2014 BAD FAITH CASES: COURT REFUSES TO DISQUALIFY INSURER APPOINTED COUNSEL POST TRIAL AFTER AN EXCESS VERDICT (New Jersey Appellate Division)

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In Carbone v. Potouridis, the carrier had appointed defense counsel to represent an individual insured and the estate of her son, and later appointed a separate counsel to represent the estate after an excess verdict.  Plaintiff had attempted to settle within policy limits, but the carrier did not settle, the matter went to trial, and there was an excess verdict.  There was an issue as to the insureds having a potential claim against the carrier and/or assigning that claim.  Plaintiffs sought to disqualify counsel who had been appointed by the carrier from any continued representation of the defendants.  After close scrutiny of the facts wherein the insured was satisfied with counsels’ advice, where counsel certified that they knew their loyalty was to the insureds and not the carrier, and where the insured made a knowing waiver; the Rules of Professional Conduct; and prior precedent on the nature of the “triadic” relationship, the Appellate Division denied the motion to disqualify.

Dated of Decision February 19, 2014

Carbone v. Potouridis, DOCKET NO. A-0575-12T1, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 329 (App. Div. Feb. 19, 2014) (Judges Sapp-Peterson and Lih)

2014 BAD FAITH CASES: NO BAD FAITH WHERE ALLEGED MISREPRESENTATIONS OCCURRED PRIOR TO POLICY’S INCEPTION; CONTRACTUAL LIMITATION ON STACKING PERMISSIBLE (Third Circuit)

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In Grudkowski v. Foremost Ins. Co., the court addressed an appeal, with the class action appellee-insureds asserting that the insurance provided them should have been deemed illusory by the lower court.  The Third Circuit affirmed, and denied the request to certify the issue to Pennsylvania’s Supreme Court.

The insured had two policies, each of which had $300,000 in UM and UIM coverage.  The insured elected not to waive stacking, however, the policies contained provisions that limit UM and UIM coverage to accidents that actually involve the covered vehicles, making stacking effectively unavailable.  A putative class action was filed, alleging breach of contract, violation of the Unfair Trade Practices and Consumer Protection Law, and the Bad Faith Statute.
There was no breach of contract because stacking can be waived or limited by “clear and unambiguous” policy language….” There was also no actionable unjust enrichment claim.

The Court rejected the UTPCPL claim that the class “justifiably relied on [the insurer's] representation that they would receive stacked [UM and UIM] coverages . . . .” Although the insured alleges that she and the putative class relied on alleged misrepresentations of the scope of its insurance coverage by accepting the unsigned waiver form whereby she conveyed that she did not waive stacking, any misrepresentation that may have transpired through the insurer’s conveyance of the form “was corrected by the other provisions of the policy which clearly and unambiguously” limited coverage to incidents involving the covered antique cars and hence disclosed that stacking was unavailable.
Dismissal of the statutory bad faith claim under was also appropriate. Section 8371 permits the recovery of damages if, “[i]n an action arising under an insurance policy,” an “insurer has acted in bad faith toward the insured.” The term “bad faith” in section 8371 concerns “the duty of good faith and fair dealing in the parties’ contract and the manner by which an insurer discharged its obligations of defense and indemnification in the third-party claim context or its obligation to pay for a loss in the first party claim context.” Thus, the statute does not “give relief . . . to an insured who alleges that his insurer engaged in unfair or deceptive practices in soliciting the purchase [of] a policy.” Here, because the insured’s allegations concern the sale of policies that allegedly provided illusory coverage, and not the insurer’s actions in discharging its obligations under those policies, there was no section 8371 claim.
Date of Decision:  February 27, 2014

Grudkowski v. Foremost Ins. Co., No. 13-1893, UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2014 U.S. App. LEXIS 3738 (3d Cir. Feb. 27, 2014) (Schwartz, J.)

2014 BAD FAITH CASES: COURT CLOSELY SCRUTINIZES PLAINTIFF’S EXPERT AND GIVES DETAILED OPINION ON LIMITS TO THAT EXPERT’S TESTIMONY AND GUIDELINES ON HOW EXPERT REPORT MUST BE MADE AND PRESENTED TO SURVIVE A MOTION TO STRIKE THAT TESTIMONY (Philadelphia Federal)

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In Leporace v. N.Y. Life & Annuity Corp. the insurers filed a motion to exclude expert testimony, on plaintiff’s bad faith expert.  The expert was previously by one of the defendants that handle claims for an insurer defendant.  She affied that she has worked in the field of disability insurance for seventeen years, and left the employment of the defendant after having a senior management position. Subsequently she has served as an expert in a number of disability insurance claims. She has testified in 72 depositions, 43 of which involved cases administered by defendants, and in ten trials which involved defendants. The court stated that the Plaintiff may be able to qualify her as an expert on the topic of industry standards insurers should follow or reasonable determination of disability benefits.
Her affidavit did not specifically state to what extent she gave testimony based on defendants’ policies and practices while she was still employed by defendants or thereafter; and the court ordered the plaintiff’s counsel to provide specific information about cases in which she testified about defendants after her employment. The court expressed doubts about here expertise on policies and procedures that may have existed when her employment ended (2001), and the time period at issue, 9 years later, “which are doubtfully relevant in this case unless plaintiff can establish these same policies and practices continued to 2010 and forward.
The Court also noted that a good deal of the expert’s opinions were based on two specific studies/reports, from 2003 and 2004; and although she relied heavily on these two apparently separate items, she did not specifically show that she has any knowledge that these were relevant to the plaintiff’s claims for the period 2010 to the present time.
One of the reports appeared to review past events, and without any evidence defendants’ conduct described in that report continued to the present day, this evidence was merely propensity evidence of prior bad acts, and would not admissible under FRE 404(b)(1). Therefore, the Court would be inclined to reject any reference to this report unless plaintiff can show the conduct found in it continued through the 2010 forward period, with evidence other than defendants’ conduct toward plaintiff.
As to the second report, to the extent that plaintiff can show that it establishes standards for future conduct by defendants, which applied as of 2010 forward, the expert’s testimony about it may be relevant as a benchmark against which the jury may measure what defendants did or should have done in investigating and determining plaintiff’s claims for reinstatement of benefits. Assuming that plaintiff meets this evidentiary threshold, the expert may be allowed to give opinions, based on her review of defendants’ practices with regard to defendants’ 2010 and forward policies and practices and whether they were in accord with the second report.
The Court also observed that many of the expert’s opinions in her reports were obviously medical in nature, and would not allow her to give opinions that express disagreement with medical opinions, since she is not a physician nor does she have any medical training.
The Court would also likely exclude opinions that exclusively concern events prior to 2010. The Court has previously noted that it may allow, subject to Federal Rule of Evidence 404(b), limited testimony by plaintiff as to defendants’ pre-2010 conduct vis a vis plaintiff, principally to give Plaintiff an opportunity to prove motive and intent. However, the Court doubted that expert opinions on this period would be proper evidence.
The Court stated that the reports and the expert’s depositions, exhibits, etc. did not meet the standards for admissibility and did not “fit” the issues that will be the subject of the trial under F.R.E. 702. However, the Court gave plaintiff an opportunity to show by competent and admissible evidence that the expert had a factual basis for opinions limited to defendants’ 2010 and forward disability insurance policies and practices, consistent with the Court’s findings and conclusions. The Court found that the existing reports contained mostly irrelevant material, and stated opinions without providing any appropriate factual basis for the opinions.

The Court determined that the appropriate resolution was to strike the expert report’s in toto, but to give plaintiff leave to submit a concise expert report, limited to fifteen pages doubled spaced, for the period 2010 forward, in which the expert must state her opinions in separately numbered paragraphs and for each opinion state the type of evidence or expertise on which she relies. Plaintiff need not supply specific testimony or facts, but should give record citations to depositions and other documents in the case, so that the Court and defendants can find the factual source of the opinion in the discovery record in this case. If the expert relies on any of her knowledge from having been employed by defendants, she must further state what knowledge, and the source of that knowledge, and cite to some evidence that those practices of defendants continued into the period 2010 and forward.  Thereafter, the Court may hold an evidentiary hearing to give the parties an opportunity to present testimony from the expert on the issue of whether her opinions concerning defendants’ practices are admissible.
The court made clear that the expert would not be permitted to give conclusory opinions that defendants exercised bad faith in its treatment of plaintiff: “[A]n expert may not give an opinion as to the ultimate legal conclusion that an insurer acted in ‘bad faith’ in violation of applicable law.”
In sum, the Court determined that “as a matter of case management and fairness to the parties, that the best process to ensure a fair and expeditious trial is a new report. With a revised report, the record will be more appropriate for direct and cross examination of [the expert] and for the jury reaching a verdict, and for this Court and any appellate court ruling on any post-trial motions that may be filed.”

Date of Decision: February 26, 2014

Leporace v. N.Y. Life & Annuity Corp., CIVIL ACTION NO. 11-2000, 2014 U.S. Dist. LEXIS 24764 (E.D. Pa. February 26, 2014) (Baylson, J.)

2014 BAD FATIH CASES: COURT FINDS: (1) PLEADING OF CLAIMS HANDLING ADEQUATE TO SURVIVE TWOMBLY CHALLENGE; (2) NO SUFFICIENTLY CLEAR CLAIM DENIAL TO TRIGGER STATUTE OF LIMITATIONS; (3) CLAIMS OF FALSE ADVERTISING PRIOR TO INCEPTION OF POLICY NOT ACTIONABLE UNDER BAD FAITH STATUTE; (4) CLAIM OF BREACH OF FIDUCIARY OBLIGATION NOT MATERIAL ELEMENT OF SECTION 8371 CLAIM; (5) CLAIM OF “INDIFFERENCE” TO POLICY HOLDERS GENERALLY STRICKEN WHERE CASE WAS NOT A CLASS ACTION; (6) ALLEGATIONS CONCERNING RESERVES COULD BE MATERIAL; AND (7) CLAIMS OF UIPA VIOLATIONS WERE TO BE STRICKEN, THOUGH BASIS MAY HAVE BEEN LACK OF OPPOSITION BY INSUREDS (Middle District)

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In Clemens v. New York Cent. Mut. Fire Ins. Co., the Court addressed a UIM case, where the accident arose in August 2009, plaintiff gave notice of a possible UIM claim in April 2010, and the carrier gave plaintiff consent to settle against the third party’s carrier in July 2011.  Plaintiff alleges numerous conversations between April of 2010 and July 15, 2013, and items of correspondence were exchanged with the insurer’s agents concerning Plaintiff’s efforts (1) to obtain a status report from the Defendant regarding its claim investigation; (2) to schedule an arbitration of the UIM claim, and (3) to schedule Plaintiff’s “Statement Under Oath”. On May 25, 2011, during the time the aforementioned matters were being discussed by the parties, Plaintiffs submitted a demand letter to Defendant detailing their injuries and supporting documentation including medical records, photographs and authorizations requested by Defendant.  On August 26, 2013, Plaintiffs brought suit.

The carrier moved to dismiss the bad faith claim, and strike certain other allegations.  It argued plaintiffs did not plead their bad faith claim with “the requisite level of facts to properly state a claim upon which relief may be granted.” The Court disagreed, finding that the various factual allegations at could be plausibly read to indicate a possibility that there was a duplicitous delay by an insurer in the claims handling process.
The court also rejected a statute of limitations argument. The carrier argued that because the Plaintiffs’ brief indicates that the medical records it submitted should have been sufficient to convince the insurer to pay the claim, and because the docket indicates that those records were provided more than two years before the Complaint was filed, the case should be dismissed.  The court found that this did not constitute the kind of clear notice existing in prior precedent triggering the statute. In this case, the parties were still attempting to resolve this matter well into the year 2013 or, at least, that Defendant was sending signals that it was actively considering the claim. Thus, the insurer had not provided the type of clear notice that the claim was being denied within the two years immediately preceding the filing of the Complaint as required by the Third Circuit.

The court did agree to strike Plaintiffs allegation that the carrier’s failure to act to help their insureds was inimical to the advertising through which the Defendant solicited policyholders. Section 8371 does not provide relief for false advertising in the procurement of an insurance policy. The carrier also sought to strike allegations of a fiduciary obligation from the Complaint; however, the court essentially found that the phrase had no functional effect on the bad faith, and denied the motion to strike as the term was basically irrelevant to the case. The court did agree to strike the allegation that the carrier was indifferent toward its policyholders generally, as it was not a class action.
The insurer also moved to strike an allegation that it set a grossly inadequate reserve for Plaintiffs’ claim, as a source of bad faith. The Court recognized that a great discrepancy between the size of a reserve and the amount offered in settlement of a claim is not, without other evidence, proof positive of bad faith on an insurer’s part, it believed that the presentation of such evidence is potentially germane to the determination of the bad faith issue. It thus denied the motion to strike.
The insurer also moved to strike allegations relating to alleged violations of the Unfair Insurance Practices Act.  The carrier cited numerous cases holding that, unless and until the Pennsylvania Supreme Court holds otherwise, evidence of violations of portions of UIPA are irrelevant to the maintenance of a bad faith claim. The insureds did not respond to Defendant’s argument in this regard, and those allegations were stricken and the Court stated that it would not admit evidence directed to establishing violations of UIPA. Interestingly, this same court followed Pennsylvania Superior Court precedent in a case decided 10 days earlier, permitting consideration of UIPA violations, which as observed in that case summary, is different that the position taken by many federal courts in the absence of a Pennsylvania Supreme Court ruling.

Dated:  February 24, 2014
Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2014 U.S. Dist. LEXIS 22534 (M.D. Pa. February 24, 2014) (Conaboy, J.)

2014 BAD FAITH CASES: COURT DENIES CARRIER’S SUMMARY JUDGMENT MOTION BECAUSE INSURED ALLEGED CONDUCT WHICH A JURY COULD FIND AMOUNTS TO BAD FAITH (Middle District)

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In Universal Underwriters Ins. Co. v. J. Murray Co., an insured automotive dealer, service center, and financier purchased an insurance policy from the defendant-carrier to insure property at its place of business.  During Tropical Storm Lee in September 2011, the insured suffered $1,700,000 in storm damage, notified its carrier of the damages and received assurances from an authorized representative of the carrier that the policy would indemnify them for the loss. However, the carrier halted the inspection of the insured’s property and informed the insured that the policy contained an explicit coverage exclusion for damage due to storms.

Magistrate Judge Arbuckle, III recommended, and Judge Brann adopted, a decision denying the carrier’s motion for summary judgment.  The court held that evidence presented by both sides raised questions for a jury to resolve at trial.  Moreover, the court determined that the insured provided enough evidence that a reasonable jury may find clear and convincing evidence that the carrier acted in bad faith in denying insurance coverage to its insured by virtue of the way the policy was amended to include a storm damage exclusion.

The court also noted that several acts undertaken by the carrier that could reveal bad faith: (1) the alleged unilateral change to the Policy and (2) the alleged failure to notify or even attempts to mislead the insureds about the extent of their flood coverage.

Date of Decisions:   October 28, 2013 by Magistrate Judge, and January 29, 2014 by District Judge

Universal Underwriters Ins. Co. v. J. Murray Co., CIVIL NO. 4:11-CV-1851Civ., 2013 U.S. Dist. LEXIS 184474 (M.D. Pa. Oct. 28, 2013) (Arbuckle, III, M.J.)

Adopted in full in, Universal Underwriters Ins. Co. v. J. Murray Co., CIVIL NO. 4:11-CV-1851Civ., 2014 U.S. Dist. LEXIS 10761 (M.D.Pa. Jan. 29, 2014 (Brann, J.)

2014 BAD FAITH CASES: COURT UPHOLDS ATTORNEYS FEE AWARD, FINDING THAT BAD FAITH IS NOT A PREREQUISITE (New Jersey Appellate Division)

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In DeMarco v. Stoddard, a medical malpractice coverage appeal, the appellate court upheld the trial court’s grant of attorney fees, finding that bad faith was not a prerequisite for such an award.

Date of Decision: January 22, 2014

DeMarco v. Stoddard, No. A-3924-12T1, 434 N.J. Super. 352, 84 A.3d 965(App.Div. Jan. 22, 2014) (ASHRAFI, J.A.D.)

2014 BAD FAITH CASES: COURT REFUSED TO DISMISS BAD FAITH CLAIM ON STATUTE OF LIMITATIONS GROUNDS WHERE BOTH TIMING OF WHEN CLAIM BEGAN AND DISCOVERY RULE APPLICATION SHOULD BE LEFT TO TRIER OF FACT (Middle District)

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In Agrotors, Inc. v. Ace Global Markets, the insured claimed bad faith, which the court analyzed solely as a section 8371 claim.  Such a claim is subject to a two year statute of limitations which accrues when the right to institute and maintain a lawsuit arises. However, pursuant to the discovery rule, the statute of limitations may be tolled until a party knows or reasonably should know that he has the right to sue. The parties disputed whether a pleaded action by the insured was an acknowledge of damages or an effort to mitigate losses. The insured further alleged that pursuant to the discovery rule, it could not have been aware that it suffered damages due to the carrier’s bad faith until a later date when it received a declination of coverage letter.

Drawing all reasonable inferences in the insured’s favor, and recognizing the Third Circuit’s admonition that when commencement of the limitations period is in dispute, the trier of fact should determine the point at which a plaintiff reasonably should have been aware of its cause of action, the trial court should not determine the commencement of the limitations period as a matter of law unless the facts are so clear that reasonable minds cannot differ,” the court refused to dismiss the claim.  Rather, it found it was not clear when the cause of action arose, nor when the insured should have reasonably been aware of its accrual. Thus, at that early stage of the litigation, the court was unable to conclude as a matter of law that the applicable statute of limitations barred the bad faith claim.

Date of Decision:  February 24, 2014

Agrotors, Inc. v. Ace Global Mkts., CIVIL ACTION NO. 1:13-CV-1604, 2014 U.S. Dist. LEXIS 22560 (M.D. Pa. February 24, 2014) (Conner, J.)

2014 BAD FAITH CASES: INSURED’S CONCEALMENT OF FACT THAT MANUFACTURER PAID FOR LOSS DESPITE MAKING CLAIM AND RECEIVING FUNDS FROM CARRIER COULD NOT CREATE BAD FAITH IN CARRIER, BUT DID STATE A COLORABLE CLAIM AGAINST INSURED’S UNDER FRAUD PREVENTION ACTION (New Jersey Appellate Division)

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In AIG Casualty Company of New York v. Walsh, AIG’s policy required it to pay for losses to a damage yacht engine, less a deductible, and it did so.  However, the manufacturer replaced the engine at no cost. The carrier sought return of the funds paid, as there was no loss, and the insureds refused on the basis that they could keep money because the amount they received from the carrier and the manufacturer did not “exceed” their loss. The court disagreed, finding that the insureds essentially received two payments for the loss.
Therefore, the insureds did not sustain any monetary loss as a result of the damage to the yacht’s engine, and the motion judge correctly determined that defendants were not entitled to retain the carrier’s payment.
The court also rejected the insured’s bad faith claim, for the insurer’s “excessively badgering” them for the return of funds.  An insurer owes its insured a duty of good faith and fair dealing in processing a first-party claim and an insured may assert a claim for breach of that duty. However, the insured must establish that the insurer did not have a reasonable basis to deny the claim. The insured also must establish that the insurer knew of or recklessly disregarded the lack of a reasonable basis for denying the claim. In this case,
the bad faith claim failed as a matter of law because the carrier had an absolute right to demand the return of the funds paid, and the insureds wrongfully refused to return the monies. Thus, whether the carrier’s demands for repayment amounted to “excessive badgering” is irrelevant because the carrier demanded the return of the monies in good faith.

However, the appellate court did reverse the trial court’s dismissal of the carrier’s fraud claim against the insureds under the Fraud Prevention Act.  A person or practitioner violates the Act if he or she “[c]onceals or knowingly fails to disclose the occurrence of an event which affects any person’s initial or continued right or entitlement to (a) any insurance benefit or payment or (b) the amount of any benefit or payment to which the person is entitled[.]” N.J.S.A. 17:33A-4(a)(3). In addition, a person or practitioner violates the Act if he or she “knowingly assists, conspires with, or urges any person or practitioner to violate any of the provisions of this act.” N.J.S.A. 17:33A-4(b).
The carrier alleged that the insureds submitted repair estimates upon which the insurer paid the claim based, without disclosing that the manufacturer paid for the repair and replacement of the engine. The carrier also claimed that the insureds tried, by various means, to conceal the fact that they had been compensated twice for the loss, alleging that defendants did not disclose that they had received payment from the manufacturer until they filed their answer to the amended complaint.
The insureds argued that the manufacturer paid for the repair and/or replacement of the engine after the insurer paid the claim, and the policy does not specifically require them to return the monies that the insurer paid on the claim; and claimed that under the circumstances, they had a good faith basis to refuse to return the insurance payment until that issue was resolved by a court.

The appellate court found that the carrier established a prima facie case under the Act, as the record showed that the insureds were paid on their claim for repair and/or replacement of the yacht’s engine, and the manufacturer thereafter paid these costs. The insureds did not inform the carrier about this within a reasonable time, and the carrier only learned about it via its own investigation.  Thus, the facts as alleged supported a claim that the insureds acted to conceal facts material to their right to retain the insurance benefits paid to them.
Date of Decision:  February 12, 2014

AIG Cas. Co. of N.Y. v. Walsh, DOCKET NO. A-1784-12T1, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 283 (N.J. App. Div. February 12, 2014) (Per Curiam)

2014 BAD FAITH CASES: COURT WOULD NOT DISMISS BAD FAITH CLAIM AT PLEADING STAGE BASED ON INSURER’S CLAIM THAT IT RELIED UPON EXPERT REPORT (Middle District)

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In Aldsworth v. State Farm Fire & Casualty Co., the insured initially claimed that they suffered water infiltration in their home after a wind and rain storm damaged the roof.  The insurer sent out an engineer.  The engineer concluded that the cause of the loss was a construction defect on the part of a roofing contractor who had performed work on Plaintiffs’ roof in 2002. Plaintiffs had retained a public adjuster who amended the claim to being a claim for collapse based on Defendant’s engineer’s report. Defendant’s engineer had concluded that it was snow loads that exceeded the load capacity of the roof that caused the collapse. The collapse caused by weight of ice, snow or sleet is a covered loss under the policy. The carrier denied the claim. The insured brought claims for breach of contract and bad faith.

The court set out a very broad statement on bad faith, based on Pennsylvania Superior Court opinions, e.g., bad faith during the pendency of litigation may be considered as evidence of bad faith; bad faith is not restricted to an insurer’s denial of benefits and includes a wide variety of objectionable conduct including lack of good faith investigation and failure to communicate with a client; a claim for bad faith may be based on an alleged violation of the Unfair Insurance Practices Act (this later position being frequently rejected by other District Courts). The court did state that negligence or bad judgment do not constitute bad faith, and to support a finding of bad faith, the insurer’s conduct must be such as to “import a dishonest purpose,” and the plaintiff must show that the insurer breached its duty of good faith through some motive of self-interest or ill will.

The insurer sought to dismiss the bad faith claim on the basis that it obtained an expert report from an engineer.  The insured took the position, that even assuming everything the engineer said was true, under its view of coverage, the insurer should still have covered the claim.  The court agreed with the insurer that the parties have a difference of opinion regarding coverage of the claim. However, it looked to the insured’s averment that “[u]nder the terms of the policy, assuming arguendo that the engineer’s conclusions are accurate, the loss remains covered”, the reasonableness of Defendant’s basis for denying coverage is an issue. In other words, if the engineer’s conclusions do not eliminate coverage under the policy, Defendant’s interpretation of those conclusions is at issue and, at this stage of the proceedings, it cannot avoid a bad faith claim based on its reliance on the engineer’s report.
In light of Defendant’s motion to dismiss burden and the facts and circumstances presented here, we conclude that dismissal of Plaintiffs’ bad faith claim would be premature. While discovery may not provide Plaintiffs with the required clear and convincing evidence that Defendant “(1) did not have a reasonable basis for denying benefits under the policy; and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim,” a determination on these matters is not properly made on the record before us. Therefore, Defendant’s motion to dismiss Plaintiffs’ bad faith claim is properly denied.

Date of Decision: February 14, 2014

Aldsworth v. State Farm Fire & Cas. Co., CIVIL ACTION NO. 3:13-CV-2941, 2014 U.S. Dist. LEXIS 18656 (M.D. Pa. February 14, 2014) (Conaboy, J.)

2014 BAD FAITH CASES: SUMMARY JUDGMENT GRANTED ON BAD FAITH CLAIM WHERE INVESTIGATION WAS REASONABLE, DELAYS ATTRIBUTABLE TO BOTH PARTIES, AND WHERE INSURER ENGAGED EXPERTS THAT RESOLVED ANY CONTRADICTION BY ITS PRIOR EXPERT ON NEED FOR REPLACMENT OVER REPAIR (Middle District)

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Moran Industries v. The Netherlands Insurance Company involved numerous disputes between the insured and the insurer over the extent of fire damage to a building and the terms of an insurance policy.  The carrier claimed there was a contractual two year limitations period for bringing a claim, and the insured denied ever receiving that endorsement, and so denied it was part of the contract.  There were additional disputes between experts over whether the fire requirement roof repair or replacement.  The carrier sought summary judgment on the breach of contract and bad faith counts.

The court found an issue of fact existed as to the actual insurance policy between the parties, including the contractual limitations endorsement.  However, the court found that if such a term did exist it would be enforceable as it was not unconscionable or in violation of public policy; was not barred by estoppel; and did not require a prior showing of prejudice.

The court did grant summary judgment on the bad faith claim.  It observed that an insurer may defeat a bad faith claim by showing it had a reasonable basis for its actions, and may do so by demonstrating it conducted a sufficiently thorough review or investigation, which it used as a foundation for its subsequent decisions. The insurer need not show that its investigation “yielded the correct conclusion or even that its conclusion more likely than not was accurate,” only that its actions were reasonable.
The insured presented no evidence that a reasonable jury could find the insurer acted in bad faith by a clear and convincing standard. The insured alleged delay in investigating the claim and finalizing its position; the carrier’s communications failures; and that the insurer’s expert expressed the opinion the roof may need to be replaced, rather than repaired—a fact the insurer disputed. The court found that the insurer demonstrated that it had a reasonable basis for its actions with respect to each of these allegations. It started its investigation within two days of the formal claim and acted with reasonable diligence throughout the investigation of the claim. It also made payment on the claim and gave the insured notice of its final position on the claim with reasonable diligence and well before the limitations period expired.
Second, regarding communication failures, the record did demonstrate some lapses in communication between the parties. The most significant communication difficulties occurred during the two-month period in which the parties attempted to arrange a meeting of their roofing consultants. The record further demonstrates, however, that the communication lapses were due to failures by both parties. Moreover, the record shows that the insurer acted with reasonable diligence following up missed communications and was conscious of the relative urgency. The insured offered no evidence demonstrating an ill-will, self-interest, or dishonest purpose on this point, and did not provide other evidence with which a reasonable jury could find bad faith by the clear and convincing standard.
Third, the insured’s allegation that the insurer disregarded its own expert’s alleged belief that the roof needed to be replaced does not establish bad faith by clear and convincing evidence, because the insurer demonstrated other reasonable bases for its actions. Even taking the facts in the light most favorable to the non-moving party and assuming the expert did manifest that the roof needed to be replaced, the insurer followed up on it expert’s assessment with a second assessment by an architect and engineer, whose report indicated an opinion that only a subsection of the roof needed to be repaired or replaced, not the entire portion of the roof as Moran contends.
Date of Decision:  February 19, 2014

Moran Indus. v. Neth. Ins., Co., Case No. 4:12-cv-01435, 2014 U.S. Dist. LEXIS 20081 (M.D. Pa. February 19, 2014) (Brann, J.)