specifically addresses the circumstances and issues at hand.  The court determined the no assignment clause in the policy was neither specific nor explicit with regard to transfer by merger or operation of law, and was therefore insufficient to bar coverage.

Furthermore, the reasoning behind the no assignment clause did not support a denial of coverage; no assignment clauses are intended to protect the insurer from unknowingly insuring against unforeseen risks when the coverage is transferred to a different insured, but where the loss has occurred prior to the transfer of coverage, that risk is abated entirely.  For that reason, courts have refused to apply no assignment clauses to transfers occurring by operation of law because such transfers do not entail any increase in the risk or hazard assumed by the insurer.  This comports with New Jersey’s practice of strictly construing clauses that are designed to limit coverage.

Coverage was also not excluded by the new entities exclusion because the surviving entity was not a new entity; it succeeded to all of the original insured’s rights automatically and as a matter of law under the state statute.  Therefore, the surviving entity was not a newly acquired entity; it was merely a continuation of the original entity.

The court awarded the LLC counsel fees under R. 4:42-9(a)(6), citing authority that the insured was entitled to such fees as the successful claimant. The insurer had declined a defense “even though it knew about their valid statutory merger.” Moreover, although the insurer’s “refusal may not have been in bad faith,” denying the insured counsel fees would have deprived it of the full benefit of its insurance contract.  New Jersey Court Rule 4:42-9(a)(6) permits, at the discretion of the trial court, an award of counsel fees in “an action upon a liability or indemnity policy of insurance, in favor of a successful claimant.”

Date of Decision: November 25, 2014

Lime Tree Assocs., LLC v. Burlington Ins. Co., Civil No.: 13-6017, 2014 U.S. Dist. LEXIS 165794 (D.N.J. Nov. 25, 2014) (Hayden, J.)

Happy Thanksgiving to All

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Picture by M. M. Ginsberg

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

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

Date of Decision:  September 20, 2014

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

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

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

Date of Decision:  October 27, 2014

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

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

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

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

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

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

Date of Decision: September 12, 2014

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

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

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

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

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

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

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

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

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

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

Date of Decision: Oct. 20, 2014

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

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

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

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

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

Date of Decision:  September 9, 2014

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