JULY 2014 BAD FAITH CASES: APPELLATE DIVISION UPHOLDS TRIAL COURT DECISION NOT TO AWARD ATTORNEYS FEES UNDER RULE 4:42-9(a)(6) FROM ONE INSURER TO ANOTHER IN DECLARATORY JUDGMENT ACTION, PARTICULARLY WHERE LOSING INSURER’S ARGUMENT WAS MADE IN GOOD FAITH (New Jersey Appellate Division)

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In Strunk v. M&A Trucking, the court refused to award attorney’s fees under Rule 4:42-9(a)(6) in a declaratory judgment action between two insurers arguing coverage issues, where one insurer had defended and indemnified the insured in the underlying action; particularly where the trial court determined the issues were worthy of consideration.

Date of Decision: June 19, 2014

Strunk v. M&A Trucking & Edson L. Silva, DOCKET NO. A-2344-12T4 A-3195-12T4 , SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 1460 (App. Div. June 19, 2014) (Alvarez, Ostrer and Carroll, JJ.)

JULY 2014 BAD FAITH CASES: COURT FINDS THAT VIOLATION OF UIPA CAN NOT BE BASIS FOR BAD FAITH CLAIM; AND FINDS THAT INSURED COULD NOT MEET CLEAR AND CONVINCING EVIDENCE STANDARD ON REASONABLENESS PRONG OF BAD FAITH TEST (Western District)

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In United States Fire Insurance Company v. Kelman Bottles, LLC, property damage occurred for the insured from an event concerning an industrial glass making furnace. The insured’s all risk carrier brought a declaratory judgment action against the insured. The insured also had a Boiler and Machinery insurance policy, and it joined that carrier by way of third party complaint, raising breach of contract and bad faith claims.

There was preliminary contact between the Boiler and Machinery insurer and the insured, prior to a formal written denial of coverage. There was also an inspection and a report from an expert for the insurer, on which the insurer ultimately based its denial of coverage, concerning the cause of the incident. The insurer argued that the cause did not fall within the policy definition of covered occurrences. The insured asserted that the insurer’s stated reasons set forth in its declination letter were at a minimum unclear, and at worst, were intentionally vague in violation of Pennsylvania insurance law; and that within a month of the breakdown, the insurer’s adjuster, retained engineering expert, risk control specialist, and a subrogation specialist all concluded that the “breakdown” was “sudden and accidental”, which was a term of art which should have triggered coverage, not a denial of coverage. The insurer moved for summary judgment.

The court first rejected the insured’s argument that the allegedly unclear letter violated Pennsylvania’s Unfair Claims Practices Act or Unfair Insurance Practices Act (“UIPA”), stating that there is no private right of action under the UIPA, and thus this claim failed as a matter of law.  (This decision adds to the split in federal district courts about whether the UIPA can be used to argue a statutory bad faith claim in Pennsylvania.) The court then analyzed the letter, and concluded it could not provide the insured with clear and convincing evidence that the carrier was either intentionally vague or unclear as to its reasons for a denial, and found no genuine issue of material fact suggesting that this letter was intentionally vague or unclear.

The court also concluded that the carrier’s position that the event was not sudden accidental was reasonable.  The carrier’s own adjuster included in his notes that the expert said the event was sudden and accidental, which was not the expert’s conclusion or analysis in his report. Thus, the court granted summary judgment, even though the contradictions existed within the insurer’s own records. The court explained that while it was technically correct that the claim note contradicted the carrier’s position, the putative contradiction was “of no moment” because the claim note was the adjuster’s interpretation/characterization of what the expert told him orally during a telephone conversation, the expert’s testimony that he would not have used the terms “sudden and accidental” during that  conversation with the adjuster, and the statements and conclusions set forth in the expert’s written report clearly contradict a “sudden and accidental” finding. Thus, the court concluded that the singular claim note did not provide clear and convincing evidence that the insurer engaged in bad faith.

The insured also asserted bad faith in the claims handling process, which argument ultimately was not based on UIPA violations. Rather, it asserted that the adjuster misrepresented the policy language; that letters from the carrier suggested it was investigating the claim when it was not; and that the carrier refused to provide any further explanation and factual support for its denial of coverage.

On the first point, the court found there was no evidence that the statement at issue was anything more than a simple mistake, and there was no evidence offered of ill will or intent, and therefore the insured could not meet its burden of showing bad faith on this point.

Next, as to the letters, the court found no bad faith.The insurer’s prior oral notification that a denial of coverage was imminent, but delay in issuing its written denial of coverage while monitoring the investigation of another insurance company, did not constitute bad faith.  The court found that the insured did not offer evidence as to how the delay between the oral and written denials illustrated breach of the duty of good faith and fair dealing through a motive of self-interest or ill will. Finally, the court ruled that the alleged refusal to supply additional information following the issuance of the denial letter was not bad faith. The court found that the carrier did not ignore the request for additional information. Rather, it directed the insured back to its denial letter for the answers. Furthermore, there was no evidence of a dishonest purpose in the alleged refusal to provide additional information outside of what was contained in the denial letter. Rather, the court viewed this aspect of the dispute as a disagreement on coverage, which was to be resolved via the breach of contract claim.

A motion for reconsideration, heard by Judge Fischer of the Third Circuit sitting as a trial judge by designation, was denied.  The Third Circuit has previously addressed a coverage issue in the case, but the court found that this ruling was not applicable in analyzing the bad faith claim.

Date of Original Decision: May 23, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 71220 (W. D. Pa. May 23, 2014) (Schwab, J.)

Date of Decision on Reconsideration: June 27, 2014

United States Fire Ins. Co. v. Kelman Bottles LLC, 11cv0891, 2014 U.S. Dist. LEXIS 88256 (W.D. Pa. June 27, 2014) (Fisher, J.)

JULY 2014 BAD FAITH CASES: NO SEPARATE TORT CAUSE OF ACTION FOR BREACH OF DUTY OF GOOD FAITH; STATUTORY BAD FAITH CLAIM PLEADED MERE POSSIBILITY OF BAD FAITH, NOT A PLAUSIBLE BAD FAITH CLAIM, AND WAS DISMISSED WITH LEAVE TO AMEND (Western District)

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In Plummer v. State Firm Fire & Casualty Insurance Company, the insureds made a first party damage claim, involving storm damage to its roof. The insureds claimed that the insurer failed to pay anything toward the roof damage, while paying a claim for roof damage to their neighbor for damage to the neighbor’s roof from the same storm. There was a finding in arbitration in state court, solely on a breach of contract claim, that the carrier owed damage payments for the roof to the insureds.

After a somewhat complicated procedural history, the case was removed to federal court, and included breach of contract, breach of the duty of good faith and fair dealing, and statutory bad faith claims. As to the breach of the duty of good faith and fair dealing claim, the court treated this as a distinct tort claim and dismissed it under the gist of the action doctrine. Any such claim was subsumed in the breach of contract claim, and would have to be pursued as a breach of contract.

As to the statutory bad faith claim, the insureds/plaintiffs attached numerous documents to their response to the carrier’s motion to dismiss that claim. The court observed that it could not consider these documents to the extent they were outside the complaint. It found that although the insured listed 14 different kinds of bad faith in the complaint, these were conclusory allegations that did not meet the Twombly standard. The only specifically pleaded allegations addressing bad faith were that a claim was paid on the neighbor’s roof on the same storm, but not plaintiff. The court found that it was left to speculate as to why the neighbor’s circumstances were the same as the insured/plaintiff, and thus made the bad faith claim on this basis a mere possibility, and not a plausible claim under Twombly. However, the plaintiff was given leave to file an amended complaint if they could set out a plausible bad faith claim.

Date of Decision: June 27, 2014

Plummer v. State Farm Fire & Cas. Co., Civil Action No. 2:13-cv-01579, 2014 U.S. Dist. LEXIS 87570 (W.D. Pa.  June 27, 2014) (Conti, J.)

JULY 2014 BAD FAITH CASES: CONTRACTUAL LIMITATIONS PERIOD DID NOT APPLY TO STATUTORY BAD FAITH CLAIMS; BUT CLAIM STILL DISMISSED FOR FAILING TO MEET TWOMBLY STANDARDS (Philadelphia Federal)

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In Mattia v. Allstate Insurance Company, the case involved a first party property damage claim.  The policy had a contractual one year commencement of suit period.  The court found that this contractual limitations period was permissible under Pennsylvania law, in altering the normal 4 year statute of limitations period.  However, following the trend in the case law, it further found that the contractual limitations period did not apply to claims under 42 Pa.C.S. § 8371, because this represented a distinct cause of action.  However, the bad faith claim in this case was still dismissed because it only included bare bones allegations that did not meet the Twombly pleading standards.

Date of Decision (June 24, 2014)

Mattia v. Allstate Ins. Co., CIVIL ACTION NO. 14-20992014 U.S. Dist. LEXIS 86258 (E.D.Pa. June 24, 2014) (Surrick, J.)

JULY 2014 BAD FAITH CASES: COURT FINDS THAT UIPA VIOLATIONS CAN SUPPORT STATUTORY BAD FAITH CLAIM; AND THAT INSURED PLEADED SUFFICIENT FACTS REGARDING ALLEGED UNDERVALUATION TO STATE A CLAIM FOR BAD FAITH (Middle District)

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In Militello v. Allstate Property & Casualty Insurance Company, the insured owned a horse barn that suffered damage when one of the horses struck a support.  The insured made a claim, and the carrier offered to pay approximately half the claim.  The insured asserted that the barn was otherwise in good condition, and it was the horse that caused the problem.  The insured alleged that the carrier asserted that there were a variety of structural problems independent of the horse’s actions, for which payment was not due under the policy.  The insured alleged that the carrier’s assertion concerning these independent structural issues were false representations.  The insured also asserted violations of the Unfair Insurance Practices Act (UIPA) as a basis for his claims.  The carrier moved to strike the references to the UIPA and to dismiss the bad faith claim as merely embodying a dispute over value, and that mere failure to accede to the insured’s demands cannot be bad faith.

Citing prior Middle District precedent and the Pennsylvania Superior Court, the court found that UIPA violations could form the basis of a bad faith.  Further, the court found that the complaint, on its face, involved allegations of more than a valuation dispute, and that the case involved more than a simple claim that the insurer failed to meet the insured’s demand.  “Although the amended complaint would have ideally included additional facts suggesting that Defendant’s payment on the claim was purposely less than the full amount to which Plaintiff was entitled, the complaint does allege that Defendant made multiple representations to Plaintiff for purposes of undervaluing his property claim.” Thus, the court stated that: “In light of the parties’ burdens at the motion to dismiss stage, and viewing the facts as true and granting Plaintiff all reasonable inferences, the court concludes that dismissal of Plaintiff’s bad faith claim would be premature. While discovery may provide a reasonable explanation for Defendant’s conduct, Plaintiff’s allegations raise a plausible inference of bad faith. As such, Defendant’s motion to dismiss Plaintiff’s bad faith claim will be denied.”

Date of Decision:  June 26, 2014

Militello v. Allstate Prop. & Cas. Ins. Co., Civ. No. 14-cv-00240 , 2014 U.S. Dist. LEXIS 86945, (M.D. Pa. June 26, 2014) (Rambo, J.)

JULY 2014 BAD FAITH CASES: COURT FINDS THAT FAILURE TO CURE TITLE DEFECTS COULD BE NEGLIGENCE, BUT DOES NOT ESTABLISH BAD FAITH UNDER NEW JERSEY LAW CONCERNING DELAY IN CLAIM PAYMENT (Third Circuit)

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In Granelli v. Chi. Title Ins. Co., plaintiffs brought claims for bad faith and negligence, inter alia, against defendant title insurer, alleging that the insurer failed to find and resolve several title defects which repeatedly prevented them from selling their home. Although the insurer cured all defects after the commencement of the litigation, the plaintiffs amended the complaint, alleging that the insurer’s failure to cure the defects in a timely matter amounted to bad faith. The lower court found that the insurer failed to cure the defects by filing quiet title actions due to a company-wide reorganization and a shut-down of the New York claims office. This reorganization occurred in the wake of the 2008 financial crisis while the insurer was handling a high volume of bankruptcy proceedings. Although the Court of Appeals vacated the District Court’s grant of summary judgment regarding Plaintiffs’ breach of contract and negligence claim, it affirmed summary judgment on the bad faith claims.

Addressing the plaintiffs’ bad faith claims, the Court stated that, under New Jersey law, in the case of a delay rather than an outright rejection, “[b]ad faith is established by showing that no valid reasons existed to delay processing the claim and the insurance company knew or recklessly disregarded the fact that no valid reason ssupported the delay…” Judge Vanaskie compared the instant case to others from the New Jersey Supreme Court, reasoning that a delay due to restructuring was analogous to delays caused by a company-wide computer crash. The Court held that, although the delays may be found to constitute negligence, they were not sufficient to show any bad faith by the insurer. The Third Circuit vacated the District Court’s judgment that the insurer’s actions were not negligent, but affirmed the lower court’s decision regarding bad faith.

Date of Decision: June 17, 2014

Granelli v. Chicago Title Insurance Company, 2014 U.S. App. LEXIS 11235 No. 13-1024 (3d Cir. N.J. June 17, 2014) (Vanaskie, J.)

JULY 2014 BAD FAITH CASES: MERE REFUSAL TO PAY A CLAIM CAN NOT CREATE A BAD FAITH CAUSE OF ACTION UNDER THE UTPCPL (Philadelphia Federal)

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In Post v. Liberty Mutual Group addressing Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) in the context of a claim against an insurer by its insured, the court observed that the “UTPCPL does not provide a cause of action for bad faith conduct based solely upon an insurance company’s refusal to pay a claim,” and that the “only provision of the UTPCPL that deals specifically with contractual obligations is section 201-2(4)(xiv), which prohibits ‘[f]ailing to comply with the terms of any written guarantee or warranty given to the buyer at, prior to or after a contract for the purchase of goods or services is made.’” However, under Pennsylvania law, it is only malfeasance, the improper performance of a contractual obligation, which raises a UTPCPL.  By contrast, an insurer’s mere refusal to pay a claim, which constitutes nonfeasance, is considered the failure to perform a contractual duty, and is not actionable.

Date of Decision:  June 17, 2014

Post v. Liberty Mut. Group, CIVIL ACTION NO.: 2:14-CV-238-CDJ,2014 U.S. Dist. LEXIS 83373 (E.D. Pa. June 17, 2014) (Jones, II, J.)

 

JULY 2014 BAD FAITH CASES: INSURER’S MOTION TO DISMISS HOSPITAL’S BAD FAITH BREACH OF CONTRACT CLAIM DENIED (New Jersey Federal Court)

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In Conn. Gen. Life Ins. Co. v. Roseland Ambulatory Surgery Ctr., the plaintiff/counterclaim-defendant insurer brought claims against defendant/counterclaim-plaintiff hospital for failure to require patients to pay certain out-of-pocket expenses. The insurer originally brought a claim alleging that the hospital had violated ERISA by refusing to charge the expenses to patients. The hospital counterclaimed, alleging the insurer failed to reimburse the hospital for care given to its insureds.

In its counterclaim, the hospital alleges that, through an agent, the insurer entered into an oral agreement with the hospital in which the insurer waives its right to audit the hospital in exchange for a substantially discounted rate. The insurer alleges that it later discovered that the hospital was not charging patients co-insurance in accordance with a cost-sharing plan between them. After the hospital declined to charge these costs to patients, the insurer stopped paying for patient care.

The hospital, however, contends that it was never required to initiate a cost-sharing plan, but did so under pressure from the insurer. Further, the hospital states that the insurer withheld coverage pending an audit which was allowed by the hospital in contravention to its prior discount agreement. The insurer brought suit against the hospital, alleging fraud, unjust enrichment, and ERISA violations. The hospital countersued, claiming breach of contract, breach of the implied covenant of good faith and fair dealing, and common law fraud.

In considering the insurer’s motion to dismiss the hospital’s claim of breach of the implied covenant of good faith and fair dealing, Judge Martini found that the hospital’s complaint satisfies the pleading standards set forth in F.R.C.P. 8(a). The court stated that, in New Jersey, “the implied covenant of good faith and fair dealing is inherent in every contract, and requires that neither party shall do anything which would have the effect of destroying or injuring the right of the other party to receive the full fruits of the contract . . . ” Further, a plaintiff must allege bad faith in order to prevail on a claim for breach of the covenant.

The court found that the hospital’s allegations regarding the oral agreement with the insurer’s agent, although unlikely, did state a valid claim for breach of the implied covenant if viewed in the light most favorable to the hospital. The court rejected the insurer’s arguments that the alleged oral agreement was a “re-pricing agreement” instead of a contract, and that the alleged contract was between the hospital and the agent, not the insurer. The insurer also alleged that the hospital had failed to plead bad faith; however, the Court found that allegation that the insurer agreed to pay the claims after finishing the audit but failed to do so was a sufficient to survive a motion to dismiss.

The Court denied the insurer’s motion to dismiss the breach of contract and breach of the implied covenant. The Court did grant the motion with regard to the fraud claim, but gave the hospital leave to amend.

Date of Decision: June 11, 2014

Connecticut General Life Insurance Company v. Roseland Ambulatory Surgery Ctr., 2014 U.S. Dist. LEXIS 79189, No. 2:12-05941  (D.N.J. June 11, 2014) (Martini, J.)

JULY 2014 BAD FAITH CASES: BERKS COUNTY TRIAL JUDGE AWARDS $18,000,000 IN PUNITIVE DAMAGES AND $3,000,000 IN ATTORNEY’S FEES AND COSTS (Berks County Court of Common Pleas)

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Following in temper the trial court judges’ decisions in Hollock v. Erie Insurance Exchange, 54 Pa. D.&C. 4th 449 (C.C.P. Luzerne 2002), and Corch Construction Company v. Assurance Company of America, 64 Pa. D.&C. 4th 496 (C.C.P. Luzerne 2003), a Berks County Judge has issued a decision imposing $18,000,000 in punitive damages, and $3,000,000 in attorney’s fees and costs, against an insurer for section 8371 bad faith.

In Berg v. Nationwide Mutual Insurance Company, after reversal and remand from a broad bad faith opinion in the Superior Court, Judge Sprecher’s finding of facts and discussion describe an auto damage property claim that could have been resolved for a $25,000 payment for the vehicle’s total loss.  Instead, the carrier was found to have paid $3,000,000 in legal fees to support the propriety of its decision that the car could have been repaired for half that sum. The litigation is over 15 years old, with the dispute starting earlier, and the plaintiff died of cancer prior to this judgment being entered, a fact mentioned to close the Court’s decision.

The Court found as fact numerous examples of bad faith conduct, beginning with the reversal of the appraiser’s initial position to pay the damages as a total loss, subsequent failures to disclose information about the vehicle’s repair and safety condition (including life threatening information), abusing the discovery and litigation process, failing to negotiate in good faith, violating the Unfair Insurance Practices Act, and paying a disproportionate sum in defending the case. The Court looked closely at the experts who examined the vehicle, and those who testified about claims handling practices in evaluating bad faith.  At its essence, however, was the Court’s finding that that the carrier did not go to these lengths simply to defeat Ms. Berg’s claim in this single dispute. Rather, the Court found, that the carrier’s conduct was part of an overall strategy regarding all of its insureds’ claims for $25,000 or less; a strategy expressly condemned by the Superior Court in Boneberger.

The Court found that this strategy was intended to send a message to insureds and the plaintiffs’ bar that it was not worth their while to bring suit against the carrier in cases worth $25,000 or less.  To quote the Court:

“What Defendant managed to do was send the ultimate message to Plaintiffs, their attorney, and the Plaintiffs’ bar in smaller cases of $25,000 or less. It screamed to the litigation world that it is “a defense minded carrier in the minds of the plaintiff legal community.” It fully accomplished its goal of broadcasting its litigation avoidance strategy. Simply put, what Plaintiff, and more importantly, what lawyer in his right mind, will compete with a conglomerate insurance company if the insurance company can drag the case out 18 years and is willing to spend $3 million in defense expenses to keep the policyholder from getting just compensation under the contract. Its message is 1) that it is a defense minded carrier, 2) do not mess with us if you know what is good for you, 3) you cannot run with the big dogs, 4) there is no level playing field to be had in your case, 5) you cannot afford it and what client will pay thousands of dollars to fight the battle, 6) so we can get away with anything we want to, and 7) you cannot stop us.”

In making its $18,000,000 punitive damages award, the court considered Pennsylvania’s criteria for evaluating a punitive damages claim: the character of the act; the nature and extent of the harm; and the wealth of the defendant.  The Court found that these factors mirrored the U.S. Supreme Court’s “guideposts” on punitive damages: the degree of reprehensibility of the defendant’s conduct; the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

On the issue of reprehensibility, the court was most troubled by its finding of the life and safety risks to the insured’s in continuing to drive the vehicle, and that the defendant “knew that the vehicle was returned to Plaintiffs with hidden structural repair failures or in the alternative, … [but] Defendant did not care if the frame and all other repairs it required were done properly, by [the] body shop. Both scenarios equate to acts of omission or commission in bad faith against the Plaintiffs.” The court also focused on the scorched earth litigation policy, as an institutional policy.  It found the $18,000,000 represented no financial jeopardy to the insurer, constituting only 0.2% of the $9 billion in its excess Statutory Surplus.

The $3,000,000 in attorney’s fees awarded to plaintiff’s contingent fee counsel approximated the fees paid to defense counsel over the life of the litigation. The Court looked at the hours counsel had spent in over a decade on the complex litigation, that counsel themselves had advanced all legal fees and costs with no compensation over that time, and that counsel persevered while being “led through a murky, tumultuous sea of litigation facing deadly obstacles every stroke of the way,” but stayed with the case and its risks, even “when hit between the eyes by Defendant’s insurmountable defense strategy….” Given all of the facts recited in the Court’s ruling, as well as the foregoing, Judge Sprecher stated that: “in the interest of fundamental fairness this court is reluctant to award counsel fees to the Plaintiffs in any amount less than Defendant paid its own attorneys who were paid timely and without risk.”

Date of Decision:  June 12, 2014

Berg v. Nationwide Mutual Insurance Company, No 98-813 (C.C.P. Berks June 12, 2014) (Sprecher, J.)

Our thanks to the Tort Talk Blog for bringing this case to our attention, and for posting a copy of the Opinion.

We would also like to congratulate Daniel E. Cummins of Tort Talk for being awarded PDI’s annual award as Distinguished Defense Counsel.  Well done!

 

All The Best for the Fourth of July

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Sunrise

Photo by M. M. Ginsberg