APRIL 2015 BAD FAITH CASES: COURT FINDS MERITORIOUS DEFENSE TO BREACH OF IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING WHERE INSURER ALLEGED IT PAID THE BENEFITS, AND OPENS DEFAULT AGAINST INSURER (New Jersey Federal)

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In Ryan v. Liberty Mutual Insurance Company, a Hurricane Sandy case, the insurer was attempting to open a default judgment. In looking at the meritorious defense component of the test for opening a default judgment, the court found that the insurer had asserted meritorious defenses to the insureds’ claims for breach of contract and the implied covenant of good faith and fair dealing.

The insured alleged “that it performed appropriate investigation of the damages to Plaintiffs’ home ‘through two visits to the property,’ ‘recorded the condition of the property in more than one hundred photographs,’ properly adjusted Plaintiffs’ claim, corresponded with Plaintiffs, and paid Plaintiffs’ policy benefits.”  The court found that: “If established at trial, [the insurer’s] satisfaction of its contractual obligations by paying appropriate policy benefits would defeat Plaintiffs’ breach of contract claim. It would also defeat Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing. To establish a breach of the implied covenant under New Jersey law, a plaintiff must show that ‘the party alleged to have acted in bad faith has engaged in some conduct that denied the benefit of the bargain originally intended by the parties.’” “If [the insurer] were to establish at trial that it properly investigated and paid Plaintiffs’ policy benefits, Plaintiffs could not establish that they were denied the benefit of their bargain.”

Date of Decision:  April 1, 2015

Ryan v. Liberty Mut. Ins., Civ. No. 14-06308 (WHW) (CLW), UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, 2015 U.S. Dist. LEXIS 42660 (D.N.J. April 1, 2015) (Walls, J.)

APRIL 2015 BAD FAITH CASES: SECTION 8371 DOES NOT PROVIDE FOR COMPENSATORY OR CONSEQUENTIAL DAMAGES; THERE IS NO PRIVATE UIPA ACTION; INDEPENDENT ADJUSTER OWED NO DUTY TO INSURED (Philadelphia Federal)

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In Tippett v. Ameriprise Insurance Company, the court observed that unlike claims for breach of the contractual duty of good faith and fair dealing, the remedy for statutory bad faith under section 8371 does not allow a plaintiff to recover compensatory or consequential damages.

These plaintiffs also brought a count for violation of the Unfair Insurance Practices Act (UIPA).  They conceded that there is no private right of action under the UIPA, but argued the court could still “consider UIPA violations to determine whether an insurer acted in bad faith under Pennsylvania’s Bad Faith Statute….” The court dismissed the attempt to plead a private action, regardless of whether it could consider evidence of UIPA violations for a bad faith claim.

The court also dismissed claims against the insurer’s independent insurance adjuster, finding no duty owed to the insured by the insurer’s independent adjuster. “Pennsylvania courts permit insureds to sue their insurers for the actions of their insurers’ agents, including adjusters[, and] Pennsylvania courts also recognize that independent insurance adjusters ‘owe a duty of performance to their principals, the insurance companies.’” Thus, “[t]he Supreme Court of Pennsylvania is unlikely to impose a duty of care on adjusters to insureds.”

Date of Decision: March 25, 2015

Tippett v. Ameriprise Ins. Co., CIVIL ACTION No. 14-4710, 2015 U.S. Dist. LEXIS 37513 (E.D. Pa.  March 25, 2015) (Sanchez, J.)

 

CAN SECTION 8371 BAD FAITH EXIST WHERE THERE IS NO DENIAL OF A BENEFIT

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We posted a case summary yesterday, where the opinion, like many others, indicated that section 8371 bad faith can exist even where no benefit is denied.   There are times when the bad faith conduct at issue involves a delay in paying a benefit (or providing a defense), which many courts have equated with the denial of a benefit.  However, where there is no denial of a benefit, including no undue delay in providing a benefit, does section 8371 still provide a remedy to the insured for an insurer’s allegedly poor conduct?

We added a Note to yesterday’s post with links to case summaries on the intertwined issue of whether a UIPA violation can be considered in the section 8371 context; whether it can be evidence of section 8371 bad faith, though not in itself bad faith per se; or whether it can be bad faith per se. We likewise observed the related issue of whether the absence of any duty to indemnify automatically eliminates bad faith claims because there is an objectively reasonable basis to deny coverage.

As the issue of section 8371’s remedial scope has come up regularly since the statute’s inception, and as the Supreme Court appeared to address the nature and scope of section 8371 in its 2007 Toy decision, we have just added a link to an article on the subject.

APRIL 2015 BAD FAITH CASES: BAD FAITH CLAIM PREEMPTED BY ERISA AS TO INSURER (Middle District)

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In the court’s first decision in Hayes v. Reliance Standard Life Insurance Company, the insured’s bad faith claim against the insurer was preempted by ERISA.  Six days later, the same argument failed, as to a claim against an insurance broker, as insufficiently related to the plan at issue.

Date of Decision:  March 17, 2015 and March 23, 2015

Hayes v. Reliance Std. Life Ins. Co., CIVIL ACTION NO. 3:14-0714, 2015 U.S. Dist. LEXIS 32543 (M.D. Pa. March 17, 2015) (Mannion, J.)

Hayes v. Reliance Std. Life Ins. Co., CIVIL ACTION NO. 3:14-0714, 2015 U.S. Dist. LEXIS 35682 (M.D. Pa. March 17, 2015) (Mannion, J.)

 

APRIL 2015 BAD FAITH CASES: COURT DOES HISTORICAL REVIEW OF CASES APPLYING TWOMBLY/IQBAL TO DISMISS BAD FAITH CLAIMS FOR BAREBONES PLEADINGS (Philadelphia Federal)

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In Schor v. State Farm Fire & Casualty Insurance Company, the court conducted an historical review of cases applying the Twombly/Iqbal standards to bad faith pleadings, where those cases were dismissed for only setting out bare bones allegations.  It then found the case before it no different, and dismissed the complaint with leave to amend.  Thus, the following allegations, alone, could not set forth a plausible bad faith claim:

“Defendant has engaged in Bad Faith conduct toward Plaintiff and has treated Plaintiff unreasonably and unfairly with respect to its adjustment of Plaintiff’s covered loss, in violation of 42 Pa.C.S.A. § 8371.” “In furtherance of its bad faith and wrongful denial and refusal to pay benefits for Plaintiff’s covered loss, Defendant, acting by and through its duly authorized agents, servants, workmen or employees, has engaged in the following conduct:

(a) in forwarding correspondence to Plaintiff and/or Plaintiff’s representative, representing to Plaintiff and/or Plaintiff’s representatives that Plaintiff’s claim was not, in fact, covered under Defendant’s policy of insurance when Defendant knew or should have known that such representation was false and misleading.” (b) in failing to effectuate a prompt, fair and equitable settlement of Plaintiff’s claim when its liability under the policy became reasonably clear; (c) in misrepresenting pertinent facts or policy or contract provisions relating to the coverages at issue; (d) in treating the Plaintiff with reckless indifference and disregard under the circumstances; (e) in not having a reasonable basis or denying Plaintiff’s benefits under the policy and in knowingly or recklessly disregarding its lack of reasonable basis when it denied Plaintiff’s claim; (f) in interpreting ambiguous terms, provisions and/or conditions of the aforementioned policy in its favor and against Plaintiff.”

“Solely as a result of Defendant’s bad faith misconduct as aforesaid, Plaintiff has been required to obtain counsel to commence the present action to recover benefits due and owing under the policy of insurance issued by Defendant for Plaintiff’s covered loss, and has incurred costs and other expenses in connection with said claim.”

The court found that such “allegations assert, in cursory fashion only, that Defendant lacked a reasonable basis for denying Plaintiff’s claim for benefits, without providing any factual allegations from which the Court could make a plausible inference that Defendant knew or recklessly disregarded its lack of a reasonable basis for denying benefits.”  Further, “[a]lthough such assertions perhaps suggest that a bad faith claim is possible, they do not allow for any non-speculative inference that a finding of bad faith is plausible.” (Emphasis by Court).

Date of Decision:  March 18, 2015

Schor v. State Farm Fire & Cas. Ins. Co., CIVIL ACTION NO. 15-610, 2015 U.S. Dist. LEXIS 33266 (E.D. Pa. March 18, 2015) (Buckwalter, J.)

APRIL 2015 BAD FAITH CASES: COURT REFUSES TO SEVER CONTRACT AND BAD FAITH UIM CLAIMS, AND REFUSES TO STAY DISCOVERY; COURT RECOGNIZES PRIVILEGES REMAIN IN TACT ABSENT ADVISE OF COUNSEL DEFENSE, BUT ALLOWS DISCOVERY OF CLAIMS FILES AS TO EVALUATION PROCESS; COURT OBSERVES THAT IT IS NOT BOUND BY CONTRARY DECISIONS OF COURTS OF COMMON PLEAS, AND THAT INSURER TOOK THAT RISK WHEN IT REMOVED THE CASE TO FEDERAL COURT (Middle District)

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In Griffith v. Allstate Insurance Company, the insurer brought a Rule 42 motion to sever the bad faith and contract claims in this UIM case, and to stay bad faith discovery. The court denied both motions.

The court first found that the issues were intertwined on both claims. The pivotal “point for both cases will be the plaintiff’s injuries, represented through relevant medical evidence and the defendant’s claim file. The jury will be able to properly evaluate the entire case including the accident, the plaintiff’s injuries, the defendant’s investigation, and, finally, the attempts to settle the matter.” This favored keeping the cases together.

Next, the insurer raised the argument that disclosure of documents may be subject to the work product doctrine in the bad faith case.  The insurer argued that “the disclosure of the impressions of the claims adjuster will hinder the defendant’s ability to litigate the breach of contract claim.” The court observed that the claims file “generally includes correspondence from plaintiff’s counsel, medical records, wage-loss records, logs indicating what material has been received, and notes from the claims adjuster regarding his or her impression of the claim’s value[, and] [t]he vast majority of the evidence in the claim file will be presented in conjunction with the breach of contract claim.” Further, “only the claim adjustor’s notes or other impression may qualify as work product.” (Emphasis by Court).

The court also found that the “bad faith claim will also only require a few additional witnesses who will discuss evidence of the plaintiff’s damages that will likely be admitted in conjunction with the breach of contract claim. All of this boded against severance.  The court then found against the insurer’s judicial efficiency argument. As to prejudice from disclosing the insurer’s subjective analysis of the claim, the insurer only relied upon “the prejudice caused by releasing the claims adjustor’s impressions regarding the plaintiff’s claims and does not contend releasing its claims evaluation process will somehow create a competitive hindrance.”  The insurer had tried to support its position with citations to a series of Court of Common Pleas decisions.  The federal court noted: “The defendant includes and cites to a bevy of cases out of various Pennsylvania Courts of Common Pleas in support of its position. The court notes it was the defendant who removed the case to this court and availed itself to the rules, procedures, and case law of the Federal District Court. The defendant made the strategic decision to have this case tried in this court and must now accept the consequences.” Further, the court observed that simply because the insured instituted a bad faith claim, this did not mean that the insurer will be deemed to have automatically waived the attorney client privilege or work product doctrine.  In addition, “[c]ommunications between inhouse counsel and claims adjustor are generally privileged.” “Moreover, only when a defendant affirmatively pleads reliance on counsel’s advice is such a privilege waived as to the communications between the specific counsel and the client.” No such defense was pleaded here. Thus, there was little or no risk of actually losing this privilege.

The court then added the following regarding production of the claim file in a bad faith UIM case, where the insurer did not settle: “Further, the claim file is merely a collection of documents along with notes from the adjustor.  As the defendant is well aware, Pennsylvania mandates an insurer act in good faith in negotiating with an injured party. The defendant has communicated offers of settlement, pegging what it believes is a fair value for the plaintiff’s injuries. It is unclear how disclosing the notes that led the defendant to make that determination would place it at any disadvantage if the claims adjustor acted in good faith as required under Pennsylvania law.” Finally, the court left evidentiary arguments to a future date. “At this point it is premature to determine whether specific pieces of evidence would be admissible wholly or on a limited basis. The best way to make that determination is to keep the matters joined, allow discovery to proceed, and bring both claims to trial as quickly as possible. Any discovery disputes or questions of privilege can be handled through the discovery dispute procedures employed by the court.”

Date of Decision:  February 21, 2014

Griffith v. Allstate Ins. Co., CIVIL ACTION NO. 3:13-2674, 2014 U.S. Dist. LEXIS 182819 (M.D. Pa. February 21, 2014) (Mannion, J.)

APRIL 2015 BAD FAITH CASES: INSURED DENIED SUMMARY JUDGMENT WHERE CLAIMS HANDLING ISSUES AND BAD FAITH TO BE RESOLVED BY JURY (Middle District)

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In Scheirer v. Nationwide Insurance Company of America, the insured pleaded bad faith, among other claims, for an alleged inordinate delay in handling her claim. The claim involved alleged uninsured motorist (“UM”) benefits owed as a result of an injury the insured suffered in a bus accident. Both the insured and insurer brought motions for summary judgment.

The insured claimed the insurer acted in bad faith “by failing to properly and promptly evaluate and investigate her UM claim, by failing to timely respond to her demands, by failing to promptly resolve her claim within the policy limits, by failing to act promptly upon communication regarding her claim, by failing to have reasonable standards with respect to her claim, by failing to pay her claim when it had all of the necessary information, by failing to provide a fair and equitable settlement of her claim, by failing to negotiate with her counsel, by forcing her to commence litigation to recover her rightful amount due under her policy, and by offering her substantially less than the amounts due on her claim.”

The court cited to general bad faith principles in applying section 8371, and added, citing earlier cases, that “’Pennsylvania law does not limit bad faith claims to unreasonable denials of coverage[]’ and, ‘[a] bad faith can have various other bases, including an insurer’s lack of investigation, lack of adequate legal research concerning coverage, or failure to communicate with the insured.’”  The cases cited stood for the proposition that “a bad faith claim includes ‘a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.’”

In this case, the insured based “in large part, her bad faith claim on the above stated alternative grounds. As stated, bad faith is not limited to the insurance company’s bad faith in denying its insured’s claim and can include the company’s investigative practices.”  The court found that “disputes exist as to whether defendant conducted a prompt investigation of plaintiff’s UM claim, as to whether defendant promptly evaluated and investigated plaintiff’s UM claim, as to whether defendant failed to timely respond to plaintiff’s demands, as to whether defendant failed to promptly resolve plaintiff’s claim within the $100,000 policy limits, as to whether defendant failed to act promptly upon communication regarding plaintiff’s claim, as to whether defendant failed to have reasonable standards with respect to plaintiff’s UM claim, and as to whether defendant failed to timely pay plaintiff’s UM claim when it had all of the necessary information.” The court held that “a reasonable trier of fact could find that the defendant failed to make a good faith and timely payment on plaintiff’s UM claim.” The open issues included the insurer’s position that it acted reasonably in light of not having all necessary information, or whether it had the necessary information; the timeliness of compensating the insured; the time between the incident and an IME; whether a deposition was unduly delayed; and the timing of responses to letters from the insured’s counsel and a monetary demand. The court stated: “In short, the record is not clear if defendant breached its duty of good faith regarding its handling of plaintiff’s UM claim and, if so, whether this breach was through a motive of self-interest or ill will as opposed to mere negligence.”  Thus, both summary judgment motions were denied.

Date of Decision: March 9, 2015

Scheirer v. Nationwide Insurance Company of America, Civil Action No. 3:13-CV-1397, 2015 U.S. Dist. LEXIS 28286 (M.D. Pa. March 9, 2015) (Mannion, J.)

Note: As reported over the years throughout this Blog, there is some question whether bad conduct in claims handling, without a denial of any benefit, can be a basis for statutory bad faith.  This is most notable in the context where it turns out no coverage was ever due under the policy, e.g., because of any exclusion.

Poor conduct that leads to delay in payment of a benefit (or provision of a defense in a third party case) can be seen as a denial of a benefit (“a delay in payment of a third party claim, if of inordinate and unreasonable length, effectively becomes a denial of the claim.”).  However, to the extent that a benefit is neither denied nor delayed, whether there is a cause of action under section 8371 for, e.g., failures to communicate or poor investigation practices alone, remains open to challenge.  By way of comparison some courts find that violations of the Unfair Insurance Practices Act, in and of themselves, cannot be the basis for a statutory bad faith claim or even be considered as evidence of bad faith, following D’Ambrosio; whereas some courts would allow this as evidence of bad faith, but not bad faith per se. Even here, however, there seem to be some decisions indicating UIPA violations can be the basis of a bad faith claim. In light of D’Ambrosio, this may simply be that the same conduct violating the UIPA simultaneously creates the basis for section 8371 bad faith, and it is not the UIPA violation as such that creates bad faith, but the conduct itself.  Additionally, there is the issue of whether there can be bad faith if no coverage was ever due, because the reasonable basis prong of the bad faith test is objectively met.

MARCH 2015 BAD FAITH CASES: MOTION TO DISMISS NOT SUITABLE MEANS TO ADDRESS WHETHER INSURER’S POSITION WAS FAIRLY DEBATABLE, IN THIS ACTION, AND WAS THEREFORE DENIED (New Jersey Federal)

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In Zodda v. National Union Fire Insurance Company, the insured pleaded bad faith, among other claims, for denial of benefits on a disability policy.  The insured brought claims against multiple insurers, alleging an elaborate scheme in marketing the disability insurance at issue, and in denying benefits.  As to the insurance bad faith claim, the insurers brought motions to dismiss under Twombly/Iqbal.

Defendants attempted to introduce a letter concerning the insured’s medical condition to show that coverage was at least fairly debatable, and thus not subject to a bad faith claim.  The court rejected this effort at the motion to dismiss stage. The medical records relied upon were both outside the complaint, and contradicted by the allegations in the complaint.  Further, the motion was premature because “[a] factual issue that appears debatable at the motion to dismiss stage may prove immaterial following discovery.” Thus, whether or not the material facts were fairly debatable would be best addressed at the summary judgment stage, after discovery.

The court did dismiss the claim against one insurer, however, because that insurer had sold its business, prior to the relevant time period, and no request was made to that insurer to pay the benefits at issue. “Under these circumstances, [that insurer] cannot be liable for a bad faith insurance claim when it had no connection to the policy at the point when the claim was denied.”

Date of Decision:  March 4, 2015

Zodda v. National Union Fire Insurance Company, Civil Case No. 13-7738, 2015 U.S. Dist. LEXIS 26206 (D.N.J. March 4, 2015) (Hochberg, J.)

MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART II: COURT PERMITS DEPOSITIONS OF INSURED’S COUNSEL IN CONNECTION WITH AFFIRMATIVE DEFENSES OF: SETTLEMENT WITHOUT CONSENT, AND ALLEGED UNCLEAN HANDS AND COLLUSION; BUT DENIES DEPOSITION OF INSURER’S COUNSEL WHOSE DECISIONS WERE MADE AFTER NOTICE OF BAD FAITH CLAIM, AND SOME OF THE DISPUTES WERE IN THE NATURE OF DISCOVERY DISPUTES WHICH ARE NOT THE BASIS OF A BAD FAITH CLAIM (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine. (This is addressed in a separate blog entry).  Further, the insurer sought the deposition of the insured’s counsel in connection with its affirmative defenses, and the insured sought to depose one of the insurer’s attorneys, discussed below.

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. Depositions of Insured’s Attorneys

The insurer sought to depose the insured’s current attorney, who was the injured third party’s attorney in the underlying action (as well as two of his partners); and also sought to depose the insured’s corporate counsel.  The insurer argued that these depositions were necessary and permitted to support its affirmative defenses, which alleged that: (1) the policy prohibited the insured from making a voluntary settlement payment without the insurer’s consent; and (2) the insured had “unclean hands” and had colluded with the underlying plaintiff and his attorney.

The court recognized that the insured, as well as the insurer, had a duty of good faith; and that “Pennsylvania law requires that a settlement entered without the insurers’ knowledge or consent must be reasonable and in good faith and non-collusive, even if the insurer breached its duty to defend.” “Indicators” that may be considered in evaluating the insured’s alleged bad faith and alleged collusion “’are unreasonableness, misrepresentation, concealment, secretiveness, lack of serious negotiations on damages, attempts to affect the insurance coverage, profit to the insured, and attempts to harm the interest of the insurer.’” In this case, the insurer alleged that “at the time of the settlement, [the underlying plaintiff] withdrew his claim for punitive damages, so that it would not appear that [the insured] was paying money … to settle a claim not covered by the terms of the … insurance policy.” The insurer further claimed it was relevant that the insured was now represented by the underlying plaintiff’s former attorney, and it alleged that the insured “had secretly agreed to pay [the underlying plaintiff] a large portion, i.e., $250,000.00, of any monies received by [the insured] from its bad faith action….”

The court found that if these two defenses could be proven, they would be valid defenses, and that the facts the insurer alleged were “sufficient for it to take discovery into the areas of [the insured’s] alleged voluntary payment made without the consent of [the insurer] and [the insured’s] bad faith.” Thus the court permitted the deposition of counsel who formerly represented the underlying plaintiff “who negotiated the challenged settlement”. The court further allowed the deposition of the insured’s corporate counsel.  The court did limit the depositions of the two partners, to the extent that if the insurer believed it still needed their depositions after these other depositions occurred, it could apply to the court for such relief.

  1. Deposition of Insurer’s Attorney/Discovery Disputes not Bad Faith

The insured sought the deposition of one of the insurer’s attorneys, concerning her decisions in relation to disclosing litigation and claims files. The insurer had been put on notice of the bad faith claim prior to this attorney’s involvement, and the insurer’s attorney referred the matter to other counsel to evaluate disclosure of the files in light of the bad faith claim, to consider the propriety of their production.  The court stated that such conduct was reasonable.

The insured further claimed that there was bad faith obstruction in producing these files.  However, the insured had eventually obtained the underlying defense litigation files, and had later obtained the claims file with certain redactions for privileged materials. The court denied the motion to compel the deposition of the same attorney on this issue, again observing this all occurred after the bad faith claim had been threatened.

Further, to the extent this was a discovery dispute, the court stated that “Pennsylvania courts have made it clear that an insured may not recover under Pennsylvania’s bad faith statute ‘for discovery abuses by an insurer or its lawyer in defending a claim predicated on its alleged prior bad faith handling of an insurance claim.’” The insured’s “only claim alleged of post settlement bad faith conduct is [the insurer’s] refusal to turn over its claim file after it was notified it may be sued for bad faith. This is the nature of a discovery violation, which does not constitute bad faith under Pennsylvania law.”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)

MARCH 2015 BAD FAITH CASES – DIETZ & WATSON PART I: STATUTORY MEDIATION PRIVILEGE APPLIES TO MEDIATIONS IN UNDERLYING TORT ACTION WHERE DISCOVERY IS SOUGHT FOR SUBSEQUENT BAD FAITH CASE; MEDIATION PRIVILEGE APPLIES TO NON-LAWYER INSURER REPRESENTATIVES; AND COURT INSTRUCTS INSURER TO PROVIDE A MORE DETAILED PRIVILEGE LOG FOR DOCUMENTS OUTSIDE THE MEDIATION PRIVILEGE WHERE THE INSURER SEEKS TO ASSERT THE ATTORNEY CLIENT PRIVILEGE OR WORK PRODUCT DOCTRINE (Philadelphia Federal)

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In Dietz & Watson v. Liberty Mutual Insurance Company, Magistrate Judge Rueter addressed numerous discovery issues in the context of third party insurance bad faith litigation.  The insurer asserted that documents the insured sought were protected by the mediation privilege and/or the attorney-client privilege or work product doctrine.  Further, the insurer had objected to producing one of its attorneys for deposition in connection with producing its litigation and claims files and sought to depose the insured’s attorneys relating to the defense of the Underlying Action  (which are discussed in a separate blog entry).

The basic factual background involved a third party personal injury claim against the insured.  The insurer had provided a defense under a reservation of rights, reserving the right to disclaim coverage for punitive damages. The case settled for $2.5 Million with the insurer paying $1,750,000 and the insured paying $750,000. In addition, at the time of settlement, the third party’s counsel and the insured’s counsel reached an agreement that the third party’s counsel would represent the insured in a bad faith claim against the insurer; and that the injured third party would receive the first $250,000 of any recovery in that bad faith action.  In addition, at that time, the injured third party withdrew his punitive damages claim against the insured.

During the underlying case, the insurer had assigned defense counsel, and the insured’s corporate counsel had also entered an appearance for the insured in that action.

The primary basis of the bad faith claim was the insurer’s alleged failure to engage in good faith settlement negotiations, by refusing to pay more than $1,750,000, and thus forcing the insured to pay the additional funds out of its own pocket to achieve the settlement.  The insured also asserted bad faith on the alleged basis that the insurer obstructed the insured from investigating and pursuing the bad faith claim, after the settlement had occurred.

  1. The Mediation Privilege

The parties agreed that Pennsylvania statutory law on the mediation privilege governed, 42 Pa.C.S. § 5949.  The party asserting the privilege has the burden of establishing its application. In this matter, there had been 5 mediation sessions, with 5 different mediators.  All but one session was covered by the privilege because those sessions “involved ‘[t]he deliberate and knowing use of a third person by disputing parties to help them reach a resolution of their dispute.’”  It did not apply to the other mediation because the insurer did not participate in that session, which only involved the injured third party’s claim against the insured’s co-defendant.

The court rejected the proposition “that the mediation privilege does not apply in a bad faith action alleging an insurer’s failure to engage in good faith settlement negotiations,” and would not allow discovery of the insurer’s “correspondence and claim notes reflecting communications made” during the mediation.

The court stated that the “mediation privilege extends not only to mediation communications of parties, but also to communications ‘by, between or among’ representatives of insurance companies present at the mediation.” The court observed applying the privilege “to participating insurance companies’ representatives is essential to the success of the mediation sessions [because,] [f]requently, adjustors or representatives of insurance companies attend mediation sessions. Indeed, many mediators require their presence, either in person or by telephone.”  Thus, “[f]or mediation sessions to be fruitful, insurance adjustors and representatives must be free to discuss candidly any offers and proposals without fear that such communications may be used against them in future litigation.”

The court specifically rejected the notion that the language of the mediation statute should not apply to mediation over the underlying claim when those communications are being used to support a later bad faith case. The court rejected this argument as both outside the statute’s plain language, and contrary to the public policy behind the mediation privilege.

Lastly, the court noted that the privilege “is limited to communications ‘by, between or among’ the mediator, parties and participants made during the mediation session, or communications made to the mediator or from the mediator outside a session,” and that “’discussions among parties outside the presence of the mediator and not occurring at a mediation proceeding are not privileged.” Thus, “[w]here the mediator has no direct involvement in the discussions and where the discussions were not designated by the parties to be a part of an ongoing mediation process, the rationale underlying the mediation privilege (i.e., that confidentiality will make the mediation more effective) is not implicated.’”

  1. Attorney-Client Privilege/Work Product

First, under Pennsylvania law, appointed defense counsel is the insured’s attorney, and may be, but is not always, the insurer’s attorney. Thus, when appointed counsel communicated with the insurer on the insured’s defense, the insurer could not assert the attorney-client privilege as against the insured. However, the insurer in this case was seeking to protect communications from in-house counsel to the insurer’s employees regarding issues of coverage, issuing a reservation of rights letter, and bad faith, in connection with the underlying action.  The court appeared to recognize this distinction in its evaluation.

The court then re-stated the federal work product doctrine in this context: (i) ordinarily a party “’may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).’”; (ii) “[a] document is prepared in anticipation of litigation when ‘in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.’”; (iii) “It has generally been held that the work product doctrine applies to insurance companies confronted with a bad faith claim brought by an insured.”; (iv) “A ‘mere claim of bad faith is not enough to shatter the work-product privilege.’”; and (v) “Courts recognize that ‘[a]t some point in its investigation, . . . an insurance company’s activity shifts from mere claims evaluation to an anticipation of litigation.’”

The court then applied the potential application of these two privileges to documents that were outside the mediation privilege.  The insurer was instructed to “review its privilege log .… and [i]f necessary, [the insurer] shall make a further production and/or amend its privilege log.”  Further, “[t]o the  extent, [the insurer] asserts the attorney-client privilege, or the work product doctrine to exclude production of documents created prior to the settlement of the Underlying Action … [the insurer] shall produce those documents to this court for in camera review ….”

Date of Decision:  January 28, 2015

Dietz & Watson v. Liberty Mut. Ins. Co., No. 14-4082, 2015 U.S. Dist. LEXIS 9815 (E.D. Pa. January 28, 2015) (Rueter, U.S.M.J.)