JUNE 2016 BAD FAITH CASES: COMMUNICATIONS BETWEEN IN-HOUSE COUNSEL OF (1) TPA AND (2) AUHTORIZED CLAIM REPRESENTATIVE WITH INSURER USING THEIR SERVICES IS PRIVILEGED (Middle District)

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In Heller’s Gas v. International Insurance Company of Hannover, a breach of contract and bad faith case, the insured claimed that documents withheld or redacted did not fall within the attorney-client privilege, the work product doctrine, or reserve information. The insured argued that all but one document was either sent to or from employees of the insurer’s third party administrator (TPA) or its authorized claim representative, and as neither of these entities were subsidiaries of or owned by the insurer, the communications were not privileged.

In the Answer, the insurer did not assert an agency relationship with either the TPA or the authorized claims representative. It took the opposite position in the motion papers, arguing that communications between the TPA’s in-house counsel and/or the claim representative’s in-house counsel with the insurer fell within the scope of attorney-client privilege.

The court reviewed the unredacted documents in camera. The court stated: “After thoroughly examining the documents, this Court finds that the information redacted appropriately falls within the attorney-client privilege and work product doctrine and is consequently information directly related to or referencing legal strategy regarding the instant litigation. The correspondence further supports [the insurer’s] latterly-advanced argument that [the TPA and authorized claims representative] are essentially agents of [the insurer].”

Date of Decision: June 1, 2016

Heller’s Gas, Inc. v. Int’l Ins. Co. of Hannover Ltd., 4:15-CV-01350, 2016 U.S. Dist. LEXIS 71069 (M.D. Pa. June 1, 2016) (Brann, J.)

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JUNE 2016 BAD FAITH CASES: UIM BAD FAITH CLAIM INADEQUATELY PLEADED AND DISMISSED WITH PREJUDICE (Philadelphia Federal)

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In Kiss v. State Farm Insurance Company, the District addressed a UIM bad faith claim. The court found the pleadings inadequate under Twombly/Iqbal, and stated as follows:

“In essence, plaintiff’s factual averments are that (1) plaintiffs are insured by defendant for underinsured motorist coverage; (2) the husband plaintiff was involved in a motor vehicle accident; (3) plaintiffs submitted medical records to defendant; (4) plaintiffs made a demand for payment of the underinsured motorist limits; and (5) plaintiffs did not agree with defendant’s valuation of the claim.”

“Plaintiff’s boilerplate allegations assert that defendant lacked a reasonable basis for denying plaintiffs’ claim for benefits, but do not provide 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. …. Indeed, it is undisputed that the defendant in this case actually paid the underinsured motorist benefits pursuant to an arbitration award. While 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. …. The Rule 12(b)(6) standards, as interpreted by Twombly and Iqbal, require more.”

Unlike a number of other cases that failed the Twombly/Iqbal standards, this case was dismissed with prejudice.

Date of Decision: May 16, 2016

Kiss v. State Farm Ins. Co., 2016 U.S. Dist. LEXIS 64572 (E.D. Pa. May 16, 2016) (Schmehl, J.)

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JUNE 2016 BAD FAITH CASES: COURT RECOMMENDS ALLOWING INSURED TO REPLEAD ITS BAD FAITH CLAIM FOR UNREASONABLE POLICY INTERPRETATION, WHICH INTERPRETATION WAS LATER ABANDONED BY INSURER (Middle District)

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In Long v. New Jersey Manufacturers Insurance Company, the insured brought a bad faith claim based upon the insurer’s allegedly unreasonable interpretation of the policy. The insurer did originally take the position complained of, limiting coverage to $100,000, but eventually dropped that position and came to agreement with the insured on there being greater coverage, $500,000. The insurer brought a motion to dismiss the bad faith claim based upon the insurer’s original position.

The pleadings showed the parties’ agreement that the insurer did for a period of time assert the more restrictive view, but later abandoned this interpretation. The bad faith case “involved an inquiry into the nature, magnitude, and reasonableness of this initial, and admittedly erroneous, interpretation of the policy….”

The court recognized “that an unreasonable, unwarranted, and unjustified interpretation of policy language may form the basis for a bad faith claim, but [there are] particularly exacting standards for such claims.” “Thus, an insurance company’s reliance on an incorrect interpretation of the law will not necessarily yield a finding of bad faith. If that interpretation of the law and policy language was erroneous, but reasonable, a bad faith may still claim fail. …. Likewise, if the insurance company had a number of bases for a legal position, some of which are objectively unreasonable, it may nonetheless defeat a bad faith claim by citing to any reasonable rationale for its action.”

The complaint itself was “spare” in its allegations of bad faith, and in the motion to dismiss process, both parties pointed to facts beyond the pleading in disputing whether the insurer’s position was reasonable. The court recognized that such factual disputes were properly addressed via a summary judgment motion. However, citing Rule 12(e), which allows a defendant to move for a more definite statement of facts in the complaint, the magistrate judge recommended dismissing the complaint without prejudice to allow plaintiff to set out a more definite statement in support of the bad faith claim in the complaint.

Date of Decision: May 17, 2016

Long v. N.J. Mfrs. Ins. Co., Civil No. 3:14-CV-2428, 2016 U.S. Dist. LEXIS 65575 (M.D. Pa. May 17, 2016) (Carlson, U.S.M.J.)

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JUNE 2016 BAD FAITH CASES: REMOVAL TO FEDERAL COURT NOT BAD FAITH (Pennsylvania Superior Court – Not Precedential)

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In Racioppi v. Progressive Insurance Company, the court rejected an argument the carrier’s initial removal to federal court constituted bad faith insurance conduct. The matter was remanded once the parties realized there was not complete diversity. The court observed this was a litigation tactic, not related to insurance coverage.

Date of Decision: May 11, 2016

Racioppi v. Progressive Ins. Co., No. 3419 EDA 2015, 2016 Pa. Super. Unpub. LEXIS 1624 (Pa. Super. Ct. May 11, 2016) (Ford Elliott, Bender, Musmanno) (non-precedential)

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BAD FAITH BLOG'S 10TH ANNIVERSARY

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It has been 10 years since we began the Bad Faith Blog, which now includes over 1,200 posts.  Bad faith litigation has remained a constant in state and federal courts over that time, and is a regular part of the litigation landscape.  There have been bad faith claims that did not survive motion practice, and some resulting in large awards.  As to the frequency of bad faith claims, one Third Circuit panel stated in 2012: “We note, however, that our experience in addressing Pennsylvania insurance coverage disputes has demonstrated that insureds tend to bring bad faith claims when insurers reject their claims even though there are legitimate disputes over whether the claims are covered.”

While there are many aspects of the law which merit  attention, one feature does earn special notice:  What is bad faith?

In 2007, it appeared that the Supreme Court provided definition to the meaning of bad faith under section 8371, in Toy v. Metropolitan Life. The Court, in both the majority and dissenting opinions, addressed the difference between bad faith conduct which is evidentiary in nature, and bad faith decisions which are actionable in and of themselves.  However, Toy is seldom cited, and there is a significant body of case law erasing the line between evidentiary conduct supporting a finding of bad faith, and that same conduct in and of itself being bad faith.  We will continue to report on the development of this fundamental issue, and on all aspects of an ever dynamic and constantly growing body of law.

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JUNE 2016 BAD FAITH CASES: ALLEGED DISCOVERY VIOLATIONS CANNOT FORM BASIS OF BAD FAITH CLAIM (Third Circuit)

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In Duda v. Standard Insurance Company, the Third Circuit reiterated the longstanding rule that statutory bad faith claims cannot be based on alleged discovery violations in the bad faith litigation.

Date of Decision: May 10, 2016

Duda v. Std. Ins. Co., 2016 U.S. App. LEXIS 8602 (3d Cir. Pa. May 10, 2016) (McKee, Jordan, and Roth)

JUNE 2015 BAD FAITH CASES: INSURED’S COMPLAINT LACKS SPECIFICITY AND IS DISMISSED WITHOUT PREJUDICE SUBJECT TO DISCOVERY BEING TAKEN (Philadelphia Federal)

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In Canizares v. Hartford Insurance Company, the insured brought breach of contract and bad faith claims. The bad faith claim was dismissed without prejudice, as it failed to meet the Twombly/Iqbal standards of pleading a plausible claim, rather than simply asserting legal conclusions.

The court observed that the insured’s “rudimentary allegations” all contained legal conclusions, “which are not entitled to the assumption of truth.” On the one claim coming closest to being adequate, that the insurer failed to respond to the benefits claim in a reasonable time, the court found this inadequate because the complaint failed “to include any specific dates detailing when the claim was submitted and when [the insurer] responded.”

However, the court did not dismiss with prejudice, in the eventuality that facts could later be developed in discovery that would form the basis of a bad faith claim. “Indeed, discovery into the handling of this claim will certainly be among the next steps in the case, and it may well be that the [insured] will seek permission to resume the bad-faith claim. They will be permitted to seek such permission if the facts so warrant.”

Date of Decision: May 27, 2016

Canizares v. Hartford Ins. Co., No. 16-1465, 2016 U.S. Dist. LEXIS 69668 (E.D. Pa. May 27, 2016)

MAY 2016 BAD FAITH CASES: COURT ADDRESSES BIFURCATION OF BAD FAITH CLAIM AND WIDE RANGE OF DISCOVERY ISSUES (Middle District)

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In Morris v. USAA Casualty Insurance Company, a UIM case, the Court provided a compact opinion addressing a wide range of discovery issues, and a motion to bifurcate the breach of contract and bad faith claims.  The issues relating to the bad faith claim are summarized as follows:

  1. The motion to bifurcate was denied. The court found there was “an overlap in the issues of the separate claims, and that having one trial would better serve judicial economy.”
  2. The court recognized “generally that an expert opinion is not required in bad faith cases, [but] there are times when expert testimony is appropriate.” Here, the court found testimony from the insured’s expert “would be helpful to the jury, but [the expert was] precluded from offering any legal conclusions.”  The court rejected the argument that report contained no legal conclusions, and found there were portions that went to the ultimate issues in this case and would not be permitted in the final report.
  3. The insurer was required to produce reserve information for a two year period, in line with a prior order.
  4. The court precluded any evidence, argument, comment or reference to any other claims or litigation to which [the insurer] is or has ever been a party, at any time during the course of the trial.”
  5. The insurer had asserted the allegations concerning the insured’s conduct as a defense and the insured sought to preclude evidence of that defense. The court ruled this was premature, and should be addressed via trial objections.
  6. The court rejected the insured’s effort to preclude payments by the tortfeasor. The amount paid is relevant to the bad faith claim.

Date of Decision:  May 3, 2016

Morris v. USAA Cas. Ins. Co., No. 3:12-cv-1664, 2016 U.S. Dist. LEXIS 58948 (M.D. Pa. May 3, 2016) (Kosik, J.)

MAY 2016 BAD FAITH CASES: NO BAD FAITH WHERE ALLEGATIONS IN COMPLAINT FALL OUTSIDE SCOPE OF COVERAGE; FAULTY WORK IS NOT AN OCCURRENCE (Philadelphia Federal)

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In Lenick Construction, Inc. v. Selective Way Insurance Company, the insured brought breach of contract and bad faith claims against the insurer in connection with an underlying suit involving material construction defects and breaches of warranty. The insured, working as a subcontractor in the construction of a condominium project, was sued by the condominium association after owners found defects in the units which caused water infiltration, leaks, and cracks in the drywall.

The insurer originally denied the insured’s demand for a defense and indemnification in the underlying suit, but eventually agreed to defend the insured subject to a reservation of rights. The insured then filed this action, seeking a declaratory judgment as to the insurer’s duty to defend and indemnify it in the underlying suit. The insurer argued that any liability the insured would face arose from its own faulty workmanship, in breach of its contractual duties.  Therefore, the property damage at issue was not caused by an “occurrence” and was not covered. The insured asserted bad faith in denying benefits.

The insured claimed that the insurer denied benefits under the policy without a reasonable basis, and knew or recklessly disregarded the lack of reasonable basis when denying the claim. The court disagreed. It found no duty to defend because the allegations arose out of faulty workmanship in performance of a contract, which was not an “occurrence” under the policy. Additionally, the court found that the insurer had no duty to indemnify because the claims were not potentially within the scope of the policy’s coverage. As the insurer was under no duty to defend or indemnify, the court determined that the insurer’s interpretation of the underlying pleadings was not made with knowing or reckless disregard of whether the denial of coverage was reasonable, and accordingly did not act in bad faith.

Date of Decision:  March 23, 2016

Lenick Constr., Inc. v. Selective Way Ins. Co., No. 14-2701, 2016 U.S. Dist. LEXIS 38119 (E.D. Pa. Mar. 23, 2016) (Rufe, J.)

MAY 2016 BAD FAITH CASES: AN INSURER’S CORRECT INTERPRETATION OF AN INSURANCE POLICY IS A VALID DEFENSE AGAINST BAD FAITH

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In Darwin National Assurance Company v. Luzerne County Transportation Authority, the Court held that an insurer who correctly denied benefits under an insurance policy did not act in bad faith.

The insured was the former operations manager of the Luzerne County Transportation Authority and had been criminally charged with conspiring to defraud the PA Department of Transportation.  The insured submitted a claim for defense and indemnity to the insurer who accepted the claim, but determined that the insured could only collect $100,000 from the policy.

The insured disagreed, arguing that he was entitled to $1 million.  The insured later brought a claim for bad faith, alleging that the insurer’s refusal to pay $1 million in policy proceeds was frivolous and unfounded.

In denying the Insured’s bad faith claim, the Court held that because the insurer’s interpretation of the policy was correct, the insured could not make out the first element of a bad faith claim – that the insurer lacked a reasonable basis for denying benefits.  The Court emphasized that the insurer did not deny benefits outright, but merely found that coverage was limited to $100,000 and even tendered payments towards the insured’s defense costs.

Date of Decision: March 30, 2016

Darwin Nat’l Assur. Co. v. Luzerne Cnty. Transp. Auth., NO. 3:14-cv-2417, 2016 U.S. Dist. LEXIS 41733 (M.D. Pa. Mar. 30, 2016)