JANUARY 2015 BAD FAITH CASES: PLAINTIFF’S UIM BAD FAITH CLAIM NARROWLY SURVIVES SUMMARY JUDGMENT BECAUSE OF MUDDLED RECORD AS TO WHAT CAUSED DELAYS (Middle District)

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In Clemens v. New York Central Mutual Fire Insurance Company, plaintiff brought a UIM bad faith case, with the chief issues focusing on the 39 month time period between the claim being asserted and the filing of suit.  There were three areas at issue on cross motions for summary judgment as to this lengthy delay and who, if any one side, bore responsibility: the content and provision of medical authorizations, efforts to arbitrate the matter, and efforts to schedule a statement under oath.  The court ultimately concluded that the record was so unclear, it could rule for neither party.

The court stated that “in each of these areas, the parties exhibited a lack of civility and an inability to move this matter forward at a reasonable pace,” and “having reviewed that record, [the court] simply cannot conclude that either party has demonstrated as a matter of law that the other side was unilaterally responsible for the long delay between Plaintiffs’ transmission of its Notice of Intent to file an underinsured motorist claim and the filing of the complaint that initiated this matter.”

Further, the court stated that it could not find “as a fact that, to the extent the long delay was attributable to the Defendant, it was or was not motivated by ‘self-interest or ill will’ as required by Terletsky….”  This statement is noteworthy as some courts have concluded that self-interest and ill will are evidence of bad faith, not elements of bad faith.

The court also stated: “The Court is compelled to note at the outset that the hallmark of this case has been petulant and even acrimonious bickering among opposing counsel. The Court is also confounded that a relatively straightforward claim for underinsured motorist benefits that could not exceed $35,000.00 in value could have produced 83 docket items and more than 7,000 pages of correspondence and medical notes. That said, we turn to the question whether either party to this lawsuit may legitimately claim that no material fact is in dispute and that either one is now entitled to judgment as a matter of law. The Court concludes that the muddled record in this case cannot support summary judgment in favor of either party.” Thus, the matter had to go to a jury “to make the ultimate determination whether Defendant’s conduct in this matter was so unreasonable as to constitute ‘bad faith’ under 42 Pa.C.S. § 8371.”  The court did observe that because (1) a plaintiff has the burden to prove its case by clear and convincing evidence, and (2) “Plaintiffs’ persistent failures to cooperate in the discovery process and a failure to observe the literal requirements of Rule 56.1 of the local rules of court, Plaintiff escaped a judicial determination that bad faith cannot be determined from this record by the narrowest of margins.”

The court had earlier stated that an insurer did not have to show its conclusions were correct, or “that its conclusion more likely than not was accurate.” “Nor is the insurance company required to show that the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.”  “Instead, an insurance company must show it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action.” As to the plaintiff’s burden under the clear and convincing evidence standard, the plaintiff has to show that “the evidence is so clear, direct, weighty and convincing as to enable a clear conviction without hesitation, about whether or not the defendants acted in bad faith.”

Date of Decision:  January 15, 2015

Clemens v. New York Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447, 2015 U.S. Dist. LEXIS 4903 (M.D. Pa. Jan. 15, 2015) (Conaboy, J.)

 

JANUARY 2015 BAD FAITH CASES: APPELLATE DIVISION REITERATES FACTORS FOR TRIAL COURTS TO CONSIDER IN DETERMINING WHETHER TO AWARD FEES UNDER R. 4:42-9(a)(6) (New Jersey Appellate Division)

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In Encompass Insurance Company v. Quincy Mutual Fire Insurance Company, the court addressed the standards for awarding counsel fees under Rule 4:42-9(a)(6) to a successful claimant in a declaratory judgment action.  The court made clear that insurer bad faith is not a perquisite, but it is a factor trial courts may consider.  The trial court has broad discretion and may consider an insurer’s good faith refusal to pay demands, the excessiveness of a plaintiff’s demands, the bona fides of either party, the insurer’s justification for litigating the matter, the insured’s conduct in substantially contributing to the necessity for the litigation, the parties’ general conduct, and the totality of the circumstances.

The court also observed that fees can be awarded if the claimant is the insured or the insurer.  In this case, the dispute was between insurers, and the court observed that in suits between insurers, as opposed to a claim between insured and insurer, it does no violence to the general principles of R. 4:42-9(a) to have each party bear its own legal fees, if the totality of the circumstances so suggests. Date of Decision:  November 14, 2014

Encompass Ins. Co. v. Quincy Mut. Fire Ins. Co., DOCKET NO. A-3000-12T4, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 2684 (November 14, 2014) (Hayden and Leone, JJ.)

JANUARY 2015 BAD FAITH CASES: WHERE NO COVERAGE IS DUE AN INSURER HAS GOOD CAUSE TO DENY COVERAGE, AND THUS A BAD FAITH CLAIM CANNOT STAND (Philadelphia Federal)

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In Guglielmelli v. State Farm Mut. Automobile Insurance Company, the insured brought breach of contract and bad faith claims seeking damages for bodily injury under an automobile insurance policy. The policy incorporated a “sign-down form,” which reduced the uninsured/underinsured motorist limits. The plaintiff was listed as the first-named insured, but did not execute the sign-down form.  Rather, the plaintiff’s co-resident, listed as a second-named insured, executed the form.

The first-named insured argued that the form was not binding, and further argued that a stacking waiver executed on a second, single-vehicle policy did not prohibit inter-policy stacking, nor did the “household exclusion” under that policy apply. The court found that the sign-down form was enforceable, and that the stacking waiver and exclusion found within the second policy prevented inter-policy stacking of coverage.  Thus, the court ruled that there was no coverage.

Having so ruled, the court granted judgment for the insurer on the bad faith claim. Quoting the Third Circuit’s opinion in Frog, Switch & Mfg. Co. v. Travelers Ins. Co.:  “Bad faith is a frivolous or unfounded refusal to pay, lack of investigation into the facts, or a failure to communicate with the insured.” Thus, “[w]here the policy does not provide for the specific coverage requested, an insurer has good cause to deny that coverage.”

Date of Decision:  December 16, 2014

Guglielmelli v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 13-5764, 2014 U.S. Dist. LEXIS 173340 (E.D. Pa. December 16, 2014) (Goldberg, J.)

JANUARY 2015 BAD FAITH CASES: HEALTH INSURER’S CHANGE IN POSITION CONCERNING COVERAGE FOR A MEDICAL TREATMENT NOT BAD FAITH (New Jersey Appellate Division)

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A state-wide podiatrist society asserted that a health insurer violated its duty of good faith and fair dealing in deciding not to cover a medical procedure, for which it previously had provided coverage.  The provider was part of a broader national federation of related insurers, which did not generally provide coverage for this procedure. The court assumed for the sake of argument that this claim was properly pleaded, but found no case was made because a violation of the duty of good faith and fair dealing requires a showing of malice or bad faith. In this case, the medical organization failed to identify any malice or bad faith reason for the change in insurer’s policy on covering this procedure. The plaintiff did not, “for example, contend that [the insurer] was trying to drive the podiatrists out of business or steer its insureds to other types of medical providers.” The fact that this insurer may have changed its position based upon the position taken by other insurers in the broader organization likewise did not constitute bad faith.  A difference among medical experts about the reliability of a procedure, resulting in a change in position on coverage, does not render the decision to change positions a breach of the duty of good faith and fair dealing.

Date of Decision:  November 17, 2014

New Jersey Podiatric Med. Soc’y, Inc. v. Horizon Blue Cross Blue Shield, DOCKET NO. A-1459-13T1, SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2014 N.J. Super. Unpub. LEXIS 2704 (App. Div. Nov. 17, 2014) (Reisner, Koblitz and Haas, JJ.)

JANUARY 2015 BAD FAITH CASES: COURT REFUSES TO SEVER UIM BAD FAITH CLAIM OR TO STAY BAD FAITH DISCOVERY (Lackawanna County)

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The Tort Talk Blog has reported on a Lackawanna County Common Pleas case where the court would neither sever the bad faith claim in a UIM case, nor stay bad faith discovery.

JANUARY 2015 BAD FAITH CASES: COURT REFUSES TO UNIVERSALIZE BAD FAITH FROM SIMPLE DENIAL OF COVERAGE IN THE ABSENCE OF SPECIFIC EVIDENCE OF BAD FAITH (Philadelphia Federal)

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In Easy Corner, Inc. v. State National Insurance Company, the court made clear the significance of a bad faith’s plaintiff’s need to prove something more than negligence, or that an insurer was simply wrong on coverage. In that case, the court granted summary judgment to the insurer because the plaintiff could not do so; and to allow the case to proceed on plaintiff’s theory would make every incorrect denial of an insurance claim bad faith.

As the court observed, an insurer’s conduct need not have been fraudulent, but “mere negligence or bad judgment is not bad faith.” An insured must ultimately show that “the insurer breached its duty of good faith through some motive of self-interest or ill will.” Thus, in “opposing a motion for summary judgment, the insured’s burden is “commensurately high because the court must view the evidence presented in light of the substantive evidentiary burden at trial.” The plaintiff’s burden of proof is clear and convincing evidence. In the case at hand, the plaintiff essentially argued that the insurer was wrong in denying coverage, “must have or should have known as much, and therefore … must have acted in bad faith.” However, the plaintiff did not point to any “facts of record showing that Defendant’s denial of coverage rose above ‘mere negligence or bad judgment’ or that Defendant acted out of self-interest or ill will.” Of note, the court then states: “Rather, under Plaintiff’s reasoning, virtually every incorrect denial of insurance coverage would constitute bad faith merely by virtue of being incorrect.”

The court emphasized that “mere insinuation is not enough”.  The court’s examples of bad faith conduct that could constitute evidence of bad faith included: misrepresenting policy terms, foot dragging in investigations, hiding information from insureds, shifting the basis on which to deny claims, making unreasonable assumptions, inexcusable periods of inactivity, inadequate communications, and a jury’s finding that the insurer violated the Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.

Date of Decision:  November 3, 2014

Easy Corner, Inc. v. State Nat’l Ins. Co., CIVIL ACTION NO. 14-1053, 2014 U.S. Dist. LEXIS 155308 (E.D.Pa. November 3, 2014) (Robreno, J.)

JANUARY 2015 BAD FAITH CASES: UIM BAD FAITH PLAINTIFF ADEQUATELY PLEADS CLAIM WHERE CARRIER SWITCHES POSITIONS ON BASIS FOR DENIAL (Philadelphia Federal)

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In Lyman v. State Farm Mutual Automobile Insurance Company, plaintiffs brought breach of contract and bad faith claims against their UIM insurer.  The carrier sought to dismiss the claims, asserting they were mere boilerplate and could not stand under Twombly.  The court disagreed.

The court found that the complaint alleged specific acts of bad faith, including allegations that: the insurer asked the insured to undergo an evaluation conducted by a chiropractor selected by the insurer,  who opined in her report that the insured’s “condition was caused by the accident in question; that her condition was not going to improve into the future and had reached the maximum level of improvement; and that further medical care … was not warranted because it would not make her any better.” The complaint alleged “that, notwithstanding the report’s findings, [that chiropractor] and the defendants ignored [the insured’s] need for palliative care, i.e., care administered to relieve pain as opposed to achieving a rehabilitative cure.”

The insured also alleged that “the defendants abused and/or violated the Peer Review … by finding that medical treatment was not reasonable or necessary without following the procedures set forth in the statute.”  The insured further alleged “that the defendants refused ongoing medical care for her, which prevented ongoing medical documentation and medical proof of her injuries admittedly caused by the accident, in order to frustrate and/or limit her claim for underinsured motorist benefits.”  These allegations supported the claim that “the defendants knew of their lack of a reasonable basis to deny medical treatment and to deny underinsured motorist benefits.” Further, the complaint alleged “that while the defendants refused to change their position on the denial of benefits, they shifted their reasons for denying them,” and that in “stark contradiction to their adoption of the chiropractor’s findings, the defendants suddenly denied that the ongoing care was related to the injuries caused by the accident in question.” The assertion was that this shift occurred to deny medical care and eliminate UIM exposure.  The court stated that: “By subsequently changing their position and asserting that [the insured’s] ongoing medical condition was not caused by the accident, a position contrary to the medical conclusions and determinations of their own chiropractor, the defendants give credence to the plaintiffs’ allegation that the defendants knowingly denied underinsured motorist benefits without a reasonable basis.” Date of Decision:  December 16, 2014

Lyman v. State Farm Mut. Auto. Ins. Co., CIVIL ACTION NO. 14-6235, 2014 U.S. Dist. LEXIS 173345(E.D. Pa. December 16, 2014) (Stengel, J.)

PENNSYLVANIA SUPREME COURT ISSUES OPINION ON GIST OF THE ACTION DOCTRINE

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In Bruno v. Erie Insurance Company, the Supreme Court affirmed the existence of the “gist of the action” doctrine. Rather than viewing this as a recent theory, initiated with the Superior Court’s 1992 Bash v. Bell Telephone Company of PA decision, the Supreme Court concluded that the gist of the action doctrine had been part of its jurisprudence since 1830.

The basic formulation is that the nature of the duty alleged to have been breached is the critical factor in determining if the case is deemed a breach of contract action or a tort action.  The courts should look at the substance of a party’s allegations, and not labels affixed to pleadings, in making that determination.  To the extent that the Superior Court added an intertwining rule, i.e., if the two claims are intertwined the doctrine applies, there is no separate intertwining rule, but only the basic rule, which is:

“If the facts of a particular claim establish that the duty breached is one created by the parties by the terms of their contract – i.e., a specific promise to do something that a party would not ordinarily have been obligated to do but for the existence of a contract – then the claim is to be viewed as one for breach of contract. … If, however, the facts establish that the claim involves the defendant’s violation of a broader social duty owed to all individuals, which is imposed by the law of torts and, hence, exists regardless of the contract, then it must be regarded as a tort.”

In Bruno, an insurance contract created an obligation to make certain payments and carry out certain investigations if mold were present. The insurer sent out an adjuster and engineer to investigate the mold at the Brunos’ home. They are alleged to have gratuitously, and negligently, informed the homeowners that the mold was not a danger, that the homeowners could continue living in the home, and could continue carrying out their home renovations.  The homeowners alleged that through their subsequent efforts, they learned the mold was dangerous, the home had to be destroyed because they had not ceased renovations, and the mother of the family developed cancer from the exposure to the mold; the family also having to evacuate the home.  The Superior Court applied the gist of the action doctrine to bar the claim in negligence.

The Supreme Court reversed the Superior Court, and found that simply because the adjuster and engineer were present because of a contractual obligation, this did not mean that every action taken thereafter was based on a contractual relationship. Rather, in this instance, the duty breached by choosing to give this gratuitous advice, which was not required by the contract, was the breach of a social duty and a claim in negligence could be pleaded.  (Compare a recent federal district court case where the court upheld a bad faith claim by an insured where the adjuster asked the insured to climb up on a roof as part of her investigation, rather than adhering to the insurer’s contractual obligation to hire a contractor for that work, and the insured fell through the roof).

The majority’s language, however, is not always so narrow.  Justice Eakins’ concurrence pointed out a concern that the Majority’s opinion was so broadly written that litigants may attempt to argue that the Court will now allow negligence claims based upon the manner of contract’s performance, in addition to claims for extra-contractual misconduct. He agreed that the Brunos’ allegations were for tortious conduct outside the contract; but that courts should be looking to the unique circumstances of each case.

Without explicitly saying so, it appears Justice Eakins was concerned that the lower courts and federal courts would slip into the idea that poor performance of a contract would be negligent misfeasance, as opposed to an utter failure to perform, nonfeasance, which would be a breach of contract.  This was a test put forward by the Commonwealth Court, and it is not the test that was adopted by the Supreme Court; but through the idea of negligent performance of a contract, it could become the working test as a practical matter.

The Superior Court’s recent decision in Indalex v. National Union Fire Insurance Company is another recent  gist of the action case that will likely be tied to Bruno, in making arguments concerning tort vs. contract conceptual distinctions. The Superior court addressed whether the gist of the action doctrine could be used in insurance coverage litigation; finding it could not in that case, which involved an underlying products liability claim against the manufacturer of an off-the-shelf product used by contractors in their construction work. The Supreme Court denied the petition for allowance of appeal.

Subsequent cases following Indalex agree that the gist of the action doctrine, as such, should not be used in an insurance coverage case; however, the coverage dispute court is still bound by the principles “that courts must focus on the substance of the [underlying] Complaint rather than any particular language,” look to the specific facts alleged, and that “Pennsylvania courts have … specifically counseled that faulty workmanship does not constitute an occurrence even if … it is cast as a negligence claim.” State Farm Fire & Cas. Co. v. McDermott, CIVIL ACTION NO. 11-5508, 2014 U.S. Dist. LEXIS 147702 (E.D. Pa. Oct. 15, 2014) (Tucker, C.J.).  Thus, while the gist of the action doctrine may not be available to a coverage court to dismiss an underlying plaintiff’s tort claim, the basic principle about discerning the nature of a claim remains available to a coverage court, so that it may prevent the use of artful pleading to invoke a duty to defend or indemnify where not warranted.

Date of Decision:  December 15, 2014

Bruno v. Erie Insurance Company, No. 25 WAP 2013, 2014 Pa. LEXIS 3319 (Pa. Dec.15, 2014)

JANUARY 2015 BAD FAITH CASES: BAD FAITH CLAIM STATED FOR CONDUCT OCCURRING AFTER INSURANCE CONTRACT WAS ENTERED, THE COURT HAVING REJECTED THE ARGUMENT THAT THE CLAIM WAS IN THE NATURE OF PRE-CONTRACT FALSE MARKETING (Philadelphia Federal)

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In Jacoby v. AXA Equitable Life Insurance Company, it was alleged that the insured purchased a life insurance policy that required an initial series of premium payments on the policy, but thereafter the premiums would be paid from dividends on the policy without the need for separate premium payments.  During the course of the policy, all of the required premiums were paid.  The insured claimed that a notice to pay another premium was issued thereafter, and when he contacted the insurer to ask why, the insurer’s representative confirmed that the notice was in error and the premiums would come out of the dividends.  Thus, no further separate premium payments needed to be made.

Twenty years went by with no further notice from the insurer, but when contact was made with insurer about the policy, the carrier stated that the failure to make the noticed payment 20 years earlier resulted in the policy being converted to a term life insurance policy.  After converting it to a term policy, that policy had expired 9 years earlier.  The insured brought suit for breach of contract and bad faith, among other claims.

In seeking dismissal of the bad faith claim, the insurer portrayed plaintiff’s claim as a false marketing/pre-contract misconduct claim. The Pennsylvania Supreme Court had ruled this kind of allegation was outside the bad faith statute, because the wrongful conduct arose before any insurance contract was entered and was unrelated to performing obligations under the insurance contract.

The district court rejected that argument.  The court found that the plaintiff’s principal allegations of bad faith conduct were not pleaded in connection with the insurer’s solicitation practices.  Rather, the “Plaintiff’s allegations principally concern Defendant’s conduct in connection with its discharge of obligations under the Policy after purchase by the Insured, which still may be an appropriate foundation for a bad faith claim.” (Emphasis in original).  Thus, the court refused to dismiss the claim at the pleading stage, and would allow discovery on the nature of how the insurer discharged its obligations to the insured.

Date of Decision:  December 15, 2014

Jacoby v. AXA Equitable Life Ins. Co., CIVIL ACTION NO. 13-6511, 2014 U.S. Dist. LEXIS 172917 (E.D. Pa. December 15, 2014) (Restrepo, J.)

JANUARY 2015 BAD FAITH CASES: COURT CONDUCTS CLOSE ANALYSIS OF WHETHER BAD FAITH CLAIM SHOULD BE REMANDED, AND FINDS THAT REMAND IS PROPER (Philadelphia Federal)

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In Plunkett v. Nationwide Mutual Insurance Company, a federal district court was once again faced with a motion to remand a removed bad faith action, where the insured made representations that the case was not seeking in excess of the $75,000 jurisdictional minimum.  Specifically, the insureds’ complaint in the Philadelphia Court of Common Pleas included an ad damnum clause alleging damages not in excess of fifty thousand dollars, and not in excess of the amount requiring compulsory arbitration under Pennsylvania law on the breach of contract claim.  Similarly, on the separate bad faith claim, the “ad damnum clause also states that she does not seek damages in excess of fifty thousand dollars and not in excess of the amount required for compulsory arbitration.”

The court stated that the removal statute is to be strictly construed against removal, and where a complaint specifically limits the amount in controversy to less than the jurisdictional minimum, the removing defendant must prove to a “legal certainty” that the amount in controversy does in fact exceed the jurisdictional threshold amount. Legal certainty falls above a preponderance of the evidence but below absolute certainty. The court left open the issue of whether this the standard of proof for remands changed with 2012 statutory amendments as neither party addressed a potential change in the law; and as the court’s ruling would not change under the preponderance of the evidence standard.

First, the court found that the two plaintiffs’ claims could not be aggregated.  Next, the court found that under Third Circuit precedent, a plaintiff may limit his or her claims to less than the statutory jurisdictional threshold in a pleading, as the plaintiffs in this case had done.  The court then drilled down in the value of the actual claims, and contemplated the potential of punitive damages and attorneys’ fees under the bad faith statute.  The court found that this still would not meet the legal certainty standard to prevent remand.

The court remanded the case.

Date of Decision:  December 22, 2014.

Plunkett v. Nationwide Mut. Ins. Co., CIVIL ACTION NO. 14-6545, 2014 U.S. Dist. LEXIS 175999 (E.D. Pa. December 22, 2014) (O’Neill, J.)