AUGUST 2015 BAD FAITH CASES: (1) INTERPRETING SEMANTIC DIFFERENCES BETWEEN INSURER’S STATED BASIS FOR DENIAL COMPARED TO POLICY LANGUAGE LEFT TO JURY; (2) POST-LOST FRAUD CLAIM AS BASIS FOR RESCISSION ALSO LEFT TO JURY (Middle District)

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In Rizk v. State Farm Fire & Casualty, the homeowner was out of town for a few months, and left a friend to set the thermostat so his pipes would not freeze.  Bathroom pipes did freeze, resulting in flooding.  The insured made a claim and the insurer “would not commit to coverage until it determined whether heat had been maintained in the home.”  “Pursuant to the terms of the policy, unless the insured ‘used reasonable care to … maintain heat in the building … [the carrier] would not insure for any loss in an unoccupied structure that resulted from frozen plumbing.”

The insurer’s investigator spoke with the furnace repairman and learned that the furnace had malfunctioned, though the thermostat was set in the mid-50s. The investigator took the position that there was a lack of heat in the home because of an improper thermostat setting, which caused the furnace to malfunction and the pipes to burst.  In denying coverage, the carrier stated that “reasonable heat” had not been maintained.

The insured brought a bad faith claim and the insurer sought summary judgment. The insured claimed that the carrier was using the wrong standard to deny coverage, i.e., that there was reasonable heat in the home, rather than whether the insured used reasonable care to maintain the heat.  The insurer argued this misrepresented the policy terms and showed inadequate investigation. The insurer argued that the phrases were actually the same; but the court refused to reach that conclusion itself for summary judgment purposes, and left the issue to the jury.

The court addressed the insurer’s claim that the homeowner made fraudulent property loss claims, and the contract should be voided. The policy provided that: “This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance, whether before or after a loss.” The court stated that “to void an insurance contract for misrepresentation, the insurer must establish that (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 observed that in the post-loss investigation context, materiality requires that “the false statement must concern a subject relevant to the insurer’s investigation.”

The court denied summary judgment to the insurer, finding issues of fact on the legitimacy of the property loss claimed, and on an issue of policy interpretation as to whether a certain type of property loss was covered.  Further, the court noted favorably the insured’s position that since the coverage denial was based upon a lack of heat, representations about personal property losses were irrelevant to the investigation.

Date of Decision:  August 18, 2015

Rizk v. State Farm Fire & Cas. Co., CIVIL NO. 1:14-CV-0619, 2015 U.S. Dist. LEXIS 108988 (M.D. Pa. August 18, 2015) (Caldwell, J.)

 

AUGUST 2015 BAD FAITH CASES: POLICY RESCISSION NOT A BASIS TO AVOID PAYMENT TO INNOCENT THIRD PARTY UNDER AUTOMOBILE INSURANCE LAW WHERE INSURED SELECTS MINIMUM BODILY INJURY COVERAGE (New Jersey Supreme Court)

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In Citizens United Reciprocal Exchange v. Perez, New Jersey’s Supreme Court found that even where an insurer could void an auto policy for fraud, if the insured had selected the $10,000 minimum coverage for bodily injury, an innocent third party could still recover that sum from the insurer.

Under New Jersey law, “a material factual misrepresentation made in an application for insurance may justify rescission if the insurer relied upon it to determine whether or not to issue the policy.” “The right rule of law . . . is one that provides insureds with an incentive to tell the truth. It would dilute that incentive to allow an insured to gamble that a lie will turn out to be unimportant.”

In that case, the insurer’s application required listing all household residents of driving age. The insured failed to list a resident who later caused an auto accident.  The court was clear that had the insured identified this person as a household member of driving age, the insurer would not have issued the policy due to his poor driving record.

Still, the court did not hesitate in finding that under New Jersey’s statutory scheme governing automobile insurance and the public policy behind those statutes, the insurer could still be liable to innocent third parties.  It did limit that liability to the amount of coverage selected by the insured (the $10,000 minimum here), and further stated that it “would likewise be improper to hold the insurance carrier liable for an amount in excess of that for which it had previously contracted….”

Thus, the court held that “where an insured elects to add the basic policy’s optional $10,000 coverage for third-party bodily injury in their original contract, the insurer shall be liable to innocent third parties for the contracted $10,000 amount as the minimal amount available under our compulsory system of automobile insurance coverage, even when that basic policy is later voided. ….  [However, we] further hold that when an insured elects not to add the basic policy’s optional $10,000 coverage in their original contract, the insurer shall not be held liable to any injured, innocent third-party claimants under that contract.”

Date of Decision:  August 13, 2015

Citizens United Reciprocal Exchange v. Perez, A-67 September Term 2013, 073384, 2015 N.J. LEXIS 871 (N.J. Aug. 13, 2015)

AUGUST 2015 BAD FAITH CASES: ON DISCOVERY MOTIONS, COURT: (1) QUASHES DEPOSITION OF FORMER CEO; (2) QUASHES DISCOVERY OF OTHER CASES; (3) ALLOWS DISCOVERY OF SI UNIT/LOW IMPACT UNIT RELATING TO SPECIFIC CASE AT HAND; (4) ALLOWS DISCOVERY OF RESERVES (Middle District)

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Morris v. USAA Casualty Insurance Company involved discovery disputes in a UIM breach of contract and bad faith case.  The court denied a motion to quash the deposition of the insurer’s designated representative on the basis that the deposition notice was vague and overbroad; but did quash the deposition of the insurer’s former president and CEO.

The court (1) granted a motion to limit discovery of information from other cases; (2) denied a motion to quash “with respect to information regarding the SI Unit or Low Impact Unit as it relates to this case”; and (3) denied a motion for protective order on reserve information. The court noted the split in authority on discovery of reserves, but agreed with the line of cases, including cases from the Middle District, ruling in favor of discovery.

Date of Decision:  August 18, 2015

Morris v. USAA Cas. Ins. Co., CIVIL ACTION NO. 3:12-CV-1664, 2015 U.S. Dist. LEXIS 108966 (M.D. Pa. August 18, 2015) (Kosik, J.)

AUGUST 2015 BAD FAITH CASE: DENIAL OF COVERAGE FAIRLY DEBATABLE WHERE RECORD NOT CLEAR IF THE LOSS OCCURRED IN THE POLICY PERIOD OR AS TO WHAT CAUSED THE LOSS (New Jersey Federal)

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In JPC Merger v. Alterra American Insurance Company, the insured was in the precast concrete business, and alleged that a number of its large metal rigging chains and steel plates went missing.  The insured made a claim, and the insurer took the position that either the loss occurred outside the policy period, or that it fell within a “missing property” exclusion, and denied the claim.  The insured brought a claim for breach of the implied covenant of good faith and fair dealing, among other claims. The insurer sought summary judgment on the bad faith claim.

The standard for first party bad faith claims in New Jersey is that the insured must show that the insurer lacked a “fairly debatable” reason to deny the claim, and that it knew or recklessly disregarded that fact. In practice, the insured must show that it could win the “fairly debatable” argument on summary judgment to pursue the claim. In addition, “[b]ad faith or ill motive is an essential element of a claim for breach of the implied covenant of good faith and fair dealing.”

The insured attempted to argue that the motion was premature because the parties had not completed discovery.  The court ruled for the insurer because (1) whether the loss occurred in the policy period was fairly debatable; and (2) the issue of whether the missing property exclusion applied was fairly debatable.  The insured’s evidence showed that “the loss may have occurred either prior to the Policy period, or during a limited window within the Policy period.” Second, while the insured did offer a plausible explanation for what caused the loss, “at the time the claim was investigated, there was no ‘physical evidence’ to ‘to show what happened’ to the property, as required by the Policy.”  Therefore, the insurer had a reasonable basis to deny the claim and was successful on summary judgment as to the bad faith claim.

Date of Decision:  August 13, 2015

JPC Merger v. Alterra American Insurance Company, Case No. 14-4909 (FLW) (LHG), 2015 U.S. Dist. LEXIS 106531 (D.N.J. August 13, 2015) (Wolfson, J.)

AUGUST 2015 BAD FAITH CASES: DELAY IN PAYMENT OF CLAIM IS NOT A PER SE BASIS TO FIND BAD FAITH; INSURER HAS A RIGHT TO INVESTIGATE CLAIMS (Philadelphia Federal)

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In Great Lakes Reinsurance v. Stephens Gardens, the court addressed allegations of delayed payment, and specific denials of coverage, in granting the insurer’s motion for partial summary judgment.

The insured was in the business of selling aquatic flora and fauna, as well as aquatic designs.  There was a fire that destroyed certain real and personal property, and killed some of the insured’s fish. The insured also sought coverage for salaries paid because the policy covered ordinary payroll expenses for 60 days following the date of direct physical loss or damage, (unless a greater number of days is shown in the Declarations).

One aspect of the bad faith claim was for delay in payment of covered claims. The court stated that:  “An insurer’s delay in settling a claim ‘does not, on its own, necessarily constitute bad faith.’” Courts instead will review “the degree to which a defendant insurer knew that [it] had no reason to deny the [claim].” Thus, a “delay attributable to the uncertainty of the claim’s value or the insurer’s need to investigate further does not constitute bad faith.”

In this case, the insurer’s “delay stemmed from a dispute over the claimed damages and [its] need to investigate further, which does not evidence bad faith.”  There was a dramatic difference in damage estimates for the claimed loss, over $500,000,  andthe companies needed to ‘sort out an agreed scope and estimate’ before [the adjustor] would recommend payment to [the insurer].”Further, the adjustor “stated that she would not recommend payment for property damage until [the insurer] was able to ascertain whether there were liens on the property.”  Thus, the court found there was no evidence showing that the delay arose “from anything other than [the insurer’s] need to investigate further.”

In ruling on the bad faith counts for the insurer’s refusal to cover certain losses, the court focused on the reasonableness of the insurer’s various denials of coverage. It found in each instance of dispute that the insurer’s position was reasonable.  Under the well-established case law, if the insurer’s denial is reasonable, there can be no actionable bad faith.

Specifically, the court found that certain of the fish were not “stock”, which was the only type of fish that could have been covered; that the demands to cover salaries were for wages beyond the 60 day policy period; the insurer’s position rejecting the principal’s claim for his entire salary for a 10 month period as attributable to debris removal was reasonable; the insured did not meet its burden to show claims for shirts it purchased for its sales staff and for accounting fees in connection with the filing of sales tax returns were even covered by the policy; the insured did not provide the insurer with sufficient documentation on a plant loss claim; ambiguous testimony resulted in the court finding that a claimed loss for a shed had in fact been paid; that certain rocks remained salable after the fire; and there was no documentation to support the insured’s claim for loss of computer hardware.

Date of Decision: August 3, 2015

Great Lakes Reinsurance (UK) PLC v. Stephens Garden Creations, CIVIL ACTION NO. 14-539, 2015 U.S. Dist. LEXIS 100827 (E.D. Pa. August 3, 2015) (Dubois, J.)

AUGUST 2015 BAD FAITH CASES: COURT FINDS THAT SUBSTANTIVE LAWS OF NEW YORK APPLY BASED ON CHOICE OF FORUM CLAUSE IN POLICY, EVEN THOUGH NEW YORK, UNLIKE PENNSYLVANIA (1) DOES NOT RECOGNIZE ACTION FOR BAD FAITH DENIAL OF INSURANCE CLAIMS AND (2) DOES NOT REQUIRE INSURED HAVE SCIENTIR FOR INSURER TO SEEK RESCISSION (Western District)

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In H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., the insured and the insurer sought a declaration from the Court as to the insurer’s obligations under a policy issued to the insured, and the insurer moved for the policy to be rescinded. The issue before the Court was whether the substantive laws of Pennsylvania or New York applied, and the Court found that New York law governed the case.

The underlying action is an insurance coverage dispute between the insurer, which has a principal place of business in Pittsburgh, and the insured, which is incorporated in Texas, with a principal place of business in New York.  The insurance policy at issue contained a “Choice of Law and Forum” provision, which states that the policy would be governed by the laws of New York. The policy also contained a Service of Suit Endorsement, which provides that in the event of the insurer’s failure to pay the amount claimed to be due under the policy, the insurer would consent to the jurisdiction of any Court chosen by the insured. The language of the endorsement also set forth that any dispute in the chosen forum would be conducted “in accordance with the law and practice of such Court.” The parties disagreed as to the interpretation of the policy and disputed the effect of the endorsement upon the Choice of Law clause.

The Court first determined whether the Service of Suit Endorsement superseded or modified the Choice of Law Clause. After an analysis under Pennsylvania’s choice of law provisions, the Court determined that the parties intended to have the substantive laws of New York apply to any legal dispute that arose with regards to the policy.

The Court pointed out a conflict in the substantive laws of Pennsylvania and New York relating to rescission and bad faith. In Pennsylvania, the standard for rescission is more stringent because it “imposes a burden on a party to demonstrate that the insured knew the representation at issue was false when it was made or the insured made the representation in bad faith.” The Court noted that New York does not have a similar scientir requirement for rescission.

The Court next acknowledged the conflict between the laws of Pennsylvania and New York particularly with regards to bad faith, in that “Pennsylvania permits a party to recover punitive damages, attorneys’ fees, and interest from an insurer if a claim is denied in bad faith, while New York does not recognize a cause of action for bad faith denial of insurance claims.” The Court noted that the competing interests between the two states are “Pennsylvania’s interest in protecting insureds and allowing them recovery of monetary funds in cases of bad faith and New York’s interest in preventing recovery from insurers, which inevitably encourages business in New York, amongst other considerations.” Because Pennsylvania did not have a “materially greater” interest in the litigation, the Court determined that the Choice of Law provision in the policy should not be disturbed, and the substantive laws of New York should govern.

Date of Decision: July 31, 2015

H.J. Heinz Co. v. Starr Surplus Lines Ins. Co., CIVIL ACTION NO. 15-cv-00631, 2015 U.S. Dist. LEXIS 100580 (W.D. Pa. July 31, 2015) (Schwab, J.)

AUGUST 2015 BAD FAITH CASES: BAD FAITH ACTION REMANDED WHERE RELIEF SOUGHT WAS LESS THAN $75,000 AND PLAINTIFF STIPULATED TO LIMITING DAMAGES (Philadelphia Federal)

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In Jacobs v. Globe Life & Accident Insurance Company, the insured brought breach of contract and bad faith claims in the Court of Common Pleas of Philadelphia.  Defendant insurer removed the case and the insured moved to remand.

The relevant complaint demanded judgment “in an amount in excess of $50,000.00, but not in excess of $75,000.00.” The insurer did not even attempt to argue that the “actual monetary demands in the aggregate exceed $75,000.” Moreover, the insurer asserted that “given Plaintiff’s stipulation limiting damages in this case, [it] does not oppose the remand of this case back to state court.” The court ruled that: “In light of this concession, the Court must find that the amount in controversy does not meet the statutory threshold, diversity jurisdiction does not exist, and remand to state court is warranted.”

The insurer attempted to argue that the remand should not be to Philadelphia County, because neither party, nor the claim, had any connection to Philadelphia.  However, the court ruled that this was a matter to be brought up in the Court of Common Pleas on remand.

Date of Decision: August 11, 2015

Jacobs v. Globe Life & Accident Ins. Co., CIVIL ACTION NO. 15-3590, 2015 U.S. Dist. LEXIS 105725 (E.D. Pa. August 11, 2015) (Buckwalter, J.)

AUGUST 2015 BAD FAITH CASES: COURT (1) DENIES INSURER’S MOTION FOR RECONSIDERATION ON CONTRACTUAL AND STATUTORY BAD FAITH ISSUES; AND (2) DENIES MOTION FOR CERTIFICATION OF INTERLOCUTORY APPEAL ON NEGLIGENCE STANDARD IN CONTRACTUAL BAD FAITH CASES (Western District)

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In McMahon v. Medical Protective Company, as discussed at length in our prior blog posting the Court previously had held that that under Pennsylvania law, a contractually based bad faith claim may be supported by evidence that an insurer made a misrepresentation to the insured or failed to communicate with the insured, if the misrepresentation or failure to communicate caused the insured to make a personal contribution to a settlement within policy limits. Upon close analysis, the court found it was a close call with respect to the disclosure issue. It concluded, however, that a factual dispute existed as to whether the insurer acted in bad faith by not revealing to the insured the full settlement authority, even after the insured offered to contribute her own money, and denied summary judgment on the contractual bad faith claim.  As to statutory bad faith, the court allowed the claim to go forward because a jury could find the insurer’s conduct reckless, under Terletsky, “based on the details of the negotiations and the settlement numbers discussed between the insurer’s representatives with the insured and her personal counsel.”

This instant decision involved the insurer’s motion for reconsideration and request for an interlocutory appeal on the refusal to dismiss all bad faith claims. The Court did dismiss the breach of contract claim. The insurer asserted that the Court clearly erred by “overlooking” parts of the insured’s testimony and failing to apply the Terletsky standard to contractual insurance bad faith claims.

The deposition argument was based upon a putative lack of reliance.  The insurer argued that the insured’s deposition testimony showed the insured was not aware that the insurer’s employee told the insured’s counsel that the insurer would not offer more than $1.3 million, and thus the insured could not have relied on this alleged misrepresentation. The Court considered the testimony, and reasoned that the testimony did not support the definite and firm opinion that the Court had made a mistake. Viewed in the light most favorable to the insured, the statement made by the insurer’s employee that the insurer would not offer more than $1.3 million was untrue, “but it was likely not material from the standpoint of a fraudulent misrepresentation because [the insurer] later offered $1.5 million.” However, the conversation between the insurer’s employee and the insurer’s attorney was relevant because “the jury could infer from it and [the insurer’s employee’s] true statement that $1.5 million was the limit of his authority that ‘[the insured] was misled into believing that $1.5 million was the absolute limit of what [the insurer] was willing to offer.’”

The insurer correctly pointed out that a person “cannot rely upon what [she] does not know or be misled by something of which [she] is not informed.” However, the Court found that the insured’s attorney was informed and did rely on the statement made by the insurer’s employee, at least until the insurer raised its offer. Thus, this untrue statement informed the advice given to the insured by her attorney and may be considered by the jury as evidence of bad faith; and the insured’s testimony did not demonstrate a clear error by the Court that would serve as a basis for reconsideration of summary judgment.

The insurer next argued that the Court committed clear error by failing to apply the Terletsky recklessness standard to the contractual bad faith claim, which the Court had carefully reviewed in its original decision, concluding that the lower standard of proving liability set forth in DeWalt v. Ohio Casualty Insurance Co., 513 F.Supp. 2d 287 (E.D. Pa. 2007), applied to the insured’s contractual bad faith claim, as discussed in this Blog.

The insurer argued that it was error to apply DeWalt because DeWalt involved “excess verdicts resulting from an insurer’s failure to settle a case and there was no excess verdict in this case.” However, in the Third Circuit’s most recent Wolfe decision, the appellate court stated that it knew of no decision in which an excess verdict was necessary in order to bring a contractual bad faith claim, and in fact cited the summary judgment decision in the earlier McMahon opinion “as an example of a decision predicting that an excess verdict is not required for a third party bad faith claim under Pennsylvania common law.”

The Court acknowledged that other Pennsylvania courts have repeatedly held that “an insurer’s unreasonable refusal to settle a claim can subject an insurer to bad faith liability,” and reasoned that it carefully considered its prediction that the DeWalt standard applied to the contractual bad faith claim here. Thus, the Court found that its decision was not clearly erroneous and denied the insurer’s motion for reconsideration on this issue as well.

Finally, the insurer made an argument for certification of an order for interlocutory appeal, and cited three issues that it claimed satisfied the requirements: “(1) whether denial of summary judgment was appropriate in light of [the insured’s] testimony that allegedly conflicts with [the insured’s attorney’s] testimony about what [the insurer’s employee] told him; (2) whether denial of summary judgment was appropriate given [the insurer’s] alleged reasonable basis for not disclosing to [the insured] its settlement strategy, its urging [the insured] not to make a personal contribution, and other factual reasons; and (3) whether the application of a negligence standard to the contractual bad faith claim was appropriate.”

The Court reasoned that the first two issues were not appropriate for interlocutory appeal because they did not involve a controlling question of law. However, the Court acknowledged that “[w]hether a negligence standard applies to the contractual bad faith claim is a controlling question of law.” Nevertheless, the Court reasoned that an immediate appeal of this issue would not “materially advance the ultimate termination of the litigation” and would likely increase unnecessary costs and waste judicial resources. Thus, a trial would still be necessary to resolve the statutory bad faith claim even if the negligence standard was erroneous. The Court found that discovery had been completed and it would be most efficient to proceed to trial without an interlocutory appeal. Consequently, the insurer “did not meet its burden of showing that certification of the summary judgment order for interlocutory appeal is an appropriate exceptional circumstance.”

Date of Decision: August 3, 2015

McMahon v. Medical Protective Co., No. 2:13-cv-00991, 2015 U.S. Dist. LEXIS 101179 (W.D. Pa. August 3, 2015) (Conti, J.)

AUGUST 2015 BAD FAITH CASES: THIRD CIRCUIT UPHOLDS APPLICATION OF TWO YEAR STATUTE OF LIMITATIONS RUNNING FROM TIME OF DENIAL OF BENEFITS TO BAR BAD FAITH CLAIM (Third Circuit)

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In Leporace v. New York Life & Annuity, the Third Circuit upheld the District Court’s opinion that the two year bad faith statute of limitations had run from the time of benefits being denied; and affirmed dismissal of that claim.  It further affirmed the applicability of the four year contractual statute of limitations in this disability case, distinguishing its prior opinion in Hofkin v. Provident Life & Accident Insurance Co., 81 F.3d 365 (3d Cir. 1996), as the District Court had done.

Date of Decision: August 10, 2015

Leporace v. New York Life & Annuity, No. 14-3821, 2015 U.S. App. LEXIS 13970 (3d Cir.  August 10, 2015) (Smith, Greenaway, Shwartz, JJ.)

AUGUST 2015 BAD FAITH CASES: IN FIRST PARTY ACTION, UNDER NEW JERSEY LAW, ATTORNEY’S FEES ONLY RECOVERABLE FOR BAD FAITH, NOT FOR SIMPLE BREACH OF CONTRACT (New Jersey Federal)

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In 213-15 76th Street Condominium Association v. Scottsdale Insurance Company, the insured sought attorney’s fees for a first party claim against its insurer.  Attorneys’ fees are only permitted in such circumstances, if the insured pleads a claim for bad faith.  However, where the claim is only for breach of the insurance contract, attorney’s fee awards are prohibited.  In this case, the plaintiff did not set out a bad faith claim, but at most asserted that future discovery may elucidate such a claim exists.  Thus, there was no basis for attorney’s fees, though the court dismissed the attorney’s fee claim without prejudice.

Date of Decision:  July 31, 2015

213-15 76th St. Condo Ass’n v. Scottsdale Ins. Co., Civil No. 14-7695 (NLH/JS),  2015 U.S. Dist. LEXIS 100212 (D.N.J. July 31, 2015) (Hillman, J.)