Restatement of the Law of Liability Insurance Conference on February 27, 2015

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On Friday, February 27, 2015, Rutgers-Camden School of Law’s Center for Risk and Responsibility will be holding a conference on “The ALI’s Principles of the Law of Liability Insurance”, which will include, among others, Restatement of the Law, Liability Insurance, Reporters Tom Baker (Penn) and Kyle Logue (Michigan).  The program is described here, and you can sign up here.

FEBRUARY 2015 BAD FAITH CASES: ALLEGING THAT INSURER MALICIOUSLY AUDITED AND RE-ADJUSTED PREMIUMS DID STATE A CLAIM FOR BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING, EVEN WHERE CLAIMS HANDLING NOT INVOLVED; ATTORNEYS’ FEES NOT PERMITTED; PUNITIVE DAMAGES COULD BE PURSUED (New Jersey Federal)

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In LM Ins. Corp v. All-Ply Roofing Co. the insured alleged, among other things, that the insurer audited its premiums, and reclassified its employees, as revenge for underreporting income, and that this stated a bad faith claim.  The insurer argued there are no recognizable bad faith claims in New Jersey for audit or premium disputes, but rather bad faith claims against insurers in New Jersey are limited to claims handling issues.

The court found for the insured, and held that the insured stated a claim for breach of implied covenant of good faith and fair dealing against Plaintiff based on the insurer’s auditor re-classifying all of insured’s employees as roofers in retaliation for the insured under-reporting its payroll. The insurer had offered no binding authority that New Jersey law limits “bad faith” claims against insurers to claims handling, without affording a viable bad faith action with respect to premium disputes.

Specifically, New Jersey courts imply a duty of good faith and fair dealing in all contracts. “[W]hen a breach of the duty of good faith and fair dealing can be shown, liability may be had in tort as well as in contract under New Jersey common law. An insurer’s obligation to exercise good faith “depend[s] upon the circumstances of the particular case.” “The boundaries of ‘good faith’ will become compressed in favor of the insured depending on those circumstances” presented. “[I]n New Jersey the covenant of good faith and fair dealing is contained in all contracts and mandates that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.'”

The insured’s Counterclaim states that the insurer’s policy contracts imply that it would deal fairly with the insured and perform its obligation under the contract in good faith. It also alleged that the auditor elected to maliciously disregard the insured’s course of business and performance while exhibiting egregious and outrageous misconduct when the insured attempted to have the classification revised, by claiming every employee of the insured was classified as a “roofer.” In essence, the insured’s counterclaim stated sufficient facts to claim the insurer consciously manipulated the insured’s premium obligations so as to punish the insured for what the insurer deemed “under-reporting” of its payroll, while maximizing the insurer’s profit at the insured’s expense. This in effect injured the right of insured to receive the “fruits” of the contract, and the insureds were held to have stated a claim for breach of the implied covenant of good faith and fair dealing.

The court did dismiss the claim for statutory attorney’s fees, as inapplicable in first party cases, but did permit the punitive damages claim to go forward, as the counterclaim clearly alleged malice on the part of the insured’s auditor when he willfully, without cause and in retaliation, reclassified the insured’s employees to the highest classification.

Date of Decision:  January 23, 2015

LM Ins. Corp v. All-Ply Roofing Co., Civil Action No. 14-cv-04723, 2015 U.S. Dist. LEXIS 7621 (D.N.J. January 23, 2015) (Linares, J.)

 

FEBRUARY 2015 BAD FAITH CASES: COURT WOULD NOT STRIKE ALLEGATION THAT BAD FAITH EXISTED BASED UIPA VIOLATION, SINCE THE SAME CONDUCT THAT COULD VIOLATE UIPA MIGHT ALSO BE EVIDENCE TO ESTABLISH BAD FAITH, DISTINCTLY FROM BEING LABELED AS A UIPA VIOLATION (Philadelphia Federal)

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In Moore v. State Farm Fire & Cas. Co., the insurer moved to strike an averment that it violated the bad faith stated because it violated the Unfair Insurance Practices Act.  The court found that although the bad faith statute 42 Pa.C.S. § 8371 does not set forth a standard, Pennsylvania courts have uniformly adopted the Terletsky standard that an insured must prove “(1) that the insurer did not have a reasonable basis for denying benefits under the policy; and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis in denying the claim.” Prior to Terletsky some courts had looked to the UIPA for standards, but that practice was not to be followed post-Terletsky.   “Thus, a violation of the UIPA does not per se constitute bad faith.”  On the other hand: “Nor does the fact conduct violates the UIPA prevent the conduct from also being evidence of bad faith.” “Instead, the question is whether the particular conduct (that may or may not violate the UIPA) is relevant to show that the insurer lacked a good faith basis for denying benefits and knowingly or recklessly disregarded that fact.” The court stated: “Based on these principles, the Court will not conclude at this juncture, that evidence regarding conduct that allegedly violated the UIPA ‘ha[s] no possible relation to the controversy’ or evaluate the extent to which it ‘may cause prejudice to one of the parties.’” The court thus refused to strike the averment.

Date of Decision: February 4, 2015

Moore v. State Farm Fire & Cas. Co., NO. 14-3113, 2015 U.S. Dist. LEXIS 13018 (E.D. Pa.  February 4, 2015) (Beetlestone, J.)

FEBRUARY 2015 BAD FAITH CASES: NEW JERSEY APPELLATE DIVISION REVERSES TRIAL COURT’S DISMISSAL OF INSURED’S BAD FAITH CLAIM DUE TO FAILURE TO COMPLY WITH PROCEDURAL REQUIREMENTS (New Jersey Appellate Division)

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In Citizens United Reciprocal Exch. v. Espinoza, the Appellate Division of the Superior Court reversed and remanded a trial court’s dismissal of an insured’s counterclaim against its insurer alleging bad faith, breach of the duty of good faith and fair dealing, and other claims in a declaratory judgment action.  Plaintiff, the insurer, issued a personal auto insurance policy to defendant.  The policy required the insurer to pay damages for bodily injury or property damage for which any insured became legally responsible because of an auto accident.  Defendant had only one vehicle listed on the Declaration page of the policy, a 2004 Volvo sedan.

The accident in question occurred when Defendant rented a U-Haul, but then allowed a friend to drive the vehicle.  The friend was in an accident, and the other driver brought suit against both Defendant and the friend.  Defendant’s insurer, Plaintiff, initially provided coverage under a reservation of rights, but ultimately denied coverage, stating the friend was not an insured under the policy.  Plaintiff then brought a declaratory judgment action against Defendant.  Defendant then brought counterclaims alleging bad faith and related claims.  Prior to the beginning of trial, Plaintiff changed its position to allege it denied coverage not because of the friend’s status as an insured, but because Defendant did not meet the definition of insured provided in the policy, because he was not using the vehicle at the time of the accident.

In relation to his bad faith claims, Defendant intended produce evidence of Plaintiff’s failure to provide him with an attorney at his deposition, as well as testimony from the claims manager regarding the denial of coverage.  Although the case was set for jury trial, prior to seating a jury the parties agreed to instead conduct a bench trial.  However, during the bench trial, the judge treated the case as a motion hearing rather than a trial, disallowing Defendant from present its evidence regarding the bad faith claim, including barring the presentation of any witness testimony by either party.  The judge treated the case as a summary judgment proceeding, entertained oral argument, and rendered a brief opinion finding the policy provided no coverage to Defendant.  Defendant then appealed this ruling.

On appeal, the Appellate Division cited many problems with the judge’s approach.  First, Defendant was not provided notice that, instead of a trial, the matter would be resolved without testimony or documentary evidence.  Furthermore, no exhibits were marked for identification, none were formally accepted into evidence, and no testimony was permitted.  Thus, the judge made his decision based on the stipulated facts presented by the parties in their prior motions for summary judgment, despite the ruling denying summary judgment on those motions due to remaining disputed material facts.  The judge made no specific findings of fact, and merely stated his conclusion that no coverage existed.  The Appellate Division thus found it impossible to give meaningful appellate review absent the trial court judge’s reasoning for his opinion, particularly given the evidentiary shortcomings of the trial.  Thus, the Appellate Division reversed the trial court’s finding, and remanded for further proceedings to allow Defendant the opportunity to present relevant testimony and documents in support of his claim for coverage.

Date of Decision: Jan. 23, 2015

Citizens United Reciprocal Exch. v. Espinoza, Docket No. A-5841-12T4, 2015 N.J. Super. Unpub. LEXIS 133 (N.J. Super. Ct. App. Div. Jan. 23, 2015) (Haas, J. and Higbee, J.).

FEBRUARY 2015 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM TO THE EXTENT IT SOUGHT EMOTIONAL DAMAGES UNDER THE BAD FAITH STATUTE, FINDING THE PENNSYLVANIA STATUTE PRESCRIBES SPECIFIC REMEDIES (Middle District)

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In Hoffman v. State Farm Fire & Cas. Co., plaintiffs brought suit alleging a claim of breach of insurance contract and a statutory bad faith claim.  Plaintiff purchased a homeowners’ insurance policy from the insurer, after which a fire rendered the home uninhabitable.   The firefighters at the scene of the fire concluded the incident was accidental and electrical in origin.  The loss was immediately reported to the insurer, who then began a year-long investigation into the cause and nature of the fire.  Plaintiffs alleged this investigation unreasonably cast suspicion upon them, and caused an unnecessary delay in the resolution of the claim.  Furthermore, the insurer’s investigator removed electrical boxes and writing from the home without the homeowners’ permission.  The lengthiness of the investigation forced the plaintiffs to seek alternative housing, which they allege the insurer did not assist in obtaining, forcing them to live nearly 50 miles from their children’s school.  Furthermore, the insurer delayed its payments of plaintiffs’ $150,000 claims, making an initial payment of only $59,000, and never paying the full value of the claim.

After plaintiffs filed suit, the insurer filed a motion to dismiss some of the claims set forth in the complaint.  Specifically, the insurer sought dismissal of a claim for attorney’s fees based on the breach of contract claim, dismissal of any claim for emotional distress based on the bad faith actions of the insurer, dismissal of the breach of contract claim for inadequately describing the damages sought by plaintiff, and dismissal of the bad faith claim in its entirety due to failure to state a claim.

The Magistrate Judge recommended granting the motions to dismiss as to the attorney’s fees associated with the breach of contract claim, and any claim for emotional distress on the basis of the insurer’s bad faith, but denying the motion as to all other requests.  In his opinion, the Magistrate Judge determined that under Pennsylvania law, attorney’s fees are not recoverable in a contract action absent an explicit provision allowing for such damages in the original contract.  Furthermore, no claim for pain, suffering, or emotional distress is permitted under the bad faith statute.  Rather, the statute explicitly prescribes the relief available should an insurer act in bad faith, allowing for an award of interest on the amount of the claim from the time the claim was made at a prime rate of interest plus 3%, punitive damages, and courts costs and attorney fees.  Therefore, damages for pain, suffering, and emotional distress simply cannot be recovered under the statute.  The District Court adopted the report and recommendation, granting the motion to dismiss only to the attorney’s fees associated with the breach of contract claim, and emotional distress damages based on bad faith actions brought against the insurer under the bad faith statute.  By contrast, some courts have held that emotional distress claims are available for common law breach of contract based bad faith actions, under Birth Center.

Date of Decisions: December 10, 2014 and January 21, 2015

Hoffman v. State Farm Fire & Cas. Co., Civil No. 4:14-CV-1978, 2014 U.S. Dist. LEXIS 180870 (M.D. Pa., Dec. 10, 2014) (U.S.M.J. Carlson) adopted by Hoffman v. State Farm Fire & Cas. Co., Civil No. 4:14-CV-1978, 2015 U.S. Dist. LEXIS 6701 (M.D. Pa., Jan. 21, 2015) (Brann, J.).

FEBRUARY 2015 BAD FAITH CASES: BAD FAITH CLAIM DISMISSED DUE TO LACK OF FACTUAL SUPPORT TO MAKE OUT A PLAUSIBLE CLAIM; PUTATIVE DISCOVERY VIOLATIONS DURING LITIGATION CANNOT CONSTITUTE BASIS FOR INSURANCE BAD FAITH CLAIM (Philadelphia Federal)

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In Morrissey v. State Farm Fire & Cas. Co., plaintiffs’ home was damaged by a fire, making it uninhabitable.  Their homeowners’ insurance policy provided coverage limits of $220,000 for the house, $165,000 for personal property, and the actual value of the loss of use sustained. Plaintiffs filed claims for the damage to the home, damage to their personal property, and costs for alternative housing while the home was being repaired.   The insurer filed a motion to dismiss the bad faith (and consumer protection law) count, which the court granted, without prejudice to amend, though the court noted amendment would appear to be futile.

The insurer investigated the claims and obtained sworn statements from the plaintiffs. After completing its investigation, the insurer extended coverage for the claim on damage to the home itself.  The check was made payable to plaintiffs, their attorney, and plaintiffs’ former bank.  Plaintiffs made repeated requests for the bank to endorse the check so repair work could begin on the home, but the bank refused because it no longer held the mortgage.  Eventually, plaintiffs’ counsel returned the check to the defendant and requested it be re-issued to the plaintiffs, plaintiffs’ counsel, and the plaintiffs’ current mortgage holder.  The insurer refused to do so based on an internal policy which required checks to be made to the bank that held the mortgage at the time of the loss.  Ultimately, a second settlement check was issued and processed four months after the original check was issued.  The insurer then provided notice it would only cover four more months of alternative housing.

Plaintiffs brought suit alleging the insurer violated the bad faith statute by: 1) issuing the settlement check over one year after the fire occurred; 2) delaying reissuing the check for three and a half months “for no valid reason”; 3) filing boilerplate objections to Plaintiff’s discovery to gain an advantage in the litigation; 4) arbitrarily refusing to settle their claims; and 5) breaching fiduciary duties and other state laws.  The Court, however, dismissed the claims.

Plaintiffs failed to set forth factual information to show that the defendant lacked a reasonable basis for delaying payment of their benefits, and also failed to offer information about the alleged repeated attempts to negotiate with the carrier.  They provided no facts to explain why the delay in settlement was arbitrary, or that the investigation was unwarranted or inadequate.  Rather, the insureds simply asserted the delay represented bad faith; however, a delay in payments of claims alone cannot constitute bad faith.  Finally, even if the delay was unreasonable, plaintiffs failed to show the insurer knew or disregarded a lack of a reasonable basis.

Allegations that the insurer acted in bad faith during the litigation by filing “boilerplate objections to Plaintiff’s discovery … for the purpose of preventing the drafting of a Complaint to get an advantage in this case” did not show bad faith. The court observed that “bad faith may extend to the misconduct of the insurer during the pendency of litigation.  ….  However, the defendant’s objections to the plaintiff’s request for pre-complaint discovery were not unreasonable. The plaintiffs’ allegation that these objections were meant to give the defendant an advantage are unsupported and merely conclusory. The court noted: “This is especially true given that the state court judge accepted the defendant’s argument that this request was a ‘fishing expedition’ and was unnecessary for the plaintiffs to file their complaint.” Further, boilerplate discovery objections do not constitute a basis for an insurance bad faith claim.

In sum, the court found that the insureds’ “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to state a valid cause of action. …. [and that the insureds] failed to assert a plausible bad faith claim under Pennsylvania law.”

Date of Decision: December 18, 2014

Morrisey v. State Farm Fire & Cas. Co., Civil Action No. 14-05193, 2014 U.S. Dist. LEXIS 174998 (E.D.Pa. Dec. 18, 2014) (Stengel, J.).

FEBRUARY 2015 BAD FAITH CASES: BAD FAITH CLAIM FUTILE BASED ON DISCOVERY DISPUTES INVOLVING DECLARATORY JUDGMENT CLAIM; AND WHERE POLICY PROVIDED INSURER A REASONABLE BASIS TO DENY CLAIM (Philadelphia Federal)

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In Byars v. State Farm Mut. Auto. Ins. Co., plaintiff sought leave to amend his complaint to add an additional count against the defendant-insurer alleging bad faith.  In the proposed amended complaint, Plaintiff alleged the insurer had acted in bad faith during the litigation process in the pending coverage action between the two parties.  In the proposed amended complaint, Plaintiff outlined the actions which he alleged constituted bad faith, including the insurer’s assertion of unreasonable objections during a deposition, as well as other discovery disputes including the redaction of files produced by the insurer to Plaintiff.

A court has broad discretion in determining whether to grant leave to amend a complaint, however, it must deny leave if the moving party has demonstrated undue delay, bad faith, or dilatory motives, the amendment would be futile, or the amendment would prejudice the other party.  Here, the Court found amendment would be futile, because the amended complaint failed to state a claim upon which relief could be granted.  The Court determined the bad faith statute provides an insured redress for an insurer’s bad faith conduct in its capacity as an insurer, not as a legal adversary in a lawsuit, and therefore the discovery violations did not fall within the statute’s ambit.

Plaintiff further alleged the insurer acted in bad faith by refusing to pay Plaintiff’s underinsured motorist claim.  However, the insurer based its continued denial of benefits on the belief that it was not bound by a state court judgment, citing a provision in the Policy regarding its consent to be bound.  (“We are not bound by any: a. judgment obtained without our written consent; and b. default judgment against any person or organization other than us.) Such consent clauses are enforceable under Pennsylvania law and not contrary to public policy, and therefore the insurer had a reasonable basis in law to refuse to pay plaintiff’s state court judgment where Plaintiff failed to obtain a default judgment against the insurer itself. Thus, the court denied Plaintiff leave to amend his complaint to add a count of bad faith on such factually insufficient claims.

Date of Decision:  January 12, 2015

Byars v. State Farm Mut. Auto. Ins. Co., Civil Action No. 13-6452, 2015 U.S. Dist. LEXIS 3524 (E.D.Pa. Jan. 12, 2015) (Dalzell, J.).

FEBRUARY 2015 BAD FAITH CASES: COURT DISMISSES BAD FAITH CLAIM FOR FAILURE TO MEET TWOMBLY AND IQBAL STANDARDS (Philadelphia Federal)

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In Mozzo v. Progressive Ins. Co., the Court dismissed a claim for bad faith due its “bares bones” conclusory allegations, and failure to provide a factual basis for an award of bad faith damages.  Plaintiff’s complaint contained only 12 numbered paragraphs, and merely alleged that plaintiff made a claim for damages under a policy provided by the defendant insurer, and that the insurer failed to pay the insured’s UIM claim.  Plaintiff failed to provide any facts regarding the insurer’s actions, much less why those actions would lead to any inference of bad faith.  The complete absence of facts surrounding the case, or establishing bad faith conduct on the part of the insurer, led the Court to grant the insurer’s motion to dismiss the bad faith claim.

Mozzo v. Progressive Ins. Co., Civil Action No. 14-5752, 2015 U.S. Dist. LEXIS 192 (E.D.Pa. Jan. 5, 2015) (Buckwalter, S.J.).

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.)