SEPTEMBER 2014 BAD FAITH CASES: VICTORY ON COVERAGE ISSUES, ON AMBIGUOUS BASIS, DID NOT PRECLUDE BAD FAITH AGAINST PRIMARY AND EXCESS INSURERS CONCERNING DUTY TO DEFEND OR SETTLE; CONDUCT OF DEFENSE COUNSEL IN DECIDING NOT TO REQUEST SPECIAL INTERROGATORIES REMAINED AN ISSUE; AND INSURED’S EXPERT TESTIMONY WAS EXCLUDED ON ISSUE OF ACTUAL CONFLICT IN APPOINTING DEFENSE COUNSEL, BUT ALL EXPERTS COULD OTHERWISE TESTIFY (Philadelphia Federal)

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In Charter Oak Insurance Company v. Maglio Fresh Foods, a primary and excess carrier sought declaratory judgments that they owned the insured no coverage duty under their policies.  The insured counterclaimed for bad faith.  The parties agreed to let the court decided the coverage issues before ruling on the bad faith issue.  The court found that neither insured owed any coverage duty.  However, this, in itself, did not end the bad faith inquiry.

Background

The insured subsequently amended its counterclaims for bad faith against each insurer. It alleged that the primary carrier acted in bad faith (1) by failing to acknowledge a conflict of interest between the insurer and insured; (2) by failing to advise the insured of its right to independent counsel as a result of that alleged conflict, and to provide that independent counsel; (3) by failing to intervene in the underlying litigation in a timely manner in order to submit jury interrogatories as means of clarifying whether the jury found against the insured based on a theory of liability that the insurance policies would cover or on an uncovered theory; and finally (4) by failing to consider settlement offers and attempt to settle the underlying lawsuit in good faith.

The insured alleged that the excess carrier acted in bad faith by (1) failing to conduct a reasonable investigation before disclaiming coverage and (2) failing to provide a defense to the insured and refusing to post an appeal bond upon the exhaustion of the primary carrier’s policy limits.

Opinion 1.  Winning coverage issue did no eliminate bad faith claims automatically and court found material issues of fact that would place these claims before a jury.

The carriers attempted to win the day on the argument that because they won on coverage, they must by necessity win on bad faith.  In rejecting that argument, the court first observed that the duty to defend was broader than the duty to indemnify.

Next, the court observed that defending under a reservation of rights does not eliminate the possibility of bad faith.  “As the Superior Court of Pennsylvania recently observed, ‘[t]his is not to say that, when an insured accepts the insurer’s defense, the insurer’s conduct of the litigation is subject to no further scrutiny.” Babcock & Wilcox Co. v. Am. Nuclear Insurers. “Rather, the insurer remains bound by its fiduciary obligation to represent the insured’s interests, and to settle the case when appropriate, in keeping with its obligation of good faith.’”

Then, on the issue of alleged bad faith by the primary insurer in not seeking to intervene in the litigation to request jury instructions that would determine whether the jury found against the insured on a covered or non-covered claim, the court appeared to place this in the context of a duty to settle.  The argument appears to be that doing so may have been advantageous to the insured at a time when itfaced potential liability based on certain claims, some of which were not covered by the policy and some of which may have been. That the court later determined there was no coverage was not the relevant question; rather, it looked to the point in time when the decision could have been made to do so, and at which time the issue of coverage was “by no means certain”. The court framed the issue: “In order to determine whether [the insurer] acted in bad faith, the factfinder must evaluate [its] conduct vis-a-vis the factual landscape that existed at the time of the conduct in question, not based on this Court’s later determinations.”

Addressing this last issue on the facts, the court stated that: “To the extent that a trial involved potentially covered theories of liability, [the insured] had an interest, and indeed a right, to have [the primary carrier] take appropriate steps so that the jury could be instructed on, and if the evidence warranted under the law, return a verdict of liability on the [the potentially covered] claim.” The facts showed that by the time to case got to the jury, potentially covered claims were still on the table.  That being said, the court came very close to ruling in the insurer’s favor on this issue.  The insurer had retained coverage counsel as well as defense counsel at the time of trial, and coverage counsel had recommended submitting special interrogatories, which the insurer wanted to do.  However, the final decision was left up to defense counsel who did not do so, but who was given full leeway on this issue without the carrier’s making the call.  Because there was some remaining question on why he so chose, the court allowed the matter to go to trial; and further, because it would not be granting the motion for summary judgment in full for the carrier in any event.  Importantly, the court did find that there was no issue about defense counsel’s independence; and defense counsel’s decision not to submit the special interrogatories when the carrier wanted him to, evidenced his independence.

The court further found that there were issues concerning an alleged bad faith failure to settle.  There were two products at issue in the underlying unfair competition case.  One went to verdict in the original action, and the other was subject to a mistrial.  The first resulted in an excess verdict for the primary carrier, but there was no bad faith as the case had been consistently evaluated as worth less than policy limits.  As to the second, there were factual disputes about whether that case could then settle before retrial.  It did not settle, and on retrial, the second verdict was for less than policy limits ($1 Million), but was still a substantial $660,000.  The court found on the record various factual issues concerning whether the cases could have settled.

As to the excess carrier, the time period at issue was likewise that period between verdicts, and then even after the verdict.  The court framed the issue as whether the excess carrier met “its potential defense obligations to [the insured]?” Because the primary carrier tendered policy limits during this period, potential defense issues arose for the excess carrier, even though the primary still provided a defense for a time before the post-verdict settlement.  The insured argued that the excess carrier needed to reevaluate the case to meet its fiduciary responsibilities, and to pay towards defense and an appeal bond.  The court found issues remained open, and would not grant summary judgment.

Finally, the court rejected the argument that bad faith could not exist because there was no objective basis to find that the excess carrier’s position on coverage was unreasonable.  However, the court again focused on the claim as relating to the duty to defend, adding that even though the court found there was no duty to indemnify, “it did so because the underlying trial record was not sufficiently clear such that [the insured] would be able to meet its burden to show that the jury awarded … damages based on a covered, as opposed to a non-covered, claim.” Thus, the question remained as to whether the excess carrier’s  refusal to participate in the “defense was reasonable in light of (1) the principle that an insurer has a duty to defend the insured until it can confine the claim to a recovery excluded from the policy, and (2) the existence of a possible [covered] claim … in the [second] trial.”

After this decision, the insured and the primary carrier settled, but the case against the excess carrier went to trial 10 days after the decision.  The court issued factual findings on August 8, which will be the basis for its ultimate decision, not rendered as of this date.

Opinion 2.  Motions in limine on experts.

In between these two rulings, the court ruled on all three parties’ motions in limine concerning experts.

First, although finding that the insureds expert was qualified on insurance issues, the court had already found that the primary insurer “did not, as a matter of law, breach its duty to [the insured] or any provision of its insurance policy by appointing [defense counsel] to represent [the insured]….” Thus, there was no factual issue for a trial on this matter, and the expert would “not be allowed to give any opinion that [the primary carrier] breached its policy by not appointing counsel in addition, or as an alternative, to [the defense counsel it had appointed].”

Second, on the jury interrogatory issue, the insured’s expert report did not “adequately address this issue nor raise relevant facts with respect to it.” Instead, the analysis on this point was all premised on there being a failure to appoint different or additional counsel, which argument the court had already rejected.  Moreover, “even assuming that, following [appointed defense] counsel’s offer of proof at the beginning of trial, as required in the Court’s opinion on summary judgment motions, the interrogatory issue remains for the jury’s consideration, [the insured’s expert’s] opinion does not ‘fit’ with the issues in this case, and therefore, he will not be allowed to testify on this issue.”

Third, on the settlement issue, the insured’s expert did address that issue in his report. Thus,  subject to any rulings that the Court makes on interpreting the policy or concerning Pennsylvania law, [the expert] will be allowed to testify as to this issue.”

Next, the court addressed the insured’s motion to exclude the primary insurer’s expert.  This motion was denied.  This expert would be allowed to testify about the factors leading up to defense counsel’s decision not to submit jury interrogatories, if that were to be before the jury.  He could also testify “as to the issue of whether [the primary insurer] acted in bad faith with respect to settlement of the underlying litigation, subject to any forthcoming rulings from the Court.”Lastly, as to the insured’s motion to preclude the expert testimony of the excess carrier’s expert, this was also denied.  He was qualified and his opinions related to the excess carrier’s duty to defend in the underlying litigation, which were relevant to key issues at trial and could potentially assist the jury in its consideration of those issues. Thus, his proposed testimony, subject to any rulings the Court makes in interpreting the contract or under Pennsylvania law, would be admitted.

Date of Decision:  July 18, 2014 (on legal issues)

Date of Decision:  July 21, 2014 (motions in limine)

Dated of Decision:  August 8, 2014 (factual findings in insured v. excess carrier)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 97795 (E.D. Pa. July 18, 2014) (Baylson, J.)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 98445 (E.D.Pa. July 21, 2014) (Baylson, J.) (motions in limine)

Charter Oak Ins. Co. v. Maglio Fresh Food, CIVIL CASE NO. 12-3967, 2014 U.S. Dist. LEXIS 109576 (E.D. Pa. August 8, 2014) (Baylson, J.) (factual findings)

AUGUST 2014 BAD FAITH CASES: WHERE POLICY EXCLUSION WAS CLEAR, AND INSUREDS OFFERED NO ACTUAL FACTS TO MEET THEIR HIGH BURDEN TO PROVE THAT INSURER’S POSITION LACKED A REASONABLE BASIS, SUMMARY JUDGMENT WAS GRANTED TO THE INSURER ON BAD FAITH CLAIM (Philadelphia Federal)

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In Leitner v. Allstate Insurance Company, the insureds alleged bad faith on the basis of improper denial of their claim and/or unreasonable delay in the investigation process.  The court cited the bad faith statute and the standards imposed by case law, emphasizing the “high bar” an insurance bad faith plaintiff had to leap to make out a case.  At issue was whether a loss was sudden and accidental, which would be covered; or was the result of action occurring over time.  The case involved flooding from a burst pipe.

The carrier had the loss inspected and followed up requesting further documentation.  It denied the claim on the basis that there was “seepage or leakage over a period of weeks, months, or years, of water, steam or fuel….”  The insured’s own plumber found the source of the problem two-fold:  the pipe became disconnected due to bad workmanship, and allowed waste to pour into the floor beneath the kitchen; and/or (2) another pipe made of terra cotta running underground just outside the property broke due to age and caused water to accumulate on the basement floor of the property. The plumber could not tell from the condition of the piping how long the problems had existed but he did state that, based mainly on the amount of accumulated waste and other debris, the piping underneath the kitchen had been leaking for “approximately more than a month” and that the outside piping had been leaking for “more than two weeks, definitely” and probably more than a month.  Even altering the number of dwellers using water, his estimate remained that the problems existed for a number of weeks.

The insureds did not offer evidence refuting this testimony or call it into question, which supported the carrier’s position that both the disconnected plastic pipe and the broken terra cotta pipe had been leaking for at least a number of weeks, and therefore the insured’s claim fell within the exclusion.  Thus, by the policy’s clear terms, the insurer’s determination did not lack a reasonable basis, and the bad faith claim was dismissed on summary judgment.

Date of Decision:  July 9, 2014

Leitner v. Allstate Ins. Co., CIVIL ACTION NO. 11-7377, 2014 U.S. Dist. LEXIS 95071 (E.D. Pa. July 9, 2014) (Tucker, C.J.)

AUGUST 2014 BAD FAITH CASES: “CLOSING PROTECTION LETTER” ISSUED BY TITLE INSURANCE COMPANY IS AN INDEMNITY AGREEMENT, BUT DOES NOT CONSTITUTE INSURANCE FOR PURPOSES OF BAD FAITH STATUTE (Philadelphia Federal)

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In Bancorp Bank v. Lawyers Title Insurance Corp., the court had to decide whether a “closing protection letter” (CPL) was title insurance, and thus subject to the bad faith statute. Under Pennsylvania law, a closing protection letter is defined as “an agreement by a title insurance company to indemnify a lender, or in some cases a purchaser, for loss caused by a settlement agent’s fraud or dishonesty or by the agent’s failure to follow the lender’s written closing instructions.” The court, after detailed analysis and a review of national case law found: “In this case, the CPL does not protect against losses which arise from liens, encumbrances, or defects which render title unmarketable. Therefore, it did not constitute “title insurance,” as defined by Pennsylvania law. The court had earlier observed that not every indemnity agreement is an insurance agreement, and “[w]hile the CPL may be an indemnity contract, it is not an insurance policy. Because a claim of bad faith denial of insurance benefits can only arise under an insurance policy, [the insurer] cannot maintain this claim [for bad faith].”

Date of Decision: July 8, 2014

Bancorp Bank v. Lawyers Title Ins. Corp., CIVIL ACTION NO. 13-6103, 2014 U.S. Dist. LEXIS 92151 (E.D. Pa. July 8, 2014) (Slomsky, J.)

AUGUST 2014 BAD FAITH CASES: COURT OBSERVES NEARLY 15 YEARS OF PRECEDENT THAT TERLETKSY REASONABLENESS PRONG IS AN OBJECTIVE TEST WHEN EVALUATING BAD FAITH CLAIMS, NOT REQUIRING ACTUAL SHOWING THAT INSURER CONSIDERED PARTICULAR BASIS FOR REASONABLENESS OF ARGUMENT FORMING A BASIS TO DECLINE COVERAGE OR DELAY SETTLEMENT, (Middle District)

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In Bodnar v. Amco Insurance Company, without ruling on the matter, the court observed the potential issue of whether Terletsky’s “reasonableness” prong was to be evaluated objectively or subjectively.  In the seminal case of Williams v. Hartford Cas. Ins. Co., 83 F. Supp. 2d 567, 574 (E.D. Pa. 2000), the court had held that this first prong of the Terletsky bad faith test “is an objective one: that is if there is a reasonable basis for delaying resolution of a claim, even if it is clear that the insurer did not rely on that reason, there cannot, as a matter of law be bad faith.” The Bodnar court further observed that, with only slight dissent, this reasoning has been almost universally followed over the ensuring 14½ years by Pennsylvania’s district courts.  Still, the court was not faced with the issue of deciding whether it needed to apply Williams, and thus would not say at this time that it was controlling law.

Date of Decision:  July 11, 2014

Bodnar v. Amco Ins. Co., 3:12-CV-01337, 2014 U.S. Dist. LEXIS 94931 (M.D. Pa. July 11, 2014) (Mariani, J.)

 

AUGUST 2014 BAD FAITH CASES: FAILURE TO FOLLOW INVESTIGATIVE AND CLAIMS HANDLING STANDARDS IN INSURER’S OWN MANUAL, ADJUSTER’S FAILURE TO CONSULT WITH OTHERS AND GO BEYOND HER OWN CONCLUSIONS, AND FAILURE TO CONDUCT IME DEFEAT MOTION TO DENY BAD FAITH CLAIM (Western District)

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Mineo v. Geico involved a UIM claim.  The insured was a Vietnam War Veteran who had suffered significant combat injuries during the War.  Years later he was in a motor vehicle accident and suffered a shoulder injury.  After the accident, there was some record that he suffered a further shoulder injury.  The insurer offered a settlement sum that the insured rejected.  The insured contended that the adjuster incorrectly placed too much emphasis on the post-accident injury in devaluing the extent of his injury from the accident.

In addressing the insurer’s motion for summary judgment on the bad faith claim, the court stated that in evaluating the insured’s bad faith claim it could consider insurer’s because bad faith can include a lack of good faith investigation into facts, and failure to communicate with the claimant.  The court stated that an “insurance company … is not required to show the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.” However, it “must conduct a meaningful investigation, which may include an in-person interview, examination under oath, medical authorizations, and/or independent medical examinations.”

The adjuster relied on only one physical therapy record to justify her position that the injury was caused or aggravated by the post-accident fall. This was based on her review of the medical records, and her conclusion that no IME was needed.  The court observed she was not a doctor, knew that the insured disputed the record, and the insured’s physical therapist had explained that there was a significant left shoulder dysfunction prior to the post-accident fall.

The court cited to the insurer’s claims manual which “admonishes its adjusters to avoid drawing conclusions based on assumption or speculation,” and which “underscores the importance of completeness….”  The manual warned: “If the denial is unsound, the result may be a complaint or a lawsuit, either of which could have been avoided. Because some cases turn on very fine points, reports must be complete and accurate.”

The manual also included “a Sequence of Investigation, which ‘applies to the majority of cases,’ and sets forth that adjusters should: ‘Determine whether independent medical examinations are necessary, and if so, see your supervisor and then arrange for them. Determine whether medical peer review should be secured. If so, see your supervisor.’” The adjuster did neither, and the carrier only had an IME pursued post-litigation.

The court next addressed the issue of whether the insurer failed to meet its own standards of using a “90-Day Control” which is used to calculated and set reserves and to revisit these matters at 6, 12, and 18 months. Under the insured’s manual “Supervisors and managers review each summary and give direction, comments and instructions…. Each Summary and supervisor/manager review must be completed by the end of the month in which the 90th day falls.” The court questioned whether this was created or produced to the insured.In addressing stalled negotiations and the languishing nature of the process, the court stated that the insurer could have conducted an in-person interview, done an examination under oath, sought medical authorizations and/or an IME.  The IME eventually conducted appeared to favor the insured’s version of events; and the court cited case law for the proposition that a failure to conduct an IME could be the basis for a bad faith claim.  In this regard, the court was “mindful” of the Unfair Insurance Practices Act.

The summary judgment motion was denied.

Date of Decision:  July 15, 2014

Mineo v. Geico, Civil Action No. 12-1547, 2014 U.S. Dist. LEXIS 95686 (W.D. Pa. July 15, 2014) (Fischer, J.)

AUGUST 2014 BAD FAITH CASES: COURT DENIES INSURERS MOTIONS TO PRECLUDE EXPERT TESTIMONY, BIFURCATE THE TRIAL AND FOR SUMMARY JUDGMENT WHERE INSURER REQUIRED 3 IMES WHICH REACHED INCONSISTENT RESULTS (Middle District)

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In Monaghan v. Travelers Prop. Cas. Co. of Am., the Court, in three separate opinions, addressed the issues of the adequate burden of proof in bad faith claims, admissibility of expert testimony, and proper bifurcation of trial. The Court found that the pleading standards were met, that expert testimony should not be precluded, although the scope must be limited, and that defendants failed to meet their burden to establish that bifurcation was appropriate.

In the instant case, Plaintiff was injured in a motor vehicle accident and had an insurance policy with Defendant which included medical benefits up to $100,000 and wage loss benefits up to $15,000. The insurer required Plaintiff to undergo three separate independent medical examinations (IMEs) due to her physical injury claims. The first and second IMEs concluded that Plaintiff’s injuries were due to the accident, while only the third found that the injuries were unrelated. After the third IME, the Defendants stopped providing further benefits and, in response, Plaintiff filed a complaint alleging Breach of Contract, Bad Faith, and violation of the Unfair Trade Practice and Consumer Protection law.

In the Court’s first opinion, on a motion for summary judgment, it addressed Defendant’s claim that Plaintiff failed to provide evidence to support her contention that the discontinuance of benefits was due to self-interest or ill-will. According to Third Circuit precedent, a plaintiff must prevent clear and convincing evidence which shows that both 1) the insurer lacked a reasonable basis for denying benefits, and 2) the insurer knew or recklessly disregarded the lack of a reasonable basis. The Court held that Plaintiff had presented evidence that the third IME resulted in an opinion adverse to the first two, and that it was for a jury to determine whether the defendants engaged in bad faith by repeatedly sending Plaintiff to different doctors until one found that her injuries were unrelated to the accident.

The Court’s second opinion addressed the Defendant’s motion in limine seeking to preclude the testimony of Plaintiff’s insurance expert witness. Defendants argued that 1) the finder of fact does not need the assistance of expert testimony to comprehend the plaintiffs’ bad faith allegations, 2) that some of the expert’s opinions related to the ultimate issues of fact, and 3) the remainder of the expert’s opinions are not based on recognized insurance industry standards. The court first asked whether the factfinder would benefit from hearing the additional expert testimony and concluded that the case before it involved complicated issues of law under the insurance policy and Pennsylvania law which could potentially confuse a jury.

Specifically: “The issue of whether an expert is warranted in a bad faith action is very fact specific to each case and dependent on the complexity of the issues. Not all bad faith claims are equally complex. This case, however, appears to be one which is somewhat complex and in which the factfinder may find an expert useful. The allegations of bad faith involve medical professionals employed by defendant and their use of independent medical examiners’ opinions. It will be important for the factfinder to understand the obligations of first party medical benefit claims handlers in such situations. Moreover, plaintiff’s bad faith allegations include not only the defendants’ legal obligations under the policy, but also under Pennsylvania law.”

Next, the Court held that Defendants could object at trial to any testimony addressing the ultimate issue of fact, but refused to preclude the testimony before it was heard. Finally, in addressing the argument that Plaintiff’s expert’s opinion was not based on “insurance standards”, the Court observed the expert’s level of experience with automobile insurance, and stated that Defendants would have ample opportunity to attack the validity of the witness’s findings through cross-examination and argument at trial, and therefore, the motion in limine should be denied.

In its third opinion, the Court addressed the issue of bifurcation raised by Defendants, who sought to separate the bad faith liability trial from a trial on determining punitive damages if liability were to be found. The Defendants argued that there was significant danger of unfair prejudice once the jury heard the size of their net worth, and so bifurcation would be appropriate. Evidence presented in support of Plaintiff’s punitive damages claim included an estimate of Defendant’s net worth — $113.459 million in surplus and $412.275 million in total assets. Defendant claimed that the estimate of net worth could improperly induce the jury to find that bad faith existed, while Plaintiff contended that it was common knowledge that insurance carriers, as large corporations, had high net worth. The Court agreed with Plaintiff finding that the Court could construct a jury charge and verdict slip to eliminate prejudice such that the benefit derived from bifurcating the trial would be “vastly outweighed by the waste of time and resources inherent to holding two trials.” Therefore, Defendants’ motion to bifurcate was denied.

In sum, the Court found for plaintiff in all three opinions, denying Defendants’ motions for summary judgment, motion in limine to preclude expert testimony, and motion to bifurcate the trial.

Dates of Decision: June 16, 2014 (Opinion 1) and July 16, 2014 (Opinions 2 and 3)

Monaghan v. Travelers Prop. Cas. Co. of Am., No. 3:12cv1285, 2014 U.S. Dist. LEXIS 82368, (M.D. Pa. June 16, 2014) (Munley, J.)

Monaghan v. Travelers Prop. Cas. Co. of Am., No. 3:12cv1285, 2014 U.S. Dist. LEXIS 96524, (M.D. Pa. July 16, 2014) (Munley, J.)

Monaghan v. Travelers Prop. Cas. Co. of Am., No. 3:12cv1285, 2014 U.S. Dist. LEXIS 96525, (M.D. Pa. July 16, 2014) (Munley, J.)

AUGUST 2014 BAD FAITH CASES: COURT PERMITS DEPOSITIONS OF INSURER’S EXECUTIVE OFFICERS WHO WERE NOT DIRECTLY INVOLVED IN HANDLING A SPECIFIC CLAIM, ON THE THEORY THAT THE ACTUAL CLAIMS HANDLERS MAY BE FOLLOWING CORPORATE POLICIES OF THE INSURER THAT RESULTED IN THE ALLEGED BAD FAITH CLAIMS HANDLING (Middle District)

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In Clemens v. New York Central Mutual Fire Insurance Company, the court addressed the propriety of deposing the insurer’s corporate officers in the context of a UIM bad faith claim. The bad faith claim was the only claim remaining in the case. The insurer offered two persons as the appropriate deponents, because they were the only decision makers in the case. There was some dispute over their knowledge, and the insured wanted to depose the insurer’s President and CEO, CFO, and Casualty Manager. Because none of these people had direct involved with the particular claim, the insurer characterized this effort as harassment.

The court found the insurer’s position “overly simplistic.” While the two individuals directly involved with the claim “made all decisions regarding how and when to settle the underlying underinsured motorist claim, this begs the question whether company policies implemented by their superiors affected their decision making in a way contradictory to their insured’s interests, an obviously relevant line of inquiry in the context of a ‘bad faith’ claim.” Invoking the Federal Rules liberal discovery principles, the court found “it appropriate, for now, to authorize the depositions of” the CFO and the Casualty Manager, finding that “given their titles, [they] ought to be persons with knowledge of the policies under which” the claims handlers made their decisions. Moreover, the court left open the possibility that the insurer’s President and CEO could be deposed if the depositions of these two implicated a need to depose that individual.

Date of Decision: July 14, 2014

Clemens v. N.Y. Cent. Mut. Fire Ins. Co., Case No. 3:13-CV-2447,  2014 U.S. Dist. LEXIS 95181 (M.D. Pa. July 14, 2014) (Conaboy, J.)

AUGUST 2014 BAD FAITH CASES: THERE IS NO BAD FAITH CLAIM WHERE THE BREACH OF INSURANCE CONTRACT CLAIMS FAILED EITHER BECAUSE THERE WAS NO COVERAGE OR INSURER’S POSITION WAS REASONABLE; CONTRACT CLAIMS AGAINST THE INSURED CONTRACTOR FAILED BECAUSE THEY DO NOT CONSTITUTE AN OCCURRENCE UNDER KVAERNER OR AS "SUBCONTRACTED WORK PROPERTY DAMAGE"; OR ARE SUBJECT TO CGL EXCLUSIONS j(5) AND j(6), AND CONDUCT AT ISSUE IS OUTSIDE PRODUCTS COMPLETED OPERATION HAZARD; AND THERE IS NO DUTY TO DEFEND IN THE ABSENCE OF A SUIT (Third Circuit and Western District)

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In Allegheny Design Management v. Travelers Indemnity Company of America, the insured was a general contractor with a commercial general liability policy. It hired a subcontractor to install glass and another to clean the glass that was to go in the new construction of a store. After installation, but during the cleaning process, the glass was discovered to have significant scratching. At that time, the store had not yet opened for business. The owner made demand against the insured, but had not brought suit. The carrier declined coverage.

The trial court found that there was no “occurrence” under the Pennsylvania Supreme Court’s 2006 Kvaerner Metals case, the leading Pennsylvania case on faulty workmanship and the definition of “occurrence”. The insured contractor acknowledged that either the installer or the cleaner damaged the glass, but attempted to argue that cleaning glass was not workmanship. The court disagreed.

Next, the policy had a separate definition of “occurrence” for “subcontracted work property damage.” This came down to whether the work at issue was within the “products-completed operations hazard”. The insurer asserted the work had not been completed as the entire contract had not been completed and/or that the particular part of the job had not been put to its intended use by a third party. The court agreed with the carrier that the job had not been completed, as, at a minimum, punch list items remained open; and that the work had not been put to its intended us as the store for which the glass was installed was not opened for business until a few days later.

The trial court also found two exclusions barred coverage: j(5) — “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations” — and j(6) — “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it”.

Further, the trial court found that there could be no duty to defend in the absence of a suit against the insured, and where there was no duty to indemnify.

In addressing the insured’s bad faith claim, the trial court concluded that: “Where, as here, there is no coverage under an insurance policy, an insurer cannot be found to have acted in bad faith for denying coverage.”

On appeal, the Third Circuit affirmed. Rather than drilling into detail on the second definition of occurrence for “subcontracted work property damage,” it found that exclusion j(6) would bar coverage in any event. It agreed with the trial court that the glass had not been put to its intended use until the store for which the glass was installed actually opened for business. The court also agreed that exclusion j(5) applied, and that there was not duty to defend.

On the bad faith issue, the panel concluded there was no bad faith because the carrier “had a reasonable basis for denying coverage … based upon the ‘occurrence’ definition and the Exclusions referred to above.”

Date of Decision in District Court: September 25, 2013

Date of Decision in Third Circuit: July 11, 2014

Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., No. 2:12-cv-00658-TFM, 2013 U.S. Dist. LEXIS 137748 (W.D. Pa. Sept. 25, 2013) (McVerry, J.)

Allegheny Design Mgmt. v. Travelers Indem. Co. of Am., No. 13-4263, 2014 U.S. App. LEXIS 13190 (3d Cir. July 11, 2014) (Rendell, Chagares, Jordan, JJ.)

JULY 2014 BAD FAITH CASES: INSUREDS FAILED TO PLEAD ANY FACTS TO SUPPORT A PLAUSIBLE BAD FAITH CLAIM IN UIM CASE, COURT GIVING EXAMPLES OF FAILURES IN PLEADING, BUT GIVES LEAVE TO AMEND; COURT STATES FIDUCIARY RELATIONSHIP ONLY EXISTS BETWEEN INSURED AND INSURER IN LIMITED CIRCUMSTANCES (Middle District)

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In Flynn v. Nationwide Insurance Company of America, the insured brought a UIM claim, alleging breach of contract, lost wages and bad faith, and included within his complaint allegations that the carrier breached its fiduciary duty.  The carrier moved to dismiss the bad faith claim, and to strike references to its alleged fiduciary duty.

Although the insured alleged 15 kinds of bad faith the claim was dismissed, as the Court found all of these were only legal conclusions, and were not factual allegations sufficient to make out a plausible bad faith claim.  Examples given by the court included  “failing objectively and fairly to evaluate plaintiffs’ claim,” “failing to adopt and implement reasonable standards in evaluating plaintiffs’ claim,” “failing to promptly offer reasonably payments to the plaintiffs,” and “failing to make an honest, intelligent, and objective settlement offer.” Thus, e.g., “plaintiffs claim that [the insured] engaged in ‘abusive claims handling’ without explaining what the abusive behavior was. Plaintiffs also make the perfunctory allegation that [the insurer]‘s payment offers weren’t reasonable, but does not disclose what those offers were, what his damages were, or how defendant’s offers were inadequate and unreasonable.”

The insureds argued that they established the carrier did not have a reasonable basis to deny coverage and recklessly disregarded evidence in the insured’s file; but they failed to explain what evidence was disregarded and how disregarding it was reckless. The court found that the insureds did “little more than state that they have a contract dispute, and assert that because the dispute has not yet ended in a manner favorable to them, that defendant has engaged in bad faith behavior.”

However, the Court did give the plaintiff leave to amend if it could plead a plausible bad faith claim with facts.

The Court then essentially granted the motion to strike references to fiduciary duty as the insureds did not oppose that motion; however, the Court did state that under Pennsylvania law, “a fiduciary relationship between an insurer and policyholder arises only in limited circumstances.”

Date of Decision:  July 7, 2014

Flynn v. Nationwide Ins. Co. of Am., CIVIL ACTION NO. 3:13-2993, 2014 U.S. Dist. LEXIS 91431 (M.D. Pa. July 7, 2014) (Mannion, J.)

JULY 2014 BAD FAITH CASES: NO BAD FAITH CLAIM STATED WHERE COURT FOUND NO DUTY TO PAY BENEFITS; AND FURTHER FOUND THAT THE COMPLAINT DID NOT ALLEGE SUFFICIENT FACTS TO MAKE OUT A BAD FAITH CLAIM EVEN HAD IT RULED OTHERWISE ON COVERAGE (Western District)

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In Hackbarth v. Nationwide Mutual Insurance Company, the insured fell while attempting to enter his car.  The court found that ice caused the fall, and the vehicle was not an instrumentality of the injury.  Thus, there was no coverage.  Thus, it dismissed the insured’s breach of contract claim.

As to the insured’s bad faith claim, while the Court seemed on the verge of wrestling with the argument that there could be bad faith in the absence of any duty to provide benefits, the insured ultimately conceded that if there was no breach of contract, there could be no bad faith.

Moreover, even had the court ruled otherwise on the contract claim, it would still have dismissed the bad faith claim “because Plaintiff’s Complaint fails to aver sufficient facts which allow for drawing a reasonable inference that Defendant acted in bad faith when denying coverage under the Policy.”  The court did not accept the argument that the pleadings were sufficient to allow further development via discovery.  Rather, even accepting the alleged facts as true and disregarding legal conclusions, the insured did not allege sufficient facts to establish that the insurer lacked a reasonable basis for denying benefits and knew or recklessly disregarded its lack of reasonable basis.

Date of Decision:  July 8, 2014

Hackbarth v. Nationwide Mut. Ins. Co., Civil No. 13-1596,  2014 U.S. Dist. LEXIS 92971 (W.D. Pa. July 8, 2014) (Cohill, J.)